PROSPECTUS SUPPLEMENT
(To Prospectus dated September 25, 2003)
$487,198,000
(APPROXIMATE)
BEAR STEARNS ASSET BACKED SECURITIES TRUST 2004-HE1
ISSUER
ASSET-BACKED CERTIFICATES, SERIES 2004-HE1
EMC MORTGAGE CORPORATION
SELLER AND MASTER SERVICER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
________________
The issuer is offering the following classes of certificates
pursuant to this prospectus supplement and the accompanying prospectus:
- --------------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-13 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 4 IN THE PROSPECTUS.
The certificates represent obligations of the trust only and do not represent an
interest in or obligation of Bear Stearns Asset Backed Securities, Inc., EMC
Mortgage Corporation, LaSalle Bank National Association or any of their
affiliates.
This prospectus supplement may be used to offer and sell the offered
certificates only if accompanied by the prospectus.
- --------------------------------------------------------------------------------
ORIGINAL CERTIFICATE PASS-THROUGH ORIGINAL CERTIFICATE
CLASS PRINCIPAL BALANCE RATE CLASS PRINCIPAL BALANCE PASS-THROUGH RATE
----- ----------------- ---- ----- ----------------- -----------------
Class I-A-1 $ 53,358,000 (1)(2) Class M-2 $ 27,081,000 (1)(2)(3)
Class I-A-2 $ 42,697,000 (1)(2)(3) Class M-3 $ 8,776,000 (1)(2)(3)
Class II-A-1 $ 136,799,000 (1)(2)(3) Class M-4 $ 6,519,000 (1)(2)(3)
Class II-A-2 $ 15,199,000 (1)(2)(3) Class M-5 $ 7,272,000 (1)(2)(3)
Class III-A $ 149,378,000 (1)(2)(3) Class M-6 $ 6,268,000 (1)(2)(3)
Class M-1 $ 33,851,000 (1)(2)(3)
(1) The pass-through rates on these classes of certificates are adjustable or
variable rates as described under "Summary--Description of the
Certificates--Pass-Through Rates" in this prospectus supplement.
(2) Subject to a cap equal as described in this prospectus supplement.
(3) Subject to a step-up if the optional termination right is not exercised.
The certificates represent interests in a pool of fixed and adjustable rate,
conventional, closed-end sub-prime mortgage loans that are secured by first and
second liens on one- to four-family residential properties.
Credit enhancement will be provided by:
o excess spread and overcollateralization
o cross-collateralization
o subordination of the Class M-1, Class M-2, Class M-3, Class M-4, Class
M-5 and Class M-6 Certificates o with respect to the Class II-A-1,
Class II-A-2, Class M-1, Class M-2, Class M-3, Class M-4, Class M-5 and
Class M-6 Certificates only, the yield maintenance agreements as
described in this prospectus supplement
o with respect to the Class III-A Certificates only, an irrevocable
financial guaranty insurance policy issued by ACE Guaranty Corp., which
will cover, under certain circumstances, certain interest shortfalls
and realized losses allocated to the Class III-A Certificates and
certain payments of principal on the Class III-A Certificates.
[AGC Logo]
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.
Bear, Stearns & Co. Inc. and Banc of America Securities LLC, as the
underwriters, will offer the certificates listed above at varying prices to be
determined at the time of sale.
The underwriters will deliver to purchasers of the offered certificates in
book-entry form only through the facilities of The Depository Trust Company,
Clearstream and Euroclear, in each case, on or about January 30, 2004.
BEAR, STEARNS & CO. INC. BANC OF AMERICA SECURITIES LLC
The date of the prospectus supplement is January 27, 2004
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
- ---------------------
SUMMARY....................................................................S-4
RISK FACTORS..............................................................S-13
THE MORTGAGE POOL.........................................................S-23
SERVICING OF THE MORTGAGE LOANS...........................................S-30
DESCRIPTION OF THE CERTIFICATES...........................................S-38
YIELD MAINTENANCE AGREEMENTS..............................................S-65
THE FINANCIAL GUARANTY INSURANCE POLICY...................................S-68
THE CLASS III-A INSURER...................................................S-69
YIELD, PREPAYMENT AND MATURITY
CONSIDERATIONS.......................................................S-72
USE OF PROCEEDS...........................................................S-88
FEDERAL INCOME TAX CONSEQUENCES...........................................S-88
STATE TAXES...............................................................S-90
ERISA CONSIDERATIONS......................................................S-90
METHOD OF DISTRIBUTION....................................................S-91
LEGAL MATTERS.............................................................S-92
EXPERTS...................................................................S-92
RATINGS...................................................................S-93
INDEX OF DEFINED TERMS....................................................S-94
SCHEDULE A.................................................................A-1
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES..........................................I-1
ANNEX II
ACE GUARANTY CORP. CONSOLIDATED
FINANCIAL STATEMENTS, DECEMBER 31, 2002,
2001 AND 2000, AND UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS, SEPTEMBER 30, 2002
AND 2003.............................................................II-1
PROSPECTUS
- ----------
RISK FACTORS.................................................................4
DESCRIPTION OF THE SECURITIES...............................................14
THE TRUST FUNDS.............................................................19
CREDIT ENHANCEMENT..........................................................40
SERVICING OF LOANS..........................................................44
THE AGREEMENTS..............................................................53
MATERIAL LEGAL ASPECTS OF THE LOANS.........................................65
THE DEPOSITOR...............................................................78
USE OF PROCEEDS.............................................................79
MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS...........................................................79
REPORTABLE TRANSACTIONS....................................................109
STATE TAX CONSIDERATIONS...................................................109
FASIT SECURITIES...........................................................109
ERISA CONSIDERATIONS.......................................................115
LEGAL MATTERS..............................................................122
FINANCIAL INFORMATION......................................................122
AVAILABLE INFORMATION......................................................122
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE............................................................122
RATINGS....................................................................123
LEGAL INVESTMENT CONSIDERATIONS............................................124
PLAN OF DISTRIBUTION.......................................................124
GLOSSARY OF TERMS..........................................................125
S-2
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We describe the certificates in two separate documents that provide
varying levels of detail: (a) the accompanying prospectus, which provides
general information, some of which may not apply to your certificates and (b)
this prospectus supplement, which describes the specific terms of your
certificates. If there is conflicting information between this prospectus
supplement and the accompanying prospectus, you should rely on the information
in this prospectus supplement.
Cross-references are included in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further discussions about related topics. The table of contents on page S-2
above provides the pages on which these captions are located.
You can find a listing of the pages where certain capitalized and other
terms used in this prospectus supplement and the accompanying prospectus are
defined under the captions "Glossary" and "Index of Defined Terms" in this
prospectus supplement or "Glossary of Terms" beginning on page 125 of the
prospectus.
S-3
SUMMARY
o This summary highlights selected information from this
document and does not contain all of the information that you
need to consider when making your investment decision. To
understand all of the terms of an offering of the
certificates, you should read this entire document and the
accompanying prospectus carefully.
o Certain statements contained in or incorporated by reference
in this prospectus supplement and the accompanying prospectus
consist of forward-looking statements relating to future
economic performance or projections and other financial items.
These statements can be identified by the use of
forward-looking words such as "may," "will," "should,"
"expects," "believes," "anticipates," "estimates," or other
comparable words. Forward-looking statements are subject to a
variety of risks and uncertainties that could cause actual
results to differ from the projected results. Those risks and
uncertainties include, among others, general economic and
business conditions, regulatory initiatives and compliance
with governmental regulations, customer preferences and
various other matters, many of which are beyond our control.
Because we cannot predict the future, what actually happens
may be very different from what is contained in our
forward-looking statements.
THE CERTIFICATES
Asset-Backed Certificates, Series 2004-HE1, represent beneficial ownership
interests in a trust fund that consists primarily of a pool of fixed and
adjustable rate, conventional, closed-end sub- prime mortgage loans that are
secured by first and second liens on one- to four-family residential properties
and certain other assets described in this prospectus supplement.
ORIGINATORS
The principal originators of the mortgage loans are: New Century Mortgage
Corporation, with respect to approximately 25.89%, 61.52% and 18.76% of the
mortgage loans in loan group I, loan group II and loan group III, respectively,
and with respect to approximately 36.84% of the mortgage loans in the aggregate;
Encore Credit Corporation, with respect to approximately 12.11% and 44.68% of
the mortgage loans in loan group I and loan group III, respectively, and with
respect to approximately 19.72% of the mortgage loans in the aggregate; IndyMac
Bank, F.S.B., with respect to approximately 35.21%, 8.45% and 18.66% of the
mortgage loans in loan group I, loan group II and loan group III, respectively,
and with respect to approximately 18.76% of the mortgage loans in the aggregate;
and People's Choice Home Loans, Inc., with respect to approximately 14.58%,
30.03% and 4.58% of the mortgage loans in loan group I, loan group II and loan
group III, respectively, and with respect to approximately 16.73% of the
mortgage loans in the aggregate. The remainder of the mortgage loans were
originated by various originators, none of which have originated more than 10%
of the mortgage loans in the aggregate.
DEPOSITOR
Bear Stearns Asset Backed Securities, Inc., a Delaware corporation and a limited
purpose finance subsidiary of The Bear Stearns Companies, Inc. and an affiliate
of Bear, Stearns & Co. Inc.
SELLER
EMC Mortgage Corporation, a Delaware corporation and an affiliate of the
depositor and Bear, Stearns & Co. Inc., which will sell the mortgage loans to
the depositor.
S-4
MASTER SERVICER
EMC Mortgage Corporation.
TRUSTEE
LaSalle Bank National Association, a national banking association.
CLASS III-A INSURER
ACE Guaranty Corp., a Maryland domiciled insurance company.
POOLING AND SERVICING AGREEMENT
The pooling and servicing agreement among the seller, the master servicer, the
depositor and the trustee, under which the trust will be formed and will issue
the certificates.
CUT-OFF DATE
The close of business on January 1, 2004.
CLOSING DATE
On or about January 30, 2004.
THE MORTGAGE LOANS
The aggregate principal balance of the mortgage loans as of the cut-off date is
approximately $501,490,725. The mortgage loans are fixed and adjustable rate
mortgage loans that are secured by first and second liens on one- to four-family
residential properties. We will divide the mortgage loans into three separate
groups. We refer to each group of mortgage loans as a loan group. The mortgage
loans that we have allocated to loan group I are comprised of mortgage loans
that may or may not conform to Freddie Mac and Fannie Mae loan limits and the
mortgage loans that we have allocated to loan group II and loan group III are
comprised of mortgage loans that conform to Freddie Mac and Fannie Mae loan
limits.
The interest rate borne by the adjustable rate mortgage loans, in most cases
after an initial fixed-rate period of two, three or five years, will be adjusted
semi-annually based on Six-Month LIBOR or annually based on One-Year U.S.
Treasury to equal the related index plus a fixed percentage set forth in or
computed in accordance with the related note subject to rounding and to certain
other limitations, including an initial cap, a subsequent periodic cap on each
adjustment date and a maximum lifetime mortgage rate, all as more fully
described under "Description of the Mortgage Loans" in this prospectus
supplement.
Approximately 1.95% and 2.16% of the mortgage loans in loan group I and loan
group III, respectively, and approximately 1.28% of the mortgage loans in the
aggregate, will receive interest only for the initial period set forth in the
related mortgage note.
TOTAL POOL
The following table summarizes the approximate characteristics of all of the
mortgage loans in the trust fund as of the cut-off date:
Number of mortgage loans..................................................3,306
Aggregate principal balance........................................$501,490,725
Average principal balance............................................. $151,691
Range of principal balances..................................$7,806 to $699,544
Range of mortgage rates.....................................5.2500% to 12.5000%
Weighted average
mortgage rate.......................................................7.5297%
Weighted average
combined original loan-to-value ratio................................80.23%
Weighted average scheduled
remaining term to maturity.......................................344 months
Range of scheduled remaining
terms to maturity..................................114 months to 360 months
Type of mortgaged properties
Single-family dwellings..............................................76.90%
2-4 family dwellings..................................................7.82%
Planned unit developments.............................................8.68%
Condominiums..........................................................6.25%
Townhouse.............................................................0.35%
Owner-occupied...........................................................93.02%
State concentrations
California...........................................................39.76%
Florida...............................................................6.64%
Illinois..............................................................5.38%
Balloon loans.............................................................2.95%
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First lien..............................................................96.73%
Second lien..............................................................3.27%
Fixed Rate Loans........................................................29.80%
Adjustable Rate Loans...................................................70.20%
Weighted Average Gross Margin*.........................................5.8513%
Weighted Average Cap at First Interest
Adjustment Date*...................................................2.1074%
Weighted Average Periodic Cap*.........................................1.3109%
Weighted Average Maximum Lifetime
Mortgage Rate (per annum)*........................................13.9868%
Weighted Average Months to First Interest
Adjustment Date*.................................................23 months
* Adjustable Rate Loans only
LOAN GROUP I
The following table summarizes the approximate characteristics of the mortgage
loans in loan group I as of the cut-off date:
Number of mortgage loans...................................................584
Aggregate principal balance.......................................$121,205,344
Average principal balance............................................ $207,543
Range of principal balances................................$19,971 to $699,544
Range of mortgage rates....................................5.3500% to 12.5000%
Weighted average
mortgage rate......................................................7.4261%
Weighted average
combined original loan-to-value ratio...............................79.73%
Weighted average scheduled
remaining term to maturity......................................332 months
Range of scheduled remaining
terms to maturity.................................118 months to 360 months
Type of mortgaged properties
Single-family dwellings.............................................82.26%
2-4 family dwellings.................................................2.74%
Planned unit developments...........................................10.07%
Condominiums.........................................................4.45%
Townhouse............................................................0.48%
Owner-occupied..........................................................94.51%
State concentrations
California..........................................................44.12%
New York.............................................................6.71%
Balloon loans............................................................8.88%
First lien..............................................................95.36%
Second lien..............................................................4.64%
Fixed Rate Loans........................................................49.95%
Adjustable Rate Loans...................................................50.05%
Weighted Average Gross Margin*.........................................5.7107%
Weighted Average Cap at First Interest
Adjustment Date*...................................................2.2060%
Weighted Average Periodic Cap*.........................................1.2725%
Weighted Average Maximum Lifetime
Mortgage Rate (per annum)*........................................13.6534%
Weighted Average Months to First Interest
Adjustment Date*.................................................23 months
* Adjustable Rate Loans only
LOAN GROUP II
The following table summarizes the approximate characteristics of the mortgage
loans in loan group II as of the cut-off date:
Number of mortgage loans.................................................1,428
Aggregate principal balance.......................................$191,795,924
Average principal balance............................................ $134,311
Range of principal balances................................$14,993 to $495,565
Range of mortgage rates....................................5.2500% to 12.2500%
Weighted average
mortgage rate......................................................7.5642%
Weighted average
combined original loan-to-value ratio...............................80.04%
Weighted average scheduled
remaining term to maturity......................................344 months
Range of scheduled remaining
terms to maturity.................................114 months to 359 months
Type of mortgaged properties
Single-family dwellings.............................................74.91%
2-4 family dwellings................................................10.14%
Planned unit developments............................................9.14%
Condominiums.........................................................5.82%
Owner-occupied..........................................................92.88%
State concentrations
California..........................................................41.15%
Florida..............................................................6.81%
Balloon loans............................................................2.11%
First lien..............................................................95.44%
Second lien..............................................................4.56%
Fixed Rate Loans........................................................26.38%
Adjustable Rate Loans...................................................73.62%
Weighted Average Gross Margin*.........................................5.8445%
Weighted Average Cap at First Interest
Adjustment Date*...................................................2.0008%
Weighted Average Periodic Cap*.........................................1.3309%
Weighted Average Maximum Lifetime
Mortgage Rate (per annum)*........................................14.0772%
Weighted Average Months to First Interest
Adjustment Date*.................................................22 months
* Adjustable Rate Loans only
LOAN GROUP III
The following table summarizes the approximate characteristics of the mortgage
loans in loan group III as of the cut-off date:
Number of mortgage loans.................................................1,294
Aggregate principal balance.......................................$188,489,457
Average principal balance............................................ $145,664
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Range of principal balances.................................$7,806 to $419,373
Range of mortgage rates....................................5.2500% to 12.5000%
Weighted average
mortgage rate......................................................7.5613%
Weighted average
combined original loan-to-value ratio...............................80.75%
Weighted average scheduled
remaining term to maturity......................................353 months
Range of scheduled remaining
terms to maturity.................................118 months to 359 months
Type of mortgaged properties
Single-family dwellings.............................................75.47%
2-4 family dwellings.................................................8.74%
Planned unit developments............................................7.32%
Condominiums.........................................................7.86%
Townhouse............................................................0.61%
Owner-occupied..........................................................92.21%
State concentrations
California..........................................................35.53%
Florida..............................................................7.79%
Illinois.............................................................7.52%
Georgia..............................................................6.50%
First lien..............................................................98.93%
Second lien..............................................................1.07%
Fixed Rate Loans........................................................20.33%
Adjustable Rate Loans...................................................79.67%
Weighted Average Gross Margin*.........................................5.9145%
Weighted Average Cap at First Interest
Adjustment Date*...................................................2.1679%
Weighted Average Periodic Cap*.........................................1.3076%
Weighted Average Maximum Lifetime
Mortgage Rate (per annum)*........................................14.0364%
Weighted Average Months to First Interest
Adjustment Date*.................................................23 months
* Adjustable Rate Loans only
DESCRIPTION OF THE CERTIFICATES
GENERAL
The trust will issue the certificates in three certificate groups. The Class
I-A-1 Certificates and Class I-A-2 Certificates will represent interests
principally in loan group I, and we sometimes refer to these certificates in
this prospectus supplement as the Class I-A Certificates. The Class II-A-1
Certificates and Class II-A-2 Certificates will represent interests principally
in loan group II, and we sometimes refer to these certificates in this
prospectus supplement as the Class II-A Certificates. The Class III-A
Certificates will represent interests principally in loan group III. We
sometimes refer to the Class I-A, Class II-A and Class III-A Certificates
collectively as the senior certificates. The Class M-1, Class M-2, Class M-3,
Class M-4, Class M-5 and Class M-6 Certificates will each represent subordinated
interests in all loan groups, and we sometimes refer to these certificates in
this prospectus supplement collectively as the Class M Certificates or the
subordinated certificates.
The trust will also issue Class R Certificates (also referred to herein as the
residual certificates), which represent the residual interest in the real estate
mortgage investment conduits established by the trust, and the Class P
Certificates and Class CE Certificates, which we are not offering by this
prospectus supplement.
The last scheduled distribution date for the offered certificates (other than
the Class I-A-1 Certificates) is the distribution date in February 2034. The
last scheduled distribution date for the Class I-A-1 Certificates is the
distribution date in April 2022.
RECORD DATE
For each class of offered certificates, the business day preceding the
applicable distribution date so long as such class of certificates are in
book-entry form; and otherwise the record date shall be the last business day of
the month immediately preceding the applicable distribution date.
DENOMINATIONS
$25,000 and multiples of $1.00 in excess thereof, except that one certificate of
each class may be issued in the remainder of the class.
REGISTRATION OF OFFERED CERTIFICATES
The trust will issue the offered certificates initially in book-entry form.
Persons acquiring interests in the offered certificates may elect to hold their
beneficial interests through The Depository Trust Company, in the United States,
or Clearstream Luxembourg or Euroclear, in Europe.
S-7
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES -- BOOK-ENTRY CERTIFICATES" IN
THIS PROSPECTUS SUPPLEMENT.
PASS-THROUGH RATES
The pass-through rate for each class of offered certificates may change from
distribution date to distribution date. On any distribution date, the
pass-through rate per annum for each such class will be based on One-Month LIBOR
and a specified margin as follows:
o Class I-A-1 Certificates: One-Month LIBOR plus 0.20% per annum.
o Class I-A-2 Certificates: One-Month LIBOR plus 0.65% per annum.
o Class II-A-1 Certificates: One-Month LIBOR plus 0.32% per annum.
o Class II-A-2 Certificates: One-Month LIBOR plus 0.45% per annum.
o Class III-A Certificates: One-Month LIBOR plus 0.32% per annum.
o Class M-1 Certificates: One-Month LIBOR plus 0.65% per annum.
o Class M-2 Certificates: One-Month LIBOR plus 1.30% per annum.
o Class M-3 Certificates: One-Month LIBOR plus 1.50% per annum.
o Class M-4 Certificates: One-Month LIBOR plus 1.75% per annum.
o Class M-5 Certificates: One-Month LIBOR plus 2.00% per annum.
o Class M-6 Certificates: One-Month LIBOR plus 4.00% per annum.
The initial pass-through rate for the Class I-A-1, Class I-A-2, Class II-A-1,
Class II-A-2, Class III- A, Class M-1, Class M-2, Class M-3, Class M-4, Class
M-5 and Class M-6 Certificates will be approximately 1.30%, 1.75%, 1.42%, 1.55%,
1.42%, 1.75%, 2.40%, 2.60%, 2.85%, 3.10% and 5.10%, respectively.
On any distribution date, the pass-through rate for each class of offered
certificates will be subject to an interest rate cap which we describe below.
After the first possible optional termination date, we will increase the margin
applicable to the pass- through rate for the Class I-A-2 Certificates as
described above, to 1.30%, the margin applicable to the pass-through rate for
the Class II-A-1 Certificates as described above, to 0.64%, the margin
applicable to the pass-through rate for the Class II-A-2 Certificates as
described above, to 0.90%, the margin applicable to the pass-through rate for
the Class III-A Certificates as described above, to 0.64%, and the margin
applicable to the pass-through rate for the Class M-1 Class M-2, Class M-3,
Class M-4, Class M-5 and Class M-6 Certificates, as described above, to 0.975%,
1.95%, 2.25%, 2.625%, 3.00% and 6.00%, respectively. Each such increased rate
will remain subject to the interest rate cap.
The interest rate cap for the Class I-A-1 Certificates and Class I-A-2
Certificates is equal to the weighted average of the net mortgage rates of all
of the group I mortgage loans.
The interest rate cap for the Class II-A-1 Certificates and Class II-A-2
Certificates is equal to the weighted average of the net mortgage rates of all
of the group II mortgage loans.
The interest rate cap for the Class III-A Certificates is equal to the weighted
average of the net mortgage rates of all of the group III mortgage loans, minus
the premium rate payable to ACE Guaranty Corp. for providing the financial
guaranty insurance policy with respect to the Class III-A Certificates.
S-8
The interest rate cap for the Class M Certificates is equal to the weighted
average of the net mortgage rates of all of the mortgage loans in each loan
group, weighted in proportion to the results of subtracting from the aggregate
principal balance of each loan group, the certificate principal balance of the
related senior certificates.
If on any distribution date, the pass-through rate for a class of offered
certificates is based on the related interest rate cap, and in the case of the
Class II-A Certificates and Class M Certificates, the amount of such limitation
exceeds the amount payable under the yield maintenance agreements, the resulting
interest shortfalls may be recovered by the holders of the related certificates
on the same distribution date or future distribution dates on a subordinated
basis to the extent that on such distribution date there are available funds
remaining after certain other distributions on the offered certificates and the
payment of certain fees and expenses of the trust. Such shortfalls allocated to
the Class III-A Certificates are not covered by the financial guaranty insurance
policy.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--DISTRIBUTIONS" AND "--EXCESS
SPREAD AND OVERCOLLATERALIZATION PROVISIONS" IN THIS PROSPECTUS SUPPLEMENT.
DISTRIBUTION DATES
The trustee will make distributions on the certificates on the 25th day of each
calendar month beginning in February 2004 to the appropriate holders of record.
If the 25th day of the month is not a business day, then the trustee will make
distributions on the following business day.
INTEREST PAYMENTS
On each distribution date holders of the offered certificates will be entitled
to receive:
o the interest that has accrued on the certificate principal balance of
such certificates at the related pass-through rate during the related
accrual period, and
o any interest due on any prior distribution dates that was not paid,
less
o interest shortfalls allocated to such certificates.
The Class II-A Certificates and Class M Certificates may receive additional
interest distributions from payments under the yield maintenance agreements as
described below under "Yield Maintenance Agreements".
The accrual period for the offered certificates will be the period from and
including the preceding distribution date (or from the closing date, in the case
of the first distribution date) to and including the day prior to the current
distribution date. Calculations of interest on the offered certificates will be
based on a 360-day year and the actual number of days elapsed during the related
accrual period.
PRINCIPAL PAYMENTS
On each distribution date, holders of the offered certificates will receive a
distribution of principal on their certificates if there is cash available on
that date for the payment of principal. Monthly principal distributions will
generally include:
o principal payments on the mortgage loans, and
o until a specified overcollateralization level has been reached,
interest payments on the mortgage loans not needed to pay interest on
the certificates and monthly fees and expenses.
You should review the priority of payments described under "Description of the
Certificates -- Distributions on the Certificates" in this prospectus
supplement.
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CREDIT ENHANCEMENT
Credit enhancements provide limited protection to holders of specified
certificates against shortfalls in payments received on the mortgage loans. This
transaction employs the following forms of credit enhancement.
SUBORDINATION. By issuing senior certificates and subordinated certificates, the
trust has increased the likelihood that senior certificateholders will receive
regular payments of interest and principal. The Class I-A-1, Class I-A-2, Class
II-A-1, Class II-A-2 and Class III-A Certificates constitute the senior
certificates, and the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5 and
Class M-6 Certificates constitute the subordinated certificates.
The certificates designated as senior certificates will have a payment priority
over the certificates designated as subordinated certificates. Among the classes
of subordinated certificates
o the Class M-1 Certificates will have payment priority over the Class
M-2, Class M-3, Class M-4, Class M-5 and Class M-6 Certificates,
o the Class M-2 Certificates will have payment priority over the Class
M-3, Class M-4, Class M-5 and Class M-6 Certificates,
o the Class M-3 Certificates will have payment priority over the Class
M-4, Class M-5 and Class M-6 Certificates,
o the Class M-4 Certificates will have payment priority over the Class
M-5 Certificates and Class M-6 Certificates, and
o the Class M-5 Certificates will have payment priority over the Class
M-6 Certificates.
Subordination provides the holders of certificates having a higher payment
priority with protection against losses realized when the remaining unpaid
principal balance on a mortgage loan exceeds the amount of proceeds recovered
upon the liquidation of that mortgage loan. In general, we accomplish this loss
protection by allocating any realized losses first to reduce the amount of
excess spread, second to reduce the overcollateralization amount, and third
among the certificates, beginning with the subordinated certificates with the
lowest payment priority, until the principal amount of that subordinated class
has been reduced to zero. We then allocate realized losses to the next most
junior class of subordinated certificates, until the principal balance of each
class of subordinated certificates is reduced to zero. If none of the Class M
Certificates are outstanding, all such losses will be allocated to the Class A
Certificates as described in this prospectus supplement.
EXCESS SPREAD AND OVERCOLLATERALIZATION. We expect the mortgage loans to
generate more interest than is needed to pay interest on the offered
certificates because we expect the weighted average net interest rate of the
mortgage loans to be higher than the weighted average pass- through rate on the
related offered certificates and, as overcollateralization increases, such
higher interest rate is paid on a principal balance of mortgage loans that is
larger than the principal balance of the certificates. Interest payments
received in respect of the mortgage loans in excess of the amount that is needed
to pay interest on the offered certificates and related trust expenses will be
used to reduce the total principal balance of such certificates until a required
level of overcollateralization has been achieved. As of the closing date, the
required level of overcollateralization will be met.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES -- EXCESS SPREAD AND
OVERCOLLATERALIZATION PROVISIONS" IN THIS PROSPECTUS SUPPLEMENT.
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CROSS-COLLATERALIZATION. The payment rules require that after the senior
certificates relating to a loan group receive certain payments on each
distribution date, available funds from that loan group otherwise allocable to
such senior certificates will be allocated to the senior certificates relating
to the other loan group or groups as described in this prospectus supplement.
This feature is called "cross-collateralization."
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES - DISTRIBUTIONS ON THE
CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
YIELD MAINTENANCE AGREEMENTS. The Class II-A Certificates and Class M
Certificates will be entitled to the benefits provided by the yield maintenance
agreements and any proceeds thereof deposited with the trustee. The counterparty
to both yield maintenance agreements will be Bear Stearns Financial Products
Inc. which is rated "AAA" by Standard & Poor's and "Aaa" by Moody's. In general,
Bear Stearns Financial Products Inc. will be obligated to make payments to the
trustee on behalf of the trust fund when One-Month LIBOR exceeds a certain
level. There can be no assurance as to the extent of benefits, if any, that may
be realized by the holders of the Class II-A Certificates and Class M
Certificates as a result of the yield maintenance agreements.
WE REFER YOU TO "THE YIELD MAINTENANCE AGREEMENTS" IN THIS PROSPECTUS
SUPPLEMENT.
FINANCIAL GUARANTY INSURANCE POLICY. The Class III-A Certificates have the
benefit of a financial guaranty insurance policy pursuant to which ACE Guaranty
Corp. will unconditionally and irrevocably guarantee certain interest shortfalls
and realized losses on each distribution date and the principal balance of the
Class III-A Certificates to the extent unpaid on the distribution date in
February 2034.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES -- DISTRIBUTIONS ON THE
CERTIFICATES" AND "THE FINANCIAL GUARANTY INSURANCE POLICY" IN THIS PROSPECTUS
SUPPLEMENT.
ADVANCES
The master servicer will make cash advances with respect to delinquent payments
of scheduled interest and principal on the mortgage loans in general to the
extent that the master servicer reasonably believes that such cash advances can
be repaid from future payments on the related mortgage loans. These cash
advances are only 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.
OPTIONAL TERMINATION
The master servicer may purchase all of the remaining assets in the trust fund
when the principal balance of the mortgage loans and any foreclosed real estate
owned by the trust fund has declined to or below 10% of the principal balance of
the mortgage loans as of the cut-off date. Such a purchase will result in the
early retirement of all the certificates and payment to ACE Guaranty Corp. of
all amounts due it.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the trust will comprise multiple real estate
mortgage investment conduits, organized in a tiered REMIC structure. The
certificates offered by this prospectus supplement (exclusive of any right to
receive any basis risk shortfall carry forward amount as described in this
prospectus supplement) and the Class P Certificates and Class CE Certificates
will represent beneficial ownership of "regular interests" in the related REMIC
identified in the pooling and servicing agreement.
The Class R Certificates will represent the beneficial ownership of the sole
class of "residual interests" in each REMIC. Certain classes of
S-11
offered certificates may be issued with original issue discount for federal
income tax purposes.
WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT
AND "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" IN THE PROSPECTUS FOR
ADDITIONAL INFORMATION CONCERNING THE APPLICATION OF FEDERAL INCOME TAX LAWS.
LEGAL INVESTMENT
The offered certificates will NOT be "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984.
WE REFER YOU TO "LEGAL INVESTMENT CONSIDERATIONS" IN THE PROSPECTUS.
ERISA CONSIDERATIONS
The offered certificates may be purchased by a pension or other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974 or Section
4975 of the Internal Revenue Code of 1986, so long as a number of conditions are
met. A fiduciary of an employee benefit plan must determine that the purchase of
a certificate is consistent with its fiduciary duties under applicable law and
does not result in a nonexempt prohibited transaction under applicable law.
WE REFER YOU TO "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE
PROSPECTUS.
RATINGS
The classes of certificates listed below will not be offered unless they receive
the respective ratings set forth below from Moody's Investors Service, Inc.,
which we refer to as "Moody's" and Standard & Poor's Rating Services, a division
of The McGraw-Hill Companies, Inc., which we refer to as "Standard & Poor's".
Moody's Standard &
Class Rating Poor's Rating
I-A-1 Aaa AAA
I-A-2 Aaa AAA
II-A-1 Aaa AAA
II-A-2 Aaa AAA
III-A Aaa AAA
M-1 Aa2 AA
M-2 A2 A
M-3 A3 A-
M-4 Baa1 BBB+
M-5 Baa2 BBB
M-6 Baa3 BBB-
A rating is not a recommendation to buy, sell or hold securities and either
rating agency can revise or withdraw such ratings at any time. In general,
ratings address credit risk and do not address the likelihood of prepayments.
The ratings on the Class III-A Certificates are without regard to the financial
guaranty insurance policy issued by ACE Guaranty Corp.
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RISK FACTORS
IN ADDITION TO THE MATTERS DESCRIBED ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE
DECIDING TO PURCHASE A CERTIFICATE.
THE SUBORDINATED When certain classes of certificates provide
CERTIFICATES HAVE A credit enhancement for other classes of
GREATER RISK OF LOSS THAN certificates it is sometimes referred to as
THE SENIOR CERTIFICATES "subordination." For purposes of this prospectus
supplement, "related subordinated classes"
means:
o with respect to the senior certificates:
the Class M-1, Class M-2, Class M-3, Class
M-4, Class M-5 and Class M-6 Certificates
and any overcollateralization;
o with respect to the Class M-1
Certificates: the Class M-2, Class M- 3,
Class M-4, Class M-5 and Class M-6
Certificates and any
overcollateralization; and
o with respect to the Class M-2
Certificates: the Class M-3, Class M- 4,
Class M-5 and Class M-6 Certificates and
any overcollateralization;
o with respect to the Class M-3
Certificates: the Class M-4, Class M- 5
and Class M-6 Certificates and any
overcollateralization;
o with respect to the Class M-4
Certificates: the Class M-5 and Class M-6
Certificates and any
overcollateralization;
o with respect to the Class M-5
Certificates: the Class M-6 Certificates
and any overcollateralization
We will provide credit enhancement for the
certificates, first, by the right of the holders
of the certificates to receive certain payments
of interest and principal prior to the related
subordinated classes and, second, by the
allocation of realized losses to the related
subordinated classes. This form of credit
enhancement uses collections on the mortgage
loans otherwise payable to the holders of the
subordinated classes to pay amounts due on the
more senior classes. Such collections are the
sole source of funds from which such credit
enhancement is provided. Realized losses will be
allocated first, to reduce the amount of excess
spread, second, to reduce the
overcollateralization amount, and third, to the
offered certificates, beginning with the offered
certificates with the lowest payment priority,
until the principal amount of that class has
been reduced to zero. This means that with
respect to the certificates offered by this
prospectus supplement, realized losses on the
mortgage loans would first be allocated to the
Class M Certificates in reverse order of
numerical designation until the principal
balance of each such class of Class M
Certificates is reduced to zero, and then to the
Class A Certificates on a pro rata basis, based
on
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the amount of realized losses on the related
mortgage loans. Accordingly, if the aggregate
principal balance of a subordinated class were
to be reduced to zero, delinquencies and
defaults on the mortgage loans would reduce the
amount of funds available for distributions to
holders of the remaining subordinated class or
classes and, if the aggregate principal balance
of all the subordinated classes were to be
reduced to zero, delinquencies and defaults on
the mortgage loans would reduce the amount of
funds available for monthly distributions to
holders of the senior certificates related to
that loan group.
You should fully consider the risks of investing
in a subordinated certificate, including the
risk that you may not fully recover your initial
investment as a result of realized losses.
See "Description of the Certificates" in this
prospectus supplement
ADDITIONAL RISKS The weighted average lives of, and the yields to
ASSOCIATED WITH THE maturity on, the Class M-1 Certificates, the
SUBORDINATED CERTIFICATES Class M-2 Certificates, the Class M-3
Certificates, Class M-4 Certificates, the Class
M-5 Certificates and the Class M-6 Certificates
will be progressively more sensitive, in that
order, to the rate and timing of mortgagor
defaults and the severity of ensuing losses on
the mortgage loans. If the actual rate and
severity of losses on the mortgage loans is
higher than those assumed by an investor in such
certificates, the actual yield to maturity of
such certificates may be lower than the yield
anticipated by such holder based on such
assumption. The timing of losses on the mortgage
loans will also affect an investor's actual
yield to maturity, even if the rate of defaults
and severity of losses over the life of the
mortgage loans are consistent with an investor's
expectations. In general, the earlier a loss
occurs, the greater the effect on an investor's
yield to maturity. Realized losses on the
mortgage loans, to the extent they exceed the
amount of overcollateralization following
distributions of principal on the related
distribution date, will reduce the certificate
principal balance of the Class M-6 Certificates,
the Class M-5 Certificates, the Class M-4
Certificates, Class M-3 Certificates, the Class
M-2 Certificates and the Class M-1 Certificates,
in that order. As a result of such reductions,
less interest will accrue on such class of
subordinated certificates than would otherwise
be the case. Once a realized loss is allocated
to a subordinated certificate, no interest will
be distributable with respect to such written
down amount.
Unless the certificate principal balances of the
senior certificates have been reduced to zero,
the subordinated certificates will not be
entitled to any principal distributions until at
least February 2007 or during any period in
which delinquencies or losses on the mortgage
loans exceed certain levels. As a result, the
weighted average lives of the subordinated
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 subordinated certificates,
the
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holders of such certificates have a greater risk
of suffering a loss on their investments.
Further, because such certificates might not
receive any principal if certain delinquency or
loss levels occur, it is possible for such
certificates to receive no principal
distributions even if no losses have occurred on
the mortgage pool.
In addition, the multiple class structure of the
subordinated certificates causes the yield of
such classes to be particularly sensitive to
changes in the rates of prepayment of the
mortgage loans. Because distributions of
principal will be made to the holders of such
certificates according to the priorities
described in this prospectus supplement, the
yield to maturity on such classes of
certificates will be sensitive to the rates of
prepayment on the mortgage loans 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 overcollateralization, excess
spread, or a class of subordinated certificates
with a lower payment priority. Furthermore, the
timing of receipt of principal and interest by
the subordinated certificates may be adversely
affected by losses even if such classes of
certificates do not ultimately bear such loss.
CREDIT ENHANCEMENT The mortgage loans are expected to generate more
MAY BE INADEQUATE TO interest than is needed to pay interest on the
COVER LOSSES AND/OR TO offered certificates because we expect the
BUILD weighted average interest rate on the mortgage
OVERCOLLATERALIZATION loans to be higher than the weighted average
pass-through rate on the related offered
certificates. If the mortgage loans generate
more interest than is needed to pay interest on
the related offered certificates and trust fund
expenses, we will use such "excess spread" to
make additional principal payments on those
offered certificates, which will reduce the
total certificate principal balance of those
offered certificates below the aggregate
principal balance of the related mortgage loans,
thereby creating "overcollateralization."
Overcollateralization is intended to provide
limited protection to certificateholders by
absorbing the certificate's share of losses from
liquidated mortgage loans. However, we cannot
assure you that enough excess spread will be
generated on the mortgage loans to establish or
maintain the required level of
overcollateralization. As of the closing date
the required level of overcollateralization will
be met.
The excess spread available on any distribution
date will be affected by the actual amount of
interest received, advanced or recovered in
respect of the mortgage loans during the
preceding month. Such amount may be influenced
by changes in the weighted average of the
mortgage rates resulting from prepayments,
defaults and liquidations of the mortgage loans.
If the protection afforded by
overcollateralization is insufficient, then you
could experience a loss on your investment.
S-15
INTEREST RATE CAPS MAY The pass-through rates on the offered
REDUCE THE YIELDS ON THE certificates are each subject to an interest
OFFERED CERTIFICATES rate cap as described in this prospectus
supplement. If on any distribution date the
pass-through rate for a class of offered
certificates is limited to the applicable
interest rate cap, and in the case of the Class
II-A Certificates and Class M Certificates the
amount of such limitation exceeds the amount
payable under the related yield maintenance
agreement, the holders of the applicable
certificates will receive a smaller amount of
interest than they would have received on that
distribution date had the pass-through rate for
that class not been calculated based on the
applicable interest rate cap. If the
pass-through rates on the offered certificates
are limited for any distribution date, the
resulting interest shortfalls may be recovered
by the holders of these certificates on the same
distribution date or on future distribution
dates on a subordinated basis 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. Any such shortfall
allocated to the Class III-A Certificates will
not be covered by the financial guaranty
insurance policy issued by ACE Guaranty Corp.
SEE "DESCRIPTION OF THE CERTIFICATES--EXCESS
SPREAD AND OVERCOLLATERALIZATION PROVISIONS" IN
THIS PROSPECTUS SUPPLEMENT.
THE OFFERED CERTIFICATES The offered certificates may not always receive
MAY NOT ALWAYS RECEIVE interest at a rate equal to One-Month LIBOR plus
INTEREST BASED ON ONE- the related margin. If the applicable interest
MONTH LIBOR PLUS rate cap is less than One-Month LIBOR plus the
RELATED MARGIN related margin, the interest rate on the offered
certificates will be reduced to such interest
rate cap. Thus, the yield to investors in such
class will be sensitive both to fluctuations in
the level of One-Month LIBOR and to the adverse
effects of the application of the applicable
interest rate cap. The prepayment or default of
mortgage loans with relatively higher net
mortgage rates, particularly during a period of
increased One-Month LIBOR rates, may result in
the applicable interest rate cap being lower
than otherwise would be the case. If on any
distribution date the application of the related
interest rate cap results in an interest payment
lower than One-Month LIBOR plus the related
margin on the offered certificates during the
related interest accrual period, the value of
such class of certificates may be temporarily or
permanently reduced.
S-16
To the extent interest on the offered
certificates is limited to the applicable
interest rate cap, the difference between such
interest rate cap and One- Month LIBOR plus the
related margin will create a shortfall. Some or
all of this shortfall in respect of the Class
II-A Certificates and Class M Certificates will
be funded to the extent of payments under the
related yield maintenance agreement. However,
payments under the yield maintenance agreements
are based on the lesser of the actual
certificate principal balance of the related
class of certificates and the principal amount
of such certificates based on certain prepayment
assumptions regarding the mortgage loans. If the
mortgage loans do not prepay according to those
assumptions, it may result in the yield
maintenance agreements providing insufficient
funds to cover such shortfalls. Such shortfalls
may remain unpaid on the final distribution
date, including the optional termination date.
In addition, although the Class II-A
Certificates and Class M Certificates are
entitled to payments under the related yield
maintenance agreement during periods of
increased One-Month LIBOR rates, the
counterparty thereunder will only be obligated
to make such payments under certain
circumstances.
To the extent that payments on the Class II-A
Certificates and Class M Certificates depend in
part on payments to be received under the yield
maintenance agreements, the ability of the trust
to make payments on the offered certificates
will be subject to the credit risk of Bear
Stearns Financial Products Inc.
WE REFER YOU TO "THE YIELD MAINTENANCE
AGREEMENTS" IN THIS PROSPECTUS SUPPLEMENT FOR A
DISCUSSION OF THE COUNTERPARTY'S OBLIGATION TO
MAKE PAYMENTS UNDER THE YIELD MAINTENANCE
AGREEMENTS.
THE YIELD ON SOME OF THE The yield to investors on the offered
OFFERED CERTIFICATES MAY certificates, other than the Class III-A
BE AFFECTED BY VARIOUS Certificates, may be adversely affected to the
RIGHTS OF THE CLASS III-A extent the class III-A insurer is entitled to
INSURER reimbursement for payments, including interest
thereon, made under the financial guaranty
insurance policy and any other amounts due to
the class III-A insurer pursuant to the
financial guaranty insurance policy and the
insurance agreement, including items unrelated
to the performance of the mortgage loans such as
certain expenses of the class III-A insurer, to
the extent not previously paid or reimbursed. In
addition, the holders of the offered
certificates, other than the Class III-A
Certificates, may be adversely affected by the
ability of the class III-A insurer to exercise
the rights of the Class III-A Certificates under
the pooling and servicing agreement and any
additional rights which they hold in connection
with any default by the master servicer or
otherwise as provided in this prospectus
supplement.
S-17
THE INITIAL RATING ON THE The rating on the Class III-A Certificates is
CLASS III-A CERTIFICATES based primarily on the structure of and the
IS WITHOUT REGARD TO THE credit characteristics of mortgage loans in the
CLASS III-A POLICY securitization, and not upon the claims paying
ability of the class III-A insurer. The rating
of the class III-A insurer is "AAA" by Standard
& Poor's and "Aa2" by Moody's, which is lower,
in the case of Moody's, than the initial ratings
of the Class III-A Certificates of "AAA" by
Standard & Poor's and "Aaa" by Moody's. THE
CLASS III-A INSURER'S RATINGS OUTLOOK FROM
STANDARD & POOR'S IS "NEGATIVE". As a result, a
downgrade in the financial strength ratings of
the class III-A insurer may not result in a
downgrade in the ratings on the Class III-A
Certificates. However, if delinquencies and
losses on the mortgage loans are higher than
expected, the ratings of the Class III-A
Certificates may be reduced to the financial
strength ratings of the class III-A insurer.
CERTAIN MORTGAGE LOANS Certain mortgage loans were underwritten
WERE UNDERWRITTEN TO generally in accordance with underwriting
NONCONFORMING standards which are primarily intended to
UNDERWRITING STANDARDS, provide for single family "non-conforming"
WHICH MAY RESULT IN mortgage loans. A "non-conforming" mortgage loan
LOSSES OR SHORTFALLS TO BE means a mortgage loan which is ineligible for
INCURRED ON THE OFFERED purchase by Fannie Mae or Freddie Mac due to
CERTIFICATES either credit characteristics of the related
mortgagor or documentation standards in
connection with the underwriting of the related
mortgage loan that do not meet the Fannie Mae or
Freddie Mac underwriting guidelines for "A"
credit mortgagors. These documentation standards
may include mortgagors who provide limited or no
documentation in connection with the
underwriting of the related mortgage loan.
Accordingly, mortgage loans underwritten under
such non- conforming credit underwriting
standards are likely to experience rates of
delinquency, foreclosure and loss that are
higher, and may be substantially higher, than
mortgage loans originated in accordance with the
Fannie Mae or Freddie Mac underwriting
guidelines. Any resulting losses, to the extent
not covered by credit enhancement, may affect
the yield to maturity of the offered
certificates.
DEFAULTS COULD CAUSE There could be substantial delays in the
PAYMENT DELAYS AND liquidation of defaulted mortgage loans and
LOSSES corresponding delays in your receiving your
portion of the proceeds of liquidation. These
delays could last up to several years.
Furthermore, an action to obtain a deficiency
judgment is regulated by statutes and rules, and
the amount of a deficiency judgment may be
limited by law. In the event of a default by a
borrower, these restrictions may impede the
ability of the master servicer to foreclose on
or to sell the mortgaged property or to obtain a
deficiency judgment. In addition, liquidation
expenses such as legal and appraisal fees, real
estate taxes and maintenance and preservation
expenses, will reduce the amount of security for
the mortgage loans and, in turn, reduce the
proceeds payable to certificateholders.
DEFAULTS COULD CAUSE There could be substantial delays in the
PAYMENT DELAYS AND liquidation of defaulted mortgage loans and
LOSSES corresponding delays in your receiving your
portion of the proceeds of liquidation. These
delays could last up to several years.
Furthermore, an action to obtain a deficiency
judgment is regulated by statutes and rules, and
the amount of a deficiency judgment may be
limited by law. In the event of a default by a
borrower, these restrictions may impede the
ability of the master servicer to foreclose on
or to sell the mortgaged property or to obtain a
deficiency judgment. In addition, liquidation
expenses such as legal and appraisal fees, real
estate taxes and maintenance and preservation
expenses, will reduce the amount of security for
the mortgage loans and, in turn, reduce the
proceeds payable to certificateholders.
In the event that:
o the mortgaged properties fail to provide
adequate security for the related mortgage
loans, and
S-18
o the protection provided by the
subordination of certain classes and the
availability of overcollateralization are
insufficient to cover any shortfall, you
could lose all or a portion of the money
you paid for your certificates.
YOUR YIELD COULD BE No one can accurately predict the level of
ADVERSELY AFFECTED BY THE prepayments that the trust will experience.
UNPREDICTABILITY OF The trust's prepayment experience may be
PREPAYMENTS affected by many factors, including:
o general economic conditions,
o the level of prevailing interest rates,
o the availability of alternative financing,
and
o homeowner mobility.
Substantially all of the mortgage loans
contain due-on-sale provisions, and the
master servicer intends to enforce those
provisions unless doing so is not permitted
by applicable law or the master servicer, in
a manner consistent with reasonable
commercial practice, permits the purchaser of
the mortgaged property in question to assume
the related mortgage loan. In addition,
approximately 77.09% of the mortgage loans by
cut-off date principal balance, imposed a
prepayment charge in connection with
voluntary prepayments made within up to five
years after origination, which prepayment
charges may discourage prepayments during the
applicable period.
The weighted average lives of the
certificates will be sensitive to the rate
and timing of principal payments, including
prepayments, on the mortgage loans, which may
fluctuate significantly from time to time.
You should note that:
o if you purchase your certificates at a
discount and principal is repaid on the
related mortgage loans slower than you
anticipate, then your yield may be lower
than you anticipate;
o if you purchase your certificates at a
premium and principal is repaid on the
related mortgage loans faster than you
anticipate, then your yield may be lower
than you anticipate;
o if you purchase a certificate bearing
interest at an adjustable rate, your yield
will also be sensitive both to the level
of one-month LIBOR and the applicable
interest rate cap;
o since repurchases of mortgage loans as a
result of breaches of representations and
warranties and liquidations of mortgage
loans following default have the same
effect as prepayments, your yield may be
lower than you expect if the rate of such
repurchases and liquidations is higher
than you expect;
S-19
o the overcollateralization provisions,
initially and whenever
overcollateralization is at a level below
the required level, are intended to result
in an accelerated rate of principal
distributions to holders of the classes of
offered certificates then entitled to
distributions of principal. An earlier
return of principal to the holders of the
offered certificates as a result of the
overcollateralization provisions will
influence the yield on the offered
certificates in a manner similar to the
manner in which principal prepayments on
the mortgage loans will influence the
yield on the related offered certificates;
and
o you bear the reinvestment risks resulting
from a faster or slower rate of principal
payments than you expected.
The yield maintenance agreements with respect
to the Class II-A Certificates and Class M
Certificates terminate in accordance with
their terms on March 25, 2010 and April 25,
2007, respectively. These dates were selected
based on certain prepayment assumptions
regarding the related mortgage loans and that
the optional termination right becomes
exercisable and is exercisable at that time.
These prepayment assumptions were used to
determine the projected principal balance of
the applicable class of certificates under
the related yield maintenance agreement. If
prepayments on such mortgage loans occur at
rates that are slower than those assumptions,
or even if such mortgage loans prepay
according to those assumptions, if the
optional termination right is not exercised,
the yield maintenance agreements will
terminate prior to the repayment in full of
the related class of certificates.
WE REFER YOU TO "THE MORTGAGE POOL" AND
"YIELD, PREPAYMENT AND MATURITY
CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT
AND "MATERIAL LEGAL ASPECTS OF THE LOANS --
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS" IN THE
PROSPECTUS FOR A DESCRIPTION OF CERTAIN
PROVISIONS OF THE MORTGAGE LOANS THAT MAY
AFFECT THE PREPAYMENT EXPERIENCE ON THE
MORTGAGE LOANS.
MORTGAGE LOAN Modifications of mortgage loans agreed to by
MODIFICATION MAY AFFECT the master servicer in order to maximize
INTEREST RATE CAPS ultimate proceeds of such mortgage loans may
extend the period over which principal is
received on the certificates or, if such
modifications downwardly adjust interest
rates, may lower the applicable interest rate
cap or caps.
A REDUCTION IN CERTIFICATE The ratings of each class of offered
RATING COULD HAVE AN certificates will depend primarily on an
ADVERSE EFFECT ON THE assessment by the rating agencies of the
VALUE OF YOUR CERTIFICATES mortgage loans, the amount of
overcollateralization and the subordination
afforded by certain classes of certificates.
The ratings by each of the rating agencies of
the offered certificates are not
recommendations to purchase, hold or sell the
offered certificates because such ratings do
not address the market prices of the
certificates or suitability for a particular
investor. The ratings on the Class III-A
Certificates are without regard to the
financial guaranty insurance policy issued by
ACE Guaranty Corp.
S-20
The rating agencies may suspend, reduce or
withdraw the ratings on the offered
certificates at any time. Any reduction in,
or suspension or withdrawal of, the rating
assigned to a class of offered certificates
would probably reduce the market value of
such class of offered certificates and may
affect your ability to sell them.
YOUR DISTRIBUTIONS COULD The seller will treat its transfer of the
BE ADVERSELY AFFECTED BY mortgage loans to the depositor as a sale of
THE BANKRUPTCY OR the mortgage loans. However, if the seller
INSOLVENCY OF becomes bankrupt, the trustee in bankruptcy
CERTAIN PARTIES may argue that the mortgage loans were not
sold but were only pledged to secure a loan
to the seller. If that argument is made, you
could experience delays or reductions in
payments on the certificates. If that
argument is successful, the bankruptcy
trustee could elect to sell the mortgage
loans and pay down the certificates early.
Thus, you could lose the right to future
payments of interest, and might suffer
reinvestment loss in a lower interest rate
environment.
In addition, if the master servicer becomes
bankrupt, a bankruptcy trustee or receiver
may have the power to prevent the appointment
of a successor master servicer. Any related
delays in servicing could result in increased
delinquencies or losses on the mortgage
loans.
DEVELOPMENTS IN Approximately 44.12% and 6.71% of the
SPECIFIED STATES COULD mortgage loans in loan group I as of the
HAVE A DISPROPORTIONATE cut-off date are secured by mortgaged
EFFECT ON THE MORTGAGE properties that are located in the states of
LOANS DUE TO GEOGRAPHIC California and New York, respectively.
CONCENTRATION OF Approximately 41.15% and 6.81% of the
MORTGAGED PROPERTIES mortgage loans in loan group II as of the
cut-off date are secured by mortgaged
properties that are located in the states of
California and Florida, respectively.
Approximately 35.53%, 7.79%, 7.52% and 6.50%
of the mortgage loans in loan group III as of
the cut-off date are secured by mortgaged
properties that are located in the states of
California, Florida, Illinois and Georgia,
respectively. Approximately 39.76%, 6.64% and
5.38% of the mortgage loans in the aggregate
as of the cut-off date are secured by
mortgaged properties that are located in the
states of California, Florida, Illinois and
Georgia, respectively. Property in certain of
those states, including California, may be
more susceptible than homes located in other
parts of the country to certain types of
uninsurable hazards, such as earthquakes,
floods, mudslides and other natural
disasters. In addition,
o economic conditions in the specified
states, which may or may not affect real
property values, may affect the ability of
borrowers to repay their loans on time;
o declines in the residential real estate
market in the specified states may reduce
the values of properties located in those
states, which would result in an increase
in the loan-to-value ratios; and
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o any increase in the market value of
properties located in the specified states
would reduce the loan-to-value ratios and
could, therefore, make alternative sources
of financing available to the borrowers at
lower interest rates, which could result
in an increased rate of prepayment of the
mortgage loans.
YOU MAY HAVE DIFFICULTY
SELLING YOUR CERTIFICATES The underwriters intend to make a secondary
market in the offered certificates, but the
underwriters have no obligation to do so. We
cannot assure you that a secondary market
will develop or, if it develops, that it will
continue. Consequently, you may not be able
to sell your certificates readily or at
prices that will enable you to realize your
desired yield. The market values of the
certificates are likely to fluctuate, and
such fluctuations may be significant and
could result in significant losses to you.
The secondary markets for asset backed
securities have experienced periods of
illiquidity and can be expected to do so in
the future. Illiquidity can have a severely
adverse effect on the prices of certificates
that are especially sensitive to prepayment,
credit or interest rate risk, or that have
been structured to meet the investment
requirements of limited categories of
investors.
THE RETURN ON YOUR The Servicemembers Civil Relief Act, formerly
CERTIFICATES COULD BE known as the Soldiers' and Sailors' Civil
REDUCED BY SHORTFALLS Relief Act of 1940, or Relief Act, and
DUE TO THE APPLICATION OF similar state laws provide relief to
THE SERVICEMEMBERS mortgagors who enter active military service
CIVIL RELIEF ACT AND and to mortgagors in reserve status who are
SIMILAR STATE LAWS called to active military service after the
origination of their mortgage loans. The
ongoing military operations of the United
States in Iraq and Afghanistan have caused an
increase in the number of citizens in active
military duty, including those citizens
previously in reserve status. Under the
Relief Act the interest rate applicable to a
mortgage loan for which the related mortgagor
is called to active military service will be
reduced from the percentage stated in the
related mortgage note to 6.00%. This interest
rate reduction and any reduction provided
under similar state laws will result in an
interest shortfall because the master
servicer will not be able to collect the
amount of interest which otherwise would be
payable with respect to such mortgage loan if
the Relief Act or similar state law was not
applicable thereto. This shortfall will not
be paid by the mortgagor on future due dates
or advanced by the master servicer and,
therefore, will reduce the amount available
to pay interest to the certificateholders on
subsequent distribution dates. We do not know
how many mortgage loans in the mortgage pool
have been or may be affected by the
application of the Relief Act or similar
state law. The financial guaranty insurance
policy issued by ACE Guaranty Corp. will not
cover any interest shortfalls on the Class
III-A Certificates as a result of the
application of the Relief Act.
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THE MORTGAGE POOL
GENERAL
We have provided below and in Schedule A to this prospectus supplement
information with respect to the conventional mortgage loans that we expect to
include in the pool of mortgage loans in the trust fund. Prior to the closing
date of January 30, 2004, we may remove mortgage loans from the mortgage pool
and we may substitute other mortgage loans for the mortgage loans we remove. The
depositor believes that the information set forth herein with respect to the
mortgage pool as presently constituted is representative of the characteristics
of the mortgage pool as it will be constituted at the closing date, although
certain characteristics of the mortgage loans in the mortgage pool may vary.
Unless we have otherwise indicated, the information we present below and in
Schedule A is expressed as of the cut-off date of January 1, 2004.
Each mortgage loan in the trust fund will bear interest at a fixed rate
or adjustable rate and will be secured by a first or second lien on the related
mortgaged property, and will be assigned to one of the three loan groups, each
of which constitutes a separate sub-trust and are referred respectively to as
Loan Group I, Loan Group II and Loan Group III in this prospectus supplement.
The mortgage loans in Loan Group I are comprised of mortgage loans that may or
may not conform to Freddie Mac and Fannie Mae loan limits and the mortgage loans
in Loan Group II and Loan Group III are comprised of mortgage loans that conform
to Freddie Mac and Fannie Mae loan limits. All of the mortgage loans we will
include in the trust fund will be fully amortizing or have a balloon payment.
Approximately 50.05%, 73.62% and 79.67% of the mortgage loans in Loan
Group I, Loan Group II and Loan Group III, respectively, and approximately
70.20% of the mortgage loans in the aggregate, are adjustable rate mortgage
loans. The interest rate borne by these adjustable rate mortgage loans, in most
cases after an initial fixed-rate period of two, three or five years, will be
adjusted semi-annually based on Six- Month LIBOR or annually based on One-Year
U.S. Treasury, computed in accordance with the related note, plus (or minus) the
related gross margin, generally subject to rounding and to certain other
limitations, including generally a maximum lifetime mortgage rate and in certain
cases a minimum lifetime mortgage rate and in certain cases a maximum upward or
downward adjustment on each interest adjustment date.
Approximately 1.95% and 2.16% of the mortgage loans in Loan Group I and
Loan Group III, respectively, and approximately 1.28% of the mortgage loans in
the aggregate, will receive interest only for the initial period set forth in
the related mortgage note.
SIX-MONTH LIBOR. Substantially all of the adjustable rate mortgage
loans will adjust semi-annually based on Six-Month LIBOR. Six-Month LIBOR will
be a per annum rate equal to the average of interbank offered rates for
six-month U.S. dollar-denominated deposits in the London market based on
quotations of major banks as published in THE WALL STREET JOURNAL and are most
recently available as of the time specified in the related mortgage note.
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SIX-MONTH LIBOR
------------------------------------------------------------
ADJUSTMENT DATE 1997 1998 1999 2000 2001 2002 2003
- ----------------- ---- ---- ---- ---- ---- ---- ----
January 1........ 5.60% 5.84% 5.07% 6.13% 6.20% 2.03% 1.38%
February 1....... 5.69 5.63 4.97 6.29 5.26 2.08 1.35
March 1.......... 5.69 5.70 5.13 6.33 4.91 2.04 1.34
April 1.......... 5.94 5.75 5.06 6.53 4.71 2.36 1.23
May 1............ 6.00 5.81 5.04 6.73 4.30 2.12 1.29
June 1........... 6.00 5.75 5.25 7.11 3.98 2.08 1.21
July 1........... 5.91 5.78 5.65 7.00 3.91 1.95 1.12
August 1......... 5.80 5.75 5.71 6.89 3.69 1.87 1.21
September 1...... 5.84 5.59 5.92 6.83 3.45 1.80 1.20
October 1........ 5.84 5.25 5.96 6.76 2.52 1.71 1.14
November 1....... 5.79 4.98 6.12 6.72 2.15 1.60 1.23
December 1....... 5.91 5.15 6.06 6.64 2.03 1.47 1.27
ONE-YEAR U.S. TREASURY. A small portion of the adjustable rate mortgage
loans will adjust based on the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year as reported by the Federal Reserve
Board in statistical Release No. H.15(519), referred to herein as the Release,
as most recently available as of the date forty-five days, thirty-five days or
thirty days prior to the adjustment date or on the adjustment date, which index
is referred to herein as One-Year U.S. Treasury, as published in the place
specified in the related mortgage note and as made available as of the date
specified in the related mortgage note. In the event that the Index specified in
a mortgage note is no longer available, an index reasonably acceptable to the
Trustee that is based on comparable information will be selected by the Master
Servicer, to the extent that it is permissible under the terms of the related
Mortgage and mortgage note.
EMC Mortgage Corporation purchased the mortgage loans directly in
privately negotiated transactions. WE REFER YOU TO "SERVICING OF THE MORTGAGE
LOANS" AND "THE MORTGAGE POOL -UNDERWRITING GUIDELINES" FOR FURTHER INFORMATION
REGARDING THE MORTGAGE LOANS.
Scheduled monthly payments made by the mortgagors on the mortgage loans
either earlier or later than the scheduled due dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest. The mortgage notes generally provide for a grace period for
monthly payments. Any mortgage loan may be prepaid in full or in part at any
time. However, approximately 77.09% of the mortgage loans by cut-off date
principal balance, provided at origination for the payment by the borrower of a
prepayment charge on voluntary prepayments typically made up to the first five
years from the date of execution of the related mortgage note. The holders of
the Class P Certificates will be entitled to all prepayment charges received on
the mortgage loans, and these amounts will not be available for distribution on
the other classes of certificates. There can be no assurance that the prepayment
charges will have any effect on the prepayment performance of the mortgage
loans. As of July 1, 2003, the Alternative Mortgage Parity Act of 1982 (the
"Parity Act"), which regulates the ability of the originators to impose
prepayment charges, was amended, and as a result, the Originators will be
required to comply with state and local laws in originating mortgage loans with
prepayment charge provisions with respect to loans originated on or after July
1, 2003. The depositor makes no representations as to the effect that the
prepayment charges and the recent amendment of the Parity Act may have on the
prepayment performance of the mortgage loans. The recent amendment of the Parity
Act does not retroactively affect loans originated before July 1, 2003. See
S-24
"Material Legal Aspects of the Loans-Enforceability of Prepayment and Late
Payment Fees" in the prospectus.
The cut-off date pool principal balance is approximately $501,490,725,
which is equal to the aggregate stated principal balance of the mortgage loans
as of the cut-off date. The mortgage loans to be transferred by the depositor to
the trust fund on the closing date will consist of 3,306 mortgage loans, of
which 584 loans are in Loan Group I with an aggregate principal balance of
approximately $121,205,344, 1,428 loans are in Loan Group II with an aggregate
principal balance of approximately $191,795,924 and 1,294 loans are in Loan
Group III with an aggregate principal balance of approximately $188,489,457. As
of the Cut-off Date, no scheduled monthly payment on any mortgage loan is more
than 31 days past due.
LOAN-TO-VALUE RATIO OR COMBINED LOAN-TO-VALUE RATIO. With respect to
any mortgage loan secured by a first lien, the loan-to-value ratio of a mortgage
loan is equal to the principal balance of such mortgage loan at the date of
origination, divided by the collateral value of the related mortgaged property.
With respect to any mortgage loan secured by a first lien, the combined
loan-to-value ratio is equal to the principal balance of the mortgage loan plus
the principal balance of any related senior mortgage loan at the date of
origination, divided by the collateral value of the related mortgaged property.
The "collateral value" of a mortgaged property is the lesser of
o the appraised value based on an appraisal made by an
independent fee appraiser at the time of the origination of
the related mortgage loan, and
o the sales price of that mortgaged property at the time of
origination.
With respect to a mortgage loan the proceeds of which were used to
refinance an existing mortgage loan, the collateral value is the appraised value
of the mortgaged property based upon the appraisal obtained at the time of
refinancing. No assurance can be given that the values of the mortgaged
properties have remained or will remain at their levels as of the dates of
origination of the related mortgage loans.
CREDIT SCORES. Many lenders obtain credit scores in connection with
mortgage loan applications to help them assess a borrower's creditworthiness.
They obtain credit scores from credit reports provided by various credit
reporting organizations, each of which may employ differing computer models and
methodologies. The credit score is designed to assess a borrower's credit
history at a single point, using objective information currently on file for the
borrower at a particular credit reporting organization. Information utilized to
create a credit score may include, among other things, payment history,
delinquencies on accounts, level of outstanding indebtedness, length of credit
history, types of credit, and bankruptcy experience. Credit scores range from
approximately 350 to approximately 840, with higher scores indicating an
individual with a more favorable credit history compared to an individual with a
lower score. However, a credit score purports only to be a measurement of the
relative degree of risk a borrower represents to a lender, that is, a borrower
with a higher score is statistically expected to be less likely to default in
payment than a borrower with a lower score. In addition, it should be noted that
credit scores were developed to indicate a level of default probability over a
two-year period, which does not correspond to the life of a mortgage loan.
Furthermore, credit scores were not developed specifically for use in connection
with mortgage loans, but for consumer loans in general, and assess only the
borrower's past credit history. Therefore, a credit score does not take into
consideration the differences between mortgage loans and consumer loans
generally or the specific characteristics of the related mortgage loan
including, for example, the loan-to-value ratio, the collateral for the mortgage
loan, or the debt to income ratio. We cannot assure you
S-25
that the credit scores of the mortgagors will be an accurate predictor of the
likelihood of repayment of the related mortgage loans.
MORTGAGE LOAN STATISTICAL DATA
Schedule A to this prospectus supplement sets forth in tabular format
certain information, as of the cut-off date, about the mortgage loans in the
aggregate and about the mortgage loans in each loan group. Other than with
respect to rates of interest, percentages are approximate and are stated by
cut-off date principal balance of all of the mortgage loans, or of mortgage
loans in the related loan group, as applicable. The sum of the respective
columns may not equal the total indicated due to rounding.
ASSIGNMENT OF THE MORTGAGE LOANS; REPURCHASE
At the time of issuance of the certificates, the depositor will cause
the mortgage loans, together with all principal and interest due with respect to
such mortgage loans after the cut-off date to be sold to the trust. The mortgage
loans in each loan group will be identified in a schedule appearing as an
exhibit to the pooling and servicing agreement with each loan group separately
identified. Such schedule will include information as to the principal balance
of each mortgage loan as of the cut-off date, as well as information including,
among other things, the mortgage rate, the borrower's monthly payment and the
maturity date of each mortgage note.
In addition, the depositor will deposit with Wells Fargo Bank
Minnesota, National Association, as custodian and agent for the trustee, for the
benefit of the certificateholders and the class III-A insurer, the following
documents with respect to each mortgage loan:
(a) the original mortgage note, endorsed without recourse in
the following form: "Pay to the order of LaSalle Bank National
Association, as trustee for certificateholders of Bear Stearns Asset
Backed Securities, Inc., Asset-Backed Certificates, Series 2004-HE1
without recourse," with all intervening endorsements that show a
complete chain of endorsement from the originator to the seller or, if
the original mortgage note is unavailable to the depositor, a photocopy
thereof, if available, together with a lost note affidavit;
(b) the original recorded mortgage or a photocopy thereof;
(c) a duly executed assignment of the mortgage to "LaSalle
Bank National Association, as trustee for certificateholders of Bear
Stearns Asset Backed Securities, Inc., Asset-Backed Certificates,
Series 2004-HE1, without recourse"'; in recordable form or, for each
mortgage loan subject to the Mortgage Electronic Registration Systems,
Inc. (the "MERS(R) System"), evidence that the mortgage is held for the
trustee as described in the pooling and servicing agreement;
(d) all interim recorded assignments of such mortgage, if any
and if available to the depositor; and
(e) the original or duplicate original lender's title policy
or, in the event such original title policy has not been received from
the title insurer, such original or duplicate original lender's title
policy shall be delivered within one year of the closing date or, in
the event such original lender's title policy is unavailable, a
photocopy of such title policy or, in lieu thereof, a current lien
search on the related property.
S-26
With respect to each mortgage loan subject to the MERS(R) System, in
accordance with the rules of membership of Merscorp, Inc. and/or Mortgage
Electronic Registration Systems, Inc. ("MERS"), the assignment of the mortgage
related to each such mortgage loan shall be registered electronically through
the MERS(R) System and MERS shall serve as mortgagee of record solely as nominee
in an administrative capacity on behalf of the trustee and shall not have any
interest in such mortgage loans.
Assignments of the mortgage loans provided to the custodian on behalf
of the trustee will be recorded in the appropriate public office for real
property records, except (i) in states as to which an opinion of counsel is
delivered to the trustee and the class III-A insurer, to the effect that such
recording is not required to protect the trustee's interests in the mortgage
loan against the claim of any subsequent transferee or any successor to or
creditor of the depositor or the seller, or (ii) with respect to any mortgage
loan electronically registered through the MERS(R) System. The seller shall be
responsible for the recordation of such assignments and the costs incurred in
connection therewith.
The custodian on behalf of the trustee will perform a limited review of
the mortgage loan documents on or prior to the closing date or in the case of
any document permitted to be delivered after the closing date, promptly after
the custodian's receipt of such documents and will hold such documents in trust
for the benefit of the holders of the certificates and class III-A insurer.
In addition, the seller will make representations and warranties in the
pooling and servicing agreement as of the cut-off date in respect of the
mortgage loans. The depositor will file the pooling and servicing agreement
containing such representations and warranties with the Securities and Exchange
Commission in a report on Form 8-K within 15 days of the closing date.
After the closing date, if any document is found to be missing or
defective in any material respect, or if a representation or warranty with
respect to any mortgage loan is breached and such breach materially and
adversely affects the interests of the holders of the certificates (without
regard to the Class III-A Policy issued by the class III-A insurer) in such
mortgage loan, the custodian, as agent for the trustee, is required to notify
the seller and the class III-A insurer in writing. If the seller cannot or does
not cure such omission, defect or breach within 60 days of its receipt of notice
from the custodian, the seller is required to repurchase the related mortgage
loan from the trust fund at a price equal to 100% of the stated principal
balance thereof as of the date of repurchase plus accrued and unpaid interest
thereon at the Mortgage Rate to the first day of the month following the month
of repurchase, plus any costs and damages incurred by the trust in connection
with any violation of such mortgage loan of any predatory lending laws, and
reduced by any portion of the servicing fee or advances payable to the purchaser
of the Mortgage Loan. Rather than repurchase the mortgage loan as provided
above, the seller may remove such mortgage loan from the trust fund and
substitute in its place another mortgage loan of like characteristics; however,
such substitution is only permitted within two years after the closing date.
With respect to any repurchase or substitution of a mortgage loan that
is not in default or as to which a default is not imminent, the trustee and the
class III-A insurer must have received a satisfactory opinion of counsel that
such repurchase or substitution will not cause the trust fund to lose the status
of its REMIC elections or otherwise subject the trust to a prohibited
transaction tax. The obligation to cure, repurchase or substitute as described
above constitutes the sole remedy available to the certificateholders, the
trustee or the depositor for omission of, or a material defect in, a mortgage
loan document or for a breach of representation or warranty by the seller with
respect to a mortgage loan.
S-27
THE ORIGINATORS
The principal originators of the mortgage loans are: New Century
Mortgage Corporation, with respect to approximately 25.89%, 61.52 and 18.76% of
the mortgage loans in Loan Group I, Loan Group II and Loan Group III,
respectively, and with respect to approximately 36.84% of the mortgage loans in
the aggregate; Encore Credit Corporation, with respect to approximately 12.11%
and 44.68% of the mortgage loans in Loan Group I and Loan Group III,
respectively, and with respect to approximately 19.72% of the mortgage loans in
the aggregate; IndyMac Bank, F.S.B., with respect to approximately 35.21%, 8.45%
and 18.66% of the mortgage loans in Loan Group I, Loan Group II and Loan Group
III, respectively, and with respect to approximately 18.76% of the mortgage
loans in the aggregate; and People's Choice Home Loans, Inc., with respect to
approximately 14.58%, 30.03 and 4.58% of the mortgage loans in Loan Group I,
Loan Group II and Loan Group III, respectively, and with respect to
approximately 16.73% of the mortgage loans in the aggregate. The remainder of
the mortgage loans were originated by various originators, none of which have
originated more than 10% of the mortgage loans in the aggregate.
NEW CENTURY MORTGAGE CORPORATION
New Century Mortgage Corporation ("New Century") is a wholly owned
subsidiary of New Century Financial Corporation, a publicly traded company. New
Century is a consumer finance and mortgage banking company that originates,
purchases, sells and services first lien and second lien mortgage loans and
other consumer loans. New Century emphasizes the origination of mortgage loans
that are commonly referred to as non conforming "B&C" loans or subprime loans.
New Century commenced lending operations on February 26, 1996.
New Century's executive offices are located at 18400 Von Karman,
Irvine, California 92612.
ENCORE CREDIT CORP.
Encore Credit Corp. ("ECC") is a privately owned specialty finance
company engaged in the business of originating, acquiring, selling and, through
an agreement with its sub-servicer Option One Mortgage Corporation, servicing
residential mortgage loans. Encore was incorporated in California in October
2001 and commenced operations in March 2002.
Encore has established a solid network of over 3,400 brokers and
correspondent lenders through which it originates loans secured primarily by one
to four-family residences. Encore Credit Corp. is headquartered in Irvine,
California, and has two other production branches in California, a regional
branch in Illinois and a branch in Virginia and is licensed in 48 states for
residential first mortgages.
Encore's executive offices are located at 1833 Alton Parkway, Irvine,
California 92606.
PEOPLE'S CHOICE HOME LOAN, INC.
People's Choice Home Loan, Inc. ("People's Choice"), a Wyoming
corporation, was incorporated on December 29, 1999 and is a non-prime mortgage
originator based in Irvine, California. People's Choice operates as a finance
company primarily engaged in the business of originating and selling home
mortgages secured by single-family residences. Loans are originated through
wholesale and retail production channels, with wholesale currently representing
the majority of loans originated.
People's Choice's executive offices are at 7515 Irvine Center Drive,
Irvine, California 92618.
S-28
INDYMAC BANK, F.S.B.
IndyMac Bank, F.S.B. ("IndyMac"), a federal savings bank, is a
wholly-owned subsidiary of IndyMac Intermediate Holdings, Inc., which is a
wholly-owned subsidiary of IndyMac Bancorp, Inc.
IndyMac's The principal executive offices of IndyMac are located at 155
North Lake Avenue, Pasadena, California 91101.
UNDERWRITING GUIDELINES
The underwriting guidelines are primarily intended to assess the
borrower's ability to repay the mortgage loan, to assess the value of the
mortgaged property and to evaluate the adequacy of the property as collateral
for the mortgage loan. While the originator's primary consideration in
underwriting a mortgage loan is the value of the mortgaged property, the
originator also considers, among other things, a mortgagor's credit history,
repayment ability and debt service to income ratio as well as the type and use
of the mortgaged property. Some of the mortgage loans bear higher rates of
interest than mortgages loan that are originated in accordance with Fannie Mae
and Freddie Mac standards, which is likely to result in 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. The mortgage loans will have been originated in accordance
with the underwriting guidelines. On a case-by-case basis, exceptions to the
underwriting guidelines are made where compensating factors exist. It is
expected that a substantial portion of the mortgage loans in the mortgage pool
that were originated by the originators will represent these exceptions.
Each applicant completes an application that includes information with
respect to the applicant's liabilities, income, credit history, employment
history and personal information. The underwriting guidelines require a credit
report on each applicant from a credit reporting company. The report typically
contains information relating to matters such as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions or judgments. Mortgaged properties that
are to secure mortgage loans generally are appraised by qualified independent
appraisers. These appraisers inspect and appraise the subject property and
verify that the property is in acceptable condition. Following each appraisal,
the appraiser prepares a report that includes a market value analysis based on
recent sales of comparable homes in the area and, replacement cost analysis
based on the current cost of constructing a similar home and, when deemed
appropriate, market rent analysis based on the rental of comparable homes in the
area. All appraisals are required to conform to the Uniform Standard of
Professional Appraisal Practice adopted by the Appraisal Standards Board of the
Appraisal Foundation and are generally on forms acceptable to Fannie Mae and
Freddie Mac.
The mortgage loans were originated consistent with and generally
conform to the underwriting guidelines' full/alternative documentation, stated
income documentation and no income documentation residential loan programs.
Under each of the programs, the originator reviews the applicant's source of
income, calculates the amount of income from sources indicated on the loan
application or similar documentation, reviews the credit history of the
applicant, calculates the debt service to income ratio, if required, to
determine the applicant's ability to repay the loan, and reviews the appraisal.
In determining the ability of the applicant to repay the loan a qualifying rate
has been created under the underwriting guidelines that generally is equal to
the interest rate on that loan. The underwriting guidelines require that
mortgage loans be underwritten in a standardized procedure that complies with
applicable federal, state and local laws and regulations. The maximum amount
loaned to a borrower and the maximum loan to value ratio allowed for that loan
depends on, among other things, the purpose of the mortgage loan, a borrower's
credit history, homeownership history, mortgage payment history or rental
payment history, repayment ability and debt service to income ratio, as well as
the type and use of the property.
S-29
In evaluating the credit quality of the borrowers, the originator
utilizes credit bureau risk scores. Generally, each credit report provides a
credit score for the borrower. Credit scores generally range from 350 to 840 and
are available from three major credit bureaus: Experian (formerly TRW
Information Systems and Services), Equifax and Trans Union. If three credit
scores are obtained, the originator applies the middle score of the primary wage
earner. Credit scores are empirically derived from historical credit bureau data
and represent a numerical weighing of a borrower's credit characteristics over a
two-year period. A credit score is generated through the statistical analysis of
a number of credit-related characteristics or variables. Common characteristics
include number of credit lines (trade lines), payment history, past
delinquencies, severity of delinquencies, current levels of indebtedness, types
of credit and length of credit history. Attributes are the specific values of
each characteristic. A scorecard (the model) is created with weights or points
assigned to each attribute. An individual loan applicant's credit score is
derived by summing together the attribute weights for that applicant.
The underwriting guidelines require that the income of each applicant
for a mortgage loan under the full/alternative documentation program be
verified. The specific income documentation required for the originator's
various programs is as follows: under the full/alternative documentation
program, applicants are required to submit one written form of verification from
the employer of stable income for at least 12 months. The documentation may take
the form of a Verification of Employment form provided by the employer, the most
recent pay stub with year-to-date earnings and the most recent W-2 or a copy of
the borrower's federal tax returns. Under the full/alternative documentation
program the borrower may choose to submit 12 consecutive months of personal
checking account bank statements. Under the stated income documentation program,
an applicant may be qualified based upon monthly income as stated on the
mortgage loan application if the applicant meets certain criteria. Income stated
on the application is not verified under the stated income documentation
program. Under the no income documentation program no income is disclosed on the
application and no debt service to income ratio is calculated. All of the
foregoing programs require that, with respect to salaried employees, there be a
telephone verification of the applicant's employment. Verification of the source
of funds, if any, deposited by the applicant into escrow in the case of a
purchase money loan is required.
SERVICING OF THE MORTGAGE LOANS
GENERAL
EMC Mortgage Corporation, or EMC, will act as the master servicer of
the mortgage loans pursuant to the pooling and servicing agreement, dated as of
January 1, 2004 (the "Agreement"), among the depositor, the seller, the master
servicer and the trustee. EMC is a Delaware corporation having its principal
executive office at 909 Hidden Ridge Drive, Irving, Texas 75038.
In the event of a default by EMC under the pooling and servicing
agreement, the trustee, subject to the provisions of the pooling and servicing
agreement, will be required to enforce any remedies against EMC and shall either
find a successor master servicer or shall assume the master servicing
obligations itself.
THE MASTER SERVICER
EMC, a wholly-owned subsidiary of The Bear Stearns Companies Inc., was
established as a full-line mortgage banking company to facilitate the purchase
and servicing of whole loan portfolios containing various levels of quality from
"investment grade" to varying degrees of "non-investment grade" up to and
including mortgaged properties acquired through foreclosure or deed-in-lieu of
foreclosure. EMC was incorporated in the State of Delaware on September 26, 1990
and commenced operation in Texas on October 9, 1990.
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The principal business of EMC has been the resolution of non-performing
residential mortgage loan portfolios acquired from Resolution Trust Corporation,
from private investors and from the Department of Housing and Urban Development
through its auctions of defaulted Federal Housing Authority mortgage loans.
EMC's servicing portfolio consists primarily of two categories:
o performing investment-quality loans serviced for EMC's own
account or the account of Fannie Mae, Freddie Mac, private
mortgage conduits and various institutional investors; and
o non-investment grade, sub-performing loans, non-performing
loans and REO properties serviced for EMC's own account and
for the account of investors in securitized performing and
non-performing collateral transactions.
EMC's operations resemble those of most mortgage banking companies,
except that significant emphasis is placed on the collection and due diligence
areas, due to the nature of the mortgage portfolios purchased. As of November
30, 2003, EMC was servicing approximately $12.7 billion of mortgage loans and
REO property.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF EMC
The following table sets forth the delinquency and foreclosure
experience of mortgage loans serviced by EMC as of the dates indicated. EMC's
portfolio of mortgage loans may differ significantly from the mortgage loans
backing the certificates in terms of underwriting standards, interest rates,
principal balances, geographic distribution, types of properties and other
possibly relevant characteristics. There can be no assurance, and no
representation is made, that the delinquency and foreclosure experience with
respect to the mortgage loans backing the certificates will be similar to that
reflected in the table below, nor is any representation made as to the rate at
which losses may be experienced on liquidation of defaulted mortgage loans. The
actual delinquency experience on the mortgage loans will depend, among other
things, upon the value of the real estate securing such mortgage loans and the
ability of borrowers to make required payments.
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DELINQUENCY AND FORECLOSURE EXPERIENCE(1)
As of June 30, 2000 As of November 30, 2001
----------------------------------------- -----------------------------------------
No. of Principal % by Principal No. of Principal % by Principal
Loans Balance(2) Balance Loans Balance(2) Balance
------ -------------- -------------- ------- -------------- --------------
Current Loans............... 40,957 $2,773,375,021 69.53% 76,892 $4,291,550,897 58.30%
Period of Delinquency(3)....
30-59 Days................ 5,116 335,858,515 8.42 14,425 795,817,499 10.81
60-89 Days................ 1,763 124,260,172 3.12 4,935 279,727,400 3.80
90 Days or more........... 2,490 175,071,236 4.39 10,257 530,744,768 7.21
Foreclosure/bankruptcies(4). 6,784 498,486,846 12.50 19,054 1,213,468,377 16.48
Real Estate Owned........... 1,045 81,915,418 2.05 4,234 249,853,497 3.39
------ -------------- ------ ------- -------------- ------
Total Portfolio............. 58,155 $3,988,967,208 100.00% 129,795 $7,361,162,438 100.00%
====== ============== ====== ======= ============== ======
As of November 30, 2002 As of November 30, 2003
----------------------------------------- -----------------------------------------
No. of Principal % by Principal No. of Principal % by Principal
Loans Balance(2) Balance Loans Balance(2) Balance
------ --------------- -------------- ------- --------------- --------------
Current Loans............... 107,444 $ 6,863,380,896 62.44% 106,121 $ 8,638,124,015 68.08%
Period of Delinquency.......
30-59 Days................ 17,455 1,044,663,778 9.50 17,011 1,092,638,661 8.61
60-89 Days................ 6,524 401,534,696 3.65 6,194 405,096,220 3.19
90 Days or more........... 13,797 686,521,557 6.25 15,417 760,682,618 5.99
Foreclosure/bankruptcies(4). 24,299 1,663,845,463 15.14 20,652 1,497,106,926 11.80
Real Estate Owned........... 5,014 331,882,863 3.02 3,553 295,106,372 2.33
Total Portfolio............. 174,533 $10,991,829,253 100.00% 168,948 $12,688,754,812 100.00%
________________
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated.
(2) For the REO properties, the principal balance is at the time of
foreclosure.
(3) No mortgage loan is included in this table as delinquent until it is
30 days past due.
(4) Exclusive of the number of loans and principal balance shown in the
period of delinquency.
Since the mortgage loans were originated by various originators at
different times, it is unlikely that the delinquency and foreclosure experience
set forth above will be representative of the actual delinquency and foreclosure
experience on the mortgage loans in the trust fund or even representative of the
mortgage loans in the trust fund being serviced by EMC. There can be no
assurance that factors beyond EMC's control, such as national or local economic
conditions or downturn in the real estate markets in which the mortgaged
properties are located, will not result in increased rates of delinquencies and
foreclosure losses in the future.
COLLECTION AND OTHER SERVICING PROCEDURES
The master servicer will use reasonable efforts to ensure that all
payments required under the terms and provisions of the mortgage loans are
collected, and shall follow collection procedures comparable to the collection
procedures of prudent mortgage lenders servicing mortgage loans for their own
account, to the extent such procedures shall be consistent with the pooling and
servicing agreement. Consistent with the foregoing, the master servicer may in
their discretion waive, modify or vary or permit to be waived, modified
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or varied, any term of any mortgage loan including, in certain instances,
changing the mortgage interest rate, forgiving the payment of principal or
extending the final maturity.
Certain mortgage loans contain due-on-sale clauses. If a mortgaged
property has been or is about to be conveyed by the mortgagor and the master
servicer has knowledge thereof, the master servicer will accelerate the maturity
of the mortgage loan, to the extent permitted by the terms of the related
mortgage note and applicable law. If it reasonably believes that the due-on-sale
clause cannot be enforced under applicable law, or would otherwise potentially
impair any recovery under a primary mortgage insurance policy, if applicable,
the master servicer in some cases with the prior consent of the trustee (not to
be unreasonably withheld) may enter into an assumption agreement with the person
to whom such property has been or is about to be conveyed, pursuant to which
such person becomes liable under the mortgage note and the mortgagor, to the
extent permitted by applicable law, remains liable thereon. The master servicer
will retain any fee collected for entering into assumption agreements as
additional servicing compensation. In regard to circumstances in which the
master servicer may be unable to enforce due-on-sale clauses, we refer you to
"Material Legal Aspects of the Loans -- Due-on-Sale Clauses in Mortgage Loans"
in the prospectus. In connection with any such assumption, the interest rate
borne by the related mortgage note may not be changed. Certain other mortgage
loans are assumable under some circumstances if, in the sole judgment of the
master servicer, the prospective purchaser of a mortgaged property is
creditworthy and the security for the mortgage loan is not impaired by the
assumption.
The master servicer will establish and maintain, in addition to the
protected accounts described below under "--Protected Accounts," one or more
servicing accounts in a depository institution the deposits of which are insured
by the FDIC to the maximum extent permitted by law. The master servicer will
deposit and retain therein all collections from the mortgagors for the payment
of taxes, assessments, insurance premiums, or comparable items as agent of the
mortgagors as provided in the pooling and servicing agreement. Each servicing
account and the investment of deposits therein shall comply with the
requirements of the pooling and servicing agreement and shall meet the
requirements of the rating agencies. Withdrawals of amounts from the servicing
accounts may be made only to effect timely payment of taxes, assessments,
insurance premiums, or comparable items, to reimburse the master servicer for
any advances made with respect to such items, to refund to any mortgagors any
sums as may be determined to be overages, to pay interest, if required, to
mortgagors on balances in the servicing accounts, to pay earnings not required
to be paid to mortgagors to the master servicer, or to clear and terminate the
servicing accounts at or at any time after the termination of the pooling and
servicing agreement.
The master servicer will maintain errors and omissions insurance and
fidelity bonds in certain specified amounts to the extent required under the
pooling and servicing agreement.
HAZARD INSURANCE
Each of the master servicer will maintain and keep, or cause to be
maintained and kept, with respect to each mortgage loan, in full force and
effect for each mortgaged property a hazard insurance policy with extended
coverage customary in the area where the mortgaged property is located in an
amount equal to the amounts required in the pooling and servicing agreement or
in general equal to at least the lesser of the outstanding principal balance of
the mortgage loan or the maximum insurable value of the improvements securing
such mortgage loan and containing a standard mortgagee clause; but no less than
the amount necessary to prevent loss due to the application of any co-insurance
provision of the related policy. Any amounts collected by the master servicer
under any such hazard insurance policy, other than amounts to be applied to the
restoration or repair of the mortgaged property or amounts released to the
mortgagor in accordance with normal servicing procedures, shall be deposited in
a protected account. Any cost incurred in maintaining any such hazard insurance
policy shall not be added to the amount owing under the mortgage
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loan for the purpose of calculating monthly distributions to certificateholders,
notwithstanding that the terms of the mortgage loan so permit. Such costs shall
be recoverable by the master servicer out of related late payments by the
mortgagor or out of insurance proceeds or liquidation proceeds or any other
amounts in the related protected account. The right of the master to
reimbursement for such costs incurred will be prior to the right of the trustee
to receive any related insurance proceeds or liquidation proceeds or any other
amounts in the related protected account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different hazard insurers and therefore will not contain
identical terms and conditions, the basic terms thereof are dictated by state
law. Such policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism and malicious mischief. The foregoing
list is merely indicative of certain kinds of uninsured risks and is not
intended to be all-inclusive.
Hazard insurance policies covering properties similar to the mortgaged
properties typically contain a clause which in effect requires the insured at
all times to carry insurance of a specified percentage generally at least 80% of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause provides that the hazard insurer's
liability in the event of partial loss does not exceed the greater of (i) the
replacement cost of the improvements less physical depreciation, or (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
Since the amount of hazard insurance to be maintained on the
improvements securing the mortgage loans may decline as the principal balances
owing thereon decrease, and since residential properties have historically
appreciated in value over time, in the event of partial loss, hazard insurance
proceeds may be insufficient to restore fully the damaged property.
Where the property securing a mortgage loan is located at the time of
origination in a federally designated flood area, the master servicer will cause
with respect to such mortgage loan flood insurance to the extent available and
in accordance with industry practices to be maintained. Such flood insurance
will generally be in an amount equal to the lesser of (i) the outstanding
principal balance of the related mortgage loan, (ii) either (a) the minimum
amount required under the terms of coverage to compensate for any damage or loss
on a replacement cost basis, or (b) the maximum insurable value of the
improvements securing such mortgage loan, and (iii) the maximum amount of such
insurance available for the related mortgaged property under either the regular
or emergency programs of the National Flood Insurance Program, assuming that the
area in which such mortgaged property is located is participating in such
program.
The master servicer, on behalf of the trustee and certificateholders,
will present claims to the hazard insurer under any applicable hazard insurance
policy. As set forth above, all collections under such policies that are not
applied to the restoration or repair of the related mortgaged property or
released to the mortgagor in accordance with normal servicing procedures are to
be deposited in a protected account. The master servicer is required to deposit
in a protected account the amount of any deductible under a blanket hazard
insurance policy, if applicable.
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REALIZATION UPON DEFAULTED MORTGAGE LOANS
The master servicer will take such action either as such deems to be in
the best interest of the trust, or as is consistent with accepted servicing
practices or in accordance with established practices for other mortgage loans
serviced by the master servicer with respect to defaulted mortgage loans and
foreclose upon or otherwise comparably convert the ownership of properties
securing defaulted mortgage loans as to which no satisfactory collection
arrangements can be made. To the extent set forth in the pooling and servicing
agreement, the master servicer will service the property acquired by the trust
through foreclosure or deed-in- lieu of foreclosure in accordance with
procedures that the master servicer employs and exercises in servicing and
administering mortgage loans for its own account and which are in accordance
with accepted mortgage servicing practices of prudent lending institutions and
Fannie Mae guidelines. The master servicer will not be required to expend its
own moneys with respect to the restoration or to make servicing advances with
respect to such mortgaged properties unless such entity has determined that (i)
such amounts would be recovered, and (ii) it believes such restoration will
increase proceeds to the trust following the mortgaged property's eventual
liquidation.
Since insurance proceeds received in connection with a mortgage loan
cannot exceed deficiency claims and certain expenses incurred by the master
servicer, no insurance payments will result in a recovery to certificateholders
which exceeds the principal balance of the defaulted mortgage loan together with
accrued interest thereon at its applicable net mortgage rate.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
EMC will not receive a fee in its capacity as master servicer but will
receive a servicing fee for the mortgage loans it will service as described
below. The master servicer will be entitled to receive a fee as compensation for
its activities under the pooling and servicing agreement equal to the servicing
fee rate multiplied by the stated principal balance of each mortgage loan
serviced by such entity as of the due date in the month preceding the month in
which such distribution date occurs. The servicing fee rate will be 0.50% per
annum. Interest shortfalls on the mortgage loans resulting from prepayments in
full in any calendar month will be offset by the master servicer on the
distribution date in the following calendar month to the extent of compensating
interest payments as described herein.
In addition to the primary compensation described above, the master
servicer will retain all assumption fees, tax service fees, fees for statements
of account payoff and late payment charges, all to the extent collected from
mortgagors. The master servicer will not be entitled to retain any prepayment
charges or penalties; prepayment charges and penalties will be distributed to
the holders of the Class P Certificates.
The master servicer will pay all related expenses incurred in
connection with its servicing responsibilities, subject to limited reimbursement
as described herein.
PROTECTED ACCOUNTS
The master servicer will establish and maintain one or more custodial
accounts (referred to herein as protected accounts) into which they will deposit
daily or at such other time specified in the pooling and servicing agreement all
collections of principal and interest on any mortgage loans, including principal
prepayments, insurance proceeds, liquidation proceeds, the repurchase price for
any mortgage loans repurchased, and advances made from the master servicer's own
funds, less the applicable servicing fee. All protected accounts and amounts at
any time credited thereto shall comply with the requirements of the pooling and
servicing agreement and shall meet the requirements of the rating agencies.
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The master servicer will retain in its protected account for
distribution directly to the trustee the daily collections of interest and
principal, Insurance Proceeds, Liquidation Proceeds and the repurchase price
with respect to any repurchased mortgage loans with respect to the mortgage
loans.
On the business day prior to each distribution date, the master
servicer will withdraw from its protected account amounts on deposit therein as
described above and will remit them to the trustee for deposit in the
Distribution Account.
DISTRIBUTION ACCOUNT
The trustee shall establish and maintain in the name of the trustee,
for the benefit of the certificateholders, an account (the "Distribution
Account"), into which on the business day prior to each distribution date it
will deposit all amounts transferred to it by the master servicer from its
protected accounts and all proceeds of any mortgage loans and REO properties
transferred in connection with the optional termination of the trust. All
amounts deposited to the Distribution Account shall be held in the name of the
trustee in trust for the benefit of the certificateholders and the class III-A
insurer in accordance with the terms and provisions of the pooling and servicing
agreement. The amount at any time credited to the Distribution Account may be
invested in the name of the trustee, in such permitted investments set forth in
the pooling and servicing agreement.
On each Distribution Date, the trustee will withdraw available funds
from the Distribution Account and make payments to the certificateholders in
accordance with the provisions set forth under "Description of the
Certificates-- Distributions on the Certificates" in this prospectus supplement.
The trustee will be entitled to a trustee fee equal to the trustee fee rate set
forth in the pooling and servicing agreement, multiplied by the aggregate stated
principal balance of the mortgage loans as of the end of the due period
immediately preceding the Distribution Date. The trustee will also be entitled
to any amounts earned on funds in the Distribution Account. The trustee will
also be entitled to be reimbursed for their expenses, costs and liabilities
incurred by or reimbursable to them pursuant to the pooling and servicing
agreement prior to the distribution of the available funds.
PREPAYMENT INTEREST SHORTFALLS AND COMPENSATING INTEREST
When a borrower prepays all or a portion of a mortgage loan between due
dates, the borrower pays interest on the amount prepaid only to the date of
prepayment. Accordingly, an interest shortfall will result equal to the
difference between the amount of interest collected and the amount of interest
that would have been due absent such prepayment. We refer to this interest
shortfall as a "Prepayment Interest Shortfall." In order to mitigate the effect
of any such shortfall in interest distributions to holders of the offered
certificates on any distribution date, generally, the amount of the servicing
fee otherwise payable to the master servicer for such month shall, to the extent
of such shortfall, be deposited by the master servicer in its protected account
for distribution to the trustee for deposit in the Distribution Account. We
refer to such deposited amounts as "Compensating Interest." Any such deposit or
remittance by the master servicer will be reflected in the distributions to
holders of the offered certificates entitled thereto made on the distribution
date on which the principal prepayment received would be distributed.
ADVANCES
If the scheduled payment on a mortgage loan which was due on a related
due date is delinquent other than as a result of application of the Relief Act
or similar state law, the master servicer will remit to the trustee within the
number of days prior to the related distribution date set forth in the pooling
and servicing agreement an amount equal to such delinquency, net of the related
servicing fee rate except to the extent the
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master servicer determines any such advance to be nonrecoverable from
Liquidation Proceeds, Insurance Proceeds or from future payments on the mortgage
loan for which such advance was made. Subject to the foregoing, such advances
will be made by the master servicer until the liquidation of the related
mortgage loan property. Failure by the master servicer to remit any required
advance, which failure goes unremedied for the number of days specified in the
pooling and servicing agreement would constitute an event of default under the
pooling and servicing agreement. See "Description of the Certificates--Events of
Default" in this prospectus supplement.
EVIDENCE AS TO COMPLIANCE
The pooling and servicing agreement will provide that on or before a
specified date in each year, a firm of independent public accountants will
furnish a statement to the trustee and the class III-A insurer to the effect
that, on the basis of the examination by such firm conducted substantially in
compliance with the Uniform Single Attestation Program for Mortgage Bankers or
the Audit Program for Mortgages serviced for Freddie Mac, the servicing by the
master servicer of mortgage loans or private asset backed securities, or under
pooling and servicing agreements substantially similar to each other, including
the pooling and servicing agreement, was conducted in compliance with such
agreements, the Audit Program for Mortgages serviced for Freddie Mac, or the
Uniform Single Attestation Program for Mortgage Bankers, except for any
significant exceptions or errors in records that, in the opinion of the firm it
is required to report. In rendering its statement such firm may rely, as to
matters relating to the direct servicing of mortgage loans by the master
servicer, upon comparable statements for examinations conducted substantially in
compliance with the Uniform Single Attestation Program for Mortgage Bankers or
the Audit Program for Mortgages serviced for Freddie Mac (rendered within one
year of such statement) of firms of independent public accountants with respect
to the master servicer.
The pooling and servicing agreement will also provide for delivery to
the trustee and the class III-A insurer, on or before a specified date in each
year, of an annual statement signed by officers of the master servicer to the
effect that the master servicer has fulfilled its obligations under the pooling
and servicing agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the master servicer may be obtained by certificateholders without
charge upon written request to the master servicer at the address of the master
servicer set forth above.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The pooling and servicing agreement will provide that the master
servicer may not resign from its obligations and duties under the pooling and
servicing agreement except (a) upon a determination that its duties thereunder
are no longer permissible under applicable law or (b) upon compliance with the
following requirements:
o the master servicer has proposed a successor master servicer
to the trustee and the class III-A insurer and each of the
class III-A insurer and the trustee has consented thereto,
such consents not to be withheld unreasonably;
o the proposed successor is qualified to service mortgage loans
on behalf of Fannie Mae or Freddie Mac; and
o the trustee has received written confirmation from each rating
agency that the appointment of such successor will not cause
that rating agency to reduce, qualify or withdraw its then-
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current ratings assigned to any class of offered certificates
(such determination to be made without regard to the Class
III-A Policy).
In addition, the master servicer may be removed from its obligations
and duties as set forth in the pooling and servicing agreement. No such
resignation will become effective until the trustee or a successor master
servicer has assumed the master servicer's obligations and duties under the
pooling and servicing agreement.
The pooling and servicing agreement will further provide that neither
the master servicer, nor the depositor nor any director, officer, employee, or
agent of the master servicer or the depositor will be under any liability to the
trust fund or certificateholders for any action taken or for refraining from the
taking of any action in good faith pursuant to the pooling and servicing
agreement, or for errors in judgment; provided, however, that neither the master
servicer, nor the depositor nor any such person will be protected against any
breach of its representations and warranties in the pooling and servicing
agreement or any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. The pooling and servicing agreement will further provide that the
master servicer, the depositor and any director, officer, employee or agent of
the master servicer or the depositor will be entitled to indemnification by the
trust fund and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the pooling and
servicing agreement or the certificates, other than any loss, liability or
expense related to any specific mortgage loan or mortgage loans and any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder.
In addition, the pooling and servicing agreement will provide that
neither the master servicer nor the depositor will be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the pooling and servicing agreement and which
in its opinion may involve it in any expense or liability. Either the master
servicer or the depositor may, however, in its discretion undertake any such
action which it may deem necessary or desirable with respect to the pooling and
servicing agreement and the rights and duties of the parties thereto and the
interests of the certificateholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
expenses, costs and liabilities of the trust fund, and the master servicer or
the depositor, as the case may be, will be entitled to be reimbursed therefor
out of funds otherwise distributable to certificateholders.
Any person into which either the master servicer may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the master servicer is a party, or any person succeeding to the business of the
master servicer, will be the successor of the master servicer under the pooling
and servicing agreement, provided that such person is qualified to service
mortgage loans on behalf of Fannie Mae or Freddie Mac and further provided that
such merger, consolidation or succession does not adversely affect the
then-current ratings of any class of offered certificates (such determination to
be made without regard to the Class III-A Policy).
DESCRIPTION OF THE CERTIFICATES
GENERAL
The trust will issue the certificates pursuant to the pooling and
servicing agreement. The certificates consist of the classes of certificates
reflected on the cover of this prospectus supplement, which we refer to as the
offered certificates, the Class R-1, Class R-2 and Class RX Certificates, the
Class P Certificates and the
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Class CE Certificates, which we are not offering by this prospectus supplement.
We refer to the Class I-A-1 Certificates and Class I-A-2 Certificates as the
Class I-A Certificates, we refer to the Class II-A-1 Certificates and Class
II-A-2 Certificates as the Class II-A Certificates, we refer to the classes with
the letter "A" in their class name as the senior certificates, and we refer to
the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5 and Class M-6
Certificates collectively as the Class M Certificates or subordinated
certificates. We refer to the Class R-1, Class R-2 and Class RX Certificates
collectively as the Class R Certificates or the residual certificates.
The Class CE Certificates are interest-only certificates issued with
notional principal balances. The Class R Certificates will not have certificate
principal balances and will not be entitled to distributions of interest.
The trust will issue the offered certificates in book-entry form as
described below, in minimum dollar denominations of $25,000 and integral
multiples of $1.00 in excess thereof, except that one certificate of each class
may be issued in the remainder of the class.
BOOK-ENTRY REGISTRATION
The offered certificates will be issued in book-entry form. Persons
acquiring beneficial ownership interests in the book-entry securities will hold
their securities through The Depository Trust Company in the United States and
through Clearstream, Luxembourg or the Euroclear System in Europe, if they are
participants of any of such systems, or indirectly through organizations which
are participants. The Depository Trust Company is referred to as "DTC".
Clearstream, Luxembourg is referred to as "Clearstream". The Euroclear System is
referred to as "Euroclear". The book-entry securities will be issued in one or
more certificates that equal the aggregate principal balance of the applicable
class or classes of securities and will initially be registered in the name of
Cede & Co., the nominee of DTC. Clearstream and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in Clearstream's and Euroclear's names on the books of their respective
depositaries that in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank N.A. will act
as the relevant depositary for Clearstream and JPMorgan Chase Bank will act as
the relevant depositary for Euroclear. Except as described below, no person
acquiring a book-entry security will be entitled to receive a physical
certificate representing such security. Unless and until physical securities are
issued, it is anticipated that the only "securityholder" with respect to a
book-entry security will be Cede & Co., as nominee of DTC. Beneficial owners are
only permitted to exercise their rights indirectly through participants and DTC.
An Owner's ownership of a book-entry security will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such book-entry security will be recorded on the records of DTC (or
of a DTC participant that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant and on the records of
Clearstream or Euroclear, as appropriate).
Beneficial owners will receive all distributions allocable to principal
and interest with respect to the book-entry securities from the trustee through
DTC and DTC participants. While the book-entry securities are outstanding
(except under the circumstances described below), under the rules, regulations
and procedures creating, governing and affecting DTC and its operations (the
"Rules"), DTC is required to make book-entry transfers among participants on
whose behalf it acts with respect to the securities. DTC is required to receive
and transmit distributions allocable to principal and interest with respect to
the securities.
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Participants and Financial Intermediaries with whom beneficial owners have
accounts with respect to securities are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective beneficial owners. Accordingly, although beneficial owners will not
possess physical certificates, the Rules provide a mechanism by which beneficial
owners will receive distributions and will be able to transfer their beneficial
ownership interests in the securities.
Beneficial owners will not receive or be entitled to receive Definitive
Securities, except under the limited circumstances described below. Unless and
until Definitive Securities are issued, beneficial owners who are not
participants may transfer ownership of securities only through participants and
Financial Intermediaries by instructing such participants and Financial
Intermediaries to transfer beneficial ownership interests in the securities by
book-entry transfer through DTC for the account of the purchasers of such
securities, which account is maintained with their respective participants or
Financial Intermediaries. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of securities will be executed through DTC
and the accounts of the respective participants at DTC will be debited and
credited. Similarly, the participants and Financial Intermediaries will make
debits or credits, as the case may be, on their records on behalf of the selling
and purchasing beneficial owners.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Clearstream participants on such business day. Cash received in
Clearstream or Euroclear as a result of sales of securities by or through a
Clearstream participant or Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC.
Transfers between DTC participants will occur in accordance with DTC
rules. Transfers between Clearstream participants and Euroclear participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
relevant depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream participants and Euroclear participants may not deliver
instructions directly to the relevant depositaries.
DTC is a New York-chartered limited purpose trust company that performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the book-entry securities, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of book-entry securities will be subject to the Rules as in
effect from time to time.
Clearstream, has advised that it is incorporated under the laws of the
Grand Duchy of Luxembourg as a professional depository. Clearstream holds
securities for its participating organizations or participants.
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Clearstream facilitates the clearance and settlement of securities transactions
between Clearstream participants through electronic book-entry changes in
account of Clearstream participants, eliminating the need for physical movement
of securities.
Clearstream provides to Clearstream participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream interfaces with domestic markets in several countries. As a
professional depository, Clearstream is subject to regulation by the Luxembourg
Commission for the Supervision of the Financial Sector (the "CSSF"). Clearstream
participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to Clearstream is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Clearstream
participant, either directly or indirectly.
Distributions, to the extent received by the Relevant Depository for
Clearstream, with respect to the securities held beneficially through
Clearstream will be credited to cash accounts of Clearstream participants in
accordance with its rules and procedures.
Euroclear was created in 1968 to hold securities for its participants
and to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thereby eliminating
the need for movement of physical securities and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 32 currencies, including United States dollars. Euroclear provides
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross- market transfers with DTC described above. Euroclear is
operated by Euroclear Bank S.A./NV under contract with Euroclear Clearance
Systems S.C., a Belgian cooperative corporation. Euroclear Bank S.A./NV conducts
all operations. All Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with Euroclear Bank S.A./NV, not Euroclear Clearance
Systems S.C. Euroclear Clearance Systems S.C. establishes policy for Euroclear
on behalf of Euroclear participants. Euroclear participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear participant, either directly or indirectly.
Euroclear Bank S.A./NV has advised us that it is licensed by the
Belgian Banking and Finance Commission to carry out banking activities on a
global basis. As a Belgian bank, it is regulated and examined by the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with Euroclear Bank
S.A./NV are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law. These terms and conditions, operating procedures and laws govern transfers
of securities and cash within Euroclear, withdrawals of securities and cash from
Euroclear, and receipts of payments with respect to securities in Euroclear. All
securities in Euroclear are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. Euroclear Bank
S.A./NV acts under the Terms and Conditions only on behalf of Euroclear
participants, and has no record of or relationship with persons holding through
Euroclear participants.
The trustee will make distributions on the book-entry securities on
each distribution date to DTC. DTC will be responsible for crediting the amount
of such payments to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners that it
represents and to each Financial Intermediary for
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which it acts as agent. Each such Financial Intermediary will be responsible for
disbursing funds to the beneficial owners that it represents.
Under a book-entry format, beneficial owners may experience some delay
in their receipt of payments, since the trustee will forward such payments to
Cede & Co. Distributions with respect to securities held through Clearstream or
Euroclear will be credited to the cash accounts of Clearstream participants or
Euroclear participants in accordance with the relevant system's rules and
procedures, to the extent received by the relevant depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
DTC participants that in turn can only act on behalf of Financial
Intermediaries, the ability of an Owner to pledge book-entry securities to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such book-entry securities, may be limited due to the lack
of physical certificates for such book-entry securities. In addition, issuance
of the book-entry securities in book-entry form may reduce the liquidity of such
securities in the secondary market since certain potential investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the applicable trust fund will be
provided to Cede & Co., as nominee of DTC, and Cede & Co may make such reports
available to beneficial owners upon request, in accordance with the Rules, and
to the DTC participants to whose DTC accounts the book-entry securities of such
beneficial owners are credited directly or are credited indirectly through
Financial Intermediaries.
DTC has advised the trustee that, unless and until Definitive
Securities are issued, DTC will take any action permitted to be taken by the
holders of the book-entry securities under the pooling and servicing agreement
only at the direction of one or more DTC participants to whose DTC accounts the
book-entry securities are credited, to the extent that such actions are taken on
behalf of such participants whose holdings include such book-entry securities.
Clearstream or Euroclear Bank S.A./NV, as the case may be, will take any other
action permitted to be taken by a holder under the pooling and servicing
agreement on behalf of a Clearstream participant or Euroclear participant only
in accordance with its relevant rules and procedures and subject to the ability
of the relevant depositary to effect such actions on its behalf through DTC. DTC
may take actions, at the direction of the related participants, with respect to
some securities which conflict with actions taken with respect to other
securities.
Except with respect to the residual certificates, physical certificates
representing a security will be issued to beneficial owners only upon the events
specified in the pooling and servicing agreement. Such events may include the
following:
o we advise the trustee in writing that DTC is no longer willing
or able to properly discharge its responsibilities as
depository with respect to the securities, and that we or the
trustee is unable to locate a qualified successor, or
o at our option, we elect to terminate the book-entry system
through DTC.
Additionally, after the occurrence of an event of default under the
pooling and servicing agreement, any Certificate Owner materially and adversely
affected thereby may, at its option, request and, subject to the procedures set
forth in the pooling and servicing agreement, receive a definitive certificate
evidencing such Certificate Owner's fractional undivided interest in the related
class of certificates Upon the occurrence of any of the events specified in the
pooling and servicing agreement, DTC will be required to notify all participants
of the availability through DTC of physical certificates. Upon surrender by DTC
of the certificates representing the securities and instruction for
re-registration, the trustee will issue the securities in the form of physical
certificates, and thereafter the trustee will recognize the holders of such
physical
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certificates as securityholders. Thereafter, payments of principal of and
interest on the securities will be made by the trustee directly to
securityholders in accordance with the procedures listed in this prospectus
supplement and in the pooling and servicing agreement. The final distribution of
any security (whether physical certificates or securities registered in the name
of Cede & Co.), however, will be made only upon presentation and surrender of
such securities on the final distribution date at such office or agency as is
specified in the notice of final payment to securityholders.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures to facilitate transfers of securities among participants of DTC,
Clearstream and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
Neither the trust nor 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 securities held by Cede & Co., as nominee
for DTC, or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
GLOSSARY
"Applied Realized Loss Amount" with respect to any class of offered
certificates and as to any distribution date means the sum of the Realized
Losses with respect to the mortgage loans, which have been applied in reduction
of the Certificate Principal Balance of such class which shall, on any such
distribution date, equal with respect to the Class M-6 Certificates, Class M-5
Certificates, Class M-4 Certificates, Class M-3 Certificates, Class M-2
Certificates, Class M-1 Certificates, in that order so long as their respective
Certificate Principal Balances have not been reduced to zero, and then to the
Class A Certificates on a pro rata basis until their respective Certificate
Principal Balances have been reduced to zero, the amount, if any, by which, (i)
the aggregate Certificate Principal Balance of all of the Certificates (after
all distributions of principal on such distribution date) exceeds (ii) the
aggregate Stated Principal Balance of the mortgage loans as of the last day of
the related Due Period.
"Basis Risk Shortfall Carry Forward Amount" as of any distribution date
for the offered certificates is the sum of :
o if on such distribution date the pass-through rate for such
class is based upon the applicable interest rate cap, the
excess, if any, of
1. The amount of Current Interest that such class would
have been entitled to receive on such distribution
date had the applicable pass-though rate been
calculated at a per annum rate equal to One-Month
LIBOR plus the applicable margin, over
2. The amount of Current Interest that such class
received on such distribution date at the applicable
interest rate cap for such distribution date (such
excess being the "Basis Risk Shortfall" for such
distribution date); and
o the Basis Risk Shortfall Carry Forward Amount for all previous
distribution dates not previously paid, together with interest
thereon at a rate equal to the applicable pass-through rate
for such distribution date.
"Certificate Principal Balance" with respect to any class of offered
certificates and any distribution date is the original certificate principal
balance of such class as set forth on the cover page of this prospectus
supplement, less the sum of (i) all amounts in respect of principal distributed
to such class on previous
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distribution dates and (ii) any Applied Realized Loss Amounts allocated to such
class on previous distribution dates.
"Class A Certificates" means the senior certificates.
"Class A Principal Distribution Amount" with respect to the Class A
Certificates and any applicable distribution date is an amount equal to the
lesser of (x) the Principal Distribution Amount for that distribution date and
(y) the excess, if any, of
o the aggregate Certificate Principal Balance of the Class A
Certificates immediately prior to such distribution date, over
o the lesser of
(a) the product of (i) approximately 58.50% and
(ii) the aggregate Stated Principal Balance
of the mortgage loans as of the last day of
the related Due Period, and
(b) the aggregate Stated Principal Balance of
the mortgage loans as of the last day of the
related Due Period minus approximately
$2,507,454.
"Class I-A Principal Distribution Amount" with respect to the Class I-A
Certificates and any distribution date is the product of the Class A Principal
Distribution Amount and a fraction, the numerator of which is the Principal
Funds for Loan Group I for such distribution date and the denominator of which
is the Principal Funds for all loan groups for such distribution date.
"Class II-A Principal Distribution Amount" with respect to the Class
II-A Certificates and any distribution date is the product of the Class A
Principal Distribution Amount and a fraction, the numerator of which is the
Principal Funds for Loan Group II for such distribution date and the denominator
of which is the Principal Funds for all loan groups for such distribution date.
"Class III-A Principal Distribution Amount" with respect to the Class
III-A Certificates and any distribution date is the product of the Class A
Principal Distribution Amount and a fraction, the numerator of which is the
Principal Funds for Loan Group III for such distribution date and the
denominator of which is the Principal Funds for all loan groups for such
distribution date.
"Class M-1 Principal Distribution Amount" with respect to any
applicable distribution date is an amount equal to the lesser of (x) the
remaining Principal Distribution Amount for that distribution date after
distribution of the Class A Principal Distribution Amount and (y) the excess, if
any, of
o the sum of (1) the aggregate Certificate Principal Balance of
the Class A Certificates (after taking into account the
payment of the Class A Principal Distribution Amount on such
distribution date) and (2) the Certificate Principal Balance
of the Class M-1 Certificates immediately prior to such
distribution date, over
o the lesser of
(a) the product of (i) approximately 72.00% and
(ii) the aggregate Stated Principal Balance
of the mortgage loans as of the last day of
the related Due Period, and
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(b) the aggregate Stated Principal Balance of
the mortgage loans as of the last day of the
related Due Period minus approximately
$2,507,454.
"Class M-2 Principal Distribution Amount" with respect to any
applicable distribution date is an amount equal to the lesser of (x) the
remaining Principal Distribution Amount for that distribution date after
distribution of the Class A Principal Distribution Amount and the Class M-1
Principal Distribution Amount and (y) the excess, if any, of
o the sum of (1) the aggregate Certificate Principal Balance of
the Class A Certificates (after taking into account the
payment of the Class A Principal Distribution Amount on such
distribution date), (2) the Certificate Principal Balance of
the Class M-1 Certificates (after taking into account the
payment of the Class M-1 Principal Distribution Amount on such
distribution date) and (3) the Certificate Principal Balance
of the Class M-2 Certificates immediately prior to such
distribution date, over
o the lesser of
(a) the product of (i) approximately 82.80% and
(ii) the aggregate Stated Principal Balance
of the mortgage loans as of the last day of
the related Due Period, and
(b) the aggregate Stated Principal Balance of
the mortgage loans as of the last day of the
related Due Period minus approximately
$2,507,454.
"Class M-3 Principal Distribution Amount" with respect to any
applicable distribution date is an amount equal to the lesser of (x) the
remaining Principal Distribution Amount for that distribution date after
distribution of the Class A Principal Distribution Amount, the Class M-1
Principal Distribution Amount and the Class M-2 Principal Distribution Amount
and (y) the excess, if any, of
o the sum of (1) the aggregate Certificate Principal Balance of
the Class A Certificates (after taking into account the
payment of the Class A Principal Distribution Amount on such
distribution date), (2) the Certificate Principal Balance of
the Class M-1 Certificates (after taking into account the
payment of the Class M-1 Principal Distribution Amount on such
distribution date), (3) the Certificate Principal Balance of
the Class M-2 Certificates (after taking into account the
payment of the Class M-2 Principal Distribution Amount on such
distribution date) and (4) the Certificate Principal Balance
of the Class M-3 Certificates immediately prior to such
distribution date, over
o the lesser of
(a) the product of (i) approximately 86.30% and
(ii) the aggregate Stated Principal Balance
of the mortgage loans as of the last day of
the related Due Period, and
(b) the aggregate Stated Principal Balance of
the mortgage loans as of the last day of the
related Due Period minus approximately
$2,507,454.
"Class M-4 Principal Distribution Amount" with respect to any
applicable distribution date is an amount equal to the lesser of (x) the
remaining Principal Distribution Amount for that distribution date after
distribution of the Class A Principal Distribution Amount, the Class M-1
Principal Distribution Amount, the
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Class M-2 Principal Distribution Amount and the Class M-3 Principal Distribution
Amount and (y) the excess, if any, of
o the sum of (1) the aggregate Certificate Principal Balance of
the Class A Certificates (after taking into account the
payment of the Class A Principal Distribution Amount on such
distribution date), (2) the Certificate Principal Balance of
the Class M-1 Certificates (after taking into account the
payment of the Class M-1 Principal Distribution Amount on such
distribution date), (3) the Certificate Principal Balance of
the Class M-2 Certificates (after taking into account the
payment of the Class M-2 Principal Distribution Amount on such
distribution date), (4) the Certificate Principal Balance of
the Class M-3 Certificates (after taking into account the
payment of the Class M-3 Principal Distribution Amount on such
distribution date) and (5) the Certificate Principal Balance
of the Class M-4 Certificates immediately prior to such
distribution date, over
o the lesser of
(a) the product of (i) approximately 88.90% and
(ii) the aggregate Stated Principal Balance
of the mortgage loans as of the last day of
the related Due Period, and
(b) the aggregate Stated Principal Balance of
the mortgage loans as of the last day of the
related Due Period minus approximately
$2,507,454.
"Class M-5 Principal Distribution Amount" with respect to any
applicable distribution date is an amount equal to the lesser of (x) the
remaining Principal Distribution Amount for that distribution date after
distribution of the Class A Principal Distribution Amount, the Class M-1
Principal Distribution Amount, the Class M-2 Principal Distribution Amount, the
Class M-3 Principal Distribution Amount and the Class M-4 Principal Distribution
Amount and (y) the excess, if any, of
o the sum of (1) the aggregate Certificate Principal Balance of
the Class A Certificates (after taking into account the
payment of the Class A Principal Distribution Amount on such
distribution date), (2) the Certificate Principal Balance of
the Class M-1 Certificates (after taking into account the
payment of the Class M-1 Principal Distribution Amount on such
distribution date), (3) the Certificate Principal Balance of
the Class M-2 Certificates (after taking into account the
payment of the Class M-2 Principal Distribution Amount on such
distribution date), (4) the Certificate Principal Balance of
the Class M-3 Certificates (after taking into account the
payment of the Class M-3 Principal Distribution Amount on such
distribution date), (5) the 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 (6) the Certificate Principal Balance
of the Class M-5 Certificates immediately prior to such
distribution date, over
o the lesser of
(a) the product of (i) approximately 91.80% and
(ii) the aggregate Stated Principal Balance
of the mortgage loans as of the last day of
the related Due Period, and
(b) the aggregate Stated Principal Balance of
the mortgage loans as of the last day of the
related Due Period minus approximately
$2,507,454.
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"Class M-6 Principal Distribution Amount" with respect to any
applicable distribution date is an amount equal to the lesser of (x) the
remaining Principal Distribution Amount for that distribution date after
distribution of the Class A Principal Distribution Amount, the Class M-1
Principal Distribution Amount, the Class M-2 Principal Distribution Amount, the
Class M-3 Principal Distribution Amount, the Class M-4 Principal Distribution
Amount and the Class M-5 Principal Distribution Amount and (y) the excess, if
any, of
o the sum of (1) the aggregate Certificate Principal Balance of
the Class A Certificates (after taking into account the
payment of the Class A Principal Distribution Amount on such
distribution date), (2) the Certificate Principal Balance of
the Class M-1 Certificates (after taking into account the
payment of the Class M-1 Principal Distribution Amount on such
distribution date), (3) the Certificate Principal Balance of
the Class M-2 Certificates (after taking into account the
payment of the Class M-2 Principal Distribution Amount on such
distribution date), (4) the Certificate Principal Balance of
the Class M-3 Certificates (after taking into account the
payment of the Class M-3 Principal Distribution Amount on such
distribution date), (5) the 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), (6) the Certificate Principal Balance of
the Class M-5 Certificates immediately prior to such
distribution date (after taking into account the payment of
the Class M-5 Principal Distribution Amount on such
distribution date) and (7) the Certificate Principal Balance
of the Class M-6 Certificates immediately prior to such
distribution date, over
o the lesser of
(a) the product of (i) approximately 94.30% and
(ii) the aggregate Stated Principal Balance
of the mortgage loans as of the last day of
the related Due Period, and
(b) the aggregate Stated Principal Balance of
the mortgage loans as of the last day of the
related Due Period minus approximately
$2,507,454.
"Current Interest" with respect to each class of offered certificates
and each distribution date is the interest accrued at the applicable
pass-through rate for the applicable accrual period on the Certificate Principal
Balance of such class plus any amount previously distributed with respect to
interest for such class that is recovered as a voidable preference by a trustee
in bankruptcy reduced by any Prepayment Interest Shortfall to the extent not
covered by Compensating Interest and any shortfalls resulting from the
application of the Relief Act, in each case to the extent allocated to such
class of offered certificates described under "Distributions on the Certificates
- -- INTEREST DISTRIBUTIONS" in this prospectus supplement.
"Current Specified Enhancement Percentage" with respect to any
distribution date, the percentage obtained by dividing (x) the sum of (i) the
aggregate Certificate Principal Balance of the Class M Certificates and (ii) the
Overcollateralization Amount, in each case prior to the distribution of the
Principal Distribution Amount on such distribution date, by (y) the aggregate
Stated Principal Balance of the mortgage loans as of the end of the related Due
Period.
"Due Period" with respect to any distribution date is the period
commencing on the second day of the month preceding the calendar month in which
such distribution date occurs and ending at the close of business on the first
day of the month in which such distribution date occurs.
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"Excess Cashflow" with respect to any distribution date is the sum of
(i) the Remaining Excess Spread for such distribution date and (ii) the
Overcollateralization Release Amount for such distribution date.
"Excess Spread" with respect to any distribution date is the excess, if
any, of the Interest Funds for such distribution date, over the sum of (i) the
premium rate payable to the class III-A insurer for such distribution date and
(ii) the Current Interest on the offered certificates and Interest Carry Forward
Amounts on the Class A Certificates (other than any such Interest Carry Forward
Amounts paid pursuant to clause 1. under "Description of the
Certificates--Excess Spread and Overcollateralization Provisions") on such
distribution date.
"Extra Principal Distribution Amount" with respect to any distribution
date is the lesser of (a) the excess, if any, of the Overcollateralization
Target Amount for such distribution date, over the Overcollateralization Amount
for such distribution date (after giving effect to distributions of principal on
the certificates other than any Extra Principal Distribution Amount) and (b) the
Excess Spread for such distribution date.
"Group I Principal Distribution Amount" with respect to any
distribution date is the product of the Principal Distribution Amount and a
fraction, the numerator of which is the Principal Funds for Loan Group I for
such distribution date and the denominator of which is the Principal Funds for
all loan groups for such distribution date.
"Group II Principal Distribution Amount" with respect to any
distribution date is the product of the Principal Distribution Amount and a
fraction, the numerator of which is the Principal Funds for Loan Group II for
such distribution date and the denominator of which is the Principal Funds for
all loan groups for such distribution date.
"Group III Principal Distribution Amount" with respect to any
distribution date is the product of the Principal Distribution Amount and a
fraction, the numerator of which is the Principal Funds for Loan Group III for
such distribution date and the denominator of which is the Principal Funds for
all loan groups for such distribution date.
"Insurance Agreement" means the Insurance and Indemnity Agreement dated
as of January 30, 2004 among the class III-A insurer, the depositor, the seller
and the trustee.
"Insurance Proceeds" are all proceeds of any insurance policies, to the
extent such proceeds are not applied to the restoration of the property or
released to the mortgagor in accordance with the master servicer's normal
servicing procedures, other than proceeds that represent reimbursement of the
master servicer's costs and expenses incurred in connection with presenting
claims under the related insurance policies.
"Interest Carry Forward Amount" with respect to each class of the
offered certificates and any distribution date, is the sum of
o the excess of
(a) Current Interest for such class with respect to such
distribution date and any prior distribution dates
over
(b) the amount actually distributed to such class with
respect to interest on such distribution dates, and
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o interest on such excess (to the extent permitted by applicable
law) at the applicable pass- through rate for the related
accrual period including the accrual period relating to the
current distribution date.
"Interest Funds" with respect to each loan group and any distribution
date are equal to the sum, without duplication, of
o all scheduled interest collected in respect of the related
mortgage loans, less the related servicing fee, the trustee
fee, the lender paid mortgage insurance fee, if any, and any
amounts required to be reimbursed to the seller, the master
servicer and the trustee as provided in the pooling and
servicing agreement,
o all advances relating to interest on the related mortgage
loans,
o all Compensating Interest,
o Liquidation Proceeds, to the extent such Liquidation Proceeds
relate to interest, less all non- recoverable advances
relating to interest and certain expenses reimbursed during
the related Prepayment Period, in each case with respect to
the mortgage loans in the related loan group,
o the interest portion of proceeds of the repurchase of any
mortgage loans in the related loan group, and
o the interest portion of the purchase price of the assets of
the trust upon exercise by EMC of its optional termination
right.
"Liquidation Proceeds" are all net proceeds, other than Insurance
Proceeds, received in connection with the partial or complete liquidation of
mortgage loans, whether through trustee's sale, foreclosure sale or otherwise,
or in connection with any condemnation or partial release of a mortgaged
property, together with the net proceeds received with respect to any mortgaged
properties acquired by the master servicer by foreclosure or deed in lieu of
foreclosure in connection with defaulted mortgage loans, other than the amount
of such net proceeds representing any profit realized by the master servicer in
connection with the disposition of any such properties.
"Margin" with respect to any distribution date on or prior to the first
possible optional termination date and (i) with respect to the Class I-A-1
Certificates, 0.20% per annum, (ii) with respect to the Class I-A-2
Certificates, 0.65% per annum, (iii) with respect to the Class II-A-1
Certificates, 0.32% per annum, (iv) with respect to the Class II-A-2
Certificates, 0.45% per annum, (v) with respect to the Class III-A Certificates,
0.32% per annum, (vi) with respect to the Class M-1 Certificates, 0.65% per
annum, (vii) with respect to the Class M-2 Certificates, 1.30% per annum, (viii)
with respect to the Class M-3 Certificates, 1.50% per annum, (ix) with respect
to the Class M-4 Certificates, 1.75% per annum, (x) with respect to the Class
M-5 Certificates, 2.00% per annum and (xi) with respect to the Class M-6
Certificates, 4.00% per annum; and with respect to any distribution date after
the first possible optional termination date, the Margin will increase to (i)
with respect to the Class I-A-2 Certificates, 1.30% per annum, (ii) with respect
to the Class II- A-1 Certificates, 0.64% per annum, (iii) with respect to the
Class II-A-2 Certificates, 0.90% per annum, (iv) with respect to the Class III-A
Certificates, 0.64% per annum, (v) with respect to the Class M-1 Certificates,
0.975% per annum, (vi) with respect to the Class M-2 Certificates, 1.95% per
annum, (vii) with respect to the Class M-3 Certificates, 2.25% per annum, (viii)
with respect to the Class M-4 Certificates, 2.625% per
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annum, (ix) with respect to the Class M-5 Certificates, 3.00% per annum and (x)
with respect to the Class M- 6 Certificates, 6.00% per annum.
"Net Rate Cap" with respect to the Class I-A Certificates is equal to
the weighted average of the net mortgage rates of the mortgage loans in Loan
Group I; with respect to the Class II-A Certificates, is equal to the weighted
average of the net mortgage rates of the mortgage loans in Loan Group II; with
respect to the Class III-A Certificates, is equal to the weighted average of the
net mortgage rates of the mortgage loans in Loan Group III, minus the premium
rate payable to the class III-A insurer in connection with the Class III-A
Policy; and with respect to the Class M Certificates, is equal to the weighted
average of the net mortgage rates of the mortgage loans in each loan group,
weighted in proportion to the results of subtracting from the aggregate Stated
Principal Balance of each loan group, the Certificate Principal Balance of the
related senior certificates. For purposes of calculating the various Net Rate
Caps, the "net mortgage rate" of a mortgage loan is equal to the applicable
interest rate borne by the mortgage loan less the sum of the respective rates
used to calculate the servicing fee, the trustee fee and the lender paid
mortgage insurance fee, if any.
"Overcollateralization Amount" with respect to any distribution date is
the excess, if any, of (a) the aggregate Stated Principal Balances of the
mortgage loans as of the last day of the related Due Period (including any
reduction due to Realized Losses) over (b) the aggregate Certificate Principal
Balances of the offered certificates on such distribution date (after taking
into account the payment of principal other than any Extra Principal
Distribution Amount on such certificates).
"Overcollateralization Release Amount" with respect to any distribution
date is the lesser of (x) the first five bullet points under the definition of
Principal Funds for such distribution date and (y) the excess, if any, of (i)
the Overcollateralization Amount for such distribution date (assuming that 100%
of such Principal Funds is applied as a principal payment on such distribution
date) over (ii) the Overcollateralization Target Amount for such distribution
date (with the amount pursuant to clause (y) deemed to be $0 if the
Overcollateralization Amount is less than or equal to the Overcollateralization
Target Amount on that distribution date).
"Overcollateralization Target Amount" with respect to any distribution
date (a) prior to the Stepdown Date, approximately 2.85% of the aggregate Stated
Principal Balance of the mortgage loans as of the Cut-off Date, (b) on or after
the Stepdown Date and if a Trigger Event is not in effect, the greater of (i)
5.70% of the then current aggregate Stated Principal Balance of the mortgage
loans as of the last day of the related Due Period and (ii) approximately
$2,507,454 or (c) on or after the Stepdown Date and if a Trigger Event is in
effect, the Overcollateralization Target Amount for the immediately preceding
distribution date.
"Pass-Through Rate" with respect to each class of offered certificates
will be the lesser of (x) the London interbank offered rate for one month United
States dollar deposits, which we refer to as One-Month LIBOR, calculated as
described under " -- Calculation of One-Month LIBOR" plus the related Margin, or
(y) the related Net Rate Cap, adjusted to an effective rate reflecting the
accrual of interest on an actual/360 basis.
"Prepayment Period" with respect to a distribution date is the period
commencing on the 16th day of the month prior to the month in which the related
distribution date occurs and ending on the 15th day of the month in which such
distribution date occurs.
"Principal Distribution Amount" with respect to each distribution date
is equal to
o the Principal Funds for such distribution date, plus
o any Extra Principal Distribution Amount for such distribution
date, less
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o any Overcollateralization Release Amount.
"Principal Funds" with respect to each loan group are equal to the sum,
without duplication, of
o the scheduled principal collected on the mortgage loans in the
related loan group during the related Due Period or advanced
on or before the related servicer advance date,
o prepayments in respect of the mortgage loans in the related
loan group, exclusive of any prepayment charges, collected in
the related Prepayment Period,
o the Stated Principal Balance of each mortgage loan in the
related loan group that was repurchased by the seller or the
master servicer,
o the amount, if any, by which the aggregate unpaid principal
balance of any replacement mortgage loans is less than the
aggregate unpaid principal balance of any deleted mortgage
loans delivered by the master servicer in connection with a
substitution of a mortgage loan,
o all Liquidation Proceeds collected during the related
Prepayment Period on the mortgage loans in the related loan
group, to the extent such Liquidation Proceeds relate to
principal, less all non-recoverable advances relating to
principal reimbursed during the related Due Period,
o the principal portion of the purchase price of the assets of
the trust upon the exercise by the master servicer of its
optional termination right; minus
o any amounts required to be reimbursed to the seller, the
master servicer or the trustee as provided in the pooling and
servicing agreement.
"Realized Loss" is the excess of the Stated Principal Balance of a
defaulted mortgage loan over the net Liquidation Proceeds with respect thereto
that are allocated to principal.
"Reimbursement Amount" is the sum of (a) the aggregate unreimbursed
amount of any payments made by the class III-A insurer under the Class III-A
Policy, together with interest on such amount from the date of payment by the
class III-A insurer until paid in full at the Accrual Rate (as defined in the
Insurance Agreement) and (b) any other amounts owed to the class III-A insurer
under the Insurance Agreement or the pooling and servicing agreement.
"Relief Act" means the Servicemembers Civil Relief Act, formerly known
as the Soldiers' and Sailors' Civil Relief Act of 1940, as amended.
"Remaining Excess Spread" with respect to any distribution date is the
Excess Spread less the sum of (i) any Extra Principal Distribution Amount, in
each case for such distribution date and (ii) any unpaid Reimbursement Amounts
related to interest or principal draws not previously paid to the class III-A
insurer other than as described in clause 1. under "Excess Spread and
Overcollateralization Provisions".
"Stated Principal Balance" of any mortgage loan means with respect to
any distribution date is the cut-off date principal balance thereof minus the
sum of
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(i) the principal portion of the scheduled monthly payments due
from mortgagors with respect to such mortgage loan during the
Due Period ending prior to such distribution date (and
irrespective of any delinquency in their payment);
(ii) all prepayments of principal with respect to such mortgage
loan received prior to or during the related Prepayment
Period, and all liquidation proceeds to the extent applied by
the master servicer as recoveries of principal in accordance
with the pooling and servicing agreement that were received by
the master servicer as of the close of business on the last
day of the Prepayment Period related to such distribution
date, and
(iii) any Realized Loss thereon incurred during the related
Prepayment Period.
The Stated Principal Balance of any liquidated mortgage loan is zero.
"Stepdown Date" means the later to occur of
(x) the distribution date occurring in February 2007 and
(y) the first distribution date for which the Current Specified
Enhancement Percentage (calculated for this purpose only,
prior to distributions on the certificates but following
distributions on the mortgage loans for the related Due
Period) is greater than or equal to approximately 41.50%.
A "Trigger Event" with respect to any distribution date exists if (i)
the aggregate principal balance of mortgage loans that are 60 or more days
delinquent (including for this purpose any such mortgage loans in foreclosure
and mortgage loans with respect to which the related mortgaged property has been
acquired by the trust) as of the close of business on the last day of the
preceding calendar month exceeds 33% of the Current Specified Enhancement
Percentage or (ii) the aggregate amount of Realized Losses on the mortgage loans
as a percentage of the initial aggregate Stated Principal Balance of the
mortgage loans as of the cut-off date exceeds the applicable percentage set
forth below:
February 2007 to January 2008............ 3.75%
February 2008 to January 2009............ 5.75%
February 2009 to January 2010............ 7.00%
February 2010 to January 2011............ 7.75%
February 2011 and thereafter............. 8.25%
"Unpaid Realized Loss Amount" with respect to the Class A Certificates
and as to any distribution date is the excess of
o Applied Realized Loss Amounts with respect to such class over
o the sum of all distributions in reduction of the Applied
Realized Loss Amounts on all previous distribution dates.
Any amounts distributed to the Class A Certificates in respect of any Unpaid
Realized Loss Amount will not be applied to reduce the certificate principal
balance of such class.
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CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR business day preceding the commencement of each
accrual period for the offered certificates bearing interest at an adjustable
rate, which date we refer to as an interest determination date, the trustee will
determine One-Month LIBOR for such accrual period on the basis of such rate as
it appears on Telerate Screen Page 3750, as of 11:00 a.m. London time on such
interest determination date. If such rate does not appear on such page, or such
other page as may replace that page on that service, or if such service is no
longer offered, such other service for displaying LIBOR or comparable rates as
may be reasonably selected by the trustee, One-Month LIBOR for the applicable
accrual period will be the Reference Bank Rate. If no such quotations can be
obtained and no Reference Bank Rate is available, One-Month LIBOR will be the
One-Month LIBOR applicable to the preceding accrual period.
The Reference Bank Rate with respect to any accrual period, means the
arithmetic mean, rounded upwards, if necessary, to the nearest whole multiple of
0.03125%, of the offered rates for United States dollar deposits for one month
that are quoted by the Reference Banks, as described below, as of 11:00 a.m.,
New York City time, on the related interest determination date to prime banks in
the London interbank market for a period of one month in amounts approximately
equal to the aggregate Certificate Principal Balance of all classes of offered
certificates bearing interest at an adjustable rate for such accrual period,
provided that at least two such Reference Banks provide such rate. If fewer than
two offered rates appear, the Reference Bank Rate will be the arithmetic mean,
rounded upwards, if necessary, to the nearest whole multiple of 0.03125%, of the
rates quoted by one or more major banks in New York City, selected by the
trustee, as of 11:00 a.m., New York City time, on such date for loans in U.S.
dollars to leading European banks for a period of one month in amounts
approximately equal to the Certificate Principal Balance of all classes of
offered certificates bearing interest at an adjustable rate for such accrual
period. As used in this section, "LIBOR business day" means a day on which banks
are open for dealing in foreign currency and exchange in London and New York
City; and "Reference Banks" means leading banks selected by the trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market
o with an established place of business in London,
o which have been designated as such by the trustee and
o which are not controlling, controlled by, or under common
control with, the depositor, the seller or the master
servicer.
The establishment of One-Month LIBOR on each interest determination
date by the trustee and the trustee's calculation of the rate of interest
applicable to the classes of offered certificates bearing interest at an
adjustable rate for the related accrual period shall, in the absence of manifest
error, be final and binding.
DISTRIBUTIONS ON THE CERTIFICATES
GENERAL. On each distribution date, the trustee will make distributions
on the certificates to the persons in whose names such certificates are
registered at the related record date.
The trustee will make distributions on each distribution date by wire
transfer in immediately available funds to the account of a certificateholder at
a bank or other depository institution having appropriate wire transfer
facilities as instructed by a certificateholder in writing in accordance with
the pooling and servicing agreement. If no such instructions are given to the
trustee, then the trustee will make such distributions by check mailed to the
address of the person entitled thereto as it appears on the certificate
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register; provided, however, that the final distribution in retirement of the
certificates will be made only upon presentation and surrender of such
certificates at the offices of the trustee designated for such purposes. As of
the closing date, the trustee designates its offices located at 135 South
LaSalle Street, Suite 1625, Chicago, Illinois 60603 for purposes of surrender,
transfer and exchange. On each distribution date, a holder of a certificate will
receive such holder's percentage interest of the amounts required to be
distributed with respect to the applicable class of certificates. The percentage
interest evidenced by a certificate will equal the percentage derived by
dividing the denomination of such certificate by the aggregate denominations of
all certificates of the applicable class.
INTEREST DISTRIBUTIONS. On each distribution date, the trustee will
withdraw the available funds from the Distribution Account for such distribution
date and apply Interest Funds in the following manner and order of priority:
1. From Interest Funds in respect of:
(a) Loan Group I, to the Class I-A-1 Certificates and
Class I-A-2 Certificates, the Current Interest and then any
Interest Carry Forward Amount for such classes, pro rata in
accordance with the amount of accrued interest due thereon;
(b) Loan Group II, to the Class II-A-1 Certificates
and Class II-A-2 Certificates, the Current Interest and then
any Interest Carry Forward Amount for such classes, pro rata
in accordance with the amount of accrued interest due thereon;
and
(c) Loan Group III, first, to the class III-A
insurer, the premium due in connection with the Class III-A
Policy, second, to the Class III-A Certificates, the Current
Interest and then any Interest Carry Forward Amount for such
class, and third, to the class III-A insurer, with respect to
any Reimbursement Amount related to interest draws on the
Class III-A Policy;
2. From remaining Interest Funds in respect of the non-related
loan groups, to the Class I-A, Class II-A and Class III-A Certificates,
the remaining Interest Carry Forward Amount, if any, for such classes,
pro rata in accordance with the amount of accrued interest due thereon;
provided, however, any such remaining Interest Funds that would
otherwise be distributed to the Class III-A Certificates to pay the
remaining Interest Carry Forward Amount for any distribution date will
be used to pay the class III-A insurer the Reimbursement Amount related
to interest draws on the Class III-A Policy, if any, prior to paying
such Interest Carry Forward Amount to the Class III-A Certificates; and
3. From remaining Interest Funds in respect of all loan
groups, sequentially to the Class M-1, Class M-2, Class M-3, Class M-4,
Class M-5 and Class M-6 Certificates, in that order, the Current
Interest for such class.
On any distribution date, any shortfalls resulting from the application
of the Relief Act and any Prepayment Interest Shortfalls to the extent not
covered by Compensating Interest will be allocated, FIRST, in reduction of
amounts otherwise distributable to the Class CE Certificates and Residual
Certificates, AND THEREAFTER, to the Current Interest payable to the offered
certificates on such distribution date, 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 be entitled to
reimbursement for any such interest shortfalls with interest thereon solely from
Excess Cashflow to the extent of funds available as described under "-- Excess
Spread and Overcollateralization Provisions". The holders of the offered
certificates will not otherwise be
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entitled to reimbursement for any such interest shortfalls and the Class III-A
Policy will not cover any such interest shortfalls.
Any Excess Spread to the extent necessary to meet a level of
overcollateralization equal to the Overcollateralization Target Amount will be
the Extra Principal Distribution Amount and will be included as part of the
Principal Distribution Amount and distributed as described below under
"--PRINCIPAL DISTRIBUTIONS"; provided, however, any such Excess Spread that
would otherwise be distributed to the Class III-A Certificates to pay the Extra
Principal Distribution Amount for any distribution date will be used to pay the
class III-A insurer any Reimbursement Amount related to interest or principal
draws on the Class III-A Policy, if any, prior to paying such Extra Principal
Distribution Amount to the Class III-A Certificates. Any Excess Spread remaining
after the distribution of the Extra Principal Distribution amount will be the
Remaining Excess Spread and, together with any Overcollateralization Release
Amount, will be applied as Excess Cashflow as described under "-- Excess Spread
and Overcollateralization Provisions".
PRINCIPAL DISTRIBUTIONS. On each distribution date, the trustee will
apply Principal Funds in the following manner and order of priority:
(A) For each distribution date (i) prior to the Stepdown Date or (ii)
on which a Trigger Event is in effect:
1. To the Class A Certificates, the Principal Distribution
Amount for such distribution date to be distributed as follows:
(a) from the Group I Principal Distribution Amount
for such distribution date, sequentially, to the Class I-A-1
Certificates and Class I-A-2 Certificates, in that order, in
each case until the Certificate Principal Balance thereof is
reduced to zero;
(b) from the Group II Principal Distribution Amount
for such distribution date, to the Class II-A-1 Certificates
and Class II-A-2 Certificates, pro rata, based on the
Certificate Principal Balance of each such class, until the
Certificate Principal Balances thereof are reduced to zero;
and
(c) from the Group III Principal Distribution Amount
for such distribution date, to the Class III-A Certificates,
until the Certificate Principal Balance thereof is reduced to
zero;
2. To the Class M-1 Certificates from remaining Principal
Funds in respect of all loan groups for such distribution date, the
remaining Principal Distribution Amount, until the Certificate
Principal Balance thereof is reduced to zero;
3. To the Class M-2 Certificates from remaining Principal
Funds in respect of all loan groups for such distribution date, the
remaining Principal Distribution Amount, until the Certificate
Principal Balance thereof is reduced to zero;
4. To the Class M-3 Certificates from remaining Principal
Funds in respect of all loan groups for such distribution date, the
remaining Principal Distribution Amount, until the Certificate
Principal Balance thereof is reduced to zero;
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5. To the Class M-4 Certificates from remaining Principal
Funds in respect of all loan groups for such distribution date, the
remaining Principal Distribution Amount, until the Certificate
Principal Balance thereof is reduced to zero;
6. To the Class M-5 Certificates from remaining Principal
Funds in respect of all loan groups for such distribution date, the
remaining Principal Distribution Amount, until the Certificate
Principal Balance thereof is reduced to zero; and
7. To the Class M-6 Certificates from remaining Principal
Funds in respect of all loan groups for such distribution date, the
remaining Principal Distribution Amount, until the Certificate
Principal Balance thereof is reduced to zero.
(B) For each distribution date on or after the Stepdown Date, so long
as a Trigger Event is not in effect:
1. To the Class A Certificates, the Principal Distribution
Amount for such distribution date to be distributed as follows:
(a) from the Group I Principal Distribution Amount
for such distribution date, sequentially, to the Class I-A-1
Certificates and Class I-A-2 Certificates, in that order, the
Class I-A Principal Distribution Amount for such distribution
date, in each case until the Certificate Principal Balance
thereof is reduced to zero;
(b) from the Group II Principal Distribution Amount
for such distribution date, to the Class II-A-1 Certificates
and Class II-A-2 Certificates, the Class II-A Principal
Distribution Amount for such distribution date, pro rata,
based on the Certificate Principal Balance of each such class,
until the Certificate Principal Balances thereof are reduced
to zero; and
(c) from the Group III Principal Distribution Amount
for such distribution date, to the Class III-A Certificates,
the Class III-A Principal Distribution Amount for such
distribution date, until the Certificate Principal Balance
thereof is reduced to zero;
2. To the Class M-1 Certificates, from any remaining Principal
Distribution Amount in respect of all loan groups, the Class M-1
Principal Distribution Amount, until the Certificate Principal Balance
thereof is reduced to zero;
3. To the Class M-2 Certificates, from any remaining Principal
Distribution Amount in respect of all loan groups, the Class M-2
Principal Distribution Amount, until the Certificate Principal Balance
thereof is reduced to zero;
4. To the Class M-3 Certificates, from any remaining Principal
Distribution Amount in respect of all loan groups, the Class M-3
Principal Distribution Amount, until the Certificate Principal Balance
thereof is reduced to zero;
5. To the Class M-4 Certificates, from any remaining Principal
Distribution Amount in respect of all loan groups, the Class M-4
Principal Distribution Amount, until the Certificate Principal Balance
thereof is reduced to zero;
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6. To the Class M-5 Certificates, from any remaining Principal
Distribution Amount in respect of all loan groups, the Class M-5
Principal Distribution Amount, until the Certificate Principal Balance
thereof is reduced to zero; and
7. To the Class M-6 Certificates, from any remaining Principal
Distribution Amount in respect of all loan groups, the Class M-6
Principal Distribution Amount, until the Certificate Principal Balance
thereof is reduced to zero.
(C) Notwithstanding the provisions of clauses (A) and (B) above, if on
any distribution date any group of Class A Certificates is no longer
outstanding, the portion of the Principal Distribution Amount or the applicable
Class A Principal Distribution Amount, as applicable, otherwise allocable to
such Class A Certificates will be allocated to the remaining group or groups of
Class A Certificates pro rata in the same manner and order of priority described
above; provided, however, any such amount allocable to the Class III- A
Certificates will be used first to pay the class III-A insurer any Reimbursement
Amounts related to principal draws on the Class III-A Policy, if any.
(D) Notwithstanding the provisions of clauses (A) and (B), if on any
distribution date the pro rata portion of the applicable Class A Principal
Distribution Amount allocated to a class or classes of Class A Certificates is
insufficient to pay to such Class A Certificates the principal to which they are
entitled under clause (B) (1) above, any Excess Cashflow will be allocated in an
amount equal to the lesser of the deficiency and the aggregate amount of such
Excess Cashflow, and if the pro rata portion of the applicable Class A Principal
Distribution Amount is insufficient for all classes of Class A Certificates,
then pro rata based upon the respective amounts of such deficiencies.
If on any distribution date, after giving effect to allocations of
Principal Distribution Amounts, the aggregate Certificate Principal Balance of
the offered certificates exceed the aggregate Stated Principal Balance of the
mortgage loans, the Certificate Principal Balances of the subordinated
certificates will be reduced, in inverse order of seniority (beginning with the
Class M-6 Certificates), and then the Certificate Principal Balances of the
senior certificates will be reduced on a pro rata basis, by an amount equal to
such excess. Any such reduction is an Applied Realized Loss Amount.
EXCESS SPREAD AND OVERCOLLATERALIZATION PROVISIONS
Excess Spread will be required to be applied as an Extra Principal
Distribution Amount and distributed as part of the Principal Distribution amount
as described above under "-- Distributions on the Certificates -- PRINCIPAL
DISTRIBUTIONS" with respect to the offered certificates whenever the
Overcollateralization Amount is less than the Overcollateralization Target
Amount. Any Remaining Excess Spread, together with any Overcollateralization
Release Amount, will be distributed in the following manner and order of
priority:
1. To the Class A Certificates, (a) FIRST, any remaining Interest Carry
Forward Amount for such classes, pro rata, in accordance with the Interest Carry
Forward Amount due with respect to each such class, to the extent not fully paid
as described under "--INTEREST DISTRIBUTIONS" above; provided, however, that any
Excess Cashflow allocable to the Class III-A Certificates under this clause will
be used to pay any unpaid Reimbursement Amounts relating to interest draws owed
to the class III-A insurer prior to paying any Interest Carry Forward Amount to
the Class III-A Certificates, and (b) SECOND, any Unpaid Realized Loss Amount
for such classes for such distribution date, pro rata, in accordance with the
Applied Realized Loss Amount allocated to each such class;
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2. From any remaining Excess Cashflow, sequentially to the Class M-1,
Class M-2, Class M-3, Class M-4, Class M-5 and Class M-6 Certificates, in that
order, an amount equal to any Interest Carry Forward Amount;
3. From any remaining Excess Cashflow, to the Class I-A, Class II-A and
Class III-A Certificates, any Basis Risk Shortfall Carry Forward Amount for such
class for such distribution date, pro rata based on the amount of such Basis
Risk Shortfall Carry Forward Amount, if any, and in the case of the Class II-A
Certificates to the extent not covered by the Yield Maintenance Agreements, if
applicable;
4. From any such remaining Excess Cashflow, to pay the class III-A
insurer any Reimbursement Amount to the extent not paid above;
5. From any remaining Excess Cashflow, sequentially to the Class M-1,
Class M-2, Class M-3, Class M-4, Class M-5 and Class M-6 Certificates, in that
order, any Basis Risk Shortfall Carry Forward Amount for such distribution date,
to the extent not covered by the Yield Maintenance Agreements;
6. From any remaining Excess Cashflow, to the Class P Certificates and
Class CE Certificates an amount specified in the pooling and servicing
agreement; and
7. From any remaining amounts, to the residual certificates.
In addition, notwithstanding the foregoing, on any distribution date
after the distribution date on which the Certificate Principal Balance of a
class of offered certificates has been reduced to zero, that class of offered
certificates will be retired and will no longer be entitled to distributions,
including distributions in respect of Prepayment Interest Shortfalls or Basis
Risk Shortfalls.
REPORTS TO CERTIFICATEHOLDERS
On each distribution date, the trustee will make available to each
certificateholder, the trustee, the master servicer, the class III-A insurer and
the depositor a statement generally setting forth, among other information:
1. the amount of the related distribution to holders of
the offered certificates allocable to principal,
separately identifying (A) the aggregate amount of
any principal prepayments included therein, (B) the
aggregate of all scheduled payments of principal
included therein and (C) any Extra Principal
Distribution Amount included therein;
2. the amount of such distribution to holders of the
offered certificates allocable to interest and the
portion thereof, if any, provided by the related
Yield Maintenance Agreement;
3. the Interest Carry Forward Amounts and any Basis Risk
Shortfall Carry Forward Amounts for each class of
offered certificates (if any);
4. the Certificate Principal Balance of the offered
certificates before and after giving effect to the
distribution of principal and allocation of Applied
Realized Loss Amounts on such distribution date;
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5. the Stated Principal Balance of all the mortgage
loans in the aggregate for the following distribution
date;
6. the amount of the servicing fee for the master
servicer for the related due period;
7. the pass-through rate for each class of offered
certificates for such distribution date and whether
such rate was based on an interest rate cap;
8. the amount of advances included in the distribution
on such distribution date;
9. the number and aggregate principal amounts of the
mortgage loans (A) delinquent, exclusive of related
mortgage loans in foreclosure, (1) 31-60 days, (2)
61-90 days and (3) 91 or more days, and (B) in
foreclosure and delinquent (1) 31-60 days, (2) 61-90
days and (3) 91 or more days, in each case as of the
close of business on the last day of the calendar
month preceding such distribution date;
10. with respect to any mortgage loan that was liquidated
during the preceding calendar month, the loan number
and stated principal balance of, and Realized Loss
on, such mortgage loan as of the end of the related
prepayment period;
11. whether a Trigger Event exists;
12. the total number and principal balance of any real
estate owned, or REO properties as of the end of the
related prepayment period;
13. the cumulative Realized Losses through the end of the
preceding month;
14. the three-month rolling average of the percent
equivalent of a fraction, the numerator of which is
the aggregate Stated Principal Balance of the
mortgage loans that are 60 days or more delinquent or
are in bankruptcy or foreclosure or are REO
properties, and the denominator of which is the
Stated Principal Balances of all of the mortgage
loans, and
15. the amount of the Prepayment Charges remitted by the
master servicer and the amount on deposit in the
reserve fund.
The trustee will make the monthly statement and, at its option, any
additional files containing the same information in an alternative format,
available each month to certificateholders and to ACE Guaranty Corp. via the
trustee's internet website. Assistance in using the website service can be
obtained by calling the trustee's customer service desk at (312) 904-7053.
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 may change the way monthly
statements are distributed in order to make such distributions more convenient
or more accessible to the above parties.
In addition, within a reasonable period of time after the end of each
calendar year, the trustee will prepare and deliver to the master servicer and
to each certificateholder of record during the previous calendar year a
statement containing information necessary to enable certificateholders to
prepare their tax returns. Such statements will not have been examined and
reported upon by an independent public accountant.
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AMENDMENT
The pooling and servicing agreement may be amended by the depositor,
the master servicer, the seller and the trustee, with the consent of the class
III-A insurer but without the consent of certificateholders,
o to cure any ambiguity,
o to correct or supplement any provision therein, or
o to make any other revisions with respect to matters or
questions arising under the pooling and servicing agreement
which are not inconsistent with the provisions thereof,
provided that such action will not adversely affect in any material respect the
interests of any certificateholder. An amendment will be deemed not to adversely
affect in any material respect the interests of the certificateholders if the
person requesting such amendment obtains a letter from each rating agency
stating that such amendment will not result in the downgrading or withdrawal of
the respective ratings then assigned to any class of certificates (such
determination to be without regard to the financial guaranty insurance policy
issued by class III-A insurer in connection with the Class III-A Certificates).
In addition, the pooling and servicing agreement may be amended with
the consent of the class III-A insurer but without the consent of
certificateholders to modify, eliminate or add to any of its provisions to such
extent as may be necessary to maintain the qualification of the trust fund's
REMIC elections, provided that the trustee and the class III-A insurer have
received an opinion of counsel to the effect that such action is necessary or
helpful to maintain such qualification. In addition, the pooling and servicing
agreement may be amended by the depositor, the master servicer, the seller and
the trustee and with the consent of the class III- A insurer and the holders of
each class of certificates affected thereby evidencing over 50% of the Voting
Rights of such class or classes for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the pooling and
servicing agreement or of modifying in any manner the rights of the
certificateholders; provided, however, that no such amendment may
(a) reduce in any manner the amount of, or delay the timing
of, payments required to be distributed on any certificate without the
consent of the holder of such certificate;
(b) cause any REMIC to fail to qualify as a REMIC for federal
tax purposes;
(c) reduce the aforesaid percentage of aggregate outstanding
principal amounts of certificates of each class, the holders of which
are required to consent to any such amendment, without the consent of
the holders of all certificates of such class.
The trustee will not be entitled to consent to any amendment to the
pooling and servicing agreement without having first received an opinion of
counsel (a copy of which shall be addressed to and delivered to the class III-A
insurer) to the effect that such amendment is permitted under the terms of the
pooling and servicing agreement and will not cause the trust fund's REMIC
elections to fail to qualify as a REMIC for federal tax purposes.
Notwithstanding the foregoing, the class III-A insurer shall have the
right to consent to any amendment which materially affects their rights and
obligations under the pooling and servicing agreement or the rights of any
holder of the Class III-A Certificates. So long as there is not a continuing
default by the class III-A insurer of its obligations under the Class III-A
Policy, the class III-A insurer has, and may exercise
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without the consent of the holders of the Class III-A Certificates, all of the
rights of the holders of the Class III-A Certificates under the pooling and
servicing agreement.
VOTING RIGHTS
As of any date of determination,
o holders of the offered certificates will be allocated 94% of
all voting rights, allocated among such offered certificates
in proportion to their respective outstanding Certificate
Principal Balances,
o holders of the Class CE Certificates will be allocated 3% of
all voting rights, and
o holders of each class of Class R Certificates (other than the
Class RX Certificates) and Class P Certificates will be
allocated 1% of all voting rights.
Voting rights will be allocated among the certificates of each such
class in accordance with their respective percentage interests.
CERTAIN RIGHTS OF THE CLASS III-A INSURER
The class III-A insurer shall be subrogated to the rights of each
holder of a Class III-A Certificate to receive distributions on the Class III-A
Certificates to the extent of any payment by the class III-A insurer under the
Class III-A Policy.
Unless it is in default under the terms of the Class III-A Policy, or
certain events with respect to bankruptcy or insolvency have occurred with
respect to the class III-A insurer, pursuant to the terms of the pooling and
servicing agreement, each Class III-A certificateholder agrees that ACE Guaranty
Corp. shall be treated by the depositor, the master servicer, the trustee and
the seller as if ACE Guaranty Corp. were the holder of all Class III-A
Certificates for the purpose of the giving of any consent, the making of any
direction or the exercise of any voting or other control rights otherwise given
to the Class III-A certificateholders thereunder without any further consent of
the holders of the Class III-A Certificates and the holders of the Class III-A
Certificates will not exercise any of such rights without the prior written
consent of ACE Guaranty Corp. Once the Class III-A Certificates have been paid
in full, and any Reimbursement Amount owed to the class III-A insurer has been
paid, these rights will terminate.
OPTIONAL TERMINATION
The master servicer will have the right to purchase all remaining
mortgage loans and REO properties and thereby effect early retirement of all the
certificates, subject to the stated principal balance of the mortgage loans and
REO properties at the time of repurchase being less than or equal to 10% of
cut-off date principal balance of the mortgage loans. We refer to such date as
the optional termination date. In the event that the master servicer, exercises
such option, it will effect such repurchase at a price equal to the sum of
o 100% of the stated principal balance of each mortgage loan,
other than in respect of REO Property, plus accrued interest
thereon at the applicable mortgage rate,
o the appraised value of any REO property, up to the stated
principal balance of the related mortgage loan, and
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o any unreimbursed out-of-pocket costs and expenses of the
trustee or the master servicer and the principal portion of
any unreimbursed advances previously incurred by the master
servicer in the performance of their respective servicing
obligations and any Reimbursement Amounts due to ACE Guaranty
Corp.
Proceeds from such purchase will be distributed to the certificateholders in the
priority described above in "Description of the Certificates -- Distributions."
The proceeds from any such distribution may not be sufficient to distribute the
full amount to which each class of certificates is entitled if the purchase
price is based in part on the appraised value of any REO property and such
appraised value is less than the stated principal balance of the related
mortgage loan. Any purchase of the mortgage loans and REO properties will result
in an early retirement of the certificates.
OPTIONAL PURCHASE OF CERTAIN LOANS
As to any mortgage loan which as of the first day of a calendar quarter
is delinquent in payment by 91 days or more, EMC Mortgage Corporation may, at
its option, purchase such mortgage loan at a price equal to 100% of the stated
principal balance thereof plus accrued interest thereon at the applicable
mortgage rate, from the date through which interest was last paid by the related
mortgagor or advanced to the first day of the month in which such amount is to
be distributed; provided that such mortgage loan is still delinquent in payment
by 91 days or more as of the date of such purchase and provided further, that
this limited purchase option, if not theretofore exercised, shall terminate on
the date prior to the last day of such calendar quarter. Such option, if not
exercised, shall not thereafter be reinstated as to any such mortgage loan
unless the delinquency is cured and the mortgage loan thereafter again becomes
delinquent in payment 91 days or more. In that event, the option shall again
become exercisable on the first date of the subsequent calendar quarter.
In addition, during the 90 day period following the closing date, EMC
Mortgage Corporation may, in its sole discretion, purchase any mortgage loan for
which the related originator or prior owner has breached a representation or
warranty made to EMC Mortgage Corporation regarding the characteristics of such
mortgage loan.
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EVENTS OF DEFAULT
Events of default under the pooling and servicing agreement include:
o any failure by the master servicer to remit to the trustee any
amount received or collected by it with respect to the
mortgage loans, or any advance required to be made by the
master servicer under the terms of the pooling and servicing
agreement, which continues unremedied for one business day
after written notice of such failure shall have been given to
the master servicer by the trustee or the depositor, or to the
master servicer and the trustee by the holders of certificates
evidencing not less than 25% of the voting rights evidenced by
the certificates;
o any failure by the master servicer to observe or perform in
any material respect any other of its covenants or agreements,
or any breach of a representation or warranty made by the
master servicer in the pooling and servicing agreement, which
continues unremedied for 60 days after the giving of written
notice of such failure to the master servicer by the trustee
or the depositor, or to the master servicer and the trustee by
the holders of certificates evidencing not less than 25% of
the voting rights evidenced by the certificates;
o insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, and certain actions by or
on behalf of the master servicer indicating its insolvency or
inability to pay its obligations; or
o any draw on the Class III-A Policy, if the class III-A insurer
is not in default; provided that if the master servicer is
EMC, the master servicer shall not be in default pursuant to
this clause if the parent of EMC is rated at least "BBB" by
Standard & Poor's or "Baa2" by Moody's.
RIGHTS UPON EVENT OF DEFAULT
So long as an event of default under the pooling and servicing
agreement remains unremedied, the trustee shall, but only upon the receipt of
written instructions from the holders of certificates having not less than 25%
of the voting rights evidenced by the certificates in the case of any event of
default described in the first three bullet points above or upon the receipt of
written instructions from the class III-A insurer in the case of any event of
default described in the last bullet point above, terminate all of the rights
and obligations of the master servicer under the pooling and servicing agreement
and in and to the mortgage loans, whereupon the trustee shall, except as
described below, automatically succeed, after a transition period not exceeding
90 days, to all of the responsibilities and duties of the master servicer under
the pooling and servicing agreement; PROVIDED, HOWEVER that the trustee in its
capacity of successor master servicer shall be responsible for making any
advances required to be made by the master servicer immediately upon termination
of the predecessor master servicer and any such advance shall be made on the
distribution date on which such advance was required to be made by the
predecessor master servicer; PROVIDED, FURTHER that the trustee shall have no
obligation whatsoever with respect to any liability incurred by the master
servicer at or prior to the time of receipt by the master servicer of such
notice of termination. As compensation therefor, the trustee shall be entitled
to all compensation which the master servicer would have been entitled to retain
if the master servicer had continued to act as such, except for those amounts
due the master servicer as reimbursement for advances previously made or
expenses previously incurred. Notwithstanding the above, the trustee may, if it
shall be unwilling so to act, or shall, if it is legally unable so to act,
appoint, or petition a court of competent jurisdiction to appoint, any
established housing and home finance institution which is a Fannie Mae or
Freddie Mac approved servicer (with the prior written consent of the class III-A
insurer, which consent shall not be unreasonably withheld) as the successor to
the master servicer under the pooling
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and servicing agreement in the assumption of all or any part of the
responsibilities, duties or liabilities of the master servicer under the pooling
and servicing agreement. Pending appointment of a successor to the master
servicer under the pooling and servicing agreement, the trustee shall act in
such capacity as provided under the pooling and servicing agreement. In
connection with such appointment and assumption, the trustee may make such
arrangements for the compensation of such successor out of payments on mortgage
loans as it and such successor shall agree; PROVIDED, HOWEVER, that no such
compensation shall be in excess of that permitted the master servicer as
provided above. No assurance can be given that termination of the rights and
obligations of the master servicer under the pooling and servicing agreement
would not adversely affect the servicing of the mortgage loans, including the
delinquency experience of the mortgage loans. The costs and expenses of the
trustee in connection with the termination of the master servicer, appointment
of a successor master servicer and the transfer of servicing, if applicable, to
the extent not paid by the terminated master servicer, will be paid by the trust
fund. To the extent the class III-A insurer directs the trustee to terminate the
master servicer due to an event of default described in the last bullet point
above, the class III-A insurer will be required to appoint a successor master
servicer which is reasonably acceptable to the trustee, which successor master
servicer will be required to assume all of the obligations of the terminated
master servicer in the manner described above.
No certificateholder, solely by virtue of such holder's status as a
certificateholder, or the class III-A insurer will have any right under the
pooling and servicing agreement to institute any proceeding with respect
thereto, unless such holder or class III-A insurer, as applicable, previously
has given to the trustee written notice of the continuation of an event of
default and unless the holders of certificates having not less than 25% of the
voting rights evidenced by the certificates or class III-A insurer, as
applicable, have made written request to the trustee to institute such
proceeding in its own name as trustee thereunder and have offered to the trustee
reasonable indemnity and the trustee for 60 days has neglected or refused to
institute any such proceeding.
THE TRUSTEE
LaSalle Bank National Association will be the trustee under the pooling
and servicing agreement. The depositor and the master servicer may maintain
other banking relationships in the ordinary course of business with the trustee.
The trustee's corporate trust office is located at 135 South LaSalle Street,
Suite 1625, Chicago, Illinois, Attention: Global Securitization Trust Services
Group - Bear Stearns Asset Backed Securities, Inc., Series 2004-HE1 or at such
other address as the trustee may designate from time to time. The trustee will
be entitled to reimbursement or indemnification by the trust for any loss,
liability or expense arising out of or in connection with the pooling and
servicing agreement as set forth in the pooling and servicing agreement except
any such loss, liability or expense as may arise from its negligence or
intentional misconduct.
The trustee may resign at any time, in which event the depositor will
be obligated to appoint a successor trustee. The depositor may also remove the
trustee if the trustee ceases to be eligible to continue as such under the
pooling and servicing agreement or if the trustee becomes incapable of acting,
bankrupt, insolvent or if a receiver or public officer takes charge of the
trustee or its property. Upon such resignation or removal of the trustee, the
depositor will be entitled to appoint a successor trustee with the prior written
consent of the class III-A insurer, which consent shall not be unreasonably
withheld). The trustee may also be removed at any time by the holders of
certificates evidencing ownership of not less than 51% of the trust with the
prior written consent of the class III-A insurer, which consent shall not be
unreasonably withheld). In the event that the certificateholders remove the
trustee, the compensation of any successor trustee shall be paid by the
certificateholders to the extent that such compensation exceeds the amount
agreed to by the depositor and the trustee. Any resignation or removal of the
trustee and appointment of a successor trustee will not become effective until
acceptance of the appointment by the successor trustee.
S-64
YIELD MAINTENANCE AGREEMENTS
The trustee, on behalf of the trust fund, will enter into two yield
maintenance agreements (each, a "Yield Maintenance Agreement") with Bear Stearns
Financial Products Inc. (the "Counterparty") for the benefit of the Class II-A
Certificateholders and Class M Certificateholders, respectively. The Yield
Maintenance Agreements are intended to provide partial protection to the Class
II-A Certificateholders and Class M Certificateholders in the event that the
pass-through rate applicable to the Class II-A Certificates and Class M
Certificates is limited by the applicable Net Rate Cap.
The Counterparty is a bankruptcy remote derivatives product company
based in New York, New York that has been established as a wholly owned
subsidiary of the Bear Stearns Companies, Inc. The Counterparty maintains a
ratings classification of "AAA" from Standard & Poor's and "Aaa" from Moody's.
The Counterparty will provide upon request, without charge, to each person to
whom this prospectus supplement is delivered, a copy of (i) the ratings analysis
from each of Standard & Poor's and Moody's evidencing those respective ratings
or (ii) the most recent audited annual financial statements of the Counterparty.
Requests for such information should be directed to the DPC Manager of Bear
Stearns Financial Products Inc. at (212) 272-4009 or in writing at 383 Madison
Avenue, New York, New York 10179. The Counterparty is an affiliate of Bear,
Stearns & Co. Inc., the seller and the depositor.
On each distribution date, payments under the Yield Maintenance
Agreements will be made to the trustee for the benefit of the holders of the
Class II-A Certificates and Class M Certificates. The payment to be made by the
Counterparty under the Yield Maintenance Agreements will be equal to the
interest accrued during the accrual period on the notional balance specified
below at a rate equal to the excess of (i) One- Month LIBOR (subject to a
ceiling of 9.25% in the case of the Yield Maintenance Agreement relating to the
Class II-A Certificates and a ceiling of 7.50% in the case of the Yield
Maintenance Agreement relating to the Class M Certificates) over (ii) for each
distribution date, the rates set forth below. The notional balance of the Yield
Maintenance Agreements relating to the Class II-A Certificates and Class M
Certificates is equal to the lesser of (i) the aggregate Certificate Principal
Balance of the Class II-A Certificates or the Class M Certificates, as the case
may be, at the beginning of the related calculation period, and (ii) the
notional balance set forth below:
Cap Rate of Cap Rate of
Month of Notional Balance of Class II-A Notional Balance of Class M
Distribution Date Class II-A Certificates Certificates Class M Certificates Certificates
- ----------------- ----------------------- ------------ -------------------- ------------
February 2004 $148,726,502.30 6.90000% $89,500,000.00 6.00000%
March 2004 146,532,178.35 6.90000% 89,500,000.00 6.00000%
April 2004 143,906,221.56 6.90000% 89,500,000.00 6.00000%
May 2004 140,853,767.87 6.90000% 89,500,000.00 6.00000%
June 2004 137,382,977.13 6.90000% 89,500,000.00 6.00000%
July 2004 133,505,086.13 6.90000% 89,500,000.00 6.00000%
August 2004 129,235,736.17 6.90000% 89,500,000.00 6.00000%
September 2004 124,600,477.70 6.90000% 89,500,000.00 6.00000%
October 2004 119,636,982.28 6.90000% 89,500,000.00 6.00000%
November 2004 114,476,116.24 6.90000% 89,500,000.00 6.00000%
S-65
Cap Rate of Cap Rate of
Month of Notional Balance of Class II-A Notional Balance of Class M
Distribution Date Class II-A Certificates Certificates Class M Certificates Certificates
- ----------------- ----------------------- ------------ -------------------- ------------
December 2004 $109,401,692.49 6.90000% $89,500,000.00 6.00000%
January 2005 104,497,493.87 6.90000% 89,500,000.00 6.00000%
February 2005 99,757,724.70 6.90000% 89,500,000.00 6.00000%
March 2005 95,176,788.96 6.90000% 89,500,000.00 6.00000%
April 2005 90,749,283.30 6.90000% 89,500,000.00 6.00000%
May 2005 86,469,990.41 6.90000% 89,500,000.00 6.00000%
June 2005 82,333,872.50 6.90000% 89,500,000.00 6.00000%
July 2005 78,336,065.11 6.90000% 89,500,000.00 6.00000%
August 2005 74,471,865.47 6.90000% 89,500,000.00 6.00000%
September 2005 70,736,757.45 6.90000% 89,500,000.00 6.00000%
October 2005 67,126,307.66 6.90000% 89,500,000.00 6.00000%
November 2005 63,635,675.83 6.90000% 89,500,000.00 6.00000%
December 2005 60,259,154.58 8.00000% 89,500,000.00 6.00000%
January 2006 56,993,719.57 8.00000% 89,500,000.00 6.00000%
February 2006 53,837,219.37 8.15000% 89,500,000.00 6.00000%
March 2006 50,785,960.52 8.15000% 89,500,000.00 6.00000%
April 2006 47,836,376.42 8.15000% 89,500,000.00 6.00000%
May 2006 44,985,022.96 8.15000% 89,500,000.00 6.00000%
June 2006 42,228,574.22 8.15000% 89,500,000.00 6.00000%
July 2006 39,563,818.43 8.15000% 89,500,000.00 6.00000%
August 2006 36,987,653.96 8.25000% 89,500,000.00 6.00000%
September 2006 34,497,085.55 8.25000% 89,500,000.00 6.00000%
October 2006 32,089,220.60 8.25000% 89,500,000.00 6.00000%
November 2006 29,761,265.62 8.25000% 89,500,000.00 6.00000%
December 2006 27,510,485.95 8.25000% 89,500,000.00 6.00000%
January 2007 25,334,301.98 8.25000% 89,500,000.00 6.00000%
February 2007 25,334,301.98 8.25000% 88,663,986.61 6.00000%
March 2007 25,334,301.98 8.60000% 83,610,629.88 6.00000%
April 2007 25,334,301.98 8.60000% 78,722,420.71 6.00000%
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Cap Rate of Cap Rate of
Month of Notional Balance of Class II-A Notional Balance of Class M
Distribution Date Class II-A Certificates Certificates Class M Certificates Certificates
- ----------------- ----------------------- ------------ -------------------- ------------
May 2007 $25,334,301.98 8.60000% $ 0.00
June 2007 25,334,301.98 8.60000% 0.00
July 2007 25,334,301.98 8.60000% 0.00
August 2007 25,334,301.98 8.60000% 0.00
September 2007 25,334,301.98 8.60000% 0.00
October 2007 25,334,301.98 8.60000% 0.00
November 2007 25,334,301.98 8.60000% 0.00
December 2007 25,334,301.98 8.60000% 0.00
January 2008 25,082,879.30 8.60000% 0.00
February 2008 24,259,963.93 8.60000% 0.00
March 2008 23,464,091.74 8.60000% 0.00
April 2008 22,694,357.32 8.85000% 0.00
May 2008 21,949,886.06 8.85000% 0.00
June 2008 21,229,833.09 8.85000% 0.00
July 2008 20,533,382.25 8.85000% 0.00
August 2008 19,859,745.12 8.85000% 0.00
September 2008 19,208,160.05 8.85000% 0.00
October 2008 18,577,891.22 8.85000% 0.00
November 2008 17,968,229.34 8.85000% 0.00
December 2008 17,378,400.13 8.85000% 0.00
January 2009 16,807,828.63 8.85000% 0.00
February 2009 16,255,876.77 8.85000% 0.00
March 2009 15,721,925.01 8.85000% 0.00
April 2009 15,205,374.79 8.85000% 0.00
May 2009 14,705,647.77 8.85000% 0.00
June 2009 14,222,185.20 8.85000% 0.00
July 2009 13,754,447.21 8.85000% 0.00
August 2009 13,301,912.15 8.85000% 0.00
September 2009 12,864,076.01 8.85000% 0.00
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Cap Rate of Cap Rate of
Month of Notional Balance of Class II-A Notional Balance of Class M
Distribution Date Class II-A Certificates Certificates Class M Certificates Certificates
- ----------------- ----------------------- ------------ -------------------- ------------
October 2009 $12,440,451.77 8.85000% $ 0.00
November 2009 12,030,568.85 8.85000% 0.00
December 2009 11,633,972.54 8.85000% 0.00
January 2010 11,250,223.45 8.85000% 0.00
February 2010 10,878,896.98 8.85000% 0.00
March 2010 10,519,582.83 8.85000% 0.00
April 2010 0.00 0.00
On each Distribution Date, amounts received from the Yield Maintenance
Agreements with respect to such Distribution Date will be allocated to the
following classes of certificates in the following order of priority:
(i) FIRST, from amounts received under the related Yield
Maintenance Agreement, to the Class II-A Certificates pro rata based on
the amount of Basis Risk Shortfall Carryforward Amount for such classes
of certificates, and to the Class M-1, Class M-2, Class M-3, Class M-4,
Class M-5 and Class M-6 Certificates, in that order, the sum of (a) any
Basis Risk Shortfall for such distribution date and (b) any Basis Risk
Shortfall Carryforward Amount for such distribution date;
(ii) SECOND, from any remaining amounts received from the
non-related Yield Maintenance Agreement, to the Class II-A Certificates
pro rata based on the amount of Basis Risk Shortfall Carryforward
Amount for such classes of certificates, and to the Class M-1, Class
M-2, Class M-3, Class M-4, Class M-5 and Class M-6 Certificates, in
that order, the sum of (a) any Basis Risk Shortfall for such
distribution date and (b) any Basis Risk Shortfall Carryforward Amount
for such distribution date to the extent not covered in clause (i)
above; and
(iii) THIRD, from any remaining amounts received from the
Yield Maintenance Agreements, to the Class CE Certificates.
THE FINANCIAL GUARANTY INSURANCE POLICY
The following summary of terms of the financial guaranty insurance
policy to be issued by ACE Guaranty Corp. (the "Class III-A Insurer" or "AGC")
does not purport to be complete and is qualified in its entirety by reference to
the financial guaranty insurance policy.
AGC has made a commitment to issue a financial guaranty insurance
policy (the "Policy") relating to the Class III-A Certificates (the "Insured
Certificates"), effective as of the date of issuance of the Insured
Certificates. The Policy will be issued to the trustee for the benefit of the
holders of the Insured Certificates. Under the terms of the Policy, AGC
unconditionally and irrevocably guarantees to pay each and every insured payment
(as described below) which becomes due for payment but shall be unpaid by reason
of nonpayment by the trust. The Policy is non-cancelable for any reason,
including without limitation the non-payment of premium.
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Insured payments for any distribution date are as follows: (i) the
Current Interest for the accrual period on the Insured Certificates; (ii) the
Insured Certificate Loss Amount for such Distribution Date, if any; and (iii)
the Certificate Principal Balance of the Insured Certificates on the related
Insured Certificate on the distribution date occurring in February 2034 or, with
the consent of AGC, upon the earlier termination of the trust pursuant to the
terms of the pooling and servicing agreement, after giving effect to
distributions from the trust on that distribution date. The total aggregate
principal amount of insured payments in respect of the Certificate Principal
Balance of the Insured Certificates payable by AGC under the Policy will in no
event exceed $149,378,000. An "Insured Certificate Loss Amount" means, with
respect to any distribution date and the Insured Certificates, the Applied
Realized Loss Amounts allocated to the Insured Certificates on such distribution
date. An insured payment is due for payment when, on a distribution date, there
is a shortfall in available funds on deposit in the Distribution Account to pay
the foregoing amounts on the applicable distribution dates (the "Defaulted
Amount"). Notwithstanding the foregoing, an insured payment does not include any
basis risk shortfalls, any interest shortfall resulting from the application of
the Relief Act or any prepayment interest shortfalls allocated to the Insured
Certificates on the related distribution date.
AGC will pay to the trustee, as beneficiary of the Policy for the
benefit of the holders of the Insured Certificates, each Defaulted Amount, other
than those amounts previously distributed by or on behalf of the trust on the
Insured Certificates which are or may be recoverable and sought to be recovered
as avoidable preferences by a trustee in bankruptcy pursuant to an insolvency
proceeding in accordance with a final nonappealable order of a court having
competent jurisdiction (the "Avoided Payments"), on the later of (i) the date
such Defaulted Amount becomes due for payment or (ii) the second business day
following the day on which AGC receives notice of claim therefor in accordance
with the terms of the Policy. AGC will pay Avoided Payments when due to be paid
pursuant to an applicable court order, but in any event no earlier than the
fourth business day following proper notice as described in the Policy.
AGC shall be subrogated to the rights of the holders of the Insured
Certificates to receive payments in respect of the insured payments to the
extent of any payment by AGC under the Policy.
Pursuant to the terms of the pooling and servicing agreement, for so
long as there is no continuing default by AGC with respect to its obligations
under the Policy, each holder of an Insured Certificate agrees that AGC shall be
treated by the depositor, the master servicer, the seller, the originators and
the trustee as if AGC were the holder of all of the Insured Certificates for the
purpose of the giving of any consent, the making of any direction or the
exercise of any voting or other control rights otherwise given to the holders of
the Insured Certificates thereunder.
In addition to the rights set forth in this prospectus supplement, AGC
may have additional rights with respect to the enforcement of representations
and warranties, events of default, and other matters as set forth in the pooling
and servicing agreement.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the meanings set forth in the pooling and servicing agreement
as of the date of execution of the Policy, without giving effect to any
subsequent amendment or modification to the pooling and servicing agreement
unless such amendment or modification has been approved in writing by AGC.
THE CLASS III-A INSURER
ACE Guaranty Corp. is a Maryland-domiciled insurance company currently
licensed as a financial guaranty insurance company in forty-one states and the
District of Columbia. AGC was formed in 1985 and commenced operations in 1988.
AGC has license applications pending, or intends to file an application, in each
of those states in which it is not currently licensed. AGC is located at 1325
Avenue of the Americas,
S-69
New York, New York 10019. AGC is indirectly owned by ACE Limited, a Cayman
Islands holding company based in Bermuda ("Ace Limited"). On December 2, 2003,
ACE Limited announced its intention to pursue an initial public offering of its
financial guaranty business, and expects to offer approximately sixty-five to
seventy-five of its interest in the newly formed parent of AGC. A registration
statement was filed on December 23, 2003 and the offering is expected to be
completed in the first half of 2004, subject to market conditions and receipt of
various regulatory approvals.
AGC is engaged in the business of writing financial guaranty insurance
and reinsurance in respect of newly issued securities sold in the primary
market, as well as writing financial guaranty insurance in respect of
outstanding securities sold in the secondary market. It also insures obligations
under credit default swaps. See "--CREDIT ENHANCEMENT BUSINESS" below.
AGC is subject to insurance laws and regulations in Maryland and New
York (among other jurisdictions) that, among other things, (i) limit AGC's
business to financial guaranty insurance and related lines, (ii) prescribe
minimum solvency requirements, including capital and surplus requirements, (iii)
limit classes and concentrations of investments, (iii) regulate the amount of
both the aggregate and individual risks that may be insured, (iv) limit the
payment of dividends by AGC, (v) require the maintenance of contingency reserves
and (vi) govern changes in control and transactions among affiliates. State laws
to which AGC is subject also require the approval of policy rates and forms.
AGC's financial strength is rated "AAA" by S&P, the highest rating
assigned by S&P, and "Aa2" by Moody's. Because AGC's credit rating is AAA and
Aa2, all securities and other obligations guaranteed by AGC are rated AAA by S&P
and Aa2 by Moody's, respectively. Each rating of AGC should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of AGC and its ability to pay claims on its
policies of insurance. Any further explanation of the significance of the above
ratings maybe obtained from the applicable rating agency. The above ratings are
not recommendations to buy, sell or hold any security, and such ratings may be
subject to revision or withdrawal at any time by the rating agencies. Any
downward revision or withdrawal of any of the above ratings may have an adverse
effect on the market price of any security guaranteed by AGC. AGC does not
guaranty the market price of the securities it guarantees, nor does it guaranty
that the ratings on such securities will not be revised or withdrawn.
The Policy is not covered by the property/casualty insurance fund
specified in Article 76 of the New York Insurance Law.
ACE LIMITED
ACE Limited is a holding company incorporated with limited liability
under the Cayman Islands Companies Law. ACE Limited maintains its business
offices in Bermuda. ACE Limited, through its various subsidiaries (the "Ace
Group"), provides a broad range of insurance and reinsurance products to
insureds in the United States and approximately 50 other countries. As of
December 31, 2002, ACE Limited had total assets of $43,450,937,000, total
liabilities of $36,751,201,000 and shareholders' equity of $6,388,686,000. The
ACE Group derives its revenue principally from premiums, fees and investment
income. The ACE Group operates through four business segments: Insurance - North
American, Insurance - Overseas General, Global Reinsurance and Financial
Services.
ACE Limited files annual, quarterly and special reports, information
statements and other information with the Securities and Exchange Commission
(the "SEC"). Copies of SEC filings, including ACE Limited's annual reports on
Form 10-K and quarterly reports on 10-Q are available over the SEC's internet
website.
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CAPITALIZATION OF ACE GUARANTY CORP.
As of December 31, 2002, AGC had total admitted assets of
$1,042,666,298, total liabilities of $755,706,172, total surplus of $286,960,126
and total statutory capital (surplus plus contingency reserves) of $593,954,287,
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities. Copies of the statutory quarterly
and annual statements filed with the Maryland Insurance Administration are
available upon request by contacting AGC investor relations at (212) 974-0100.
Attached to this prospectus supplement as Annex II are the audited
financial statements of AGC as of December 31, 2002 and for the three years then
ended and the unaudited financial statements as of September 30, 2003 and 2002,
and for the nine months then ended.
The following table sets forth the capitalization of AGC as of the
years ended December 2001 and 2002 and as of September 30, 2003 (unaudited), on
the basis of accounting principles generally accepted in the United States of
America ("GAAP"):
SEPTEMBER 30,
2003
DECEMBER 31, 2001 DECEMBER 31, 2002 (IN MILLIONS)
(IN MILLIONS) (IN MILLIONS) (UNAUDITED)
------------- ------------- -----------
Unearned Premiums 324 353 386
Other Liabilities 166 233 236
Stockholders Equity:
Common Stock 15 15 15
Additional Paid-in Capital 342 345 351
Unrealized Gain on Bonds, Net of Tax 15 42 46
Retained Earnings 334 371 434
--- --- ---
Total Stockholder's Equity 706 773 846
--- --- ---
Total Liabilities and Stockholders Equity 1,196 1,359 1,468
CREDIT ENHANCEMENT BUSINESS
AGC issues financial guaranty insurance policies that guarantee timely
payment of interest, principal and other amounts in respect of securities and
other financial obligations. A financial guaranty insurance policy is used in
the capital markets as credit enhancement for principal, interest and other
amounts due in accordance with the original debt service schedule of the
guaranteed security. In the event the issuer of the security defaults on its
insured payment obligations, the financial guarantor pays such obligations upon
receipt of a claim therefor in accordance with the terms of the related policy.
In these instances, AGC generally has the option, but not the obligation, to pay
the obligations insured on an accelerated basis. The financial guaranty
insurance policy is unconditional, irrevocable and noncancellable. AGC collects
a premium (payable either upon issuance of its policy or periodically in
installments) equal to a significant portion of the savings resulting from the
trading levels of the guaranteed securities over what those trading levels would
have been had such securities not been guaranteed.
AGC underwrites all risks insured by it to a "zero loss" standard; that
is, obligations insured by AGC are required to be structured with sufficient
levels of excess collateral or other first loss protection so that AGC, to a
high degree of certainty, anticipates no losses on each risk insured, considered
without regard to the premium collected thereon or the investment income related
thereto. To this end, each policy written by
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AGC is required to meet specified criteria applicable to the risk proposed to be
insured and set forth by AGC in its underwriting guidelines. AGC is able to
deviate from such guidelines on a case-by-case basis only in accordance with
established procedures. There can be no assurance, however, that this "zero
loss" standard will be met.
AGC monitors its exposure to insured credits on an ongoing basis. In
this regard, AGC reviews available information on the entities which issued the
insured securities, the assets underlying the insured securities, and general
trends in the relevant industry.
RESERVES
AGC maintains a general loss reserve for all insured obligations. A
general loss reserve is an estimate of ultimate liability for potential losses
and loss adjustment expenses with respect to insured obligations. To determine
the general loss reserve, management periodically reviews its exposure to
various credits and sets its reserves based on its estimate of ultimate
liability with respect to such exposure. AGC reflects its liability for the
ultimate payment of incurred losses and loss adjustment expenses by establishing
case basis and loss adjustment expense reserves, which are balance sheet
liabilities representing estimates of future amounts needed to pay claims and
related expenses with respect to insured obligations.
Because reserves are necessarily based on estimates and because of the
absence of a sufficient number of losses in its financial guaranty insurance
activities and in the financial guaranty industry generally to establish a
meaningful statistical base, there can be no assurance that AGC's general or
case basis reserves will be adequate to cover losses in AGC's insured book of
business. Reserves are estimates of potential claims at a given time, based on
facts and circumstances then known to AGC. It is possible that the ultimate
liability may exceed or be less than such estimates. AGC reviews its estimates
on an ongoing basis and, as experience develops and new information becomes
known, AGC will adjust its reserves as necessary.
AGC also maintains contingency reserves pursuant to New York and
Maryland insurance laws and regulations. Contingency reserves are non-specific
reserves set up for the protection of policyholders against the effects of
excessive losses occurring during adverse economic cycles. Such contingency
reserves, which are calculated as a specified percentage of principal
guaranteed, are established over a fifteen or twenty year period, and taken down
over a corresponding period of time.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
GENERAL
The weighted average life of, and the yield to maturity on, each class
of offered certificates generally will be directly related to the rate of
payment of principal, including prepayments, of the related mortgage loans. The
actual rate of principal prepayments on pools of mortgage loans is influenced by
a variety of economic, tax, geographic, demographic, social, legal and other
factors and has fluctuated considerably in recent years. In addition, the rate
of principal prepayments may differ among pools of mortgage loans at any time
because of specific factors relating to the mortgage loans in the particular
pool, including, among other things, the age of the mortgage loans, the
geographic locations of the properties securing the loans, the extent of the
mortgagors' equity in such properties, and changes in the mortgagors' housing
needs, job transfers and employment status. The rate of principal prepayments
may also be affected by whether the mortgage loans impose prepayment penalties.
Approximately 77.09% of the mortgage loans, by cut-off date principal balance,
at origination provided for the payment by the borrower of a prepayment charge
on voluntary prepayments typically made within up to five years from the date of
the execution of the related mortgage note. These penalties, if still applicable
and if enforced by the related servicer would typically discourage
S-72
prepayments on the mortgage loans. The holders of the Class P Certificates will
be entitled to all prepayment charges received on the mortgage loans, and these
amounts will not be available for distribution on the other classes of
certificates. However, there can be no assurance that the prepayment charges
will have any effect on the prepayment performance of the mortgage loans.
Investors should conduct their own analysis of the effect, if any, that the
prepayment charges may have on the prepayment performance of the mortgage loans.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors who purchase the offered certificates at
prices other than par, even if the average rate of principal prepayments is
consistent with the expectations of investors. In general, the earlier the
payment of principal of the mortgage loans the greater the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal prepayments occurring at a rate higher or lower than the rate
anticipated by the investor during the period immediately following the issuance
of the offered certificates may not be offset by a subsequent like reduction or
increase in the rate of principal prepayments.
Certain of the mortgage loans were underwritten generally in accordance
with underwriting standards which are primarily intended to provide for single
family "non-conforming" mortgage loans. A "nonconforming" mortgage loan means a
mortgage loan which is ineligible for purchase by Fannie Mae or Freddie Mac due
to either credit characteristics of the related mortgagor or documentation
standards in connection with the underwriting of the related mortgage loan that
do not meet the Fannie Mae or Freddie Mac underwriting guidelines for "A" credit
mortgagors. These documentation standards may include mortgagors who provide
limited or no documentation in connection with the underwriting of the related
mortgage loan. Accordingly, mortgage loans underwritten under the seller's
non-conforming credit underwriting standards are likely to experience rates of
delinquency, foreclosure and loss that are higher, and may be substantially
higher, than mortgage loans originated in accordance with the Fannie Mae or
Freddie Mac underwriting guidelines. Any resulting losses, to the extent not
covered by credit enhancement, may affect the yield to maturity of the offered
certificates.
The weighted average life and yield to maturity of each class of
offered certificates will also be influenced by the amount of Excess Spread
generated by the mortgage loans and applied in reduction of the Certificate
Principal Balances of such certificates. The level of Excess Spread available on
any distribution date to be applied in reduction of the Certificate Principal
Balances of the offered certificates will be influenced by, among other factors,
o the overcollateralization level of the assets in the mortgage
pool at such time, i.e., the extent to which interest on the
mortgage loans is accruing on a higher stated principal
balance than the Certificate Principal Balance of the offered
certificates;
o the delinquency and default experience of the mortgage loans,
o the provisions of the pooling and servicing agreement that
permit principal collections to be distributed to the Class CE
Certificates and the residual certificates in each case as
provided in the pooling and servicing agreement when required
overcollateralization levels have been met.
To the extent that greater amounts of Excess Spread are distributed in
reduction of the Certificate Principal Balance of a class of offered
certificates, the weighted average life thereof can be expected to shorten. No
assurance, however, can be given as to the amount of Excess Spread to be
distributed at any time or in the aggregate.
S-73
The principal payment rules require that, after certain payments are
made to the Class A Certificates, funds from the related loan group shall be
allocated to the Class A Certificates relating to the other loan group. To the
extent a class of Class A Certificates receives such additional amounts, the
weighted average life thereof can be expected to shorten.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES -- DISTRIBUTIONS ON
THE CERTIFICATES" AND " -- EXCESS SPREAD AND OVERCOLLATERALIZATION PROVISIONS"
IN THIS PROSPECTUS SUPPLEMENT.
The yields to maturity of the offered certificates and, in particular
the subordinated certificates, in the order of payment priority, will be
progressively more sensitive to the rate, timing and severity of Realized Losses
on the mortgage loans. If an Applied Realized Loss Amount is allocated to a
class of offered certificates, that class will thereafter accrue interest on a
reduced Certificate Principal Balance.
PREPAYMENTS AND YIELDS OF OFFERED CERTIFICATES
The extent to which the yield to maturity of an offered certificate may
vary from the anticipated yield will depend upon the degree to which it is
purchased at a discount or premium and, correspondingly, the degree to which the
timing of payments thereon is sensitive to prepayments, liquidations and
purchases of the mortgage loans in the related loan group. In particular, in the
case of an offered certificate purchased at a discount, an investor should
consider the risk that a slower than anticipated rate of principal payments,
liquidations and purchases of the mortgage loans in the related loan group could
result in an actual yield to such investor that is lower than the anticipated
yield and, in the case of an offered certificate purchased at a premium, the
risk that a faster than anticipated rate of principal payments, liquidations and
purchases of such mortgage loans in the related loan group could result in an
actual yield to such investor that is lower than the anticipated yield.
Some of the mortgage loans bear fixed rates. In general, if prevailing
interest rates fall significantly below the interest rates on the mortgage
loans, the mortgage loans are likely to be subject to higher prepayment rates
than if prevailing rates remain at or above the interest rates on the mortgage
loans. Conversely, if prevailing interest rates rise appreciably above the
interest rates on the mortgage loans, the mortgage loans are likely to
experience a lower prepayment rate than if prevailing rates remain at or below
the interest rates on such mortgage loans.
Mortgage loans with higher mortgage rates may prepay faster than
mortgage loans with relatively lower mortgage rates in response to a given
change in market interest rates. Any such disproportionate prepayment of
mortgage loans may reduce the interest rate cap applicable to a class or classes
of certificates. If the pass-through rate on a class of certificates is limited
by an interest rate cap no amounts will be distributable on the applicable
distribution date or on any future distribution date in respect of the foregone
interest amounts.
To the extent that the pass-through rate on the Class II-A Certificates
and Class M Certificates is limited by the applicable interest rate cap, the
difference between (x) the interest amount payable to such class at the
applicable pass-through rate without regard to the related interest rate cap,
and (y) the Current Interest payable to such class on an applicable distribution
date will create a shortfall. Such shortfall will be payable to the extent of
payments made under the related Yield Maintenance Agreement on the applicable
distribution date. However, payments under the yield maintenance agreements are
based on the lesser of the actual certificate principal balance of the related
class of certificates and the principal amount of such certificates based on
certain prepayment assumptions regarding the mortgage loans. If the mortgage
loans do not prepay according to those assumptions, it may result in the yield
maintenance agreements providing insufficient funds to cover such shortfalls.
S-74
The "last scheduled distribution date" for each class of the offered
certificates (other than the Class I- A-1 Certificates) is the distribution date
in February 2034, which is the distribution date in the month following the
latest maturing mortgage loan. Assuming a 0% prepayment assumption, no losses or
delinquencies on the related mortgage loans, and no Excess Cashflow on any
distribution date, the last scheduled distribution date for the Class I-A-1
Certificates is the distribution date in April 2022. The actual final
distribution date with respect to each class of offered certificates could occur
significantly earlier than its last scheduled distribution date because
o prepayments on the related mortgage loans are likely to occur
which will be applied to the payment of the Certificate
Principal Balances thereof,
o Excess Spread to the extent available will be applied as an
accelerated payment of principal on the offered certificates
to the extent described herein and
o EMC may purchase all the mortgage loans when the outstanding
Stated Principal Balances thereof has declined to 10% or less
of the cut-off date principal balance of the mortgage loans
and may purchase mortgage loans in certain other circumstances
as described herein.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement,
which we refer to as the prepayment model, is a prepayment assumption which
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans similar to the
mortgage loans for the life of such mortgage loans. A 100% prepayment assumption
assumes that the outstanding principal balance of a pool of mortgage loans
prepays at a constant prepayment rate ("CPR") of 4% in the first month of the
life of such pool, such rate increasing by an additional approximate 1.91% CPR
(precisely 21/11 percent), in the case of the fixed rate mortgage loans, and an
additional approximate 2.81% CPR (precisely 31/11 percent) in the case of the
adjustable rate mortgage loans, each month thereafter through the twelfth month
of the life of such pool, and such rate thereafter remaining constant at 25%
CPR, in the case of the fixed rate mortgage loans, and 35% CPR, in the case of
the adjustable rate mortgage loans, for the remainder of the life of such pool.
There is no assurance, however, that prepayments on the mortgage loans
will conform to any level of the prepayment model, and no representation is made
that the mortgage loans will prepay at the prepayment rates shown or any other
prepayment rate. The rate of principal payments on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors,
including the level of interest rates. Other factors affecting prepayment of
mortgage loans include changes in obligors, housing needs, job transfers and
unemployment. In the case of mortgage loans in general, if prevailing interest
rates fall significantly below the interest rates on such mortgage loans, the
mortgage loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above the rates borne by such mortgage
loans. Conversely, if prevailing interest rates rise above the interest rates on
such mortgage loans, the rate of prepayment would be expected to decrease.
The following tables have been prepared on the basis of the following
assumptions, which we refer to, collectively, as modeling assumptions:
o the mortgage loans in the respective loan groups prepay at the
indicated percentages of the prepayment assumption;
o distributions on the offered certificates are received, in
cash, on the 25th day of each month, commencing in February
2004, in accordance with the payment priorities defined
herein;
S-75
o no defaults or delinquencies in, or modifications, waivers or
amendments respecting, the payment by the mortgagors of
principal and interest on the mortgage loans occur;
o scheduled payments are assumed to be received on the first day
of each month commencing in February 2004, there are no
shortfalls in the payment of interest to certificateholders
and prepayments represent payment in full of individual
mortgage loans and are assumed to be received on the last day
of each month, commencing in January 2004, and include 30
days, interest thereon;
o the level of Six-Month LIBOR, One-Year U.S. Treasury and
One-Month LIBOR remains constant at 1.17%, 1.201% and 1.10%
per annum;
o the mortgage rate on each adjustable rate mortgage loan will
be adjusted on each interest adjustment date (as necessary) to
a rate equal to Six-Month LIBOR or One-Year U.S. Treasury (as
described above), as applicable, plus the applicable gross
margin, subject to maximum lifetime mortgage rates, minimum
lifetime mortgage rates and periodic caps (as applicable);
o scheduled payments of principal and interest on the mortgage
loans are calculated on their respective principal balances
(prior to giving effect to prepayments received thereon during
the preceding calendar month), mortgage rate and remaining
amortization terms to stated maturity such that the mortgage
loans will fully amortize by their remaining amortization
terms;
o scheduled payments of principal and interest on each mortgage
loan will be adjusted in the month immediately following each
interest adjustment date (as necessary) for such mortgage loan
to equal the fully amortizing payment described in above;
o the closing date for the Certificates is January 30, 2004;
o except as indicated with respect to the weighted average
lives, the master servicer does not exercise its right to
purchase the assets of the trust fund on the optional
termination date; and
o each loan group consists of mortgage loans having the
approximate characteristics described below:
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REMAINING ORIGINAL REMAINING
CURRENT AGGREGATE TERM TO AMORTIZATION AMORTIZATION
LOAN CURRENT MORTGAGE RATE EXPENSE RATE MATURITY (IN TERM (IN TERM (IN GROSS MARGIN
NUMBER* GROUP BALANCES ($) (%) (%) MONTHS) MONTHS) MONTHS) (%)
- -------- ----- -------------- ------------- ------------ ------------ ------------ ------------ ------------
1 I 1,868,250.00 6.9944078683 0.5036000000 359 360 359 5.7642124983
2 I 55,336,570.88 7.1816271322 0.5056725777 358 360 358 5.6969068148
3 I 366,552.94 8.2500000000 0.5036000000 356 360 356 6.5000000000
4 I 2,403,594.05 6.8761102856 0.5036000000 358 360 358 5.7841669914
5 I 689,420.32 6.8750000000 0.5036000000 359 360 359 6.0000000000
6 I 10,757,404.04 7.4477272597 0.5036000000 176 360 355 N/A
7 I 49,783,552.13 7.7374786681 0.5036000000 333 336 333 N/A
8 II 137,755,436.80 7.4122440364 0.5036000000 358 360 358 5.8462367049
9 II 2,898,755.96 7.6255498692 0.5036000000 358 360 358 5.7841331940
10 II 547,126.36 7.0787400519 0.5036000000 358 360 358 5.7260499567
11 II 4,039,602.07 7.0569283499 0.5036000000 175 360 355 N/A
12 II 46,555,002.93 8.0596986063 0.5036000000 318 320 318 N/A
13 III 4,075,188.74 7.5287141744 0.5036000000 359 360 359 7.1474884461
14 III 136,645,403.08 7.5691779638 0.5036000000 358 360 358 5.8768071341
15 III 745,524.45 7.6125833956 0.5036000000 358 360 358 5.1848555000
16 III 7,805,010.85 7.0068747667 0.5036000000 357 360 357 5.9882069057
17 III 286,397.74 6.3750000000 0.5036000000 357 360 357 4.2500000000
18 III 312,686.22 6.3057571453 0.5036000000 357 360 357 5.7500000000
19 III 291,295.76 8.2924181196 0.5036000000 358 360 358 8.0424181196
20 III 38,327,949.77 7.6619193985 0.5036000000 331 333 331 N/A
NUMBER OF RATE
SUBSEQUENT MAXIMUM GROSS MINIMUM GROSS MONTHS UNTIL ADJUSTMENT
LOAN INITIAL PERIODIC PERIODIC RATE CAP MORTGAGE MORTGAGE RATE FIRST RATE FREQUENCY
NUMBER* RATE CAP (%) (%) RATE (%) (%) ADJUSTMENT (IN MONTHS) INDEX
- ------- ---------------- ----------------- ------------- ------------- ------------ ----------- -----------
1 3.0000000000 1.1343503278 12.3777880369 5.7642124983 23 6 6 Mo. LIBOR
2 2.1617197588 1.2776749643 13.7162870087 6.8818667368 22 6 6 Mo. LIBOR
3 3.0000000000 2.0000000000 14.2500000000 6.0000000000 32 12 1 Yr. CMT
4 2.2591927805 1.2267905577 13.3296914010 6.8468689358 34 6 6 Mo. LIBOR
5 3.0000000000 1.0000000000 12.8750000000 6.8750000000 59 6 6 Mo. LIBOR
6 N/A N/A N/A N/A N/A N/A N/A
7 N/A N/A N/A N/A N/A N/A N/A
8 1.9967114177 1.3322331679 14.0767103722 7.4122440364 22 6 6 Mo. LIBOR
9 2.0058133869 1.3313955377 14.2883409445 7.6255498692 34 6 6 Mo. LIBOR
10 3.0000000000 1.0000000000 13.0787400519 7.0787400519 58 6 6 Mo. LIBOR
11 N/A N/A N/A N/A N/A N/A N/A
12 N/A N/A N/A N/A N/A N/A N/A
13 3.0000000000 1.1391598123 12.8459509510 7.2347644038 23 6 6 Mo. LIBOR
14 2.1239504720 1.3119388744 14.1098348931 7.1450111178 22 6 6 Mo. LIBOR
15 3.0000000000 1.7796665690 13.6125833956 5.5638545976 34 12 1 Yr. CMT
16 2.1953294876 1.2633397877 13.5335543420 6.8742431646 33 6 6 Mo. LIBOR
17 5.0000000000 2.0000000000 12.3750000000 4.2500000000 57 12 1 Yr. CMT
18 4.4743135147 1.0000000000 12.3057571453 6.3057571453 57 6 6 Mo. LIBOR
19 3.0000000000 1.2529534930 14.2924181196 8.1688948662 4 6 6 Mo. LIBOR
20 N/A N/A N/A N/A N/A N/A N/A
* Loan Numbers 1 and 13 have a remaining interest only period of 23 months.
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PERCENT OF THE INITIAL CLASS CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS I-A-1 CERTIFICATES
------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 175% 200%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ----
Initial Percentage.................. 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2005.................... 98 73 60 47 35 21 8 0
January 25, 2006.................... 95 41 17 0 0 0 0 0
January 25, 2007.................... 92 14 0 0 0 0 0 0
January 25, 2008.................... 89 0 0 0 0 0 0 0
January 25, 2009.................... 86 0 0 0 0 0 0 0
January 25, 2010.................... 83 0 0 0 0 0 0 0
January 25, 2011.................... 79 0 0 0 0 0 0 0
January 25, 2012.................... 75 0 0 0 0 0 0 0
January 25, 2013.................... 71 0 0 0 0 0 0 0
January 25, 2014.................... 66 0 0 0 0 0 0 0
January 25, 2015.................... 61 0 0 0 0 0 0 0
January 25, 2016.................... 56 0 0 0 0 0 0 0
January 25, 2017.................... 50 0 0 0 0 0 0 0
January 25, 2018.................... 44 0 0 0 0 0 0 0
January 25, 2019.................... 23 0 0 0 0 0 0 0
January 25, 2020.................... 16 0 0 0 0 0 0 0
January 25, 2021.................... 9 0 0 0 0 0 0 0
January 25, 2022.................... 1 0 0 0 0 0 0 0
January 25, 2023.................... 0 0 0 0 0 0 0 0
January 25, 2024.................... 0 0 0 0 0 0 0 0
January 25, 2025.................... 0 0 0 0 0 0 0 0
January 25, 2026.................... 0 0 0 0 0 0 0 0
January 25, 2027.................... 0 0 0 0 0 0 0 0
January 25, 2028.................... 0 0 0 0 0 0 0 0
January 25, 2029.................... 0 0 0 0 0 0 0 0
January 25, 2030.................... 0 0 0 0 0 0 0 0
January 25, 2031.................... 0 0 0 0 0 0 0 0
January 25, 2032.................... 0 0 0 0 0 0 0 0
January 25, 2033.................... 0 0 0 0 0 0 0 0
January 25, 2034.................... 0 0 0 0 0 0 0 0
Weighted Average Life (in years)(1) 11.51 1.79 1.27 1.00 0.83 0.72 0.64 0.57
Weighted Average Life (in years)(1)(2) 11.51 1.79 1.27 1.00 0.83 0.72 0.64 0.57
_____________
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective Certificate Principal Balance for such class of offered
certificates.
(2) To the optional termination date.
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PERCENT OF THE INITIAL CLASS CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS I-A-2 CERTIFICATES
------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 175% 200%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ----
Initial Percentage.................. 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2005.................... 100 100 100 100 100 100 100 93
January 25, 2006.................... 100 100 100 92 67 43 22 0
January 25, 2007.................... 100 100 79 46 20 0 0 0
January 25, 2008.................... 100 89 64 46 20 0 0 0
January 25, 2009.................... 100 75 50 33 20 0 0 0
January 25, 2010.................... 100 64 39 24 16 0 0 0
January 25, 2011.................... 100 54 31 18 12 0 0 0
January 25, 2012.................... 100 45 24 14 9 0 0 0
January 25, 2013.................... 100 38 19 10 7 0 0 0
January 25, 2014.................... 100 32 15 8 4 0 0 0
January 25, 2015.................... 100 27 12 7 1 0 0 0
January 25, 2016.................... 100 23 10 6 0 0 0 0
January 25, 2017.................... 100 20 8 3 0 0 0 0
January 25, 2018.................... 100 17 7 1 0 0 0 0
January 25, 2019.................... 100 13 5 0 0 0 0 0
January 25, 2020.................... 100 11 5 0 0 0 0 0
January 25, 2021.................... 100 9 3 0 0 0 0 0
January 25, 2022.................... 100 8 1 0 0 0 0 0
January 25, 2023.................... 92 7 0 0 0 0 0 0
January 25, 2024.................... 81 6 0 0 0 0 0 0
January 25, 2025.................... 70 5 0 0 0 0 0 0
January 25, 2026.................... 63 4 0 0 0 0 0 0
January 25, 2027.................... 55 3 0 0 0 0 0 0
January 25, 2028.................... 46 1 0 0 0 0 0 0
January 25, 2029.................... 37 0 0 0 0 0 0 0
January 25, 2030.................... 27 0 0 0 0 0 0 0
January 25, 2031.................... 16 0 0 0 0 0 0 0
January 25, 2032.................... 6 0 0 0 0 0 0 0
January 25, 2033.................... * 0 0 0 0 0 0 0
January 25, 2034.................... 0 0 0 0 0 0 0 0
Weighted Average Life (in years)(1) 23.46 9.07 6.32 4.62 3.35 1.97 1.66 1.42
Weighted Average Life (in years)(1)(2) 23.42 8.02 5.44 3.89 2.72 1.97 1.66 1.42
_____________
*Indicates a number that is greater than zero but less than 0.5%
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective Certificate Principal Balance for such class of offered
certificates.
(2) To the optional termination date.
S-79
PERCENT OF THE INITIAL CLASS CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS II-A-1 AND CLASS II-A-2 CERTIFICATES
------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 175% 200%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ----
Initial Percentage.................. 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2005.................... 99 84 77 70 62 55 47 39
January 25, 2006.................... 97 66 51 38 26 15 6 0
January 25, 2007.................... 96 50 32 17 5 0 0 0
January 25, 2008.................... 94 37 25 17 5 0 0 0
January 25, 2009.................... 93 30 19 11 5 0 0 0
January 25, 2010.................... 91 25 14 8 4 0 0 0
January 25, 2011.................... 89 21 11 5 2 0 0 0
January 25, 2012.................... 87 17 8 3 1 0 0 0
January 25, 2013.................... 84 14 6 2 1 0 0 0
January 25, 2014.................... 82 12 4 2 * 0 0 0
January 25, 2015.................... 79 9 3 1 0 0 0 0
January 25, 2016.................... 76 8 2 1 0 0 0 0
January 25, 2017.................... 73 6 2 * 0 0 0 0
January 25, 2018.................... 70 5 1 0 0 0 0 0
January 25, 2019.................... 64 4 1 0 0 0 0 0
January 25, 2020.................... 60 3 1 0 0 0 0 0
January 25, 2021.................... 56 3 * 0 0 0 0 0
January 25, 2022.................... 52 2 0 0 0 0 0 0
January 25, 2023.................... 47 2 0 0 0 0 0 0
January 25, 2024.................... 42 1 0 0 0 0 0 0
January 25, 2025.................... 37 1 0 0 0 0 0 0
January 25, 2026.................... 33 1 0 0 0 0 0 0
January 25, 2027.................... 29 * 0 0 0 0 0 0
January 25, 2028.................... 25 0 0 0 0 0 0 0
January 25, 2029.................... 21 0 0 0 0 0 0 0
January 25, 2030.................... 16 0 0 0 0 0 0 0
January 25, 2031.................... 12 0 0 0 0 0 0 0
January 25, 2032.................... 8 0 0 0 0 0 0 0
January 25, 2033.................... 4 0 0 0 0 0 0 0
January 25, 2034.................... 0 0 0 0 0 0 0 0
Weighted Average Life (in years)(1) 17.70 4.53 3.12 2.28 1.65 1.22 1.05 0.92
Weighted Average Life (in years)(1)(2) 17.62 4.25 2.91 2.12 1.54 1.22 1.05 0.92
_____________
*Indicates a number that is greater than zero but less than 0.5%
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective Certificate Principal Balance for such class of offered
certificates.
(2) To the optional termination date.
S-80
PERCENT OF THE INITIAL CLASS CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS III-A CERTIFICATES
------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 175% 200%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ----
Initial Percentage.................. 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2005.................... 99 84 77 69 62 54 46 38
January 25, 2006.................... 98 65 51 37 25 14 4 0
January 25, 2007.................... 96 49 31 16 4 0 0 0
January 25, 2008.................... 94 36 24 16 4 0 0 0
January 25, 2009.................... 93 30 18 10 4 0 0 0
January 25, 2010.................... 91 24 13 7 3 0 0 0
January 25, 2011.................... 89 20 10 4 1 0 0 0
January 25, 2012.................... 87 16 7 3 * 0 0 0
January 25, 2013.................... 84 13 5 2 0 0 0 0
January 25, 2014.................... 82 11 4 1 0 0 0 0
January 25, 2015.................... 79 9 3 * 0 0 0 0
January 25, 2016.................... 76 7 2 * 0 0 0 0
January 25, 2017.................... 73 6 1 0 0 0 0 0
January 25, 2018.................... 70 5 1 0 0 0 0 0
January 25, 2019.................... 67 4 * 0 0 0 0 0
January 25, 2020.................... 63 3 * 0 0 0 0 0
January 25, 2021.................... 59 2 0 0 0 0 0 0
January 25, 2022.................... 54 2 0 0 0 0 0 0
January 25, 2023.................... 49 1 0 0 0 0 0 0
January 25, 2024.................... 44 1 0 0 0 0 0 0
January 25, 2025.................... 39 1 0 0 0 0 0 0
January 25, 2026.................... 36 * 0 0 0 0 0 0
January 25, 2027.................... 32 0 0 0 0 0 0 0
January 25, 2028.................... 28 0 0 0 0 0 0 0
January 25, 2029.................... 24 0 0 0 0 0 0 0
January 25, 2030.................... 19 0 0 0 0 0 0 0
January 25, 2031.................... 14 0 0 0 0 0 0 0
January 25, 2032.................... 9 0 0 0 0 0 0 0
January 25, 2033.................... 5 0 0 0 0 0 0 0
January 25, 2034.................... 0 0 0 0 0 0 0 0
Weighted Average Life (in years)(1) 18.07 4.40 3.02 2.19 1.57 1.20 1.03 0.90
Weighted Average Life (in years)(1)(2) 17.97 4.17 2.85 2.07 1.50 1.20 1.03 0.90
_____________
*Indicates a number that is greater than zero but less than 0.5%
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective Certificate Principal Balance for such class of offered
certificates.
(2) To the optional termination date.
S-81
PERCENT OF THE INITIAL CLASS CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-1 CERTIFICATES
------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 175% 200%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ----
Initial Percentage.................. 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2005.................... 100 100 100 100 100 100 100 100
January 25, 2006.................... 100 100 100 100 100 100 100 73
January 25, 2007.................... 100 100 100 100 100 52 0 0
January 25, 2008.................... 100 100 70 47 97 52 0 0
January 25, 2009.................... 100 83 53 32 34 52 0 0
January 25, 2010.................... 100 69 40 22 11 30 0 0
January 25, 2011.................... 100 57 30 15 7 16 0 0
January 25, 2012.................... 100 47 23 10 4 6 0 0
January 25, 2013.................... 100 39 17 7 1 * 0 0
January 25, 2014.................... 100 32 13 5 0 0 0 0
January 25, 2015.................... 100 27 10 3 0 0 0 0
January 25, 2016.................... 100 22 7 0 0 0 0 0
January 25, 2017.................... 100 18 6 0 0 0 0 0
January 25, 2018.................... 100 15 4 0 0 0 0 0
January 25, 2019.................... 100 11 2 0 0 0 0 0
January 25, 2020.................... 100 9 0 0 0 0 0 0
January 25, 2021.................... 100 7 0 0 0 0 0 0
January 25, 2022.................... 100 6 0 0 0 0 0 0
January 25, 2023.................... 100 5 0 0 0 0 0 0
January 25, 2024.................... 100 4 0 0 0 0 0 0
January 25, 2025.................... 98 1 0 0 0 0 0 0
January 25, 2026.................... 89 0 0 0 0 0 0 0
January 25, 2027.................... 79 0 0 0 0 0 0 0
January 25, 2028.................... 68 0 0 0 0 0 0 0
January 25, 2029.................... 57 0 0 0 0 0 0 0
January 25, 2030.................... 44 0 0 0 0 0 0 0
January 25, 2031.................... 31 0 0 0 0 0 0 0
January 25, 2032.................... 20 0 0 0 0 0 0 0
January 25, 2033.................... 9 0 0 0 0 0 0 0
January 25, 2034.................... 0 0 0 0 0 0 0 0
Weighted Average Life (in years)(1) 25.48 9.06 6.23 5.05 5.02 4.79 2.53 2.12
Weighted Average Life (in years)(1)(2) 25.29 8.28 5.63 4.58 4.61 3.42 2.53 2.12
_____________
*Indicates a number that is greater than zero but less than 0.5%
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective Certificate Principal Balance for such class of offered
certificates.
(2) To the optional termination date.
S-82
PERCENT OF THE INITIAL CLASS CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-2 CERTIFICATES
------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 175% 200%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ----
Initial Percentage.................. 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2005.................... 100 100 100 100 100 100 100 100
January 25, 2006.................... 100 100 100 100 100 100 100 100
January 25, 2007.................... 100 100 100 100 100 100 57 0
January 25, 2008.................... 100 100 70 47 30 79 57 0
January 25, 2009.................... 100 83 53 32 19 13 40 0
January 25, 2010.................... 100 69 40 22 11 6 16 0
January 25, 2011.................... 100 57 30 15 7 0 3 0
January 25, 2012.................... 100 47 23 10 2 0 0 0
January 25, 2013.................... 100 39 17 7 0 0 0 0
January 25, 2014.................... 100 32 13 4 0 0 0 0
January 25, 2015.................... 100 27 10 0 0 0 0 0
January 25, 2016.................... 100 22 7 0 0 0 0 0
January 25, 2017.................... 100 18 5 0 0 0 0 0
January 25, 2018.................... 100 15 2 0 0 0 0 0
January 25, 2019.................... 100 11 0 0 0 0 0 0
January 25, 2020.................... 100 9 0 0 0 0 0 0
January 25, 2021.................... 100 7 0 0 0 0 0 0
January 25, 2022.................... 100 6 0 0 0 0 0 0
January 25, 2023.................... 100 3 0 0 0 0 0 0
January 25, 2024.................... 100 * 0 0 0 0 0 0
January 25, 2025.................... 98 0 0 0 0 0 0 0
January 25, 2026.................... 89 0 0 0 0 0 0 0
January 25, 2027.................... 79 0 0 0 0 0 0 0
January 25, 2028.................... 68 0 0 0 0 0 0 0
January 25, 2029.................... 57 0 0 0 0 0 0 0
January 25, 2030.................... 44 0 0 0 0 0 0 0
January 25, 2031.................... 31 0 0 0 0 0 0 0
January 25, 2032.................... 20 0 0 0 0 0 0 0
January 25, 2033.................... 9 0 0 0 0 0 0 0
January 25, 2034.................... 0 0 0 0 0 0 0 0
Weighted Average Life (in years)(1) 25.47 9.00 6.17 4.85 4.36 4.53 4.44 2.58
Weighted Average Life (in years)(1)(2) 25.29 8.28 5.62 4.43 4.04 3.90 3.09 2.57
_____________
*Indicates a number that is greater than zero but less than 0.5%
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective Certificate Principal Balance for such class of offered
certificates.
(2) To the optional termination date.
S-83
PERCENT OF THE INITIAL CLASS CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-3 CERTIFICATES
------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 175% 200%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ----
Initial Percentage.................. 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2005.................... 100 100 100 100 100 100 100 100
January 25, 2006.................... 100 100 100 100 100 100 100 100
January 25, 2007.................... 100 100 100 100 100 100 100 30
January 25, 2008.................... 100 100 70 47 30 19 95 30
January 25, 2009.................... 100 83 53 32 19 10 0 30
January 25, 2010.................... 100 69 40 22 11 0 0 6
January 25, 2011.................... 100 57 30 15 6 0 0 0
January 25, 2012.................... 100 47 23 10 0 0 0 0
January 25, 2013.................... 100 39 17 7 0 0 0 0
January 25, 2014.................... 100 32 13 0 0 0 0 0
January 25, 2015.................... 100 27 10 0 0 0 0 0
January 25, 2016.................... 100 22 7 0 0 0 0 0
January 25, 2017.................... 100 18 0 0 0 0 0 0
January 25, 2018.................... 100 15 0 0 0 0 0 0
January 25, 2019.................... 100 11 0 0 0 0 0 0
January 25, 2020.................... 100 9 0 0 0 0 0 0
January 25, 2021.................... 100 7 0 0 0 0 0 0
January 25, 2022.................... 100 1 0 0 0 0 0 0
January 25, 2023.................... 100 0 0 0 0 0 0 0
January 25, 2024.................... 100 0 0 0 0 0 0 0
January 25, 2025.................... 98 0 0 0 0 0 0 0
January 25, 2026.................... 89 0 0 0 0 0 0 0
January 25, 2027.................... 79 0 0 0 0 0 0 0
January 25, 2028.................... 68 0 0 0 0 0 0 0
January 25, 2029.................... 57 0 0 0 0 0 0 0
January 25, 2030.................... 44 0 0 0 0 0 0 0
January 25, 2031.................... 31 0 0 0 0 0 0 0
January 25, 2032.................... 20 0 0 0 0 0 0 0
January 25, 2033.................... 9 0 0 0 0 0 0 0
January 25, 2034.................... 0 0 0 0 0 0 0 0
Weighted Average Life (in years)(1) 25.46 8.91 6.10 4.74 4.13 3.96 4.30 3.78
Weighted Average Life (in years)(1)(2) 25.29 8.28 5.62 4.37 3.86 3.74 3.24 2.74
_____________
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective Certificate Principal Balance for such class of offered
certificates.
(2) To the optional termination date.
S-84
PERCENT OF THE INITIAL CLASS CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-4 CERTIFICATES
------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 175% 200%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ----
Initial Percentage.................. 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2005.................... 100 100 100 100 100 100 100 100
January 25, 2006.................... 100 100 100 100 100 100 100 100
January 25, 2007.................... 100 100 100 100 100 100 100 100
January 25, 2008.................... 100 100 70 47 30 19 11 100
January 25, 2009.................... 100 83 53 32 19 10 0 24
January 25, 2010.................... 100 69 40 22 11 0 0 0
January 25, 2011.................... 100 57 30 15 0 0 0 0
January 25, 2012.................... 100 47 23 10 0 0 0 0
January 25, 2013.................... 100 39 17 0 0 0 0 0
January 25, 2014.................... 100 32 13 0 0 0 0 0
January 25, 2015.................... 100 27 10 0 0 0 0 0
January 25, 2016.................... 100 22 1 0 0 0 0 0
January 25, 2017.................... 100 18 0 0 0 0 0 0
January 25, 2018.................... 100 15 0 0 0 0 0 0
January 25, 2019.................... 100 11 0 0 0 0 0 0
January 25, 2020.................... 100 9 0 0 0 0 0 0
January 25, 2021.................... 100 1 0 0 0 0 0 0
January 25, 2022.................... 100 0 0 0 0 0 0 0
January 25, 2023.................... 100 0 0 0 0 0 0 0
January 25, 2024.................... 100 0 0 0 0 0 0 0
January 25, 2025.................... 98 0 0 0 0 0 0 0
January 25, 2026.................... 89 0 0 0 0 0 0 0
January 25, 2027.................... 79 0 0 0 0 0 0 0
January 25, 2028.................... 68 0 0 0 0 0 0 0
January 25, 2029.................... 57 0 0 0 0 0 0 0
January 25, 2030.................... 44 0 0 0 0 0 0 0
January 25, 2031.................... 31 0 0 0 0 0 0 0
January 25, 2032.................... 20 0 0 0 0 0 0 0
January 25, 2033.................... 9 0 0 0 0 0 0 0
January 25, 2034.................... 0 0 0 0 0 0 0 0
Weighted Average Life (in years)(1) 25.45 8.84 6.04 4.68 4.04 3.81 3.92 4.78
Weighted Average Life (in years)(1)(2) 25.29 8.28 5.62 4.36 3.80 3.61 3.24 2.74
_____________
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective Certificate Principal Balance for such class of offered
certificates.
(2) To the optional termination date.
S-85
PERCENT OF THE INITIAL CLASS CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-5 CERTIFICATES
------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 175% 200%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ----
Initial Percentage.................. 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2005.................... 100 100 100 100 100 100 100 100
January 25, 2006.................... 100 100 100 100 100 100 100 100
January 25, 2007.................... 100 100 100 100 100 100 100 100
January 25, 2008.................... 100 100 70 47 30 19 8 50
January 25, 2009.................... 100 83 53 32 19 5 0 0
January 25, 2010.................... 100 69 40 22 9 0 0 0
January 25, 2011.................... 100 57 30 15 0 0 0 0
January 25, 2012.................... 100 47 23 5 0 0 0 0
January 25, 2013.................... 100 39 17 0 0 0 0 0
January 25, 2014.................... 100 32 13 0 0 0 0 0
January 25, 2015.................... 100 27 3 0 0 0 0 0
January 25, 2016.................... 100 22 0 0 0 0 0 0
January 25, 2017.................... 100 18 0 0 0 0 0 0
January 25, 2018.................... 100 15 0 0 0 0 0 0
January 25, 2019.................... 100 9 0 0 0 0 0 0
January 25, 2020.................... 100 1 0 0 0 0 0 0
January 25, 2021.................... 100 0 0 0 0 0 0 0
January 25, 2022.................... 100 0 0 0 0 0 0 0
January 25, 2023.................... 100 0 0 0 0 0 0 0
January 25, 2024.................... 100 0 0 0 0 0 0 0
January 25, 2025.................... 98 0 0 0 0 0 0 0
January 25, 2026.................... 89 0 0 0 0 0 0 0
January 25, 2027.................... 79 0 0 0 0 0 0 0
January 25, 2028.................... 68 0 0 0 0 0 0 0
January 25, 2029.................... 57 0 0 0 0 0 0 0
January 25, 2030.................... 44 0 0 0 0 0 0 0
January 25, 2031.................... 31 0 0 0 0 0 0 0
January 25, 2032.................... 20 0 0 0 0 0 0 0
January 25, 2033.................... 1 0 0 0 0 0 0 0
January 25, 2034.................... 0 0 0 0 0 0 0 0
Weighted Average Life (in years)(1) 25.43 8.73 5.96 4.61 3.95 3.66 3.66 4.04
Weighted Average Life (in years)(1)(2) 25.29 8.28 5.62 4.34 3.75 3.50 3.24 2.74
_____________
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective Certificate Principal Balance for such class of offered
certificates.
(2) To the optional termination date.
S-86
PERCENT OF THE INITIAL CLASS CERTIFICATE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-6 CERTIFICATES
------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 175% 200%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ----
Initial Percentage.................. 100% 100% 100% 100% 100% 100% 100% 100%
January 25, 2005.................... 100 100 100 100 100 100 100 100
January 25, 2006.................... 100 100 100 100 100 100 100 100
January 25, 2007.................... 100 100 100 100 100 100 100 100
January 25, 2008.................... 100 100 70 47 30 19 0 0
January 25, 2009.................... 100 83 53 32 19 0 0 0
January 25, 2010.................... 100 69 40 22 0 0 0 0
January 25, 2011.................... 100 57 30 9 0 0 0 0
January 25, 2012.................... 100 47 23 0 0 0 0 0
January 25, 2013.................... 100 39 16 0 0 0 0 0
January 25, 2014.................... 100 32 3 0 0 0 0 0
January 25, 2015.................... 100 27 0 0 0 0 0 0
January 25, 2016.................... 100 22 0 0 0 0 0 0
January 25, 2017.................... 100 18 0 0 0 0 0 0
January 25, 2018.................... 100 8 0 0 0 0 0 0
January 25, 2019.................... 100 0 0 0 0 0 0 0
January 25, 2020.................... 100 0 0 0 0 0 0 0
January 25, 2021.................... 100 0 0 0 0 0 0 0
January 25, 2022.................... 100 0 0 0 0 0 0 0
January 25, 2023.................... 100 0 0 0 0 0 0 0
January 25, 2024.................... 100 0 0 0 0 0 0 0
January 25, 2025.................... 98 0 0 0 0 0 0 0
January 25, 2026.................... 89 0 0 0 0 0 0 0
January 25, 2027.................... 79 0 0 0 0 0 0 0
January 25, 2028.................... 68 0 0 0 0 0 0 0
January 25, 2029.................... 57 0 0 0 0 0 0 0
January 25, 2030.................... 44 0 0 0 0 0 0 0
January 25, 2031.................... 31 0 0 0 0 0 0 0
January 25, 2032.................... 20 0 0 0 0 0 0 0
January 25, 2033.................... 0 0 0 0 0 0 0 0
January 25, 2034.................... 0 0 0 0 0 0 0 0
Weighted Average Life (in years)(1) 25.38 8.56 5.81 4.48 3.82 3.52 3.44 3.61
Weighted Average Life (in years)(1)(2) 25.29 8.28 5.62 4.33 3.72 3.42 3.24 2.74
_____________
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related distribution date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective Certificate Principal Balance for such class of offered
certificates.
(2) To the optional termination date.
S-87
ADDITIONAL INFORMATION
The depositor intends to file certain additional yield tables and other
computational materials with respect to the certificates with the Securities and
Exchange Commission in a report on Form 8-K. Such tables and materials were
prepared by the underwriters at the request of certain prospective investors,
based on assumptions provided by, and satisfying the special requirements of,
such prospective investors. Such tables and assumptions may be based on
assumptions that differ from the modeling assumptions. Accordingly, such tables
and other materials may not be relevant to or appropriate for investors other
than those specifically requesting them.
USE OF PROCEEDS
The depositor will apply the net proceeds of the sale of the offered
certificates against the purchase price of the mortgage loans.
FEDERAL INCOME TAX CONSEQUENCES
The pooling and servicing agreement provides that multiple REMIC
elections will be made with respect to the assets in the trust fund, creating a
tiered REMIC structure.
Upon the issuance of the offered certificates, Thacher Proffitt & Wood
LLP ("Tax Counsel") will deliver its opinion concluding that for federal income
tax purposes and assuming compliance with the pooling and servicing agreement,
each REMIC comprising the trust fund will qualify as a REMIC within the meaning
of Section 860D of the Internal Revenue Code of 1986, as amended (the "Code")
and the offered certificates will represent regular interests in a REMIC and the
Class R Certificates will each represent the residual interest in a REMIC.
TAXATION OF REGULAR INTERESTS
A holder of an offered certificate (a "Regular Certificate"), will be
treated for federal income tax purposes as owning a regular interest in a REMIC.
Assuming that a Regular Certificate is held as a "capital asset" within
the meaning of section 1221 of the Code, gain or loss on its disposition should
generally, subject to the limitation described below, be capital gain or loss.
Gain will be treated as ordinary income, however, to the extent such gain does
not exceed the excess, if any, of (x) the amount that would have been includable
in the holder's gross income with respect to the Regular Certificate had income
thereon accrued at a rate equal to 125% of the applicable federal rate as
defined in Section 1274(d) of the Code determined as of the date of purchase of
the Regular Certificate over (y) the amount actually included in such holder's
income with respect to the Regular Certificate.
Interest on a Regular Certificate must be included in income by a
holder under the accrual method of accounting, regardless of the holder's
regular method of accounting. In addition, a Regular Certificate could be
considered to have been issued with original issue discount, known as OID. The
Class M-6 Certificates will, and the other classes of Regular Certificates will
not, be issued with OID. We refer you to "Material Federal Income Tax
Considerations - Taxation of Debt Securities" in the prospectus. The prepayment
assumption that will be used in determining the accrual of OID, market discount,
or bond premium, if any, will be a rate equal to, 125% of the Prepayment
Assumption as described above. No representation is made that the mortgage loans
will prepay at such rates or at any other rate. OID must be included in income
as it accrues on a constant yield method, regardless of whether the holder
receives currently the cash attributable to such OID.
Each holder of a Regular Certificate is deemed to own an undivided
beneficial ownership interest in a REMIC regular interest and the right to
receive payments from the Reserve Fund in respect of the Basis Risk Shortfall
Carry Forward Amount. The Reserve Fund will not be an asset of any REMIC.
S-88
The treatment of amounts received by a holder of a Regular Certificate
in respect of the Basis Risk Shortfall Carry Forward Amount will depend on the
portion, if any, of such holder's purchase price allocable thereto. Under the
REMIC Regulations, each holder of a Regular Certificate must allocate its
purchase price for the Regular Certificate among its undivided interest in the
REMIC regular interest and its undivided interest in the right to receive
payments from the Reserve Fund in respect of the Basis Risk Shortfall Carry
Forward Amount, in accordance with the relative fair market values of each
property right. The trustee will, as required, treat payments made to the
holders of the Regular Certificates in respect of the Basis Risk Shortfall Carry
Forward Amount as income or expense or loss, as the case may be, 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 right to receive payments from the
Reserve Fund in respect of Basis Risk Shortfall Carry Forward Amounts may be
treated as having more than a DE MINIMIS value. Under the REMIC Regulations, the
trustee is required to account for each REMIC regular interest and the right to
receive payments from the Reserve Fund in respect of the Basis Risk Shortfall
Carry Forward Amount as discrete property rights. Holders of Regular
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. If the trustee's treatment of
payments of the Basis Risk Shortfall Carry Forward Amount is respected,
ownership of the right to such payments will entitle the owner to amortize the
price paid therefor under the Notional Principal Contract Regulations.
Upon the sale of a Regular Certificate the amount of the sale allocated
to the selling certificateholder's right to receive payments from the Reserve
Fund in respect of the Basis Risk Shortfall Carry Forward Amount would be
considered a "termination payment" under the Notional Principal Contract
Regulations allocable to the related Regular Certificate. A holder of a Regular
Certificate will have gain or loss from such a termination of the right to
receive payments from the Reserve Fund in respect of the Basis Risk Shortfall
Carry Forward Amount in an 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 such payments. Such gain or loss
generally will be treated as capital gain or loss. Moreover, in the case of a
bank or thrift institution, Code Section 582(c) likely would not apply to treat
such gain or loss as ordinary.
It is possible that the right to receive payments in respect of the
Basis Risk Shortfall Carry Forward Amount could be treated as a partnership
among the holders of all of the certificates, in which case holders of such
Certificates potentially would be subject to different timing of income and
foreign holders of such Certificates could be subject to withholding in respect
of any related Basis Risk Shortfall Carry Forward Amount. Holders of the Regular
Certificates are advised to consult their own tax advisors regarding the
allocation of issue price, timing, character and source of income and deductions
resulting from the ownership of their certificates.
STATUS OF THE OFFERED CERTIFICATES
The offered certificates (exclusive of the rights of the holders of
such certificates to receive certain payments in respect of the Basis Risk
Shortfall Carry Forward Amount) will be treated as assets described in Section
7701(a)(19)(C) of the Code, and as "real estate assets" under Section
856(c)(5)(B) of the Code, generally, in the same proportion that the assets of
the trust fund would be so treated. In addition, to the extent a regular
interest represents real estate assets under Section 856(c)(5)(B) of the Code,
the interest derived from that regular interest would be interest on obligations
secured by interests in real property for purposes of section 856(c)(3) of the
Code.
For further information regarding the federal income tax consequences
of investing in the offered certificates, we refer you to "Material Federal
Income Tax Considerations" in the prospectus.
S-89
STATE TAXES
None of the depositor, the master servicer or the trustee makes any
representations regarding the tax consequences of purchase, ownership or
disposition of the offered certificates under the tax laws of any state.
Investors considering an investment in the offered certificates should consult
their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the offered certificates.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an employee
benefit plan subject to ERISA from engaging in certain transactions involving
such plan and its assets unless a statutory, regulatory or administrative
exemption applies to the transaction. Section 4975 of the Code imposes certain
excise taxes on prohibited transactions involving "disqualified persons" and
employee benefit plans or other arrangements (including, but not limited to,
individual retirement accounts) described under that section (collectively with
employee benefit plans subject to ERISA, "Plans"). ERISA authorizes the
imposition of civil penalties for prohibited transactions involving Plans not
covered under Section 4975 of the Code. Any Plan fiduciary which proposes to
cause a Plan to acquire offered certificates should consult with its counsel
with respect to the potential consequences under ERISA and the Code of the
Plan's acquisition and ownership of such offered certificates. See "ERISA
Considerations" in the prospectus.
Certain employee benefit plans, including governmental plans and
certain church plans, are not subject to ERISA's requirements. Accordingly,
assets of such plans may be invested in offered certificates without regard to
the ERISA considerations described herein and in the prospectus, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
may nonetheless be subject to the prohibited transaction rules set forth in
Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's
general fiduciary requirements, including the requirement of investment prudence
and diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary which decides to
invest the assets of a Plan in a class of offered certificates should consider,
among other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the mortgage loans.
The U.S. Department of Labor has granted to Bear, Stearns & Co. Inc. an
administrative exemption (Prohibited Transaction Exemption ("PTE") 90-30, as
amended by PTE 97-34, PTE 2000-58 and PTE 2002-41) (the "Exemption") from
certain of the prohibited transaction rules of ERISA and the related excise tax
provisions of Section 4975 of the Code with respect to the initial purchase, the
holding and the subsequent resale by Plans of certificates in pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of the Exemption as discussed in "ERISA
Considerations" in the prospectus. The Exemption applies to obligations such as
the mortgage loans in the trust fund which have loan-to-value ratios not in
excess of 100 percent, provided that the certificates issued are rated at least
"BBB-" or its equivalent, as more fully described in "ERISA Considerations" in
the prospectus.
The Exemption also provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when a Plan fiduciary causes
a Plan to acquire certificates in a trust holding receivables as to which the
fiduciary (or its affiliate) is an obligor, provided that, among other
requirements,
S-90
o in the case of an acquisition in connection with the initial
issuance of certificates, at least fifty percent (50%) of each
class of certificates in which Plans have invested is acquired
by persons independent of the Restricted Group;
o such fiduciary (or its affiliate) is an obligor with respect
to five percent (5%) or less of the fair market value of the
obligations contained in the trust;
o a Plan's investment in certificates of any class does not
exceed twenty-five percent (25%) of all of the certificates of
that class outstanding at the time of the acquisition; and
o immediately after the acquisition, no more than twenty-five
percent (25%) of the assets of any Plan with respect to which
such person is a fiduciary are invested in certificates
representing an interest in one or more trusts containing
assets sold or serviced by the same entity.
The Exemption does not apply to Plans sponsored by the underwriters,
the trustee, the master servicer, any subservicer, any obligor with respect to
mortgage loans included in the trust fund constituting more than five percent of
the aggregate unamortized principal balance of the assets in the trust fund, any
insurer or any affiliate of such parties (the "Restricted Group"). As of the
date hereof, there is no single mortgagor that is the obligor on five percent
(5%) of the mortgage loans included in the trust fund by aggregate unamortized
principal balance of the assets of the trust fund.
It is expected that the Exemption will apply to the acquisition and
holding of the senior certificates and the subordinated certificates by Plans if
the conditions of the Exemption are met. A fiduciary of or other investor of
Plan assets contemplating purchasing an offered certificate must make its own
determination that the conditions described above will be satisfied for such
certificate. As noted above, one requirement for eligibility of the offered
certificates under the Exemption is that all of the mortgage loans must have a
loan-to-value ratio of not more than 100%, based on outstanding principal
balance of the loan and the fair market value of any of the mortgaged property
as of the closing date. It is possible that, if the fair market value of any of
the mortgage loans has declined substantially since origination, this
requirement may not be satisfied. This possibility is greater for the seasoned
loans than it is for the other mortgage loans.
Each beneficial owner of a subordinate 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 subordinate certificate
in reliance on the Exemption, and that it understands that there are certain
conditions to the availability of the Exemption, including that the subordinate
certificate must be rated, at the time of purchase, not lower than "BBB-" (or
its equivalent) by Standard & Poor's, Fitch Ratings or Moody's 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 PTE 95-60, and (3) the conditions in Sections I and III
of PTE 95-60 have been satisfied.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Exemption or any other exemption, and the
potential consequences in their specific circumstances, prior to making an
investment in the senior certificates. Moreover, each Plan fiduciary should
determine whether under the general fiduciary standards of investment prudence
and diversification, an investment in the offered certificates is appropriate
for the Plan, taking into account the overall investment policy of the Plan and
the composition of the Plan's investment portfolio.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement among the depositor and Bear, Stearns & Co. Inc. and Banc of America
Securities LLC, as the underwriters, the depositor has agreed to sell the
offered certificates to the underwriters, and the underwriters have agreed to
purchase the offered certificates from the depositor. Distribution of the
offered certificates will be made by the
S-91
underwriters from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. In connection with the sale
of the offered certificates, the underwriters may be deemed to have received
compensation from the depositor in the form of underwriting discounts. It is
expected that the proceeds to the depositor from the sale of the offered
certificates will be approximately $486,901,500 before deducting issuance
expenses payable by the depositor, estimated to be approximately $788,000.
The depositor has been advised by the underwriters that they intend to
make a market in the offered certificates, but the underwriters have no
obligation to do so. There can be no assurance that a secondary market for the
offered certificates, or any particular Class thereof, will develop or, if it
does develop, that it will continue or that such market will provide sufficient
liquidity to certificateholders.
The depositor has agreed to indemnify the underwriters against, or make
contributions to the underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended. Bear, Stearns & Co.
Inc. is an affiliate of the depositor and EMC.
LEGAL MATTERS
The validity of the certificates, including certain federal income tax
consequences with respect hereto, will be passed upon for the depositor by
Thacher Proffitt & Wood LLP, New York, New York. Thacher Proffitt & Wood LLP,
New York, New York, will also pass upon certain legal matters on behalf of the
seller, EMC and Bear, Stearns & Co. Inc.
EXPERTS
The audited financial statements of AGC as of December 31, 2002 and for
the three years then ended attached to this prospectus supplement as Annex II
have been audited by PricewaterhouseCoopers LLP, independent auditors, as stated
in their report appearing in Annex II, and are included in reliance upon the
reports of that firm given upon their authority as experts in accounting and
auditing.
S-92
RATINGS
It is a condition of the issuance of the offered certificates that each
class of offered certificates be assigned at least the ratings designated below
by Moody's and Standard & Poor's.
RATING
CLASS MOODY'S STANDARD &
POOR'S
I-A-1 Aaa AAA
I-A-2 Aaa AAA
II-A-1 Aaa AAA
II-A-2 Aaa AAA
III-A Aaa AAA
M-1 Aa2 AA
M-2 A2 A
M-3 A3 A-
M-4 Baa1 BBB+
M-5 Baa2 BBB
M-6 Baa3 BBB-
The security ratings assigned to the offered certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the respective rating
agency. The ratings on the offered certificates do not, however, constitute
statements regarding the likelihood or frequency of prepayments on the mortgage
loans or the anticipated yields in light of prepayments. The ratings on the
Class III-A Certificates are without regard to the Class III-A Policy.
In addition, the ratings by Moody's and Standard & Poor's do not
address the likelihood of the receipt of any amounts in respect of Prepayment
Interest Shortfalls or Basis Risk Shortfalls.
The depositor has not requested ratings of the offered certificates by
any rating agency other than Moody's and Standard & Poor's. However, there can
be no assurance as to whether any other rating agency will rate the offered
certificates or, if it does, what ratings would be assigned by such other rating
agency. The ratings assigned by such other rating agency to the offered
certificates could be lower than the respective ratings assigned by the rating
agencies.
S-93
INDEX OF DEFINED TERMS
Ace Group...................................................................S-70
Ace Limited.................................................................S-70
AGC.........................................................................S-68
Agreement...................................................................S-30
Applied Realized Loss Amount................................................S-43
Avoided Payments............................................................S-69
Basis Risk Shortfall........................................................S-43
Basis Risk Shortfall Carry Forward Amount...................................S-43
Certificate Principal Balance...............................................S-43
Class A Certificates........................................................S-44
Class A Principal Distribution Amount.......................................S-44
Class I-A Principal Distribution Amount.....................................S-44
Class II-A Principal Distribution Amount....................................S-44
Class III-A Insurer.........................................................S-68
Class III-A Principal Distribution Amount...................................S-44
Class M-1 Principal Distribution Amount.....................................S-44
Class M-2 Principal Distribution Amount.....................................S-45
Class M-3 Principal Distribution Amount.....................................S-45
Class M-4 Principal Distribution Amount.....................................S-45
Class M-5 Principal Distribution Amount.....................................S-46
Class M-6 Principal Distribution Amount.....................................S-47
Clearstream.................................................................S-39
Code........................................................................S-88
collateral value............................................................S-25
Counterparty................................................................S-65
CSSF........................................................................S-41
Current Interest............................................................S-47
Current Specified Enhancement Percentage....................................S-47
Defaulted Amount............................................................S-69
disqualified persons........................................................S-90
Distribution Account........................................................S-36
DTC.........................................................................S-39
Due Period..................................................................S-47
EMC.........................................................................S-30
ERISA.......................................................................S-90
Euroclear...................................................................S-39
Excess Cashflow.............................................................S-48
Excess Spread...............................................................S-48
Exemption...................................................................S-90
Extra Principal Distribution Amount.........................................S-48
Financial Intermediary......................................................S-39
Group I Principal Distribution Amount.......................................S-48
Group II Principal Distribution Amount......................................S-48
IndyMac.....................................................................S-29
Insurance Agreement.........................................................S-48
Insurance Proceeds..........................................................S-48
Insured Certificate Loss Amount.............................................S-69
Interest Carry Forward Amount...............................................S-48
S-94
Interest Funds..............................................................S-49
Liquidation Proceeds........................................................S-49
loan-to-value ratio.........................................................S-25
Margin......................................................................S-49
MERS........................................................................S-27
MERS(R)System...............................................................S-26
Moody's.....................................................................S-12
Net Rate Cap................................................................S-50
One-Year U.S. Treasury......................................................S-24
Overcollateralization Amount................................................S-50
Overcollateralization Release Amount........................................S-50
Overcollateralization Target Amount.........................................S-50
Plans.......................................................................S-90
Policy......................................................................S-68
Prepayment Interest Shortfall...............................................S-36
Prepayment Period...........................................................S-50
Principal Distribution Amount...............................................S-50
Principal Funds.............................................................S-51
PTE.........................................................................S-90
Realized Loss...............................................................S-51
Reimbursement Amount........................................................S-51
Relief Act..................................................................S-51
Remaining Excess Spread.....................................................S-51
Restricted Group............................................................S-91
Rules.......................................................................S-39
SEC.........................................................................S-70
Six-Month LIBOR.............................................................S-23
Standard & Poor's...........................................................S-12
Stated Principal Balance....................................................S-51
Stepdown Date...............................................................S-52
Tax Counsel.................................................................S-88
Trigger Event...............................................................S-52
Unpaid Realized Loss Amount.................................................S-52
Yield Maintenance Agreement.................................................S-65
S-95
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SCHEDULE A
MORTGAGE LOAN STATISTICAL DATA
The following information sets forth in tabular format certain
information, as of the cut-off date, about the mortgage loans in the aggregate
and about the mortgage loans in each loan group. Other than with respect to
rates of interest, percentages are approximate and are stated by cut-off date
principal balance of the mortgage loans, or of mortgage loans in each loan
group, as applicable. The sum of the respective columns may not equal the total
indicated due to rounding.
MORTGAGE INTEREST RATES OF THE MORTGAGE LOANS IN TOTAL POOL
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
MORTGAGE INTEREST RATE LOANS AS OF CUT-OFF DATE POOL
- ----------------------------- --------- ------------------- --------
0.000% - 5.500%............ 16 $ 4,058,220 0.81%
5.501% - 6.000%............ 108 26,004,721 5.19
6.001% - 6.500%............ 279 58,569,013 11.68
6.501% - 7.000%............ 535 104,964,242 20.93
7.001% - 7.500%............ 526 96,313,768 19.21
7.501% - 8.000%............ 524 83,653,013 16.68
8.001% - 8.500%............ 380 53,373,323 10.64
8.501% - 9.000%............ 283 34,659,526 6.91
9.001% - 9.500%............ 122 11,698,614 2.33
9.501% - 10.000%............ 173 10,568,053 2.11
10.001% - 10.500%............ 180 8,466,137 1.69
10.501% - 11.000%............ 114 5,252,290 1.05
11.001% - 11.500%............ 30 1,856,817 0.37
11.501% - 12.000%............ 29 1,632,496 0.33
12.001% - 12.500%............ 7 420,492 0.08
----- ------------ ------
Total................. 3,306 $501,490,725 100.00%
===== ============ ======
As of the cut-off date, the weighted average mortgage interest rate of
the mortgage loans in the total pool was approximately 7.5297% per annum.
A-1
ORIGINAL COMBINED LOAN-TO-VALUE RATIO OF THE MORTGAGE LOANS IN TOTAL POOL
NUMBER OF AGGREGATE SCHEDULED % OF
ORIGINAL COMBINED LOAN-TO-VALUE MORTGAGE BALANCE OUTSTANDING MORTGAGE
RATIOS (%) LOANS AS OF CUT-OFF DATE POOL
- ------------------------------- --------- ------------------- --------
10.01% - 20.00%............... 3 $ 117,622 0.02%
20.01% - 30.00%............... 11 1,104,866 0.22
30.01% - 40.00%............... 35 3,054,782 0.61
40.01% - 50.00%............... 84 10,394,809 2.07
50.01% - 60.00%............... 128 19,857,278 3.96
60.01% - 70.00%............... 314 51,117,381 10.19
70.01% - 80.00%............... 1,068 185,813,236 37.05
80.01% - 90.00%............... 1,101 185,381,106 36.97
90.01% - 100.00%............... 562 44,649,645 8.90
----- ------------ ------
Total.................... 3,306 $501,490,725 100.00%
===== ============ ======
As of the cut-off date, the weighted average original combined
loan-to-value ratio of the mortgage loans in the total pool was approximately
80.23%.
SCHEDULED PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE
MORTGAGE LOAN CUT-OFF DATE IN TOTAL POOL
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
SCHEDULED PRINCIPAL BALANCE LOANS AS OF CUT-OFF DATE POOL
- ------------------------------- --------- ------------------- --------
$ 0 - $ 50,000.......... 452 $ 15,915,944 3.17%
$ 50,001 - $ 100,000.......... 804 60,574,790 12.08
$100,001 - $ 150,000.......... 695 86,492,897 17.25
$150,001 - $ 200,000.......... 532 92,548,898 18.45
$200,001 - $ 250,000.......... 296 66,370,380 13.23
$250,001 - $ 300,000.......... 215 59,016,489 11.77
$300,001 - $ 350,000.......... 122 39,187,994 7.81
$350,001 - $ 400,000.......... 87 32,881,708 6.56
$400,001 - $ 450,000.......... 49 20,865,174 4.16
$450,001 - $ 500,000.......... 37 17,872,695 3.56
$500,001 - $ 550,000.......... 8 4,211,990 0.84
$550,001 - $ 600,000.......... 5 2,864,943 0.57
$600,001 - $ 650,000.......... 2 1,297,859 0.26
$650,001 or more............... 2 1,388,965 0.28
----- ------------ ------
Total........................ 3,306 $501,490,725 100.00%
===== ============ ======
As of the cut-off date, the average principal balance of the mortgage
loans in the total pool was approximately $151,691.
A-2
CREDIT SCORE FOR THE MORTGAGE LOANS IN TOTAL POOL
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
CREDIT SCORE RANGE LOANS AS OF CUT-OFF DATE POOL
- -------------------------- --------- ------------------- --------
1 - 500................... 5 $ 879,795 0.18%
500 - 520................. 145 18,354,123 3.66
521 - 540................. 301 41,762,847 8.33
541 - 560................. 340 50,047,830 9.98
561 - 580................. 359 57,137,311 11.39
581 - 600................. 392 55,621,573 11.09
601 - 620................. 452 72,296,587 14.42
621 - 640................. 418 62,838,808 12.53
641 - 660................. 339 53,340,624 10.64
661 - 680................. 248 36,380,553 7.25
681 - 700................. 127 21,222,382 4.23
701 - 720................. 73 11,987,719 2.39
721 - 740................. 40 6,701,781 1.34
741 - 760................. 40 7,093,317 1.41
761 - 780................. 16 3,662,774 0.73
781 - 800................. 9 1,868,721 0.37
800 or more............... 2 293,980 0.06
----- ------------ ------
Total.............. 3,306 $501,490,725 100.00%
===== ============ ======
As of the cut-off date, the weighted average credit score of the
mortgage loans in the total pool is approximately 609.
A-3
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES IN TOTAL POOL*
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
STATE LOANS AS OF CUT-OFF DATE POOL
- -------------------------- ---------- ------------------- --------
Alaska.................... 1 $ 128,802 0.03%
Alabama................... 29 2,299,180 0.46
Arkansas.................. 6 626,783 0.12
Arizona................... 55 6,384,345 1.27
California................ 963 199,379,675 39.76
Colorado.................. 54 6,380,936 1.27
Connecticut............... 37 7,771,087 1.55
District of Columbia...... 15 2,375,277 0.47
Florida................... 265 33,297,702 6.64
Georgia................... 147 20,213,151 4.03
Hawaii.................... 36 5,186,570 1.03
Iowa...................... 26 1,652,156 0.33
Idaho..................... 17 1,741,633 0.35
Illinois.................. 184 26,999,817 5.38
Indiana................... 29 2,565,582 0.51
Kansas.................... 10 751,671 0.15
Kentucky.................. 28 2,758,148 0.55
Louisiana................. 22 2,277,192 0.45
Massachusetts............. 58 13,657,949 2.72
Maryland.................. 77 12,981,331 2.59
Maine..................... 5 510,476 0.10
Michigan.................. 81 7,949,677 1.59
Minnesota................. 45 6,450,861 1.29
Missouri.................. 64 6,556,535 1.31
Mississippi............... 16 1,269,684 0.25
Montana................... 2 392,796 0.08
North Carolina............ 60 6,058,540 1.21
North Dakota.............. 1 55,120 0.01
Nebraska.................. 7 630,746 0.13
New Hampshire............. 7 1,154,486 0.23
New Jersey................ 58 10,956,071 2.18
New Mexico................ 22 1,440,319 0.29
Nevada.................... 64 10,201,641 2.03
New York.................. 96 22,273,811 4.44
Ohio...................... 112 11,712,063 2.34
Oklahoma.................. 16 1,000,369 0.20
Oregon.................... 47 7,034,977 1.40
Pennsylvania.............. 76 7,819,738 1.56
Rhode Island.............. 15 2,102,865 0.42
South Carolina............ 30 2,985,046 0.60
Tennessee................. 41 3,900,076 0.78
Texas..................... 174 16,594,840 3.31
Utah...................... 14 1,139,172 0.23
Virginia.................. 42 7,526,785 1.50
Vermont................... 3 362,371 0.07
Washington................ 114 9,287,528 1.85
Wisconsin................. 29 3,762,421 0.75
West Virginia............. 2 201,501 0.04
Wyoming................... 4 731,219 0.15
----- ------------ ------
Total.............. 3,306 $501,490,725 100.00%
===== ============ ======
*No more than approximately 0.44% of the total pool by cut-off date
principal balance will be secured by properties located in any one zip code
area.
A-4
PROPERTY TYPES OF MORTGAGED PROPERTIES IN TOTAL POOL
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
PROPERTY TYPE LOANS AS OF CUT-OFF DATE POOL
- ----------------------------- --------- ------------------- --------
2-4 Family................... 200 $ 39,236,705 7.82%
Condominium.................. 239 31,363,774 6.25
PUD.......................... 281 43,527,785 8.68
Single Family................ 2,575 385,630,673 76.90
Townhouse.................... 11 1,731,788 0.35
----- ------------ ------
Total................. 3,306 $501,490,725 100.00%
===== ============ ======
OCCUPANCY STATUS OF MORTGAGED PROPERTIES IN TOTAL POOL*
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
OCCUPANCY STATUS LOANS AS OF CUT-OFF DATE POOL
- ---------------------------- --------- ------------------- --------
Investor.................... 255 $ 32,355,671 6.45%
Owner Occupied.............. 3,034 466,495,597 93.02
Second Home................. 17 2,639,457 0.53
----- ------------ ------
Total................ 3,306 $501,490,725 100.00%
===== ============ ======
* Based upon representation of the related mortgagors at the time of
origination.
A-5
ORIGINAL TERM OF THE MORTGAGE LOANS IN TOTAL POOL
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
ORIGINAL TERM LOANS AS OF CUT-OFF DATE POOL
- ---------------------------- --------- ------------------- --------
120 - 179 months............ 6 $ 494,459 0.10%
180 - 239 months............ 276 27,694,426 5.52
240 - 359 months............ 294 13,949,620 2.78
360 months.................. 2,730 459,352,220 91.60
----- ------------ ------
Total................ 3,306 $501,490,725 100.00%
===== ============ ======
As of the cut-off date, the weighted average stated original term to
scheduled maturity of the mortgage loans in the total pool was approximately 347
months.
REMAINING TERM TO STATED MATURITY FOR THE MORTGAGE LOANS IN TOTAL POOL
NUMBER OF AGGREGATE SCHEDULED % OF
REMAINING TERM TO STATED MORTGAGE BALANCE OUTSTANDING MORTGAGE
MATURITY LOANS AS OF CUT-OFF DATE POOL
- ----------------------------- --------- ------------------- --------
61 - 120 months............. 6 $ 494,459 0.10%
121 - 180 months............. 276 27,694,426 5.52
181 - 240 months............. 292 13,677,263 2.73
241 - 300 months............. 2 272,357 0.05
301 - 360 months............. 2,730 459,352,220 91.60
----- ------------ ------
Total................. 3,306 $501,490,725 100.00%
===== ============ ======
As of the cut-off date, the weighted average stated remaining months to
scheduled maturity of the mortgage loans in the total pool was approximately 344
months.
A-6
LOAN PURPOSE FOR THE MORTGAGE LOANS IN TOTAL POOL
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
LOAN PURPOSE LOANS AS OF CUT-OFF DATE POOL
- ------------------------------ --------- ------------------- --------
Cash-Out Refinance............ 2,042 $331,588,064 66.12%
Purchase...................... 991 126,424,991 25.21
Rate/Term Refinance........... 273 43,477,670 8.67
----- ------------ ------
Total.................. 3,306 $501,490,725 100.00%
===== ============ ======
DOCUMENTATION TYPE OF THE MORTGAGE LOANS IN TOTAL POOL
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
DOCUMENTATION TYPE LOANS AS OF CUT-OFF DATE POOL
- ------------------------------ --------- ------------------- --------
Full/Alternative.............. 2,050 $288,541,257 57.54%
Limited....................... 224 43,567,340 8.69
No Ratio...................... 13 2,485,084 0.50
Stated Income................. 1,018 166,742,058 33.25
Stated/Stated................. 1 154,986 0.03
----- ------------ ------
Total.................. 3,306 $501,490,725 100.00%
===== ============ ======
A-7
PRODUCT TYPE OF THE MORTGAGE LOANS IN TOTAL POOL
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
PRODUCT TYPE LOANS AS OF CUT-OFF DATE POOL
- ------------------------------ --------- ------------------- --------
2/6 LIBOR IO.................. 30 $ 5,943,439 1.19%
2/6 LIBOR..................... 1,879 329,737,411 65.75
3/1 Treasury.................. 6 1,112,077 0.22
3/6 LIBOR..................... 74 13,107,361 2.61
5/1 Treasury.................. 1 286,398 0.06
5/6 LIBOR..................... 6 1,549,233 0.31
6 Month LIBOR................. 2 291,296 0.06
Balloon....................... 127 14,797,006 2.95
Fixed......................... 1,181 134,666,505 26.85
----- ------------ ------
Total.................. 3,306 $501,490,725 100.00%
===== ============ ======
RATE ADJUSTMENT FREQUENCY OF THE MORTGAGE LOANS IN TOTAL POOL
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
RATE ADJUSTMENT FREQUENCY LOANS AS OF CUT-OFF DATE POOL
- ------------------------------ --------- ------------------- --------
6 Months...................... 1,991 $350,628,739 69.92%
12 Months..................... 7 1,398,475 0.28
Fixed......................... 1,308 149,463,511 29.80
----- ------------ ------
Total.................. 3,306 $501,490,725 100.00%
===== ============ ======
A-8
MONTHS TO NEXT RATE ADJUSTMENT OF THE MORTGAGE LOANS IN TOTAL POOL
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
MONTHS TO NEXT RATE ADJUSTMENT LOANS AS OF CUT-OFF DATE POOL
- ------------------------------ --------- ------------------- --------
0 - 5......................... 2 $ 291,296 0.06%
6 - 11........................ 1 142,941 0.03
12 - 17....................... 10 1,174,319 0.23
18 - 23....................... 1,897 334,036,590 66.61
24 - 29....................... 1 327,000 0.07
30 - 35....................... 80 14,219,438 2.84
54 - 59....................... 7 1,835,631 0.37
Fixed......................... 1,308 149,463,511 29.80
----- ------------ ------
Total.................. 3,306 $501,490,725 100.00%
===== ============ ======
The weighted average next rate adjustment for the adjustable rate
mortgage loans is 23 months. Months to next rate adjustment is calculated by
using the first rate adjustment date for the loans still in a hybrid period and
by using next rate adjustment for loans that are fully indexed.
A-9
MAXIMUM LIFETIME MORTGAGE RATES OF THE MORTGAGE LOANS IN TOTAL POOL
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
MAXIMUM MORTGAGE RATE LOANS AS OF CUT-OFF DATE POOL
- ------------------------------ --------- ------------------- --------
10.500% - 10.749%............. 3 $ 403,255 0.08%
11.250% - 11.499%............. 3 451,347 0.09
11.500% - 11.749%............. 6 1,461,284 0.29
11.750% - 11.999%............. 17 3,713,402 0.74
12.000% - 12.249%............. 9 1,822,560 0.36
12.250% - 12.499%............. 49 10,446,280 2.08
12.500% - 12.749%............. 64 13,105,171 2.61
12.750% - 12.999%............. 147 31,809,259 6.34
13.000% - 13.249%............. 66 12,748,991 2.54
13.250% - 13.499%............. 138 28,531,240 5.69
13.500% - 13.749%............. 183 33,759,428 6.73
13.750% - 13.999%............. 256 49,408,910 9.85
14.000% - 14.249%............. 133 21,999,469 4.39
14.250% - 14.499%............. 212 37,512,313 7.48
14.500% - 14.749%............. 161 24,970,307 4.98
14.750% - 14.999%............. 206 33,151,313 6.61
15.000% - 15.249%............. 84 11,564,743 2.31
15.250% - 15.499%............. 96 14,093,576 2.81
15.500% - 15.749%............. 50 7,003,431 1.40
15.750% - 15.999%............. 55 7,506,709 1.50
16.000% - 16.249%............. 26 2,828,178 0.56
16.250% - 16.499%............. 11 1,190,611 0.24
16.500% - 16.749%............. 7 866,170 0.17
16.750% - 16.999%............. 5 345,026 0.07
17.000% - 14.249%............. 2 86,194 0.02
17.250% - 17.249%............. 2 297,363 0.06
17.500% - 17.749%............. 2 253,963 0.05
17.750% - 17.999%............. 4 595,827 0.12
18.000% - 18.249%............. 1 100,895 0.02
Fixed......................... 1,308 149,463,511 29.80
----- ------------ ------
Total.............. 3,306 $501,490,725 100.00%
===== ============ ======
As of the cut-off date, the weighted average maximum mortgage rate of
the adjustable rate mortgage loans was approximately 13.9868%.
A-10
PERIODIC RATE CAP OF THE MORTGAGE LOANS IN TOTAL POOL
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
PERIODIC RATE CAP LOANS AS OF CUT-OFF DATE POOL
- ------------------------------ --------- ------------------- --------
1.000%........................ 765 $134,372,158 26.79%
1.500%........................ 1,227 216,420,845 43.16
2.000%........................ 6 1,234,211 0.25
Fixed......................... 1,308 149,463,511 29.80
----- ------------ ------
Total.............. 3,306 $501,490,725 100.00%
===== ============ ======
As of the cut-off date, the weighted average periodic rate cap of the
adjustable rate mortgage loans was approximately 1.3109%.
INITIAL RATE CAP OF THE MORTGAGE LOANS IN TOTAL POOL
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
INITIAL RATE CAP LOANS AS OF CUT-OFF DATE POOL
- ------------------------------ --------- ------------------- --------
1.000%........................ 3 $ 453,841 0.09%
1.500%........................ 1,145 205,591,475 41.00
2.000%........................ 30 5,952,225 1.19
3.000%........................ 817 139,512,778 27.82
5.000%........................ 3 516,897 0.10
Fixed......................... 1,308 149,463,511 29.80
----- ------------ ------
Total.............. 3,306 $501,490,725 100.00%
===== ============ ======
As of the cut-off date, the weighted average initial rate cap of the
adjustable rate mortgage loans was approximately 2.1074%.
A-11
GROSS MARGIN OF THE MORTGAGE LOANS IN TOTAL POOL
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING MORTGAGE
GROSS MARGIN LOANS AS OF CUT-OFF DATE POOL
- ------------------------------ --------- ------------------- --------
2.750% - 2.999%............... 1 $ 493,714 0.10%
3.000% - 3.249%............... 1 165,471 0.03
3.250% - 3.499%............... 1 82,107 0.02
4.000% - 4.249%............... 3 555,594 0.11
4.250% - 4.499%............... 13 3,500,734 0.70
4.500% - 4.749%............... 23 5,133,709 1.02
4.750% - 4.999%............... 108 19,609,812 3.91
5.000% - 5.249%............... 35 6,797,328 1.36
5.250% - 5.499%............... 250 46,140,796 9.20
5.500% - 5.749%............... 309 54,391,441 10.85
5.750% - 5.999%............... 550 103,557,386 20.65
6.000% - 6.249%............... 240 41,985,067 8.37
6.250% - 6.499%............... 123 19,834,016 3.96
6.500% - 6.749%............... 81 12,331,862 2.46
6.750% - 6.999%............... 78 11,167,831 2.23
7.000% - 7.249%............... 20 3,214,105 0.64
7.250% - 7.499%............... 21 3,806,415 0.76
7.500% - 7.749%............... 33 4,653,320 0.93
7.750% - 7.999%............... 21 3,229,954 0.64
8.000% - 8.249%............... 23 3,298,414 0.66
8.250% - 8.499%............... 22 2,508,144 0.50
8.500% - 8.749%............... 23 3,213,226 0.64
8.750% - 8.999%............... 11 1,493,919 0.30
9.000% - 9.249%............... 7 794,570 0.16
9.250% - 9.499%............... 1 68,278 0.01
Fixed......................... 1,308 149,463,511 29.80
----- ------------ ------
Total.............. 3,306 $501,490,725 100.00%
===== ============ ======
As of the cut-off date, the weighted average gross margin of the
adjustable rate mortgage loans was approximately 5.8513%.
A-12
MORTGAGE INTEREST RATES OF THE MORTGAGE LOANS IN LOAN GROUP I
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
MORTGAGE INTEREST RATE LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------ --------- ------------------- -------
0.000% - 5.500%............. 1 $ 565,824 0.47%
5.501% - 6.000%............. 27 10,357,609 8.55
6.001% - 6.500%............. 46 15,854,531 13.08
6.501% - 7.000%............. 90 27,774,917 22.92
7.001% - 7.500%............. 82 23,025,977 19.00
7.501% - 8.000%............. 74 17,414,081 14.37
8.001% - 8.500%............. 61 9,866,195 8.14
8.501% - 9.000%............. 44 5,363,514 4.43
9.001% - 9.500%............. 37 3,076,135 2.54
9.501% - 10.000%............. 34 2,475,104 2.04
10.001% - 10.500%............. 48 2,848,135 2.35
10.501% - 11.000%............. 22 1,279,708 1.06
11.001% - 11.500%............. 7 590,665 0.49
11.501% - 12.000%............. 8 494,065 0.41
12.001% - 12.500%............. 3 218,885 0.18
--- ------------ ------
Total.................. 584 $121,205,344 100.00%
=== ============ ======
As of the cut-off date, the weighted average mortgage interest rate of
the mortgage loans in Loan Group I was approximately 7.4261% per annum.
A-13
ORIGINAL COMBINED LOAN-TO-VALUE RATIO OF THE MORTGAGE LOANS IN LOAN GROUP I
NUMBER OF AGGREGATE SCHEDULED % OF
ORIGINAL COMBINED LOAN-TO-VALUE MORTGAGE BALANCE OUTSTANDING LOAN
RATIOS (%) LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------- --------- ------------------- -------
10.01% - 20.00%............... 1 $ 29,441 0.02%
20.01% - 30.00%............... 3 140,635 0.12
30.01% - 40.00%............... 4 484,828 0.40
40.01% - 50.00%............... 15 2,494,412 2.06
50.01% - 60.00%............... 28 5,745,387 4.74
60.01% - 70.00%............... 68 15,420,446 12.72
70.01% - 80.00%............... 176 45,676,079 37.68
80.01% - 90.00%............... 162 38,882,619 32.08
90.01% - 100.00%............... 127 12,331,497 10.17
--- ------------ ------
Total.................... 584 $121,205,344 100.00%
=== ============ ======
As of the cut-off date, the weighted average original combined
loan-to-value ratio of the mortgage loans in Loan Group I was approximately
79.73%.
A-14
SCHEDULED PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE
MORTGAGE LOAN CUT-OFF DATE IN LOAN GROUP I
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
SCHEDULED PRINCIPAL BALANCE LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------ --------- ------------------- -------
$ 0 - $ 50,000.......... 79 $ 2,859,669 2.36%
$ 50,001 - $100,000.......... 169 12,470,654 10.29
$100,001 - $150,000.......... 68 8,289,009 6.84
$150,001 - $200,000.......... 43 7,309,862 6.03
$200,001 - $250,000.......... 9 1,982,212 1.64
$250,001 - $300,000.......... 11 3,154,266 2.60
$300,001 - $350,000.......... 34 11,465,855 9.46
$350,001 - $400,000.......... 76 28,667,375 23.65
$400,001 - $450,000.......... 43 18,359,864 15.15
$450,001 - $500,000.......... 35 16,882,822 13.93
$500,001 - $550,000.......... 8 4,211,990 3.48
$550,001 - $600,000.......... 5 2,864,943 2.36
$600,001 - $650,000.......... 2 1,297,859 1.07
$650,001 or more.............. 2 1,388,965 1.15
--- ------------ ------
Total....................... 584 $121,205,344 100.00%
=== ============ ======
As of the cut-off date, the average principal balance of the mortgage
loans in Loan Group I was approximately $207,543.
A-15
CREDIT SCORE FOR THE MORTGAGE LOANS IN LOAN GROUP I
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
CREDIT SCORE RANGE LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------ --------- ------------------- -------
1 - 500..................... 1 $ 41,906 0.03%
501 - 520..................... 13 1,635,593 1.35
521 - 540..................... 27 5,206,128 4.30
541 - 560..................... 43 7,681,097 6.34
561 - 580..................... 63 12,821,000 10.58
581 - 600..................... 64 11,679,132 9.64
601 - 620..................... 103 21,920,755 18.09
621 - 640..................... 84 16,044,807 13.24
641 - 660..................... 73 15,499,264 12.79
661 - 680..................... 52 12,191,894 10.06
681 - 700..................... 20 4,883,154 4.03
701 - 720..................... 15 3,686,346 3.04
721 - 740..................... 9 2,691,677 2.22
741 - 760..................... 7 1,865,181 1.54
761 - 780..................... 8 2,433,555 2.01
781 - 800..................... 2 923,855 0.76
--- ------------ ------
Total.................. 584 $121,205,344 100.00%
=== ============ ======
As of the cut-off date, the weighted average credit score of the
mortgage loans in Loan Group I is approximately 625.
A-16
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES IN LOAN GROUP I*
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
STATE LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------ --------- ------------------- -------
Alabama....................... 3 $ 203,689 0.17%
Arkansas...................... 2 225,789 0.19
Arizona....................... 7 1,225,546 1.01
California.................... 172 53,479,276 44.12
Colorado...................... 9 791,180 0.65
Connecticut................... 11 3,669,597 3.03
District of Columbia.......... 2 593,412 0.49
Florida....................... 28 5,557,720 4.59
Georgia....................... 30 5,455,670 4.50
Hawaii........................ 1 135,385 0.11
Iowa.......................... 11 535,654 0.44
Idaho......................... 6 1,009,864 0.83
Illinois...................... 18 3,551,851 2.93
Indiana....................... 5 710,365 0.59
Kansas........................ 5 348,565 0.29
Kentucky...................... 9 826,488 0.68
Louisiana..................... 2 121,795 0.10
Massachusetts................. 9 3,339,707 2.76
Maryland...................... 15 3,070,888 2.53
Maine......................... 1 26,262 0.02
Michigan...................... 3 652,578 0.54
Minnesota..................... 14 2,647,114 2.18
Missouri...................... 13 1,656,341 1.37
Mississippi................... 2 190,239 0.16
North Carolina................ 13 1,433,430 1.18
Nebraska...................... 1 48,680 0.04
New Hampshire................. 1 164,799 0.14
New Jersey.................... 8 1,646,590 1.36
New Mexico.................... 3 85,993 0.07
Nevada........................ 9 1,867,845 1.54
New York...................... 30 8,136,469 6.71
Ohio.......................... 20 2,680,044 2.21
Oklahoma...................... 1 43,805 0.04
Oregon........................ 13 2,854,891 2.36
Pennsylvania.................. 16 1,785,501 1.47
Rhode Island.................. 2 238,776 0.20
South Carolina................ 7 855,366 0.71
Tennessee..................... 14 1,365,384 1.13
Texas......................... 34 4,267,458 3.52
Utah.......................... 3 139,013 0.11
Virginia...................... 4 1,163,931 0.96
Vermont....................... 1 54,377 0.04
Washington.................... 24 1,877,596 1.55
Wisconsin..................... 1 90,687 0.07
Wyoming....................... 1 379,737 0.31
--- ------------ ------
Total.................. 584 $121,205,344 100.00%
=== ============ ======
*No more than approximately 0.93% of Loan Group I by cut-off date
principal balance will be secured by properties located in any one zip code
area.
A-17
PROPERTY TYPES OF MORTGAGED PROPERTIES IN LOAN GROUP I
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
PROPERTY TYPE LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------ --------- ------------------- -------
2-4 Family.................... 19 $ 3,315,363 2.74%
Condominium................... 27 5,390,011 4.45
PUD........................... 50 12,208,770 10.07
Single Family................. 485 99,708,056 82.26
Townhouse..................... 3 583,145 0.48
--- ------------ ------
Total.................. 584 $121,205,344 100.00%
=== ============ ======
OCCUPANCY STATUS OF MORTGAGED PROPERTIES IN LOAN GROUP I*
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
OCCUPANCY STATUS LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------ --------- ------------------- -------
Investor...................... 38 $ 4,997,919 4.12%
Owner Occupied................ 540 114,547,502 94.51
Second Home................... 6 1,659,923 1.37
--- ------------ ------
Total.................. 584 $121,205,344 100.00%
=== ============ ======
* Based upon representation of the related mortgagors at the time of
origination.
A-18
ORIGINAL TERM OF THE MORTGAGE LOANS IN LOAN GROUP I
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
ORIGINAL TERM LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------ --------- ------------------- -------
120 - 179 months.............. 1 $ 79,163 0.07%
180 - 239 months.............. 132 14,746,356 12.17
240 - 359 months.............. 65 3,767,804 3.11
360 months.................... 386 102,612,021 84.66
--- ------------ ------
Total.................. 584 $121,205,344 100.00%
=== ============ ======
As of the cut-off date, the weighted average stated original term to
scheduled maturity of the mortgage loans in Loan Group I was approximately 334
months.
REMAINING TERM TO STATED MATURITY FOR THE MORTGAGE LOANS IN LOAN GROUP I
NUMBER OF AGGREGATE SCHEDULED % OF
REMAINING TERM TO STATED MORTGAGE BALANCE OUTSTANDING LOAN
MATURITY LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------ --------- ------------------- -------
61 - 120 months.............. 1 $ 79,163 0.07%
121 - 180 months.............. 132 14,746,356 12.17
181 - 240 months.............. 65 3,767,804 3.11
301 - 360 months.............. 386 102,612,021 84.66
--- ------------ ------
Total.................. 584 $121,205,344 100.00%
=== ============ ======
As of the cut-off date, the weighted average stated remaining months to
scheduled maturity of the mortgage loans in Loan Group I was approximately 332
months.
A-19
LOAN PURPOSE FOR THE MORTGAGE LOANS IN LOAN GROUP I
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
LOAN PURPOSE LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------ --------- ------------------- -------
Cash-Out Refinance............ 353 $ 75,356,168 62.17%
Purchase...................... 174 31,661,130 26.12
Rate/Term Refinance........... 57 14,188,047 11.71
--- ------------ ------
Total.................. 584 $121,205,344 100.00%
=== ============ ======
DOCUMENTATION TYPE OF THE MORTGAGE LOANS IN LOAN GROUP I
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
DOCUMENTATION TYPE LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------ --------- ------------------- -------
Full/Alternative.............. 354 $ 62,104,887 51.24%
Limited....................... 59 16,948,112 13.98
No Income/No Asset............ 8 1,959,954 1.62
Stated Income................. 162 40,037,405 33.03
Stated/Stated................. 1 154,986 0.13
--- ------------ ------
Total.................. 584 $121,205,344 100.00%
=== ============ ======
A-20
PRODUCT TYPE OF THE MORTGAGE LOANS IN LOAN GROUP I
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
PRODUCT TYPE LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------ --------- ------------------- -------
2/6 LIBOR IO.................. 5 $ 1,868,250 1.54%
2/6 LIBOR..................... 139 55,336,571 45.66
3/1 Treasury.................. 1 366,553 0.30
3/6 LIBOR..................... 6 2,403,594 1.98
5/6 LIBOR..................... 1 689,420 0.57
Balloon....................... 93 10,757,404 8.88
Fixed......................... 339 49,783,552 41.07
--- ------------ ------
Total.................. 584 $121,205,344 100.00%
=== ============ ======
RATE ADJUSTMENT FREQUENCY OF THE MORTGAGE LOANS IN LOAN GROUP I
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
RATE ADJUSTMENT FREQUENCY LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------ --------- ------------------- -------
6 Months...................... 151 $60,297,835 49.75%
12 Months..................... 1 366,553 0.30
Fixed......................... 432 60,540,956 49.95
--- ------------ ------
Total.................. 584 $121,205,344 100.00%
=== ============ ======
A-21
MONTHS TO NEXT RATE ADJUSTMENT OF THE MORTGAGE LOANS IN LOAN GROUP I
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
MONTHS TO NEXT RATE ADJUSTMENT LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------ --------- ------------------- -------
18 - 23....................... 143 $ 56,877,821 46.93%
24 - 29....................... 1 327,000 0.27
30 - 35....................... 7 2,770,147 2.29
54 - 59....................... 1 689,420 0.57
Fixed......................... 432 60,540,956 49.95
--- ------------ ------
Total.................. 584 $121,205,344 100.00%
=== ============ ======
The weighted average next rate adjustment for the adjustable rate
mortgage loans in Loan Group I is 23 months. Months to next rate adjustment is
calculated by using the first rate adjustment date for the loans still in a
hybrid period and by using next rate adjustment for loans that are fully
indexed.
A-22
MAXIMUM LIFETIME MORTGAGE RATES OF THE MORTGAGE LOANS IN LOAN GROUP I
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
MAXIMUM MORTGAGE RATE LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------ --------- ------------------- -------
11.500% - 11.749%............. 2 $ 732,107 0.60%
11.750% - 11.999%............. 4 1,649,805 1.36
12.000% - 12.249%............. 1 441,560 0.36
12.250% - 12.499%............. 6 2,844,114 2.35
12.500% - 12.749%............. 8 3,346,765 2.76
12.750% - 12.999%............. 24 9,468,530 7.81
13.000% - 13.249%............. 5 1,637,482 1.35
13.250% - 13.499%............. 14 5,512,802 4.55
13.500% - 13.749%............. 14 5,354,029 4.42
13.750% - 13.999%............. 24 9,576,624 7.90
14.000% - 14.249%............. 5 2,488,135 2.05
14.250% - 14.499%............. 16 6,436,694 5.31
14.500% - 14.749%............. 6 2,297,869 1.90
14.750% - 14.999%............. 13 4,952,818 4.09
15.000% - 15.249%............. 3 926,539 0.76
15.250% - 15.499%............. 3 1,280,874 1.06
15.500% - 15.749%............. 2 818,260 0.68
15.750% - 15.999%............. 2 899,380 0.74
Fixed......................... 432 60,540,956 49.95
--- ------------ ------
Total................ 584 $121,205,344 100.00%
=== ============ ======
As of the cut-off date, the weighted average maximum mortgage rate of
the adjustable rate mortgage loans was approximately 13.6534%.
A-23
PERIODIC RATE CAP OF THE MORTGAGE LOANS IN LOAN GROUP I
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
PERIODIC RATE CAP LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------ --------- ------------------- -------
1.000%........................ 70 $ 27,974,450 23.08%
1.500%........................ 81 32,323,386 26.67
2.000%........................ 1 366,553 0.30
Fixed......................... 432 60,540,956 49.95
--- ------------ ------
Total.............. 584 $121,205,344 100.00%
=== ============ ======
As of the cut-off date, the weighted average periodic rate cap of the
adjustable rate mortgage loans in Loan Group I was approximately 1.2725%.
A-24
INITIAL RATE CAP OF THE MORTGAGE LOANS IN LOAN GROUP I
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
INITIAL RATE CAP LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------ --------- ------------------- -------
1.500%........................ 75 $ 30,881,025 25.48%
2.000%........................ 5 1,846,616 1.52
3.000%........................ 72 27,936,747 23.05
Fixed......................... 432 60,540,956 49.95
--- ------------ ------
Total.............. 584 $121,205,344 100.00%
=== ============ ======
As of the cut-off date, the weighted average initial rate cap of the
adjustable rate mortgage loans in Loan Group I was approximately 2.2060%.
A-25
GROSS MARGIN OF THE MORTGAGE LOANS IN LOAN GROUP I
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
GROSS MARGIN LOANS AS OF CUT-OFF DATE GROUP I
- ------------------------------ --------- ------------------- -------
2.750% - 2.999%............... 1 $ 493,714 0.41%
3.250% - 3.499%............... 1 82,107 0.07
4.250% - 4.499%............... 4 1,829,085 1.51
4.500% - 4.749%............... 4 1,557,210 1.28
4.750% - 4.999%............... 6 2,585,792 2.13
5.000% - 5.249%............... 4 1,662,257 1.37
5.250% - 5.499%............... 20 8,100,265 6.68
5.500% - 5.749%............... 22 8,484,725 7.00
5.750% - 5.999%............... 46 18,928,754 15.62
6.000% - 6.249%............... 22 9,816,811 8.10
6.250% - 6.499%............... 4 1,677,107 1.38
6.500% - 6.749%............... 3 1,084,290 0.89
6.750% - 6.999%............... 3 918,713 0.76
7.000% - 7.249%............... 2 671,648 0.55
7.250% - 7.499%............... 4 1,226,696 1.01
7.500% - 7.749%............... 2 270,386 0.22
7.750% - 7.999%............... 1 334,797 0.28
8.500% - 8.749%............... 1 359,594 0.30
8.750% - 8.999%............... 2 580,436 0.48
Fixed......................... 432 60,540,956 49.95
--- ------------ ------
Total................ 584 $121,205,344 100.00%
=== ============ ======
As of the cut-off date, the weighted average gross margin of the
adjustable rate mortgage loans in Loan Group I was approximately 5.7107%.
A-26
MORTGAGE INTEREST RATES OF THE MORTGAGE LOANS IN LOAN GROUP II
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
MORTGAGE INTEREST RATE LOANS AS OF CUT-OFF DATE GROUP II
- ------------------------------ --------- ------------------- --------
0.000% - 5.500%............. 7 $ 1,677,026 0.87%
5.501% - 6.000%............. 34 6,992,280 3.65
6.001% - 6.500%............. 102 20,530,843 10.70
6.501% - 7.000%............. 235 42,474,588 22.15
7.001% - 7.500%............. 220 35,884,062 18.71
7.501% - 8.000%............. 259 37,895,745 19.76
8.001% - 8.500%............. 141 19,135,154 9.98
8.501% - 9.000%............. 102 11,904,175 6.21
9.001% - 9.500%............. 26 2,311,882 1.21
9.501% - 10.000%............. 99 4,753,310 2.48
10.001% - 10.500%............. 95 3,798,616 1.98
10.501% - 11.000%............. 73 2,859,497 1.49
11.001% - 11.500%............. 16 711,038 0.37
11.501% - 12.000%............. 16 754,863 0.39
12.001% - 12.500%............. 3 112,845 0.06
----- ------------ ------
Total.................. 1,428 $191,795,924 100.00%
===== ============ ======
As of the cut-off date, the weighted average mortgage interest rate of
the mortgage loans in Loan Group II was approximately 7.5642% per annum.
A-27
ORIGINAL COMBINED LOAN-TO-VALUE RATIO OF THE MORTGAGE LOANS IN LOAN GROUP II
NUMBER OF AGGREGATE SCHEDULED % OF
ORIGINAL COMBINED LOAN-TO-VALUE MORTGAGE BALANCE OUTSTANDING LOAN
RATIOS (%) LOANS AS OF CUT-OFF DATE GROUP II
- ------------------------------- --------- ------------------- --------
10.01% - 20.00%............... 1 $ 67,434 0.04%
20.01% - 30.00%............... 4 466,412 0.24
30.01% - 40.00%............... 18 1,347,818 0.70
40.01% - 50.00%............... 35 4,214,354 2.20
50.01% - 60.00%............... 53 7,691,567 4.01
60.01% - 70.00%............... 132 18,410,869 9.60
70.01% - 80.00%............... 480 75,657,687 39.45
80.01% - 90.00%............... 441 69,962,143 36.48
90.01% - 100.00%............... 264 13,977,641 7.29
----- ------------ ------
Total.................... 1,428 $191,795,924 100.00%
===== ============ ======
As of the cut-off date, the weighted average original combined
loan-to-value ratio of the mortgage loans in Loan Group II was approximately
80.04%.
A-28
SCHEDULED PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE
MORTGAGE LOAN CUT-OFF DATE IN LOAN GROUP II
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
SCHEDULED PRINCIPAL BALANCE LOANS AS OF CUT-OFF DATE GROUP II
--------------------------- ----- ------------------ --------
$ 0 - $ 50,000............. 283 $ 10,037,687 5.23%
$ 50,001 - $100,000............. 329 24,557,892 12.80
$100,001 - $150,000............. 269 33,574,885 17.51
$150,001 - $200,000............. 229 39,821,430 20.76
$200,001 - $250,000............. 145 32,571,025 16.98
$250,001 - $300,000............. 109 29,616,072 15.44
$300,001 - $350,000............. 49 15,475,716 8.07
$350,001 - $400,000............. 8 3,065,407 1.60
$400,001 - $450,000............. 5 2,085,937 1.09
$450,001 - $500,000............. 2 989,873 0.52
----- ------------ ------
Total......................... 1,428 $191,795,924 100.00%
===== ============ ======
As of the cut-off date, the average principal balance of the mortgage
loans in Loan Group II was approximately $134,311.
A-29
CREDIT SCORE FOR THE MORTGAGE LOANS IN LOAN GROUP II
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
CREDIT SCORE RANGE LOANS AS OF CUT-OFF DATE GROUP II
------------------ ----- ------------------ --------
1 - 500........................ 2 $ 294,389 0.15%
501 - 520...................... 85 10,646,360 5.55
521 - 540...................... 118 14,872,830 7.75
541 - 560...................... 146 19,537,775 10.19
561 - 580...................... 135 21,995,633 11.47
581 - 600...................... 156 19,026,416 9.92
601 - 620...................... 181 24,624,555 12.84
621 - 640...................... 182 23,974,941 12.50
641 - 660...................... 146 20,448,560 10.66
661 - 680...................... 116 13,527,509 7.05
681 - 700...................... 77 11,239,640 5.86
701 - 720...................... 34 4,850,057 2.53
721 - 740...................... 20 2,157,765 1.13
741 - 760...................... 22 3,333,367 1.74
761 - 780...................... 4 690,024 0.36
781 - 800...................... 3 409,625 0.21
800 or more.................... 1 166,479 0.09
----- ------------ ------
Total................... 1,428 $191,795,924 100.00%
===== ============ ======
As of the cut-off date, the weighted average credit score of the
mortgage loans in Loan Group II is approximately 609.
A-30
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES IN LOAN GROUP II*
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
STATE LOANS AS OF CUT-OFF DATE GROUP II
----- ----- ------------------ --------
Alabama.......................... 9 $ 808,422 0.42%
Arkansas......................... 4 400,994 0.21
Arizona.......................... 28 2,800,525 1.46
California....................... 436 78,932,783 41.15
Colorado......................... 31 3,310,993 1.73
Connecticut...................... 7 1,108,374 0.58
District of Columbia............. 3 476,890 0.25
Florida.......................... 121 13,065,201 6.81
Georgia.......................... 25 2,514,053 1.31
Hawaii........................... 32 4,612,600 2.40
Iowa............................. 10 654,726 0.34
Idaho............................ 9 614,105 0.32
Illinois......................... 73 9,270,954 4.83
Indiana.......................... 15 1,001,670 0.52
Kansas........................... 2 200,579 0.10
Kentucky......................... 12 1,124,256 0.59
Louisiana........................ 8 611,942 0.32
Massachusetts.................... 26 5,786,191 3.02
Maryland......................... 23 3,236,939 1.69
Maine............................ 3 367,005 0.19
Michigan......................... 47 4,716,118 2.46
Minnesota........................ 15 1,870,866 0.98
Missouri......................... 23 2,096,710 1.09
Mississippi...................... 7 634,379 0.33
Montana.......................... 1 224,530 0.12
North Carolina................... 19 2,009,151 1.05
Nebraska......................... 4 416,266 0.22
New Hampshire.................... 2 392,144 0.20
New Jersey....................... 30 5,899,372 3.08
New Mexico....................... 12 691,867 0.36
Nevada........................... 27 3,817,987 1.99
New York......................... 32 7,586,208 3.96
Ohio............................. 50 4,582,366 2.39
Oklahoma......................... 11 744,414 0.39
Oregon........................... 21 2,342,805 1.22
Pennsylvania..................... 25 2,070,160 1.08
Rhode Island..................... 6 851,913 0.44
South Carolina................... 11 827,832 0.43
Tennessee........................ 16 1,479,672 0.77
Texas............................ 97 8,623,202 4.50
Utah............................. 9 739,614 0.39
Virginia......................... 11 2,164,399 1.13
Washington....................... 60 4,228,159 2.20
Wisconsin........................ 13 1,656,912 0.86
West Virginia.................... 1 150,638 0.08
Wyoming.......................... 1 79,039 0.04
Total..................... 1,428 $191,795,924 100.00%
*No more than approximately 0.47% of Loan Group II by cut-off date
principal balance will be secured by properties located in any one zip code
area.
A-31
PROPERTY TYPES OF MORTGAGED PROPERTIES IN LOAN GROUP II
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
PROPERTY TYPE LOANS AS OF CUT-OFF DATE GROUP II
------------- ----- ------------------ --------
2-4 Family............................... 95 $ 19,453,340 10.14%
Condominium.............................. 99 11,155,354 5.82
PUD...................................... 137 17,520,979 9.14
Single Family............................ 1,097 143,666,251 74.91
----- ------------ ------
Total............................. 1,428 $191,795,924 100.00%
===== ============ ======
OCCUPANCY STATUS OF MORTGAGED PROPERTIES IN LOAN GROUP II*
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
OCCUPANCY STATUS LOANS AS OF CUT-OFF DATE GROUP II
---------------- ----- ------------------ --------
Investor................................. 107 $ 13,268,942 6.92%
Owner Occupied........................... 1,316 178,137,008 92.88
Second Home.............................. 5 389,974 0.20
----- ------------ ------
Total............................. 1,428 $191,795,924 100.00%
===== ============ ======
* Based upon representation of the related mortgagors at the time of
origination.
A-32
ORIGINAL TERM OF THE MORTGAGE LOANS IN LOAN GROUP II
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
ORIGINAL TERM LOANS AS OF CUT-OFF DATE GROUP II
------------- ----- ------------------ --------
120 - 179 months......................... 3 $ 247,204 0.13%
180 - 239 months......................... 109 9,622,620 5.02
240 - 359 months......................... 161 6,990,699 3.64
360 months............................... 1,155 174,935,400 91.21
----- ------------ ------
Total............................. 1,428 $191,795,924 100.00%
===== ============ ======
As of the cut-off date, the weighted average stated original term to
scheduled maturity of the mortgage loans in Loan Group II was approximately 346
months.
REMAINING TERM TO STATED MATURITY FOR THE MORTGAGE LOANS IN LOAN GROUP II
NUMBER OF AGGREGATE SCHEDULED % OF
REMAINING TERM TO STATED MORTGAGE BALANCE OUTSTANDING LOAN
MATURITY LOANS AS OF CUT-OFF DATE GROUP II
-------- ----- ------------------ --------
61 - 120 months........................ 3 $ 247,204 0.13%
121 - 180 months......................... 109 9,622,620 5.02
181 - 240 months......................... 159 6,718,342 3.50
241 - 300 months......................... 2 272,357 0.14
301 - 360 months........................ 1,155 174,935,400 91.21
----- ------------ ------
Total............................. 1,428 $191,795,924 100.00%
===== ============ ======
As of the cut-off date, the weighted average stated remaining months to
scheduled maturity of the mortgage loans in Loan Group II was approximately 344
months.
A-33
LOAN PURPOSE FOR THE MORTGAGE LOANS IN LOAN GROUP II
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
LOAN PURPOSE LOANS AS OF CUT-OFF DATE GROUP II
------------ ----- ------------------ --------
Cash-Out Refinance....................... 809 $121,704,295 63.46%
Purchase................................. 523 57,314,679 29.88
Rate/Term Refinance...................... 96 12,776,950 6.66
----- ------------ ------
Total............................. 1,428 $191,795,924 100.00%
===== ============ ======
DOCUMENTATION TYPE OF THE MORTGAGE LOANS IN LOAN GROUP II
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
DOCUMENTATION TYPE LOANS AS OF CUT-OFF DATE GROUP II
------------------ ----- ------------------ --------
Full/Alternative......................... 882 $112,957,505 58.89%
Limited.................................. 72 11,718,498 6.11
No Ratio................................. 1 153,509 0.08
Stated Income............................ 473 66,966,412 34.92
----- ------------ ------
Total............................. 1,428 $191,795,924 100.00%
===== ============ ======
A-34
PRODUCT TYPE OF THE MORTGAGE LOANS IN LOAN GROUP II
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
PRODUCT TYPE LOANS AS OF CUT-OFF DATE GROUP II
------------ ----- ------------------ --------
2/6 LIBOR................................ 846 $137,755,437 71.82%
3/6 LIBOR................................ 18 2,898,756 1.51
5/6 LIBOR................................ 2 547,126 0.29
Balloon.................................. 34 4,039,602 2.11
Fixed.................................... 528 46,555,003 24.27
----- ------------ ------
Total............................. 1,428 $191,795,924 100.00%
===== ============ ======
RATE ADJUSTMENT FREQUENCY OF THE MORTGAGE LOANS IN LOAN GROUP II*
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
RATE ADJUSTMENT FREQUENCY LOANS AS OF CUT-OFF DATE GROUP II
------------------------- ----- ------------------ --------
6 Months................................. 866 $141,201,319 73.62%
Fixed.................................... 562 50,594,605 26.38
----- ------------ ------
Total............................. 1,428 $191,795,924 100.00%
===== ============ ======
A-35
MONTHS TO NEXT RATE ADJUSTMENT OF THE MORTGAGE LOANS IN LOAN GROUP II*
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
MONTHS TO NEXT RATE ADJUSTMENT LOANS AS OF CUT-OFF DATE GROUP II
------------------------------ ----- ------------------ --------
18 - 23.................................. 846 $137,755,437 71.82%
30 - 35.................................. 18 2,898,756 1.51
54 - 59.................................. 2 547,126 0.29
Fixed.................................... 562 50,594,605 26.38
----- ------------ ------
Total............................. 1,428 $191,795,924 100.00%
===== ============ ======
The weighted average next rate adjustment for the adjustable rate
mortgage loans in Loan Group II is 22 months. Months to next rate adjustment is
calculated by using the first rate adjustment date for the loans still in a
hybrid period and by using next rate adjustment for loans that are fully
indexed.
A-36
MAXIMUM LIFETIME MORTGAGE RATES OF THE MORTGAGE LOANS
IN LOAN GROUP II
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
MAXIMUM MORTGAGE RATE LOANS AS OF CUT-OFF DATE GROUP II
--------------------- ----- ------------------ --------
11.500% - 11.749%.............. 1 $ 305,985 0.16%
11.750% - 11.999%.............. 4 627,809 0.33
12.000% - 12.249%.............. 2 436,954 0.23
12.250% - 12.499%.............. 9 1,921,480 1.00
12.500% - 12.749%.............. 20 4,172,048 2.18
12.750% - 12.999%.............. 55 11,341,410 5.91
13.000% - 13.249%.............. 23 4,838,594 2.52
13.250% - 13.499%.............. 54 10,784,151 5.62
13.500% - 13.749%.............. 79 14,948,756 7.79
13.750% - 13.999%.............. 111 19,794,600 10.32
14.000% - 14.249%.............. 57 9,147,093 4.77
14.250% - 14.499%.............. 94 14,818,916 7.73
14.500% - 14.749%.............. 98 14,366,461 7.49
14.750% - 14.999%.............. 114 16,774,843 8.75
15.000% - 15.249%.............. 37 4,315,559 2.25
15.250% - 15.499%.............. 39 5,268,228 2.75
15.500% - 15.749%.............. 17 2,023,482 1.06
15.750% - 15.999%.............. 27 2,795,983 1.46
16.000% - 16.249%.............. 14 1,736,512 0.91
16.250% - 16.499%.............. 5 337,092 0.18
16.500% - 16.749%.............. 2 147,942 0.08
16.750% - 16.999%.............. 2 74,740 0.04
17.000% - 17.249%.............. 1 37,487 0.02
17.750% - 17.999%.............. 1 185,195 0.10
Fixed.................................... 562 50,594,605 26.38
----- ------------ ------
Total........................ 1,428 $191,795,924 100.00%
===== ============ ======
As of the cut-off date, the weighted average maximum mortgage rate of
the adjustable rate mortgage loans in Loan Group II was approximately 14.0772%.
A-37
PERIODIC RATE CAP OF THE MORTGAGE LOANS IN LOAN GROUP II
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
PERIODIC RATE CAP LOANS AS OF CUT-OFF DATE GROUP II
----------------- ----- ------------------ --------
1.000%................................... 297 $ 47,746,199 24.89%
1.500%................................... 569 93,455,120 48.73
Fixed.................................... 562 50,594,605 26.38
----- ------------ ------
Total........................ 1,428 $191,795,924 100.00%
===== ============ ======
As of the cut-off date, the weighted average periodic rate cap of the
adjustable rate mortgage loans in Loan Group II was approximately 1.3309%.
INITIAL RATE CAP OF THE MORTGAGE LOANS IN LOAN GROUP II
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
INITIAL RATE CAP LOANS AS OF CUT-OFF DATE GROUP II
---------------- ----- ------------------ --------
1.000%................................... 3 $ 453,841 0.24%
1.500%................................... 569 93,455,120 48.73
3.000%................................... 294 47,292,359 24.66
Fixed.................................... 562 50,594,605 26.38
----- ------------ ------
Total........................ 1,428 $191,795,924 100.00%
===== ============ ======
As of the cut-off date, the weighted average initial rate cap of the
adjustable rate mortgage loans in Loan Group II was approximately 2.0008%.
A-38
GROSS MARGIN OF THE MORTGAGE LOANS IN LOAN GROUP II
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
GROSS MARGIN LOANS AS OF CUT-OFF DATE GROUP II
------------ ----- ------------------ --------
5.250% - 5.499%.............. 9 $ 1,052,611 0.55%
5.500% - 5.749%.............. 225 36,584,172 19.07
5.750% - 5.999%.............. 401 68,428,454 35.68
6.000% - 6.249%.............. 102 15,927,612 8.30
6.250% - 6.499%.............. 41 6,820,550 3.56
6.500% - 6.749%.............. 50 7,193,518 3.75
6.750% - 6.999%.............. 35 4,749,706 2.48
7.000% - 7.249%.............. 1 199,480 0.10
7.250% - 7.499%.............. 1 131,550 0.07
7.500% - 7.749%.............. 1 113,665 0.06
Fixed............................. 562 50,594,605 26.38
----- ------------ ------
Total........................ 1,428 $191,795,924 100.00%
===== ============ ======
As of the cut-off date, the weighted average gross margin of the
adjustable rate mortgage loans in Loan Group II was approximately 5.8445%.
A-39
MORTGAGE INTEREST RATES OF THE MORTGAGE LOANS IN LOAN GROUP III
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
MORTGAGE INTEREST RATE LOANS AS OF CUT-OFF DATE GROUP III
---------------------- ----- ------------------ ---------
0.000% - 5.500%................... 8 $ 1,815,370 0.96%
5.501% - 6.000%................... 47 8,654,832 4.59
6.001% - 6.500%................... 131 22,183,639 11.77
6.501% - 7.000%................... 210 34,714,737 18.42
7.001% - 7.500%................... 224 37,403,729 19.84
7.501% - 8.000%................... 191 28,343,187 15.04
8.001% - 8.500%................... 178 24,371,974 12.93
8.501% - 9.000%................... 137 17,391,837 9.23
9.001% - 9.500%................... 59 6,310,598 3.35
9.501% - 10.000%................... 40 3,339,639 1.77
10.001% - 10.500%................... 37 1,819,386 0.97
10.501% - 11.000%................... 19 1,113,085 0.59
11.001% - 11.500%................... 7 555,114 0.29
11.501% - 12.000%................... 5 383,569 0.20
12.001% - 12.500%................... 1 88,761 0.05
----- ------------ ------
Total........................... 1,294 $188,489,457 100.00%
===== ============ ======
As of the cut-off date, the weighted average mortgage interest rate of
the mortgage loans in Loan Group III was approximately 7.5613% per annum.
A-40
ORIGINAL COMBINED LOAN-TO-VALUE RATIO OF THE MORTGAGE LOANS IN LOAN GROUP III
NUMBER OF AGGREGATE SCHEDULED % OF
ORIGINAL COMBINED LOAN-TO-VALUE MORTGAGE BALANCE OUTSTANDING LOAN
RATIOS (%) LOANS AS OF CUT-OFF DATE GROUP III
---------- ----- ------------------ ---------
10.01% - 20.00%.................... 1 $ 20,747 0.01%
20.01% - 30.00%.................... 4 497,819 0.26
30.01% - 40.00%.................... 13 1,222,136 0.65
40.01% - 50.00%.................... 34 3,686,043 1.96
50.01% - 60.00%.................... 47 6,420,324 3.41
60.01% - 70.00%.................... 114 17,286,066 9.17
70.01% - 80.00%.................... 412 64,479,470 34.21
80.01% - 90.00%.................... 498 76,536,343 40.61
90.01% - 100.00%.................... 171 18,340,508 9.73
----- ------------ ------
Total............................ 1,294 $188,489,457 100.00%
===== ============ ======
As of the cut-off date, the weighted average original combined
loan-to-value ratio of the mortgage loans in Loan Group III was approximately
80.75%.
A-41
SCHEDULED PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE
MORTGAGE LOAN CUT-OFF DATE IN LOAN GROUP III
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
SCHEDULED PRINCIPAL BALANCE LOANS AS OF CUT-OFF DATE GROUP III
--------------------------- ----- ------------------ ---------
$ 0 - $ 50,000.............. 90 $ 3,018,589 1.60%
$ 50,001 - $ 100,000.............. 306 23,546,243 12.49
$ 100,001 - $ 150,000.............. 358 44,629,002 23.68
$ 150,001 - $ 200,000.............. 260 45,417,606 24.10
$ 200,001 - $ 250,000.............. 142 31,817,144 16.88
$ 250,001 - $ 300,000.............. 95 26,246,150 13.92
$ 300,001 - $ 350,000.............. 39 12,246,423 6.50
$ 350,001 - $ 400,000.............. 3 1,148,926 0.61
$ 400,001 - $ 450,000.............. 1 419,373 0.22
Total.................................. 1,294 $188,489,457 100.00%
As of the cut-off date, the average principal balance of the mortgage
loans in Loan Group III was approximately $145,664.
A-42
CREDIT SCORE FOR THE MORTGAGE LOANS IN LOAN GROUP III
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
CREDIT SCORE RANGE LOANS AS OF CUT-OFF DATE GROUP III
------------------ ----- ------------------ ---------
1 - 500.................................. 2 543,500 0.29%
501 - 520................................ 47 6,072,170 3.22
521 - 540................................ 156 21,683,888 11.50
541 - 560................................ 151 22,828,958 12.11
561 - 580................................ 161 22,320,678 11.84
581 - 600................................ 172 24,916,025 13.22
601 - 620................................ 168 25,751,278 13.66
621 - 640................................ 152 22,819,060 12.11
641 - 660................................ 120 17,392,799 9.23
661 - 680................................ 80 10,661,151 5.66
681 - 700................................ 30 5,099,588 2.71
701 - 720................................ 24 3,451,316 1.83
721 - 740................................ 11 1,852,339 0.98
741 - 760................................ 11 1,894,769 1.01
761 - 780................................ 4 539,195 0.29
781 - 800................................ 4 535,241 0.28
800 or more.............................. 1 127,501 0.07
----- ----------- ------
Total............................. 1,294 188,489,457 100.00%
===== =========== ======
As of the cut-off date, the weighted average credit score of the
mortgage loans in Loan Group III is approximately 600.
A-43
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES IN LOAN GROUP III*
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
STATE LOANS AS OF CUT-OFF DATE GROUP III
----- ----- ------------------ ---------
Alaska................................... 1 $ 128,802 0.07%
Alabama.................................. 17 1,287,069 0.68
Arizona.................................. 20 2,358,275 1.25
California............................... 355 66,967,617 35.53
Colorado................................. 14 2,278,764 1.21
Connecticut.............................. 19 2,993,116 1.59
District of Columbia..................... 10 1,304,975 0.69
Florida.................................. 116 14,674,782 7.79
Georgia.................................. 92 12,243,428 6.50
Hawaii................................... 3 438,584 0.23
Iowa..................................... 5 461,776 0.24
Idaho.................................... 2 117,664 0.06
Illinois................................. 93 14,177,013 7.52
Indiana.................................. 9 853,547 0.45
Kansas................................... 3 202,526 0.11
Kentucky................................. 7 807,404 0.43
Louisiana................................ 12 1,543,456 0.82
Massachusetts............................ 23 4,532,051 2.40
Maryland................................. 39 6,673,505 3.54
Maine.................................... 1 117,209 0.06
Michigan................................. 31 2,580,982 1.37
Minnesota................................ 16 1,932,882 1.03
Missouri................................. 28 2,803,485 1.49
Mississippi.............................. 7 445,066 0.24
Montana.................................. 1 168,266 0.09
North Carolina........................... 28 2,615,959 1.39
North Dakota............................. 1 55,120 0.03
Nebraska................................. 2 165,801 0.09
New Hampshire............................ 4 597,543 0.32
New Jersey............................... 20 3,410,109 1.81
New Mexico............................... 7 662,459 0.35
Nevada................................... 28 4,515,809 2.40
New York................................. 34 6,551,135 3.48
Ohio..................................... 42 4,449,653 2.36
Oklahoma................................. 4 212,149 0.11
Oregon................................... 13 1,837,281 0.97
Pennsylvania............................. 35 3,964,077 2.10
Rhode Island............................. 7 1,012,175 0.54
South Carolina........................... 12 1,301,847 0.69
Tennessee................................ 11 1,055,020 0.56
Texas.................................... 43 3,704,179 1.97
Utah..................................... 2 260,545 0.14
Virginia................................. 27 4,198,455 2.23
Vermont.................................. 2 307,994 0.16
Washington............................... 30 3,181,773 1.69
Wisconsin................................ 15 2,014,822 1.07
West Virginia............................ 1 50,863 0.03
Wyoming.................................. 2 272,443 0.14
----- ------------ ------
Total............................. 1,294 $188,489,457 100.00%
===== ============ ======
*No more than approximately 0.76% of Loan Group III by cut-off date
principal balance will be secured by properties located in any one zip code
area.
A-44
PROPERTY TYPES OF MORTGAGED PROPERTIES IN LOAN GROUP III
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
PROPERTY TYPE LOANS AS OF CUT-OFF DATE GROUP III
------------- ----- ------------------ ---------
2-4 Family............................... 86 $ 16,468,002 8.74%
Condominium.............................. 113 14,818,409 7.86
PUD...................................... 94 13,798,035 7.32
Single Family............................ 993 142,256,366 75.47
Townhouse................................ 8 1,148,644 0.61
----- ------------ ------
Total............................. 1,294 $188,489,457 100.00%
===== ============ ======
OCCUPANCY STATUS OF MORTGAGED PROPERTIES IN LOAN GROUP III*
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
OCCUPANCY STATUS LOANS AS OF CUT-OFF DATE GROUP III
---------------- ----- ------------------ ---------
Investor................................. 110 $ 14,088,809 7.47%
Owner Occupied........................... 1,178 173,811,087 92.21
Second Home.............................. 6 589,560 0.31
----- ------------ ------
Total............................. 1,294 $188,489,457 100.00%
===== ============ ======
* Based upon representation of the related mortgagors at the time of
origination.
A-45
ORIGINAL TERM OF THE MORTGAGE LOANS IN LOAN GROUP III
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
ORIGINAL TERM LOANS AS OF CUT-OFF DATE GROUP III
------------- ----- ------------------ ---------
129 - 179 months......................... 2 $ 168,091 0.09%
180 - 239 months......................... 35 3,325,449 1.76
240 - 359 months......................... 68 3,191,117 1.69
360 months............................... 1,189 181,804,799 96.45
----- ------------ ------
Total............................. 1,294 $188,489,457 100.00%
===== ============ ======
As of the cut-off date, the weighted average stated original term to
scheduled maturity of the mortgage loans in Loan Group III was approximately 355
months.
REMAINING TERM TO STATED MATURITY FOR THE MORTGAGE LOANS IN LOAN GROUP III
NUMBER OF AGGREGATE SCHEDULED % OF
REMAINING TERM TO STATED MORTGAGE BALANCE OUTSTANDING LOAN
MATURITY LOANS AS OF CUT-OFF DATE GROUP III
-------- ----- ------------------ ---------
61 - 120 months........................ 2 $ 168,091 0.09%
121 - 180 months......................... 35 3,325,449 1.76
181 - 240 months......................... 68 3,191,117 1.69
301 - 360 months........................ 1,189 181,804,799 96.45
----- ------------ ------
Total............................. 1,294 $188,489,457 100.00%
===== ============ ======
As of the cut-off date, the weighted average stated remaining months to
scheduled maturity of the mortgage loans in Loan Group III was approximately 353
months.
A-46
LOAN PURPOSE FOR THE MORTGAGE LOANS IN LOAN GROUP III
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
LOAN PURPOSE LOANS AS OF CUT-OFF DATE GROUP III
------------ ----- ------------------ ---------
Cash-Out Refinance....................... 880 $134,527,602 71.37%
Purchase................................. 294 37,449,181 19.87
Rate/Term Refinance...................... 120 16,512,674 8.76
----- ------------ ------
Total............................. 1,294 $188,489,457 100.00%
===== ============ ======
DOCUMENTATION TYPE OF THE MORTGAGE LOANS IN LOAN GROUP III
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
DOCUMENTATION TYPE LOANS AS OF CUT-OFF DATE GROUP III
------------------ ----- ------------------ ---------
Full/Alternative......................... 814 $113,478,864 60.20%
Limited.................................. 93 14,900,730 7.91
No Ratio................................. 4 371,621 0.20
Stated Income............................ 383 59,738,241 31.69
----- ------------ ------
Total............................. 1,294 $188,489,457 100.00%
===== ============ ======
A-47
PRODUCT TYPE OF THE MORTGAGE LOANS IN LOAN GROUP III
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
PRODUCT TYPE LOANS AS OF CUT-OFF DATE GROUP III
------------ ----- ------------------ ---------
2/6 LIBOR IO............................. 25 $ 4,075,189 2.16%
2/6 LIBOR................................ 894 136,645,403 72.49
3/1 Treasury............................. 5 745,524 0.40
3/6 LIBOR................................ 50 7,805,011 4.14
5/1 Treasury............................. 1 286,398 0.15
5/6 LIBOR................................ 3 312,686 0.17
6 Month LIBOR............................ 2 291,296 0.15
Fixed.................................... 314 38,327,950 20.33
----- ------------ ------
Total............................. 1,294 $188,489,457 100.00%
===== ============ ======
RATE ADJUSTMENT FREQUENCY OF THE MORTGAGE LOANS IN LOAN GROUP III*
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
RATE ADJUSTMENT FREQUENCY LOANS AS OF CUT-OFF DATE GROUP III
------------------------- ----- ------------------ ---------
6 Months................................. 974 $149,129,585 79.12%
12 Months................................ 6 1,031,922 0.55
Fixed.................................... 314 38,327,950 20.33
----- ------------ ------
Total............................. 1,294 $188,489,457 100.00%
===== ============ ======
A-48
MONTHS TO NEXT RATE ADJUSTMENT OF THE MORTGAGE LOANS IN LOAN GROUP III*
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
MONTHS TO NEXT RATE ADJUSTMENT LOANS AS OF CUT-OFF DATE GROUP III
------------------------------ ----- ------------------ ---------
0 - 5.................................... 2 $ 291,296 0.15%
6 - 11................................... 1 142,941 0.08
12 - 17.................................. 10 1,174,319 0.62
18 - 23.................................. 908 139,403,332 73.96
30 - 35.................................. 55 8,550,535 4.54
54 - 59.................................. 4 599,084 0.32
Fixed.................................... 314 38,327,950 20.33
----- ------------ ------
Total............................. 1,294 $188,489,457 100.00%
===== ============ ======
The weighted average next rate adjustment for the adjustable rate
mortgage loans in Loan Group III is 23 months. Months to next rate adjustment is
calculated by using the first rate adjustment date for the loans still in a
hybrid period and by using next rate adjustment for loans that are fully
indexed.
A-49
MAXIMUM LIFETIME MORTGAGE RATES OF THE MORTGAGE LOANS
IN LOAN GROUP III
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
MAXIMUM MORTGAGE RATE LOANS AS OF CUT-OFF DATE GROUP III
--------------------- ----- ------------------ ---------
10.500% - 10.749%.............. 3 $ 403,255 0.21%
11.250% - 11.499%.............. 3 451,347 0.24
11.500% - 11.749%.............. 3 423,193 0.22
11.750% - 11.999%.............. 9 1,435,788 0.76
12.000% - 12.249%.............. 6 944,045 0.50
12.250% - 12.499%.............. 34 5,680,686 3.01
12.500% - 12.749%.............. 36 5,586,357 2.96
12.750% - 12.999%.............. 68 10,999,319 5.84
13.000% - 13.249%.............. 38 6,272,915 3.33
13.250% - 13.499%.............. 70 12,234,287 6.49
13.500% - 13.749%.............. 90 13,456,642 7.14
13.750% - 13.999%.............. 121 20,037,686 10.63
14.000% - 14.249%.............. 71 10,364,241 5.50
14.250% - 14.499%.............. 102 16,256,703 8.62
14.500% - 14.749%.............. 57 8,305,977 4.41
14.750% - 14.999%.............. 79 11,423,651 6.06
15.000% - 15.249%.............. 44 6,322,645 3.35
15.250% - 15.499%.............. 54 7,544,475 4.00
15.500% - 15.749%.............. 31 4,161,689 2.21
15.750% - 15.999%.............. 26 3,811,346 2.02
16.000% - 16.249%.............. 12 1,091,666 0.58
16.250% - 16.499%.............. 6 853,519 0.45
16.500% - 16.749%.............. 5 718,228 0.38
16.750% - 16.999%.............. 3 270,286 0.14
17.000% - 17.249%.............. 1 48,707 0.03
17.250% - 17.499%.............. 2 297,363 0.16
17.500% - 17.749%.............. 2 253,963 0.13
17.750% - 17.999%.............. 3 410,631 0.22
18.000% - 18.249%.............. 1 100,895 0.05
Fixed.................................... 314 38,327,950 20.33
----- ------------ ------
Total........................ 1,294 $188,489,457 100.00%
===== ============ ======
As of the cut-off date, the weighted average maximum mortgage rate of
the adjustable rate mortgage loans in Loan Group III was approximately 14.0364%.
A-50
PERIODIC RATE CAP OF THE MORTGAGE LOANS IN LOAN GROUP III
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
PERIODIC RATE CAP LOANS AS OF CUT-OFF DATE GROUP III
----------------- ----- ------------------ ---------
1.000%................................... 398 $ 58,651,509 31.12%
1.500%................................... 577 90,642,340 48.09
2.000%................................... 5 867,658 0.46
Fixed.................................... 314 38,327,950 20.33
----- ------------ ------
Total........................ 1,294 $188,489,457 100.00%
===== ============ ======
As of the cut-off date, the weighted average periodic rate cap of the
adjustable rate mortgage loans in Loan Group III was approximately 1.3076%.
INITIAL RATE CAP OF THE MORTGAGE LOANS IN LOAN GROUP III
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
INITIAL RATE CAP LOANS AS OF CUT-OFF DATE GROUP III
---------------- ----- ------------------ ---------
1.500%................................... 501 $ 81,255,330 43.11%
2.000%................................... 25 4,105,608 2.18
3.000%................................... 451 64,283,672 34.10
5.000%................................... 3 516,897 0.27
Fixed.................................... 314 38,327,950 20.33
----- ------------ ------
Total........................ 1,294 $188,489,457 100.00%
===== ============ ======
As of the cut-off date, the weighted average initial rate cap of the
adjustable rate mortgage loans in Loan Group III was approximately 2.1679%.
A-51
GROSS MARGIN OF THE MORTGAGE LOANS IN LOAN GROUP III
NUMBER OF AGGREGATE SCHEDULED % OF
MORTGAGE BALANCE OUTSTANDING LOAN
GROSS MARGIN LOANS AS OF CUT-OFF DATE GROUP III
------------ ----- ------------------ ---------
3.000% - 3.249%.............. 1 $ 165,471 0.09%
4.000% - 4.249%.............. 3 555,594 0.29
4.250% - 4.499%.............. 9 1,671,648 0.89
4.500% - 4.749%.............. 19 3,576,499 1.90
4.750% - 4.999%.............. 102 17,024,020 9.03
5.000% - 5.249%.............. 31 5,135,071 2.72
5.250% - 5.499%.............. 221 36,987,920 19.62
5.500% - 5.749%.............. 62 9,322,544 4.95
5.750% - 5.999%.............. 103 16,200,178 8.59
6.000% - 6.249%.............. 116 16,240,644 8.62
6.250% - 6.499%.............. 78 11,336,359 6.01
6.500% - 6.749%.............. 28 4,054,054 2.15
6.750% - 6.999%.............. 40 5,499,412 2.92
7.000% - 7.249%.............. 17 2,342,976 1.24
7.250% - 7.499%.............. 16 2,448,169 1.30
7.500% - 7.749%.............. 30 4,269,269 2.26
7.750% - 7.999%.............. 20 2,895,158 1.54
8.000% - 8.249%.............. 23 3,298,414 1.75
8.250% - 8.499%.............. 22 2,508,144 1.33
8.500% - 8.749%.............. 22 2,853,632 1.51
8.750% - 8.999%.............. 9 913,483 0.48
9.000% - 9.249%.............. 7 794,570 0.42
9.250% - 9.499%.............. 1 68,278 0.04
Fixed.................................... 314 38,327,950 20.33
----- ------------ ------
Total........................ 1,294 $188,489,457 100.00%
===== ============ ======
As of the cut-off date, the weighted average gross margin of the
adjustable rate mortgage loans in Loan Group III was approximately 5.9145%.
A-52
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES
Except under limited circumstances, the globally offered Bear Stearns
Asset Backed Securities, Inc. Asset-Backed Certificates, Series 2004-HE1 (the
"Global Securities") will be available only in book-entry form. Investors in the
Global Securities may hold the Global Securities through any of DTC, Euroclear
or Clearstream. The Global Securities will be tradable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Euroclear and Clearstream will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Asset-Backed Certificates issues.
Secondary cross-market trading between Euroclear or Clearstream and DTC
participants holding Certificates will be effected on a delivery-against-payment
basis through the respective depositaries of Euroclear and Clearstream and as
DTC participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless the holders meet established
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect participants in DTC. As a result, Euroclear and
Clearstream will hold positions on behalf of their participants through their
respective depositaries, which in turn will hold the positions in accounts as
DTC participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior Asset-Backed Certificates
issues. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Euroclear or
Clearstream accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
I-1
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior
Asset-Backed Certificates issues in same day funds.
TRADING BETWEEN EUROCLEAR AND/OR CLEARSTREAM PARTICIPANTS. Secondary
market trading between Euroclear participants or Clearstream participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
TRADING BETWEEN DTC SELLER AND EUROCLEAR OR CLEARSTREAM PURCHASER. When
Global Securities are to be transferred from the account of a DTC participant to
the account of a Euroclear participant or a Clearstream participant, the
purchaser will send instructions to Euroclear or Clearstream through a Euroclear
participant or Clearstream participant at least one business day prior to
settlement. Euroclear or Clearstream will instruct the respective depositary, as
the case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of either
the actual number of days in the accrual period and a year assumed to consist of
360 days or a 360-day year of 12 30-day months as applicable to the related
class of Global Securities. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective depositary of the
DTC participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Euroclear participant's or Clearstream participant's
account. The securities credit will appear the next day (European time) and the
cash debt will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(i.e., the trade fails), the Euroclear or Clearstream cash debt will be valued
instead as of the actual settlement date.
Euroclear participants and Clearstream participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Euroclear or Clearstream. Under
this approach, they may take on credit exposure to Euroclear or Clearstream
until the Global Securities are credited to their accounts one day later.
As an alternative, if Euroclear or Clearstream has extended a line of
credit to them, Euroclear participants or Clearstream participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Euroclear participants or Clearstream
participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of the overdraft charges, although this result will depend
on each Euroclear participant's or Clearstream participant's particular cost of
funds.
Since the settlement is taking place during New York business hours,
DTC participants can employ their usual procedures for sending Global Securities
to the respective European depositary for the benefit of Euroclear participants
or Clearstream participants. The sale proceeds will be available to the DTC
seller on the settlement date. Thus, to the DTC participants a crossmarket
transaction will settle no differently than a trade between two DTC
participants.
Trading between Euroclear or Clearstream seller and DTC Purchaser. Due
to time zone differences in their favor, Euroclear participants and Clearstream
participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through
I-2
the respective depositary, to a DTC participant. The seller will send
instructions to Euroclear or Clearstream through a Euroclear participant or
Clearstream participant at least one business day prior to settlement. In these
cases Euroclear or Clearstream will instruct the respective depositary, as
appropriate, to deliver the Global Securities to the DTC participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of either the actual number of days in the accrual period and a
year assumed to consist of 360 days or a 360-day year of 12 30-day months as
applicable to the related class of Global Securities. For transactions settling
on the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. The payment will then be reflected in the
account of the Euroclear participant or Clearstream participant the following
day, and receipt of the cash proceeds in the Euroclear participant's or
Clearstream participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). Should the
Euroclear participant or Clearstream participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt of
the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended value date (i.e., the trade fails), receipt of the cash proceeds in
the Euroclear participant's or Clearstream participant's account would instead
be valued as of the actual settlement date.
Finally, day traders that use Euroclear or Clearstream and that
purchase Global Securities from DTC participants for delivery to Euroclear
participants or Clearstream participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through Euroclear or Clearstream for one day (until the
purchase side of the day trade is reflected in their Euroclear or Clearstream
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Euroclear or Clearstream
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is at least one
day prior to the value date for the sale to the Euroclear participant or
Clearstream participant.
U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest on registered debt issued by U.S. persons, unless (1)
each clearing system, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business in the chain of
intermediaries between the beneficial owner and the U.S. entity required to
withhold tax complies with applicable certification requirements and (2) the
beneficial owner takes one of the following steps to obtain an exemption or
reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8 BEN). Beneficial owners of
Global Securities that are non-U.S. persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 BEN. If the information shown on
Form W-8 BEN changes, a new Form W-8 BEN must be filed within 30 days of the
change.
I-3
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
W-8ECI). A non- U.S. person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form W-8ECI.
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM W-8 BEN). Non- U.S. persons that are beneficial owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form W-8
BEN.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. persons can obtain a
complete exemption from the withholding tax by filing Form W-9.
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Global Securities
holder files by submitting the appropriate form to the person through whom he
holds (e.g., the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Forms W-8 BEN and W-8ECI are generally effective
for three calendar years.
o U.S. Person. As used in this prospectus supplement
the term "U.S. person" means a beneficial owner of a
Certificate that is for United States federal income
tax purposes
o a citizen or resident of the United States,
o a corporation or partnership created or organized in
or under the laws of the United States or of any
State thereof or the District of Columbia,
o an estate the income of which is subject to United
States federal income taxation regardless of its
source, or
o a trust if a court within the United States is able
to exercise primary supervision of the administration
of the trust and one or more United States persons
have the authority to control all substantial
decisions of the trust.
As used in this prospectus supplement, the term "non-U.S. person" means
a beneficial owner of a Certificate that is not a U.S. person.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities or
with the application of the extensive withholding regulations that are generally
effective with respect to payments made after December 31, 2000 which have
detailed rules regarding the determination of beneficial ownership. Investors
are advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
I-4
ANNEX II
ACE GUARANTY CORP. CONSOLIDATED FINANCIAL STATEMENTS,
DECEMBER 31, 2002, 2001 AND 2000 AND UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS, SEPTEMBER 30, 2003 AND 2002
PAGE
CONSOLIDATED FINANCIAL STATEMENT FOR THE YEARS ENDED DECEMBER 31,
2002, 2001 AND 2002
Report of Independent Auditors II-2
Consolidated Balance Sheets II-3
Consolidated Statements of Operations and Comprehensive Income II-4
Consolidated Statements of Stockholder's Equity II-5
Consolidated Statements of Cash Flows II-6
Notes to Consolidated Financial Statements II-7
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE MONTHS ENDED
SEPTEMBER 30, 2003 AND 2002
Consolidated Balance Sheets II-21
Consolidated Statements of Operations and Comprehensive Income II-22
II-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholder
ACE Guaranty Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income, of stockholder's
equity and of cash flows, present fairly, in all material respects, the
financial position of ACE Guaranty Corp. (the "Company") at December 31, 2002
and 2001, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 3 to the financial statements, effective January 1, 2002,
the Company changed its method of accounting for goodwill. In addition, as
discussed in Note 4 to the financial statements, effective January 1, 2001, the
Company changed its method of accounting for derivatives.
PricewaterhouseCoopers LLP
New York, New York
February 3, 2003 (except for Note 16, which is dated December 23, 2003)
II-2
ACE GUARANTY CORP.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31,
2002 2001
(DOLLARS IN THOUSANDS)
ASSETS
Fixed maturity securities available for sale,
at fair value (amortized cost: $896,375 in 2002 and
$803,460 in 2001) $ 961,057 $ 825,736
Short-team investments, at cost, which approximates
market 52,384 72,093
----------- ------------
TOTAL INVESTMENTS 1,013,441 897,829
----------- ------------
Cash 3,081 280
Accrued investment income 12,138 11,590
Deferred acquisition costs 135,884 127,672
Prepaid reinsurance premiums 51,926 35,525
Reinsurance recoverable on ceded losses 11,420 588
Premiums receivable 32,081 24,270
Goodwill 87,062 87,062
Other assets 12,341 10,753
----------- ------------
TOTAL ASSETS $ 1,359,374 $ 1,195,569
=========== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Unearned premium reserve $ 352,551 $ 323,951
Reserve for losses and loss adjustment expenses 75,961 70,521
Deferred federal income taxes payable 53,567 49,145
Current federal income taxes payable 8,517 2,196
Fair value of derivative financial instruments 67,023 30,025
Other liabilities 28,318 13,961
----------- ------------
TOTAL LIABILITIES 585,937 489,799
----------- ------------
Commitments and contingencies (Note 13)
Stockholder's equity
Common stock-$720 par value per share in 2002 and 2001:
200,000 authorized, 20,834 issued and outstanding
in 2002 and 2001 15,000 15,000
Additional paid-in capital 345,561 342,029
Unearned stock grant compensation (2,056) (984)
Retained earnings 372,889 335,246
Accumulated other comprehensive income -
net unrealized gain on fixed maturity
securities available for sale 42,043 14,479
----------- ------------
Total stockholder's equity 773,437 705,770
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,359,374 $ 1,195,569
=========== ============
See accompanying notes to consolidated financial statements.
II-3
ACE GUARANTY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
2002 2001 2000
(DOLLARS IN THOUSANDS)
Revenues
Gross written premiums $ 155,079 $ 120,796 $ 89,761
Ceded premiums 31,367 31,798 7,015
--------- --------- ---------
Net written premiums 123,712 88,998 82,746
Increase in unearned premium reserve (12,199) (11,336) (15,212)
--------- --------- ---------
Net premiums earned 111,513 77,662 67,534
Net investment income 46,730 46,487 47,496
Net realized gains 6,888 10,203 7,388
Net realized (loss) gain on derivative financial instruments (36,998) 5,051 --
Other income 1,307 633 735
--------- --------- ---------
TOTAL REVENUES 129,440 140,036 123,153
--------- --------- ---------
Expenses
Losses and loss adjustment expenses 24,513 5,875 9,109
Acquisition costs 41,624 31,520 21,724
Increase in deferred acquisition costs (8,212) (7,011) (2,573)
Other operating expenses 15,229 13,703 15,430
Goodwill amortization -- 3,785 3,785
Foreign exchange losses (gains) 216 3 (36)
--------- --------- ---------
TOTAL EXPENSES 73,370 47,875 47,439
--------- --------- ---------
Income before provision for federal income taxes 56,070 92,161 75,714
Provision (benefit) for federal income taxes
Current 20,847 14,749 15,767
Deferred (10,420) 11,036 4,896
--------- --------- ---------
Total provision far federal
income taxes 10,427 25,785 20,663
--------- --------- ---------
Net income before cumulative effect of new
accounting standard 45,643 66,376 55,051
Cumulative effect of new accounting standard,
net of tax -- (22,800) --
--------- --------- ---------
NET INCOME 45,643 43,576 55,051
Other comprehensive income, net of tax
Unrealized holding gains (losses) arising
during the year 23,087 (16,788) 19,833
Reclassification adjustment for realized
gains included in net income 4,477 6,632 4,802
--------- --------- ---------
Change in net unrealized gain (loss) on
fixed maturity securities available for sale 27,564 (10,156) 24,635
--------- --------- ---------
COMPREHENSIVE INCOME $ 73,207 $ 33,420 $ 79,686
========= ========= =========
See accompanying notes to consolidated financial statements.
II-4
ACE GUARANTY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
----------------------------------------------------------
ADDITIONAL UNEARNED
COMMON PAID-IN RETAINED STOCK GRANT
STOCK CAPITAL EARNINGS COMPENSATION
(DOLLARS IN THOUSANDS)
Balance January 1, 2000 $ 2,215 $ 352,622 $247,619 $ -
Net income 55,051
Dividends (5,500)
Issued stock (2,377 shares) 285
Tax benefit for options exercised 278
Unrealized gain on fixed maturity
securities, net of tax ($13,265) -
-------- ----------- -------- ----------
Balance December 31, 2000 $ 2,500 $ 352,900 $297,170 $ -
Net income 43,576
Dividends (5,500)
Change in Par Value 12,500 (12,500)
Tax benefit for options exercised 1,629
Unrealized loss on fixed maturity securities, net
of tax ($5,469)
Unearned stock grant compensation (984)
-------- ----------- -------- ----------
Balance, December 31, 2001 $ 15,000 $ 342,029 $335,246 $ (984)
Net income 45,643
Dividends (8,000)
Tax benefit for options exercised 3,532
Unrealized gain on fixed maturity securities, net
of tax ($14,842)
Unearned stock grant compensation (1,072)
-------- ---------- -------- ----------
Balance, December 31, 2002 $ 15,000 $ 345,561 $372,889 $ (2,056)
======== ========== ======== ==========
For the years ended December 31, 2002, 2001 and 2000
------------------------------------------------------
Accumulated
Other Total
Comprehensive Stockholder's
Income Equity
Balance January 1, 2000 $ - $ 602,456
Net income 55,051
Dividends (5,500)
Issued stock (2,377 shares) 285
Tax benefit for options exercised 278
Unrealized gain on fixed maturity
securities, net of tax ($13,265) 24,635 24,635
-------- ------------
Balance December 31, 2000 $ 24,635 $ 677,205
Net income 43,576
Dividends (5,500)
Change in Par Value -
Tax benefit for options exercised 1,629
Unrealized loss on fixed maturity securities, net
of tax ($5,469) (10,156) (10,156)
Unearned stock grant compensation (984)
-------- ------------
Balance, December 31, 2001 $ 14,479 $ 705,770
Net income 45,643
Dividends (8,000)
Tax benefit for options exercised 3,532
Unrealized gain on fixed maturity securities, net
of tax ($14,842) 27,564 27,564
Unearned stock grant compensation (1,072)
-------- ------------
Balance, December 31, 2002 $ 42,043 $ 773,437
======== ============
See accompanying notes to consolidated financial statements.
II-5
ACE GUARANTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
2002 2001 2000
(DOLLARS IN THOUSANDS)
Operating activities
Net income $ 45,643 $ 43,576 $ 55,051
Adjustments to reconcile net income to net cash provided
by operating activities
Net amortization of security premiums (discounts) 3,605 1,289 (1,395)
Amortization of goodwill - 3,785 3,785
(Benefit) provision for deferred federal income taxes (10,420) 11,036 4,896
Net realized gains on investments (6,888) (10,203) (7,388)
Cumulative effect of adopting a new accounting
standard, net - 22,800 -
Change in fair value of derivative financial instrument 36,998 (5,051) -
Change in acquisition costs deferred (8,212) (7,011) (2,573)
Change in accrued investment income (548) 916 (2,500)
Change in premiums receivable, net (8,584) (18,334) 1,841
Change in prepaid reinsurance premiums (16,401) (18,997) 5,139
Change in unearned premium reserves 28,600 30,333 10,073
Change in outstanding loss reserves, net (1,513) 9,848 7,404
Other 9,732 1,634 4,102
------------ ------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 72,012 65,621 78,435
Investing activities
Fixed maturity securities available-for-sale:
Purchases (667,060) (876,701) (768,428)
Sales 577,428 839,921 670,058
Sales (purchases) of short-team investments, net 19,709 (8,571) 21,630
Other, net 8,712 (15,903) 5,221
------------ ------- --------------
NET CASH USED IN INVESTING ACTIVITIES (61,211) (61,254) (71,519)
------------ ------- --------------
Financing activities
Capital contribution - - 285
Dividends paid (8,000) (5,500) (5,500)
------------ ------- --------------
NET CASH USED IN FINANCING ACTIVITIES (8,000) (5,500) (5,215)
------------ ------- --------------
Increase/(decrease) increase in cash 2,801 (1,133) 1,701
Cash at beginning of year 280 1,413 (288)
------------ ------- --------------
Cash at end of year $ 3,081 $ 280 $ 1,413
============ ======= ==============
Supplementary cash flow information
Income taxes paid $ 10,796 $ 7.250 $ 14,100
See accompanying notes to consolidated financial statements,
11-6
ACE GUARANTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS AND ORGANIZATION
ACE Guaranty Corp. (formerly known as ACE Guaranty Re Inc.), (the
"Company") is a Maryland domiciled company, which commenced operations in
January 1988 and provides insurance and reinsurance of investment grade
financial guaranty exposures, including municipal and nonmunicipal
reinsurance, credit default swap ("CDS") transactions as well as trade
credit and related reinsurance. The Company has financial strength ratings
of AAA and Aa2 from Standard & Poor's and Moody's Investor Services, Inc.,
respectively, and is licensed in 30 jurisdictions. The Company owns 100% of
ACE Risk Assurance Company, a Maryland domiciled company, and is a direct
wholly-owned subsidiary of ACE Financial Services Inc., ("ACE Financial" or
the "Corporation"). The Corporation is a Delaware domiciled insurance
holding company.
ACE Financial is an indirect wholly-owned subsidiary of ACE Limited, a
holding company incorporated with limited liability under Cayman Islands
Companies Law. ACE Limited's Ordinary Shares are listed on the New York
Stock Exchange and thus they are subject to the rules and regulations of
the U.S. Securities and Exchange Commission.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, ACE Risk Assurance Company, after
elimination of inter-company accounts and transactions. Certain items in
the prior years' financial statements have been reclassified to conform to
the current year presentation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP")
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PREMIUM REVENUE RECOGNITION
All premiums are earned over the terms of the risks covered under the
Company's insurance and reinsurance contracts. Generally, premiums are
received either in full at contract inception or in installments over the
life of the covered risk. For purposes of earnings recognition, premiums
received in full at contract inception are earned pro-rata over the period
of risk. Installment premiums are typically earned on a monthly pro-rata
basis over the installment period.
INVESTMENTS IN SECURITIES
The Company accounts for its investments in fixed maturity securities in
accordance with the Financial Accounting Standard Board's ("FASB")
Statement of Financial Accounting Standards ("FAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("FAS 115").
Management determines the appropriate classification of securities at the
time of purchase. At December 31, 2002 and 2001, all investments in fixed
maturity securities were designated as available-for-sale.
The amortized cost of fixed maturity securities is adjusted for
amortization of premiums and accretion of discounts. That amortization or
accretion is included in net investment income. For mortgage-backed
securities, and any other holdings for which there is prepayment risk,
prepayment assumptions are evaluated and revised as necessary. Any
necessary adjustments required due to the resulting change in effective
yields and maturities are recognized in current income.
II-7
ACE GUARANTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CASH
The Company classifies demand deposits as cash.
DEFERRED ACQUISITION COSTS
Acquisition costs include expenses that relate to, and vary with, premium
production, including commissions, brokerage expenses and costs of
underwriting and marketing personnel. Acquisition costs are deferred and
amortized over the period in which the related premiums are earned. Ceding
commission income on premiums ceded to other reinsurers reduces acquisition
costs. Anticipated losses, loss adjustment expenses and the remaining costs
of servicing the insured and reinsured issues are considered in determining
the recoverability of acquisition costs.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Case basis reserves are established when specific issues are identified as
currently or likely to be in default. Such reserves are based on the
present value of the expected loss and loss adjustment payments, net of
recoveries, under salvage and subrogation rights. Reserves for losses and
loss adjustment expenses, which include portfolio reserves are management's
best estimate of expected losses related to the Company's entire portfolio.
These reserves are based on the Company's own historical loss experience as
well as historical default statistics of municipal, asset-backed and
corporate bonds, net of expected recoveries. The financial guaranty case
basis reserves have been discounted using an average rate of six percent in
2002 and 2001, resulting in a discount of $14.9 million and $8 million,
respectively. Portfolio reserves totaled $43.6 million at December 31, 2002
and $46.4 million at December 31, 2001.
Management updates the estimates for losses and loss adjustment expense on
a periodic basis, and any resulting adjustments are reflected in current
earnings. Management believes that its claim estimation procedures are
reasonable and that the reserves as of December 31, 2002 are adequate.
However, due to the inherent uncertainties of estimating losses and loss
adjustment expenses, actual claims and claims expenses may deviate from the
estimates reflected in the financial statements.
INCOME TAXES
Deferred federal income taxes are provided on the temporary differences
between the tax bases of assets or liabilities and the reported amounts in
the financial statements, which differences will result in deductible or
taxable amounts in future years when the reported amounts of the assets of
liabilities are recovered or settled. Such temporary differences relate
principally to deferred acquisition costs, loss reserves, unearned premium
and contingency reserves.
3. RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted FAS No. 141, "Business
Combinations" and FAS No. 142, "Goodwill and Other Intangible Assets". FAS
No. 141, which supercedes APB 16, "Business Combinations," requires
business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting and provides specific criteria for
initial recognition of intangible assets apart from goodwill. FAS No. 142,
which supercedes APB 17, "Intangible Assets," requires that goodwill and
intangible assets with indefinite lives no longer be amortized but instead
tested for impairment at least annually. FAS No. 142 established new
accounting and reporting standards for acquired goodwill and other
intangible assets. It requires that an entity determine if the goodwill or
other intangible assets has an indefinite or a finite useful life. Those
with indefinite useful lives will not be subject to amortization and must
be tested annually for impairment. Management has determined that the
goodwill of $87.1 million as of December 31,
II-8
ACE GUARANTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2001 was not impaired. The Company completed its transitional impairment
testing on its existing goodwill as of January 1, 2002 in accordance with
FAS No. 142.
4. DERIVATIVES
The Company adopted FAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133"), which established accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities as of January 1, 2001. It requires
that an entity recognize all derivatives as either assets or liabilities in
the consolidated balance sheet and measure those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated
as a fair value, cash flow or foreign currency hedge. The accounting for
changes in the fair value of a derivative depends on the intended use of
the derivative and the resulting designation. Upon initial application of
FAS 133, hedging relationships must be designated anew and documented
pursuant to the provisions of this statement.
The Company's insured CDS transactions have been deemed to meet the
definition of a derivative under FAS 133. Effective January 1, 2001, the
Company records these transactions at fair value, which is determined
principally through obtaining quotes from independent dealers,
counterparties, and rating agency models. The Company's involvement with
derivative instruments and transactions is primarily to offer credit
protection to others and is not considered speculative in nature.
The Company recorded in net realized gain (losses) on investments, a pretax
loss of $37.0 million and a pretax gain of $5.1 million to reflect the
change in the fair value of derivatives during the years ended December 31,
2002 and 2001, respectively. The level of gains and losses resulting from
changes in the fair value of derivatives on a prospective basis is
dependent upon a number of factors including changes in interest rates,
credit spreads and other market factors. The mark-to-market adjustment
reflects the estimated cost to the Company to purchase mirror protection on
its outstanding exposures and is not an estimate of expected losses
incurred. Expected losses on derivative contracts are provided for in
reserve for loss and loss adjustment expenses.
5. STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on a GAAP basis, which differs in
certain respects from accounting practices prescribed or permitted by the
Maryland Insurance Department and the National Association of Insurance
Commissioners ("NAIC").
In 1998, the NAIC established Codification of Statutory Accounting
Principle guidance, which replaced the Accounting Practices and Procedures
Manual as the NAIC's primary guidance on statutory accounting. Effective
January 1, 2001, the State of Maryland requires that insurance companies
domiciled in the State of Maryland prepare their statutory basis financial
statements in accordance with the NAIC Accounting Practices and Procedures
Manual-Version effective January 1, 2001, subject to any deviations
prescribed or permitted by the State of Maryland Insurance Commissioner.
Statutory accounting practices for the Company differ from GAAP as follows:
o Acquisition costs are charged to current operations as incurred; under
GAAP, acquisition costs are deferred and charged to operations as
related premiums are earned.
II-9
ACE GUARANTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
o Investments in fixed-maturity securities are reported at amortized
cost; under GAAP, these fixed-maturity investments are carried at fair
value.
o Certain assets designated as "non-admitted assets" are charged
directly to statutory capital and surplus; under GAAP, these are
reflected as assets.
o Portfolio reserves are established according to applicable insurance
law in the form of contingency reserves, and additions to such
contingency reserves are recorded as a direct reduction of
policyholders' surplus; under GAAP, portfolio reserves are established
based on the Company's reasonable estimate of losses incurred, and
reduce the Company's net income.
o Purchases of tax and loss bonds are reflected as admitted assets;
under GAAP, they are recorded as federal income tax payments.
o Financial guaranty premiums are earned in direct proportion to the
payment of debt service; under GAAP, premiums are earned pro rata over
the period of risk.
o The amount of deferred tax assets that may be admitted is generally
limited to the lesser of those assets the Company expects to realize
within one year of the balance sheet date or ten percent of the
Company's statutory capital and surplus, as adjusted for certain
items. In addition, the admitted deferred tax assets may not exceed
the amount of the Company's existing deferred tax liabilities. The net
change in the deferred tax assets and liabilities is recognized as a
separate component of gains and losses in unassigned surplus; under
GAAP, deferred taxes are recorded for any temporary differences
between the tax bases of assets or liabilities.
II-10
ACE GUARANTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following tables provide a reconciliation of the Company's GAAP net
income to statutory net income and GAAP stockholder's equity to statutory
surplus.
YEARS ENDED DECEMBER 31,
2002 2001 2000
(DOLLARS IN THOUSANDS)
GAAP net income $ 45,643 $ 43,576 $ 55,051
Deferred acquisition costs (8,212) (7,011) (2,573)
Deferral of income taxes (10,420) 11,036 4,896
Losses (12,303) (6,290) 9,503
Realized gain differential due to application of purchase (2,573) (687) (7,781)
accounting
Realized loss on affiliate - (7,955) -
Premium revenue recognition (6,578) (11,265) (10,040)
Cumulative effect of adopting a new accounting
standard, net - 22,800 -
Amortization of goodwill - 3,785 3,785
Fair value adjustment on derivative financial instruments 36,998 (5,051) -
Other 3,771 2,057 7,740
-------- -------- --------
Statutory net income $ 46,326 $ 44,995 $ 60,581
======== ======== ========
DECEMBER 31,
2002 2001
(DOLLARS IN THOUSANDS)
GAAP stockholder's equity $ 773,437 $ 705,770
Unrealized gain on fixed maturities
available for sale (64,682) (22,276)
Unrealized loss differential due to
application of purchase accounting 9,717 12,453
Premium revenue recognition (69,258) (63,118)
Contingency reserve (306,994) (223,144)
Deferred acquisition costs (135,884) (127,672)
Deferral of income taxes 53,567 49.145
Losses 21,728 46,258
Tax and loss bonds 17,134 16,937
Fair value of derivative financial instruments 67,023 30,025
Goodwill (87,062) (87,062)
Other 8,234 (3,293)
--------- ---------
Statutory policyholders' surplus $ 286,960 $ 334,023
========= =========
The decrease in statutory policyholders' surplus is related to the 2002
addition to contingency reserve. The addition to contingency reserve is
derived based on a statutorily mandated formula applied to exposure or
premium written without regard to credit quality or term. The Company
believes its contingency reserve is excessive relative to its historical
loss experience and inforce
II-11
ACE GUARANTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
exposure and has filed a request with the Maryland Insurance Administration
to release a portion of such reserve.
6. INSURANCE IN FORCE - FINANCIAL GUARANTY
At December 31, 2002 and 2001, net financial guaranty par in force
including insured credit default swaps ("CDS") was approximately $72.3
billion and $69.2 billion, respectively. The portfolio was broadly
diversified by payment source, geographic location and maturity schedule,
with no single risk representing more than 1.2% of the total net par in
force. The composition by sector was as follows:
NET PAR IN FORCE
YEARS ENDED DECEMBER 31,
SECTORS 2002 2001
(DOLLARS IN BILLIONS)
MUNICIPAL EXPOSURE:
Tax-backed $ 18.2 $ 17.0
Municipal utilities 9.1 9.3
Healthcare 5.6 5.6
Special revenue 7.7 7.4
Structured municipal 2.6 2.6
Other municipals 2.1 2.3
------- --------
TOTAL MUNICIPAL $ 45.3 $ 44.2
======= ========
Non-Municipal Exposure:
Collateralized debt obligations $ 10.2 $ 8.4
Consumer receivables 7.8 7.6
Single name corporate CDS 4.2 4.6
Commercial receivables 3.4 1.5
Other structured finance 1.4 2.9
------- --------
TOTAL NON-MUNICIPAL $ 27.0 $ 25.0
======= ========
TOTAL EXPOSURE $ 72.3 $ 69.2
======= ========
Maturities for municipal obligations range from 1 to 30 years, with the
average maturity in the 12 to 15 year range. Non-municipal transactions
have legal maturities that range from 1 to 30 years with an average life of
5 to 7 years. Maturities on single name corporate CDSs range from 1 to 5
years with an average remaining maturity of 1.7 years as of December 31,
2002.
The portfolio contained exposures in each of the 50 states. Net par in
force in California and New York comprised 8.3% and 6.3%, respectively, of
the total net par in force. Net par in force in all other states did not
individually exceed 5% of the total net par in force.
II-12
ACE GUARANTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As part of its financial guaranty business, the Company insures CDS
transactions written by its affiliate AGR Financial Products, whereby one
party pays a periodic fee in fixed basis points on a notional amount in
return for a contingent payment by the other party in the event one or more
defined credit events occurs with respect to one or more third party
reference securities or loans. A credit event may be a nonpayment event
such as a failure to pay, bankruptcy, or restructuring, as negotiated by
the parties to the CDS transaction. The total notional amount of insured
investment grade CDS exposure outstanding at December 31, 2002 and 2001 and
included in the Company's financial guaranty exposure was $17.0 billion and
$14.7 billion, respectively.
7. INVESTMENTS IN SECURITIES
The following summarizes the Company's aggregate investment portfolio at
December 31, 2002:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
(DOLLARS IN THOUSANDS)
Fixed maturity securities available for sale
U.S. Treasury securities and obligations
of U.S. Government agencies $ 73,000 s 4,936 $ - $ 77,936
Obligations of states and
political subdivisions 543,122 47,573 (53) 590,642
Corporate securities 69,426 6,247 (1) 75,672
Mortgage-backed securities 181,675 5,110 (38) 186,747
Asset-backed securities 29,152 919 (11) 30,060
----------- ----------- -------- -----------
TOTAL AVAILABLE-FOR-SALE 896,375 64,785 (103) 961,057
Short-term investments 52,384 - - 52,384
----------- ----------- -------- -----------
TOTAL INVESTMENTS $ 948,759 $ 64,785 $ (103) $ 1,013,441
=========== =========== ======== ===========
II-13
ACE GUARANTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following summarizes the Company's aggregate investment portfolio at
December 31, 2001:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
(DOLLARS IN THOUSANDS)
Fixed maturity securities available for sale
U.S. Treasury securities and obligations
of U.S. government agencies $ 63,639 $ 1,212 $ (191) $ 64,660
Obligations of states and
political subdivisions 452,690 20,095 (2,751) 470,034
Corporate securities 73,603 3,814 (71) 77,346
Mortgage-backed securities 197,631 723 (666) 197,688
Asset-backed securities 15,897 242 (131) 16,008
--------- -------- ------ ----------
TOTAL AVAILABLE-FOR-SALE 803,460 26,086 (3,810) 825,736
Short-term investments 72,093 - - 72,093
--------- -------- ------ ----------
TOTAL INVESTMENTS $875,553 $ 26,086 (3,810) $ 897,829
========= ======== ====== ==========
The amortized cost and estimated fair value of fixed maturity securities
available-for-sale at December 31, 2002, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
AMORTIZED ESTIMATED
COST FAIR VALUE
(DOLLARS IN THOUSANDS)
Maturity
Due within one year $ 3,017 $ 3,044
Due in 2004-2007 93,584 97,698
Due in 2008-2012 110,119 120,316
Due after 2012 507,980 553,251
Mortgage-backed securities 181,675 186,748
----------- ---------
Total $ 896,375 $ 961,057
=========== =========
II-14
ACE GUARANTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Realized gains and (losses) were as follows:
YEARS ENDED DECEMBER 31,
2002 2001 2000
(DOLLARS IN MILLIONS)
FIXED MATURITIES:
Gains $ 7.9 $ 20.3 $ 9.6
Losses (1.0) (10.1) (2.2)
-------- ------ -------
6.9 10.2 7.4
Fair value adjustment on derivative financial instruments (37.0) 5.1 -
-------- ------ -------
Net realized (losses) gains on investments $ (30.1) $ 15.3 $ 7.4
======== ====== =======
Approximately 18.4% of the Company's total investment portfolio at December
31, 2002 was composed of mortgage-backed securities ("MBS"), including
collateralized mortgage obligations and commercial mortgage-backed
securities. Of the securities in the MBS portfolio, approximately 82.2%
were backed by agencies or entities sponsored by the U.S. government. As of
December 31, 2002, the weighted average credit quality of the Company's
entire investment portfolio was AA+.
Net investment income is derived from the following sources:
YEARS ENDED DECEMBER 31,
2002 2001 2000
(DOLLARS IN THOUSANDS)
Income from fixed maturity securities $46,648 $43,738 $42,559
Income from short-term investments 865 3,515 5,668
------- ------- -------
TOTAL INVESTMENT INCOME 47,513 47,253 48,227
Less investment expenses (783) (766) (731)
------- ------- -------
Net investment income $46,730 $46,487 $47,496
======= ======= =======
Under agreements with its cedents and in accordance with statutory
requirements, the Company maintains fixed maturity securities in trust
accounts for the benefit of reinsured companies and for the protection of
policyholders, generally in states in which the Company or its
subsidiaries, as applicable, are not licensed or accredited. The carrying
amount of such restricted balances amounted to approximately $62.4 million
and $58.4 million at December 31, 2002 and 2001, respectively.
As part of its insured CDS business, the Company is party to certain
contractual agreements that require collateral to be posted for the benefit
of either party depending on ratings of the parties to the agreement and
mark-to-market movements relative to applicable specified thresholds of the
insured swap transactions. As of December 31, 2002, the Company posted
collateral of $19.9 million for the benefit of CDS customers.
II-15
ACE GUARANTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. RESERVES FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and ending
reserve balances for unpaid losses and loss adjustment expenses ("LAE").
YEARS ENDED DECEMBER 31,
2002 2001 2000
(DOLLARS IN THOUSANDS)
Reserves for unpaid losses and LAE, net of related
reinsurance recoverables, at beginning of year $ 70,076 $ 64,833 $ 55,635
Add
Provision for unpaid losses and LAE for claims
occurring in the current year, net of reinsurance 35,506 12,991 9,463
Decrease in estimated losses and LAE for claims
occurring in prior years, net of reinsurance (10,993) (7,116) (354)
---------- ---------- -----------
Incurred losses during the current year, net of
reinsurance 24,513 5,875 9,109
---------- ---------- -----------
Deduct
Losses and LAE payments (net of recoverables)
for claims occurring in the current year 27,799 5,884 -
Losses and LAE payments (net of recoverables)
for claims occurring in the prior year 3,054 (5,252) (89)
---------- ---------- -----------
30,853 632 (89)
---------- ---------- -----------
Reserve for unpaid losses and LAE, net of related
reinsurance recoverables, at end of year 63,736 70,076 64,833
Unrealized foreign exchange (gain) loss on reserve
revaluation 805 (143) (105)
Reinsurance recoverable on unpaid losses and LAE,
at end of year 11,420 588 7,015
---------- ---------- -----------
Reserve for unpaid losses and LAE, gross of
reinsurance recoverables on unpaid losses at end
of year $ 75,961 $ 70,521 $ 71,743
========== ========== ===========
9. INCOME TAXES
The Corporation and its direct and indirect U.S. subsidiaries, ACE Guaranty
Corp, ACE Risk Assurance Company, ACE Asset Management, AGR Financial
Products and AFP Transferor Inc. prepare a consolidated federal income tax
return with ACE Prime Holding Inc, an immediate owner of the Corporation.
Each company pays its proportionate share of the consolidated federal tax
burden, the proportion determined by reference to the amount a company
would have been liable to pay, had such company filed on a separate return
basis with current credit for net losses. The Company's effective federal
tax rate for 2002 is 19%.
II-16
ACE GUARANTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Reconciliation from the tax provision calculated at the federal statutory
rate of 35% in 2002, 2001 and 2000 to the total tax is as follows:
YEARS ENDED DECEMBER 31,
2002 2001 2000
(DOLLARS IN THOUSANDS)
Tax provision at statutory rate $ 19,625 $ 32,256 $ 26,500
Tax-exempt interest (8,297) (7,053) (7,179)
Other (901) 582 1,342
----------- ----------- -----------
TOTAL FEDERAL INCOME TAX PROVISION $ 10,427 $ 25,785 $ 20,663
=========== =========== ===========
The deferred federal income tax liability reflects the tax effect of the
following temporary differences:
YEARS ENDED DECEMBER 31,
2002 2001
(DOLLARS IN THOUSANDS)
Deferred tax assets
Portfolio reserves $ 15,243 $ 16,241
Tax and loss bonds 16,071 16,071
Fair value of derivative financial instruments 23,458 10,509
----------- --------
TOTAL DEFERRED TAX ASSETS 54,772 42,521
Deferred tax liabilities
Deferred acquisition costs 47,559 44,685
Contingency reserve 28,124 28,124
Deferred premium revenue 10,600 9,739
Unrealized gain on fixed maturity securities
available for sale 22,638 7,796
Discounting of loss reserves (24) 2,618
Other (558) (996)
----------- --------
TOTAL DEFERRED TAX LIABILITIES 108,339 91,966
----------- --------
NET DEFERRED LIABILITY FOR FEDERAL
INCOME TAXES $ 53,567 $ 49,145
=========== ========
Under the terms of the tax sharing agreement the Company's current income
tax payable to the Corporation was $8.5 million and $2.2 million at
December 31, 2002 and 2001, respectively. Income taxes paid in 2002, 2001
and 2000, were $10.8 million, $7.3 million and $14.1 million, respectively.
II-17
ACE GUARANTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. REINSURANCE CEDED
To limit its exposure on assumed risks, the Company enters into certain
proportional and nonproportional retrocessional agreements that cede a
portion of risks underwritten to other insurance companies. In the event
that any or all of the reinsurers are unable to meet their obligations, the
Company would be liable for such defaulted amounts.
For the years ended December 31, 2002, 2001 and 2000, ceded earned premiums
were $15.0 million, $12.8 million and $12.2 million, respectively. Ceded
losses incurred for 2002, 2001 and 2000 were $11.3 million, $0.6 million
and $(1.5) million, respectively.
11. INSURANCE REGULATIONS
Under Maryland's 1993 revised insurance law, the amount of surplus
available for distribution as dividends is subject to certain statutory
provisions, which generally prohibit the payment of dividends in any
twelve-month period in an aggregate amount exceeding 10% of policyholders'
surplus (at the preceding December 31) without prior approval of the
Maryland Commissioner of Insurance. The amount available for distribution
from the Company during 2003 with notice to, but without prior approval of,
the Maryland Commissioner of Insurance under Maryland insurance law is
approximately $28.7 million. During the years ended December 31, 2002,
2001, and 2000, the Company paid $8.0 million, $5.5 million and $5.5
million, respectively, in dividends to the Corporation.
Under Maryland insurance regulations, the Company is required at all times
to maintain a minimum surplus of $750,000.
12. INTERCOMPANY TRANSACTIONS
EXPENSE SHARING AGREEMENTS
Effective October 2000, the Company entered into an agreement with ACE
Capital Re Overseas, Ltd. ("ACRO"), an affiliate, pursuant to which certain
expenses for employee salaries and shared resources such as office space,
office supplies and management information system services are allocated to
each company according to annual predetermined percentages. The percentages
are determined based on each company's weighted average salary expense.
The Company is also party to various inter-company service agreements
whereby it provides support services (credit analysis, surveillance,
accounting, MIS, legal and administrative services) to certain affiliates.
For the years ended December 31, 2002, 2001 and 2000, the Company was paid
approximately $9.2 million, $6.2 million and $5.3 million, respectively,
under its expense sharing agreements.
In addition to expense sharing agreements, the Company entered into
employee leasing agreements with affiliates. Under the agreements, the
Company will provide staffing services and will be reimbursed for
compensation costs. For the years ended December 31, 2002, 2001 and 2000,
the Company was paid approximately $8.3 million, $6.8 million and $5.5
million under its employee leasing agreements.
II-18
ACE GUARANTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
REINSURANCE AGREEMENTS
The Company cedes business to affiliated entities under certain reinsurance
agreements. Amounts deducted from the premiums, losses and commissions in
2002, 2001 and 2000 for reinsurance ceded to affiliates are reflected in
the table below.
2002 2001 2000
(DOLLARS IN THOUSANDS)
CEDED ACTIVITY:
Written premium $ 28,327 $ 29,982 $ 3,132
Earned premium 9,111 8,227 3,772
Losses and LAE incurred 11,339 420 (1,334)
Commissions incurred 71 111 159
Unearned premium reserve 45,238 26,022 4,266
Unpaid losses and LAE 11,419 406 182
The Company also writes business with affiliated entities under insurance
and reinsurance agreements. The approximate amounts included in premiums,
losses and commissions in 2002, 2001 and 2000 for business assumed from
affiliates are reflected in the table below.
2002 2001 2000
(DOLLARS IN THOUSANDS)
GROSS ACTIVITY'
Written premium $ 44,096 $ 28,410 $ 14,261
Earned premium 37,852 23,905 14,514
Losses and LAE incurred 22,449 4,139 -
Commissions incurred 626 35 29
Unearned premium reserve 11,796 4,376 1,146
Unpaid losses and LAE 10,849 5,651 -
13. COMMITMENTS AND CONTINGENCIES
At December 31, 2002, future minimum rental payments under the terms of the
Company's non-cancelable operating lease for office space are $3.4 million
for the year 2003, $3.3 million for the year 2004, $3.4 million for each of
the years 2005, 2006 and 2007 and $5.2 million in aggregate thereafter.
These payments are subject to escalations in building operating costs and
real estate taxes. Rent expense for the years ended December 31, 2002, 2001
and 2000 was approximately $2.5 million, $2.2 million and $1.2 million,
respectively. Rent expense is shared with ACRO pursuant to the agreement
discussed in Note 12.
Various lawsuits have arisen in the ordinary course of the Company's
business. Contingent liabilities arising from litigation, income tax and
other matters are not considered material in relation to the Company's
financial position, results of operations or liquidity.
II-19
ACE GUARANTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. CONCENTRATIONS
Of the Company's total gross premiums written for the year ended December
31, 2002, 17.7% and 25.5% came from Municipal Bond Investors Assurance
Company and Financial Security Assurance, respectively, two of four
monoline primary financial guaranty companies. The Company's client base
includes all six monolines, many banks and several European insurance and
reinsurance companies.
15. CREDIT FACILITY
The Company is party to a non-recourse credit facility with a syndicate of
banks which provides up to $175 million specifically designed to provide
rating agency qualified capital to further support the Company's claim
paying resources. This agreement expires November 2009.
The Company has entered into the following credit facilities which are
available for general corporate purposes:
(i) The Company participates in a liquidity facility established for the
benefit of ACE Limited and certain of its subsidiaries. The overall
facility is a 364 day credit agreement in the amount of $800 million
with a syndicate of banks. The Company has a $50 million participation
in the facility.
(ii) The Company also participates in a liquidity facility established for
the benefit of ACE Guaranty. The overall facility is a 364 day credit
agreement in the amount of $100 million with a syndicate of banks.
(iii)The Company has a $75 million line of credit facility from ACE-INA.
As of December 31, 2002, the Company has not drawn any amounts under its
credit facilities.
16. SUBSEQUENT EVENT
On December 2, 2003, ACE Limited announced its intention to pursue an
initial public offering of its financial guaranty business. The new company
will be a Bermuda-based holding company that will acquire the stock of ACE
Limited's subsidiaries that conduct its financial guaranty business, which
include ACE Guaranty Corp. and ACE Capital Re International Ltd. The new
company filed a registration statement with the U.S. Securities and
Exchange Commission on December 23, 2003 and expects to complete the IPO in
the first half of 2004, subject to market conditions and receipt of various
regulatory approvals.
ACE Limited expects to offer approximately 65% to 75% of its interest in
the new company. The amount ACE Limited will receive in the IPO will depend
on market conditions and on other factors.
II-20
ACE GUARANTY CORP.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 DECEMBER 31, 2002
(UNAUDITED)
ASSETS
Fixed maturity securities available for sale, at fair value (amortized cost:
( $1,030,402 at September 30, 2003 and $896,375 at December 31, 2002) $1,100,540 $961,057
Short-term investments 54,917 52,384
---------- ----------
TOTAL INVESTMENTS 1,155,457 1,013,441
========== ==========
Cash 10,595 3,081
Accrued investment income 13,893 12,138
Deferred acquisition costs 146,379 135,884
Prepaid reinsurance premiums 8,009 51,926
Reinsurance recoverable on ceded losses 0 11,420
Premium receivable 35,363 32,081
Goodwill 87,062 87,062
Other assets 11,271 12,341
---------- ----------
TOTAL ASSETS $1,468,029 $1,359,374
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Unearned premium reserve $385,858 $352,551
Reserve for losses and loss adjustment expenses 94,043 75,961
Deferred federal income tax payable 68,731 53,567
Current federal income tax payable 7,234 8,517
Fair value of derivative financial instruments 45,307 67,023
Other liabilities 20,929 28,318
---------- ----------
Total liabilities 622,102 585,937
========== ==========
STOCKHOLDER'S EQUITY
Common stock - $720 par value per share in 2002 and 2001: 200,000
authorized, 20,834 issued and outstanding in 2002 and 2001 15,000 15,000
Additional paid-in-capital 351,231 345,561
Unearned stock grant compenstaion (3,215) (2,056)
Retained earnings 437,321 372,889
Accumulated other comprehensive income -
net unrealized gain on fixed maturity securities
available for sale 45,590 42,043
---------- ----------
TOTAL STOCKHOLDER'S EQUITY 845,927 773,437
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,468,029 $1,359,374
========== ==========
II-21
ACE GUARANTY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE NINE MONTH PERIOD ENDING,
-------------------------------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
(UNAUDITED) (UNAUDITED)
REVENUES
Gross written premiums $ 170,865 $ 118,132
Ceded premium (36,806) 30,047
----------- ----------
Net written premiums 207,671 88,085
Increase (decrease) in unearned premium reserve (77,224) (10,608)
----------- ----------
Net premiums earned 130,447 77,477
Net investment income 34,785 35,130
Net realized gains 2,213 6,449
Net realized gain (loss) on derivative financial instruments 21,716 (59,362)
Other income 1,023 867
----------- ----------
TOTAL REVENUES 190,184 60,561
=========== ==========
EXPENSES
Losses and loss adjustment expenses 38,269 10,818
Acquisition costs 40,056 27,610
Increase in deferred acquisition costs (10,495) (8,744)
Other operating expenses 23,264 16,704
Foreign exchange gain (177) (98)
----------- ----------
TOTAL EXPENSES 90,917 46,290
=========== ==========
INCOME BEFORE PROVISION FOR FEDERAL INCOME TAXES 99,267 14,271
Provision (benefit) for federal income taxes
Current 14,830 7,647
Deferred 13,255 (9,745)
TOTAL PROVISION FOR FEDERAL INCOME TAXES 28,085 (2,098)
----------- ----------
NET INCOME $ 71,182 $ 16,369
=========== ==========
II-22
PROSPECTUS
MORTGAGE-BACKED/ASSET-BACKED SECURITIES (ISSUABLE IN SERIES)
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
________________________ THE SECURITIES
CONSIDER CAREFULLY Each issue of securities will have its own series designation and will evidence
THE RISK FACTORS either the ownership of assets in the related trust fund or debt obligations
BEGINNING ON PAGE 4 secured by assets of the related trust fund.
OF THIS PROSPECTUS.
o Each series of securities will consist of one or more classes of
The securities mortgage-backed or asset-backed certificates or notes.
represent obligations
of the trust only and o Each class of securities will represent the entitlement to a specified
do not represent an portion of interest payments and a specified portion of principal payments
interest in or on the trust assets.
obligation of the
depositor, the seller, o A series may include classes of securities that are senior in right of
the master servicer or payment to other classes. Classes of securities may be entitled to receive
any of their affiliates. distributions of principal, interest or both prior to other classes or
before or after specified events.
This prospectus may
be used to offer and o No market will exist for the securities of any series before they are
sell the securities only issued. In addition, even after the securities of a series have been
if accompanied by a issued and sold, there can be no assurance that a resale market for them
prospectus supplement will develop.
________________________
Offers of the securities will be made through Bear, Stearns & Co. Inc. and the
other underwriters listed in the related prospectus supplement.
THE TRUST FUND AND ITS ASSETS
As specified in the related prospectus supplement, each trust fund will consist
primarily of assets from one of the following categories:
o mortgage loans secured by senior or junior liens on one- to four-family
residential properties;
o closed-end and/or revolving home equity loans secured by senior or
junior liens on one- to four-family residential or mixed-use
properties;
o home improvement installment sales contracts and loan agreements that
are either unsecured or secured by senior or junior liens on one- to
four-family residential or mixed-use properties or by purchase money
security interests in the related home improvements;
o installment sales contracts and installment loan agreements secured by
senior or junior liens on manufactured homes or by mortgages on the
related real estate;
o mortgage-backed securities issued or guaranteed by Ginnie Mae, Freddie
Mac or Fannie Mae; and
o private label mortgage-backed or asset-backed securities.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
BEAR, STEARNS & CO. INC.
SEPTEMBER 25, 2003
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
o this prospectus, which provides general information, some of which may
not apply to a particular series; and
o the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series.
Although the accompanying prospectus supplement cannot contradict the
information contained in this prospectus, insofar as the prospectus supplement
contains specific information about a particular series of securities that
differs from the more general information contained in this prospectus, you
should rely on the information in the prospectus supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement.
Each prospectus supplement generally will include the following information with
respect to the related series of securities:
o the principal amount, interest rate and authorized denominations of
each class of securities;
o information concerning the mortgage loans, home equity loans, home
improvement contracts, manufactured housing contracts, mortgage backed
securities and/or private securities in the related trust fund;
o information concerning the seller or sellers of the mortgage loans,
home equity loans, home improvement contracts, manufactured housing
contracts, mortgage backed securities and/or private securities and
information concerning any servicer;
o the terms of any credit enhancement with respect to particular classes
of the securities;
o information concerning other trust fund assets, including any reserve
fund;
o the final scheduled distribution date for each class of securities;
o the method for calculating the amount of principal to be paid to each
class of securities, and the timing and order of priority of principal
payments;
2
o information about any REMIC or FASIT tax elections for some or all of
the trust fund assets; and
o particulars of the plan of distribution for the securities.
We include cross-references in this prospectus and the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The Table of Contents included in the accompanying
prospectus supplement lists the pages on which these captions are located.
There is also a Glossary of Terms beginning on page 125 where you will find
definitions of certain capitalized terms used in this prospectus.
If you require additional information, the mailing address of our principal
executive offices is Bear Stearns Asset Backed Securities, Inc., 383 Madison
Avenue, New York, New York, 10179 and our telephone number is (212) 272-2000.
For other means of acquiring additional information about us or a series of
securities, see "Incorporation of Certain Information by Reference" beginning on
page 122 of this prospectus.
3
RISK FACTORS
You should consider carefully the following information, together with the
information set forth under "Risk Factors" in the accompanying prospectus
supplement, since it identifies the principal risk factors associated with an
investment in the securities.
YOU MAY HAVE DIFFICULTY
SELLING YOUR SECURITIES OR
OBTAINING YOUR DESIRED PRICE............No market will exist for the
securities before they are issued. In
addition, we cannot give you any
assurance that a resale market will
develop following the issuance and
sale of any series of the securities.
Even if a resale market does develop,
you may not be able to sell your
securities when you wish or at the
price you want.
ONLY THE ASSETS OF THE RELATED
TRUST FUND ARE AVAILABLE TO PAY
YOUR SECURITIES............................The securities of each series will be
payable solely from the assets of the
related trust fund, including any
applicable credit enhancement, and
will not have a claim against the
assets of any other trust. In the
case of securities that are in the
form of notes, the related indenture
will require that noteholders proceed
only against the assets of the
related trust fund. We cannot give
you any assurance that the market
value of the assets in any trust fund
will be equal to or greater than the
total principal amount of the related
securities then outstanding, plus
accrued interest. Moreover, if the
assets of a trust fund are ever sold,
the sale proceeds will be applied
first to reimburse any related
trustee, servicer and credit
enhancement provider for their unpaid
fees and expenses before any
remaining amounts are distributed to
securityholders.
In addition, at the times specified
in the related prospectus supplement,
assets of the trust fund and the
related security accounts may be
released to the depositor, the
servicer, the credit enhancement
provider or other persons, if
o all payments then due on
the related securities have
been made, and
o any other payments
specified in the related
prospectus supplement have
been made.
Once released, such assets will no
longer be available to make payments
to securityholders.
4
You will have no recourse against the
depositor or any other person if any
required distribution on the
securities is not made or for any
other default. The only obligations
of the depositor with respect to a
trust fund or the related securities
would result from a breach of the
representations and warranties that
the depositor may make concerning the
trust assets. However, because of the
depositor's very limited assets, even
if the depositor should be required
to repurchase a loan from a
particular trust fund because of the
breach of a representation or
warranty, its sole source of funds
for the repurchase would be:
o funds obtained from
enforcing any similar
obligation of the
originator of the loan, or
o monies from any reserve
fund established to pay for
loan repurchases.
CREDIT ENHANCEMENT MAY BE
INSUFFICIENT TO PROVIDE AGAINST
PARTICULAR RISKS........................
Although credit enhancement is
intended to reduce the effect of
delinquent payments or loan losses on
particular classes of securities, the
amount of any credit enhancement is
subject to the limits described in
the related prospectus supplement. In
addition, the amount of credit
enhancement may decline or be
depleted before the related
securities are paid in full. As a
result, securityholders may suffer
losses.
PRINCIPAL PAYMENTS ON THE
LOANS MAY ADVERSELY AFFECT THE
AVERAGE LIFE OF, AND RATE OF
RETURN ON, YOUR SECURITIES.................You may be unable to reinvest the
principal payments on your securities
at a rate of return equal to the rate
on your securities. The timing of
principal payments on the securities
of a series will be affected by a
number of factors, including the
following:
o the extent of prepayments
on the underlying loans in
the trust fund or, if the
trust fund contains
underlying securities, on
the loans backing the
underlying securities;
o how payments of principal
are allocated among the
classes of securities of
that series as specified in
the related prospectus
supplement;
o if any party has an option
to terminate the related
trust early, the effect of
the exercise of the option;
5
o the rate and timing of
defaults and losses on the
assets in the related trust
fund;
o repurchases of assets in
the related trust fund as a
result of material breaches
of representations and
warranties made by the
depositor or a seller; and
o in the case of a trust fund
that contains revolving
credit line loans, any
provisions for
non-amortization, early
amortization or scheduled
amortization periods
described in the related
prospectus supplement.
All the above factors may affect the
yield to maturity of the securities.
THE INTEREST ACCRUAL PERIOD
MAY REDUCE THE EFFECTIVE YIELD
ON YOUR SECURITIES.........................Interest payable on the securities on
any given distribution date will
include all interest accrued during
the related interest accrual period.
Each prospectus supplement will
specify the interest accrual period
for the related securities. If
interest accrues during the calendar
month before the related distribution
date, your effective yield will be
less than it would be if the interest
accrual period ended the day before
the distribution date. As a result,
your effective yield at par may be
less than the indicated coupon rate.
LOANS WITH BALLOON PAYMENTS
MAY INCREASE YOUR RISK OF LOSS.............Certain underlying loans may not be
fully amortizing over their terms to
maturity and may require a
substantial principal payment (a
"balloon" payment) at their stated
maturity. Loans of this type involve
greater risk than fully amortizing
loans since the borrower generally
must be able to refinance the loan or
sell the related property prior to
the loan's maturity date. The
borrower's ability to do so will
depend on 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.
6
ADJUSTABLE RATE LOANS MAY BE
UNDERWRITTEN TO LESS STRINGENT
STANDARDS THAN FIXED RATE LOANS............A trust fund may include adjustable
rate loans that were underwritten on
the assumption that the borrowers
would be able to make higher monthly
payments in a relatively short period
of time. In fact, however, the
borrowers' income may not be
sufficient to meet their loan
payments as payment amounts increase,
thus increasing the risk of default.
JUNIOR LIEN LOANS GENERALLY ARE
RISKIER THAN SENIOR LIEN LOANS.............If the mortgage or home equity loans
in a trust fund are primarily in a
junior lien position, any proceeds
from liquidations, insurance
recoveries or condemnations must be
used first to satisfy the claims of
the related senior lien loans (and
related foreclosure expenses) before
being available to satisfy the junior
lien loans. In addition, a junior
mortgage lender may only foreclose
subject to the related senior
mortgage. As a result, the junior
mortgage lender must either pay the
related senior mortgage lender in
full, at or before the foreclosure
sale, or agree to make the regular
payments on the senior mortgage. The
trust will not have a source of funds
to satisfy any senior mortgages or to
continue making payments on them. As
a result, the trust's ability, as a
practical matter, to foreclose on any
junior mortgage loan will be quite
limited.
A DECLINE IN PROPERTY VALUES
COULD REDUCE THE AMOUNT AND
DELAY THE TIMING OF RECOVERIES
ON DEFAULTED MORTGAGE LOANS................The following factors, among others,
could adversely affect property
values in such a way that the
outstanding balance of the related
loans, together with any senior
financing on the same properties,
would equal or exceed those values:
o an overall decline in the
residential real estate
markets where the
properties are located;
o failure of borrowers to
maintain their properties
adequately; and
o natural disasters that may
not be covered by hazard
insurance, such as
earthquakes and floods.
If property values decline, actual
rates of delinquencies, foreclosures
and losses on the underlying loans
could be higher than those currently
experienced by the mortgage lending
industry in general.
7
SOME MORTGAGED PROPERTIES
MAY NOT BE OWNER OCCUPIED................The mortgaged properties in the trust
fund may not be owner occupied. Rates
of delinquencies, foreclosures and
losses on mortgage loans secured by
non-owner occupied properties may be
higher than those on mortgage loans
secured by the borrower's primary
residence.
HOME IMPROVEMENT CONTRACTS
AND OTHER LOANS MAY NOT HAVE
SUFFICIENT SECURITY........................A trust fund may include home
improvement contracts that are not
secured by an interest in real estate
or otherwise. A trust fund may also
include mortgage or home equity loans
with original loan-to-value ratios
(or combined loan-to-value ratios in
the case of junior loans) greater
than 100%. In these cases, the trust
fund could be treated as a general
unsecured creditor for the unsecured
portion of these loans.
If a loan of this type goes into
default, the trust fund will have
recourse only against the borrower's
assets generally for the unsecured
portion of the loan, along with the
borrower's other general unsecured
creditors. In a bankruptcy
proceeding, the unsecured portion of
the loan may be discharged, even if
the value of the borrower's assets
available to the trust fund would be
insufficient to pay the remaining
amounts owing on the loan.
HOME IMPROVEMENT CONTRACTS
WILL NOT BE STAMPED........................The depositor will ensure that a
UCC-1 financing statement is filed
that identifies as collateral the
home improvement contracts included
in a trust fund. However, unless the
related prospectus supplement
provides otherwise, the home
improvement contracts themselves will
not be stamped or marked to reflect
their assignment to the trust fund.
Thus, if as a result of negligence,
fraud or otherwise, a subsequent
purchaser were able to take physical
possession of the contracts without
notice of the assignment to the trust
fund, the interests of the related
securityholders in those contracts
could be defeated.
8
IF AMOUNTS IN ANY PRE-FUNDING
ACCOUNT ARE NOT USED TO
PURCHASE TRUST ASSETS, YOU WILL
RECEIVE A PREPAYMENT ON THE
RELATED SECURITIES....................... The related prospectus supplement may
provide that the depositor or seller
will deposit a specified amount in a
pre-funding account on the date the
securities are issued. In this case,
the deposited funds may be used only
to acquire additional assets for the
trust during a specified period after
the initial issuance of the
securities. Any amounts remaining in
the account at the end of that period
will be distributed as a prepayment
of principal to the holders of the
related securities. The resulting
prepayment could adversely affect the
yield to maturity on those
securities.
BANKRUPTCY LAWS MAY RESULT
IN ADVERSE CLAIMS AGAINST TRUST
FUND ASSETS................................The federal bankruptcy code and state
debtor relief laws may adversely
affect the ability of the trust fund,
as a secured lender, to realize upon
its security. For example, in a
federal bankruptcy proceeding, a
lender may not foreclose on mortgaged
property without the bankruptcy
court's permission. Similarly, the
debtor may propose a rehabilitation
plan, in the case of mortgaged
property that is not his principal
residence, that would reduce the
amount of the lender's secured
indebtedness to the value of the
property as of the commencement of
the bankruptcy. As a result, the
lender would be treated as a general
unsecured creditor for the reduced
amount, the amount of the monthly
payments due on the loan could be
reduced, and the interest rate and
loan payment schedule could be
changed.
Any such actions could result in
delays in receiving payments on the
loans underlying the securities and
result in the reduction of total
payments.
ENVIRONMENTAL RISKS MAY
ADVERSELY AFFECT TRUST FUND ASSETS.........Federal, state and local laws and
regulations impose a wide range of
requirements on activities that may
affect the environment, health and
safety. In certain circumstances,
these laws and regulations impose
obligations on owners or operators of
residential properties such as those
that secure the loans. Failure to
comply with these laws and
regulations can result in fines and
penalties that could be assessed
against the trust fund as owner of
the related property.
9
In some states, a lien on the
property due to contamination has
priority over the lien of an existing
mortgage. Further, a mortgage lender
may be held liable as an "owner" or
"operator" for costs associated with
the release of petroleum from an
underground storage tank under
certain circumstances. If the trust
fund is considered the owner or
operator of a property, it will
suffer losses as a result of any
liability imposed for environmental
hazards on the property.
CONSUMER PROTECTION LAWS
MAY ADVERSELY AFFECT TRUST
FUND ASSETS................................The loans and contracts in each trust
fund also may be subject to federal
laws relating to loan origination and
underwriting. These laws
o require certain disclosures
to the borrowers regarding
the terms of the loans;
o prohibit discrimination on
the basis of age, race,
color, sex, religion,
marital status, national
origin, receipt of public
assistance or the exercise
of any right under the
consumer credit protection
act, in the extension of
credit;
o regulate the use and
reporting of information
related to the borrower's
credit experience; and
o require additional
application disclosures,
limit changes that may be
made to the loan documents
without the borrower's
consent and restrict a
lender's ability to declare
a default or to suspend or
reduce a borrower's credit
limit to certain enumerated
events.
Loans may also be subject to federal
laws that impose additional
disclosure requirements on creditors
with respect to non-purchase money
mortgage loans with high interest
rates or high up-front fees and
charges. These laws can impose
specific liabilities upon creditors
that fail to comply and may affect
the enforceability of the related
loans. In addition, the trust fund,
as assignee of the creditor, would
generally be subject to all claims
and defenses that the borrower could
assert against the creditor,
including the right to rescind the
loan.
10
Home improvement contracts may be
subject to federal laws that protect
the borrower from defective or
incomplete work by a contractor.
These laws permit the borrower to
withhold payment if the work does not
meet the quality and durability
standards agreed to between the
borrower and the contractor. These
laws have the effect of subjecting
the trust fund, as assignee of the
creditor, to all claims and defenses
which the borrower in a sale
transaction could assert against the
seller of defective goods.
If certain provisions of these
federal laws are violated, the
servicer may be unable to collect all
or part of the principal or interest
on the loans. The trust fund also
could be subject to damages and
administrative enforcement.
SUBORDINATE SECURITIES ARE
SUBJECT TO ADDITIONAL RISK................If you invest in any class of
subordinate securities, your rights
as an investor to receive payments
otherwise due you will be subordinate
to the rights of the servicer and the
holders of the related senior
securities. As a result, before
investing in any subordinate
securities, you must be prepared to
bear the risk that payments on your
securities may be delayed and that
you might not recover all of your
initial investment.
ANY CREDIT SUPPORT PROVIDED
BY FINANCIAL INSTRUMENTS MAY
BE INSUFFICIENT TO PROTECT
AGAINST PARTICULAR RISKS...................As described under "Credit
Enhancement--Financial Instruments"
in this prospectus, a trust fund may
include financial instruments to
protect against certain risks or to
provide certain cash flow
characteristics for particular
classes of the securities of a
series. If you invest in one of these
classes and the issuer of the
financial instruments fails to
perform its obligations, the yield to
maturity, market price and liquidity
of your securities could be
materially adversely affected. In
addition, if the issuer of the
related financial instruments
experiences a credit rating
downgrade, the market price and
liquidity of your securities could be
reduced. Finally, if the financial
instruments are intended to provide
an approximate or partial hedge for
certain risks or cashflow
characteristics, the yield to
maturity, market price and liquidity
of your securities could be adversely
affected to the extent that the
financial instrument does not provide
a perfect hedge.
11
REMIC RESIDUAL SECURITIES ARE
SUBJECT TO ADDITIONAL RISK.................If you invest in any class of
securities that represent the
"residual interest" in a real estate
mortgage investment conduit (REMIC),
you will be required to report as
ordinary income your pro rata share
of the REMIC's taxable income,
whether or not you actually received
any cash. Thus, as the holder of a
REMIC residual interest security, you
could have taxable income and tax
liabilities in a year that are in
excess of your ability to deduct
servicing fees and any other REMIC
expenses. In addition, because of
their special tax treatment, your
after-tax yield on a REMIC residual
interest security may be
significantly less than that of a
corporate bond with similar cash-flow
characteristics and pre-tax yield.
Transfers of REMIC residual interest
securities are also restricted.
FASIT OWNERSHIP SECURITIES
ARE SUBJECT TO ADDITIONAL RISK.............If you are a fully taxable domestic
corporation that invests in any class
of securities representing the
"ownership interest" in a financial
asset securitization investment trust
(FASIT), you will be required to
report as ordinary income your pro
rata share of the FASIT's taxable
income, whether or not you actually
received any cash. Thus, as the
holder of a FASIT ownership interest
security, you could have taxable
income and tax liabilities in a year
that are in excess of your ability to
deduct servicing fees and any other
FASIT expenses. In addition, because
of their special tax treatment, your
after-tax yield on a FASIT ownership
interest security may be
significantly less than that of a
corporate bond with similar cash-flow
characteristics and pre-tax yield.
Transfers of FASIT ownership interest
securities are also restricted.
BOOK-ENTRY REGISTRATION MAY
LIMIT YOUR ABILITY TO SELL
SECURITIES AND DELAY YOUR
RECEIPT OF PAYMENTS........................LIMIT ON LIQUIDITY OF SECURITIES.
Securities issued in book-entry form
may have only limited liquidity in
the resale market, since investors
may be unwilling to purchase
securities for which they cannot
obtain physical instruments.
LIMIT ON ABILITY TO TRANSFER OR
PLEDGE. Transactions in book-entry
securities can be effected only
through The Depository Trust Company,
its participating organizations, its
indirect participants and certain
banks. As a result, your ability to
transfer or pledge securities issued
in book-entry form may be limited.
12
DELAYS IN DISTRIBUTIONS. You may
experience some delay in the receipt
of distributions on book-entry
securities since the distributions
will be forwarded by the trustee to
DTC for DTC to credit to the accounts
of its participants. In turn, these
participants will credit the
distributions to your account either
directly or indirectly through
indirect participants.
RATINGS OF THE SECURITIES DO
NOT ADDRESS ALL INVESTMENT
RISKS AND MUST BE VIEWED WITH CAUTION......Any class of securities issued under
this prospectus and the accompanying
prospectus supplement will be rated
in one of the four highest rating
categories of a nationally recognized
rating agency. A rating is based on
the adequacy of the value of the
trust fund assets and any credit
enhancement for that class and
reflects the rating agency's
assessment of the likelihood that
holders of the class of securities
will receive the payments to which
they are entitled. A rating is not an
assessment of the likelihood that
principal prepayments on the
underlying loans will be made, the
degree to which the rate of
prepayments might differ from that
originally anticipated or the
likelihood of an early termination of
the securities. You should not view a
rating as a recommendation to
purchase, hold or sell securities
because it does not address the
market price or suitability of the
securities for any particular
investor.
There is no assurance that any rating
will remain in effect for any given
period or that the rating agency will
not lower or withdraw the rating in
the future. The rating agency could
lower or withdraw its rating due to:
o any decrease in the
adequacy of the value of
the trust fund assets or
any related credit
enhancement, or
o an adverse change in the
financial or other
condition of a credit
enhancement provider.
13
DESCRIPTION OF THE SECURITIES
GENERAL
Bear Stearns Asset Backed Securities, Inc., as depositor, will establish a
trust fund for each series of its securities. A particular series of
certificates will consist of mortgage-backed or asset-backed certificates or
notes or both certificates and notes.
Each series of certificates will be issued under a pooling and servicing
agreement or a trust agreement among the depositor, the trustee and, if the
trust fund includes loans, the related servicer. A form of pooling and servicing
agreement has been filed as an exhibit to the registration statement of which
this prospectus forms a part.
Each series of notes will be issued under an indenture between the related
trust fund and the trustee named in the prospectus supplement for that series. A
form of indenture has been filed as an exhibit to the registration statement of
which this prospectus forms a part. If the trust fund includes loans, the trust
fund and the servicer of the loans will also enter into a servicing agreement.
Each seller named in the related prospectus supplement, from which the
depositor will have purchased assets to be included in the trust fund, may agree
to reimburse the depositor for certain fees and expenses that the depositor
incurs in connection with the offering of the securities.
The following summaries describe the material provisions which may appear
in each pooling and servicing agreement or trust agreement, in the case of a
series of certificates, and in each indenture and servicing agreement, in the
case of a series of notes. The prospectus supplement for each series of
securities will describe any provision of the pooling and servicing agreement or
trust agreement, in the case of a series of certificates, and of the indenture
and servicing agreement, in the case of a series of notes, which materially
differs from the description contained in this prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the prospectus supplement and the
governing agreements for that series.
Each series of securities will consist of one or more classes which may be
compound interest securities, variable interest securities, planned balance
(PAC) securities, zero coupon securities, principal only securities, interest
only securities or participating securities. A series may also include one or
more classes of subordinated securities. The securities of each series will be
issued only in fully registered form, without coupons, in the authorized
denominations for each class specified in the related prospectus supplement.
Upon satisfaction of any conditions applicable to a particular class as
described in the related prospectus supplement, the transfer of the securities
may be registered, and the securities may be exchanged, at the office of the
trustee without the payment of any service charge, other than any tax or
governmental charge payable in connection with the registration of transfer or
exchange. If specified in the related prospectus supplement, one or more classes
of a series may be available in book-entry form only.
14
Unless otherwise provided in the related prospectus supplement, payments of
principal of and interest on a series of securities will be made on each
distribution date specified in the prospectus supplement by check mailed to
holders of that series, registered as such at the close of business on the
record date specified in the prospectus supplement that is applicable to that
distribution date, at their addresses appearing on the security register.
However, payments may be made by wire transfer (at the expense of the holder
requesting payment by wire transfer) in circumstances described in the
prospectus supplement. However, final payments of principal in retirement of
each security will be made only upon presentation and surrender of the security
at the office of the related trustee. Notice of the final payment on a security
will be mailed to each holder before the distribution date on which the final
principal payment is expected to be made.
Payments of principal of and interest on the securities will be made by the
trustee, or a paying agent on behalf of the trustee, as specified in the related
prospectus supplement. Unless otherwise provided in the related prospectus
supplement, the following amounts will be deposited directly into the collection
account established for a particular series of securities with the trustee (or
with the servicer in the name of the trustee):
o all payments with respect to the primary assets for that series (see,
"--The Primary Assets and Their Valuation" below), together with
reinvestment income thereon;
o amounts withdrawn from any cash, letters of credit, short-term
investments or other instruments acceptable to the rating agencies
identified in the prospectus supplement as rating that series and
deposited in each reserve fund for the series established in the name
of the trustee; and
o amounts available pursuant to any other credit enhancement for the
series.
If provided in the related prospectus supplement, the deposits may be net
of certain amounts payable to the servicer and any other person specified in the
prospectus supplement. These amounts thereafter will be deposited into the
separate distribution account established for the series and will be available
to make payments on the related securities on the next distribution date. See
"The Trust Funds--Collection and Distribution Accounts" in this prospectus.
THE PRIMARY ASSETS AND THEIR VALUATION
The primary assets of each trust fund may include one or more pools of the
following:
o Residential Loans,
o Home Equity Loans,
o Home Improvement Contracts,
o Manufactured Housing Contracts,
15
o Agency Securities, and
o Private Label Securities.
When we use the term "loans" in this prospectus, we include Residential
Loans, Home Equity Loans, Home Improvement Contracts and Manufactured Housing
Contracts. The residential or mixed-use properties that secure the loans are
collectively referred to in this prospectus as the "mortgaged properties."
If specified in the related prospectus supplement for a series of notes,
each primary asset included in the related trust fund will be assigned an
initial Asset Value. Unless otherwise specified in the related prospectus
supplement, the initial Asset Value of the primary assets of the trust fund will
be at least equal to the principal amount of the related notes on the date of
issuance.
PAYMENTS OF INTEREST
The securities of each class that by their terms are entitled to receive
interest will bear interest (calculated, unless otherwise specified in the
related prospectus supplement, on the basis of a 360-day year of twelve 30-day
months) from the date and at the rate specified in the prospectus supplement, or
will be entitled to receive interest payment amounts calculated in the method
described in the prospectus supplement. Interest on the interest-bearing
securities of a series will be payable on the distribution date specified in the
related prospectus supplement. The rate of interest on securities of a series
may be variable or may change with changes in the annual interest rates of the
loans (or underlying loans) included in the related trust fund and/or as
prepayments occur with respect to the loans (or underlying loans). Principal
only securities may not be entitled to receive any interest distributions or may
be entitled to receive only nominal interest distributions. Any interest on zero
coupon securities that is not paid on the related distribution date will accrue
and be added to principal on that date.
Interest payable on the securities on a distribution date will include all
interest accrued during the period specified in the related prospectus
supplement. In the event interest accrues during the calendar month preceding a
distribution date, the effective yield to holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the securities were to
accrue through the day immediately preceding that distribution date.
PAYMENTS OF PRINCIPAL
On each distribution date for a series, principal payments will be made to
the holders of the securities on which principal is then payable, to the extent
set forth in the prospectus supplement. The payments will be made in a total
amount determined as specified in the prospectus supplement and will be
allocated among the respective classes of the series in the manner, at the times
and in the priority (which may include allocation by random lot) set forth in
the prospectus supplement.
16
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date with respect to each class of a
series of notes is the date no later than which the total principal balance of
the class will be fully paid, and the final scheduled distribution date with
respect to each class of a series of certificates is the date on which the
principal balance of the class is expected to be reduced to zero, in each case
calculated on the basis of the assumptions applicable to that series described
in the related prospectus supplement. The final scheduled distribution date for
each class of a series will be specified in the related prospectus supplement.
Since payments on the primary assets of each trust fund will be used to
make distributions that reduce the outstanding principal amount of the related
securities, it is likely that the actual final distribution date of any class
will occur earlier, and may occur substantially earlier, than its final
scheduled distribution date. Furthermore, with respect to a series of
certificates, unless otherwise specified in the related prospectus supplement,
the actual final distribution date of any certificate may occur later than its
final scheduled distribution date as a result of delinquencies, defaults and
liquidations of the primary assets of the related trust fund. No assurance can
be given as to the actual prepayment experience with respect to any series. See
"--Weighted Average Lives of the Securities" below.
SPECIAL REDEMPTION
If so specified in the prospectus supplement relating to a series of
securities having other than monthly distribution dates, one or more classes of
the securities may be subject to special redemption, in whole or in part, on the
special redemption date specified in the related prospectus supplement if, as a
consequence of prepayments on the loans (or underlying loans) or low yields then
available for reinvestment, the entity specified in the prospectus supplement
determines, based on assumptions set forth in the applicable agreement, that the
available interest amount that will have accrued on the securities through the
designated interest accrual date specified in the related prospectus supplement
is less than the amount of interest that will have accrued on the securities to
that date. In this event and as further described in the related prospectus
supplement, the trustee will redeem a principal amount of outstanding securities
of the series sufficient to cause the available interest amount to equal the
amount of interest that will have accrued through the designated interest
accrual date for the securities outstanding immediately after the redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The depositor or the servicer or any other entity that may be designated in
the related prospectus supplement will have the option, on any distribution
date, to purchase one or more classes of certificates of any series or redeem,
in whole or in part, one or more classes of notes of any series under the
circumstances, if any, specified in the related prospectus supplement.
Alternatively, if the prospectus supplement for a series of certificates so
provides, the depositor, the servicer or another entity designated in the
prospectus supplement will have the option to cause an early termination of the
related trust fund by repurchasing all of the primary assets from the trust fund
on or after a date specified in the prospectus supplement, or on or after such
time as the total outstanding principal amount of the certificates or primary
assets (as specified in the
17
prospectus supplement) is equal to or less than the amount or percentage
specified in the prospectus supplement. Notice of the redemption, purchase or
termination must be given by the depositor or the trustee prior to the related
date. The redemption, purchase or repurchase price will be set forth in the
prospectus supplement. If specified in the prospectus supplement, in the event
that a REMIC election has been made, the trustee shall receive a satisfactory
opinion of counsel that the optional redemption, purchase or termination will be
conducted so as to constitute a "qualified liquidation" under Section 860F of
the Internal Revenue Code of 1986, as amended.
In addition, the prospectus supplement may provide other circumstances
under which holders of securities of a series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related primary assets.
WEIGHTED AVERAGE LIVES OF THE SECURITIES
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of the
security will be repaid to the investor. Unless otherwise specified in the
related prospectus supplement, the weighted average life of the securities of a
class will be influenced by the rate at which the amount financed under the
loans (or underlying loans relating to the Agency Securities or Private Label
Securities, as applicable), included in the trust fund for a series is paid,
whether in the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The prospectus supplement for each series of
securities will describe the prepayment standard or model, if any, that is used
and may contain tables setting forth the projected weighted average life of each
class of securities of the series and the percentage of the original principal
amount of each class of securities of the series that would be outstanding on
specified distribution dates based on the assumptions stated in the prospectus
supplement, including assumptions that prepayments on the loans (or underlying
loans relating to the Agency Securities or Private Label Securities, as
applicable) included in the related trust fund are made at rates corresponding
to various percentages of the prepayment standard or model specified in the
prospectus supplement.
There is, however, no assurance that prepayment of the loans (or underlying
loans relating to the Agency Securities or Private Label Securities, as
applicable) included in the related trust fund will conform to any level of any
prepayment standard or model specified in the related prospectus supplement. The
rate of principal prepayments on pools of loans may be influenced by a variety
of factors, including job-related factors such as transfers, layoffs or
promotions and personal factors such as divorce, disability or prolonged
illness. Economic conditions, either generally or within a particular geographic
area or industry, also may affect the rate of principal prepayments. Demographic
and social factors may influence the rate of principal prepayments in that some
borrowers have greater financial flexibility to move or refinance than do
others. The deductibility of mortgage interest payments, servicing decisions and
other factors also can affect the rate of principal prepayments. As a result,
there can be no
18
assurance as to the rate or timing of principal prepayments of the loans (or
underlying loans) either from time to time or over the lives of the loans (or
underlying loans).
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the loans (or
underlying loans) for a series, the loans are likely to prepay at rates higher
than if prevailing interest rates remain at or above the interest rates borne by
the loans. In this regard, it should be noted that the loans (or underlying
loans) for a series may have different interest rates. In addition, the weighted
average life of a class of securities may be affected by the varying maturities
of the loans (or underlying loans). If any loans (or underlying loans) for a
series have actual terms to stated maturity that are less than those that were
assumed in calculating the final scheduled distribution date of the related
securities, one or more classes of the series may be fully paid prior to their
respective final scheduled distribution date, even in the absence of prepayments
and a reinvestment return higher than the Assumed Reinvestment Rate established
by the rating agencies named in the related prospectus supplement.
THE TRUST FUNDS
GENERAL
The notes of each series will be secured by the pledge of the assets of the
related trust fund, and the certificates of each series will represent interests
in the assets of the related trust fund. Unless otherwise specified in the
related prospectus supplement, the trust fund of each series will include assets
purchased by the depositor from the seller composed of:
o the primary assets of the trust fund;
o amounts available from the reinvestment of payments on the primary
assets at any Assumed Reinvestment Rate that may be established by the
rating agencies specified in the related prospectus supplement;
o any credit enhancement in the form of an irrevocable letter of credit,
surety bond, insurance policy or other form of credit support;
o REO property consisting of any mortgaged property or home improvement
that secured a loan but which is acquired by foreclosure or deed in
lieu of foreclosure or repossession; and
o the amount, if any, initially deposited into the collection account or
distribution account(s) for the series as specified in the related
prospectus supplement.
The securities will be non-recourse obligations of the related trust fund.
Unless the prospectus supplement indicates otherwise, the assets of the trust
fund specified in the related prospectus supplement will serve as collateral
only for that series of securities. Holders of a series of notes may only
proceed against the collateral securing that series in the case of a default
19
with respect to the notes and may not proceed against any assets of the
depositor or the related trust fund not pledged to secure the notes.
The primary assets for a series will be sold by the seller to the depositor
or purchased by the depositor in the open market or in privately negotiated
transactions (which may include transactions with affiliates) and will be
transferred by the depositor to the related trust fund. Loans relating to a
series will be serviced by the servicer (which may be the seller) that is
specified in the related prospectus supplement. The servicer will service the
loans pursuant to a pooling and servicing agreement with respect to a series of
certificates, or a servicing agreement between the trust fund and servicer with
respect to a series of notes.
If the prospectus supplement so provides, a trust fund relating to a series
of securities may be a business trust formed under the laws of the state
specified in the prospectus supplement pursuant to a trust agreement between the
depositor and the trustee.
Each trust fund, prior to the initial offering of the related series of
securities, will have no assets or liabilities. No trust fund is expected to
engage in any activities other than:
o to acquire, manage and hold the related primary assets and other
assets contemplated in this prospectus and in the related prospectus
supplement, and the proceeds thereof,
o to issue the related securities,
o to make payments and distributions on the securities, and
o to perform certain related activities.
No trust fund is expected to have any source of capital other than its assets
and any related credit enhancement.
Primary assets included in the trust fund for a series may consist of any
combination of loans, Agency Securities and Private Label Securities, as and to
the extent the related prospectus supplement specifies.
THE LOANS
GENERAL. Loans in each trust fund may consist of Residential Loans, Home
Equity Loans, Home Improvement Contracts or Manufactured Housing Contracts. If
specified in the related prospectus supplement, the loans in the related trust
fund may include cooperative apartment loans secured by security interests in
shares issued by private, non-profit, cooperative housing corporations and in
the related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in the cooperatives' buildings. As more fully
described in the related prospectus supplement, the loans may be either
"conventional" loans or loans that are insured or guaranteed by a governmental
agency like the FHA or VA. The loans will have been originated in accordance
with the underwriting criteria specified in the related prospectus supplement.
20
In general, the loans in a pool will have monthly payments due on the first
day of each month. However, as described in the related prospectus supplement,
the loans in a pool may have payments due more or less frequently than monthly.
In addition, payments may be due on any day during a month. The payment terms of
the loans to be included in a trust fund will be described in the related
prospectus supplement and may include any of the following features, all as
described in this prospectus or in the related prospectus supplement:
o Interest may be payable at
- a fixed rate,
- a rate that adjusts from time to time in relation to an index
that will be specified in the related prospectus supplement,
- a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate,
- a rate that otherwise varies from time to time, or
- a rate that is convertible from an adjustable rate to a fixed
rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of these limitations. As
specified in the related prospectus supplement, the loans may provide for
payments in level monthly installments, for balloon payments, or for
payments that are allocated to principal and interest according to the "sum
of the digits" or "Rule of 78s" methods. Accrued interest may be deferred
and added to the principal of a loan for the periods and under the
circumstances as may be specified in the related prospectus supplement.
Loans may provide for the payment of interest at a rate lower than the
specified loan rate for a period of time or for the life of the loan, and
the amount of any difference may be contributed from funds supplied by the
seller of the property or another source.
o Principal may be
- payable on a level debt service basis to fully amortize the loan
over its term,
- calculated on the basis of an assumed amortization schedule that
is significantly longer than the original term to maturity or on
an interest rate that is different from the loan rate, or
- nonamortizing during all or a portion of the original term.
Payment of all or a substantial portion of the principal may be due on
maturity in the form of a balloon payment. Principal may include interest
that has been deferred and added to the principal balance of the loan.
21
o Monthly payments of principal and interest may
- be fixed for the life of the loan,
- increase over a specified period of time or
- change from period to period.
Loans may include limits on periodic increases or decreases in the amount
of monthly payments and may include maximum or minimum amounts of monthly
payments.
Prepayments of principal may be conditioned on payment of a prepayment fee,
which may be fixed for the life of the loan or may decline over time, and may be
prohibited for the life of the loan or for particular lockout periods. Some
loans may permit prepayments after expiration of the applicable lockout period
and may require the payment of a prepayment fee in connection with any
subsequent prepayment. Other loans may permit prepayments without payment of a
fee unless the prepayment occurs during specified time periods. The loans may
include "due on sale" clauses which permit the mortgagee to demand payment of
the entire loan in connection with the sale or transfers of the related
property. Other loans may be assumable by persons meeting the then applicable
underwriting standards of the related seller.
A trust fund may contain buydown loans that include provisions for a third
party to subsidize partially the monthly payments of the borrowers on those
loans during the early years of those loans, the difference to be made up from a
buydown fund contributed by that third party at the time of origination of the
loan. A buydown fund will be in an amount equal either to the discounted value
or full aggregate amount of future payment subsidies. The underlying assumption
of buydown plans is that the income of the borrower will increase during the
buydown period as a result of normal increases in compensation and inflation, so
that the borrower will be able to meet the full loan payments at the end of the
buydown period. If assumption of increased income is not fulfilled, the
possibility of defaults on buydown loans is increased. The related prospectus
supplement will contain information with respect to any buydown loan concerning
limitations on the interest rate paid by the borrower initially, on annual
increases in the interest rate and on the length of the buydown period.
When we use the term "mortgaged property" in this prospectus, we mean the
real property which secures repayment of the related loan. Home Improvement
Contracts and Manufactured Housing Contracts may, and the other loans will, be
secured by mortgages or deeds of trust or other similar security instruments
creating a lien on a mortgaged property. In the case of Home Equity Loans, the
related liens may be subordinated to one or more senior liens on the related
mortgaged properties as described in the prospectus supplement. As specified in
the related prospectus supplement, home improvement contracts and manufactured
housing contracts may be unsecured or secured by purchase money security
interests in the financed home improvements and the financed manufactured homes.
When we use the term "properties" in this prospectus supplement, we mean the
related mortgaged properties, home improvements and manufactured homes. The
properties relating to the loans will consist primarily of single-family
properties, meaning detached or semi-detached one- to four-family dwelling
units, townhouses, rowhouses, individual condominium units, individual units in
planned unit
22
developments and other dwelling units, or mixed-use properties. Any mixed-use
property will not exceed three stories and its primary use will be for one- to
four-family residential occupancy, with the remainder of its space for retail,
professional or other commercial uses. Any non-residential use will be in
compliance with local zoning laws and regulations. Properties may include
vacation and second homes, investment properties and leasehold interests. In the
case of leasehold interests, the term of the leasehold will exceed the scheduled
maturity of the related loan by a time period specified in the related
prospectus supplement. The properties may be located in any one of the fifty
states, the District of Columbia, Guam, Puerto Rico or any other territory of
the United States.
Loans with specified loan-to-value ratios and/or principal balances may be
covered wholly or partially by primary mortgage guaranty insurance policies. The
existence, extent and duration of any coverage provided by primary mortgage
guaranty insurance policies will be described in the related prospectus
supplement.
HOME EQUITY LOANS. The primary assets for a series may consist, in whole or
in part, of, closed-end home equity loans, revolving credit line home equity
loans or certain balances forming a part of the revolving credit line loans,
secured by mortgages creating senior or junior liens primarily on one- to
four-family residential or mixed-use properties. The full principal amount of a
closed-end loan is advanced at origination of the loan and generally is
repayable in equal (or substantially equal) installments of an amount sufficient
to fully amortize the loan at its stated maturity. Unless otherwise described in
the related prospectus supplement, the original terms to stated maturity of
closed-end loans will not exceed 360 months. Principal amounts of a revolving
credit line loan may be drawn down (up to the maximum amount set forth in the
related prospectus supplement) or repaid from time to time, but may be subject
to a minimum periodic payment. Except to the extent provided in the related
prospectus supplement, the trust fund will not include any amounts borrowed
under a revolving credit line loan after the cut-off date designated in the
prospectus supplement. As more fully described in the related prospectus
supplement, interest on each revolving credit line loan, excluding introductory
rates offered from time to time during promotional periods, is computed and
payable monthly on the average daily principal balance of that loan. Under
certain circumstances, a borrower under either a revolving credit line loan or a
closed-end loan may choose an interest-only payment option. In this case only
the amount of interest that accrues on the loan during the billing cycle must be
paid. An interest-only payment option may be available for a specified period
before the borrower must begin making at least the minimum monthly payment of a
specified percentage of the average outstanding balance of the loan.
The rate of prepayment on Home Equity Loans cannot be predicted. Home
Equity Loans have been originated in significant volume only during the past few
years and the depositor is not aware of any publicly available studies or
statistics on the rate of their prepayment. The prepayment experience of the
related trust fund may be affected by a wide variety of factors, including
general economic conditions, prevailing interest rate levels, the availability
of alternative financing and homeowner mobility and the frequency and amount of
any future draws on any revolving credit line loans. Other factors that might be
expected to affect the prepayment rate of a pool of Home Equity Loans include
the amounts of, and interest rates on, the underlying first mortgage loans, and
the use of first mortgage loans as long-term financing for home purchase and
junior mortgage loans as shorter-term financing for a variety of purposes,
including
23
home improvement, education expenses and purchases of consumer durables such as
automobiles. Accordingly, Home Equity Loans may experience a higher rate of
prepayment than traditional fixed-rate first mortgage loans. On the other hand,
because Home Equity Loans such as the revolving credit line loans generally are
not fully amortizing, the absence of voluntary borrower prepayments could cause
rates of principal payments to be lower than, or similar to, those of
traditional fully-amortizing first mortgage loans. Any future limitations on the
right of borrowers to deduct interest payments on Home Equity Loans for federal
income tax purposes may further increase the rate of prepayments of the Home
Equity Loans. Moreover, the enforcement of a "due-on-sale" provision (as
described below) will have the same effect as a prepayment of the related Home
Equity Loans. See "Material Legal Aspects of the Loans--Due-on-Sale Clauses in
Mortgage Loans" in this prospectus.
Collections on revolving credit line loans may vary for a number of
reasons, including those listed below.
o A borrower may make a payment during a month in an amount that is as
little as the minimum monthly payment for that month or, during the
interest-only period for certain revolving credit line loans (and, in
more limited circumstances, closed-end loans with respect to which an
interest-only payment option has been selected), the interest, fees
and charges for that month.
o A borrower may make a payment that is as much as the entire principal
balance plus accrued interest and related fees and charges during a
month.
o A borrower may fail to make the required periodic payment.
o Collections on the mortgage loans may vary due to seasonal purchasing
and the payment habits of borrowers.
Each single family property will be located on land owned in fee simple by
the borrower or on land leased by the borrower for a term at least ten years
(unless otherwise provided in the related prospectus supplement) greater than
the term of the related loan. Attached dwellings may include owner-occupied
structures where each borrower owns the land upon which the unit is built, with
the remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building. Unless otherwise specified in the related prospectus supplement,
mortgages on cooperative dwelling units consist of a lien on the shares issued
by the cooperative dwelling corporation and the proprietary lease or occupancy
agreement relating to the cooperative dwelling.
The aggregate principal balance of loans secured by single family
properties that are owner-occupied will be disclosed in the related prospectus
supplement. Unless otherwise specified in the prospectus supplement, the sole
basis for a representation that a given percentage of the loans are secured by
single family property that is owner-occupied will be either
o a representation by the borrower at origination of the loan either
that the underlying mortgaged property will be used by the borrower
for a period of at least six months
24
every year or that the borrower intends to use the mortgaged property
as a primary residence, or
o a finding that the address of the underlying mortgaged property is the
borrower's mailing address as reflected in the servicer's records.
To the extent specified in the related prospectus supplement, single family
properties may include non-owner occupied investment properties and vacation and
second homes.
HOME IMPROVEMENT CONTRACTS. The primary assets for a series may consist, in
whole or in part, of home improvement installment sales contracts and
installment loan agreements originated by home improvement contractors in the
ordinary course of business. As specified in the related prospectus supplement,
the Home Improvement Contracts will be either unsecured or secured by senior or
junior mortgages primarily on single family properties, or by purchase money
security interests in the related home improvements. Unless otherwise specified
in the applicable prospectus supplement, the Home Improvement Contracts will be
fully amortizing and may have fixed interest rates or adjustable interest rates
and may provide for other payment characteristics as described below and in the
related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the home
improvements securing the Home Improvement Contracts include, but are not
limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels.
MANUFACTURED HOUSING CONTRACTS. The trust fund assets for a series may
consist, in whole or part, of conventional manufactured housing installment
sales contracts and installment loan agreements originated by a manufactured
housing dealer in the ordinary course of business. As specified in the related
prospectus supplement, the Manufactured Housing Contracts will be secured by
manufactured homes, located in any of the fifty states or the District of
Columbia or by mortgages on the real estate on which the manufactured homes are
located.
The manufactured homes securing the Manufactured Housing Contracts will
consist of manufactured homes within the meaning of 42 United States Code,
Section 5402(6), or manufactured homes meeting those other standards as shall be
described in the related prospectus supplement. Section 5402(6) defines a
"manufactured home" as "a structure, transportable in one or more sections,
which, in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning and
electrical systems contained therein; except that the term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
Manufactured homes, unlike mortgaged properties, generally depreciate in
value. Consequently, at any time after origination it is possible, especially in
the case of contracts with
25
high loan-to-value ratios at origination, that the market value of a
manufactured home or home improvement may be lower than the principal amount
outstanding under the related contract.
ADDITIONAL INFORMATION. The selection criteria applicable to the loans will
be specified in the related prospectus supplement. These include, but are not
limited to, the combined loan-to-value ratios or loan-to-value ratios, as
applicable, original terms to maturity and delinquency information.
The loans for a series of securities may include loans that do not amortize
their entire principal balance by their stated maturity in accordance with their
terms but require a balloon payment of the remaining principal balance at
maturity, as specified in the related prospectus supplement. As further
described in the related prospectus supplement, the loans for a series of
securities may include loans that do not have a specified stated maturity.
The loans will be either conventional contracts or contracts insured by the
Federal Housing Administration (FHA) or partially guaranteed by the Veterans
Administration (VA). Loans designated in the related prospectus supplement as
insured by the FHA will be insured under various FHA programs as authorized
under the United States Housing Act of 1937, as amended. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured. Loans insured by the FHA generally require a minimum down payment of
approximately 5% of the original principal amount of the loan. No FHA-insured
loans relating to a series of securities may have an interest rate or original
principal amount exceeding the applicable FHA limits at the time or origination
of such loan.
The insurance premiums for loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development (HUD) and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to HUD or upon assignment of the defaulted loan to HUD. With respect to
a defaulted FHA-insured loan, the servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the servicer or HUD,
that default was caused by circumstances beyond the borrower's control, the
servicer is expected to make an effort to avoid foreclosure by entering, if
feasible, into one of a number of available forms of forbearance plans with the
borrower. Such plans may involve the reduction or suspension of regular mortgage
payments for a specified period, with such payments to be made upon or before
the maturity date of the mortgage, or the recasting of payments due under the
mortgage up to or beyond the maturity date. In addition, when a default caused
by such circumstances is accompanied by certain other criteria, HUD may provide
relief by making payments to the servicer in partial or full satisfaction of
amounts due under the loan (which payments are to be repaid by the borrower to
HUD) or by accepting assignment of the loan from the servicer. With certain
exceptions, at least three full monthly installments must be due and unpaid
under the loan and HUD must have rejected any request for relief from the
borrower before the servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear
26
interest at the applicable HUD debenture interest rate. The servicer of each
FHA-insured loan will be obligated to purchase any such debenture issued in
satisfaction of a loan upon default for an amount equal to the principal amount
of the debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted loan adjusted to reimburse the
servicer for certain costs and expenses and to deduct certain amounts received
or retained by the servicer after default. When entitlement to insurance
benefits results from foreclosure (or other acquisition of possession) and
conveyance to HUD, the servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to the date of foreclosure but in general only to the extent it was allowed
pursuant to a forbearance plan approved by HUD. When entitlement to insurance
benefits results from assignment of the loan to HUD, the insurance payment
includes full compensation for interest accrued and unpaid to the assignment
date. The insurance payment itself, upon foreclosure of an FHA-insured loan,
bears interest from a date 30 days after the borrower's first uncorrected
failure to perform any obligation to make any payment due under the loan and,
upon assignment, from the date of assignment to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Loans designated in the related prospectus supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended. The Serviceman's Readjustment Act permits a veteran (or
in certain instances, the spouse of a veteran) to obtain a mortgage loan
guaranty by the VA covering mortgage financing of the purchase of a one- to
four-family dwelling unit at interest rates permitted by the VA. The program has
no mortgage loan limits, requires no down payment from the purchaser and permits
the guarantee of mortgage loans of up to 30 years' duration.
The maximum guaranty that may be issued by the VA under a VA-guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. The
liability on the guaranty is reduced or increased pro rata with any reduction or
increase in the amount of indebtedness, but in no event will the amount payable
on the guaranty exceed the amount of the original guaranty. The VA may, at its
option and without regard to its guaranty, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA-guaranteed loan, the servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for the
guaranteed amount is submitted to the VA after liquidation of the related
mortgaged property.
The amount payable under a VA guaranty will be the percentage of the
VA-insured loan originally guaranteed by the VA applied to the indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guaranty will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the mortgaged
27
property. The amount payable under the guaranty may in no event exceed the
amount of the original guaranty.
The prospectus supplement for each series will provide information with
respect to the loans that are primary assets of the related trust fund as of the
cut-off date, including, among other things, and to the extent relevant:
o the aggregate unpaid principal balance of the loans;
o the range and weighted average interest rates on the loans and, in the
case of adjustable rate loans, the range and weighted average of the
current interest rates and the lifetime interest rate caps, if any;
o the range and average principal balance of the loans;
o the weighted average original and remaining terms to stated maturity
of the loans and the range of original and remaining terms to stated
maturity, if applicable;
o the range and weighted average of combined loan-to-value ratios or
loan-to-value ratios for the loans, as applicable;
o the percentage (by principal balance as of the cut-off date) of loans
that accrue interest at adjustable or fixed interest rates;
o any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the loans;
o the percentage (by principal balance as of the cut-off date) of loans
that are secured by mortgaged properties or home improvements or that
are unsecured;
o the geographic distribution of any mortgaged properties securing the
loans;
o for loans that are secured by single family properties, the percentage
(by principal balance as of the cut-off date) secured by shares
relating to cooperative dwelling units, condominium units, investment
property and vacation or second homes;
o the lien priority of the loans;
o the delinquency status and year of origination of the loans;
o whether the loans are closed-end loans and/or revolving credit line
loans; and
o in the case of revolving credit line loans, the general payments and
credit line terms of those loans and other pertinent features.
The prospectus supplement will also specify any other limitations on the
types or characteristics of the loans in the trust fund for the related series
of securities.
28
If information of the nature described above respecting the loans is not
known to the depositor at the time the securities are initially offered, more
general or approximate information of the nature described above will be
provided in the prospectus supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related series of securities and to be filed with the SEC
within 15 days after the initial issuance of the securities.
PRIVATE LABEL SECURITIES
GENERAL. Primary assets for a series may consist, in whole or in part, of
Private Label Securities or PLS (i.e., private mortgage-backed asset-backed
securities) that include:
o pass-through certificates representing beneficial interests in
underlying loans of a type that would otherwise be eligible to be
loans held directly by the trust fund, or
o collateralized obligations secured by underlying loans of a type that
would otherwise be eligible to be loans held directly by the trust
fund.
The Private Label Securities will previously have been
o offered and distributed to the public pursuant to an effective
registration statement, or
o purchased in a transaction not involving any public offering from a
person that is not an affiliate of the Private Label Securities at the
time of sale (nor its affiliate at any time during the three preceding
months) and a period of two years has elapsed since the date the
Private Label Securities were acquired from the issuer or its
affiliate, whichever is later.
Although individual underlying loans may be insured or guaranteed by the
United States or one of its agencies or instrumentalities, they need not be, and
the Private Label Securities themselves may be, but need not be, insured or
guaranteed.
The Private Label Securities will have been issued pursuant to a pooling
and servicing agreement, a trust agreement or similar agreement. The
seller/servicer of the underlying loans will have entered into a PLS agreement
with the PLS trustee. The PLS trustee, its agent or a custodian will take
possession of the underlying loans. The underlying loans will be serviced by the
PLS servicer directly or by one or more sub-servicers subject to the supervision
of the PLS servicer.
The issuer Private Label Securities will be
o a financial institution or other entity engaged generally in the
business of lending,
o a public agency or instrumentality of a state, local or federal
government, or
o a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling loans to
such trusts, and selling beneficial interests in trusts.
29
If specified in the prospectus supplement, the PLS issuer may be an affiliate of
the depositor. The obligations of the PLS issuer generally will be limited to
certain representations and warranties that it makes with respect to the assets
it conveys to the related trust. Unless otherwise specified in the related
prospectus supplement, the PLS issuer will not have guaranteed any of the assets
conveyed to the related trust or any of the Private Label Securities issued
under the PLS agreement.
Distributions of principal and interest will be made on the Private Label
Securities on the dates specified in the related prospectus supplement. The
Private Label Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Label Securities by the PLS trustee or
the PLS servicer. The PLS issuer or the PLS servicer may have the right to
repurchase the underlying loans after a certain date or under other
circumstances specified in the related prospectus supplement.
The loans underlying the Pri`vate Label Securities may be fixed rate, level
payment, fully amortizing loans or adjustable rate loans or loans having balloon
or other irregular payment features. The underlying loans will be secured by
mortgages on mortgaged properties.
CREDIT SUPPORT RELATING TO PRIVATE LABEL SECURITIES. Credit support in the
form of reserve funds, subordination of other private securities issued under
the PLS agreement, guarantees, cash collateral accounts, security policies or
other types of credit support may be provided with respect to the underlying
loans or with respect to the Private Label Securities themselves. The type,
characteristics and amount of credit support will be a function of the
characteristics of the underlying loans and other factors and will be based on
the requirements of the nationally recognized statistical rating organization
that rated the Private Label Securities.
ADDITIONAL INFORMATION. If the primary assets of a trust fund include
Private Label Securities, the related prospectus supplement will specify the
items listed below, to the extent relevant and to the extent information is
reasonably available to the depositor and the depositor reasonably believes the
information to be reliable:
o the total approximate principal amount and type of the Private Label
Securities to be included in the trust fund,
o the maximum original term to stated maturity of the Private Label
Securities,
o the weighted average term to stated maturity of the Private Label
Securities,
o the pass-through or certificate rate or range of rates of the Private
Label Securities,
o the PLS issuer, the PLS servicer (if other than the PLS issuer) and
the PLS trustee,
o certain characteristics of any credit support such as reserve funds,
security policies or guarantees relating to the underlying loans or to
the Private Label Securities themselves;
30
o the terms on which underlying loans may, or are required to, be
purchased prior to their stated maturity or the stated maturity of the
Private Label Securities, and
o the terms on which underlying loans may be substituted for those
originally underlying the Private Label Securities.
In addition, the related prospectus supplement will provide information about
the loans underlying the Private Label Securities, including
o the payment features of the underlying loans (i.e., whether closed-end
loans or revolving credit line loans, whether fixed rate or adjustable
rate, whether level payment or balloon payment loans),
o the approximate aggregate principal balance, if known, of the
underlying loans insured guaranteed by a governmental entity,
o the servicing fee or range of servicing fees with respect to the
underlying loans,
o the minimum and maximum stated maturities of the underlying loans at
origination,
o the lien priority of the underlying loans, and
o the delinquency status and year of origination of the underlying
loans.
The above disclosure may be on an approximate basis and will be as of the
date specified in the related prospectus supplement. If information of the
nature described above for the Private Label Securities is not known to the
depositor at the time the securities are initially offered, more general or
approximate information of a similar nature will be provided in the prospectus
supplement and the additional information, if available, will be set forth in a
Current Report on Form 8-K to be available to investors on the date of issuance
of the related series of securities and to be filed with the SEC within 15 days
of the initial issuance of the securities.
AGENCY SECURITIES
GINNIE MAE. The Government National Mortgage Association (Ginnie Mae) is a
wholly-owned corporate instrumentality of HUD. Section 306(g) of Title II of the
National Housing Act of 1934, as amended, authorizes Ginnie Mae to, among other
things, guarantee the timely payment of principal of and interest on
certificates which represent an interest in a pool of mortgage loans insured by
the FHA under the National Housing Act of 1934 or Title V of the National
Housing Act of 1949, or partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or Chapter 37 of Title 38 of the United
States Code.
Section 306 (g) of the National Housing Act of 1934 provides that "the full
faith and credit of the United States is pledged to the payment of all amounts
which may be required to be paid under any guarantee under this subsection." In
order to meet its obligations under any guarantee under Section 306 (g) of the
National Housing Act, Ginnie Mae may, under Section 306(d) of the National
Housing Act, borrow from the United States Treasury in an amount which
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is at any time sufficient to enable Ginnie Mae, with no limitations as to
amount, to perform its obligations under its guarantee.
GINNIE MAE CERTIFICATES. Each Ginnie Mae certificate held in a trust fund
for a series of securities will be a "fully modified pass-through"
mortgaged-backed certificate issued and serviced by a mortgage banking company
or other financial concern approved by Ginnie Mae or approved by Fannie Mae as a
seller-servicer of FHA loans and/or VA loans. Each Ginnie Mae certificate may be
a GNMA I certificate or a GNMA II certificate. The mortgage loans underlying the
Ginnie Mae certificates will consist of FHA loans and/or VA loans. Each mortgage
loan of this type is secured by a one- to four-family residential property or a
manufactured home. Ginnie Mae will approve the issuance of each Ginnie Mae
certificate in accordance with a guaranty agreement between Ginnie Mae and the
issuer and servicer of the Ginnie Mae certificate. Pursuant to its guaranty
agreement, a Ginnie Mae servicer will be required to advance its own funds in
order to make timely payments of all amounts due on each of the related Ginnie
Mae certificates, even if the payments received by the Ginnie Mae servicer on
the FHA loans or VA loans underlying each of those Ginnie Mae certificates are
less than the amounts due on those Ginnie Mae certificates.
The full and timely payment of principal of and interest on each Ginnie Mae
certificate will be guaranteed by Ginnie Mae, which obligation is backed by the
full faith and credit of the United States. Each Ginnie Mae certificate will
have an original maturity of not more than 40 years (but may have original
maturities of substantially less than 40 years). Each Ginnie Mae certificate
will provide for the payment by or on behalf of the Ginnie Mae servicer to the
registered holder of the Ginnie Mae certificate of scheduled monthly payments of
principal and interest equal to the registered holder's proportionate interest
in the aggregate amount of the monthly principal and interest payment on each
FHA loan or VA loan underlying the Ginnie Mae certificate, less the applicable
servicing and guarantee fee which together equal the difference between the
interest on the FHA loans or VA loans and the pass-through rate on the Ginnie
Mae certificate. In addition, each payment will include proportionate
pass-through payments of any prepayments of principal on the FHA loans or VA
loans underlying the Ginnie Mae certificate and liquidation proceeds in the
event of a foreclosure or other disposition of any the related FHA loans or VA
loans.
If a Ginnie Mae servicer is unable to make the payments on a Ginnie Mae
certificate as it becomes due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make the payment. Upon notification and request, Ginnie Mae will
make payments directly to the registered holder of a Ginnie Mae certificate. In
the event no payment is made by a Ginnie Mae servicer and the Ginnie Mae
servicer fails to notify and request Ginnie Mae to make the payment, the holder
of the related Ginnie Mae certificate will have recourse only against Ginnie Mae
to obtain the payment. The trustee or its nominee, as registered holder of the
Ginnie Mae certificates held in a trust fund, will have the right to proceed
directly against Ginnie Mae under the terms of the guaranty agreements relating
to the Ginnie Mae certificates for any amounts that are not paid when due.
Except for pools of mortgage loans secured by manufactured homes, all
mortgage loans underlying a particular Ginnie Mae certificate must have the same
interest rate over the term of the loan. The interest rate on a GNMA I
certificate will equal the interest rate on the mortgage
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loans included in the pool of mortgage loans underlying the GNMA I certificate,
less one-half percentage point per year of the unpaid principal balance of the
mortgage loans.
Mortgage loans underlying a particular GNMA II certificate may have annual
interest rates that vary from each other by up to one percentage point. The
interest rate on each GNMA II certificate will be between one-half percentage
point and one and one-half percentage points lower than the highest interest
rate on the mortgage loans included in the pool of mortgage loans underlying the
GNMA II certificate (except for pools of mortgage loans secured by manufactured
homes).
Regular monthly installment payments on each Ginnie Mae certificate will be
comprised of interest due as specified on a Ginnie Mae certificate plus the
scheduled principal payments on the FHA loans or VA loans underlying the Ginnie
Mae certificate due on the first day of the month in which the scheduled monthly
installments on the Ginnie Mae certificate is due. Regular monthly installments
on each Ginnie Mae certificate, are required to be paid to the trustee
identified in the related prospectus supplement as registered holder by the 15th
day of each month in the case of a GNMA I certificate, and are required to be
mailed to the trustee by the 20th day of each month in the case of a GNMA II
certificate. Any principal prepayments on any FHA loans or VA loans underlying a
Ginnie Mae certificate held in a trust fund or any other early recovery of
principal on a loan will be passed through to the trustee identified in the
related prospectus supplement as the registered holder of the Ginnie Mae
certificate.
Ginnie Mae certificates may be backed by graduated payment mortgage loans
or by "buydown" mortgage loans for which funds will have been provided, and
deposited into escrow accounts, for application to the payment of a portion of
the borrowers' monthly payments during the early years of those mortgage loans.
Payments due the registered holders of Ginnie Mae certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other Ginnie Mae certificates and will include amounts to
be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of the mortgage loans, will be less than the amount
of stated interest on the mortgage loans. The interest not so paid will be added
to the principal of the graduated payment mortgage loans and, together with
interest on that interest, will be paid in subsequent years. The obligations of
Ginnie Mae and of a Ginnie Mae issuer/servicer will be the same irrespective of
whether the Ginnie Mae certificates are backed by graduated payment mortgage
loans or "buydown" mortgage loans. No statistics comparable to the FHA's
prepayment experience on level payment, non-buydown loans are available in
inspect of graduated payment or buydown mortgages. Ginnie Mae certificates
related to a series of certificates may be held in book-entry form.
FANNIE MAE. The Federal National Mortgage Association (Fannie Mae) is a
federally chartered and privately owned corporation organized and existing under
the Federal National Mortgage Association Charter Act. Fannie Mae was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder-owned
and privately managed corporation by legislation enacted in 1968.
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Fannie Mae provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders. Fannie Mae acquires funds to purchase mortgage
loans from many capital market investors that may not ordinarily invest in
mortgages. In so doing, it expands the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas.
FANNIE MAE CERTIFICATES. Fannie Mae certificates are either guaranteed
mortgage pass-through certificates or stripped mortgage-backed securities. The
following discussion of Fannie Mae certificates applies equally to both types of
Fannie Mae certificates, except as otherwise indicated. Each Fannie Mae
certificate to be included in the trust fund for a series of securities will
represent a fractional undivided interest in a pool of mortgage loans formed by
Fannie Mae. Each pool formed by Fannie Mae will consist of mortgage loans of one
of the following types:
o fixed-rate level installment conventional mortgage loans,
o fixed-rate level installment mortgage loans that are insured by FHA or
partially guaranteed by the VA,
o adjustable rate conventional mortgage loans, or
o adjustable rate mortgage loans that are insured by the FHA or
partially guaranteed by the VA.
Each mortgage loan must meet the applicable standards set forth under the Fannie
Mae purchase program and will be secured by a first lien on a one- to
four-family residential property.
Each Fannie Mae certificate will be issued pursuant to a trust indenture.
Original maturities of substantially all of the conventional, level payment
mortgage loans underlying a Fannie Mae certificate are expected to be between
either eight to 15 years or 20 to 40 years. The original maturities of
substantially all of the fixed rate level payment FHA loans or VA loans are
expected to be 30 years.
Mortgage loans underlying a Fannie Mae certificate may have annual interest
rates that vary by as much as two percentage points from one another. The rate
of interest payable on a Fannie Mae guaranteed mortgage-backed certificate and
the series pass-through rate payable with respect to a Fannie Mae stripped
mortgage-backed security is equal to the lowest interest rate of any mortgage
loan in the related pool, less a specified minimum annual percentage
representing servicing compensation and Fannie Mae's guaranty fee. Under a
regular servicing option pursuant to which the mortgagee or other servicer
assumes the entire risk of foreclosure losses, the annual interest rates on the
mortgage loans underlying a Fannie Mae certificate will be between 50 basis
points and 250 basis points greater than the annual pass-through rate, in the
case of a Fannie Mae guaranteed mortgage-backed certificate, or the series
pass-through rate in the case of a Fannie Mae stripped mortgage-backed security.
Under a special servicing option pursuant to which Fannie Mae assumes the entire
risk for foreclosure losses, the annual interest rates on the mortgage loans
underlying a Fannie Mae certificate will generally be between 55 basis points
and 255 basis points greater than the annual pass-through rate, in the case of a
34
Fannie Mae guaranteed mortgage-backed certificate, or the series pass-through
rate in the case of a Fannie Mae stripped mortgage-backed security.
Fannie Mae guarantees to each registered holder of a Fannie Mae certificate
that it will distribute on a timely basis amounts representing the holder's
proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by the Fannie Mae certificate on the
underlying mortgage loans, whether or not received, and the holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated mortgage loan, whether or not the principal amount is
actually recovered. The obligations of Fannie Mae under its guarantees are
obligations solely of Fannie Mae and are not backed by, or entitled to, the full
faith and credit of the United States. If Fannie Mae were unable to satisfy its
obligations, distributions to holders of Fannie Mae certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of Fannie Mae certificates would
be affected by delinquent payments and defaults on those mortgage loans.
Fannie Mae stripped mortgage-backed securities are issued in series of two
or more classes, with each class representing a specified undivided fractional
interest in principal distributions and interest distributions, adjusted to the
series pass-through rate, on the underlying pool of mortgage loans. The
fractional interests of each class in principal and interest distributions are
not identical, but the classes in the aggregate represent 100% of the principal
distributions and interest distributions, adjusted to the series pass-through
rate, on the respective pool. Because of the difference between the fractional
interests in principal and interest of each class, the effective rate of
interest on the principal of each class of Fannie Mae stripped mortgage-backed
securities may be significantly higher or lower than the series pass-through
rate and/or the weighted average interest rate of the underlying mortgage loans.
Unless otherwise specified by Fannie Mae, Fannie Mae certificates
evidencing interests in pools of mortgages formed on or after May 1, 1985 will
be available in book-entry form only. Distributions of principal and interest on
each Fannie Mae certificate will be made by Fannie Mae on the 25th day of each
month to the persons in whose name the Fannie Mae certificate is entered in the
books of the Federal Reserve Banks, or registered on the Fannie Mae certificate
register in the case of fully registered Fannie Mae certificates as of the close
of business on the last day of the preceding month. With respect to Fannie Mae
certificates issued in book-entry form, distributions on the Fannie Mae
certificates will be made by wire, and with respect to fully registered Fannie
Mae certificates, distributions on the Fannie Mae certificates will be made by
check.
FREDDIE MAC. The Federal Home Loan Mortgage Corporation (Freddie Mac) is a
shareholder-owned, United States government-sponsored enterprise created
pursuant to the Federal Home loan Mortgage Corporation Act, Title III of the
Emergency Home Finance Act of 1970, as amended. The common stock of Freddie Mac
is owned by the Federal Home loan Banks. Freddie Mac was established primarily
for the purpose of increasing the availability of mortgage credit for the
financing of urgently needed housing. It seeks to provide an enhanced degree of
liquidity for residential mortgage investments primarily by assisting in the
development of secondary markets for conventional mortgages. The principal
activity of Freddie Mac currently consists of the purchase of first lien
conventional mortgage loans FHA loans, VA
35
loans or participation interests in those mortgage loans and the sale of the
loans or participations so purchased in the form of mortgage securities,
primarily Freddie Mac certificates. Freddie Mac is confined to purchasing, so
far as practicable, mortgage loans that it deems to be of the quality, type and
class which meet generally the purchase standards imposed by private
institutional mortgage investors.
FREDDIE MAC CERTIFICATES. Each Freddie Mac certificate included in a trust
fund for a series will represent an undivided interest in a pool of mortgage
loans that may consist of first lien conventional loans, FHA loans or VA loans.
Freddie Mac certificates are sold under the terms of a mortgage participation
certificate agreement. A Freddie Mac certificate may be issued under either
Freddie Mac's Cash Program or Guarantor Program. Typically, mortgage loans
underlying the Freddie Mac certificates held by a trust fund will consist of
mortgage loans with original terms to maturity of from ten to 40 years. Each of
those mortgage loans must meet the applicable standards set forth in the law
governing Freddie Mac. A Freddie Mac certificate group may include whole loans,
participation interests in whole loans and undivided interests in whole loans
and/or participations comprising another Freddie Mac certificate group. Under
the guarantor program, any Freddie Mac certificate group may include only whole
loans or participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable certificate rate on the registered holder's pro
rata share of the unpaid principal balance outstanding on the underlying
mortgage loans in the Freddie Mac certificate group represented by a Freddie Mac
certificate, whether or not received. Freddie Mac also guarantees to each
registered holder of a Freddie Mac certificate ultimate receipt by a holder of
all principal on the underlying mortgage loans, without any offset or deduction,
to the extent of that holder's pro rata share. However, Freddie Mac does not
guarantee, except if and to the extent specified in the prospectus supplement
for a series, the timely payment of scheduled principal. Under Freddie Mac's
Gold PC Program, Freddie Mac guarantees the timely payment of principal based on
the difference between the pool factor published in the month preceding the
month of distribution and the pool factor published in the related month of
distribution. Pursuant to its guarantees, Freddie Mac indemnifies holders of
Freddie Mac certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. Freddie Mac may remit
the amount due on account of its guarantee of collection of principal at any
time after default on an underlying mortgage loan, but not later than (x) 30
days following foreclosure sale, (y) 30 days following payment of the claim by
any mortgage insurer, or (z) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying Freddie Mac certificates, including the timing
of demand for acceleration, Freddie Mac reserves the right to exercise its
judgment with respect to the mortgage loans in the same manner as for mortgage
loans which it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each borrower, and Freddie Mac has not adopted
standards which require that the demand be made within any specified period.
36
Freddie Mac certificates are not guaranteed by the United States or by any
Federal Home loan Bank and do not constitute debts or obligations of the United
States or any Federal Home loan Bank. The obligations of Freddie Mac under its
guarantee are obligations solely of Freddie Mac and are not backed by, nor
entitled to, the full faith and credit of the United States. If Freddie Mac were
unable to satisfy its obligations, distributions to holders of Freddie Mac
certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on those mortgage loans.
Registered holders of Freddie Mac certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial prepayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or by the party that sold
the related mortgage loans to Freddie Mac. Freddie Mac is required to remit each
registered Freddie Mac certificateholder's pro rata share of principal payments
on the underlying mortgage loans, interest at the Freddie Mac pass-through rate
and any other sums like prepayment fees, within 60 days of the date on which
those payments are deemed to have been received by Freddie Mac.
Under Freddie Mac's Cash Program, with respect to pools formed prior to
June 1, 1987, there is no limitation on be amount by which interest rates on the
mortgage loans underlying a Freddie Mac certificate may exceed the pass-through
rate on the Freddie Mac certificate. With respect to Freddie Mac certificates
issued on or after June 1, 1987, the maximum interest rate on the mortgage loans
underlying the Freddie Mac certificates may exceed the pass-through rate of the
Freddie Mac certificates by 50 to 100 basis points. Under that program, Freddie
Mac purchases group of whole mortgage loans from sellers at specified
percentages of their unpaid principal balances, adjusted for accrued or prepaid
interest, which when applied to the interest rate of the mortgage loans and
participations purchased, results in the yield expressed as a percentage
required by Freddie Mac. The required yield, which includes a minimum servicing
fee retained by the servicer, is calculated using the outstanding principal
balance. The range of interest rates on the mortgage loans and participations in
a Freddie Mac certificate group under the Cash Program will vary since mortgage
loans and participations are purchased and assigned to a Freddie Mac certificate
group based upon their yield to Freddie Mac rather than on the interest rate on
the underlying mortgage loans.
Under Freddie Mac's Guarantor Program, the pass-through rate on a Freddie
Mac certificate is established based upon the lowest interest rate on the
underlying mortgage loans, minus a minimum servicing fee and the amount of
Freddie Mac's management and guaranty income as agreed upon between the seller
and Freddie Mac. For Freddie Mac certificate group formed under the Guarantor
Program with certificate numbers beginning with 18-012, the range between the
lowest and the highest annual interest rates on the mortgage loans in a Freddie
Mac certificate group may not exceed two percentage points.
Freddie Mac certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a Freddie Mac
certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the
37
purchaser became a registered holder of the Freddie Mac certificates. Subsequent
remittances will be distributed monthly to the registered holder so as to be
received normally by the 15th day of each month. The Federal Reserve Bank of New
York maintains book-entry accounts with respect to Freddie Mac certificates sold
by Freddie Mac on or after January 2, 1985, and makes payments of principal and
interest each month to the registered holders of Freddie Mac certificates in
accordance with the holders' instructions.
STRIPPED MORTGAGE-BACKED SECURITIES. Agency Securities may consist of one
or more stripped mortgage-backed securities, each as described in this
prospectus and in the related prospectus supplement. Each Agency Security of
this type will represent an undivided interest in all or part of either the
principal distributions or the interest distributions, or in some specified
portion of the principal and interest distributions, on particular Freddie Mac,
Fannie Mae, Ginnie Mae or other government agency or government-sponsored agency
certificates. The underlying securities will be held under a trust agreement by
Freddie Mac, Fannie Mae, Ginnie Mae or another government agency or
government-sponsored agency, each as trustee, or by another trustee named in the
related prospectus supplement. Freddie Mac, Fannie Mae, Ginnie Mae or another
government agency or government-sponsored agency will guarantee each stripped
agency security to the same extent as the applicable entity guarantees the
underlying securities backing the stripped Agency Security, unless otherwise
specified in the related prospectus supplement.
OTHER AGENCY SECURITIES. If specified in the related prospectus supplement,
a trust fund may include other mortgage pass-through certificates issued or
guaranteed by Ginnie Mae, Fannie Mae, Freddie Mac or other government agencies
or government-sponsored agencies. The characteristics of any other mortgage
pass-through certificates issued or guaranteed by Ginnie Mae, Fannie Mae,
Freddie Mac or other government agencies or government-sponsored agencies will
be described in that prospectus supplement. If so specified, a combination of
different types of Agency Securities may be held in a trust fund.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate collection account will be established by the trustee, or by the
servicer in the name of the trustee, for each series of securities for receipt
of
o the amount of any cash specified in the related prospectus supplement
to be initially deposited by the depositor in the collection account,
o all amounts received with respect to the primary assets of the related
trust fund, and
o unless otherwise specified in the related prospectus supplement,
income earned on the foregoing amounts.
As provided in the related prospectus supplement, certain amounts on deposit in
the collection account and certain amounts available under any credit
enhancement for the securities of that series will be deposited into the
applicable distribution account for distribution to the holders of the related
securities. The trustee will establish a separate distribution account for each
series of securities. Unless otherwise specified in the related prospectus
supplement, the trustee will
38
invest the funds in the collection account and the distribution account in
eligible investments including, among other investments, obligations of the
United States and certain of its agencies, federal funds, certificates of
deposit, commercial paper, demand and time deposits and banker's acceptances,
certain repurchase agreements of United States government securities and certain
guaranteed investment contracts, in each case acceptable to the rating agencies
named in the prospectus supplement. With certain exceptions, all such eligible
investments must mature, in the case of funds in the collection account, not
later than the day preceding the date when the funds are due to be deposited
into the distribution account or otherwise distributed and, in the case of funds
in the distribution account, not later than the day preceding the next
distribution date for the related series of securities.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any deposit agreement or minimum principal payment
agreement that may be specified in the related prospectus supplement.
If specified in the related prospectus supplement, a trust fund will
include one or more pre-funding accounts that are segregated trust accounts
established and maintained with the trustee for the related series. If specified
in the prospectus supplement, a portion of the proceeds of the sale of the
securities equal to the pre-funded amount will be deposited into the pre-funding
account on the closing date and may be used to purchase additional primary
assets during the pre-funding period specified in the prospectus supplement. In
no case will the pre-funded amount exceed 50% of the total principal amount of
the related securities, and in no case will the pre-funding period exceed one
year. The primary assets to be purchased generally will be selected on the basis
of the same criteria as those used to select the initial primary assets of the
trust fund, and the same representations and warranties will be made with
respect to them. If any pre-funded amount remains on deposit in the pre-funding
account at the end of the pre-funding period, the remaining amount will be
applied in the manner specified in the related prospectus supplement to prepay
the notes and/or the certificates of that series.
If a pre-funding account is established, one or more capitalized interest
accounts that are segregated trust accounts may be established and maintained
with the trustee for the related series. On the closing date for the series, a
portion of the proceeds of the sale of the related securities will be deposited
into the capitalized interest account and used to fund the excess, if any, of
o the sum of
o the amount of interest accrued on the securities of the series,
and
o if specified in the related prospectus supplement, certain fees
or expenses during the pre-funding period,
over
o the amount of interest available from the primary assets in the trust
fund.
39
Any amounts on deposit in the capitalized interest account at the end of
the pre-funding period that are not necessary for these purposes will be
distributed to the person specified in the related prospectus supplement.
CREDIT ENHANCEMENT
If so provided in the prospectus supplement relating to a series of
securities, simultaneously with the depositor's assignment of the primary assets
to the trustee, the depositor will obtain from an institution or by other means
acceptable to the rating agencies named in the prospectus supplement one or more
types of credit enhancement in favor of the trustee on behalf of the holders of
the related series or designated classes of the series. The credit enhancement
will support the payment of principal of and interest on the securities, and may
be applied for certain other purposes to the extent and under the conditions set
forth in the prospectus supplement. Credit enhancement for a series may include
one or more of the forms described below or any other form as may be specified
in the related prospectus supplement. If so specified in the related prospectus
supplement, the credit enhancement may be structured so as to protect against
losses relating to more than one trust fund.
SUBORDINATED SECURITIES
If specified in the related prospectus supplement, credit enhancement for a
series may consist of one or more classes of subordinated securities. The rights
of the holders of subordinated securities to receive distributions on any
distribution date will be subordinate in right and priority to the rights of
holders of senior securities of the same series, but only to the extent
described in the related prospectus supplement.
INSURANCE POLICIES, SURETY BONDS AND GUARANTIES
If so provided in the prospectus supplement for a series of securities,
deficiencies in amounts otherwise payable on the securities or on specified
classes will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Those instruments may cover, with
respect to one or more classes of securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related prospectus supplement. In addition, if specified in the
related prospectus supplement, a trust fund may also include bankruptcy bonds,
special hazard insurance policies, other insurance or guaranties for the purpose
of:
o maintaining timely payments or providing additional protection against
losses on the trust fund assets;
o paying administrative expenses; or
o establishing a minimum reinvestment rate on the payments made in
respect of those assets or principal payment rate on those assets.
40
Arrangements may include agreements under which securityholders are entitled to
receive amounts deposited in various accounts held by the trustee upon the terms
specified in the related prospectus supplement. A copy of any arrangement
instrument for a series will be filed with the SEC as an exhibit to a Current
Report on Form 8-K to be filed with the SEC following issuance of the securities
of the related series.
OVER-COLLATERALIZATION
If so provided in the prospectus supplement for a series of securities, a
portion of the interest payment on each loan included in the trust fund may be
applied as an additional distribution in respect of principal to reduce the
principal balance of a class or classes of securities and, thus, accelerate the
rate of payment of principal on that class or those classes of securities.
OTHER INSURANCE POLICIES
If specified in the related prospectus supplement, credit enhancement for a
series may consist of pool insurance policies, special hazard insurance
policies, bankruptcy bonds and other types of insurance relating to the primary
assets, as described below and in the related prospectus supplement.
POOL INSURANCE POLICY. If so specified in the related prospectus
supplement, the depositor will obtain a pool insurance policy for the loans in
the related trust fund. The pool insurance policy will cover any loss (subject
to the limitations described in the prospectus supplement) by reason of default,
but will not cover the portion of the principal balance of any loan that is
required to be covered by any primary mortgage insurance policy. The amount and
terms of any pool insurance coverage will be set forth in the related prospectus
supplement.
SPECIAL HAZARD INSURANCE POLICY. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to property securing a defaulted or foreclosed loan (title
to which has been acquired by the insured) and to the extent the damage is not
covered by a standard hazard insurance policy (or any flood insurance policy, if
applicable) required to be maintained with respect to the property, or in
connection with partial loss resulting from the application of the coinsurance
clause in a standard hazard insurance policy, the special hazard insurer will
pay the lesser of
o the cost of repair or replacement of the property, and
o upon transfer of the property to the special hazard insurer, the
unpaid principal balance of the loan at the time of acquisition of the
property by foreclosure or deed in lieu of foreclosure, plus accrued
interest to the date of claim settlement and certain expenses incurred
by the servicer with respect to the property.
If the unpaid principal balance of the loan plus accrued interest and
certain expenses is paid by the special hazard insurer, the amount of further
coverage under the special hazard insurance policy will be reduced by that
amount less any net proceeds from the sale of the related property. Any amount
paid as the cost of repair of the property will reduce coverage by that
41
amount. Special hazard insurance policies typically do not cover losses
occasioned by war, civil insurrection, certain governmental actions, errors in
design, faulty workmanship or materials (except under certain circumstances),
nuclear reaction, flood (if the mortgaged property is in a federally designated
flood area), chemical contamination and certain other risks.
Restoration of the property with the proceeds described in the first bullet
of the second previous paragraph is expected to satisfy the condition under any
pool insurance policy that the property be restored before a claim under the
pool insurance policy may be validly presented with respect to the defaulted
loan secured by the property. The payment described in the second bullet of the
second previous paragraph will render unnecessary presentation of a claim in
respect of the loan under any pool insurance policy. Therefore, so long as a
pool insurance policy remains in effect, the payment by the special hazard
insurer of the cost of repair or of the unpaid principal balance of the related
loan plus accrued interest and certain expenses will not affect the total amount
in respect of insurance proceeds paid to holders of the securities, but will
affect the relative amounts of coverage remaining under the special hazard
insurance policy and pool insurance policy.
BANKRUPTCY BOND. In the event of a bankruptcy of a borrower, the bankruptcy
court may establish the value of the property securing the related loan at an
amount less than the then-outstanding principal balance of the loan. The amount
of the secured debt could be reduced to that value, and the holder of the loan
thus would become an unsecured creditor to the extent the principal balance of
the loan exceeds the value assigned to the property by the bankruptcy court. In
addition, certain other modifications of the terms of a loan can result from a
bankruptcy proceeding. See "Material Legal Aspects of the Loans" in this
prospectus. If the related prospectus supplement so provides, the depositor or
other entity specified in the prospectus supplement will obtain a bankruptcy
bond or similar insurance contract covering losses resulting from proceedings
with respect to borrowers under the Federal Bankruptcy Code. The bankruptcy bond
will cover certain losses resulting from a reduction by a bankruptcy court of
scheduled payments of principal of and interest on a loan or a reduction by the
court of the principal amount of a loan and will cover certain unpaid interest
on the amount of any principal reduction from the date of the filing of a
bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the prospectus supplement for all loans in the trust fund for the related
series. The amount will be reduced by payments made under the bankruptcy bond in
respect of the loans, unless otherwise specified in the related prospectus
supplement, and will not be restored.
RESERVE FUNDS
If the prospectus supplement relating to a series of securities so
specifies, the depositor will deposit into one or more reserve funds cash, a
letter or letters of credit, cash collateral accounts, eligible investments, or
other instruments meeting the criteria of the rating agencies in the amount
specified in the prospectus supplement. Each reserve fund will be established by
the trustee as part of the trust fund for that series or for the benefit of the
credit enhancement provider for that series. In the alternative or in addition
to the initial deposit by the depositor, a reserve fund for a series may be
funded over time through application of all or a portion of the excess cash flow
from the primary assets for the series, to the extent described in the related
42
prospectus supplement. If applicable, the initial amount of the reserve fund and
the reserve fund maintenance requirements for a series of securities will be
described in the related prospectus supplement.
Amounts withdrawn from any reserve fund will be applied by the trustee to
make payments on the securities of the related series, to pay expenses, to
reimburse any credit enhancement provider for the series or for any other
purpose, in the manner and to the extent specified in the related prospectus
supplement.
Amounts deposited into a reserve fund will be invested by the trustee in
eligible investments maturing no later than the day specified in the related
prospectus supplement.
CROSS-COLLATERALIZATION
If specified in the related prospectus supplement, the beneficial ownership
of separate groups of assets included in a trust fund may be evidenced by
separate classes of the related series of securities. In that case, credit
support may be provided by a cross-collateralization feature which requires that
distributions be made with respect to securities evidencing a beneficial
ownership interest in, or secured by, one or more asset groups within the same
trust fund prior to distributions to subordinated securities evidencing a
beneficial ownership interest in, or secured by, one or more other asset groups
within that trust fund. Cross-collateralization may be provided by
o the allocation of a portion of excess amounts generated by one or more
asset groups within the same trust fund to one or more other asset
groups within the same trust fund, or
o the allocation of losses with respect to one or more asset groups to
one or more other asset groups within the same trust fund.
Excess amounts will be applied and/or losses will be allocated to the class or
classes of subordinated securities of the related series then outstanding having
the lowest rating assigned by any rating agency or the lowest payment priority,
in each case to the extent and in the manner more specifically described in the
related prospectus supplement. The prospectus supplement for a series which
includes a cross-collateralization feature will describe the manner and
conditions for applying the cross-collateralization feature.
If specified in the related prospectus supplement, the coverage provided by
one or more forms of credit support described in this prospectus may apply
concurrently to two or more related trust funds. If applicable, the related
prospectus supplement will identify the trust funds to which credit support
relates and the manner of determining the amount of coverage the credit support
provides to the identified trust funds.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If provided in the prospectus supplement relating to a series of
securities, the depositor will enter into a minimum principal payment agreement
with an entity meeting the criteria of the rating agencies named in the
prospectus supplement under which the entity will provide certain
43
payments on the securities of the series in the event that aggregate scheduled
principal payments and/or prepayments on the primary assets for the series are
not sufficient to make payments on the securities of the series as provided in
the prospectus supplement.
DEPOSIT AGREEMENT
If specified in a prospectus supplement, the depositor and the trustee for
a series of securities will enter into a deposit agreement with the entity
specified in the prospectus supplement on or before the sale of the related
series of securities. The deposit agreement is intended to accumulate available
cash for investment so that the cash, together with income thereon, can be
applied to future distributions on one or more classes of securities. The
related prospectus supplement will describe the terms of any deposit agreement.
FINANCIAL INSTRUMENTS
If provided in the related prospectus supplement, the trust fund may
include one or more financial instruments that are intended to meet the
following goals:
o to convert the payments on some or all of the loans and Private Label
Securities from fixed to floating payments, or from floating to fixed,
or from floating based on a particular index to floating based on
another index;
o to provide payments if any index rises above or falls below specified
levels; or
o to provide protection against interest rate changes, certain types of
losses or other payment shortfalls to one or more classes of the
related series.
If a trust fund includes financial instruments of this type, the instruments may
be structured to be exempt from the registration requirements of the Securities
Act of 1933, as amended.
The related prospectus supplement will include, or incorporate by
reference, material financial and other information about the provider of the
financial instruments.
SERVICING OF LOANS
GENERAL
Under the pooling and servicing agreement or the servicing agreement for a
series of securities, the servicer will provide customary servicing functions
with respect to the loans comprising the primary assets of the related trust
fund.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The servicer will make reasonable efforts to collect all payments required
to be made under the loans and will, consistent with the terms of the related
governing agreement for a series and any applicable credit enhancement, follow
such collection procedures as it follows with respect to comparable loans held
in its own portfolio. Consistent with the above, the servicer has the discretion
to
44
o waive any assumption fee, late payment charge, or other charge in
connection with a loan, and
o to the extent provided in the related agreement, arrange with a
borrower a schedule for the liquidation of delinquencies by extending
the due dates for scheduled payments on the loan.
If the related prospectus supplement so provides, the servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
with respect to loans in which borrower payments for taxes, assessments,
mortgage and hazard insurance policy premiums and other comparable items will be
deposited. In the case of loans that do not require such payments under the
related loan documents, the servicer will not be required to establish any
escrow or impound account for those loans. The servicer will make withdrawals
from the escrow accounts to effect timely payment of taxes, assessments and
mortgage and hazard insurance, to refund to borrowers amounts determined to be
overages, to pay interest to borrowers on balances in the escrow accounts to the
extent required by law, to repair or otherwise protect the related property and
to clear and terminate the escrow accounts. The servicer will be responsible for
the administration of the escrow accounts and generally will make advances to
the escrow accounts when a deficiency exists.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless the related prospectus supplement specifies otherwise, the trustee
or the servicer will establish a separate collection account in the name of the
trustee. Unless the related prospectus supplement provides otherwise, the
collection account will be
o an account maintained at a depository institution, the long-term
unsecured debt obligations of which at the time of any deposit are
rated by each rating agency named in the prospectus supplement at
levels satisfactory to the rating agency; or
o an account the deposits in which are insured to the maximum extent
available by the Federal Deposit Insurance Corporation or an account
secured in a manner meeting requirements established by each rating
agency named in the prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the funds
held in the collection account may be invested in eligible investments. If so
specified in the related prospectus supplement, the servicer will be entitled to
receive as additional compensation any interest or other income earned on funds
in the collection account.
Unless otherwise specified in the related prospectus supplement, the
servicer, the depositor, the trustee or the seller, as appropriate, will deposit
into the collection account for each series, on the business day following the
closing date, all scheduled payments of principal and interest on the primary
assets due after the related cut-off date but received by the servicer on or
before the closing date, and thereafter, within two business days after the date
of receipt thereof, the following payments and collections received or made by
the servicer (other than, unless otherwise provided in the related prospectus
supplement, in respect of principal of and interest on the related primary
assets due on or before the cut-off date):
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o all payments in respect of principal, including prepayments, on the
primary assets;
o all payments in respect of interest on the primary assets after
deducting, at the discretion of the servicer (but only to the extent
of the amount permitted to be withdrawn or withheld from the
collection account in accordance with the related agreement), related
servicing fees payable to the servicer;
o all Liquidation Proceeds after deducting, at the discretion of the
servicer (but only to the extent of the amount permitted to be
withdrawn from the collection account in accordance with the related
agreement), the servicing fee, if any, in respect of the related
primary asset;
o all Insurance Proceeds;
o all amounts required to be deposited into the collection account from
any reserve fund for the series pursuant to the related agreement;
o all advances of cash made by the servicer in respect of delinquent
scheduled payments on a loan and for any other purpose as required
pursuant to the related agreement; and
o all repurchase prices of any primary assets repurchased by the
depositor, the servicer or the seller pursuant to the related
agreement.
Unless otherwise specified in the related prospectus supplement, the
servicer is permitted, from time to time, to make withdrawals from the
collection account for each series for the following purposes:
o to reimburse itself for advances that it made in connection with that
series under the related agreement; provided that the servicer's right
to reimburse itself is limited to amounts received on or in respect of
particular loans (including, for this purpose, Liquidation Proceeds
and proceeds of insurance policies covering the related loans and
Mortgaged Properties ("Insurance Proceeds")) that represent late
recoveries of scheduled payments with respect to which the Advance was
made;
o to the extent provided in the related agreement, to reimburse itself
for any advances that it made in connection with the series which the
servicer determines in good faith to be nonrecoverable from amounts
representing late recoveries of scheduled payments respecting which
the advance was made or from Liquidation Proceeds or Insurance
Proceeds;
o to reimburse itself from Liquidation Proceeds for liquidation expenses
and for amounts expended by it in good faith in connection with the
restoration of damaged property and, in the event deposited into the
collection account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the principal
balance of the related loan, together with accrued and unpaid interest
thereon to the due date for the loan next succeeding the date of its
receipt of
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the Liquidation Proceeds, to pay to itself out of the excess the
amount of any unpaid servicing fee and any assumption fees, late
payment charges, or other charges on the related loan;
o in the event the servicer has elected not to pay itself the servicing
fee out of the interest component of any scheduled payment, late
payment or other recovery with respect to a particular loan prior to
the deposit of the scheduled payment, late payment or recovery into
the collection account, to pay to itself the servicing fee, as
adjusted pursuant to the related agreement, from any scheduled
payment, late payment or other recovery to the extent permitted by the
related agreement;
o to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related agreement;
o to pay to the applicable person with respect to each primary asset or
related real property that has been repurchased or removed from the
trust fund by the depositor, the servicer or the seller pursuant to
the related agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
o to make payments to the trustee of the series for deposit into the
related distribution account or for remittance to the holders of the
series in the amounts and in the manner provided for in the related
agreement; and
o to clear and terminate the collection account pursuant to the related
agreement.
In addition, if the servicer deposits into the collection account for a
series any amount not required to be deposited therein, the servicer may, at any
time, withdraw the amount from the collection account.
ADVANCES AND LIMITATIONS ON ADVANCES
The related prospectus supplement will describe the circumstances, if any,
under which the servicer will make advances with respect to delinquent payments
on loans. If specified in the related prospectus supplement, the servicer will
be obligated to make advances. Its obligation to make advances may be limited in
amount, or may not be activated until a certain portion of a specified reserve
fund is depleted. Advances are intended to provide liquidity and, except to the
extent specified in the related prospectus supplement, not to guarantee or
insure against losses. Accordingly, any funds advanced are recoverable by the
servicer out of amounts received on particular loans that represent late
recoveries of scheduled payments, Insurance Proceeds or Liquidation Proceeds
respecting which an advance was made. If an advance is made and subsequently
determined to be nonrecoverable from late collections, Insurance Proceeds or
Liquidation Proceeds from the related loan, the servicer may be entitled to
reimbursement from other funds in the collection account or distribution
account(s), as the case may be, or from a specified reserve fund, as applicable,
to the extent specified in the related prospectus supplement.
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MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
STANDARD HAZARD INSURANCE; FLOOD INSURANCE. Except as otherwise specified
in the related prospectus supplement, the servicer will be required to maintain
(or to cause the borrower under each loan to maintain) a standard hazard
insurance policy providing the standard form of fire insurance coverage with
extended coverage for certain other hazards as is customary in the state in
which the related property is located. The standard hazard insurance policies
will provide for coverage at least equal to the applicable state standard form
of fire insurance policy with extended coverage for property of the type
securing the related loans. In general, the standard form of fire and extended
coverage policy will cover physical damage to, or destruction of, the related
property caused by fire, lightning, explosion, smoke, windstorm, hail, riot,
strike and civil commotion, subject to the conditions and exclusions in each
policy. Because the standard hazard insurance policies relating to the loans
will be underwritten by different hazard insurers and will cover properties
located in various states, the policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of credit enhancement will adversely affect distributions to
holders. When a property securing a loan is located in a flood area identified
by HUD pursuant to the Flood Disaster Protection Act of 1973, as amended, the
servicer will be required to cause flood insurance to be maintained with respect
to the property, to the extent available.
The standard hazard insurance policies covering properties typically will
contain a "coinsurance" clause, which in effect will require that the insured at
all times carry hazard insurance of a specified percentage (generally 80% to
90%) of the full replacement value of the property, including any improvements
on the property, in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, the coinsurance clause
will provide that the hazard insurer's liability in the event of partial loss
will not exceed the GREATER of
o the actual cash value (I.E., replacement cost less physical
depreciation) of the property, including the improvements, if any,
damaged or destroyed, and
o such proportion of the loss, without deduction for depreciation, as
the amount of insurance carried bears to the specified percentage of
the full replacement cost of the property and improvements.
Since the amount of hazard insurance to be maintained on the improvements
securing the loans declines as their principal balances decrease, and since the
value of the properties will fluctuate over time, the effect of this requirement
in the event of partial loss may be that hazard insurance proceeds will be
insufficient to restore fully the damage to the affected property.
48
Unless otherwise specified in the related prospectus supplement, coverage
will be in an amount at least equal to the GREATER of
o the amount necessary to avoid the enforcement of any co-insurance
clause contained in the policy, and
o the outstanding principal balance of the related loan.
Unless otherwise specified in the related prospectus supplement, the servicer
will also maintain on REO property a standard hazard insurance policy in an
amount that is at least equal to the maximum insurable value of the REO
property. No earthquake or other additional insurance will be required of any
borrower or will be maintained on REO property other than pursuant to such
applicable laws and regulations as shall at any time be in force and shall
require the additional insurance.
Any amounts collected by the servicer under insurance policies (other than
amounts to be applied to the restoration or repair of the property, released to
the borrower in accordance with normal servicing procedures or used to reimburse
the servicer for amounts to which it is entitled to reimbursement) will be
deposited into the collection account. In the event that the servicer obtains
and maintains a blanket policy insuring against hazard losses on all of the
loans, written by an insurer then acceptable to each rating agency named in the
prospectus supplement, it will conclusively be deemed to have satisfied its
obligations to cause to be maintained a standard hazard insurance policy for
each loan or related REO property. This blanket policy may contain a deductible
clause, in which case the servicer will be required, in the event that there has
been a loss that would have been covered by the policy absent the deductible
clause, to deposit into the collection account the amount not otherwise payable
under the blanket policy because of the application of the deductible clause.
REALIZATION UPON DEFAULTED LOANS
The servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the properties
securing the related loans that come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In this connection, the servicer will follow such practices and
procedures as it deems necessary or advisable and as are normal and usual in its
servicing activities with respect to comparable loans that it services. However,
the servicer will not be required to expend its own funds in connection with any
foreclosure or towards the restoration of the property unless it determines that
o the restoration or foreclosure will increase the Liquidation Proceeds
of the related loan available to the holders after reimbursement to
itself for its expenses, and
o its expenses will be recoverable either through Liquidation Proceeds
or Insurance Proceeds.
However, in the case of a trust fund for which a REMIC election has been made,
the servicer will be required to liquidate any REO property by the end of the
third calendar year after the trust
49
fund acquires beneficial ownership of the REO property. While the holder of an
REO property can often maximize its recovery by providing financing to a new
purchaser, the trust fund will have no ability to do so and neither the servicer
nor the depositor will be required to do so.
The servicer may arrange with the borrower on a defaulted loan a change in
the terms of the loan to the extent provided in the related prospectus
supplement. This type of modification may only be entered into if it meets the
underwriting policies and procedures employed by the servicer in servicing
receivables for its own account and meets the other conditions set forth in the
related prospectus supplement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related prospectus supplement for a
series, when any property is about to be conveyed by the borrower, the servicer
will, to the extent it has knowledge of the prospective conveyance and prior to
the time of the consummation of the conveyance, exercise its rights to
accelerate the maturity of the related loan under any applicable "due-on-sale"
clause, unless it reasonably believes that the clause is not enforceable under
applicable law or if enforcement of the clause would result in loss of coverage
under any primary mortgage insurance policy. In that event, the servicer is
authorized to accept from or enter into an assumption agreement with the person
to whom the property has been or is about to be conveyed. Under the assumption,
the transferee of the property becomes liable under the loan and the original
borrower is released from liability and the transferee is substituted as the
borrower and becomes liable under the loan. Any fee collected in connection with
an assumption will be retained by the servicer as additional servicing
compensation. The terms of a loan may not be changed in connection with an
assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related prospectus supplement, the
servicer will be entitled to a periodic servicing fee in an amount to be
determined as specified in the related prospectus supplement. The servicing fee
may be fixed or variable, as specified in the related prospectus supplement. In
addition, unless otherwise specified in the related prospectus supplement, the
servicer will be entitled to additional servicing compensation in the form of
assumption fees, late payment charges and similar items, and excess proceeds
following disposition of property in connection with defaulted loans.
Unless otherwise specified in the related prospectus supplement, the
servicer will pay certain expenses incurred in connection with the servicing of
the loans, including, without limitation, the payment of the fees and expenses
of each trustee and independent accountants, payment of security policy and
insurance policy premiums, if applicable, and the cost of any credit
enhancement, and payment of expenses incurred in preparation of reports to
holders.
When a borrower makes a principal prepayment in full between due dates on
the related loan, the borrower generally will be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the related prospectus supplement, in order that one or more classes of the
securities of a series will not be adversely affected by any resulting shortfall
in interest, the amount of the servicing fee may be reduced to the extent
50
necessary to include in the servicer's remittance to the applicable trustee for
deposit into the related distribution account an amount equal to one month's
interest on the related loan (less the servicing fee). If the total amount of
these shortfalls in a month exceeds the servicing fee for that month, a
shortfall to holders may occur.
Unless otherwise specified in the related prospectus supplement, the
servicer will be entitled to reimbursement for certain expenses that it incurs
in connection with the liquidation of defaulted loans. The related holders will
suffer no loss by reason of the servicer's expenses to the extent the expenses
are covered under related insurance policies or from excess Liquidation
Proceeds. If claims are either not made or paid under the applicable insurance
policies or if coverage under the policies has been exhausted, the related
holders will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the servicer's expenses, are less than the principal balance of
and unpaid interest on the related loan that would be distributable to holders.
In addition, the servicer will be entitled to reimbursement of its expenses in
connection with the restoration of REO property. This right of reimbursement is
prior to the rights of the holders to receive any related Insurance Proceeds,
Liquidation Proceeds or amounts derived from other credit enhancement. The
servicer generally is also entitled to reimbursement from the collection account
for advances.
Unless otherwise specified in the related prospectus supplement, the rights
of the servicer to receive funds from the collection account for a series,
whether as the servicing fee or other compensation, or for the reimbursement of
advances, expenses or otherwise, are not subordinate to the rights of holders of
securities of the series.
EVIDENCE AS TO COMPLIANCE
If so specified in the related prospectus supplement, the applicable
governing agreement will provide that, each year, a firm of independent public
accountants will furnish a statement to the trustee to the effect that the firm
has examined certain documents and records relating to the servicing of the
loans by the servicer and that, on the basis of the examination, the firm is of
the opinion that the servicing has been conducted in compliance with the
agreement, except for such exceptions as the firm believes to be immaterial and
any other exceptions set forth in the statement.
If so specified in the related prospectus supplement, the applicable
agreement will also provide for delivery to the trustee of an annual statement
signed by an officer of the servicer to the effect that the servicer has
fulfilled its obligations under the agreement throughout the preceding calendar
year.
CERTAIN MATTERS REGARDING THE SERVICER
The servicer for each series will be identified in the related prospectus
supplement. The servicer may be an affiliate of the depositor and may have other
business relationships with the depositor and its affiliates.
If an event of default occurs under either a servicing agreement or a
pooling and servicing agreement, the servicer may be replaced by the trustee or
a successor servicer. Unless otherwise
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specified in the related prospectus supplement, the events of default and the
rights of a trustee upon a default under the agreement for the related series
will be substantially similar to those described under "The Agreements--Events
of Default; Rights upon Event of Default--Pooling and Servicing Agreement;
Servicing Agreement" in this prospectus.
Unless otherwise specified in the prospectus supplement, the servicer does
not have the right to assign its rights and delegate its duties and obligations
under the related agreement unless the successor servicer accepting such
assignment or delegation
o services similar loans in the ordinary course of its business;
o is reasonably satisfactory to the trustee;
o has a net worth of not less than the amount specified in the
prospectus supplement;
o would not cause the rating of the related securities by a rating
agency named in the prospectus supplement, as such rating is in effect
immediately prior to the assignment, sale or transfer, to be
qualified, downgraded or withdrawn as a result of the assignment, sale
or transfer; and
o executes and delivers to the trustee an agreement, in form and
substance reasonably satisfactory to the trustee, that contains an
assumption by the successor servicer of the due and punctual
performance and observance of each covenant and condition required to
be performed or observed by the servicer under the agreement from and
after the date of the agreement.
No assignment will become effective until the trustee or a successor
servicer has assumed the servicer's obligations and duties under the related
agreement. To the extent that the servicer transfers its obligations to a
wholly-owned subsidiary or affiliate, the subsidiary or affiliate need not
satisfy the criteria set forth above. In this instance, however, the assigning
servicer will remain liable for the servicing obligations under the agreement.
Any entity into which the servicer is merged or consolidated or any successor
corporation resulting from any merger, conversion or consolidation will succeed
to the servicer's obligations under the agreement provided that the successor or
surviving entity meets the requirements for a successor servicer set forth
above.
Except to the extent otherwise provided, each agreement will provide that
neither the servicer nor any director, officer, employee or agent of the
servicer will be under any liability to the related trust fund, the depositor or
the holders for any action taken or for failing to take any action in good faith
pursuant to the related agreement, or for errors in judgment. However, neither
the servicer nor any such person will be protected against any breach of
warranty or representations made under the agreement, or the failure to perform
its obligations in compliance with any standard of care set forth in the
agreement, or liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of their duties or by
reason of reckless disregard of their obligations and duties under the
agreement. Each agreement will further provide that the servicer and any
director, officer, employee or agent of the servicer is entitled to
indemnification from the related trust fund and will be held harmless against
any
52
loss, liability or expense incurred in connection with any legal action relating
to the agreement or the securities, other than any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence in the
performance of duties under the agreement or by reason of reckless disregard of
those obligations and duties. In addition, the agreement will provide that the
servicer is not under any obligation to appear in, prosecute or defend any legal
action that is not incidental to its servicing responsibilities under the
agreement that, in its opinion, may involve it in any expense or liability. The
servicer may, in its discretion, undertake any such action that it may deem
necessary or desirable with respect to the agreement and the rights and duties
of the parties thereto and the interests of the holders thereunder. In that
event, the legal expenses and costs of the action and any resulting liability
may be expenses, costs, and liabilities of the trust fund and the servicer may
be entitled to be reimbursed therefor out of the collection account.
THE AGREEMENTS
The following summaries describe the material provisions of the pooling and
servicing agreement or trust agreement, in the case of a series of certificates,
and the indenture and servicing agreement, in the case of a series of notes. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the agreements applicable to
the particular series of securities. Where particular provisions or terms used
in the agreements are referred to, the provisions or terms are as specified in
the agreements.
ASSIGNMENT OF PRIMARY ASSETS
GENERAL. At the time of issuance of the securities of a series, the
depositor will transfer, convey and assign to the related trust fund all right,
title and interest of the depositor in the primary assets and other property to
be transferred to the trust fund. This assignment will include all principal and
interest due on or with respect to the primary assets after the cut-off date
(except for any retained interests). The trustee will, concurrently with the
assignment, execute and deliver the securities.
ASSIGNMENT OF MORTGAGE LOANS. Unless otherwise specified in the related
prospectus supplement, the depositor will deliver to the trustee (or, if
specified in the prospectus supplement, a custodian on behalf of the trustee),
as to each Residential Loan and Home Equity Loan, the related note endorsed
without recourse to the order of the trustee or in blank, the original mortgage,
deed of trust or other security instrument with evidence of recording indicated
thereon (except for any mortgage not returned from the public recording office,
in which case a copy of the mortgage will be delivered, together with a
certificate that the original of the mortgage was delivered to such recording
office), and an assignment of the mortgage in recordable form. The trustee or,
if so specified in the related prospectus supplement, the custodian will hold
these documents in trust for the benefit of the holders.
If so specified in the related prospectus supplement, at the time of
issuance of the securities, the depositor will cause assignments to the trustee
of the mortgages relating to the loans to be recorded in the appropriate public
office for real property records, except in states where, in the opinion of
counsel acceptable to the trustee, recording is not required to protect the
trustee's interest in the related loans. If specified in the prospectus
supplement, the depositor will cause the assignments to be recorded within the
time after issuance of the securities as is
53
specified in the related prospectus supplement. In this event, the prospectus
supplement will specify whether the agreement requires the depositor to
repurchase from the trustee any loan the related mortgage of which is not
recorded within that time, at the price described below with respect to
repurchases by reason of defective documentation. Unless otherwise provided in
the prospectus supplement, the enforcement of the repurchase obligation would
constitute the sole remedy available to the holders or the trustee for the
failure of a mortgage to be recorded.
ASSIGNMENT OF HOME IMPROVEMENT CONTRACTS. Unless otherwise specified in the
related prospectus supplement, the depositor will deliver to the trustee or the
custodian each original Home Improvement Contract and copies of related
documents and instruments and, except in the case of unsecured Home Improvement
Contracts, the security interest in the related home improvements. In order to
give notice of the right, title and interest of holders to the Home Improvement
Contracts, the depositor will cause a UCC-1 financing statement to be executed
by the depositor or the seller identifying the trustee as the secured party and
identifying all Home Improvement Contracts as collateral. Unless otherwise
specified in the related prospectus supplement, the Home Improvement Contracts
will not be stamped or otherwise marked to reflect their assignment to the trust
fund. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Home Improvement
Contracts without notice of the assignment, the interest of holders in the Home
Improvement Contracts could be defeated. See "Material Legal Aspects of the
Loans--The Home Improvement Contracts and the Manufactured Housing Contracts" in
this prospectus.
ASSIGNMENT OF MANUFACTURED HOUSING CONTRACTS. If specified in the related
prospectus supplement, the depositor or the seller will deliver to the trustee
the original contract as to each Manufactured Housing Contract and copies of
documents and instruments related to each contract and, other than in the case
of unsecured contracts, the security interest in the property securing that
contract. In order to give notice of the right, title and interest of
securityholders to the contracts, if specified in the related prospectus
supplement, the depositor or the seller will cause a UCC-1 financing statement
to be executed by the depositor or the seller identifying the trustee as the
secured party and identifying all contracts as collateral. If so specified in
the related prospectus supplement, the contracts will not be stamped or
otherwise marked to reflect their assignment to the trustee. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of the assignment, the
interest of securityholders in the contracts could be defeated. See "Material
Legal Aspects of the Loans -- The Home Improvement Contracts and the
Manufactured Housing Contracts."
LOAN SCHEDULE. Each loan w`ill be identified in a schedule appearing as an
exhibit to the related agreement and will specify with respect to each loan:
o the original principal amount,
o its unpaid principal balance as of the cut-off date,
o the current interest rate,
o the current scheduled payment of principal and interest,
54
o the maturity date, if any, of the related note, and
o if the loan is an adjustable rate loan, the lifetime rate cap, if any,
and the current index.
ASSIGNMENT OF AGENCY AND PRIVATE LABEL SECURITIES. The depositor will cause
the Agency and Private Label Securities to be registered in the name of the
trustee (or its nominee or correspondent). The trustee (or its nominee or
correspondent) will take possession of any certificated Agency or Private Label
Securities. Unless otherwise specified in the related prospectus supplement, the
trustee will not be in possession of, or be assignee of record of, any loans
underlying the Agency or Private Label Securities. See "The Trust Funds--Private
Label Securities" in this prospectus. Each Agency and Private Label Security
will be identified in a schedule appearing as an exhibit to the related
agreement, which will specify the original principal amount, principal balance
as of the cut-off date, annual pass-through rate or interest rate and maturity
date for each Agency and Private Label Security conveyed to the related trust
fund. In the agreement, the depositor will represent and warrant to the trustee
that:
o the information contained in the Agency or Private Label Securities
schedule is true and correct in all material respects,
o immediately prior to the conveyance of the Agency or Private Label
Securities, the depositor had good title and was the sole owner of the
Agency or Private Label Securities (subject to any retained interest),
o there has been no other sale of the Agency or Private Label
Securities, and
o there is no existing lien, charge, security interest or other
encumbrance on the Agency or Private Label Securities (other than any
retained interest).
REPURCHASE AND SUBSTITUTION OF NON-CONFORMING PRIMARY ASSETS. Unless
otherwise provided in the related prospectus supplement, if any document in the
file relating to the primary assets delivered by the depositor to the trustee
(or custodian) is found by the trustee, within 90 days of the execution of the
related agreement (or promptly after the trustee's receipt of any document
permitted to be delivered after the closing date), to be defective in any
material respect and the depositor or seller does not cure such defect within 90
days (or within any other period specified in the related prospectus supplement)
the depositor or seller will, not later than 90 days (or within such any period
specified in the related prospectus supplement), after the trustee's notice to
the depositor or the seller, as the case may be, of the defect, repurchase from
the trustee the related primary asset or any property acquired in respect of the
asset. Unless otherwise specified in the related prospectus supplement, the
repurchase shall be effected at a price equal to the SUM of:
55
o the LESSER of
o the principal balance of the primary asset, and
o the trust fund's federal income tax basis in the primary asset;
plus
o accrued and unpaid interest to the date of the next scheduled payment
on the primary asset at the rate set forth in the related agreement.
However, the purchase price shall not be limited to the trust fund's federal
income tax basis in the asset, if the repurchase at a price equal to the
principal balance of the repurchased primary asset will not result in any
prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related prospectus supplement, the depositor or seller,
as the case may be, may, rather than repurchase the primary asset as described
above, remove the non-conforming primary asset from the trust fund and
substitute in its place one or more other qualifying substitute primary assets.
If no REMIC election is made with respect to the trust fund, the substitution
must be effected within 120 days of the date of initial issuance of the
securities. If a REMIC election is made with respect to the trust fund the
trustee must have received after a specified time period a satisfactory opinion
of counsel that the substitution will not cause the trust fund to lose its
status as a REMIC or otherwise subject the trust fund to a prohibited
transaction tax.
Unless otherwise specified in the related prospectus supplement, any
qualifying substitute primary asset will, on the date of substitution, meet the
following criteria:
o it has a principal balance, after deduction of all scheduled payments
due in the month of substitution, not in excess of the principal
balance of the deleted primary asset (the amount of any shortfall to
be deposited to the collection account in the month of substitution
for distribution to holders),
o it has an interest rate not less than (and not more than 2% greater
than) the interest rate of the deleted primary asset,
o it has a remaining term-to-stated maturity not greater than (and not
more than two years less than) that of the deleted primary asset; and
o it complies with all of the representations and warranties set forth
in the applicable agreement as of the date of substitution.
Unless otherwise provided in the related prospectus supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the holders or the trustee for a material defect in the
documentation for a primary asset.
The depositor or another entity will make representations and warranties
with respect to primary assets for each series. If the depositor or the other
entity cannot cure a breach of any
56
such representations and warranties in all material respects within the time
period specified in the related prospectus supplement after notification by the
trustee of such breach, and if the breach is of a nature that materially and
adversely affects the value of the primary asset, the depositor or the other
entity will be obligated to repurchase the affected primary asset or, if
provided in the prospectus supplement, provide a qualifying substitute primary
asset, subject to the same conditions and limitations on purchases and
substitutions as described above.
The depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or seller of the non-conforming primary
assets. See "Risk Factors--Only the assets of the related trust fund are
available to pay your certificates" in this prospectus.
No holder of securities of a series, solely by virtue of the holder's
status as a holder, will have any right under the applicable agreement to
institute any proceeding with respect to agreement, unless holder previously has
given to the trustee for the series written notice of default and unless the
holders of securities evidencing not less than 51% of the aggregate voting
rights of the securities of the series have made written request upon the
trustee to institute the proceeding in its own name as trustee thereunder and
have offered to the trustee reasonable indemnity, and the trustee for 60 days
has neglected or refused to institute the proceeding.
REPORTS TO HOLDERS
The applicable trustee or other entity specified in the related prospectus
supplement will prepare and forward to each holder on each distribution date, or
as soon thereafter as is practicable, a statement setting forth, to the extent
applicable to any series, among other things:
o the amount of principal distributed to holders of the related
securities and the outstanding principal balance of the securities
following the distribution;
o the amount of interest distributed to holders of the related
securities and the current interest on the securities;
o the amount of any overdue accrued interest included in such
distribution, any remaining overdue accrued interest with respect to
the securities, or any current shortfall in amounts to be distributed
as accrued interest to holders of the securities;
o the amount of any overdue payments of scheduled principal included in
the distribution, any remaining overdue principal amounts with respect
to the securities, any current shortfall in receipt of scheduled
principal payments on the related primary assets, or any realized
losses or Liquidation Proceeds to be allocated as reductions in the
outstanding principal balances of the securities;
o the amount received under any related credit enhancement, and the
remaining amount available under the credit enhancement;
o the amount of any delinquencies with respect to payments on the
related primary assets;
57
o the book value of any REO property acquired by the related trust fund;
and
o other information specified in the related agreement.
In addition, within a reasonable period of time after the end of each
calendar year, the applicable trustee, unless otherwise specified in the related
prospectus supplement, will furnish to each holder of record at any time during
the calendar year:
o the total of the amounts reported pursuant to clauses under the first
and second bullets above and under the last clause of the fourth
bullet above for the calendar year, and
o the information specified in the related agreement to enable holders
to prepare their tax returns including, without limitation, the amount
of any original issue discount accrued on the securities.
Information in the distribution date statements and annual statements
provided to the holders will not have been examined and reported upon by an
independent public accountant. However, the servicer will provide to the trustee
a report by independent public accountants with respect to its servicing of the
loans. See "Servicing of Loans--Evidence as to Compliance" in this prospectus.
If so specified in the prospectus supplement, the related series of
securities (or one or more classes of the series) will be issued in book-entry
form. In that event, owners of beneficial interests in those securities will not
be considered holders and will not receive such reports directly from the
trustee. The trustee will forward reports only to the entity or its nominee that
is the registered holder of the global certificate that evidences the book-entry
securities. Beneficial owners will receive reports from the participants and
indirect participants of the applicable book-entry system in accordance with the
policies and procedures of the participants and indirect participants.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
POOLING AND SERVICING AGREEMENT; SERVICING AGREEMENT. Unless otherwise
specified in the related prospectus supplement, "events of default under the
pooling and servicing agreement for each series of certificates include:
o any failure by the servicer to deposit amounts in the collection
account and distribution account(s) to enable the trustee to
distribute to holders of securities of the series any required
payment, provided that this failure continues unremedied for the
number of days specified in the related prospectus supplement after
the giving of written notice to the servicer by the trustee, or to the
servicer and the trustee by holders having not less than 25% of the
total voting rights of the series;
o any failure by the servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the agreement
provided that this failure continues unremedied for the number of days
specified in the related prospectus supplement after the giving of
written to the servicer by the trustee, or to the servicer
58
and the trustee by the holders having not less than 25% of the total
voting rights of the of the series; and
o certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and certain actions by
the servicer indicating its insolvency, reorganization or inability to
pay its obligations.
So long as an event of default remains unremedied under the applicable
agreement for a series of securities relating to the servicing of loans, unless
otherwise specified in the related prospectus supplement, the trustee or holders
of securities of the series having not less than 51% of the total voting rights
of the series may terminate all of the rights and obligations of the servicer as
servicer under the applicable agreement (other than its right to recovery of
other expenses and amounts advanced pursuant to the terms of the agreement,
which rights the servicer will retain under all circumstances), whereupon the
trustee will succeed to all the responsibilities, duties and liabilities of the
servicer under the agreement and will be entitled to reasonable servicing
compensation not to exceed the applicable servicing fee, together with other
servicing compensation in the form of assumption fees, late payment charges or
otherwise as provided in the agreement.
In the event that the trustee is unwilling or unable so to act, it may
select (or petition a court of competent jurisdiction to appoint) a finance
institution, bank or loan servicing institution with a net worth specified in
the related prospectus supplement to act as successor servicer under the
provisions of the agreement. The successor servicer would be entitled to
reasonable servicing compensation in an amount not to exceed the servicing fee
as set forth in the related prospectus supplement, together with other servicing
compensation in the form of assumption fees, late payment charges or otherwise,
as provided in the agreement.
During the continuance of any event of default of a servicer under an
agreement for a series of securities, the trustee will have the right to take
action to enforce its rights and remedies and to protect and enforce the rights
and remedies of the holders of securities of the series, and, unless otherwise
specified in the related prospectus supplement, holders of securities having not
less than 51% of the total voting rights of the series may direct the time,
method and place of conducting any proceeding for any remedy available to the
trustee or exercising any trust or power conferred upon the trustee. However,
the trustee will not be under any obligation to pursue any such remedy or to
exercise any of such trusts or powers unless the holders have offered the
trustee reasonable security or indemnity against the cost, expenses and
liabilities that may be incurred by the trustee as a result. The trustee may
decline to follow any such direction if it determines that the action or
proceeding so directed may not lawfully be taken or would involve it in personal
liability or be unjustly prejudicial to the non-assenting holders.
INDENTURE. Unless otherwise specified in the related prospectus supplement,
"events of default" under the indenture for each series of notes include:
59
o a default for thirty (30) days or more in the payment of any principal
of or interest on any note of the series;
o failure to perform any other covenant of the depositor or the trust
fund in the indenture, provided that the failure continues for a
period of sixty (60) days after notice is given in accordance with the
procedures described in the related prospectus supplement;
o any representation or warranty made by the depositor or the trust fund
in the indenture or in any certificate or other writing delivered
pursuant to it or in connection with it with respect to or affecting
such series having been incorrect in a material respect as of the time
made, provided that the breach is not cured within sixty (60) days
after notice is given in accordance with the procedures described in
the related prospectus supplement;
o certain events of bankruptcy, insolvency, receivership or liquidation
of the depositor or the trust fund; and
o any other event of default specified with respect to notes of that
series.
If an event of default with respect to the then-outstanding notes of any
series occurs and is continuing, either the indenture trustee or the holders of
a majority of the total amount of those notes may declare the principal amount
of all the notes of the series (or, if the notes of that series are zero coupon
securities, such portion of the principal amount as may be specified in the
related prospectus supplement) to be due and payable immediately. Under certain
circumstances of this type the declaration may be rescinded and annulled by the
holders of a majority of the total amount of those notes.
If, following an event of default with respect to any series of notes, the
related notes have been declared to be due and payable, the indenture trustee
may, in its discretion, and notwithstanding such acceleration, elect to maintain
possession of the collateral securing the notes and to continue to apply
distributions on the collateral as if there had been no declaration of
acceleration, provided that the collateral continues to provide sufficient funds
for the payment of principal of and interest on the notes as they would have
become due if there had not been a declaration. In addition, the indenture
trustee may not sell or otherwise liquidate the collateral securing the notes of
a series following an event of default (other than a default in the payment of
any principal of or interest on any note of the series for thirty (30) days or
more), unless:
o the holders of 100% of the total amount of the then-outstanding notes
of the series consent to the sale; or
o the proceeds of the sale or liquidation are sufficient to pay in full
the principal of and accrued interest due and unpaid on the
outstanding notes of the series at the date of sale; or
o the indenture trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the notes as
such payments would have
60
become due if the notes had not been declared due and payable, and the
indenture trustee obtains the consent of the holders of 66 2/3% of the
total amount of the then-outstanding notes of the series.
In the event that the indenture trustee liquidates the collateral in
connection with an event of default involving a default for thirty (30) days or
more in the payment of principal of or interest on the notes of a series, the
indenture provides that the indenture trustee will have a prior lien on the
proceeds of any liquidation for its unpaid fees and expenses. As a result, upon
the occurrence of an event of default of this type, the amount available for
distribution to the noteholders may be less than would otherwise be the case.
However, the indenture trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the indenture for the benefit of the noteholders
after the occurrence of the event of default.
Unless otherwise specified in the related prospectus supplement, in the
event that the principal of the notes of a series is declared due and payable as
described above, holders of the notes issued at a discount from par may be
entitled to receive no more than an amount equal to the unpaid principal amount
of those notes less the amount of the discount that remains unamortized.
Subject to the provisions of the indenture relating to the duties of the
indenture trustee, in case an event of default shall occur and be continuing
with respect to a series of notes, the indenture trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request or direction of any of the holders of notes of the series, unless the
holders offer security or indemnity satisfactory to the indenture trustee
against the costs, expenses and liabilities it might incur in complying with
their request or direction. Subject to the provisions for indemnification and
certain limitations contained in the indenture, the holders of a majority of
amount of the then-outstanding notes of the series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the indenture trustee or exercising any trust or power conferred on
the indenture trustee with respect to those notes, and the holders of a majority
of the amount of the amount of the then- outstanding notes of the series may, in
certain cases, waive any default with respect to the notes, except a default in
the payment of principal or interest or a default in respect of a covenant or
provision of the indenture that cannot be modified without the waiver or consent
of all affected holders of the outstanding notes.
THE TRUSTEES
The identity of the commercial bank, savings and loan association or trust
company named as the trustee or indenture trustee, as the case may be, for each
series of securities will be set forth in the related prospectus supplement.
Entities serving as trustee may have normal banking relationships with the
depositor or the servicer. In addition, for the purpose of meeting the legal
requirements of certain local jurisdictions, each trustee will have the power to
appoint co-trustees or separate trustees. In the event of an appointment, all
rights, powers, duties and obligations conferred or imposed upon the trustee by
the related agreement will be conferred or imposed upon that trustee and each
separate trustee or co-trustee jointly, or, in any jurisdiction in which the
trustee shall be incompetent or unqualified to perform certain acts, singly upon
the
61
separate trustee or co-trustee who will exercise and perform such rights,
powers, duties and obligations solely at the direction of the trustee. The
trustee may also appoint agents to perform any of its responsibilities, which
agents will have any or all of the rights, powers, duties and obligations of the
trustee conferred on them by their appointment; provided, however, that the
trustee will continue to be responsible for its duties and obligations under the
agreement.
DUTIES OF TRUSTEES
No trustee will make any representations as to the validity or sufficiency
of the related agreement, the securities or of any primary asset or related
documents. If no event of default (as defined in the related agreement) has
occurred, the applicable trustee will be required to perform only those duties
specifically required of it under the agreement. Upon receipt of the various
certificates, statements, reports or other instruments required to be furnished
to it, the trustee will be required to examine them to determine whether they
are in the form required by the related agreement. However, the trustee will not
be responsible for the accuracy or content of any documents furnished to it by
the holders or the servicer under the agreement.
Each trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that no trustee will be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the related
holders in an event of default. No trustee will be required to expend or risk
its own funds or otherwise incur any financial liability in the performance of
any of its duties under the related agreement, or in the exercise of any of its
rights or powers, if it has reasonable grounds for believing that repayment of
such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
RESIGNATION OF TRUSTEES
Each trustee may, upon written notice to the depositor, resign at any time,
in which event the depositor will be obligated to use its best efforts to
appoint a successor trustee. If no successor trustee has been appointed and has
accepted such appointment within 30 days after the giving of such notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for appointment of a successor trustee. Each trustee may also be
removed at any time
o if the trustee ceases to be eligible to continue as such under the
related agreement, or
o if the trustee becomes insolvent, or
o the holders of securities having more than over 50% of the total
voting rights of the securities in the trust fund give written notice
to the trustee and to the depositor.
Any resignation or removal of a trustee and appointment of a successor trustee
will not become effective until the successor trustee accepts its appointment.
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AMENDMENT OF AGREEMENT
Unless otherwise specified in the prospectus supplement, the Agreement for
each series of securities may be amended by the depositor, the servicer (with
respect to a series relating to loans), and the trustee, without notice to or
consent of the holders, for the following purposes:
o to cure any ambiguity,
o to correct any defective provisions or to correct or supplement any
provision in the agreement,
o to add to the duties of the depositor, the applicable trustee or the
servicer,
o to add any other provisions with respect to matters or questions
arising under the agreement or related credit enhancement,
o to add or amend any provisions of the agreement as required by any
rating agency named in the prospectus supplement in order to maintain
or improve the rating of the securities (it being understood that none
of the depositor, the seller, the servicer or any trustee is obligated
to maintain or improve the rating), or
o to comply with any requirements imposed by the Code.
In no event, however, shall any amendment (other than an amendment to comply
with Code requirements) adversely affect in any material respect the interests
of any holders of the series, as evidenced by an opinion of counsel delivered to
the trustee. Unless otherwise specified in the prospectus supplement, an
amendment shall be deemed not to adversely affect in any material respect the
interests of any holder if the trustee receives written confirmation from each
rating agency named in the prospectus supplement that the amendment will not
cause the rating agency to reduce its then-current rating.
Unless otherwise specified in the prospectus supplement, each agreement for
a series may also be amended by the applicable trustee, the servicer, if
applicable, and the depositor with the consent of the holders possessing not
less than 66 2/3% of the total outstanding principal amount of the securities of
the series (or, if only certain classes are affected by the amendment, 66 2/3%
of the total outstanding principal amount of each affected class), for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the agreement, or modifying in any manner the rights of
holders of the series. In no event, however, shall any amendment
o reduce the amount or delay the timing of payments on any security
without the consent of the holder of the security, or
o reduce the percentage of the total outstanding principal amount of
securities of each class, the holders of which are required to consent
to any such amendment, without the consent of the holders of 100% of
the total outstanding principal amount of each affected class.
63
VOTING RIGHTS
The prospectus supplement will set forth the method of determining
allocation of voting rights with respect to the related series of securities.
LIST OF HOLDERS
Upon written request of three or more holders of record of a series for
purposes of communicating with other holders with respect to their rights under
the agreement (which request is accompanied by a copy of the communication such
holders propose to transmit), the trustee will afford them access during
business hours to the most recent list of holders of that series held by the
trustee.
No agreement will provide for the holding of any annual or other meeting of
holders.
BOOK-ENTRY SECURITIES
If specified in the related prospectus supplement for a series of
securities, the securities (or one or more of the securities) may be issued in
book-entry form. In that event, beneficial owners of those securities will not
be considered "Holders" under the agreements and may exercise the rights of
holders only indirectly through the participants in the applicable book-entry
system.
REMIC ADMINISTRATOR
For any series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
trust fund may be performed by a REMIC administrator, which may be an affiliate
of the depositor.
TERMINATION
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. The obligations created
by the pooling and servicing agreement or trust agreement for a series will
terminate upon the distribution to holders of all amounts distributable to them
under the agreement in the circumstances described in the related prospectus
supplement. See "Description of the Securities--Optional Redemption, Purchase or
Termination" in this prospectus.
INDENTURE. The indenture will be discharged with respect to a series of
notes (except with respect to certain continuing rights specified in the
indenture) upon the delivery to the indenture trustee for cancellation of all
the notes of that series or, with certain limitations, upon deposit with the
indenture trustee of funds sufficient for the payment in full of all of the
notes of the series.
In addition to such discharge with certain limitations, if so specified
with respect to the notes of any series, the indenture will provide that the
related trust fund will be discharged from any and all obligations in respect of
the notes of that series (except for certain obligations relating to temporary
notes and exchange of notes, registration of the transfer or exchange of those
notes, replacing stolen, lost or mutilated notes, maintaining paying agencies
and holding
64
monies for payment in trust) upon the deposit with the indenture trustee, in
trust, of money and/or direct obligations of or obligations guaranteed by the
United States of America that, through the payment of interest and principal in
accordance with their terms, will provide money in an amount sufficient to pay
the principal of and each installment of interest on the notes on the final
scheduled distribution date for the notes and any installment of interest on the
notes in accordance with the terms of the indenture and the notes. In the event
of any such defeasance and discharge of notes of a series, holders of notes of
that series would be able to look only to such money and/or direct obligations
for payment of principal of and interest on, if any, their notes until maturity.
MATERIAL LEGAL ASPECTS OF THE LOANS
The following discussion contains general summaries of material legal
matters mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements that are general in nature. Because the
legal matters are determined primarily by applicable state law and because state
laws may differ substantially, the summaries do not purport to be complete, to
reflect the laws of any particular state, or to encompass the laws of all states
in which the properties securing the loans may be situated.
MORTGAGES
The Residential Loans and Home Equity Loans for a series will, and the Home
Improvement Contracts for a series may, be secured by mortgages or deeds of
trust or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to a mortgage loan is located. We refer to
Residential Loans, Home Equity Loans and Home Improvement Contracts that are
secured by mortgages as "mortgage loans." The filing of a mortgage, deed of
trust or deed to secure debt creates a lien or title interest upon the real
property covered by that instrument and represents the security for the
repayment of an obligation that is customarily evidenced by a promissory note.
It is not prior to the lien for real estate taxes and assessments or other
charges imposed under governmental police powers and may also be subject to
other liens pursuant to the laws of the jurisdiction in which the mortgaged
property is located. Priority with respect to the instruments depends on their
terms, the knowledge of the parties to the mortgage and generally on the order
of recording with the applicable state, county or municipal office. There are
two parties to a mortgage: the mortgagor, who is the borrower/property owner or
the land trustee (as described below), and the mortgagee, who is the lender.
Under the mortgage instrument, the mortgagor delivers to the mortgagee a note or
bond and the mortgage. In the case of a land trust, there are three parties
because title to the property is held by a land trustee under a land trust
agreement of which the borrower/property owner is the beneficiary; at
origination of a mortgage loan, the borrower executes a separate undertaking to
make payments on the mortgage note. A deed of trust transaction normally has
three parties: the trustor, who is the borrower/property owner; the beneficiary,
who is the lender; and the trustee, a third-party grantee. Under a deed of
trust, the trustor grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
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FORECLOSURE ON MORTGAGES
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust generally is accomplished by a nonjudicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, foreclosure also may be
accomplished by judicial action in the manner provided for foreclosure of
mortgages. In some states, the trustee must record a notice of default and send
a copy to the borrower-trustor and to any person who has recorded a request for
a copy of a notice of default and notice of sale. In addition, the trustee in
some states must provide notice to any other individual having an interest in
the real property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the property. The trustor, borrower or any person having a
junior encumbrance on the real estate may, during a reinstatement period, cure
the default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Generally, state law controls the amount
of foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised its rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances, a court
of equity may relieve the mortgagor from an entirely technical default where the
default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, and sometimes requires up
to several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was
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for less than fair consideration and the sale occurred while the mortgagor was
insolvent and within one year (or within the state statute of limitations if the
trustee in bankruptcy elects to proceed under state fraudulent conveyance law)
of the filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, a
public sale is conducted by the referee or other designated officer or by the
trustee. However, because of the difficulty potential third party purchasers at
the sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount that may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished. The lender may purchase the property
for a lesser amount in order to preserve its right against the borrower to seek
a deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the loans. The failure to comply with these laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations, an
owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs.
Liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of hazardous substances, and could
exceed the value of the property and the aggregate assets of the owner or
operator. In addition, persons who transport or dispose of hazardous substances,
or arrange for the transportation, disposal or treatment of hazardous
substances, at off-site locations may also be held liable if there are releases
or threatened releases of hazardous substances at such off-site locations.
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In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against the property. Under CERCLA, the
clean-up lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by the current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the facility.
The Solid Waste Disposal Act (SWDA) provides similar protection to secured
creditors in connection with liability for releases of petroleum from certain
underground storage tanks. However, if a lender "participates in the management"
of the facility in question or is found not to have held its interest primarily
to protect a security interest, the lender may forfeit its secured creditor
exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency (EPA)
in April 1992 attempted to clarify the activities in which lenders could engage
both prior to and subsequent to foreclosure of a security interest without
forfeiting the secured creditor exemption under CERCLA. The rule was struck down
in 1994 by the United States Court of Appeals for the District of Columbia
Circuit in KELLEY EX REL STATE OF MICHIGAN V. ENVIRONMENTAL PROTECTION AGENCY,
15 F.3d 1100 (D.C. Cir. 1994), REH'G DENIED, 25 F.3d 1088, CERT. DENIED SUB NOM.
AM. BANKERS ASS'N V. KELLEY, 115 S.Ct. 900 (1995). Another EPA regulation
promulgated in 1995 clarifies the activities in which lenders may engage without
forfeiting the secured creditor exemption under the underground storage tank
provisions of SWDA. That regulation has not been struck down.
On September 30, 1996, Congress enacted the Asset Conservation, Limited
Liability and Deposit Insurance Protection Act (ACA) which amended both CERCLA
and SWDA to provide additional clarification regarding the scope of the lender
liability exemptions under the two statutes. Among other things, ACA specifies
the circumstances under which a lender will be protected by the CERCLA and SWDA
exemptions, both while the borrower is still in possession of the secured
property and following foreclosure on the secured property.
Generally, ACA states that a lender who holds indicia of ownership
primarily to protect a security interest in a facility will be considered to
participate in management only if, while the borrower is still in possession of
the facility encumbered by the security interest, the lender
o exercises decision-making control over environmental compliance
related to the facility such that the lender has undertaken
responsibility for hazardous substance handling or disposal practices
related to the facility or
o exercises control at a level comparable to that of a manager of the
facility such that the lender has assumed or manifested responsibility
for (a) overall management of the facility encompassing daily
decision-making with respect to environmental
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compliance or (b) overall or substantially all of the operational
functions (as distinguished from financial or administrative
functions) of the facility other than the function of environmental
compliance.
ACA also specifies certain activities that are not considered to be
"participation in management," including monitoring or enforcing the terms of
the extension of credit or security interest, inspecting the facility, and
requiring a lawful means of addressing the release or threatened release of a
hazardous substance.
ACA also specifies that a lender who did not participate in management of a
facility prior to foreclosure will not be considered an "owner or operator,"
even if the lender forecloses on the facility and after foreclosure sells or
liquidates the facility, maintains business activities, winds up operations,
undertakes an appropriate response action, or takes any other measure to
preserve, protect, or prepare the facility prior to sale or disposition, if the
lender seeks to sell or otherwise divest the facility at the earliest
practicable, commercially reasonable time, on commercially reasonable terms,
taking into account market conditions and legal and regulatory requirements.
ACA specifically addresses the potential liability of lenders who hold
mortgages or similar conventional security interests in real property, such as
the trust fund does in connection with the mortgage loans and the Home
Improvement Contracts.
If a lender is or becomes liable under CERCLA, it may be authorized to
bring a statutory action for contribution against any other "responsible
parties," including a previous owner or operator. However, these persons or
entities may be bankrupt or otherwise judgment proof, and the costs associated
with environmental cleanup and related actions may be substantial. Moreover,
some state laws imposing liability for addressing hazardous substances do not
contain exemptions from liability for lenders. Whether the costs of addressing a
release or threatened release at a property pledged as collateral for one of the
loans would be imposed on the related trust fund, and thus occasion a loss to
the holders, therefore depends on the specific factual and legal circumstances
at issue.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a non-statutory right that must be exercised prior to the foreclosure sale.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The exercise of a
right of redemption would defeat the title of any purchaser at a foreclosure
sale, or of any purchaser from the lender subsequent to foreclosure or sale
under a deed of trust. Consequently, the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
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JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The mortgage loans comprising or underlying the primary assets included in
the trust fund for a series will be secured by mortgages or deeds of trust,
which may be second or more junior mortgages to other mortgages held by other
lenders or institutional investors. The rights of the related trust fund (and
therefore of the security holders), as mortgagee under a junior mortgage, are
subordinate to those of the mortgagee under the senior mortgage, including the
prior rights of the senior mortgagee to receive hazard insurance and
condemnation proceeds and to cause the property securing the mortgage loan to be
sold upon default of the mortgagor, thereby extinguishing the junior mortgagee's
lien unless the junior mortgagee asserts its subordinate interest in the
property in foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage. A junior mortgagee may satisfy a defaulted senior loan in full and, in
some states, may cure the default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. In most
states, absent a provision in the mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured by
the mortgage, in such order as the mortgagee may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the property is taken by condemnation, the mortgagee or
beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property that appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon
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the public sale of the real property and the amount due to the lender. Other
statutes require the beneficiary or mortgagee to exhaust the security afforded
under a deed of trust or mortgage by foreclosure in an attempt to satisfy the
full debt before bringing a personal action against the borrower. In other
states, the lender has the option of bringing a personal action against the
borrower on the debt without first exhausting the security. However, in some of
these states, the lender, following judgment on the personal action, may be
deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of the election
requirement, when applicable, is that lenders will usually proceed first against
the security rather than bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of the public sale.
The purpose of these statutes is generally to prevent a beneficiary or a
mortgagee from obtaining a large deficiency judgment against the former borrower
as a result of low or no bids at the foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the Federal Bankruptcy Code, the Soldiers'
and Sailors' Relief Act of 1940 and state laws affording relief to debtors, may
interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a deficiency judgment. For example, with respect to
Federal Bankruptcy Code, the filing of a petition acts as a stay against the
enforcement of remedies for collection of a debt. Moreover, a court with federal
bankruptcy jurisdiction may permit a debtor through a rehabilitation plan under
chapter 13 of the Federal Bankruptcy Code to cure a monetary default with
respect to a loan on his residence by paying arrearages within a reasonable time
period and reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon its
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a chapter 11 case under the Federal Bankruptcy Code, the lender is
precluded from foreclosing without authorization from the bankruptcy court. The
lender's lien may be transferred to other collateral and/or be limited in amount
to the value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
71
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Federal Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted mortgage loan. In addition, substantive requirements are
imposed upon lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws. The
laws include the federal Truth in Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal laws impose
specific statutory liabilities upon lenders that originate loans and that fail
to comply with the provisions of the law. In some cases, this liability may
affect assignees of the loans.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 preempts state constitutional, statutory and case law that prohibits
the enforcement of due-on-sale clauses and permits lenders to enforce these
clauses in accordance with their terms, subject to certain exceptions. As a
result, due-on-sale clauses have become generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period" under the Garn-St. Germain Act,
which ended in all cases not later than October 15, 1982, and (ii) originated by
lenders other than national banks, federal savings institutions and federal
credit unions. Freddie Mac has taken the position in its published mortgage
servicing standards that, out of a total of eleven "window period states," five
states (Arizona, Michigan, Minnesota, New Mexico and Utah) have enacted statutes
extending, on various terms and for varying periods, the prohibition on
enforcement of due-on-sale clauses with respect to certain categories of window
period loans. Also, the Garn-St. Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
In addition, under the Federal Bankruptcy Code, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain circumstances,
be eliminated in any modified mortgage resulting from bankruptcy proceedings.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that
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a lender may collect from a borrower as an additional charge if the loan is
prepaid. Late charges and prepayment fees are typically retained by servicers as
additional servicing compensation.
Some state laws restrict the imposition of prepayment charges and late fees
even when the loans expressly provide for the collection of those charges.
Certain types of loans that were closed before July 1, 2003 can provide for such
charges because of the effect of the Alternative Mortgage Transaction Parity Act
of 1982, (the "Parity Act") and its Office of Thrift Supervision implementing
regulations, which permit the collection of prepayment charges and late charges
in connection with those types of loans, preempting any contrary state law
restrictions. However, some states may not recognize the preemptive authority of
the Parity Act. As a result, it is possible that prepayment charges and late
fees may not be collected even on loans that provide for the payment of these
charges based on the Parity Act. The Office of Thrift Supervision withdrew its
favorable regulations and opinions that previously authorized lenders to charge
prepayment charges and late fees on Parity Act loans notwithstanding contrary
state law, effective with respect to Parity Act loans originated on or after
July 1, 2003.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his default
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon its
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Office of Thrift Supervision
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of such mortgage loans.
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APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 provides that state usury limitations shall not apply to certain
types of residential first mortgage loans originated by certain lenders after
March 31, 1980. Similar federal statutes were in effect with respect to mortgage
loans made during the first three months of 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V.
Title V authorizes any state to reimpose interest rate limits by adopting a
state law before April 1, 1983 or by certifying that the voters of such state
have voted in favor of any provision, constitutional or otherwise, which
expressly rejects an application of the federal law. Fifteen states adopted such
a law prior to the April 1, 1983 deadline. In addition, even where Title V is
not rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V.
THE HOME IMPROVEMENT CONTRACTS AND THE MANUFACTURED HOUSING CONTRACTS
GENERAL
The Home Improvement Contracts and Manufactured Housing Contracts, other
than those that are unsecured or secured by mortgages on real estate, generally
are "chattel paper" or constitute "purchase money security interests," each as
defined in the Uniform Commercial Code (UCC) in effect in the applicable
jurisdiction. Pursuant to the UCC, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. Under the
related agreement, the depositor will transfer physical possession of the
contracts to the trustee or a custodian or may retain possession of the
contracts as custodian for the trustee. In addition, the depositor will make an
appropriate filing of a UCC-1 financing statement in the appropriate states to
give notice of the trustee's ownership of the contracts. Unless otherwise
specified in the related prospectus supplement, the contracts will not be
stamped or otherwise marked to reflect their assignment from the depositor to
the trustee. Therefore, if through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of such assignment, the trustee's interest in the contracts could be defeated.
SECURITY INTERESTS IN HOME IMPROVEMENTS
A Home Improvement Contract that is secured by the related home
improvements grants to the originator of the contract a purchase money security
interest in the related home improvements to secure all or part of the purchase
price of the home improvements and related services. A financing statement
generally is not required to be filed to perfect a purchase money security
interest in consumer goods. Purchase money security interests of this type are
assignable. In general, a purchase money security interest grants to the holder
a security interest that has priority over a conflicting security interest in
the same collateral and the proceeds of the collateral. However, to the extent
that the collateral subject to a purchase money security interest becomes a
fixture, in order for the related purchase money security interest to take
priority over a conflicting interest in the fixture, the holder's interest in
the home improvement must generally be perfected by a timely fixture filing. In
general, under the UCC, a security interest does not
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exist under the UCC in ordinary building material incorporated into an
improvement on land. Home Improvement Contracts that finance lumber, bricks,
other types of ordinary building material or other goods that are deemed to lose
their characterization, upon incorporation of the materials into the related
property, will not be secured by a purchase money security interest in the home
improvement being financed.
ENFORCEMENT OF SECURITY INTEREST IN HOME IMPROVEMENTS
So long as the home improvement has not become subject to real estate law,
a creditor can repossess a home improvement securing a Home Improvement Contract
by voluntary surrender, by "self-help" repossession that is "peaceful" (i.e.,
without breach of the peace) or, in the absence of voluntary surrender and the
ability to repossess without breach of the peace, by judicial process. The
holder of a Home Improvement Contract must give the debtor a number of days'
notice, which varies from ten to 30 days depending on the state, prior to
commencement of any repossession. The UCC and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting the sale. The
law in most states also requires that the debtor be given notice of any sale
prior to resale of the unit that the debtor may redeem it at or before resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments, and in many cases the
defaulting borrower will have no assets from which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The manufactured homes securing the Manufactured Housing Contracts may be
located in all 50 states and the District of Columbia. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state law.
The security interests of the trustee in the manufactured homes will not be
noted on the certificates of title or by delivery of the required documents and
payment of fees to the applicable state motor vehicle authorities unless the
related prospectus supplement so requires. With respect to each transaction, a
decision will be made as to whether or not the security interests of the trustee
in the manufactured homes will be noted on the certificates of title and the
required documents and fees will be delivered to the applicable state motor
vehicle authorities based upon, among other things, the practices and procedures
of the related originator and servicer and after consultation with the
applicable rating agency or rating agencies. In some nontitle states, perfection
pursuant to the provisions of the UCC is required. As manufactured homes have
become large and often have been attached to their sites without any apparent
intention to move them, courts in many states have held that manufactured homes,
under particular circumstances, may become governed by real estate title and
recording laws. As a
75
result, a security interest in a manufactured home could be rendered subordinate
to the interests of other parties claiming an interest in the manufactured home
under applicable state real estate law. In order to perfect a security interest
in a manufactured home under real estate laws, the secured party must file
either a "fixture filing" under the provisions of the UCC or a real estate
mortgage under the real estate laws of the state where the home is located.
These filings must be made in the real estate records office of the county where
the manufactured home is located. If so specified in the related prospectus
supplement, the Manufactured Housing Contracts may contain provisions
prohibiting the borrower from permanently attaching the manufactured home to its
site. So long as the borrower does not violate this agreement, a security
interest in the manufactured home will be governed by the certificate of title
laws or the UCC, and the notation of the security interest on the certificate of
title or the filing of a UCC financing statement will be effective to maintain
the priority of the security interest in the manufactured home. If, however, a
manufactured home is permanently attached to its site, the related lender may be
required to perfect a security interest in the manufactured home under
applicable real estate laws.
In the event that the owner of a manufactured home moves it to a state
other than the state in which the manufactured home initially is registered,
under the laws of most states the perfected security interest in the
manufactured home would continue for four months after relocation and, after
expiration of the four months, only if and after the owner re-registers the
manufactured home in the new state. If the owner were to relocate a manufactured
home to another state and not re-register a security interest in that state, the
security interest in the manufactured home would cease to be perfected. A
majority of states generally require surrender of a certificate of title to
re-register a manufactured home. Accordingly, the secured party must surrender
possession if it holds the certificate of title to the manufactured home or, in
the case of manufactured homes registered in states which provide for notation
of lien on the certificate of title, notice of surrender would be given to the
secured party noted on the certificate of title. In states which do not require
a certificate of title for registration of a manufactured home, re-registration
could defeat perfection.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority over a
perfected security interest in the manufactured home.
CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract that is the seller of goods that gave rise to the transaction (and
certain related lenders and assignees) to transfer the contract free of notice
of claims by the related debtor. The effect of this rule is to subject the
assignee of the contract to all claims and defenses the debtor could assert
against the seller of goods. Liability under this rule is limited to amounts
paid under a contract; however, the obligor also may be able to assert the rule
to set off remaining amounts due as a defense against a claim brought by the
trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act
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and the Uniform Consumer Credit Code. In the case of some of these laws, the
failure to comply with their provisions may affect the enforceability of the
related contract.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 provides that, subject to the following conditions, state usury
limitations shall not apply to any contract that is secured by a first lien on
certain kinds of consumer goods. The Home Improvement Contracts or Manufactured
Housing Contracts would be covered if they satisfy certain conditions, among
other things, governing the terms of any prepayments, late charges and deferral
fees and requiring a 30-day notice period prior to instituting any action
leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
INSTALLMENT SALES CONTRACTS
The loans may also consist of installment sales contracts. Under an
installment sales contract the seller/lender retains legal title to the property
and enters into an agreement with the purchaser/borrower for the payment of the
purchase price, plus interest, over the term of the contract. Only after full
performance by the purchaser/borrower of the contract is the seller/lender
obligated to convey title to the property to the borrower. As with mortgage or
deed of trust financing, during the effective period of the installment sales
contract, the borrower is generally responsible for maintaining the property in
good condition and for paying real estate taxes, assessments and hazard
insurance policy premiums associated with the property.
The method of enforcing the rights of the seller/lender under an
installment sales contract varies on a state-by-state basis depending upon the
extent to which state courts are willing, or able pursuant to state statute, to
enforce the contract strictly according to the terms. The terms of installment
sales contracts generally provide that upon a default by the borrower, the
borrower loses his right to occupy the property, the entire indebtedness is
accelerated, and the borrower's equitable interest in the property is forfeited.
The seller/lender in such a situation does not have to foreclose in order to
obtain title to the property, although in some cases a quiet title action is in
order if the borrower has filed the installment sales contract in local land
records and an ejectment action may be necessary to recover possession. In a few
states, particularly in cases of borrower default during the early years of an
installment sales contract, the courts will permit ejectment of the buyer and a
forfeiture of his interest in the property. However, most state legislatures
have enacted provisions by analogy to mortgage law protecting borrowers under
installment sales contracts from the harsh consequences of forfeiture. Under
these statutes, a judicial or nonjudicial foreclosure may be required, the
lender may be required to give notice of default and the borrower may be granted
some grace period during which the installment sales contract may be reinstated
upon full payment of the default amount and the borrower may have a
post-foreclosure statutory redemption right. In other states, courts in equity
may permit a
77
borrower with significant investment in the property under an installment sales
contract for the sale of real estate to share in the proceeds of sale of the
property after the indebtedness is repaid or may otherwise refuse to enforce the
forfeiture clause. Nevertheless, generally speaking, the lender's procedures for
obtaining possession and clear title under an installment sales contract in a
given state are simpler and less time-consuming and costly than are the
procedures for foreclosing and obtaining clear title to a property subject to
one or more liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service,
o are entitled to have their interest rates reduced and capped at 6% per
year, on obligations (including loans) incurred prior to the
commencement of military service for the duration of military service,
and
o may be entitled to a stay of proceedings on any kind of foreclosure or
repossession action in the case of defaults on such obligations
entered into prior to military service for the duration of military
service, and
o may have the maturity of their obligations incurred prior to military
service extended, the payments lowered and the payment schedule
readjusted for a period of time after the completion of military
service.
However, these benefits are subject to challenge by creditors and if, in the
opinion of the court, the ability of a person to comply with his obligations is
not materially impaired by military service, the court may apply equitable
principles accordingly.
If a borrower's obligation to repay amounts otherwise due on a loan included in
a trust fund for a series is relieved pursuant to the Relief Act, none of the
trust fund, the servicer, the depositor or the trustee will be required to
advance such amounts, and any related loss may reduce the amounts available to
be paid to the holders of the related securities. Unless otherwise specified in
the related prospectus supplement, any shortfalls in interest collections on
loans (or underlying loans), included in a trust fund for a series resulting
from application of the Relief Act will be allocated to each class of securities
of the series that is entitled to receive interest in respect of the loans (or
underlying loans) in proportion to the interest that each class of securities
would have otherwise been entitled to receive in respect of the loans (or
underlying loans) had the interest shortfall not occurred.
THE DEPOSITOR
The depositor, Bear Stearns Asset Backed Securities, Inc., was incorporated
in the state of Delaware in June 1995, and is a wholly-owned subsidiary of The
Bear Stearns Companies Inc. The depositor's principal executive offices are
located at 383 Madison Avenue, New York, New York 10179. Its telephone number is
(212) 272-2000.
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The depositor will not engage in any activities other than to authorize,
issue, sell, deliver, purchase and invest in (and enter into agreements in
connection with), and/or to engage in the establishment of one or more trusts,
which will issue and sell, bonds, notes, debt or equity securities, obligations
and other securities and instruments. The depositor securities must be
collateralized or otherwise secured or backed by, or otherwise represent an
interest in, among other things, receivables or pass-through certificates or
participations or certificates of participation or beneficial ownership in one
or more pools of receivables, and the proceeds of the foregoing, that arise in
connection with loans secured by senior or junior mortgages on real estate or
manufactured housing and any and all other commercial transactions and
commercial, sovereign, student or consumer loans or indebtedness. The depositor
may purchase, acquire, own, hold, transfer, convey, service, sell, pledge,
assign, finance and otherwise deal with such receivables, pass-through
certificates, or participations or certificates of participation or beneficial
ownership. Article Third of the depositor's Certificate of Incorporation limits
the depositor's activities to the above activities and certain related
activities, such as credit enhancement with respect to depositor securities, and
to any activities incidental to and necessary or convenient for the
accomplishment of those purposes.
USE OF PROCEEDS
The depositor will apply all or substantially all of the net proceeds from
the sale of each of the related trust fund series of securities for one or more
of the following purposes:
o to purchase the primary assets of the related trust fund,
o to repay indebtedness incurred to obtain funds to acquire the primary
assets of the related trust fund,
o to establish any reserve funds described in the related prospectus
supplement, and
o to pay costs of structuring and issuing the securities, including the
costs of obtaining any credit enhancement.
If specified in the related prospectus supplement, the purchase of the
primary assets for a series may be effected by delivering the securities to the
seller in exchange for the primary assets.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary of the material federal income tax consequences of
the purchase, ownership, and disposition of the securities is based on the
opinion of Sidley Austin Brown & Wood LLP, Stroock & Stroock & Lavan LLP,
Thacher Proffitt & Wood LLP or other tax counsel designated in the prospectus
supplement, as special counsel to the depositor. This summary is based upon the
provisions of the Internal Revenue Code, the regulations promulgated thereunder,
including, where applicable, proposed regulations, and the judicial and
administrative rulings and decisions now in effect, all of which are subject to
change or possible
79
differing interpretations. The statutory provisions, regulations, and
interpretations on which this interpretation is based are subject to change
either prospectively or retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
securities as "capital assets" (generally, property held for investment) within
the meaning of section 1221 of the Code. Prospective investors may wish to
consult their own tax advisers concerning the federal, state, local and any
other tax consequences as relates specifically to such investors in connection
with the purchase, ownership and disposition of the securities.
The federal income tax consequences to security holders will vary depending
on whether
o the securities of a series are classified as indebtedness;
o an election is made to treat the trust fund relating to a particular
series of securities as a real estate mortgage investment conduit or
REMIC under the Code;
o the securities represent an ownership interest in some or all of the
assets included in the trust fund for a series;
o an election is made to treat the trust fund relating to a particular
series of certificates as a partnership; or
o an election is made to treat the trust fund relating to a particular
series of securities as a financial asset securitization investment
trust or FASIT under the Code.
The prospectus supplement for each series of securities will specify how
the securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to the series.
TAXATION OF DEBT SECURITIES
STATUS AS REAL PROPERTY LOANS. Except to the extent otherwise provided in
the related prospectus supplement, if the securities are regular interests in a
REMIC or represent interests in a grantor trust, in the opinion of tax counsel:
o securities held by a domestic building and loan association will
constitute "loans... secured by an interest in real property" within
the meaning of section 7701(a)(19)(C)(v) of the Code; and
o securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of section 856(c)(4)(A) of the
Code and interest on securities will be considered "interest on
obligations secured by mortgages on real property or on interests in
real property" within the meaning of section 856(c)(3)(B) of the Code.
INTEREST AND ACQUISITION DISCOUNT. In the opinion of tax counsel,
securities that are REMIC regular interests are generally taxable to holders in
the same manner as evidences of
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indebtedness issued by the REMIC. Stated interest on the securities that are
REMIC regular interests will be taxable as ordinary income and taken into
account using the accrual method of accounting, regardless of the holder's
normal accounting method. Interest (other than original issue discount) on
securities (other than securities that are REMIC regular interests) which are
characterized as indebtedness for federal income tax purposes will be includible
in income by holders thereof in accordance with their usual methods of
accounting. When we refer to "debt securities" in this section, we mean
securities characterized as debt for federal income tax purposes and securities
that are REMIC regular interests.
In the opinion of tax counsel, "compound interest securities" (i.e., debt
securities that permit all interest to accrue for more than one year before
payments of interest are scheduled to begin) will, and certain of the other debt
securities issued at a discount may, be issued with "original issue discount" or
OID. The following discussion is based in part on the OID Regulations. A holder
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the debt securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a debt security and its issue price. In the
opinion of tax counsel, a holder of a debt security must include OID in gross
income as ordinary interest income as it accrues under a method taking into
account an economic accrual of the discount. In general, OID must be included in
income in advance of the receipt of the cash representing that income. The
amount of OID on a debt security will be considered to be zero if it is less
than a DE MINIMIS amount determined under the Code.
The issue price of a debt security is the first price at which a
substantial amount of debt securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of debt securities is sold for cash on
or prior to the closing date, the issue price for that class will be treated as
the fair market value of that class on the closing date. The issue price of a
debt security also includes the amount paid by an initial debt security holder
for accrued interest that relates to a period prior to the issue date of the
debt security. The stated redemption price at maturity of a debt security
includes the original principal amount of the debt security, but generally will
not include distributions of interest if the distributions constitute "qualified
stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below), provided that the interest payments are unconditionally payable at
intervals of one year or less during the entire term of the debt security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Debt securities may provide for default remedies in the
event of late payment or nonpayment of interest. Although the matter is not free
from doubt, the trustee intends to treat interest on such debt securities as
unconditionally payable and as constituting qualified stated interest, not OID.
However, absent clarification of the OID Regulations, where debt securities do
not provide for default remedies, the interest payments will be included in the
debt security's stated redemption price at maturity and taxed as OID. Interest
is payable at a single fixed rate only if the rate appropriately takes into
account the length of the interval between payments. Distributions of interest
on debt securities with respect to which deferred interest will accrue,
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will not constitute qualified stated interest payments, in which case the stated
redemption price at maturity of such debt securities includes all distributions
of interest as well as principal thereon. Where the interval between the issue
date and the first distribution date on a debt security is longer than the
interval between subsequent distribution dates, the greater of (i) the interest
foregone and (ii) the excess of the stated principal amount over the issue price
will be included in the stated redemption price at maturity and tested under the
DE MINIMIS rule described below. Where the interval between the issue date and
the first distribution date on a debt security is shorter than the interval
between subsequent distribution dates, all of the additional interest will be
included in the stated redemption price at maturity and tested under the DE
MINIMIS rule described below. In the case of a debt security with a long first
period that has non-DE MINIMIS OID, all stated interest in excess of interest
payable at the effective interest rate for the long first period will be
included in the stated redemption price at maturity and the debt security will
generally have OID. Holders of debt securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a debt security.
Under the DE MINIMIS rule, OID on a debt security will be considered to be
zero if the OID is less than 0.25% of the stated redemption price at maturity of
the debt security multiplied by the weighted average maturity of the debt
security. For this purpose, the weighted average maturity of the debt security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the debt security and the
denominator of which is the stated redemption price at maturity of the debt
security. Holders generally must report DE MINIMIS OID pro rata as principal
payments are received, and such income will be capital gain if the debt security
is held as a capital asset. However, holders may elect to accrue all DE MINIMIS
OID as well as market discount under a constant yield method. See "--Election to
Treat All Interest as Original Issue Discount" below.
Debt securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is generally treated as payable at a
qualified variable rate and not as contingent interest if
o the interest is unconditionally payable at least annually,
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments, and
o interest is based on a "qualified floating rate," an "objective rate,"
or a combination of "qualified floating rates" that do not operate in
a manner that significantly accelerates or defers interest payments on
the debt security.
In the case of compound interest securities, certain interest weighted
securities, and certain of the other debt securities, none of the payments under
the instrument will be considered qualified stated interest, and thus the
aggregate amount of all payments will be included in the stated redemption price
at maturity.
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The Internal Revenue Service issued contingent payment regulations
governing the calculation of OID on instruments having contingent interest
payments. These contingent payment regulations represent the only guidance
regarding the views of the IRS with respect to contingent interest instruments
and specifically do not apply for purposes of calculating OID on debt
instruments subject to section 1272(a)(6) of the Code, such as the debt
securities. Additionally, the OID Regulations do not contain provisions
specifically interpreting section 1272(a)(6) of the Code. Until the Treasury
issues guidance to the contrary, trustee intends to base its computation on
section 1272(a)(6) of the Code and the OID Regulations as described in this
prospectus. However, because no regulatory guidance currently exists under
section 1272(a)(6) of the Code, there can be no assurance that such methodology
represents the correct manner of calculating OID.
The holder of a debt security issued with OID must include in gross income,
for all days during its taxable year on which it holds the debt security, the
sum of the "daily portions" of OID. The amount of OID includible in income by a
holder will be computed by allocating to each day during an accrual period a pro
rata portion of the original issue discount that accrued during the accrual
period. In the case of a debt security that is not a REMIC 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 the debt security's 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 holder of a pay-through security is computed by
taking into account the prepayment rate assumed in pricing the debt instrument.
The amount of OID that will accrue during an accrual period on a pay-through
security is the EXCESS, if any, of the
o sum of
(a) the present value of all payments remaining to be made on the
pay-through security as of the close of the accrual period and
(b) the payments during the accrual period of amounts included in the
stated redemption price of the pay-through security,
OVER
o the adjusted issue price of the pay-through security at the beginning
of the accrual period.
The present value of the remaining payments is to be determined on the basis of
three factors:
83
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 of a pay-through security to take into account
prepayments with respect to the loans at a rate that exceeds the prepayment
assumption, and to decrease (but not below zero for any period) the portions of
OID required to be included in income by a holder of a pay-through security to
take into account prepayments with respect to the loans at a rate that is slower
than the prepayment assumption. Although OID will be reported to holders of
pay-through securities based on the prepayment assumption, no representation is
made to holders that loans will be prepaid at that rate or at any other rate.
The depositor may adjust the accrual of OID on a class of securities that
are REMIC regular interests 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 REMIC regular interests could increase.
Certain classes of securities 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 a holder who purchases the debt security for an amount that
exceeds its adjusted issue price will be entitled (as will an initial holder who
pays more than a debt security's issue price) to offset such OID by comparable
economic accruals of portions of the excess.
EFFECTS OF DEFAULTS AND DELINQUENCIES. In the opinion of tax counsel,
holders will be required to report income with respect to the related securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the loans, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
holder of a security in any period could significantly exceed the amount of cash
distributed to the holder in that period. The holder will eventually be allowed
a loss (or will be allowed to report a lesser amount of income) to the extent
that the aggregate amount of distributions on the securities is reduced as a
result of a loan default. However, the timing and character of losses or
reductions in income are uncertain and, accordingly, holders of securities
should consult their own tax advisors on this point.
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INTEREST WEIGHTED SECURITIES. An "interest weighted security" is a security
that is a REMIC regular interest or a "stripped" security (as discussed under
"--Tax Status as a Grantor Trust; General" below) the payments on which consist
solely or primarily of a specified portion of the interest payments on qualified
mortgages held by the REMIC or on loans underlying pass-through securities. It
is not clear how income should be accrued with respect to interest weighted
securities. The trustee intends to take the position that all of the income
derived from an interest weighted security should be treated as OID and that the
amount and rate of accrual of such OID should be calculated by treating the
interest weighted security as a compound interest security. However, in the case
of interest weighted securities that are entitled to some payments of principal
and are REMIC regular interests, the IRS could assert that income derived from
the interest weighted security should be calculated as if the security were a
security purchased at a premium equal to the excess of the price paid by the
holder for the security over its stated principal amount, if any. Under this
approach, a holder would be entitled to amortize such premium only if it has in
effect an election under section 171 of the Code with respect to all taxable
debt instruments held by such holder, as described below. Alternatively, the IRS
could assert that an interest weighted security should be taxable under the
rules governing bonds issued with contingent payments. This treatment may be
more likely in the case of interest weighted securities that are stripped
securities as described below. See "--Tax Status as a Grantor Trust--DISCOUNT OR
PREMIUM ON PASS-THROUGH SECURITIES" below.
VARIABLE RATE DEBT SECURITIES. In the opinion of tax counsel, in the case
of debt securities bearing interest at a rate that varies directly, according to
a fixed formula, with an objective index, it appears that the yield to maturity
of the debt securities and, in the case of pay-through securities, the present
value of all payments remaining to be made on the debt securities, should be
calculated as if the interest index remained at its value as of the issue date
of the securities. Because the proper method of adjusting accruals of OID on a
variable rate debt security is uncertain, holders of variable rate debt
securities should consult their own tax advisers regarding the appropriate
treatment of such securities for federal income tax purposes.
MARKET DISCOUNT. In the opinion of tax counsel, a purchaser of a security
may be subject to the market discount rules of sections 1276 through 1278 of the
Code. A holder that acquires a debt security with more than a prescribed DE
MINIMIS amount of "market discount" (generally, the excess of the principal
amount of the debt security over the purchaser's purchase price) will be
required to include accrued market discount in income as ordinary income in each
month, but limited to an amount not exceeding the principal payments on the debt
security received in that month and, if the securities are sold, the gain
realized. This market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, market discount
would in general accrue either
o on the basis of a constant yield (in the case of a pay-through
security, taking into account a prepayment assumption) or
o in the ratio of (a) in the case of securities (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)
85
originally issued at a discount, OID in the relevant period to total
OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the debt security (or, in the case of a pass-through security, the loans),
the excess of interest paid or accrued to purchase or carry the security (or, in
the case of a pass-through security, as described below, the underlying loans)
with market discount over interest received on the security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the security (or, in the case of a
pass-through security, an underlying loan). A holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
PREMIUM. In the opinion of tax counsel, a holder who purchases a debt
security (other than an interest weighted security to the extent described
above) at a cost greater than its stated redemption price at maturity, generally
will be considered to have purchased the security at a premium, which it may
elect to amortize as an offset to interest income on the security (and not as a
separate deduction item) on a constant yield method. Although no regulations
addressing the computation of premium accrual on comparable securities have been
issued, the legislative history of The Tax Reform Act of 1986 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 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 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
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election or thereafter. Similarly, the holder of a debt security that makes this
election for a debt security that is acquired at a premium will be deemed to
have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that the holder owns or acquires.
The election to accrue interest, discount and premium on a constant yield method
with respect to a debt security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
GENERAL. In the opinion of tax counsel, if a REMIC election is made with
respect to a series of securities, then the arrangement by which the securities
of that series are issued will be treated as a REMIC as long as all of the
provisions of the applicable governing agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "regular interests" or "residual interests" in a REMIC, as
specified in the related prospectus supplement.
Except to the extent specified otherwise in a prospectus supplement, if a
REMIC election is made with respect to a series of securities, in the opinion of
tax counsel:
o securities held by a domestic building and loan association will
constitute "a regular or a residual interest in a REMIC" within the
meaning of Section 7701(a)(19)(C)(xi) of the Code (assuming that at
least 95% of the REMIC's assets consist of cash, government
securities, "loans secured by an interest in real property," and other
types of assets described in Code Section 7701(a)(19)(C)); and
o securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of Section 856(c)(4)(A) of the
Code, and income with respect to the securities will be considered
"interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Section 856(c)(3)(B)
of the Code (assuming, for both purposes, that at least 95% of the
REMIC's assets are qualifying assets).
If less than 95% of the REMIC's assets consist of assets described in the
immediately preceding bullets, then a security will qualify for the tax
treatment described in the previous sentence in the proportion that such REMIC's
assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, in the opinion of tax counsel, all of the expenses of a
REMIC will be taken into account by holders of the residual interest securities.
In the case of a "single class REMIC," however, the expenses will be allocated
under Treasury regulations among the holders of the REMIC regular interest
securities and the holders of the REMIC residual interest securities on a daily
basis in proportion to the relative amounts of income accruing to each holder on
that day. In the case of a holder of a REMIC regular interest security who is an
individual or a "pass-through interest holder" (including certain pass-through
entities but not including real estate investment trusts), the expenses will be
deductible only to the extent that the expenses, plus other "miscellaneous
itemized deductions" of the holder, exceed 2% of the holder's adjusted gross
income. In addition, for taxable years beginning after December 31, 1990, the
amount of
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itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of
o 3% of the excess of adjusted gross income over the applicable amount,
or
o 80% of the amount of itemized deductions otherwise allowable for the
taxable year.
This reduction is scheduled to be phased-out over a five-year period beginning
in 2006. The reduction or disallowance of this deduction may have a significant
impact on the yield of the REMIC regular interest security to the holder. In
general terms, a single class REMIC is one that either
o would qualify, under existing Treasury regulations, as a grantor trust
if it were not a REMIC (treating all interests as ownership interests,
even if they would be classified as debt for federal income tax
purposes), or
o is similar to such a trust and is structured with the principal
purpose of avoiding the single class REMIC rules.
Unless otherwise specified in the related prospectus supplement, the expenses of
the REMIC will be allocated to holders of the related REMIC residual interest
securities.
TAXATION OF THE REMIC
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of tax counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the holders of the REMIC residual interests. As described above,
the REMIC regular interests are generally taxable as debt of the REMIC.
Qualification as a REMIC requires ongoing compliance with certain conditions.
Although a REMIC is not generally subject to federal income tax, the Code
provides that failure to comply with one or more of the ongoing requirements of
the Code for REMIC status during any taxable year, including the implementation
of restrictions on the purchase and transfer of the residual interests in a
REMIC as described below under "--Taxation of Owners of Residual Interest
Securities", would cause the trust not to be treated as a REMIC for that year
and thereafter. In this event, the entity may be taxable as a separate
corporation and the related certificates may not be accorded the status or given
the tax treatment described below.
CALCULATION OF REMIC INCOME. In the opinion of tax counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with certain
adjustments. In general, the taxable income or net loss will be the difference
between
o the gross income produced by the REMIC's assets, including stated
interest and any OID or market discount on loans and other assets, and
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o deductions, including stated interest and original issue discount
accrued on the REMIC regular interest securities, amortization of any
premium with respect to loans, and servicing fees and other expenses
of the REMIC.
A holder of a REMIC residual interest security that is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including real estate investment trusts) will be unable to deduct servicing fees
payable on the loans or other administrative expenses of the REMIC for a given
taxable year, to the extent that these expenses, when aggregated with the
holder's other miscellaneous itemized deductions for that year, do not exceed 2%
of the holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the startup
day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the DE
MINIMIS rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of pay-through securities
accrue OID (i.e., under the constant yield method taking into account the
prepayment assumption). The REMIC will deduct OID on the regular interest
securities in the same manner that the holders of the regular interest
securities include such discount in income, but without regard to the DE MINIMIS
rules. See "--Taxation of Debt Securities" above. However, a REMIC that acquires
loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds exceeds
their principal amounts, the resulting premium, if attributable to mortgages
originated after September 27, 1985, will be amortized over the life of the
loans (taking into account the prepayment assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before that date, it is possible that the
premium may be recovered in proportion to payments of loan principal.
PROHIBITED TRANSACTIONS AND CONTRIBUTIONS TAX. The REMIC will be subject to
a 100% tax on any net income derived from a "prohibited transaction." For this
purpose, net income will be calculated without taking into account any losses
from prohibited transactions or any deductions attributable to any prohibited
transaction that resulted in a loss. In general, prohibited transactions
include:
o subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
o subject to a limited exception, the sale or other disposition of a
cash flow investment;
89
o the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or
o the receipt of any fees or other compensation for services rendered by
the REMIC.
It is anticipated that a REMIC will not engage in any prohibited transactions in
which it would recognize a material amount of net income. In addition, subject
to a number of exceptions, a tax is imposed at the rate of 100% on amounts
contributed to a REMIC after the close of the three-month period beginning on
the startup day. The holders of REMIC residual interest securities will
generally be responsible for the payment of any taxes imposed on the REMIC.
However, to the extent not paid by the holders of the REMIC residual interest
securities or otherwise, taxes will be paid out of the trust fund and will be
allocated pro rata to all outstanding classes of securities of the REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
In the opinion of tax counsel, the holder of a certificate representing a
REMIC residual interest will take into account the "daily portion" of the
taxable income or net loss of the REMIC for each day during the taxable year on
which the holder held the residual interest security. The daily portion is
determined by allocating to each day in any calendar quarter its ratable portion
of the taxable income or net loss of the REMIC for that quarter, and by
allocating that amount among the holders (on that day) of the residual interest
securities in proportion to their respective holdings on that day.
In the opinion of tax counsel, the holder of a residual interest security
must report its proportionate share of the taxable income of the REMIC whether
or not it receives cash distributions from the REMIC attributable to income or
loss. The reporting of taxable income without corresponding distributions could
occur, for example, if the loans held by the REMIC were issued or acquired at a
discount, since mortgage prepayments cause recognition of discount income, while
the corresponding portion of the prepayment could be used in whole or in part to
make principal payments on REMIC regular interests securities issued without any
discount or at an insubstantial discount. (If this occurs, it is likely that
cash distributions will exceed taxable income in later years.) The taxable
income of a REMIC may also be greater in earlier years as a result of the fact
that interest expense deductions, as a percentage of outstanding principal on
the REMIC regular interest securities, will typically increase over time as
lower yielding securities are paid, whereas interest income with respect to
loans will generally remain constant over time as a percentage of loan
principal.
In any event, because the holder of a REMIC residual interest security is
taxed on the net income of the REMIC, the taxable income derived from the
residual interest security in a given taxable year will not be equal to the
taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pretax yield. Therefore,
the after-tax yield on a residual interest security may be less than that of a
corporate bond or stripped instrument.
LIMITATION ON LOSSES. In the opinion of tax counsel, the amount of the
REMIC's net loss that a holder may take into account currently is limited to the
holder's adjusted basis at the end of
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the calendar quarter in which the loss arises. A holder's basis in a REMIC
residual interest security will initially equal the holder's purchase price, and
will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income generated by the same REMIC. The ability of holders of
residual interest securities to deduct net losses may be subject to additional
limitations under the Code. Holders should consult their tax advisers with
respect to such additional limitations.
DISTRIBUTIONS. In the opinion of tax counsel, distributions on a REMIC
residual interest security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or loss
to a holder of the residual interest security. If the amount of the payment
exceeds the holder's adjusted basis in the residual interest security, however,
the holder will recognize gain (treated as gain from the sale of the residual
interest security) to the extent of the excess.
SALE OR EXCHANGE. In the opinion of tax counsel, the holder of a residual
interest security will recognize gain or loss on the sale or exchange of the
residual interest security equal to the difference, if any, between the amount
realized and the holder's adjusted basis in the residual interest security at
the time of sale or exchange. A holder's adjusted basis in a residual interest
security generally equals the cost of the residual interest security increased
by the taxable income of the REMIC that was included in the income of the holder
and decreased by distributions received thereon by the holder and amounts of the
REMIC net loss allocated to the holder. Except to the extent provided in
regulations which have not yet been issued, any loss upon disposition of a
residual interest security will be disallowed if the selling holder acquires any
residual interest in a REMIC or similar mortgage pool within six months before
or after disposition. In that event, the loss will be used to increase the
residual interest security holder's adjusted basis in the newly acquired asset.
EXCESS INCLUSIONS. In the opinion of tax counsel, the portion of the REMIC
taxable income of a holder of a residual interest security consisting of "excess
inclusion" income may not be offset by other deductions or losses, including net
operating losses, on the holder's federal income tax return. Further, if the
holder of a residual interest security is an organization subject to the tax on
unrelated business income imposed by Section 511 of the Code, the holder's
excess inclusion income will be treated as unrelated business taxable income of
the holder. In addition, under Treasury regulations yet to be issued, if a real
estate investment trust, a regulated investment company, a common trust fund, or
certain cooperatives were to own a residual interest security, a portion of
dividends (or other distributions) paid by the real estate investment trust (or
other entity) would be treated as excess inclusion income. If a residual
interest security is owned by a foreign person, excess inclusion income is
subject to tax at a rate of 30%, which may not be reduced by treaty, is not
eligible for treatment as "portfolio interest" and is subject to certain
additional limitations. See "--Tax Treatment of Foreign Investors" below. The
Small Business Job Protection Act of 1996 has eliminated the special rule
permitting Section 593 thrift institutions to use net operating losses and other
allowable deductions to offset their excess inclusion income from residual
interest securities that have "significant value" within the meaning of the
REMIC Regulations, effective for taxable years beginning after December 31,
91
1995, except with respect to residual interest securities continuously held by a
thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect of excess inclusions on the alternative minimum
taxable income of a residual holder.
o FIRST, alternative minimum taxable income for the residual holder is
determined without regard to the special rule that taxable income
cannot be less than excess inclusions.
o SECOND, the residual holder's alternative minimum taxable income for a
tax year cannot be less than excess inclusions for the year.
o THIRD, the amount of any alternative minimum tax net operating loss
deductions must be computed without regard to any excess inclusions.
These rules are effective for tax years beginning after December 31, 1986,
unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of
o REMIC taxable income for the quarterly period allocable to a residual
interest security,
over
o the daily accruals for such quarterly period of (i) 120% of the long
term applicable federal rate on the startup day multiplied by (ii) the
adjusted issue price of the residual interest security at the
beginning of the quarterly period.
The adjusted issue price of a residual interest security at the beginning of
each calendar quarter will equal its issue price (calculated in a manner
analogous to the determination of the issue price of a regular interest
security), increased by the aggregate of the daily accruals for prior calendar
quarters, and decreased (but not below zero) by the amount of loss allocated to
a holder and the amount of distributions made on the residual interest security
before the beginning of the quarter. The long-term federal rate, which is
announced monthly by the Treasury Department, is an interest rate that is based
on the average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
Under the REMIC Regulations, transfers of residual interest securities may
be disregarded in certain circumstances. See "--RESTRICTIONS ON OWNERSHIP AND
TRANSFER OF RESIDUAL INTEREST SECURITIES" and "--Tax TreatmenT of Foreign
Investors" below.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF RESIDUAL INTEREST SECURITIES. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "disqualified
organization" including the United States, any
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State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of any of the
foregoing, a rural electric or telephone cooperative described in Section
1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by sections
1 through 1399 of the Code, if the entity is not subject to tax on its unrelated
business income. Accordingly, the applicable pooling and servicing agreement
will prohibit disqualified organizations from owning a residual interest
security. In addition, no transfer of a residual interest security will be
permitted unless the proposed transferee shall have furnished to the trustee an
affidavit representing and warranting that it is neither a disqualified
organization nor an agent or nominee acting on behalf of a disqualified
organization.
If a residual interest security is transferred to a disqualified
organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of the residual
interest security at the time of the transfer. In addition, if a disqualified
organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee an interest in a
pass-through entity), that owns a residual interest security, the pass-through
entity will be required to pay an annual tax on its allocable share of the
excess inclusion income of the REMIC.
The REMIC Regulations disregard certain transfers of Residual Certificates,
in which case the transferor continues to be treated as the owner of the
Residual Certificates and thus continues to be subject to tax on its allocable
portion of the net income of the REMIC Pool. Under the REMIC Regulations, a
transfer of a "noneconomic residual interest" (as defined below) to a Residual
Holder (other than a Residual Holder who is not a U.S. Person, as defined in
"Tax Treatment of Foreign Investors") is disregarded for all federal income tax
purposes if a significant purpose of the transferor is to impede the assessment
or collection of tax. A residual interest in a REMIC (including a residual
interest with a positive value at issuance) is a "noneconomic residual interest"
unless, at the time of the transfer, (i) the present value of the expected
future distributions on the residual interest at least equals the product of the
present value of the anticipated excess inclusions and the highest corporate
income tax rate in effect for the year in which the transfer occurs, and (ii)
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 on each
excess inclusion. The present value of the anticipated excess inclusions and the
present value of the expected futures distributions are determined in the manner
set forth in Regulation 1.860E-2(a)(4). The REMIC Regulations explain that 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 safe harbor is provided if (i) the transferor
conducted, at the time of the transfer, a reasonable investigation of the
financial condition of the transferee and found that the transferee historically
had paid its debts as they came due and found no significant evidence to
indicate that the transferee would not continue to pay its debts as they came
due in the future, (ii) the transferee represents to the transferor that it
understands that, as the holder of the non-economic residual interest, the
transferee may incur tax liabilities in excess of any cash flows generated by
the interest and that the transferee intends to pay taxes associated with
holding the residual interest as they become due, (iii) the transferee
represents to the transferor that it will not cause income from the Residual
Certificate to be attributable to a foreign
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permanent establishment or fixed base (within the meaning of an applicable
income tax treaty) of the transferee or any other person, and (iv) one of the
two following tests is satisfied: either
(a) the present value of the anticipated tax liabilities associated with
the holding the noneconomic residual interest will not exceed the sum of:
(1) the present value of any consideration given to the transferee to
acquire the residual interest;
(2) the present value of the expected future distributions on the
residual; and
(3) the present value of the anticipated tax savings associated with
holding the residual interest as the REMIC generates losses; or
(b) (1) the transferee must be a domestic "C" corporation (other than a
corporation exempt from taxation or a regulated investment company or real
estate investment trust);
(2) the transferee must agree in writing that any subsequent transfer
of the residual interest would be to an eligible "C" corporation
and would meet the requirements for a safe harbor transfer; and
(3) the facts and circumstances known to the transferor on or before
the date of the transfer must not reasonably indicate that the
taxes associated with ownership of the residual interest will not
be paid by the transferee.
For purposes of the computation in clause (a), the transferee is assumed to
pay tax at the highest corporate rate of tax specified in the Code or, in
certain circumstances, the alternative minimum tax rate. Further, present values
generally are computed using a discount rate equal to the short-term Federal
rate set forth in Section 1274(d) of the Code for the month of the transfer and
the compounding period used by the transferee.
MARK-TO-MARKET RULES. A REMIC residual interest security acquired after
January 3, 1995 cannot be marked-to-market.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
GENERAL. As further specified in the related prospectus supplement, if a
REMIC election is not made and the trust fund is not structured as a
partnership, then, in the opinion of tax counsel, the trust fund relating to a
series of securities will be classified for federal income tax
94
purposes as a grantor trust under Subpart E, Part 1 of Subchapter J of the Code
and not as an association taxable as a corporation. We refer to the securities
of a series of this type as "pass-through securities". In some series there will
be no separation of the principal and interest payments on the loans. In these
circumstances, a holder will be considered to have purchased a pro rata
undivided interest in each of the loans. In the case of "stripped securities",
sale of the securities will produce a separation in the ownership of all or a
portion of the principal payments from all or a portion of the interest payments
on the loans.
In the opinion of tax counsel, each holder must report on its federal
income tax return its share of the gross income derived from the loans (not
reduced by the amount payable as trust expense fees to the applicable trustee
and the servicer and similar fees), at the same time and in the same manner as
the items would have been reported under the holder's tax accounting method had
it held its interest in the loans directly, received directly its share of the
amounts received with respect to the loans, and paid directly its share of the
trust expense fees. In the case of pass-through securities other than stripped
securities, income will consist of a pro rata share of all of the income derived
from all of the loans and, in the case of stripped securities, income will
consist of a pro rata share of the income derived from each stripped bond or
stripped coupon in which the holder owns an interest. The holder of a security
will generally be entitled to deduct trust expense fees under section 162 or
section 212 of the Code to the extent that such fees represent "reasonable"
compensation for the services rendered by the applicable trustee and the
servicer (or third parties that are compensated for the performance of
services). In the case of a noncorporate holder, however, trust expense fees (to
the extent not otherwise disallowed, e.g., because they exceed reasonable
compensation) will be deductible in computing the holder's regular tax liability
only to the extent that the fees, when added to other miscellaneous itemized
deductions, exceed 2% of adjusted gross income and may not be deductible to any
extent in computing the holder's alternative minimum tax liability. In addition,
for taxable years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation in taxable years beginning after 1990) will be reduced by
the LESSER of:
o 3% of the excess of adjusted gross income over the applicable amount,
or
o 80% of the amount of itemized deductions otherwise allowable for that
taxable year.
This reduction is scheduled to be phased-out over a five-year period
beginning in 2006.
DISCOUNT OR PREMIUM ON PASS-THROUGH SECURITIES. In the opinion of tax
counsel, the holder's purchase price of a pass-through security is to be
allocated among the loans in proportion to their fair market values, determined
as of the time of purchase of the securities. In the typical case, the trustee
(to the extent necessary to fulfill its reporting obligations) will treat each
loan as having a fair market value proportional to the share of the aggregate
principal balances of all of the loans that it represents, since the securities,
unless otherwise specified in the related prospectus supplement, will have a
relatively uniform interest rate and other common characteristics. To the extent
that the portion of the purchase price of a pass-through security allocated to a
loan (other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the principal balance
95
of the loan allocable to the security, the interest in the loan allocable to the
pass-through security will be deemed to have been acquired at a discount or
premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a loan with OID in excess of a
prescribed DE MINIMIS amount or a stripped security, a holder of the security
will be required to report as interest income in each taxable year its share of
the amount of OID that accrues during that year in the manner described above.
OID with respect to a loan could arise, for example, by virtue of the financing
of points by the originator of the loan, or by virtue of the charging of points
by the originator of the loan in an amount greater than a statutory DE MINIMIS
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a loan
will be includible in income, generally in the manner described above, except
that in the case of pass-through securities, market discount is calculated with
respect to the loans underlying the security, rather than with respect to the
security itself. A holder that acquires an interest in a loan originated after
July 18, 1984 with more than a DE MINIMIS amount of market discount (generally,
the excess of the principal amount of the loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See "--Taxation of Debt Securities --Market
Discount" and "--Premium" above.
In the case of market discount on a pass-through security attributable to
loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of the discount that is allocable to a loan
among the principal payments on the loan and to include the discount allocable
to each principal payment in ordinary income at the time the principal payment
is made. This treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
STRIPPED SECURITIES. A stripped security may represent a right to receive
only a portion of the interest payments on the loans, a right to receive only
principal payments on the loans, or a right to receive certain payments of both
interest and principal. Ratio stripped securities may represent a right to
receive differing percentages of both the interest and principal on each loan.
Pursuant to section 1286 of the Code, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from ownership
of the right to receive some or all of the principal payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. Section 1286 of the Code applies the
OID rules to stripped bonds and stripped coupons. For purposes of computing OID,
a stripped bond or a stripped coupon is treated as a debt instrument issued on
the date that such stripped interest is purchased with an issue price equal to
its purchase price or, if more than one stripped interest is purchased, the
ratable share of the purchase price allocable to the stripped interest.
Servicing fees in excess of reasonable servicing fees will be treated under
the stripped bond rules. If the excess servicing fee is less than 100 basis
points (i.e., 1% interest on the loan's principal balance) or the securities are
initially sold with a DE MINIMIS discount (assuming no prepayment assumption is
required), any NON-DE MINIMIS discount arising from a subsequent transfer of the
securities should be treated as market discount. The IRS appears to require that
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reasonable servicing fees be calculated on a loan by loan basis, which could
result in some loans being treated as having more than 100 basis points of
interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and OID rules are to apply to stripped securities and
other pass-through securities. Under the cash flow bond method described above
for pay-through securities, a prepayment assumption is used and periodic
recalculations are made that take into account with respect to each accrual
period the effect of prepayments during such period. However, the Tax Reform Act
of 1986 does not, absent Treasury regulations, appear specifically to cover
instruments such as stripped securities, which technically represent ownership
interests in the underlying loans, rather than being debt instruments "secured
by" those loans. Nevertheless, it is believed that the cash flow bond method is
a reasonable method of reporting income for such securities, and it is expected
that OID will be reported on that basis unless otherwise specified in the
related prospectus supplement. In applying the calculation to pass-through
securities, the trustee will treat all payments to be received by a holder with
respect to the underlying loans as payments on a single installment obligation.
The IRS could, however, assert that OID must be calculated separately for each
loan underlying a security.
Under certain circumstances, if the loans prepay at a rate faster than the
prepayment assumption, the use of the cash flow bond method may accelerate the
holder's recognition of income. If, however, the loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate the holder's recognition of income.
In the case of a stripped security that is an interest weighted security,
the applicable trustee intends, absent contrary authority, to report income to
holders as OID, in the manner described above for interest weighted securities.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS. The characterizations of the
stripped securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that:
o in certain series, each non-interest weighted security is composed of
an unstripped undivided ownership interest in loans and an installment
obligation consisting of stripped principal payments;
o the non-interest weighted securities are subject to the contingent
payment provisions of the regulations; or
o each interest weighted stripped security is composed of an unstripped
undivided ownership interest in loans and an installment obligation
consisting of stripped interest payments.
Given the variety of alternatives for treatment of the stripped securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the securities for federal income tax
purposes.
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CHARACTER AS QUALIFYING LOANS. In the case of stripped securities, there is
no specific legal authority existing regarding whether the character of the
securities, for federal income tax purposes, will be the same as the loans. The
IRS could take the position that the loans' character is not carried over to the
securities in such circumstances. Pass-through securities will be, and, although
the matter is not free from doubt, stripped securities should be considered to
represent:
o "real estate assets" within the meaning of section 856(c)(4)(A) of the
Code; and
o "loans secured by an interest in real property" within the meaning of
section 7701(a)(19)(C)(v) of the Code.
Interest income attributable to pass-through securities and stripped securities
should be considered to represent "interest on obligations secured by mortgages
on real property or on interests in real property" within the meaning of section
856(c)(3)(B) of the Code. Reserves or funds underlying the securities may cause
a proportionate reduction in the above-described qualifying status categories of
securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to any trust fund as to which
a partnership election is made, in the opinion of tax counsel, a holder's tax
basis in a security is the price the holder pays for the security, increased by
amounts of OID or market discount included in income, and reduced by any
payments received (other than qualified stated interest payments) and any
amortized premium. Gain or loss recognized on a sale, exchange, or redemption of
a security, measured by the difference between the amount realized and the
security's basis as so adjusted, will generally be capital gain or loss,
assuming that the security is held as a capital asset and will generally be
long-term capital gain or loss if the holding period of the security is more
than one year and short-term capital gain or loss if the holding period of the
Security is one year or less. Non-corporate taxpayers are subject to reduced
maximum rates on long-term capital gains and are generally subject to tax at
ordinary income rates on short-term capital gains. The deductibility of capital
losses is subject to certain limitations. Prospective investors should consult
their own tax advisors concerning these tax law provisions.
In the case of a security held by a bank, thrift, or similar institution
described in section 582 of the Code, however, gain or loss realized on the sale
or exchange of a REMIC regular interest security will be taxable as ordinary
income or loss. In addition, gain from the disposition of a regular interest
security that might otherwise be capital gain will be treated as ordinary income
to the extent of the excess, if any, of:
o the amount that would have been includible in the holder's income if
the yield on the regular interest security had equaled 110% of the
applicable federal rate as of the beginning of such holder's holding
period,
OVER
o the amount of ordinary income actually recognized by the holder with
respect to the regular interest security.
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MISCELLANEOUS TAX ASPECTS
BACKUP WITHHOLDING. Subject to the discussion below with respect to any
trust fund as to which a partnership election is made, a holder, other than a
holder of a REMIC residual interest security, may, under certain circumstances,
be subject to "backup withholding" with respect to distributions or the proceeds
of a sale of certificates to or through brokers that represent interest or
original issue discount on the securities. The current backup withholding rate
is 30%. This rate is scheduled to adjust in future periods. This withholding
generally applies if the holder of a security:
o fails to furnish the applicable trustee with its taxpayer
identification number;
o furnishes the applicable trustee an incorrect taxpayer identification
number;
o fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
o under certain circumstances, fails to provide the applicable trustee
or such holder's securities broker with a certified statement, signed
under penalty of perjury, that the taxpayer identification number
provided is its correct number and that the holder is not subject to
backup withholding.
Backup withholding will not apply, however, with respect to certain
payments made to holders, including payments to certain exempt recipients (such
as exempt organizations) and to certain nonresident alien individuals, foreign
partnerships or foreign corporations. Holders should consult their tax advisers
as to their qualification for exemption from backup withholding and the
procedure for obtaining the exemption.
The applicable trustee will report to the holders and to the servicer for
each calendar year the amount of any "reportable payments" during such year and
the amount of tax withheld, if any, with respect to payments on the securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to any trust fund as to which
a partnership election is made, under the Code, unless interest (including OID)
paid on a security (other than a residual interest security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation,
in the opinion of tax counsel, interest will normally qualify as portfolio
interest, and will be exempt from federal income tax. However, interest will not
qualify as portfolio interest where:
o the recipient is a holder, directly or by attribution, of 10% or more
of the capital or profits interest in the issuer, or
o the recipient is a controlled foreign corporation to which the issuer
is a related person.
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For interest to qualify for the portfolio interest exemption from U.S.
withholding tax, the holder must generally complete a Form W-8BEN indicating
that the holder is a non-U.S. Person. The Form W-8BEN, or in certain
circumstances other documentation, must be provided to the person otherwise
required to withhold U.S. tax. If a foreign holder is a partnership or other
type of pass-through entity that is not treated for U.S. withholding tax
purposes as the beneficial owner of the income with respect to the security, the
holder generally must receive the Form W-8BEN as described in the previous
sentence from the holder's partners or other beneficial owners of the income
with respect to the security and may be required to provide the forms, and
certain additional information, to the person through whom the holder holds the
security. The forms provided by the holder or its interestholders regarding
status as a non-U.S. Person must generally be passed through the ownership chain
to the person otherwise required to withhold tax in order for the exemption to
apply. These provisions supersede the generally applicable provisions of United
States law that would otherwise require the issuer to withhold at a 30% rate
(unless such rate were reduced or eliminated by an applicable tax treaty) on,
among other things, interest and other fixed or determinable, annual or periodic
income paid to nonresident alien individuals, foreign partnerships or foreign
corporations. Holders of pass-through securities and stripped securities,
including ratio strip securities, however, may be subject to withholding to the
extent that the loans were originated on or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder and appropriate documentation is provided to the person
otherwise required to withhold. They will, however, generally be subject to the
regular United States income tax.
Payments to holders of REMIC residual interest securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Holders should assume that such
income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable income that constitutes excess inclusion income, the
holder of a residual interest security will not be entitled to an exemption from
or reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the residual interest security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations that would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Regulations could, for example, require withholding prior to
the distribution of cash in the case of residual interest securities that do not
have significant value. Under the REMIC Regulations, if a residual interest
security has tax avoidance potential, a transfer of a residual interest security
to a nonresident alien individual, foreign partnership or foreign corporation
will be disregarded for all federal tax purposes. A residual interest security
has tax avoidance potential unless, at the time of the transfer the transferor
reasonably expects that the REMIC will distribute to the transferee residual
interest holder amounts that will equal at least 30% of each excess inclusion,
and that such amounts will be distributed at or after the time at which the
excess inclusions accrue and not later than the calendar year following the
calendar year of accrual. If a nonresident alien individual, foreign partnership
or foreign corporation transfers a residual interest security to a U.S. Person,
and if the transfer has the effect of allowing the transferor to avoid tax on
accrued excess inclusions, then the transfer is disregarded and the transferor
continues to be treated as the
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owner of the residual interest security for purposes of the withholding tax
provisions of the Code. See "--Excess Inclusions" above.
TAX CHARACTERIZATION OF THE TRUST FUND AS A PARTNERSHIP
Tax counsel is of the opinion that a trust fund structured as a partnership
will not be an association (or publicly traded partnership) taxable as a
corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the trust agreement and related documents will be
complied with, and on counsel's conclusions that the nature of the income of the
trust fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the certificates has
been structured as a private placement under an IRS safe harbor, so that the
trust fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the trust fund were taxable as a corporation for federal income tax
purposes, in the opinion of tax counsel, the trust fund would be subject to
corporate income tax on its taxable income. The trust fund's taxable income
would include all its income, possibly reduced by its interest expense on the
notes. Any such corporate income tax could materially reduce cash available to
make payments on the notes and distributions on the certificates, and holders of
certificates could be liable for any such tax that is unpaid by the trust fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES AS INDEBTEDNESS. The trust fund will agree, and the
noteholders will agree by their purchase of notes, to treat the notes as debt
for federal income tax purposes. As a result, tax counsel is, (except as
otherwise provided in the related prospectus supplement,) of the opinion that
the notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the notes is correct.
OID, INDEXED SECURITIES, ETC. The discussion below assumes that all
payments on the notes are denominated in U.S. dollars, and that the notes are
not "indexed securities" or "strip notes." Moreover, the discussion assumes that
the interest formula for the notes meets the requirements for "qualified stated
interest" under the OID Regulations, and that any OID on the notes (i.e., any
excess of the principal amount of the notes over their issue price) does not
exceed a DE MINIMIS amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID Regulations. If these conditions are not satisfied with respect to any given
series of notes, additional tax considerations with respect to the notes will be
disclosed in the applicable prospectus supplement.
INTEREST INCOME ON THE NOTES. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of tax counsel, the notes
will not be considered issued with OID. The stated interest on the notes will be
taxable to a noteholder as ordinary interest income when received or accrued in
accordance with the noteholder's method of tax accounting. Under the OID
Regulations, a holder of a note issued with a DE MINIMIS amount of OID must
include the OID in income, on a pro rata basis, as principal payments are made
on the note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a
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note for more or less than its principal amount will generally be subject,
respectively, to the premium amortization or market discount rules of the Code.
A holder of a note that is a "short-term note" (i.e., it has a fixed
maturity date of not more than one year from the issue date) may be subject to
special rules. An accrual basis holder of a short-term note (and certain cash
method holders, including regulated investment companies, as set forth in
section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a short-term note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the short-term note). However, a cash basis holder of a
short-term note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the short-term note until the taxable disposition of the
short-term note. A cash basis taxpayer may elect under section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
short-term note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a short-term note is purchased for more or less than its
principal amount.
SALE OR OTHER DISPOSITION. In the opinion of tax counsel, if a noteholder
sells a note, the holder will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale and the holder's adjusted tax
basis in the note. The adjusted tax basis of a note to a particular noteholder
will equal the holder's cost for the note, increased by any market discount,
acquisition discount, OID and gain previously included by the noteholder in
income with respect to the note and decreased by the amount of bond premium (if
any) previously amortized and by the amount of principal payments previously
received by the noteholder with respect to the note. Any such gain or loss will
be capital gain or loss if the note was held as a capital asset, except for gain
representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains.
FOREIGN HOLDERS. In the opinion of tax counsel, interest payments made (or
accrued) to a noteholder who is a "foreign person" (i.e., nonresident alien,
foreign corporation or other non-U.S. Person) generally will be considered
"portfolio interest," and generally will not be subject to United States federal
income tax and withholding tax, if the interest is not effectively connected
with the conduct of a trade or business within the United States by the foreign
person and the foreign person:
o is not actually or constructively a "10 percent shareholder" of the
trust fund or the seller (including a holder of 10% of the outstanding
certificates) or a "controlled foreign corporation" with respect to
which the trust fund or the seller is a "related person" within the
meaning of the Code; and
o provides the trustee or other person who is otherwise required to
withhold U.S. tax with respect to the notes with an appropriate
statement (on Form W-8BEN), signed under penalties of perjury,
certifying that the beneficial owner of the note is a foreign person
and providing the foreign person's name and address.
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If a foreign holder is a partnership or other type of pass-through entity that
is not treated for U.S. withholding tax purposes as the beneficial owner of the
income with respect to the certificate, the holder generally must receive the
Form W-8BEN as described in the previous sentence from the holder's partners or
other beneficial owners of the income with respect to the certificate and may be
required to provide the forms, and certain additional information, to the person
through whom the holder holds the certificates. The forms provided by the holder
or its interestholders regarding status as a non-U.S. Person must generally be
passed through the ownership chain to the person otherwise required to withhold
tax in order for the exemption to apply. If a note is held through a securities
clearing organization or certain other financial institutions, the foreign
person that owns the note should furnish such organization or institution with a
Form W-8BEN or a similar form. The organization or institution may then be
required to forward the Form W-8BEN to the withholding agent. If interest is not
portfolio interest and is not effectively connected with the conduct of a U.S.
trade or business, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax; provided, that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
BACKUP WITHHOLDING. Each holder of a note (other than an exempt holder such
as a corporation, tax-exempt organization, qualified pension and profit-sharing
trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt noteholder fail to
provide the required certification, the trust fund will be required to backup
withhold from the amount otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
The current backup withholding rate is 30%. This rate is scheduled to adjust in
future periods.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the opinion
of tax counsel, the IRS successfully asserted that one or more of the notes did
not represent debt for federal income tax purposes, the notes might be treated
as equity interests in the trust fund. If so treated, the trust fund might be
taxable as a corporation with the adverse consequences described above (and the
taxable corporation would not be able to reduce its taxable income by deductions
for interest expense on notes recharacterized as equity). Alternatively, and
most likely in the view of tax counsel, the trust fund might be treated as a
publicly traded partnership that would not be taxable as a corporation because
it would meet certain qualifying income tests. Nonetheless, treatment of the
notes as equity interests in such a publicly traded partnership could have
adverse tax consequences to certain holders. For example, income to certain
tax-exempt entities (including pension funds) may be "unrelated business taxable
income," income to foreign holders generally would be subject to U.S. tax and
U.S. tax return filing and withholding
103
requirements, and individual holders might be subject to certain limitations on
their ability to deduct their share of the trust fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
TREATMENT OF THE TRUST FUND AS A PARTNERSHIP. The trust fund and the
servicer will agree, and the certificateholders will agree by their purchase of
certificates, to treat the trust fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
trust fund, the partners of the partnership being the certificateholders, and
the notes being debt of the partnership. However, the proper characterization of
the arrangement involving the trust fund, the certificates, the notes, the trust
fund and the servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the trust fund. Any such
characterization would not result in materially adverse tax consequences to
certificateholders as compared to the consequences from treatment of the
certificates as equity in a partnership, described below. The following
discussion assumes that the certificates represent equity interests in a
partnership.
INDEXED SECURITIES, ETC. The following discussion assumes that all payments
on the certificates are denominated in U.S. dollars, none of the certificates is
an indexed security or a stripped certificate, and that a series of securities
includes a single class of certificates. If these conditions are not satisfied
with respect to any given series of certificates, additional tax considerations
with respect to such certificates will be disclosed in the applicable prospectus
supplement.
PARTNERSHIP TAXATION. If the trust fund is a partnership, in the opinion of
tax counsel, the trust fund will not be subject to federal income tax. Rather,
in the opinion of tax counsel, each certificateholder will be required to
separately take into account the holder's allocated share of income, gains,
losses, deductions and credits of the trust fund. The trust fund's income will
consist primarily of interest and finance charges earned on the loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of loans. The trust fund's deductions will
consist primarily of interest accruing with respect to the notes, servicing and
other fees, and losses or deductions upon collection or disposition of loans.
In the opinion of tax counsel, the tax items of a partnership are allocable
to the partners in accordance with the Code, Treasury regulations and the
partnership agreement (here, the trust agreement and related documents). The
trust agreement will provide, in general, that the certificateholders will be
allocated taxable income of the trust fund for each month equal to the sum of:
o the interest that accrues on the certificates in accordance with their
terms for such month, including interest accruing at the pass-through
rate for that month and interest on amounts previously due on the
certificates but not yet distributed;
104
o any trust fund income attributable to discount on the loans that
corresponds to any excess of the principal amount of the certificates
over their initial issue price;
o prepayment premium payable to the certificateholders for that month;
and
o any other amounts of income payable to the certificateholders for that
month.
This allocation will be reduced by any amortization by the trust fund of
premium on loans that corresponds to any excess of the issue price of
certificates over their principal amount. All remaining taxable income of the
trust fund will be allocated to the depositor. Based on the economic arrangement
of the parties, in the opinion of tax counsel, this approach for allocating
trust fund income should be permissible under applicable Treasury regulations,
although no assurance can be given that the IRS would not require a greater
amount of income to be allocated to certificateholders. Moreover, in the opinion
of tax counsel, even under the foregoing method of allocation,
certificateholders may be allocated income equal to the entire pass-through rate
plus the other items described above even though the trust fund might not have
sufficient cash to make current cash distributions of that amount. Thus, cash
basis holders will in effect be required to report income from the certificates
on the accrual basis and certificateholders may become liable for taxes on trust
fund income even if they have not received cash from the trust fund to pay
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all certificateholders but certificateholders may be
purchasing certificates at different times and at different prices,
certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the trust fund.
In the opinion of tax counsel, all of the taxable income allocated to a
certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) may
constitute "unrelated business taxable income" generally taxable to the holder
under the Code.
In the opinion of tax counsel, an individual taxpayer's share of expenses
of the trust fund (including fees to the servicer but not interest expense)
would be miscellaneous itemized deductions. Such deductions might be disallowed
to the individual in whole or in part and might result in such holder being
taxed on an amount of income that exceeds the amount of cash actually
distributed to the holder over the life of the trust fund.
The trust fund intends to make all tax calculations relating to income and
allocations to certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each loan, the trust fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on certificateholders.
DISCOUNT AND PREMIUM. It is believed that the loans were not issued with
OID, and, therefore, the trust fund should not have OID income. However, the
purchase price paid by the trust fund for the loans may be greater or less than
the remaining principal balance of the loans at the time of purchase. If so, in
the opinion of tax counsel, the loan will have been acquired at a premium or
discount, as the case may be. (As indicated above, the trust fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
loan-by-loan basis.)
105
If the trust fund acquires the loans at a market discount or premium, the
trust fund will elect to include any discount in income currently as it accrues
over the life of the loans or to offset any premium against interest income on
the loans. As indicated above, a portion of market discount income or premium
deduction may be allocated to certificateholders.
SECTION 708 TERMINATION. In the opinion of tax counsel, under section 708
of the Code, the trust fund will be deemed to terminate for federal income tax
purposes if 50% or more of the capital and profits interests in the trust fund
are sold or exchanged within a 12-month period. Pursuant to final Treasury
regulations issued May 9, 1997 under section 708 of the Code, if such a
termination occurs, the trust fund would be deemed to contribute its assets to a
new partnership in exchange for interests in the new partnership. Such interests
would be deemed distributed to the partners of the original trust fund in
liquidation thereof, which would not constitute a sale or exchange.
DISPOSITION OF CERTIFICATES. Generally, in the opinion of tax counsel,
capital gain or loss will be recognized on a sale of certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the certificates sold. A certificateholder's tax basis in a certificate will
generally equal the holder's cost increased by the holder's share of trust fund
income (includible in income) and decreased by any distributions received with
respect to the certificate. In addition, both the tax basis in the certificates
and the amount realized on a sale of a certificate would include the holder's
share of the notes and other liabilities of the trust fund. A holder acquiring
certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in the certificates, and, upon sale or other disposition of
some of the certificates, allocate a portion of the aggregate tax basis to the
certificates sold (rather than maintaining a separate tax basis in each
certificate for purposes of computing gain or loss on a sale of that
certificate).
Any gain on the sale of a certificate attributable to the holder's share of
unrecognized accrued market discount on the loans would generally be treated as
ordinary income to the holder and would give rise to special tax reporting
requirements. The trust fund does not expect to have any other assets that would
give rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the trust fund will elect to include market discount in
income as it accrues.
If a certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the certificates that exceeds the aggregate
cash distributions with respect thereto, this excess will generally give rise to
a capital loss upon the retirement of the certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the trust
fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the certificateholders
in proportion to the principal amount of certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
106
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the trust fund might be reallocated among the certificateholders. The trust
fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
SECTION 754 ELECTION. In the event that a certificateholder sells its
certificates at a profit (loss), the purchasing certificateholder will have a
higher (lower) basis in the certificates than the selling certificateholder had.
The tax basis of the trust fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the trust fund were to file an election under
section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the trust fund will not make such
election. As a result, certificateholders might be allocated a greater or lesser
amount of trust fund income than would be appropriate based on their own
purchase price for certificates.
ADMINISTRATIVE MATTERS. The trustee is required to keep or have kept
complete and accurate books of the trust fund. Books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the trust fund will be the calendar year. The trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
trust fund and will report each certificateholder's allocable share of items of
trust fund income and expense to holders and the IRS on Schedule K-1. The trust
fund will provide the Schedule K-l information to nominees that fail to provide
the trust fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the trust fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under section 6031 of the Code, any person that holds certificates as a
nominee at any time during a calendar year is required to furnish the trust fund
with a statement containing certain information on the nominee, the beneficial
owners and the certificates so held. Such information includes:
o the name, address and taxpayer identification number of the nominee;
and
o as to each beneficial owner (a) the name, address and identification
number of such person, (b) whether such person is a U.S. Person, a
tax-exempt entity or a foreign government, an international
organization or any wholly owned agency or instrumentality of either
of the foregoing, and (c) certain information on certificates that
were held, bought or sold on behalf of such person throughout the
year.
In addition, brokers and financial institutions that hold certificates
through a nominee are required to furnish directly to the trust fund information
as to themselves and their ownership of certificates. A clearing agency
registered under section 17A of the Securities Exchange Act of 1934 is not
required to furnish any such information statement to the trust fund. The
information referred to above for any calendar year must be furnished to the
trust fund on or before the
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following January 31. Nominees, brokers and financial institutions that fail to
provide the trust fund with the information described above may be subject to
penalties.
The depositor will be designated as the tax matters partner in the related
trust agreement and, as such, will be responsible for representing the
certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the trust fund by the appropriate taxing authorities
could result in an adjustment of the returns of the certificateholders, and,
under certain circumstances, a certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the trust fund. An
adjustment could also result in an audit of a certificateholder's returns and
adjustments of items not related to the income and losses of the trust fund.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear whether the
trust fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
Persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the trust fund would be engaged in a trade or business in the United States
for such purposes, the trust fund will withhold as if it were so engaged in
order to protect the trust fund from possible adverse consequences of a failure
to withhold. The trust fund expects to withhold on the portion of its taxable
income that is allocable to foreign certificateholders pursuant to section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 38.6% (subject to adjustment in future periods) for all other foreign
holders. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the trust fund to change its
withholding procedures. In determining a holder's withholding status, the trust
fund may rely on IRS Form W-8BEN or a similar form, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the trust fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the trust fund on Form W-8BEN in order to assure appropriate crediting of the
taxes withheld. A foreign holder generally would be entitled to file with the
IRS a claim for refund with respect to taxes withheld by the trust fund taking
the position that no taxes were due because the trust fund was not engaged in a
U.S. trade or business. However, interest payments made (or accrued) to a
certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the trust fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30%, unless reduced
or eliminated pursuant to an applicable treaty. In such case, a foreign holder
would only be entitled to claim a refund for that portion of the taxes in excess
of the taxes that should be withheld with respect to the guaranteed payments.
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BACKUP WITHHOLDING. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to "backup" withholding tax
if, in general, the certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code. The current backup withholding rate is 30%.
This rate is scheduled to adjust in future periods.
REPORTABLE TRANSACTIONS
As currently written, recent Temporary and Proposed Treasury Regulations
(the "New Regulations") meant to require the reporting of abusive tax shelters
("Reportable Transactions") could be read to cover transactions generally not
regarded as tax shelters, including certain securitizations of financial assets.
Under the New Regulations, transactions may be characterized as Reportable
Transactions for a variety of reasons, one or more of which may apply to an
investment in the Securities. You should be aware that Bear Stearns and others
may be required to disclose information with respect to your securities.
Investors should consult their own tax advisers to determine their tax return
disclosure obligations, if any, with respect to their investment in the
Securities, including any requirement to file IRS Form 8886 (Reportable
Transaction Disclosure Statement). The New Regulations regarding tax return
disclosure generally are effective for transactions occurring on or after
January 1, 2003.
STATE TAX CONSIDERATIONS
In addition to the federal income tax considerations described in this
prospectus under "Material Federal Income Tax Considerations," potential
investors should consider the state and local income tax consequences of the
acquisition, ownership, and disposition of the securities. State and local
income tax law may differ substantially from the corresponding federal law, and
this discussion does not purport to describe any aspect of the income tax laws
of any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various state and local tax consequences of
an investment in the securities.
FASIT SECURITIES
GENERAL. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities effective on
September 1, 1997. On February 4, 2000, the IRS and Treasury issued proposed
Treasury regulations for FASITs. The regulations generally would not be
effective until final regulations are filed with the federal register. However,
it appears that certain anti-abuse rules would apply as of February 4, 2000.
Investors also should note that the FASIT discussions contained herein
constitutes only a summary of the federal income tax consequences to holders of
FASIT securities. With respect to each series of FASIT securities, the related
prospectus supplement will provide a detailed discussion regarding the federal
income tax consequences associated with the particular transaction.
FASIT securities will be classified as either FASIT "regular securities,"
which generally will be treated as debt for federal income tax purposes, or
FASIT "ownership securities," which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related series. The prospectus
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supplement for each series of securities will indicate whether one or more FASIT
elections will be made for the series, and which securities of the series will
be designated as regular securities, and which, if any, will be designated as
ownership securities.
QUALIFICATION AS A FASIT. The trust fund underlying a series (or one or
more designated pools of assets held in the trust fund) will qualify under the
Code as a FASIT in which the FASIT regular securities and the FASIT ownership
securities will constitute the "regular interests" and the "ownership
interests," respectively, if
o a FASIT election is in effect,
o certain tests concerning the composition of the FASIT's assets and the
nature of the holders' interests in the FASIT are met on a continuing
basis, and
o the trust fund is not a regulated investment company or RIC as defined
in section 851(a) of the Code.
However, the qualification as a FASIT of any trust fund for which a FASIT
election is made depends on the trust's ability to satisfy the requirements of
the FASIT provisions on an ongoing basis, including, without limitation, the
requirements of any final Treasury regulations that may be promulgated in the
future under the FASIT provisions or as a result of any change in applicable
law. Thus, no assurances can be made regarding the qualification as a FASIT of
any trust for which a FASIT election is made at any particular time after the
issuance of securities by the trust.
ASSET COMPOSITION. In order for a trust fund (on one or more designated
pools of assets held by a trust fund) to be eligible for FASIT status,
substantially all of the assets of the trust fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the closing date and at all times thereafter. Permitted assets include
o cash or cash equivalents,
o debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC (generally, instruments that provide
for interest at a fixed rate, a qualifying variable rate, or a
qualifying interest-only type rate,
o foreclosure property,
o certain hedging instruments (generally, interest and currency rate
swaps and credit enhancement contracts) that are reasonably required
to guarantee or hedge against the FASIT's risks associated with being
the obligor on FASIT interests,
o contract rights to acquire qualifying debt instruments or qualifying
hedging instruments,
o FASIT regular interests, and
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o REMIC regular interests.
o Permitted assets do not include any debt instruments issued by the
holder of the FASIT's ownership interest or by any person related to
the holder.
INTERESTS IN A FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT must meet certain requirements. All of
the interests in a FASIT must belong to either
o one or more classes of regular interests or
o a single class of ownership interest that is held by a fully taxable
domestic corporation. In the case of series that include FASIT
ownership securities, the ownership interest will be represented by
the FASIT ownership securities.
A FASIT interest generally qualifies as a regular interest if
o it is designated as a regular interest,
o it has a stated maturity no greater than thirty years,
o it entitles its holder to a specified principal amount,
o the issue price of the interest does not exceed 125% of its stated
principal amount,
o the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and
o if it pays interest, such interest is payable either at a fixed rate
with respect to the principal amount of the regular interest or at a
permissible variable rate with respect to the principal amount.
Permissible variable rates for FASIT regular interests are the same as those for
REMIC regular interest (i.e., certain qualified floating rates and weighted
average rates). See "Material Federal Income Tax Considerations--Taxation of
Debt Securities--Variable Rate Debt Securities" in this prospectus.
If a FASIT security fails to meet one or more of the requirements set out
in the third, fourth or fifth bullet in the preceding paragraph, but otherwise
meets the above requirements, it may still qualify as a type of regular interest
known as a "high-yield interest." In addition, if a FASIT security fails to meet
the requirements of the final bullet in the preceding paragraph, but the
interest payable on the security consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the life of the
security, the security also will qualify as a high-yield interest. A high-yield
interest may be held only by domestic corporations that are fully subject to
corporate income tax, other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, holders of
high-yield
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interests are subject to limitations on offset of income derived from such
interest. See "--TAX TREATMENT OF FASIT REGULAR SECURITIES" and "--TREATMENT OF
HIGH-YIELD INTERESTS" below.
ANTI-ABUSE RULE. Under proposed Treasury regulations, the IRS Commissioner
may make appropriate adjustments with regard to the FASIT and any arrangement or
transaction involving the FASIT if a principal purpose of forming or using the
FASIT is to achieve results inconsistent with the intent of the FASIT provisions
and the FASIT regulations. This determination would be based on all of the facts
and circumstances, including a comparison of the purported business purpose for
a transaction and the claimed tax benefits resulting from the transaction.
CONSEQUENCES OF THE FAILURE OF THE FASIT TRUST TO QUALIFY AS A FASIT. If a
FASIT trust fails to comply with one or more of the Code's ongoing requirements
for FASIT status during any taxable year, proposed Treasury regulations provide
that its FASIT status would be lost for that year and the FASIT trust would be
unable to elect FASIT status without the Commissioner's approval. If FASIT
status is lost, under proposed Treasury regulations the entity classification of
the former FASIT would be determined under general federal income tax
principles. The holder of the FASIT ownership security would be treated as
exchanging the assets of the former FASIT for an amount equal to their value and
gain recognized would be treated as gain from a prohibited transaction that is
subject to the 100% tax, without exception. Loss, if any, would be disallowed.
In addition, the holder of the FASIT ownership security must recognize
cancellation of indebtedness income, on a regular interest by regular interest
basis, in an amount equal to the adjusted issue price of each FASIT regular
security outstanding immediately before the loss of FASIT status over its fair
market value. If the holder of the FASIT ownership security has a continuing
economic interest in the former FASIT, the characterization of this interest is
determined under general federal income tax principles. Holders of FASIT regular
securities are treated as exchanging their securities for interests in the new
entity classification of the former FASIT, which classification is determined
under general federal income tax principles. Gain is recognized to the extent
the new interest either does not qualify as debt or differs either in kind or
extent. The basis of the interest in the new entity classification of the former
FASIT equals the basis in the FASIT regular security increased by any gain
recognized on the exchange.
TAX TREATMENT OF FASIT REGULAR SECURITIES. Payments received by holders of
FASIT regular securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC regular securities. As in the case of holders of REMIC regular
securities, holders of FASIT regular securities must report income from such
securities under an accrual method of accounting, even if they otherwise would
have used the cash receipts and disbursements method. Except in the case of
FASIT regular securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT regular security
generally will be treated as ordinary income to the holder and a principal
payment on the security will be treated as a return of capital to the extent
that the holder's basis is allocable to that payment. Holders of FASIT regular
securities issued with original issue discount or acquired with market discount
or premium generally will be required to treat interest and principal payments
on the securities in the same manner described for REMIC regular securities. See
"Material Federal Income Tax Considerations--Taxation of Debt Securities,"
"--Market Discount," and "--Premium" in this prospectus. High-yield interests
may be held only by fully taxable domestic corporations, other FASITs, and
certain securities dealers. Holders of high-yield interests are subject to
limitations
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on their ability to use current losses or net operating loss carryforwards or
carrybacks to offset any income derived from those securities.
If a FASIT regular security is sold or exchanged, the holder generally will
recognize gain or loss upon the sale in the manner described above for
securities other than REMIC regular interest securities. See "Material Federal
Income Tax Considerations--Sale or Exchange" in this prospectus. In addition, if
a FASIT regular security becomes wholly or partially worthless as a result of
default and delinquencies of the underlying assets, the holder of the security
should be allowed to deduct the loss sustained (or alternatively be able to
report a lesser amount of income). See "Material Federal Income Tax
Considerations--Taxation of Debt Securities--Effects of Default and
Delinquencies" in this prospectus.
FASIT regular securities held by a real estate investment trust or REIT
will qualify as "real estate assets" within the meaning of section 856(c) (4)(A)
of the Code, and interest on such securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of section 856(c)(3)(B) of the Code to the same
extent that REMIC securities would be so considered. FASIT regular securities
held by a thrift institution taxed as a "domestic building and loan association"
will represent qualifying assets for purposes of the qualification requirements
set forth in section 7701(a)(19) of the Code to the same extent that REMIC
securities would be so considered. See "Material Federal Income Tax
Considerations--Taxation of Debt Securities--Status as Real Property Loans" in
this prospectus. In addition, FASIT regular securities held by a financial
institution to which section 585 of the Code applies will be treated as
evidences of indebtedness for purposes of section 582(c)(1) of the Code. FASIT
securities will not qualify as "government securities" for either REIT - or RIC
- - qualification purposes. TREATMENT OF HIGH-YIELD INTERESTS. High-yield
interests are subject to special rules regarding the eligibility of holders of
such interests, and the ability of such holders to offset income derived from
their FASIT security with losses. High-yield interests may be held only by
eligible corporations other FASITs, and dealers in securities who acquire such
interests as inventory. If a securities dealer (other than an eligible
corporation) initially acquires a high-yield interest as inventory, but later
begins to hold it for investment, the dealer will be subject to an excise tax
equal to the income from the high-yield interest multiplied by the highest
corporate income tax rate. In addition, transfers of high-yield interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor still will be treated as the holder of the high-yield interest.
The holder of a high-yield interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the high-yield interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
regular security that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT regular
security and that have the same features as high-yield interests.
TAX TREATMENT OF FASIT OWNERSHIP SECURITIES. A FASIT ownership security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT ownership security
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determines its taxable income by taking into account all assets, liabilities and
items of income, gain, deduction, loss and credit of a FASIT. In general, the
character of the income to the holder of a FASIT ownership interest will be the
same as the character of such income of the FASIT, except that any tax-exempt
interest income taken into account by the holder of a FASIT ownership interest
is treated as ordinary income. In determining that taxable income, the holder of
a FASIT ownership security must determine the amount of interest, original issue
discount, market discount and premium recognized with respect to the FASIT's
assets and the FASIT regular securities issued by the FASIT according to a
constant yield methodology and under an accrual method of accounting. In
addition, holders of FASIT ownership securities are subject to the same
limitations on their ability to use losses to offset income from their FASIT
security as are the holders of high-yield interests. See "FASIT
Securities--Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC residual
securities also will apply to FASIT ownership securities. Accordingly, losses on
dispositions of a FASIT ownership security generally will be disallowed where,
within six months before or after the disposition, the seller of such security
acquires any other FASIT ownership security or, in the case of a FASIT holding
mortgage assets, any interest in a taxable mortgage pool described in section
7701 of the Code that is economically comparable to a FASIT Ownership Security.
In addition, if any security that is sold or contributed to a FASIT by the
holder of the related FASIT ownership security was required to be
marked-to-market under section 475 of the Code by such holder, then section 475
will continue to apply to such securities, except that the amount realized under
the mark-to-market rules will be a greater of the securities' value under
present law or the securities' value after applying special valuation rules
contained in the FASIT provisions. Those special valuation rules generally
require that the value of debt instruments that are not traded on an established
securities market be determined by calculating the present value of the
reasonably expected payments under the instrument using a discount rate of 120%
of the applicable federal rate, compounded semiannually.
The holder of a FASIT ownership security will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT and
(iv) in certain cases, the receipt of income representing a servicing fee or
other compensation. Any series for which a FASIT election is made generally will
be structured in order to avoid application of the prohibited transaction tax.
BACKUP WITHHOLDING, REPORTING AND TAX ADMINISTRATION. Holders of FASIT
securities will be subject to backup withholding to the same extent holders of
REMIC securities would be subject. See "Certain Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes of
reporting and tax administration, holders of record of FASIT securities
generally will be treated in the same manner as holders of REMIC securities.
Under proposed Treasury regulations, if a non-U.S. Person holds (either
directly or through a vehicle which itself is not subject to U.S. federal income
tax, such as a partnership or a trust) a FASIT regular security and a "conduit
debtor" pays or accrues interest on a debt instrument held by such FASIT, any
interest received or accrued by the non-U.S. Person FASIT
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regular security holder is treated as received or accrued from the conduit
debtor. The proposed Treasury regulations state that a debtor is a conduit
debtor if the debtor is a U.S. Person or the United States branch of a non-U.S.
Person and the non-U.S. Person FASIT regular security holder is (1) a "10
percent shareholder" of the debtor, (2) a "controlled foreign corporation" and
the debtor is a related person with respect to the controlled foreign
corporation or (3) related to the debtor. As set forth above, the proposed
Treasury regulations would not be effective until final regulations are filed
with the federal register.
Due to the complexity of the federal income tax rules applicable to holders
and the considerable uncertainty that exists with respect to many aspects of
those rules, potential investors should consult their own tax advisors regarding
the tax treatment of the acquisition, ownership, and disposition of the
securities.
ERISA CONSIDERATIONS
The following describes certain considerations under the Employee
Retirement Income Security Act of 1974, as amended and the Code, which apply
only to securities of a series that are not divided into subclasses. If
securities are divided into subclasses, the related prospectus supplement will
contain information concerning considerations relating to ERISA and the Code
that are applicable to the related subclasses.
ERISA and section 4975 of the Code impose requirements on employee benefit
plans - and on certain other retirement plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and collective
investment funds and separate accounts in which plans, accounts or arrangements
are invested - and on persons who are fiduciaries with respect to these types of
plans and arrangements. In this prospectus we refer to these types of plans and
arrangements as "Plans." Generally, ERISA applies to investments made by Plans.
Among other things, ERISA requires that the assets of Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of such Plans. ERISA also
imposes certain duties on persons who are fiduciaries of Plans, such as the duty
to invest prudently, to diversify investments unless it is prudent not to do so,
and to invest in accordance with the documents governing the Plan. Under ERISA,
any person who exercises any authority or control respecting the management or
disposition of the assets of a Plan, or who renders investment advice for a fee,
is considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant). Certain employee benefit plans, such as governmental plans (as
defined in section 3(32) of ERISA) and, if no election has been made under
section 410(d) of the Code, church plans (as defined in section 3(33) of ERISA),
are not subject to ERISA's requirements. Accordingly, assets of such plans may
be invested in securities without regard to the ERISA considerations described
above and below, subject to the provisions of applicable federal or state law.
Any such plan that is qualified and exempt from taxation under sections 401(a)
and 501(a) of the Code, however, is subject to the prohibited transaction rules
set forth in section 503 of the Code.
The United States Department of Labor (DOL) has issued final regulations
under section 401(c) of ERISA describing a safe harbor for insurers that issued
certain nonguaranteed policies supported by their general accounts to Plans, and
under which an insurer would not be
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considered an ERISA fiduciary with respect to its general account by virtue of a
Plan's investment in such a policy. In general, to meet the safe harbor, an
insurer must
o disclose certain specified information to investing Plan fiduciaries
initially and on an annual basis;
o allow Plans to terminate or discontinue a policy on 90 days' notice to
the insurer, and to elect, without penalty, either a lump-sum payment
or annual installment payments over a ten-year period, with interest;
and
o give Plans written notice of "insurer-initiated amendments" 60 days
before the amendments take effect.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA and section 4975 of the Code prohibit a
broad range of transactions involving Plan assets and persons having certain
specified relationships to a Plan ("parties in interest"), and impose additional
prohibitions where parties in interest are fiduciaries with respect to a Plan.
Certain parties in interest that participate in a prohibited transaction may be
subject to excise taxes imposed pursuant to section 4975 of the Code, or
penalties imposed pursuant to section 502(i) of ERISA, unless a statutory,
regulatory or administrative exemption is available.
The DOL has issued plan asset regulations defining what constitutes the
assets of a Plan (Department of Labor Reg. Section 2510.3-101). Under these
regulations, the underlying assets and properties of corporations, partnerships,
trusts and certain other entities in which a Plan makes an "equity" investment
could be deemed for purposes of ERISA to be assets of the investing Plan in
certain circumstances.
Under the plan asset regulations, the term "equity" interest is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." If the trust fund issues notes that are not treated as equity
interests in the trust fund for purposes of the plan asset regulations, a Plan's
investment in such notes would not cause the assets of the trust to be deemed
Plan assets. However, the seller, the servicer, the backup servicer, the
indenture trustee, the owner trustee, the underwriter and the depositor may be
the sponsor of or investment advisor with respect to one or more Plans. Because
such parties may receive certain benefits in connection with the sale of the
notes, the purchase of notes using Plan assets over which any of these parties
(or their affiliates) has investment authority might be deemed to be a violation
of the prohibited transaction rules of ERISA and the Code for which no exemption
may be available. Accordingly, a prospective purchaser should consult with
counsel before purchasing a note using the assets of any Plan if the seller, the
servicer, the backup servicer, the indenture trustee, the owner trustee, the
underwriter, the depositor or any of their affiliates
o has investment or administrative discretion with respect to such Plan
assets;
o has authority or responsibility to give, or regularly gives,
investment advice with respect to such Plan assets for a fee and
pursuant to an agreement or understanding that the
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advice will serve as a primary basis for investment decisions with
respect to the Plan assets and will be based on the particular
investment needs for the Plan; or
o is an employer maintaining or contributing to such Plan.
In addition, the trust fund, any underwriter, the trustee or their
affiliates might be considered or might become "parties in interest" with
respect to a Plan. Also, any holder of certificates of the trust fund, because
of its activities or the activities of its respective affiliates, may be deemed
to be a "party in interest" with respect to certain Plans, including but not
limited to Plans sponsored by the holder. In either case, whether nor not the
assets of the trust are considered to be Plan assets, the acquisition or holding
of notes by or on behalf of a Plan could give rise to a prohibited transaction
within the meaning of ERISA and the Code, unless it is subject to one or more
exemptions such as:
o Prohibited Transaction Class Exemption (PTCE) 84-14, which exempts
certain transactions effected on behalf of a Plan by a "qualified
professional asset manager;"
o PTCE 90-1, which exempts certain transactions involving insurance
company pooled separate accounts;
o PTCE 91-38, which exempts certain transactions involving bank
collective investment funds;
o PTCE 95-60, which exempts certain transactions involving insurance
company general accounts; or
o PTCE 96-23, which exempts certain transactions effected on behalf of a
Plan by certain "in-house asset managers."
There can be no assurance that any of these class exemptions will apply
with respect to any particular Plan's investment in notes, or, even if it did
apply, that any exemption would apply to all prohibited transactions that may
occur in connection with such an investment. Unless a different requirement is
imposed in the prospectus supplement, each prospective purchaser or transferee
of a note that is a Plan or a person acting on behalf or investing the assets of
a Plan shall be required to represent (or, with respect to any transfer of a
beneficial interest in a global note, shall be deemed to represent) to the
indenture trustee and the note registrar that the relevant conditions for
exemptive relief under at least one of the foregoing exemptions have been
satisfied.
The plan asset regulations provide that, generally, the assets of an entity
in which a Plan invests will not be deemed to be assets of the Plan for purposes
of ERISA if the equity interest acquired by the investing Plan is a
publicly-offered security, or if equity participation by benefit plan investors
is not significant. In general, a publicly-offered security, as defined in the
PLAN asset regulations, is a security that is widely held, freely transferable
and registered under the Securities Exchange Act of 1934, as amended. 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
117
investors," which include benefit plans described in ERISA or under section 4975
of the Code, whether or not they are subject to Title I of ERISA, as well as
entities whose underlying assets include assets of a Plan by reason of a Plan's
investment in the entity.
If no exception under the plan asset regulations applies and if a Plan (or
a person investing Plan assets, such as an insurance company general account)
acquires an equity interest in the trust, then the assets of the trust would be
considered to be assets of the Plan. Because the loans held by the trust may be
deemed assets of each Plan that purchases an equity interest, an investment by a
Plan in an equity interest issued by the trust 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.
The DOL issued to Bear, Stearns & Co. Inc. ("Bear, Stearns") an individual
underwriter exemption (Prohibited Transaction Exemption 90-30, 55 Fed. Reg.
21461 (1990)), which is set forth in Prohibited Transaction Exemption 2002-41,
67 Fed. Reg. 54487 (2002). It exempts from the application of certain of the
prohibited transaction rules transactions relating to the acquisition, sale and
holding by Plans of certain asset-backed securities, including certificates
issued by entities, including trusts, that hold certain types of receivables or
obligations and with respect to which Bear, Stearns or certain of its
affiliates, is the underwriter, or the manager or co-manager of an underwriting
syndicate.
The underwriter exemption sets forth the following general conditions which
must be satisfied before a transaction involving the acquisition, sale and
holding of the securities or a transaction in connection with the servicing,
operation and management of the trust fund may be eligible for exemptive relief
thereunder:
o The acquisition of the securities by a Plan is on terms (including the
price for the securities) that are at least as favorable to the
investing Plan as they would be in an arm's-length transaction with an
unrelated party.
o The rights and interests evidenced by the securities acquired by the
Plan are not subordinated to the rights and interests evidenced by
other securities of the same trust fund, other than in the case of a
"designated transaction" (as defined below).
o The securities acquired by the Plan have received a rating at the time
of such acquisition that is in one of the three (or in the case of a
designated transaction, four) highest generic rating categories from
any of Fitch Ratings, Moody's Investors Service, Inc. and Standard &
Poor's, a division of the McGraw-Hill Companies, Inc.
o The trustee is not an affiliate of the depositor, the servicer, any
borrower whose obligations under one or more mortgage loans constitute
more than 5% of the aggregate unamortized principal balance of the
assets in the trust, the counterparty in a permitted notional
principal transaction, or any of their respective affiliates (together
with the trustee and the underwriters, the "restricted group").
118
o The sum of all payments made to and retained by the underwriters in
connection with the distribution of the securities represents not more
than reasonable compensation for underwriting or placing such
securities; the sum of all payments made to and retained by the
depositor pursuant to the sale of the mortgage loans to the trust
represents not more than the fair market value of such mortgage loans;
and the sum of all payments made to and retained by the servicers
represent not more than reasonable compensation for the servicers'
services under the pooling and servicing agreements and reimbursement
of the servicers' reasonable expenses in connection therewith.
o The Plan investing in the securities is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
For purposes of the underwriter exemption, a "designated transaction" means
a transaction in which the assets underlying the securities consist of
single-family residential, multi-family residential, home equity, manufactured
housing and/or commercial mortgage obligations that are fully secured by
single-family residential, multi-family residential or commercial real property
or leasehold interests in the foregoing.
Moreover, the underwriter exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when a
fiduciary causes a Plan to acquire securities in a trust containing receivables
on which such person (or its affiliate) is an obligor; provided, that among
other requirements:
o the person (or its affiliate) is not an obligor with respect to more
than 5% of the fair market value of the obligations or receivables
contained in the trust;
o the Plan is not a plan with respect to which any member of the
restricted group is the "plan sponsor" (as defined in section 3(16)(B)
of ERISA);
o in the case of an acquisition in connection with the initial issuance
of securities, at least 50% of each class of securities in which Plans
have invested is acquired by persons independent of the restricted
group and at least 50% of the aggregate interest in the trust fund is
acquired by persons independent of the restricted group;
o a Plan's investment in 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 such person has discretionary authority
or renders investment advice are invested in securities representing
an interest in one or more trusts containing assets sold or serviced
by the same entity.
The underwriter exemption also provides exemptive relief to certain
mortgage-backed and asset-backed securities transactions that utilize
pre-funding accounts and that otherwise satisfy the requirements of the
underwriter exemption. Mortgage loans or other secured receivables supporting
payments to securityholders, and having a value equal to no more than
119
25% of the total principal amount of the securities being offered by the trust,
may be transferred to the trust within a 90-day or three-month funding period
following the closing date instead of being required to be either identified or
transferred on or before the closing date. The relief is available when the
following conditions are met:
o The funding limit (I.E., the ratio of the amount allocated to the
pre-funding account to the total principal amount of the securities
being offered) must not exceed 25%.
o All the additional obligations transferred after the closing date must
meet the same terms and conditions for eligibility as the original
obligations used to create the trust, which terms and conditions have
been approved by a rating agency; provided, that the terms and
conditions for determining the eligibility of an obligation may be
changed if such changes receive prior approval either by a majority
vote of the outstanding securityholders or by a rating agency.
o The transfer of additional obligations to the trust during the funding
period must not result in the securities to be covered by the
underwriter exemption receiving a lower credit rating from a rating
agency upon termination of the funding period than the rating that was
obtained at the time of the initial issuance of the securities by the
trust.
o Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the obligations in the
trust at the end of the funding period must not be more than 100 basis
points lower than the average interest rate for the obligations
transferred to the trust on the closing date.
o In order to insure that the characteristics of the additional
obligations are substantially similar to the original obligations
which were transferred to the trust fund:
1. the characteristics of the additional obligations must be monitored by
an insurer or other credit support provider that is independent of the
depositor; or
2. an independent accountant retained by the depositor must provide the
depositor with a letter (with copies provided to each rating agency
rating the securities, the related underwriter and the related
trustee) stating whether or not the characteristics of the additional
obligations conform to the characteristics described in the related
prospectus or prospectus supplement and/or pooling and servicing
agreement. In preparing the letter, the independent accountant must
use the same type of procedures as were applicable to the obligations
transferred to the trust as of the closing date.
o The period of pre-funding must end no later than three months or 90
days after the closing date or earlier in certain circumstances if the
pre-funding account falls below the minimum level specified in the
pooling and servicing agreement or an event of default occurs.
o Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be
invested only in certain permitted investments.
120
o The related prospectus or prospectus supplement must describe:
1. any pre-funding account and/or capitalized interest account used in
connection with a pre-funding account;
2. the duration of the period of pre-funding;
3. the percentage and/or dollar amount of the funding limit for the
trust; and
4. that the amounts remaining in the pre-funding account at the end of
the funding period will be remitted to securityholders as repayments
of principal.
o The related pooling and servicing agreement must describe the
permitted investments for the pre-funding account and/or capitalized
interest account and, if not disclosed in the related prospectus or
prospectus supplement, the terms and conditions for eligibility of
additional obligations.
The underwriter exemption also permits Plans to purchase securities,
including subordinated securities underwritten by Bear, Stearns, rated in any of
the four highest ratings categories (provided that all other requirements of the
underwriter exemption are met).
In general, neither PTCE 83-1, which exempts certain transactions involving
Plan investments in mortgage trusts, nor the underwriter exemption applies to a
trust which contains unsecured obligations. However, under the underwriter
exemption, residential and home equity loan receivables issued in designated
transactions may be less than fully secured if:
o the rights and interests evidenced by the securities issued in the
designated transaction are not subordinated to the rights and
interests evidenced by other securities of the same trust fund,
o the securities have received a rating at the time of acquisition that
is in one of the two highest generic rating categories from a rating
agency, and
o the receivables are secured by collateral whose fair market value on
the closing date of the designated transaction is at least 80% of the
sum of the outstanding principal balance due under the receivable and
the outstanding principal balance of any other receivable of higher
priority which is secured by the same collateral.
Any Plan fiduciary that proposes to cause a Plan to purchase securities should
consult with counsel concerning the impact of ERISA and the Code, the
applicability of PTCE 83-1, the underwriter exemption, or any other exemption
and the potential consequences in their specific circumstances, prior to making
an investment. Moreover, each Plan fiduciary should determine whether, under the
general fiduciary standards of investment prudence and diversification, an
investment in the securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
121
LEGAL MATTERS
The legality of the securities of each series, including the material
federal income tax consequences with respect to the securities, will be passed
upon for the depositor by Sidley Austin Brown & Wood LLP, New York, New York,
Stroock & Stroock & Lavan LLP, New York, New York, Thacher Proffitt & Wood LLP,
New York, New York or other counsel designated in the prospectus supplement.
FINANCIAL INFORMATION
A new trust fund will be formed for each series of securities. No trust
fund will engage in any business activities or have any assets or obligations
prior to the issuance of the related series of securities. Accordingly, no
financial statements with respect to any trust fund will be included in this
prospectus or in the related prospectus supplement.
AVAILABLE INFORMATION
The depositor has filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the securities. This
prospectus, which forms a part of the registration statement, and the prospectus
supplement relating to each series of securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the registration statement pursuant
to the Rules and Regulations of the SEC. For further information, reference is
made to the registration statement and its exhibits. The registration statement
and exhibits can be inspected and copied at prescribed rates at the public
reference facilities maintained by the SEC at its Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located
as follows: Midwest Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10048. In addition, the SEC maintains a
Web site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the depositor,
that file electronically with the SEC.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This prospectus incorporates by reference all documents and reports filed
by the depositor, Bear Stearns Asset Backed Securities, Inc., with respect to a
trust fund pursuant to Section 13(a), 14 or 15(d) of the Securities Exchange Act
of 1934, as amended, prior to the termination of the offering of the related
securities. Upon request by any person to whom this prospectus is delivered in
connection with the offering of one or more classes securities, the depositor
will provide or cause to be provided without charge a copy of any of the
documents and/or reports incorporated herein by reference, in each case to the
extent the documents or reports relate to those classes of securities, other
than the exhibits to the documents (unless the exhibits are specifically
incorporated by reference in such documents). Requests to the depositor should
be directed in writing to: Bear Stearns Asset Backed Securities, Inc., 383
Madison Avenue, New York, New York 10179, telephone number (212) 272-2000. The
depositor has determined that its financial statements are not material to the
offering of any securities.
122
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each trust fund, that file
electronically with the SEC.
RATINGS
It is a condition to the issuance of the securities of each series offered
by this prospectus and the accompanying prospectus supplement that they shall
have been rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies specified in the prospectus
supplement.
Each such rating will be based on, among other things, the adequacy of the
value of the trust fund assets and any credit enhancement with respect to the
related class and will reflect the rating agency's assessment solely of the
likelihood that the related holders will receive payments to which they are
entitled. No rating will constitute an assessment of the likelihood that
principal prepayments on the related loans will be made, the degree to which the
rate of prepayments might differ from that originally anticipated or the
likelihood of early optional termination of the securities. A rating should not
be deemed a recommendation to purchase, hold or sell securities, inasmuch as it
does not address market price or suitability for a particular investor. A rating
will not address the possibility that prepayment at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that an investor purchasing a security at a significant
premium might fail to recoup its initial investment under certain prepayment
scenarios.
There is also no assurance that any rating will remain in effect for any
given period of time or that it may not be lowered or withdrawn entirely by the
applicable rating agency in the future if in its judgment circumstances so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of trust fund assets or any credit enhancement with
respect to a series, a rating might also be lowered or withdrawn because of,
among other reasons, an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of the credit enhancement
provider's long-term debt.
The amount, type and nature of any credit enhancement established with
respect to a series of securities will be determined on the basis of criteria
established by each rating agency named in the related prospectus supplement.
These criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each rating agency determines the amount of credit enhancement required with
respect to each class of securities. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately reflect
future experience nor any assurance that the data derived from a large pool of
mortgage loans will accurately predict the delinquency, foreclosure or loss
experience of any particular pool of loans. No assurance can be given that
values of any properties have remained or will remain at their levels on the
respective dates of origination of the related loans. If residential real estate
markets should experience an overall decline in property values such that the
principal balances of the loans in a particular trust fund
123
and any secondary financing on the related properties become equal to or greater
than the value of those properties, the rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the mortgage
lending industry. In additional, adverse economic conditions (which may or may
not affect real property values) may affect the timely payment by borrowers of
scheduled payments of principal of and interest on the loans and, accordingly,
the rates of delinquencies, foreclosures and losses with respect to any trust
fund. To the extent that losses are not covered by credit enhancement, losses
will be borne, at least in part, by the holders of one or more classes of the
securities of the related series.
LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise specified in the related prospectus supplement, the
securities will not constitute "mortgage-related securities" within the meaning
of the Secondary Market Mortgage Credit Enhancement Act of 1984, as amended.
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the securities constitute legal investments for them.
PLAN OF DISTRIBUTION
The depositor may offer each series of securities through Bear, Stearns &
Co. Inc. (BS&Co.) or one or more other firms that may be designated at the time
of the related offering. The participation of BS&Co. in any offering will comply
with Schedule E to the By-Laws of the National Association of Securities
Dealers, Inc. The prospectus supplement relating to each series of securities
will set forth the specific terms of the offering of the series and of each
class within the series, the names of the underwriters, the purchase price of
the securities, the proceeds to the depositor from the sale, any securities
exchange on which the securities may be listed, and, if applicable, the initial
public offering prices, the discounts and commissions to the underwriters and
any discounts and concessions allowed or reallowed to dealers. The place and
time of delivery of each series of securities will also be set forth in the
related prospectus supplement. BS&Co. is an affiliate of the depositor.
124
GLOSSARY OF TERMS
AGENCY SECURITIES. Mortgage-backed securities issued or guaranteed by
Ginnie Mae, Fannie Mae or Freddie Mac.
ASSET VALUE. Unless otherwise specified in the related prospectus
supplement with respect to the primary assets in the trust fund, the PRODUCT of
the Asset Value percentage set forth in the related indenture MULTIPLIED BY the
lesser of
o the stream of remaining regularly scheduled payments in the primary
assets net of certain amounts payable as expenses, together with
income earned on each regularly scheduled payment received through the
day preceding the next distribution date at the Assumed Reinvestment
Rate, if any, discounted to present value at the highest interest rate
on the notes of the series over periods equal to the interval between
payments on the notes AND
o the then outstanding principal balance of the primary assets.
ASSUMED REINVESTMENT RATE. With respect to a series of securities, the
highest rate permitted by the rating agencies named in the related prospectus
supplement or a rate insured by means of a surety bond, guaranteed investment
contract, reinvestment agreement or other arrangement satisfactory to the rating
agencies.
HOME EQUITY LOANS. Closed-end loans and/or revolving credit line loans
secured by mortgages, deeds of trust or other similar security instruments
creating senior or junior liens on one- to four-family residential properties or
mixed-use properties.
HOME IMPROVEMENT CONTRACTS. Home Improvement installment sales contracts
and installment loan agreements which are either unsecured or secured by
mortgages, deeds of trust or similar security instruments creating generally
junior liens on one- to four-family residential properties or mixed-use
properties or secured by purchase money security interests in the related home
improvements.
INSURANCE PROCEEDS. Amounts received by the related servicer under any
title insurance policy, hazard insurance policy or other insurance policy
covering any primary asset in a trust fund, other than amounts to be applied to
the restoration or repair of the related property or released to the borrower
under the related agreement.
LIQUIDATION PROCEEDS. Amounts received by the related servicer in
connection with the liquidation of the primary assets or related real property
in a trust fund, whether through foreclosure sale, repossession or otherwise,
including payments in connection with the primary assets received from the
borrower, other than amounts required to be paid or refunded to the borrower
under the applicable loan documents or pursuant to law, net of the related
liquidation expenses.
125
OID REGULATIONS. Sections 1271 through 1275 of the Internal Revenue Code of
1986, as amended, and the Treasury regulations issued thereunder on February 2,
1994 and amended on June 11, 1996.
MANUFACTURED HOUSING CONTRACTS. Manufactured housing installment sales
contracts and installment loan agreements secured by senior or junior liens on
the related manufactured homes or secured by mortgages, deeds of trust or other
similar security instruments creating senior or junior liens on the real estate
on which the related manufactured homes are located.
PRIVATE LABEL SECURITIES. Private mortgage-backed securities, other than
Agency Securities, backed or secured by underlying loans that may be Residential
Loans, Home Equity Loans, Home Improvement Contracts and/or Manufactured Housing
Contracts.
RESIDENTIAL LOANS. Loans secured by mortgages, deeds of trust or other
similar security instruments creating senior or junior liens on one- to
four-family residential properties.
U.S. PERSON: Any of the following:
o a citizen or resident of the United States;
o a corporation or a partnership (including an entity treated as a
corporation or partnership for U.S. federal income tax purposes)
organized in or under the laws of the United States, or any State
thereof or the District of Columbia (unless in the case of a
partnership Treasury regulations are adopted that provide otherwise);
o an estate whose income from sources outside the United States is
includible in gross income for federal income tax purposes regardless
of its connection with the conduct of a trade or business within the
United States; or
o a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more
U.S. Persons have the authority to control all substantial decisions
of the trust.
In addition, certain trusts which would not qualify as U.S. Persons under the
above definition but which are eligible to and make an election to be treated as
U.S. Persons will also be treated as U.S. Persons.
126
$487,198,000
(APPROXIMATE)
BEAR STEARNS ASSET BACKED SECURITIES TRUST 2004-HE1
ISSUER
ASSET-BACKED CERTIFICATES, SERIES 2004-HE1
EMC MORTGAGE CORPORATION
SELLER AND MASTER SERVICER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
BEAR, STEARNS & CO. INC. BANC OF AMERICA SECURITIES LLC
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the Series 2004-HE1 Asset-Backed Certificates in
any state where the offer is not permitted.
Until 90 days after the date of this prospectus supplement, all dealers
effecting transactions in the certificates offered by this prospectus
supplement, whether or not participating in this distribution, may be required
to deliver this prospectus supplement and the accompanying prospectus. This is
in addition to the obligation of dealers to deliver this prospectus supplement
and the accompanying prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
JANUARY 27, 2004