Prospectus Supplement
(To Prospectus dated March 8, 2002)
Equity One Mortgage Pass-Through Trust 2002-2
Equity One ABS, Inc. [EQUITY ONE LOGO]
as Depositor
Equity One, Inc.
as Servicer
$287,552,000
Mortgage Pass-Through Certificates, Series 2002-2
- ------------------------------------------------------------------------------------------------------
Offered Price to Underwriting Net Proceeds
Certificates Principal Balance Pass-Through Rate Public Discount to Depositor (1)
- ------------ ----------------- ------------------ ------ -------- ----------------
Class AF-1 $89,800,000 LIBOR + 0.150% (2) 100.0000% 0.25% $89,575,500.00
Class AF-2 $32,200,000 5.025% (2) 99.9999% 0.25% $32,249,810.72 (3)
Class AF-3 $37,700,000 5.773% (2) 99.9999% 0.25% $37,781,035.10 (3)
Class AF-4 $30,282,000 6.539% (2)(4) 99.9999% 0.25% $30,365,775.99 (3)
Class AV-1 $97,570,000 LIBOR + 0.280% (2)(5) 100.0000% 0.25% $97,326,075.00
Class A-IO $19,000,000 (6) 6.000% (6) 10.9556% 0.25% $2,168,197.40 (3)
- -----------
(1) Before deducting expenses, payable by the depositor, estimated to be
approximately $500,000 in the aggregate.
(2) This rate may be limited by the applicable maximum rate described under the
caption "Description of the Certificates--Interest."
(3) Includes accrued interest, if any, from April 1, 2002.
(4) After the optional termination date, this rate will increase to 7.039%.
(5) After the optional termination date, this rate will increase to LIBOR +
0.560%.
(6) The Class A-IO Certificates do not have a principal balance and are not
entitled to any principal payments, but will accrue interest at a rate of
6.000% on a notional balance, initially equal to $19,000,000. The Class
A-IO Certificates are not entitled to distributions after the distribution
date in April 2004.
- ------------------------------
Before buying certificates, The certificates--
consider carefully the risk
factors beginning on page S-14 o represent an interest in a trust fund
in this document and on page 5 consisting primarily of a pool of
in the prospectus. adjustable rate and fixed rate, fully
amortizing and balloon, first and second
The certificates will lien mortgage loans divided into two
represent interests in the groups, Group I and Group II. Subject to
trust fund only and will not certain cross-collateralization
represent interests in or be provisions, the Class AF-1, Class AF-2,
obligations of any other Class AF-3, Class AF-4 and Class A-IO
entity. Certificates will represent primarily an
interest in the mortgage loans in Group I
This prospectus supplement may and the Class AV-1 Certificates will
be used to offer and sell the represent primarily an interest in the
certificates only if it is mortgage loans in Group II.
accompanied by the prospectus.
o currently have no trading market.
Credit enhancement for the certificates--
o will include overcollateralization. A
portion of excess interest received from
the mortgage loans in each group will be
applied to cover losses on the mortgage
loans in that group and to make payments
of principal on the related class or
classes of offered certificates (other
than the Class A-IO Certificates) to
establish and maintain a required level
of overcollateralization for that group.
o will also include cross-
collateralization. A portion of excess
interest received from the mortgage loans
in each group will be applied to cover
losses on the mortgage loans in the other
group and to make payments of principal
on the unrelated class or classes of
offered certificates (other than the
Class A-IO Certificates) to establish and
maintain a required level of
overcollateralization for that group.
o will also include a certificate guaranty
insurance policy from Ambac Assurance
Corporation. This policy will guarantee
current payments of interest and ultimate
payment of principal to holders of the
certificates on the terms described in
this document.
o will also include a reserve fund that
will be funded pursuant to a yield
maintenance agreement in order to cover
shortfalls in principal and interest
payable to the Class AV-1 Certificates on
the terms described in this document.
[Ambac Logo]
- ------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved the certificates or determined that this prospectus
supplement or the accompanying prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
It is expected that delivery of the certificates will be made in book-entry form
only through the facilities of The Depository Trust Company, Clearstream,
Luxembourg, and the Euroclear System on or about April 30, 2002.
First Union Securities, Inc. is acting under the trade name "Wachovia
Securities."
Wachovia Securities
April 25, 2002
Information about the certificates is presented in two separate documents
that progressively provide more detail:
o the accompanying prospectus which provides general information,
some of which may not apply to your certificates, and
o this prospectus supplement, which describes the specific terms of
your certificates.
We strongly encourage you to read both this prospectus supplement and the
prospectus in full. 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.
If the description of the terms of your certificates varies between this
prospectus supplement and the accompanying prospectus, you should rely on the
information in this prospectus supplement.
We have made cross-references to captions in this prospectus supplement and
the accompanying prospectus under which you can find further related
discussions. The table of contents that follows on the next page and the table
of contents in the accompanying prospectus indicate where these captions are
located.
We are not offering the certificates in any state where the offer is not
permitted.
We do not claim that the information in this prospectus supplement and the
accompanying prospectus is accurate as of any date other than the dates stated
on the cover of each document.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Mortgage Pass-Through Certificates, Series 2002-2, and with
respect to their unsold allotments or subscriptions. In addition, all dealers
selling the Mortgage Pass-Through Certificates, Series 2002-2 will be required
to deliver a prospectus supplement and prospectus until July 24, 2002.
Subject to some limitations, you can get a copy of any of the documents
referred to in the accompanying prospectus under the caption "Incorporation of
Certain Documents by Reference" free of charge from the trustee. You should
direct any requests for these documents to the Corporate Trust Office of the
Trustee at 450 West 33rd Street, 14th Floor, New York, New York 10001,
telephone: (212) 946-3015, facsimile number: (212) 946-8191, Attention:
Institutional Trust Services/Structured Finance Services.
This prospectus supplement and the accompanying prospectus contain
forward-looking statements relating to future economic performance or
projections and other financial items. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the depositor notes that these
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause actual results or performance to differ
materially from these forward-looking statements. Those risks, uncertainties and
other factors include, among others, the rate and timing of prepayments on
mortgage loans, general economic and business conditions, competition, changes
in political and social conditions, regulatory initiatives and compliance with
government regulations, customer preferences and various other matters, many of
which are beyond the depositor's control. These forward-looking statements,
together with related qualifying language and assumptions, are found in the
material, including each of the tables, set forth under the captions "Risk
Factors," "Yield, Prepayment and Maturity Considerations," and "Yield and
Prepayment Considerations." Forward-looking statements are also found elsewhere
in this prospectus supplement and the accompanying prospectus, and may be
identified by, among other things, the use of forward-looking words like
"expects," "intends," "anticipates," "estimates," "believes," "may" or other
comparable words. These forward-looking statements speak only as of the date of
this prospectus supplement. The depositor expressly disclaims any obligation or
undertaking to update or revise forward-looking statements to reflect any change
in the depositor's expectations or any change in events, conditions or
circumstances on which any forward-looking statement is based.
S-2
TABLE OF CONTENTS
Prospectus Supplement
Page
----
Summary of Terms...........................................................S-4
Risk Factors..............................................................S-14
The Mortgage Pool.........................................................S-22
Servicing of Loans........................................................S-46
Description of the Certificates...........................................S-50
Yield, Prepayment and Maturity Considerations.............................S-68
The Certificate Insurer...................................................S-79
Use of Proceeds...........................................................S-80
Federal Income Tax Consequences...........................................S-80
ERISA Considerations......................................................S-82
Legal Investment..........................................................S-83
Underwriting..............................................................S-83
Legal Matters.............................................................S-84
Experts...................................................................S-84
Ratings...................................................................S-85
Index of Defined Terms....................................................S-86
Annex I - Global Clearance, Settlement and Tax Documentation Procedures....A-1
Annex II - Projected Principal Balance Schedule............................A-5
Prospectus
Risk Factors.................................................................5
The Trust Fund..............................................................13
Use of Proceeds.............................................................17
The Depositor...............................................................18
Loan Program................................................................18
Description of the Securities...............................................24
Credit Enhancement..........................................................39
Yield and Prepayment Considerations.........................................44
The Agreements..............................................................46
Legal Aspects of the Loans..................................................59
Federal Income Tax Consequences.............................................69
State Tax Considerations....................................................93
ERISA Considerations........................................................93
Legal Investment............................................................97
Method of Distribution......................................................98
Legal Matters...............................................................99
Financial Information.......................................................99
Rating......................................................................99
Available Information......................................................100
Incorporation of Certain Documents by Reference............................100
Index of Defined Terms.....................................................101
S-3
- --------------------------------------------------------------------------------
SUMMARY OF TERMS
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. You should read this entire prospectus supplement and the
accompanying prospectus carefully before you decide whether to purchase
certificates.
This summary provides an overview of calculations, cash flows and other
information to aid your understanding and is qualified by the full description
of these calculations, cash flows and other information in this prospectus
supplement and the accompanying prospectus.
The Trust Fund and the Sellers
Equity One Mortgage Pass-Through Trust 2002-2 will be formed pursuant to a
pooling and servicing agreement to be dated as of March 31, 2002 by and
among Equity One ABS, Inc., as depositor, Equity One, Inc., as a seller and
as the servicer, JPMorgan Chase Bank, as trustee, and the other sellers
listed in the next sentence. Equity One, Inc., a Delaware corporation,
Equity One, Inc., a Minnesota corporation, Equity One Consumer Loan
Company, a New Hampshire corporation, Equity One, Incorporated, a
Pennsylvania corporation, and Popular Financial Services, LLC, a Delaware
limited liability company, as sellers, will sell the mortgage loans to
Equity One ABS, Inc. Equity One ABS, Inc. will deposit the mortgage loans
in the trust fund.
The Certificates
On or about April 30, 2002, the trust fund will issue the certificates.
This document discusses the following classes of certificates: the Class
AF-1, Class AF-2, Class AF-3 and Class AF-4 Certificates, the Class AV-1
Certificates, the Class A-IO Certificates, the Class X Certificates and the
Class R Certificates, all of which will represent interests in the trust
fund. The Class AF-1, Class AF-2, Class AF-3 and Class AF-4 Certificates
are sometimes referred to in this prospectus supplement as the Class AF
Certificates. The Class AF Certificates, the Class AV-1 Certificates and
the Class A-IO Certificates are sometimes referred to in this prospectus
supplement as the offered certificates. The offered certificates are being
offered to you by this prospectus supplement and the accompanying
prospectus. We are not offering the Class X Certificates or the Class R
Certificates for sale to investors. The Class R Certificates will not have
a pass-through rate.
Generally, the offered certificates will be offered for purchase in
denominations of $25,000 and integral multiples of $1 in excess thereof.
Registration of Certificates
We will issue the offered certificates in book-entry form. You will hold
your interests either through a depository in the United States or through
one of two depositories in Europe. While the certificates are book-entry
they will be registered in the name of the nominee of the depository in the
United States.
Transfers within any depository system will be in accordance with the usual
rules and operating procedures of that system. Cross-market transfers
between two different depository systems may be effected through a
third-party bank and/or the related depositories. The limited circumstances
under which definitive certificates will replace the book-entry
certificates are described in the prospectus.
We refer you to "Description of the Certificates--Book-Entry Certificates,"
and Annex I in this prospectus supplement and "Description of the
Securities--Book-Entry Registration of Securities" in the prospectus for
more detail.
- --------------------------------------------------------------------------------
S-4
- --------------------------------------------------------------------------------
Trust Property
The trustee will hold the trust property for the benefit of the
certificateholders. The trust property will include:
o a pool of adjustable rate and fixed rate, fully amortizing and
balloon, first and second lien mortgage loans. The pool will be
comprised of two groups, Group I and Group II. Group I will
consist of fixed rate mortgage loans and Group II will consist of
adjustable rate mortgage loans;
o payments on the mortgage loans received after the close of
business on March 31, 2002, sometimes referred to in this
prospectus supplement as the cut-off date (other than amounts
received after the cut-off date in respect of principal and
interest on the mortgage loans due on or prior to the cut-off
date);
o the deed of trust or mortgage related to each mortgage loan;
o property that once secured a mortgage loan that the trust fund
has acquired through foreclosure or deed in lieu of foreclosure;
o the benefits of the certificate guaranty insurance policy and
yield maintenance agreement;
o amounts on deposit in the various accounts maintained by the
servicer and the trustee for the benefit of the
certificateholders;
o rights of the depositor and the trustee under the pooling and
servicing agreement pursuant to which the depositor purchased the
mortgage loans from the sellers, including the right to require
the sellers or their successors in interest to repurchase
mortgage loans for breaches of representations and warranties;
and
o rights of the sellers or their successors in interest under any
hazard insurance policies covering the mortgaged properties.
The Mortgage Pool
On the closing date, the trust fund will acquire a pool of adjustable rate
and fixed rate mortgage loans, which will consist of two groups: Group I
and Group II. Group I will consist of fixed rate mortgage loans and Group
II will consist of adjustable rate mortgage loans. Group I will include
mortgage loans secured by first and second liens on one- to four-family
dwellings and on multi-family properties and structures which contain both
residential dwelling units and space used for retail, professional or other
commercial uses. Group II will include mortgage loans secured by first
liens on one- to four-family dwellings. The mortgage loans were generally
originated or acquired in accordance with underwriting guidelines that are
less stringent than Fannie Mae and Freddie Mac guidelines.
Subject to certain cross-collateralization provisions, the Class AF and
Class A-IO Certificates will represent primarily an interest in the
mortgage loans in Group I and the Class AV-1 Certificates will represent
primarily an interest in the mortgage loans in Group II.
The mortgage loans had the following characteristics as of the close of
business on March 31, 2002:
Group I:
o 100% fixed rate
o mortgage rate range: 6.490% to 15.450%
o weighted average mortgage rate: 8.838% (approximate)
o principal balance range: $9,010.00 to $497,125.00
- --------------------------------------------------------------------------------
S-5
- --------------------------------------------------------------------------------
o average principal balance: $104,501.03 (approximate)
o maximum original loan-to-value ratio: 100.00% (approximate)
o weighted average original loan-to-value ratio: 77.59%
(approximate)
o loan origination dates range from July 2, 2001 to February 28,
2002
o remaining term to stated maturity range: 54 months to 360 months
o weighted average remaining term to stated maturity (by principal
balance): 240 months (approximate)
o 92.65% residential loans, which are loans secured by one- to
four-family dwellings, and 7.35% mixed use loans, which are loans
secured by multi-family properties and structures that contain
both residential dwelling units and space used for retail,
professional or other commercial uses (by principal balance)
(approximate)
o mortgaged properties are 85.90% owner occupied and 14.10%
non-owner occupied (by principal balance) (approximate)
o 94.58% first priority lien and 5.42% second priority lien (by
principal balance) (approximate)
Group II:
o 100% adjustable rate
o current mortgage rate range: 6.990% to 12.050%
o weighted average current mortgage rate: 8.651% (approximate)
o principal balance range: $19,462.21 to $494,684.36
o average principal balance: $122,576.26 (approximate)
o maximum original loan-to-value ratio: 100.00% (approximate)
o weighted average original loan-to-value ratio: 82.91%
(approximate)
o loan origination dates range from July 2, 2001 to February 23,
2002
o remaining term to stated maturity range: 178 months to 360 months
o weighted average remaining term to stated maturity (by principal
balance): 357 months (approximate)
o 100% residential loans and no mixed use loans (by principal
balance)
o mortgaged properties are 94.94% owner occupied and 5.06%
non-owner occupied (by principal balance) (approximate)
o 100% first priority lien
The mortgage rate on each adjustable rate mortgage loan will adjust on each
adjustment date to equal the sum of the related index and the related
margin on that mortgage loan, subject to a maximum and minimum mortgage
rate, as described in this prospectus supplement.
We refer you to "The Mortgage Pool" in this prospectus supplement.
Servicer and Servicing
Equity One, Inc. will service, manage and make collections on the mortgage
loans. In exchange for these services, Equity One, Inc. will receive an
annual servicing fee, payable monthly, of 0.50% of the principal
- --------------------------------------------------------------------------------
S-6
- --------------------------------------------------------------------------------
balance of each mortgage loan. The servicer will also be entitled to other
specified amounts as servicing compensation from the trust fund.
We refer you to "Servicing of Loans--The Servicer" and "--Servicing
Compensation and Payment of Expenses" in this prospectus supplement.
Distributions to Certificateholders
General
On each distribution date, the trustee will make a payment on the offered
certificates. The distribution date will be the 25th day of each month or,
if the 25th day is not a business day, the next business day, commencing on
May 28, 2002. Distributions will be made to the persons in whose names the
certificates are registered at the close of business on the related record
date. The record date for the Class AF-1 and Class AV-1 Certificates is the
business day immediately preceding that distribution date. The record date
for the Class AF-2, Class AF-3, Class AF-4 and Class A-IO Certificates is
the last business day of the calendar month immediately preceding that
distribution date (or the closing date with respect to the first
distribution date).
Payments on the Class AF Certificates will be funded:
o from the payments received with respect to the mortgage loans in
Group I; and
o if the amount described in the above bullet is insufficient, from
excess interest and overcollateralization from Group I; and
o if the amount described in the above two bullets is insufficient,
from certain excess interest from Group II, only to the extent
those amounts are available and subject to the
cross-collateralization provisions of the trust fund; and
o if the amount described in the above three bullets is
insufficient, from draws on the certificate guaranty insurance
policy; and
o if the pass-through rate for the Class AF-1 Certificates is
determined by the applicable maximum rate, supplemental interest
payments may be made to the Class AF-1 Certificates from amounts
released from an interest reserve fund we refer to in this
prospectus supplement as the Net WAC Cap Account.
Payments on the Class AV-1 Certificates will be funded:
o from the payments received with respect to the mortgage loans in
Group II; and
o if the amount described in the above bullet is insufficient, from
excess interest and overcollateralization from Group II, as well
as available amounts in a reserve fund that will be funded from
time to time pursuant to the terms of the yield maintenance
agreement; and
o if the amount described in the above two bullets is insufficient,
from certain excess interest from Group I, only to the extent
those amounts are available and subject to the
cross-collateralization provisions of the trust fund; and
o if the amount described in the above three bullets is
insufficient, from draws on the certificate guaranty insurance
policy; and
o if the pass-through rate for the Class AV-1 Certificates is
determined by the applicable maximum rate, supplemental interest
payments may be made to the Class AV-1 Certificates from amounts
released from the Net WAC Cap Account and the reserve fund funded
pursuant to the terms of the yield maintenance agreement.
Payments on the Class A-IO Certificates will be funded:
- --------------------------------------------------------------------------------
S-7
- --------------------------------------------------------------------------------
o from the payments received with respect to the mortgage loans in
Group I; and
o if the amount described in the above bullet is insufficient, from
draws on the certificate guaranty insurance policy.
Payments will be made on each distribution date from collections on
mortgage loans in each loan group in the following order of priority:
o to interest on the related class or classes of offered
certificates; and
o to principal on the related class or classes of offered
certificates (other than the Class A-IO Certificates), subject to
the priorities described under the caption "Description of the
Certificates--Principal" in this prospectus supplement.
After payment of the above amounts to the holders of offered certificates,
and other specified allocations, any remaining amounts will be distributed
on the Class X Certificates and the Class R Certificates.
We refer you to "Description of the Certificates--Principal--Residual
Certificates" in this prospectus supplement.
Distributions of Interest
On each distribution date, you will be entitled to receive interest earned
during the applicable interest accrual period on your certificate at the
rate per annum set forth or described on the cover page of this prospectus
supplement, subject, if your certificate is any type of offered certificate
other than a Class A-IO Certificate, to the maximum rate described under
the caption "Description of the Certificates--Interest." Interest payments
to holders of the Class A-IO Certificates will not be subject to the
maximum rate described under the caption "Description of the
Certificates--Interest." If you hold Class AV-1 Certificates, the per annum
rate at which you are paid interest will increase to one-month LIBOR plus
0.560% (subject to the applicable maximum rate), and if you hold Class AF-4
Certificates, the per annum rate at which you are paid interest will
increase to 7.039% (subject to the applicable maximum rate), with respect
to any distribution date after the date on which the servicer has the
option to purchase the mortgage loans in the trust fund and properties
acquired by the trust fund in satisfaction of mortgage loans, if any, as
described under the caption "Description of the Certificates--Optional
Termination."
The interest accrual period for the Class AF-1 and Class AV-1 Certificates
will be the period commencing on the distribution date in the prior
calendar month (or on the Closing Date with respect to the first
distribution date) and ending on the day preceding each distribution date.
The interest accrual period for the Class AF-2, Class AF-3, Class AF-4 and
Class A-IO Certificates will be the calendar month preceding each
distribution date.
On each distribution date through and including the distribution date in
April 2004, the Class A-IO Certificates will be paid interest at the
applicable rate on an aggregate notional balance equal to the lesser of
o $19,000,000, or
o the aggregate principal balance of the mortgage loans in Group I.
No interest will be payable on the Class A-IO Certificates after the April
2004 distribution date.
You will also be entitled to receive any interest that you earned
previously but did not receive plus interest thereon. There are some
circumstances which could reduce the amount of interest payable to you.
In addition, if you hold Class AF-1 or Class AV-1 Certificates and the
amount of interest you are entitled to receive on any distribution date is
determined by the applicable maximum rate, you may also be entitled to
- --------------------------------------------------------------------------------
S-8
- --------------------------------------------------------------------------------
receive supplemental interest payments on a subordinated basis from a
portion of the funds in the Net WAC Cap Account and, if you hold Class AV-1
Certificates and to the extent amounts in the Net WAC Cap Account are not
sufficient, from a reserve fund into which amounts payable under the yield
maintenance agreement will be deposited. The Net WAC Cap Account will be
funded on the Closing Date with a deposit of $10,000. Subsequent deposits
to the Net WAC Cap Account will be made from distributions of excess
distributable funds, if any, so that the amount on deposit in the Net WAC
Cap Account does not exceed $10,000.
We refer you to "Description of the Certificates--Distributions" and
"--Interest" in this prospectus supplement.
Distributions of Principal
On each distribution date, the trustee will make a payment of principal on
the Class AF and the Class AV-1 Certificates if there is cash available for
the payment on that date and the priorities of payment in the Pooling and
Servicing Agreement provide for a payment on the Class AF and the Class
AV-1 Certificates. Principal payments to the Class AF Certificates will
generally be made out of amounts received on the mortgage loans in Group I.
Principal payments to the Class AV-1 Certificates will generally be made
out of amounts received on the mortgage loans in Group II. The Class A-IO
Certificates do not have a principal balance and are not entitled to any
payments of principal.
The amount of principal distributable to the holders of the Class AF
Certificates on any distribution date will generally equal:
o the amount of principal received on the mortgage loans in Group I
during the prior month; plus
o in some circumstances, losses on the mortgage loans in Group I
incurred during the prior month; plus
o until the required overcollateralization level for the Class AF
Certificates has been reached, excess interest payments on the
mortgage loans in Group I.
The amount of principal distributable to the holders of the Class AV-1
Certificates on any distribution date will generally equal:
o the amount of principal received on the mortgage loans in Group
II during the prior month; plus
o in some circumstances, losses on the mortgage loans in Group II
incurred during the prior month; plus
o until the required overcollateralization level for the Class AV-1
Certificates has been reached, excess interest payments on the
mortgage loans in Group II.
We refer you to "Description of the Certificates--Distributions" and
"--Principal" in this prospectus supplement for more details.
Credit Enhancement
General. Credit enhancement is intended to reduce the harm caused to
holders of certificates by shortfalls in payments received on the mortgage
loans. The credit enhancement provided for the benefit of the holders of
the Class AF Certificates will include excess interest,
overcollateralization, cross-collateralization and the certificate guaranty
insurance policy. The credit enhancement provided for the benefit of the
holders of the Class AV-1 Certificates will include excess interest,
overcollateralization, cross-collateralization, the reserve fund funded by
the yield maintenance agreement and the certificate guaranty insurance
policy. The various forms of credit enhancement on the offered certificates
are described below and elsewhere in this prospectus supplement.
- --------------------------------------------------------------------------------
S-9
- --------------------------------------------------------------------------------
Excess Interest and Overcollateralization. On the date of issuance of the
certificates, the unpaid principal balance of the Group I mortgage loans
will approximately equal the principal balance of the Class AF
Certificates, and the unpaid principal balance of the Group II mortgage
loans will approximately equal the principal balance of the Class AV-1
Certificates. The overcollateralization that will serve as credit
enhancement for the holders of the Class AF and Class AV-1 Certificates is
the excess, if any, of the unpaid principal balance of a group of mortgage
loans over the principal balance of the related class or classes of
certificates. Any excess interest not used to cover interest shortfalls or
current period losses will be paid as an accelerated payment of principal
on the related class or classes of certificates until the required level of
overcollateralization is reached. Any overcollateralization will generally
be available to absorb losses on the related group of mortgage loans.
Excess interest collections not used to cover current losses will be used
to pay principal on the related class or classes of certificates to
maintain the level of overcollateralization at required levels. The
required level of overcollateralization may increase or decrease over time.
We cannot assure you that sufficient interest will be generated by the
related group of mortgage loans to attain or maintain the required level of
overcollateralization. If the required level of overcollateralization is
permitted to decrease, the Pooling and Servicing Agreement permits a
portion of the principal distribution amount available for distribution to
not be distributed in reduction of the principal balance of the related
class or classes of certificates.
If on any distribution date the required level of overcollateralization
with respect to both the Class AF Certificates and the Class AV-1
Certificates has been attained and is maintained, any additional excess
cash flow from the related group of mortgage loans will be available to
fund any supplemental interest payments to the Class AF-1 Certificates or
Class AV-1 Certificates, as applicable, due as a result of the application
of the applicable maximum rate, to fund the Net WAC Cap Account to its
required level and to make distributions to the Class X Certificates and
the Class R Certificates.
We refer you to "Description of the Certificates--Overcollateralization" in
this prospectus supplement.
Cross-Collateralization. The Pooling and Servicing Agreement will provide
for cross-collateralization through the application of amounts remaining
from one group of mortgage loans after distributing all applicable amounts
to the related certificates and establishing the required level of
overcollateralization on the related certificates to cover shortfalls in
the amount of funds available from the other group of mortgage loans for
distribution on the unrelated certificates and to increase
overcollateralization on the unrelated certificates to the required level.
The payment of any amounts in respect of cross-collateralization will be
applied in the order specified above under "Description of the
Certificates--Distributions."
The Reserve Fund and the Yield Maintenance Agreement. The trust will
include a yield maintenance agreement between Wachovia Bank, National
Association., a national banking association, and the trustee on behalf of
the certificate insurer and the holders of Class AV-1 Certificates.
Payments under the yield maintenance agreement will be deposited in a
reserve fund. Payments under the yield maintenance agreement will be made
pursuant to the formula described in "Description of the Certificates--The
Reserve Fund and the Yield Maintenance Agreement."
On each distribution date, to the extent of amounts in the reserve fund, an
amount will be withdrawn from the reserve fund and distributed in the
following order of priority:
o to reimburse the certificate insurer for all payments made to
holders of Class AV-1 Certificates under the certificate guaranty
insurance policy; and
o to the Class AV-1 Certificates to cover any shortfalls in regular
payments of principal and interest (subject to the maximum rate
of interest) that were not covered by excess interest.
In addition, following distributions to be made on any distribution date,
to the extent that (1) the sum of (a) the amount in the reserve fund, and
(b) the current level of overcollateralization of the Class AV-1
Certificates, exceeds (2) the overcollateralization target relating to the
Class AV-1 Certificates, the excess will be withdrawn from the reserve fund
and distributed in the following order of priority:
- --------------------------------------------------------------------------------
S-10
- --------------------------------------------------------------------------------
o to cover certain amounts owed to the Class AV-1 Certificates from
prior distribution dates as a result of limiting their
pass-through rate to the maximum rate of interest, to the extent
these amounts were not previously paid out of the Net WAC Cap
Account; and
o to the Class X Certificates.
We refer you to "Description of the Certificates--The Reserve Fund and the
Yield Maintenance Agreement" in this prospectus supplement.
The Certificate Guaranty Insurance Policy. Ambac Assurance Corporation, the
certificate insurer, will issue the certificate guaranty insurance policy
to provide additional credit enhancement to the offered certificates.
Generally, under the certificate guaranty insurance policy, the certificate
insurer will guarantee payment on each distribution date to the trustee,
for the benefit of the holders of the offered certificates, of an amount
sufficient to cover any shortfalls in funds available to pay interest on
the offered certificates at the lesser of the rate per annum described on
the cover page or the applicable maximum rate, as applicable, on that
distribution date. The certificate guaranty insurance policy does not cover
any specified rate of payment of principal; provided, however, that it
guarantees payment of
o on each distribution date, the amount, if any, by which the
aggregate principal balance of the Class AF Certificates exceeds
the aggregate principal balance of the mortgage loans in Group I,
o on each distribution date, the amount, if any, by which the
aggregate principal balance of the Class AV-1 Certificates
exceeds the aggregate principal balance of the mortgage loans in
Group II, and
o the aggregate outstanding principal balance of the Class AF and
Class AV-1 Certificates to the extent they would otherwise remain
unpaid on the last scheduled distribution date or any earlier
termination of the trust fund.
The certificate guaranty insurance policy does not guarantee the receipt of
any supplemental interest payments.
We refer you to "Description of the Certificates--Certificate Guaranty
Insurance Policy" in this prospectus supplement.
Neither the offered certificates nor the underlying mortgage loans are
insured or guaranteed by any governmental agency or instrumentality, or by
any other entity.
Advances
Subject to certain exceptions, the servicer is required to make cash
advances to cover delinquent scheduled payments of principal of and
interest on any mortgage loan in the trust fund if it determines that these
advances will be recoverable from subsequent collections on that mortgage
loan. In some cases, the trustee, in its capacity as successor servicer,
will be required to make an advance if the servicer fails to do so.
We refer you to "Servicing of Loans--Advances" in this prospectus
supplement.
Optional Termination
The servicer may exercise an option to purchase all the mortgage loans and
any properties that the trustee acquired in satisfaction of any of the
mortgage loans when the aggregate principal balance of all mortgage loans
in the trust fund, including the mortgage loans related to properties which
the trustee has acquired, is less than 10% of the aggregate principal
balance of all mortgage loans in the trust fund as of the close of business
on March 31, 2002. If the servicer exercises this option, your certificate
will be retired early and you will be entitled to:
- --------------------------------------------------------------------------------
S-11
- --------------------------------------------------------------------------------
o the outstanding principal balance of your certificate (with
respect to the Class AF and Class AV-1 Certificates);
o any unpaid accrued interest on your certificate to the date of
optional termination at the lesser of the rate per annum
described on the cover page and the maximum rate, if applicable;
and
o any unpaid supplemental interest payments on your certificate to
the date of optional termination (with respect to the Class AF-1
and Class AV-1 Certificates).
We refer you to "Description of the Certificates--Optional Termination" in
this prospectus supplement.
Federal Income Tax Consequences
The trust fund will make elections to treat some of its assets as several
"real estate mortgage investment conduits," or REMICs, for federal income
tax purposes. The offered certificates (excluding any associated rights to
receive payments from the Net WAC Cap Account or reserve fund) and the
Class X Certificates will constitute "regular interests" in a REMIC and the
Class R Certificates will constitute the sole class of "residual interest"
in each REMIC. Depending on their issue price and other factors, the
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 in the accompanying prospectus.
ERISA Considerations
If you are a fiduciary of any pension, other employee benefit or similar
plan subject to the Employee Retirement Income Security Act of 1974, as
amended, or Section 4975 of the Internal Revenue Code of 1986, as amended,
you should review carefully with your counsel whether you are permitted to
buy or hold any of the certificates.
Subject to the considerations described under "ERISA Considerations" in
this prospectus supplement and in the accompanying prospectus, it is
expected that the offered certificates may be purchased by a pension, other
employee benefit or similar plan.
Legal Investment
You should consult with your counsel to see if you are permitted to buy any
of the certificates since the legal investment rules vary depending on what
kind of entity you are and which other entities regulate you. 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" in this prospectus supplement and in the
accompanying prospectus.
Ratings
The trust fund will not issue the certificates unless the offered
certificates are rated:
o "AAA" by Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc.; and
o "Aaa" by Moody's Investors Service, Inc.
The ratings address credit risk. When evaluating credit risk, the rating
agencies look at the likelihood of whether or not you will receive your
interest and principal payments. Credit risk does not relate to the
likelihood of prepayments on the mortgage loans. Prepayments affect the
timing of your payments and, as
- --------------------------------------------------------------------------------
S-12
- --------------------------------------------------------------------------------
a result, could cause your actual return to differ substantially from your
anticipated return on your investment.
The entitlement to any supplemental interest payments on the Class AF-1 and
Class AV-1 Certificates is not rated, and therefore the ratings of the
Class AF-1 and Class AV-1 Certificates do not address the likelihood of
whether you, if you hold Class AF-1 or Class AV-1 Certificates, will
receive any supplemental interest payments on your certificate.
We refer you to "Ratings" and "Risk Factors--Certificate Rating Subject to
Change" in this prospectus supplement.
- --------------------------------------------------------------------------------
S-13
RISK FACTORS
o The certificates are not suitable investments for all investors.
o You should not purchase any of the certificates unless you understand and
are able to bear the prepayment, credit, liquidity and market risks
associated with these securities.
o The certificates are complex securities and it is important that you
possess, either alone or together with an investment advisor, the expertise
necessary to evaluate the information contained in this prospectus
supplement and the accompanying prospectus in the context of your financial
situation.
o In addition to the matters described elsewhere in this prospectus
supplement and the accompanying prospectus, you should carefully consider
the following risk factors before deciding to purchase a certificate. For a
discussion of additional risks pertaining to the certificates, we refer you
to "Risk Factors" in the accompanying prospectus.
You may have difficulty selling your certificates.
The certificates will not be listed on any securities exchange. As a
result, if you wish to sell your certificates, you will have to find a purchaser
that is willing to purchase your certificates. The underwriter intends to make a
secondary market for the offered certificates. The underwriter may do so by
offering to buy the offered certificates from investors that wish to sell.
However, the underwriter will not be obligated to make offers to buy the offered
certificates and may stop making offers at any time. In addition, the prices
offered, if any, may not reflect prices that other potential purchasers, were
they to be given the opportunity, would be willing to pay. There have been times
in the past where there have been very few buyers of similar asset-backed
securities, and there may be similar times in the future. As a result, you may
not be able to sell your certificates when you wish to do so or you may not be
able to obtain the price you wish to receive.
Subprime mortgage loans are subject to greater risk of delinquency and loss.
The underwriting standards of the sellers are less restrictive than those
of Fannie Mae or Freddie Mac with respect to a borrower's credit history and
other factors. A derogatory credit history or a lack of credit history will not
necessarily prevent the sellers from making a loan but may reduce the size and
the loan-to-value ratio of the loan the sellers will make. As a result of these
less restrictive standards, the trust fund may experience higher rates of
delinquencies, defaults and losses than if the mortgage loans were underwritten
in a more traditional manner.
Newly originated mortgage loans may be more likely to default which may cause
losses.
Defaults on mortgage loans tend to occur at higher rates during the early
years of the mortgage loans. Most of the mortgage loans will have been
originated within 12 months prior to the sale to the trust fund. As a result,
the trust may experience higher rates of default than if the mortgage loans had
been outstanding for a longer period of time.
Book-entry certificates may be illiquid.
Issuance of the certificates in book-entry form may adversely affect your
ability to sell your certificate in the secondary trading market since investors
may be unwilling to purchase certificates for which they cannot obtain physical
certificates.
We refer you to "Description of the Certificates--Book-Entry Certificates"
in this prospectus supplement and "Risk Factors--Book-Entry Registration" in the
accompanying prospectus.
S-14
Book-entry certificates may not be able to be pledged.
Since transactions in the offered certificates can be effected only through
The Depository Trust Company, Clearstream, Luxembourg, or the Euroclear System,
their participating organizations, indirect participants and certain banks, your
ability to pledge your certificate to persons or entities that do not
participate in the Euroclear System, The Depository Trust Company or
Clearstream, Luxembourg, systems may be limited due to lack of a physical
certificate representing your certificate.
We refer you to "Description of the Certificates--Book-Entry Certificates"
in this prospectus supplement and "Risk Factors--Book-Entry Registration" in the
accompanying prospectus.
Book-entry certificates may result in delayed receipt of distributions.
As a beneficial owner, you may experience some delay in receiving
distributions of interest and principal on your certificates since these
distributions will be:
o forwarded by the trustee to the depository;
o credited by the depository to the accounts of its participants;
and
o ultimately credited to your account by a depository participant.
We refer you to "Description of the Certificates--Book-Entry Certificates"
and Annex I in this prospectus supplement and "Risk Factors--Book-Entry
Registration" in the accompanying prospectus.
Liquidations could result in delays and losses.
Even if the mortgaged properties provide adequate security for the mortgage
loans, substantial delays could be encountered in connection with the
liquidation of mortgage loans that are delinquent and resulting shortfalls in
distributions on your certificate could occur. Corresponding delays in your
receipt of related proceeds could occur if the certificate insurer fails to
perform its obligations under the certificate guaranty insurance policy. Also,
liquidation expenses (including legal fees, real estate taxes, and maintenance
and preservation expenses) will be paid first, thereby reducing the proceeds
payable on your certificate and thereby reducing the security for the mortgage
loans. If any of the mortgaged properties fails to provide adequate security for
the related mortgage loan, you could experience a loss if the certificate
insurer fails to perform its obligations under the certificate guaranty
insurance policy.
We refer you to "Yield, Prepayment and Maturity Considerations--Prepayment
Considerations and Risks" in this prospectus supplement and "Prepayment and
Yield Considerations" in the accompanying prospectus.
Your yield to maturity may be reduced by prepayments.
The yield to maturity and weighted average life of your certificate will be
affected primarily by the rate and timing of prepayments on the mortgage loans
in Group I if you hold a Class AF Certificate or a Class A-IO Certificate and
Group II if you hold a Class AV-1 Certificate. The mortgage loans may be prepaid
in whole or in part at any time, many without penalty. The trust's prepayment
experience may be affected by a wide variety of factors, including general
economic conditions, interest rates, the availability of alternative financing
and homeowner mobility. The servicer and its affiliates periodically conduct
telemarketing and mass mailings to their existing customers with respect to the
refinancing of existing mortgage loans. Although these marketing efforts are not
specifically directed to customers who have mortgage loans included in a trust
fund, these customers may receive the marketing materials as part of a broader
telemarketing campaign or mailing, which may result in an increase in the rate
of prepayments of mortgage loans included in a trust fund through refinancings.
In addition, substantially all of the mortgage loans contain due-on-sale
provisions, and the servicer intends to enforce those provisions unless (1)
enforcement is not permitted by applicable law or (2) the servicer, in a manner
consistent with reasonable commercial practice, permits the purchaser of the
related mortgaged property to assume the mortgage loan. To the extent permitted
by applicable law, assumption of the mortgage loan will not release the original
S-15
borrower from its obligation under the mortgage loan. Enforcement of a
due-on-sale provision would result in repayment in full of the mortgage loan,
which would be treated as a prepayment.
You will bear any reinvestment risks resulting from a faster or slower
incidence of prepayments of the mortgage loans.
Consider carefully the discussion under "Yield, Prepayment and Maturity
Considerations--Prepayment Considerations and Risks" in this prospectus
supplement and under "Prepayment and Yield Considerations" and "Certain Legal
Aspects of the Loans--Due-on-Sale Clauses" in the accompanying prospectus.
Defaults and delinquent payments on the mortgage loans could affect your yield.
If the certificate insurer fails to pay amounts required under the
certificate guaranty insurance policy, the yield to maturity on your certificate
will be sensitive to defaults and delinquent payments on the mortgage loans in
the applicable group. If the actual rate of defaults on the mortgage loans in
the applicable group and the actual amount of losses to the trust fund upon
liquidation of those mortgage loans is greater than the amounts assumed by you
in estimating the yield to maturity on your certificate, the actual yield will
be lower than your estimate. If the trust fund experiences substantial losses,
you may experience a loss. If the certificate insurer fails to pay amounts
required under the certificate guaranty insurance policy, the timing of losses
to the trust fund in connection with liquidations of mortgage loans in the
applicable group will affect the yield to maturity on your certificate even if
the rate of defaults and severity of those losses are consistent with your
expectations. In general, the earlier a loss occurs, the greater effect it will
have on the yield to maturity. There can be no assurance as to the delinquency,
foreclosure or loss experience with respect to the mortgage loans.
Limitations on pass-through rate of the certificates may affect your yield to
maturity.
The rate at which interest accrues on the Class AF and Class AV-1
Certificates is subject to a maximum rate based on the weighted average of the
mortgage rates on the mortgage loans in Group I with respect to the Class AF
Certificates and Group II with respect to the Class AV-1 Certificates, in each
case net of fees and expenses aggregating approximately 0.71% per annum, less,
in the case of the mortgage loans in Group I only, the amount per annum payable
to the Class A-IO Certificates, and less, in the case of the mortgage loans in
Group II only, 0.50% per annum. If mortgage loans in Group I or Group II with
relatively higher mortgage rates prepay, the maximum rate on the Class AF
Certificates or Class AV-1 Certificates, as applicable, will be lower than
otherwise would be the case. Further, since the pass-through rates of the Class
AF-1 and Class AV-1 Certificates are based on one-month LIBOR plus a margin,
increases in one-month LIBOR that exceed increases in the weighted average
mortgage rate of the mortgage loans in Group I or Group II, as applicable, may
cause the pass-through rate of the Class AF-1 or Class AV-1 Certificates, as
applicable, to become subject to the maximum rate. In this event, the value and
marketability of the Class AF-1 and Class AV-1 Certificates may be temporarily
or permanently reduced.
All of the Group I mortgage loans have fixed mortgage rates, and all of the
Group II mortgage loans have adjustable mortgage rates that are generally
adjusted semi-annually based on the related index. Consequently, the interest
that becomes due on the mortgage loans in either Group I or Group II during a
due period may be less than interest that would accrue on the Class AF-1 or
Class AV-1 Certificates at the rate of one-month LIBOR plus the applicable
margin. In a rising interest rate environment, the Class AF-1 and Class AV-1
Certificates could therefore receive interest at the applicable maximum rate for
a protracted period of time. In addition, in such a situation, there would be
little or no net monthly excess cash flow to cover losses and create additional
overcollateralization.
If the pass-through rate for the Class AF-1 Certificates or Class AV-1
Certificates is determined by the applicable maximum rate described in this
prospectus supplement, holders of that class will be entitled to receive
supplemental interest payments only to the extent of available funds in the Net
WAC Cap Account and, with respect to the Class AV-1 Certificates, the reserve
fund. Supplemental interest payments, however, are not rated, not covered under
the certificate guaranty insurance policy or otherwise guaranteed, are
contingent on the performance of the mortgage loans and, with respect to the
Class AV-1 Certificates, the yield maintenance agreement, and may not ever be
available. Further, payments into the reserve fund under the yield maintenance
agreement are based on a declining balance determined by making assumptions as
to the prepayment speed of the mortgage loans in Group II. A slower prepayment
speed than the one assumed under the yield maintenance agreement may result in
the yield
S-16
maintenance agreement providing insufficient funds to cover such
shortfalls with respect to the Class AV-1 Certificates. It is unlikely that the
mortgage loans in the trust fund will prepay exactly in accordance with those
assumptions.
The rate at which interest accrues on the offered certificates may also be
reduced if borrowers under the mortgage loans in the applicable group obtain
relief from payment obligations pursuant to statutory provisions or if interest
shortfalls resulting from borrower prepayments of mortgage loans are not covered
by a reduction of the servicer's fees for the following distribution date as
provided in the pooling and servicing agreement.
We refer you to "Servicing of Loans--Adjustment to Servicing Fee in
Connection with Certain Prepaid Loans" and "Description of the
Certificates--Interest."
Recent events may result in losses.
On September 11, 2001, certain tragic events occurred at the World Trade
Center in New York and in Washington, D.C. that have caused significant
uncertainty with respect to global markets. The short term and long term impact
of these events is uncertain, but could have a material effect on general
economic conditions, consumer confidence and market liquidity. No assurance can
be given as to the effect of these events on the rate of delinquencies and
losses on the mortgage loans and servicing decisions with respect thereto. Any
adverse impact as a result of these events would be borne by the holders of the
offered certificates to the extent that the certificate insurer fails to perform
under the certificate guaranty insurance policy.
The response of the United States to the events of September 11, 2001
involves military operations. The Soldiers' and Sailors' Civil Relief Act of
1940, referred to herein as the Relief Act, provides relief to borrowers who
enter active military service and to borrowers in reserve status who are called
to active duty after the origination of their mortgage loan. The Relief Act
provides generally that these borrowers may not be charged interest on a
mortgage loan in excess of 6% per annum during the period of the borrower's
active duty. These shortfalls are not required to be paid by the borrower at any
future time, will not be advanced by the servicer and, to the extent excess
interest is insufficient, will reduce accrued interest on each class of
certificates on a pro rata basis. The certificate guaranty insurance policy does
not cover shortfalls resulting from the application of the Relief Act. In
addition, the Relief Act imposes limitations that would impair the ability of
the servicer to foreclose on an affected loan during the borrower's period of
active duty status, and, under some circumstances, during an additional period
thereafter.
Payment delay lowers your effective yield.
Generally, if you hold a Class AF-2, Class AF-3, Class AF-4 or Class A-IO
Certificate, payments of principal and interest on the mortgage loans received
in any calendar month will not be passed through as payments on your certificate
until the distribution date in the following calendar month. As a result, the
monthly distributions on your certificate generally will reflect borrower
payments during the prior calendar month. The distribution date will be the 25th
day of each month (or the next succeeding business day), commencing on May 28,
2002. Thus, the effective yield to you will be below that otherwise produced by
the pass-through rate and the price paid by you for your certificate because
distributions on your certificate in respect of any given month will not be made
until on or about the 25th day of the following month.
Balloon loans may bear higher risk of loss.
As of the close of business on March 31, 2002, approximately 47.24% and
none of the aggregate outstanding principal balance of the mortgage loans in
Group I and Group II, respectively, consisted of balloon loans, which generally
provide for equal monthly payments and a final monthly payment substantially
greater than the preceding monthly payments. The balloon loans in the trust fund
have original terms of 60 to 300 months and provide for monthly payments based
on a 180 to 360 month amortization schedule. The borrower on a balloon loan will
generally attempt to refinance a balloon loan or sell the underlying mortgaged
property on or prior to the stated maturity date in order to avoid payment of
the final balloon payment. A borrower's ability to accomplish either of these
goals will be affected by a number of factors, including the level of available
mortgage rates at the time of sale or refinancing, the borrower's equity in the
related mortgaged property, the financial condition of the borrower, tax
S-17
laws and prevailing general economic conditions. If a borrower is unable to
refinance a balloon loan prior to its stated maturity date, the borrower may be
more likely to default on the loan. None of the sellers, the servicer, the
depositor or the trustee is obligated to refinance any mortgage loan.
Owners of Class A-IO Certificates may not recover their initial investments.
An investment in the Class A-IO Certificates is risky because the return of
the investment depends solely on the payments of interest by borrowers under the
mortgage loans. If the borrowers prepay their mortgage loans, no further
interest payments will be made. If borrowers prepay their mortgage loans very
quickly, investors in the Class A-IO Certificates may not recover their initial
investments. In addition, the Class A-IO Certificates are not entitled to any
distributions after the distribution date in April 2004.
The liquidation proceeds of mixed use loans may take longer to recover.
Mixed use loans are mortgage loans secured by multi-family properties and
structures that include both residential dwelling units and space used for
retail, professional or other commercial uses. Mixed use loans represented
approximately 7.35% and none of the aggregate principal balance of the mortgage
loans in Group I and Group II, respectively, as of the close of business on
March 31, 2002. Due to the limited market for the type of properties securing
mixed use loans, in the event of a foreclosure, we expect that it will take
longer to recover proceeds from the liquidation of a mixed use loan than it
would for a mortgage loan secured by a one- to four-family dwelling.
Withdrawal or downgrading of initial ratings will reduce the value of the
certificates.
The ratings of the certificates will be based on, among other things, the
adequacy of the value of the mortgage loans in the applicable group and the
certificate guaranty insurance policy. These ratings should not be deemed a
recommendation to purchase, hold or sell certificates, since they do not address
market price or suitability for a particular investor. There is also no
assurance that these ratings will remain in effect for any given period of time
or may not be lowered or withdrawn entirely by the rating agency if in its
judgment circumstances in the future so warrant. In addition to being lowered or
withdrawn due to any erosion in the adequacy of the value of the mortgage loans,
these ratings might also be lowered or withdrawn, among other reasons, because
of an adverse change in the financial or other condition of the certificate
insurer or a change in the rating of the certificate insurer's long term debt.
Any reduction or withdrawal of a rating will have an adverse effect on the value
of the certificates.
There could be delays in distributions on your certificate if the transfer of
the mortgage loans to the trust fund is not considered a sale in the event of
bankruptcy.
For purposes of the Bankruptcy Code and for legal purposes, the servicer,
the sellers and the depositor will treat each conveyance of mortgage loans by
the sellers to the depositor as a sale of those mortgage loans; however, for
financial reporting purposes, the sellers will treat this transaction as the
incurrence of debt by the sellers, which debt will be evidenced by the
certificates. The depositor will treat each conveyance of mortgage loans from
the depositor to the trust fund as a sale of those mortgage loans. If the
conveyance of the mortgage loans by the sellers to the depositor is treated as a
sale, those mortgage loans would not be part of the related seller's bankruptcy
estate and would not be available to that seller's creditors. In the event of
the bankruptcy or insolvency of a seller, however, the bankruptcy trustee, a
conservator or a receiver of the seller or another person may attempt to
recharacterize the sale of the mortgage loans as a borrowing by the seller,
secured by a pledge of the mortgage loans. Similarly, if the conveyance of the
mortgage loans by the depositor to the trust fund is treated as a sale, those
mortgage loans would not be part of the depositor's bankruptcy estate and would
not be available to the depositor's creditors. In the event of the bankruptcy or
insolvency of the depositor, however, the bankruptcy trustee, a conservator or a
receiver of the depositor or another person may attempt to recharacterize the
sale of the mortgage loans as a borrowing by the depositor, secured by a pledge
of the mortgage loans. In either case, this position, if argued before or
accepted by a court, could prevent timely payments of amounts due on your
certificate and result in a reduction of payments on your certificate.
S-18
Interest payments may be insufficient to create overcollateralization.
Because the weighted average of the mortgage rates on the mortgage loans in
each of Group I and Group II (net of certain fees and expenses, and, in the case
of mortgage loans in Group II, an additional 0.50% per annum) is expected to be
higher than the weighted average of the pass-through rates on the Class AF and
Class A-IO Certificates and Class AV-1 Certificates, respectively, the mortgage
loans in each group are expected to generate more interest than the amount
necessary to pay interest owed on the applicable class(es) of certificates as
well as certain fees and expenses of the trust fund. Any remaining interest will
then be used to compensate for losses that occur on the mortgage loans in the
related loan group. After these financial obligations of the trust fund are
covered, the available excess interest from a group will be used to create and
maintain overcollateralization for the related class(es) of certificates. We
cannot assure you, however, that enough excess interest will be generated by the
mortgage loans in the related group to attain or to maintain the
overcollateralization level required for the related class(es) of certificates
by the rating agencies and the certificate insurer. The factors described below
will affect the amount of excess interest that the mortgage loans in each group
will generate:
o Every time a mortgage loan is prepaid in full, excess interest
may be reduced because the mortgage loan will no longer be
outstanding and generating interest or, in the case of a partial
prepayment, will be generating less interest.
o Every time a mortgage loan is liquidated or written off, excess
interest will be reduced because the mortgage loan will no longer
be outstanding and generating interest.
If the rates of delinquencies, defaults or losses on the mortgage loans turn out
to be higher than expected, excess interest will be reduced by the amount
necessary to compensate for any shortfalls in cash available on that date to pay
certificateholders.
Environmental conditions affecting the mortgaged properties may result in
losses.
Real property pledged as security to a lender may be subject to
environmental risks. Under the laws of some states, contamination of a property
may give rise to a lien on the property to assure the costs of clean-up. In
several states, this type of lien has priority over the lien of an existing
mortgage or owner's interest against real property. In addition, under the laws
of some states and under the federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, a lender may be liable, as an owner or
operator, for costs of addressing releases or threatened releases of hazardous
substances that require remedy at a property, if agents or employees of the
lender have become sufficiently involved in the operations of the borrower,
regardless of whether or not the environmental damage or threat was caused by a
prior owner. A lender also risks liability on foreclosure of the mortgaged
property.
Second liens may result in losses in foreclosure proceedings.
Mortgage loans representing approximately 5.42% and none of the aggregate
outstanding principal balance of the mortgage loans in Group I and Group II,
respectively, as of the close of business on March 31, 2002 are secured by
second liens on the related mortgaged properties. The first lien mortgage
related to a loan secured by a second lien in the mortgage pool will not be
included in the mortgage pool.
The proceeds from any liquidation, insurance or condemnation proceedings in
connection with the underlying mortgaged property will be available to satisfy
the outstanding balance of the related second mortgage only to the extent that
the claim of the related first mortgagee has been satisfied in full, including
any related foreclosure costs. In addition, the servicer, as second mortgagee on
the loans in its portfolio, may not foreclose on the property securing a second
mortgage unless it forecloses subject to the first mortgage, in which case it
must either pay the entire amount due on the first mortgage to the first
mortgagee at or prior to the foreclosure sale or advance funds to keep the first
mortgage current in the event the borrower is in default thereunder. The
servicer may, but is under no obligation to, advance funds in these
circumstances. The trust fund will not have any source of funds to satisfy
related first mortgages or make payments due to the first mortgagees. If you
hold Class AF Certificates, you will bear any risk associated with any delays in
payments on the mortgage loans and any
S-19
reinvestment risk resulting from any accelerated payments on the offered
certificates resulting from losses on mortgage loans in Group I secured by
second liens on the related mortgaged properties.
Decrease in value of mortgaged property would disproportionately affect second
lienholders.
There are several factors that could adversely affect the value of
properties such that the outstanding balance of the related loan, together with
any senior financing on the properties, would equal or exceed the value of the
properties. Among the factors that could adversely affect the value of the
properties are an overall decline in the residential real estate market in the
areas in which the properties are located or a decline in the general condition
of the properties as a result of failure of borrowers to maintain adequately the
properties or of natural disasters that are not necessarily covered by
insurance, such as earthquakes and floods. Any such decline could extinguish the
value of a second interest in property before having any effect on the related
first interest therein. If such a decline occurs, the actual rates of
delinquencies, foreclosure and losses on the loans secured by second liens could
be higher than those currently experienced in the mortgage lending industry in
general. Group I and, accordingly, you, if you hold Class AF Certificates, will
bear the risk of delay in distributions while a deficiency judgment, if any,
against the borrower is sought and any reinvestment risk resulting from
accelerated prepayments on the Class AF Certificates due to losses on second
lien mortgage loans.
Geographic concentration of mortgaged properties may affect payments on your
certificate.
As of the close of business on March 31, 2002:
o approximately 15.83%, 12.82%, 11.86%, 5.86%, 5.18% and 5.01% (by
outstanding principal balance) of the Group I mortgage loans are
secured by properties located in the Commonwealth of
Pennsylvania, State of New Jersey, State of New York, State of
Maryland, State of North Carolina and State of California,
respectively;
o approximately 16.33%, 8.41%, 6.00%, 5.83%, 5.62%, 5.38% and 5.29%
(by outstanding principal balance) of the Group II mortgage loans
are secured by properties located in the State of Illinois, State
of Michigan, State of California, State of Wisconsin, State of
North Carolina, Commonwealth of Pennsylvania and State of New
Jersey, respectively;
o approximately 0.65% and 1.41% (by outstanding principal balance)
of the Group I mortgage loans and Group II mortgage loans,
respectively, are secured by properties located in a single zip
code, which is in Wildwood, New Jersey and Chicago, Illinois,
respectively; and
o the aggregate outstanding principal balance of the mortgage loans
in Group I and Group II secured by properties in each other state
represents not more than approximately 5.00% of the mortgage
loans in the applicable group.
If the Pennsylvania, New Jersey, New York, Maryland, North Carolina, Illinois,
Michigan, California or Wisconsin residential real estate markets should
experience an overall decline in property values or a catastrophic event occurs
in these areas after the dates of origination of the mortgage loans, the rates
of losses on the mortgage loans would be expected to increase, and could
increase substantially. Because of the concentration of mortgage loans in these
states, those types of problems may have a greater effect on your certificates
than if borrowers and mortgaged properties were more spread out in different
geographic areas.
Violations of consumer protection laws may result in losses.
Applicable state laws generally regulate interest rates and other charges
and require specific disclosures. In addition, other state laws, public policy
and general principles of equity relating to the protection of consumers, unfair
and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the mortgage loans.
S-20
The mortgage loans are also subject to federal laws including:
o the federal Truth in Lending Act and Regulation Z promulgated
under the Truth in Lending Act, which require particular
disclosures to the borrowers regarding the terms of the mortgage
loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
under the Equal Credit Opportunity Act, which prohibit
discrimination on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or
the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit;
o the Americans with Disabilities Act, which, among other things,
prohibits discrimination on the basis of disability in the full
and equal enjoyment of the goods, services, facilities,
privileges, advantages or accommodations of any place of public
accommodation;
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience; and
o the Fair Debt Collections Practices Act, which provides various
consumer protections to borrowers and imposes certain
restrictions on debt collectors in connection with the collection
of mortgage loans and other debts.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability of the servicer to collect all or part of the principal of
or interest on the mortgage loans, may entitle the borrower to a refund of
amounts previously paid and, in addition, could subject the trust fund, as owner
of the mortgage loans, to damages and administrative enforcement.
The offered certificates are not suitable investments for all investors.
The offered certificates are not suitable investments for any investor that
requires a regular or predictable schedule of payments or payment on a specific
date. The offered certificates are complex investments that should be considered
only by investors who, either alone or with their financial, tax and legal
advisors, have the expertise to analyze the prepayment, reinvestment, default
and market risks, the tax consequences of an investment, and the interaction of
these factors.
S-21
THE MORTGAGE POOL
General
Unless otherwise indicated, information presented herein under "The
Mortgage Pool" expressed as percentages (other than rates of interest) are
approximate percentages based on the Stated Principal Balances of the Loans (as
defined below) as of the Cut-off Date (as defined below).
The mortgage pool will consist of adjustable rate and fixed rate mortgage
loans divided into two groups: Group I and Group II. Group I will consist of
fixed rate mortgage loans (the "Group I Loans") and Group II will consist of
adjustable rate mortgage loans (the "Group II Loans" and, collectively with the
Group I Loans, the "Loans"). Group I will include mortgage loans secured by
first and second liens on one- to four-family dwellings (each, a "Residential
Loan") and on multi-family properties and structures which contain both
residential dwelling units and space used for retail, professional or other
commercial uses (each, a "Mixed Use Loan"). Group II will include only
Residential Loans secured by first liens. The Loans were generally originated or
acquired in accordance with underwriting guidelines that are less stringent than
Fannie Mae and Freddie Mac guidelines.
Residential Loans represent approximately 92.65% of the Loans in Group I
and 100% of the Loans in Group II. Mixed Use Loans represent approximately 7.35%
of the Group I Loans and none of the Group II Loans. All of the Loans are
evidenced by promissory notes (the "Mortgage Notes").
Equity One ABS, Inc. (the "Depositor") will purchase the Loans from Equity
One, Inc., a Delaware corporation, Equity One, Inc., a Minnesota corporation,
Equity One Consumer Loan Company, a New Hampshire corporation, Equity One,
Incorporated, a Pennsylvania corporation, and Popular Financial Services, LLC, a
Delaware limited liability company (each a "Seller" and, collectively, the
"Sellers"), pursuant to the Pooling and Servicing Agreement (the "Pooling and
Servicing Agreement") dated as of March 31, 2002 (the "Cut-off Date") among the
Sellers, Equity One, Inc. (the "Servicer"), the Depositor and JPMorgan Chase
Bank (the "Trustee"). The Sellers will treat this transaction as a sale under
applicable law, however, for financial reporting purposes the Sellers will treat
this transaction as the incurrence of debt by the Sellers, which debt will be
evidenced by the Certificates. The Depositor will then convey the Loans, without
recourse, to the Trustee for the benefit of the holders of the Mortgage
Pass-Through Certificates, Series 2002-2 (the "Certificates").
The Certificates will consist of the Class AF-1 Certificates, the Class
AF-2 Certificates, the Class AF-3 Certificates, the Class AF-4 Certificates
(collectively, the "Class AF Certificates"), the Class AV-1 Certificates, the
Class A-IO Certificates, the Class X Certificates and the Class R Certificates.
We are offering the Class AF Certificates, the Class A-IO Certificates and the
Class AV-1 Certificates (collectively, the "Offered Certificates") pursuant to
this prospectus supplement; we are not offering the Class X Certificates or the
Class R Certificates for sale to investors.
Under the Pooling and Servicing Agreement, the Sellers will make
representations, warranties and covenants to the Depositor relating to, among
other things, the due execution and enforceability of the Pooling and Servicing
Agreement and characteristics of the Loans. Subject to the limitations described
below under "--Sale of the Loans," the Sellers will be obligated to repurchase
or substitute a similar mortgage loan for any Loan as to which there exists
deficient documentation or an uncured material breach of any representation,
warranty or covenant. The Sellers will represent and warrant to the Depositor in
the Pooling and Servicing Agreement that they selected the Loans from among the
outstanding loans in their portfolios as to which the representations and
warranties set forth in the Pooling and Servicing Agreement can be made and that
they did not make this selection in a manner that would adversely affect the
interests of Ambac Assurance Corporation (the "Certificate Insurer") or the
certificateholders. See "Loan Program--Representations by Sellers; Repurchases"
in the accompanying prospectus. Under the Pooling and Servicing Agreement, the
Depositor will convey all its right, title and interest in and to the Sellers'
representations, warranties and covenants, including the Sellers' repurchase
obligation, to the Trustee for the benefit of the Certificate Insurer and the
certificateholders. The Depositor will make no representations or warranties
with respect to the Loans and will have no obligation to repurchase or
substitute Loans with deficient documentation or which are otherwise defective.
The Sellers are selling the Loans without recourse and will have no obligation
with respect to the Certificates in their capacity as Sellers other than the
repurchase obligation
S-22
described above. The obligations of Equity One, Inc., as Servicer, with respect
to the Certificates are limited to the Servicer's contractual servicing
obligations under the Pooling and Servicing Agreement.
Information with respect to the Loans expected to be included in the
mortgage pool is set forth below. Prior to April 30, 2002 (the "Closing Date"),
Loans may be removed from the mortgage pool and other Loans may be substituted
therefor. The Depositor believes that the information set forth herein under
"The Mortgage Pool" with respect to the mortgage pool as presently constituted
is representative of the characteristics of the mortgage pool and each loan
group as they will be constituted at the Closing Date, although some
characteristics of the Loans in the mortgage pool may vary. Information
regarding FICO scores is presented for informational purposes only.
"Stated Principal Balance" means as to any Loan and Due Date, the unpaid
principal balance of that Loan as of that Due Date, as specified in the
amortization schedule at the time relating thereto, before any adjustment to
that amortization schedule by reason of any moratorium or similar waiver or
grace period, after giving effect to any previous partial prepayments and
Liquidation Proceeds allocable to principal, other than with respect to any
Liquidated Loan, received and to the payment of principal due on that Due Date
and irrespective of any delinquency in payment by the related borrower.
As of any Distribution Date,
o the "Group I Principal Balance" equals the aggregate of the
Stated Principal Balances of the Group I Loans,
o the "Group II Principal Balance" equals the aggregate of the
Stated Principal Balances of the Group II Loans, and
o the "Pool Principal Balance" with respect to any Distribution
Date equals the sum of the Group I Principal Balance and the
Group II Principal Balance.
As of the close of business on the Cut-off Date,
o the aggregate of the Stated Principal Balances of the Group I
Loans was $189,982,877.30 (the "Cut-off Date Group I Principal
Balance"),
o the aggregate of the Stated Principal Balances of the Group II
Loans was $97,570,706.76 (the "Cut-off Date Group II Principal
Balance"), and
o the sum of the Cut-off Date Group I Principal Balance and the
Cut-off Date Group II Principal Balance was $287,553,584.06 (the
"Cut-off Date Pool Principal Balance").
Loans with balloon payments ("Balloon Loans") provide for payment based on
the amortization of the amount financed over a series of substantially equal
monthly payments over approximately 60 to 300 months, with a significantly
greater payment due at the stated maturity. As of the Cut-off Date,
approximately 47.24% of the Group I Loans and none of the Group II Loans were
Balloon Loans. Balloon Loans may involve a greater degree of risk than loans
which are fully amortizing because the ability of a borrower to make a balloon
payment typically will depend upon the ability of the borrower to either timely
refinance the loan or sell the related mortgaged property.
All of the Loans provide for payments due on a set day, but not necessarily
the first day, of each month (the "Due Date"). The Loans to be included in the
mortgage pool were originated or acquired by the Sellers substantially in
accordance with the Sellers' underwriting criteria for mortgage loans, described
herein under "The Mortgage Pool--Underwriting Standards" and under "Loan
Program" in the prospectus.
Scheduled monthly payments made by the borrowers on the Loans ("Scheduled
Payments") either earlier or later than the scheduled Due Dates thereof will not
affect the amortization schedule or the relative application of those payments
to principal and interest. All of the Loans provide for the actuarial accrual of
interest. All of the Loans provide for a grace period of 15 days for monthly
payments, as required by applicable law. All of the Loans may be prepaid in full
or in part at any time, approximately 27.32% of the Group I Loans and
approximately 12.21% of the Group II Loans without penalty.
S-23
Each Loan was originated on or after July 2, 2001.
The latest stated maturity date of any Group I Loan is March 1, 2032 and of
any Group II Loan is March 2, 2032. The earliest stated maturity date of any
Group I Loan is September 1, 2006 and of any Group II Loan is January 1, 2017.
As of the Cut-off Date, approximately 2.23% and 4.54% of the Group I Loans
and Group II Loans, respectively, were 30 to 59 days contractually past due
(assuming 30 day months) and none of the Loans were more than 59 days
contractually past due (assuming 30 day months).
No Loan had a Loan-to-Value Ratio at origination of more than 100.00%. The
weighted average Loan-to-Value Ratio of the Group I Loans at origination was
approximately 77.59% and of the Group II Loans at origination was approximately
82.91%.
The weighted average of the FICO scores (issued by the Fair Isaac Credit
Bureau with a higher score generally signifying a better credit history)
obtained by the Sellers at origination for each borrower on the Group I Loans
and Group II Loans were approximately 635 and 614, respectively.
The "Loan-to-Value Ratio" of a Loan is the fraction, expressed as a
percentage, the numerator of which is the principal balance of the Loan at the
date of origination and the denominator of which is the Collateral Value of the
related mortgaged property.
The "Collateral Value" of a mortgaged property, other than with respect to
Loans that were used to refinance an existing mortgage loan (each, a "Refinance
Loan"), is the lesser of
o the appraised value based on an appraisal obtained by the
originator from an independent fee appraiser at the time of the
origination of the related Loan, and
o if the Loan was originated either in connection with the
acquisition of the mortgaged property by the borrower or within
one year after acquisition of the mortgaged property by the
borrower, the purchase price paid by the borrower for the
mortgaged property.
In the case of Refinance Loans, the Collateral Value is the appraised value of
the mortgaged property based upon the appraisal obtained at the time of
refinancing.
None of the Loans is subject to the Home Ownership and Equity Protection
Act.
Mortgage Rate Adjustment of the Group II Loans
All of the Group II Loans have adjustable mortgage rates. All of the Group
II Loans provide for semi-annual adjustment of the related mortgage rate based
on Six-Month LIBOR (as defined below), as specified in the related Mortgage
Note, and for corresponding adjustments to the monthly payment due thereon, in
each case on each adjustment date applicable thereto (each, an "Adjustment
Date"). However, the first such adjustment for approximately 96.70% and 3.30% of
the Group II Loans (by principal balance) will occur after an initial period of
two or three years, respectively, following origination. On each Adjustment Date
for each Group II Loan, the mortgage rate thereon will be adjusted to equal the
sum of Six-Month LIBOR and a fixed percentage amount (the "Margin"). The
mortgage rate on each Group II Loan will not increase or decrease by more than a
specified percentage (the "Initial Rate Cap") on the first Adjustment Date for
that Group II Loan. In addition, the mortgage rate will not increase or decrease
by more than a specified percentage (the "Periodic Rate Cap") on each subsequent
Adjustment Date. As of the Cut-off Date, none of the Group II Loans had reached
their first Adjustment Date.
The mortgage rate on a Group II Loan may not exceed the maximum rate set
forth in the related Mortgage Note (the "Maximum Mortgage Rate"), or be less
than the minimum rate set forth on the related Mortgage Note (the "Minimum
Mortgage Rate"). The Maximum Mortgage Rates on the Group II Loans range from
10.990% to 19.050%, with a weighted average Maximum Mortgage Rate as of the
Cut-off Date of approximately 14.968%. The
S-24
Minimum Mortgage Rates on the Group II Loans range from 5.990% to 12.050%, with
a weighted average Minimum Mortgage Rate as of the Cut-off Date of approximately
8.638%.
Effective with the first monthly payment due on each Group II Loan after
each related Adjustment Date, the monthly payment amount is adjusted to an
amount that will fully amortize the outstanding principal balance of the related
Group II Loan over its remaining term, and pay interest at the adjusted mortgage
rate. None of the Group II Loans permits the related mortgagor to convert the
adjustable mortgage rate thereon to a fixed mortgage rate.
The interest rate index for all of the Group II Loans is 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 ("Six-Month LIBOR") as published in The Wall Street Journal and as most
recently available on the first business day of the month prior to each
Adjustment Date.
The following section, "Mortgage Pool Tables," sets forth in tabular format
information, as of the Cut-off Date, relating to all Loans in the aggregate as
well as the Loans in each of Group I and Group II separately. The sum of the
columns in the tables below may not equal the total indicated due to rounding.
Mortgage Pool Tables
Aggregate Pool of Loans
Mortgage Rates (1)
------------------
Number of Aggregate Principal Percent of Pool
Mortgage Rate (%) Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
6.001 - 6.500 2 $343,156.25 0.12%
6.501 - 7.000 61 7,540,247.97 2.62
7.001 - 7.500 176 24,486,628.28 8.52
7.501 - 8.000 430 53,953,663.04 18.76
8.001 - 8.500 469 57,437,981.66 19.97
8.501 - 9.000 484 56,285,820.51 19.57
9.001 - 9.500 251 28,311,258.29 9.85
9.501 - 10.000 283 30,119,292.06 10.47
10.001 - 10.500 123 12,887,008.08 4.48
10.501 - 11.000 101 6,884,113.51 2.39
11.001 - 11.500 57 2,831,935.72 0.98
11.501 - 12.000 75 2,944,833.53 1.02
12.001 - 12.500 43 1,364,511.55 0.47
12.501 - 13.000 31 1,337,360.33 0.47
13.001 - 13.500 18 562,727.26 0.20
13.501 - 14.000 9 253,052.74 0.09
15.001 - 15.500 1 9,993.28 0.00
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 2,614 $287,553,584.06 100.00%
====================== ======================== ========================
- ----------
(1) As of the Cut-off Date, the weighted average mortgage rate of the Loans was
approximately 8.775%.
S-25
Cut-off Date Loan Principal Balances (1)
----------------------------------------
Cut-off Date Loan Number of Aggregate Principal Percent of Pool
Principal Balance ($) Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
0.01 - 25,000.00 153 $2,919,632.81 1.02%
25,000.01 - 50,000.00 389 15,145,242.99 5.27
50,000.01 - 75,000.00 493 30,832,994.21 10.72
75,000.01 - 100,000.00 409 35,727,043.38 12.42
100,000.01 - 125,000.00 348 38,874,139.13 13.52
125,000.01 - 150,000.00 259 35,525,662.61 12.35
150,000.01 - 175,000.00 153 24,803,522.80 8.63
175,000.01 - 200,000.00 108 20,238,666.37 7.04
200,000.01 - 225,000.00 73 15,615,122.67 5.43
225,000.01 - 250,000.00 66 15,635,964.35 5.44
250,000.01 - 275,000.00 46 11,997,802.43 4.17
275,000.01 - 300,000.00 31 8,957,203.74 3.11
300,000.01 - 325,000.00 17 5,299,448.94 1.84
325,000.01 - 350,000.00 23 7,717,523.63 2.68
350,000.01 - 375,000.00 13 4,672,103.71 1.62
375,000.01 - 400,000.00 19 7,431,249.79 2.58
400,000.01 - 425,000.00 6 2,478,007.90 0.86
425,000.01 - 450,000.00 4 1,748,133.81 0.61
450,000.01 - 475,000.00 1 454,302.28 0.16
475,000.01 - 500,000.00 3 1,479,816.51 0.51
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 2,614 $287,553,584.06 100.00%
====================== ======================== ========================
- ----------
(1) As of the Cut-off Date, the average Loan principal balance was
approximately $110,005.20.
S-26
FICO Scores (1)
---------------
Number of Aggregate Principal Percent of Pool
FICO Score Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
Not Available 5 $298,418.96 0.10%
501 - 525 1 220,000.00 0.08
526 - 550 161 18,387,560.23 6.39
551 - 575 252 26,811,814.25 9.32
576 - 600 392 44,647,067.08 15.53
601 - 625 484 51,977,535.22 18.08
626 - 650 538 59,011,401.41 20.52
651 - 675 341 36,592,498.40 12.73
676 - 700 188 23,219,607.69 8.07
701 - 725 132 14,899,945.67 5.18
726 - 750 69 7,106,707.76 2.47
751 - 775 29 2,581,969.75 0.90
776 - 800 18 1,462,048.63 0.51
801 - 825 4 337,009.01 0.12
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 2,614 $287,553,584.06 100.00%
====================== ======================== ========================
- ----------
(1) FICO scores listed represent the FICO score obtained by the Sellers at
origination for each borrower on the Loans.
S-27
State Distribution of Mortgaged Properties (1)
----------------------------------------------
Number of Aggregate Principal Percent of Pool
State Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
Arizona 8 $847,517.57 0.29%
California 107 15,369,851.16 5.35
Colorado 13 1,639,931.74 0.57
Connecticut 29 3,189,395.65 1.11
Delaware 64 6,055,843.40 2.11
Florida 96 8,237,875.20 2.86
Georgia 37 3,585,567.18 1.25
Idaho 24 2,677,279.29 0.93
Illinois 143 19,913,518.88 6.93
Indiana 31 2,409,777.09 0.84
Iowa 41 3,558,166.44 1.24
Kansas 52 4,545,190.68 1.58
Kentucky 38 3,525,889.20 1.23
Maryland 127 13,873,919.94 4.82
Massachusetts 74 11,478,646.18 3.99
Michigan 107 10,510,128.30 3.66
Minnesota 43 5,779,669.89 2.01
Missouri 101 8,937,569.68 3.11
Montana 27 4,130,998.50 1.44
Nebraska 22 1,386,963.45 0.48
Nevada 27 4,381,222.96 1.52
New Hampshire 5 554,539.35 0.19
New Jersey 221 29,521,601.14 10.27
New Mexico 5 382,477.53 0.13
New York 123 23,145,037.36 8.05
North Carolina 146 15,319,452.90 5.33
North Dakota 3 230,042.30 0.08
Ohio 121 10,463,356.89 3.64
Oklahoma 15 1,360,113.70 0.47
Oregon 7 913,984.37 0.32
Pennsylvania 391 35,324,824.27 12.28
Rhode Island 16 1,451,768.70 0.50
South Carolina 76 7,279,399.25 2.53
South Dakota 69 5,691,018.64 1.98
Tennessee 80 7,145,336.75 2.48
Utah 4 841,915.71 0.29
Virginia 15 1,379,110.39 0.48
Washington 28 3,103,819.31 1.08
Wisconsin 76 7,283,145.37 2.53
Wyoming 2 127,717.75 0.04
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 2,614 $287,553,584.06 100.00%
====================== ======================== ========================
- ----------
(1) No more than approximately 0.48% of the Loans are secured by mortgaged
properties located in any one postal zip code area.
S-28
Occupancy Types (1)
-------------------
Number of Aggregate Principal Percent of Pool
Occupancy Type Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
Owner Occupied 2,280 $255,828,825.22 88.97%
Non-Owner Occupied 334 31,724,758.84 11.03
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 2,614 $287,553,584.06 100.00%
====================== ======================== ========================
- ----------
(1) Based upon representations of the related borrowers at the time of
origination.
Remaining Terms to Maturity (1)
-------------------------------
Remaining Term Number of Aggregate Principal Percent of Pool
to Maturity (Months) Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
49 - 60 20 $3,477,372.26 1.21%
109 - 120 81 9,338,976.69 3.25
169 - 180 1,075 97,016,253.36 33.74
229 - 240 162 12,980,846.91 4.51
289 - 300 4 647,612.37 0.23
349 - 360 1,272 164,092,522.47 57.07
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 2,614 $287,553,584.06 100.00%
====================== ======================== ========================
- ----------
(1) As of the Cut-off Date, the weighted average remaining term to maturity of
the Loans was approximately 279 months.
Documentation Types (1)
-----------------------
Number of Aggregate Principal Percent of Pool
Documentation Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
Full Doc 2,145 $224,969,082.64 78.24%
SI 300 38,751,331.33 13.48
AIV 127 18,761,458.31 6.52
Lite Doc 42 5,071,711.78 1.76
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 2,614 $287,553,584.06 100.00%
====================== ======================== ========================
- ----------
(1) See "Specific Underwriting Criteria; Underwriting Programs" in the
prospectus for a description of the Sellers' documentation programs.
S-29
Loan-to-Value Ratios (1)
------------------------
Number of Aggregate Principal Percent of Pool
Loan-to-Value Ratio (%) Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
5.001 - 10.000 37 $848,125.58 0.29%
10.001 - 15.000 46 1,338,667.71 0.47
15.001 - 20.000 136 4,351,026.77 1.51
20.001 - 25.000 50 2,422,775.01 0.84
25.001 - 30.000 23 1,148,686.92 0.40
30.001 - 35.000 22 1,181,047.57 0.41
35.001 - 40.000 16 1,103,907.66 0.38
40.001 - 45.000 15 1,051,350.87 0.37
45.001 - 50.000 26 2,789,253.30 0.97
50.001 - 55.000 33 3,100,584.88 1.08
55.001 - 60.000 52 5,498,460.17 1.91
60.001 - 65.000 59 6,430,755.71 2.24
65.001 - 70.000 142 16,061,699.35 5.59
70.001 - 75.000 241 24,765,236.16 8.61
75.001 - 80.000 619 69,793,034.07 24.27
80.001 - 85.000 276 38,973,940.85 13.55
85.001 - 90.000 573 71,036,047.26 24.70
90.001 - 95.000 153 22,234,591.23 7.73
95.001 - 100.000 95 13,424,392.99 4.67
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 2,614 $287,553,584.06 100.00%
====================== ======================== ========================
- ----------
(1) At time of origination.
Credit Grades (1)
-----------------
Number of Aggregate Principal Percent of Pool
Credit Grade Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
A 1,775 $197,293,377.33 68.61%
B 592 64,029,129.46 22.27
C 247 26,231,077.27 9.12
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 2,614 $287,553,584.06 100.00%
====================== ======================== ========================
- ----------
(1) See "Specific Underwriting Criteria; Underwriting Programs" in the
prospectus for a description of the Sellers' underwriting programs.
S-30
Group I Loans (Fixed Rate Loans)
Mortgage Rates (1)
------------------
Percent of
Number of Aggregate Principal Group I Loans
Mortgage Rate (%) Group I Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
6.001 - 6.500 2 $343,156.25 0.18%
6.501 - 7.000 19 2,657,546.59 1.40
7.001 - 7.500 114 15,636,404.99 8.23
7.501 - 8.000 277 34,884,523.40 18.36
8.001 - 8.500 332 39,567,497.97 20.83
8.501 - 9.000 348 38,668,908.81 20.35
9.001 - 9.500 169 16,852,555.97 8.87
9.501 - 10.000 175 18,762,436.82 9.88
10.001 - 10.500 88 9,510,785.13 5.01
10.501 - 11.000 79 5,045,154.22 2.66
11.001 - 11.500 46 2,006,422.70 1.06
11.501 - 12.000 68 2,549,813.56 1.34
12.001 - 12.500 42 1,334,537.28 0.70
12.501 - 13.000 31 1,337,360.33 0.70
13.001 - 13.500 18 562,727.26 0.30
13.501 - 14.000 9 253,052.74 0.13
15.001 - 15.500 1 9,993.28 0.01
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 1,818 $189,982,877.30 100.00%
====================== ======================== ========================
- ----------
(1) As of the Cut-off Date, the weighted average mortgage rate of the Group I
Loans was approximately 8.838%.
S-31
Cut-off Date Group I Loan Principal Balances (1)
------------------------------------------------
Cut-off Date Percent of
Group I Loan Number of Aggregate Principal Group I Loans
Principal Balance ($) Group I Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
0.01 - 25,000.00 143 $2,692,220.88 1.42%
25,000.01 - 50,000.00 322 12,463,546.86 6.56
50,000.01 - 75,000.00 354 21,972,460.40 11.57
75,000.01 - 100,000.00 259 22,617,809.43 11.91
100,000.01 - 125,000.00 221 24,534,994.63 12.91
125,000.01 - 150,000.00 144 19,788,549.95 10.42
150,000.01 - 175,000.00 98 15,949,164.17 8.40
175,000.01 - 200,000.00 72 13,520,346.22 7.12
200,000.01 - 225,000.00 52 11,147,556.94 5.87
225,000.01 - 250,000.00 44 10,449,606.24 5.50
250,000.01 - 275,000.00 31 8,088,824.66 4.26
275,000.01 - 300,000.00 22 6,348,142.37 3.34
300,000.01 - 325,000.00 10 3,118,843.87 1.64
325,000.01 - 350,000.00 15 5,044,236.25 2.66
350,000.01 - 375,000.00 8 2,878,632.38 1.52
375,000.01 - 400,000.00 14 5,482,188.98 2.89
400,000.01 - 425,000.00 5 2,065,866.19 1.09
425,000.01 - 450,000.00 2 868,459.54 0.46
450,000.01 - 475,000.00 1 454,302.28 0.24
475,000.01 - 500,000.00 1 497,125.06 0.26
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 1,818 $189,982,877.30 100.00%
====================== ======================== ========================
- ----------
(1) As of the Cut-off Date, the average Group I Loan principal balance was
approximately $104,501.03.
S-32
FICO Scores (1)
---------------
Percent of
Number of Aggregate Principal Group I Loans
FICO Score Group I Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
Not Available 4 $244,519.55 0.13%
526 - 550 85 10,024,894.92 5.28
551 - 575 146 14,171,443.16 7.46
576 - 600 242 26,706,168.32 14.06
601 - 625 327 31,418,837.95 16.54
626 - 650 398 41,610,566.46 21.90
651 - 675 249 25,996,382.64 13.68
676 - 700 154 18,153,170.14 9.56
701 - 725 107 11,582,938.35 6.10
726 - 750 60 5,976,470.10 3.15
751 - 775 26 2,368,401.58 1.25
776 - 800 16 1,392,075.12 0.73
801 - 825 4 337,009.01 0.18
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 1,818 $189,982,877.30 100.00%
====================== ======================== ========================
- ----------
(1) FICO scores listed represent the FICO score obtained by the Sellers at
origination for each borrower on the Group I Loans.
S-33
State Distribution of Mortgaged Properties (1)
----------------------------------------------
Percent of
Number of Aggregate Principal Group I Loans
State Group I Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
Arizona 5 $448,854.41 0.24%
California 76 9,512,573.86 5.01
Colorado 10 1,184,254.68 0.62
Connecticut 26 2,791,912.06 1.47
Delaware 51 4,516,932.99 2.38
Florida 78 6,771,315.34 3.56
Georgia 26 2,016,183.95 1.06
Idaho 11 836,708.37 0.44
Illinois 39 3,979,069.00 2.09
Indiana 18 1,269,353.26 0.67
Iowa 35 3,050,470.68 1.61
Kansas 36 2,545,786.81 1.34
Kentucky 13 1,090,411.57 0.57
Maryland 107 11,125,988.69 5.86
Massachusetts 60 9,229,935.79 4.86
Michigan 30 2,299,724.59 1.21
Minnesota 25 3,930,947.32 2.07
Missouri 70 5,717,651.40 3.01
Montana 9 1,280,746.27 0.67
Nebraska 14 917,806.80 0.48
Nevada 11 1,557,273.38 0.82
New Hampshire 5 554,539.35 0.29
New Jersey 192 24,364,246.76 12.82
New Mexico 3 138,291.50 0.07
New York 120 22,525,037.65 11.86
North Carolina 106 9,836,452.22 5.18
North Dakota 1 80,798.19 0.04
Ohio 88 7,702,025.30 4.05
Oklahoma 8 645,844.22 0.34
Oregon 5 527,442.10 0.28
Pennsylvania 336 30,077,933.55 15.83
Rhode Island 12 1,059,470.99 0.56
South Carolina 62 5,520,546.82 2.91
South Dakota 28 1,750,150.67 0.92
Tennessee 48 3,681,312.47 1.94
Utah 4 841,915.71 0.44
Virginia 12 845,662.96 0.45
Washington 18 2,033,069.93 1.07
Wisconsin 18 1,596,517.94 0.84
Wyoming 2 127,717.75 0.07
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 1,818 $189,982,877.30 100.00%
====================== ======================== ========================
- ----------
(1) No more than approximately 0.65% of the Group I Loans are secured by
mortgaged properties located in any one postal zip code area.
S-34
Occupancy Types (1)
-------------------
Percent of
Number of Aggregate Principal Group I Loans
Occupancy Type Group I Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
Owner Occupied 1,547 $163,199,333.88 85.90%
Non-Owner Occupied 271 26,783,543.42 14.10
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 1,818 $189,982,877.30 100.00%
====================== ======================== ========================
- ----------
(1) Based upon representations of the related borrowers at the time of
origination.
Remaining Terms to Maturity (1)
-------------------------------
Percent of
Remaining Term Number of Aggregate Principal Group I Loans
to Maturity (Months) Group I Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
49 - 60 20 $3,477,372.26 1.83%
109 - 120 81 9,338,976.69 4.92
169 - 180 1,074 96,892,078.29 51.00
229 - 240 161 12,865,846.91 6.77
289 - 300 4 647,612.37 0.34
349 - 360 478 66,760,990.78 35.14
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 1,818 $189,982,877.30 100.00%
====================== ======================== ========================
- ----------
(1) As of the Cut-off Date, the weighted average remaining term to maturity of
the Group I Loans was approximately 240 months.
Documentation Types (1)
-----------------------
Percent of
Number of Aggregate Principal Group I Loans
Documentation Group I Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
Full Doc 1,521 $151,790,853.44 79.90%
SI 193 24,344,034.77 12.81
AIV 82 10,829,538.86 5.70
Lite Doc 22 3,018,450.23 1.59
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 1,818 $189,982,877.30 100.00%
====================== ======================== ========================
- ----------
(1) See "Specific Underwriting Criteria; Underwriting Programs" in the
prospectus for a description of the Sellers' documentation programs.
S-35
Loan-to-Value Ratios (1)
------------------------
Percent of
Number of Aggregate Principal Group I Loans
Loan-to-Value Ratio (%) Group I Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
5.001 - 10.000 37 $848,125.58 0.45%
10.001 - 15.000 46 1,338,667.71 0.70
15.001 - 20.000 136 4,351,026.77 2.29
20.001 - 25.000 50 2,422,775.01 1.28
25.001 - 30.000 23 1,148,686.92 0.60
30.001 - 35.000 20 1,096,102.66 0.58
35.001 - 40.000 15 1,073,605.25 0.57
40.001 - 45.000 13 953,577.20 0.50
45.001 - 50.000 20 2,272,727.42 1.20
50.001 - 55.000 21 2,432,681.77 1.28
55.001 - 60.000 41 4,424,813.18 2.33
60.001 - 65.000 37 4,185,764.36 2.20
65.001 - 70.000 111 12,960,316.22 6.82
70.001 - 75.000 170 16,997,856.91 8.95
75.001 - 80.000 366 40,186,869.96 21.15
80.001 - 85.000 179 26,599,996.24 14.00
85.001 - 90.000 341 39,419,450.29 20.75
90.001 - 95.000 121 17,491,137.47 9.21
95.001 - 100.000 71 9,778,696.38 5.15
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 1,818 $189,982,877.30 100.00%
====================== ======================== ========================
- ----------
(1) At time of origination.
Credit Grades (1)
-----------------
Percent of
Number of Aggregate Principal Group I Loans
Credit Grade Group I Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
A 1,330 $140,699,660.29 74.06%
B 356 35,972,728.4 18.93
C 132 13,310,488.56 7.01
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 1,818 $189,982,877.30 100.00%
====================== ======================== ========================
- ----------
(1) See "Specific Underwriting Criteria; Underwriting Programs" in the
prospectus for a description of the Sellers' underwriting programs.
S-36
Group II Loans (Adjustable Rate Loans)
Current Mortgage Rates (1)
--------------------------
Percent of
Number of Aggregate Principal Group II Loans
Current Mortgage Rate (%) Group II Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
6.501 - 7.000 42 $4,882,701.38 5.00%
7.001 - 7.500 62 8,850,223.29 9.07
7.501 - 8.000 153 19,069,139.64 19.54
8.001 - 8.500 137 17,870,483.69 18.32
8.501 - 9.000 136 17,616,911.70 18.06
9.001 - 9.500 82 11,458,702.32 11.74
9.501 - 10.000 108 11,356,855.24 11.64
10.001 - 10.500 35 3,376,222.95 3.46
10.501 - 11.000 22 1,838,959.29 1.88
11.001 - 11.500 11 825,513.02 0.85
11.501 - 12.000 7 395,019.97 0.40
12.001 - 12.500 1 29,974.27 0.03
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 796 $97,570,706.76 100.00%
====================== ======================== ========================
- ----------
(1) As of the Cut-off Date, the weighted average current mortgage rate of the
Group II Loans was approximately 8.651%.
S-37
Cut-off Date Group II Loan Principal Balances (1)
-------------------------------------------------
Cut-off Date Percent of
Group II Loan Number of Aggregate Principal Group II Loans
Principal Balance ($) Group II Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
0.01 - 25,000.00 10 $227,411.93 0.23%
25,000.01 - 50,000.00 67 2,681,696.13 2.75
50,000.01 - 75,000.00 139 8,860,533.81 9.08
75,000.01 - 100,000.00 150 13,109,233.95 13.44
100,000.01 - 125,000.00 127 14,339,144.50 14.70
125,000.01 - 150,000.00 115 15,737,112.66 16.13
150,000.01 - 175,000.00 55 8,854,358.63 9.07
175,000.01 - 200,000.00 36 6,718,320.15 6.89
200,000.01 - 225,000.00 21 4,467,565.73 4.58
225,000.01 - 250,000.00 22 5,186,358.11 5.32
250,000.01 - 275,000.00 15 3,908,977.77 4.01
275,000.01 - 300,000.00 9 2,609,061.37 2.67
300,000.01 - 325,000.00 7 2,180,605.07 2.23
325,000.01 - 350,000.00 8 2,673,287.38 2.74
350,000.01 - 375,000.00 5 1,793,471.33 1.84
375,000.01 - 400,000.00 5 1,949,060.81 2.00
400,000.01 - 425,000.00 1 412,141.71 0.42
425,000.01 - 450,000.00 2 879,674.27 0.90
475,000.01 - 500,000.00 2 982,691.45 1.01
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 796 $97,570,706.76 100.00%
====================== ======================== ========================
- ----------
(1) As of the Cut-off Date, the average Group II Loan principal balance was
approximately $122,576.26.
FICO Scores (1)
---------------
Percent of
Number of Aggregate Principal Group II Loans
FICO Score Group II Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
Not Available 1 $53,899.41 0.06%
501 - 525 1 220,000.00 0.23
526 - 550 76 8,362,665.31 8.57
551 - 575 106 12,640,371.09 12.96
576 - 600 150 17,940,898.76 18.39
601 - 625 157 20,558,697.27 21.07
626 - 650 140 17,400,834.95 17.83
651 - 675 92 10,596,115.76 10.86
676 - 700 34 5,066,437.55 5.19
701 - 725 25 3,317,007.32 3.40
726 - 750 9 1,130,237.66 1.16
751 - 775 3 213,568.17 0.22
776 - 800 2 69,973.51 0.07
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 796 $97,570,706.76 100.00%
====================== ======================== ========================
- ----------
(1) FICO scores listed represent the FICO score obtained by the Sellers at
origination for each borrower on the Group II Loans.
S-38
State Distribution of Mortgaged Properties (1)
----------------------------------------------
Percent of
Number of Aggregate Principal Group II Loans
State Group II Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
Arizona 3 $398,663.16 0.41%
California 31 5,857,277.30 6.00
Colorado 3 455,677.06 0.47
Connecticut 3 397,483.59 0.41
Delaware 13 1,538,910.41 1.58
Florida 18 1,466,559.86 1.50
Georgia 11 1,569,383.23 1.61
Idaho 13 1,840,570.92 1.89
Illinois 104 15,934,449.88 16.33
Indiana 13 1,140,423.83 1.17
Iowa 6 507,695.76 0.52
Kansas 16 1,999,403.87 2.05
Kentucky 25 2,435,477.63 2.50
Maryland 20 2,747,931.25 2.82
Massachusetts 14 2,248,710.39 2.30
Michigan 77 8,210,403.71 8.41
Minnesota 18 1,848,722.57 1.89
Missouri 31 3,219,918.28 3.30
Montana 18 2,850,252.23 2.92
Nebraska 8 469,156.65 0.48
Nevada 16 2,823,949.58 2.89
New Jersey 29 5,157,354.38 5.29
New Mexico 2 244,186.03 0.25
New York 3 619,999.71 0.64
North Carolina 40 5,483,000.68 5.62
North Dakota 2 149,244.11 0.15
Ohio 33 2,761,331.59 2.83
Oklahoma 7 714,269.48 0.73
Oregon 2 386,542.27 0.40
Pennsylvania 55 5,246,890.72 5.38
Rhode Island 4 392,297.71 0.40
South Carolina 14 1,758,852.43 1.80
South Dakota 41 3,940,867.97 4.04
Tennessee 32 3,464,024.28 3.55
Virginia 3 533,447.43 0.55
Washington 10 1,070,749.38 1.10
Wisconsin 58 5,686,627.43 5.83
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 796 $97,570,706.76 100.00%
====================== ======================== ========================
- ----------
(1) No more than approximately 1.41% of the Group II Loans are secured by
mortgaged properties located in any one postal zip code area.
S-39
Occupancy Types (1)
-------------------
Percent of
Number of Aggregate Principal Group II Loans
Occupancy Type Group II Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
Owner Occupied 733 $92,629,491.34 94.94%
Non-Owner Occupied 63 4,941,215.42 5.06
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 796 $97,570,706.76 100.00%
====================== ======================== ========================
- ----------
(1) Based upon representations of the related borrowers at the time of
origination.
Remaining Terms to Maturity(1)
------------------------------
Percent of
Remaining Term Number of Aggregate Principal Group II Loans
to Maturity (Months) Group II Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
169 - 180 1 $124,175.07 0.13%
229 - 240 1 115,000.00 0.12
349 - 360 794 97,331,531.69 99.75
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 796 $97,570,706.76 100.00%
====================== ======================== ========================
- ----------
(1) As of the Cut-off Date, the weighted average remaining term to maturity of
the Group II Loans was approximately 357 months.
Documentation Types (1)
-----------------------
Percent of
Number of Aggregate Principal Group II Loans
Documentation Group II Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
Full Doc 624 $73,178,229.20 75.00%
SI 107 14,407,296.56 14.77
AIV 45 7,931,919.45 8.13
Lite Doc 20 2,053,261.55 2.10
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 796 $97,570,706.76 100.00%
====================== ======================== ========================
- ----------
(1) See "Specific Underwriting Criteria; Underwriting Programs" in the
prospectus for a description of the Sellers' documentation programs.
S-40
Loan-to-Value Ratios (1)
------------------------
Percent of
Number of Aggregate Principal Group II Loans
Loan-to-Value Ratio (%) Group II Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
30.001 - 35.000 2 $84,944.91 0.09%
35.001 - 40.000 1 30,302.41 0.03
40.001 - 45.000 2 97,773.67 0.10
45.001 - 50.000 6 516,525.88 0.53
50.001 - 55.000 12 667,903.11 0.68
55.001 - 60.000 11 1,073,646.99 1.10
60.001 - 65.000 22 2,244,991.35 2.30
65.001 - 70.000 31 3,101,383.13 3.18
70.001 - 75.000 71 7,767,379.25 7.96
75.001 - 80.000 253 29,606,164.11 30.34
80.001 - 85.000 97 12,373,944.61 12.68
85.001 - 90.000 232 31,616,596.97 32.40
90.001 - 95.000 32 4,743,453.76 4.86
95.001 - 100.000 24 3,645,696.61 3.74
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 796 $97,570,706.76 100.00%
====================== ======================== ========================
- ----------
(1) At time of origination.
Credit Grades (1)
-----------------
Percent of
Number of Aggregate Principal Group II Loans
Credit Grade Group II Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
A 445 $56,593,717.04 58.00%
B 236 28,056,401.01 28.75
C 115 12,920,588.71 13.24
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 796 $97,570,706.76 100.00%
====================== ======================== ========================
- ----------
(1) See "Specific Underwriting Criteria; Underwriting Programs" in the
prospectus for a description of the Sellers' underwriting programs.
Initial Rate Caps
-----------------
Percent of
Number of Aggregate Principal Group II Loans
Initial Rate Cap (%) Group II Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
2.000 333 $42,275,833.09 43.33%
3.000 463 55,294,873.67 56.67
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 796 $97,570,706.76 100.00%
====================== ======================== ========================
S-41
Periodic Rate Caps
------------------
Percent of
Number of Aggregate Principal Group II Loans
Periodic Rate Cap (%) Group II Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
1.000 331 $41,932,369.90 42.98%
1.500 463 55,294,873.67 56.67
2.000 2 343,463.19 0.35
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 796 $97,570,706.76 100.00%
====================== ======================== ========================
Maximum Mortgage Rates (1)
--------------------------
Percent of
Number of Aggregate Principal Group II Loans
Maximum Mortgage Rate (%) Group II Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
10.501 - 11.000 1 $87,577.46 0.09%
11.501 - 12.000 1 448,123.92 0.46
12.001 - 12.500 1 92,640.77 0.09
12.501 - 13.000 39 4,519,737.84 4.63
13.001 - 13.500 47 6,703,424.68 6.87
13.501 - 14.000 120 15,085,652.61 15.46
14.001 - 14.500 119 15,418,161.84 15.80
14.501 - 15.000 119 14,654,830.20 15.02
15.001 - 15.500 68 9,542,594.77 9.78
15.501 - 16.000 113 12,857,886.70 13.18
16.001 - 16.500 65 8,104,097.81 8.31
16.501 - 17.000 59 6,515,285.89 6.68
17.001 - 17.500 17 1,696,096.95 1.74
17.501 - 18.000 16 1,048,173.08 1.07
18.001 - 18.500 9 698,594.61 0.72
18.501 - 19.000 1 67,853.36 0.07
19.001 - 19.500 1 29,974.27 0.03
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 796 $97,570,706.76 100.00%
====================== ======================== ========================
- ----------
(1) As of the Cut-off Date, the weighted average Maximum Mortgage Rate of the
Group II Loans was approximately 14.968%.
S-42
Minimum Mortgage Rates (1)
--------------------------
Percent of
Number of Aggregate Principal Group II Loans
Minimum Mortgage Rate (%) Group II Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
5.501 - 6.000 1 $331,450.68 0.34%
6.501 - 7.000 43 4,925,106.98 5.05
7.001 - 7.500 62 8,850,223.29 9.07
7.501 - 8.000 153 19,079,421.35 19.55
8.001 - 8.500 137 17,870,483.69 18.32
8.501 - 9.000 135 17,285,461.02 17.72
9.001 - 9.500 84 11,688,714.77 11.98
9.501 - 10.000 105 11,074,155.48 11.35
10.001 - 10.500 35 3,376,222.95 3.46
10.501 - 11.000 22 1,838,959.29 1.88
11.001 - 11.500 11 825,513.02 0.85
11.501 - 12.000 7 395,019.97 0.40
12.001 - 12.500 1 29,974.27 0.03
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 796 $97,570,706.76 100.00%
====================== ======================== ========================
- ----------
(1) As of the Cut-off Date, the weighted average Minimum Mortgage Rate of the
Group II Loans was approximately 8.638%.
Gross Margins (1)
-----------------
Percent of
Number of Aggregate Principal Group II Loans
Gross Margin (%) Group II Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
2.001 - 2.500 1 $35,937.39 0.04%
3.501 - 4.000 2 415,547.04 0.43
4.001 - 4.500 1 193,759.22 0.20
4.501 - 5.000 212 26,557,240.45 27.22
5.001 - 5.500 126 14,482,012.51 14.84
5.501 - 6.000 70 9,950,917.10 10.20
6.001 - 6.500 61 7,317,375.14 7.50
6.501 - 7.000 89 11,380,172.47 11.66
7.001 - 7.500 57 8,022,175.62 8.22
7.501 - 8.000 32 3,687,274.65 3.78
8.001 - 8.500 31 3,648,433.43 3.74
8.501 - 9.000 30 3,120,850.11 3.20
9.001 - 9.500 30 3,457,123.63 3.54
9.501 - 10.000 15 1,468,380.58 1.50
10.001 - 10.500 17 1,857,168.55 1.90
10.501 - 11.000 10 782,359.87 0.80
11.001 - 11.500 7 877,248.55 0.90
11.501 - 12.000 4 286,756.18 0.29
12.001 - 12.500 1 29,974.27 0.03
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 796 $97,570,706.76 100.00%
====================== ======================== ========================
- ----------
(1) As of the Cut-off Date, the weighted average gross margin of the Group II
Loans was approximately 6.484%.
S-43
Months to Next Adjustment Date (1)
----------------------------------
Percent of
Months to Next Number of Aggregate Principal Group II Loans
Adjustment Date Group II Loans Balance Outstanding (by principal balance)
- -------------------------------------- ---------------------- ------------------------ ------------------------
7 - 12 7 $731,518.03 0.75%
13 - 18 39 5,436,971.05 5.57
19 - 24 721 88,089,435.34 90.28
25 - 30 3 454,016.25 0.47
31 - 36 26 2,858,766.09 2.93
- -------------------------------------- ---------------------- ------------------------ ------------------------
Total 796 $97,570,706.76 100.00%
====================== ======================== ========================
- ----------
(1) As of the Cut-off Date, the weighted average number of months to the next
adjustment date for the Group II Loans was approximately 22 months.
Sale of the Loans
Pursuant to the Pooling and Servicing Agreement, the Depositor on the
Closing Date will convey without recourse to the Trustee in trust for the
benefit of the certificateholders all right, title and interest of the Depositor
in and to each Loan and all right, title and interest in and to all other assets
included in the trust fund as of the Closing Date, including all principal and
interest received on or with respect to the Loans after the Cut-off Date,
exclusive of principal and interest due on or prior to the Cut-off Date.
In connection with the conveyance of each of the Loans and pursuant to the
requirements of the Pooling and Servicing Agreement, the Depositor or the
Seller(s), as the case may be, will deliver or cause to be delivered to the
Trustee, or a custodian for the Trustee, among other things,
o the Mortgage Note (and any modification or amendment thereto)
endorsed to the Trustee without recourse,
o the original instrument creating a first or second lien on the
related mortgaged property (the "Mortgage") with evidence of
recording indicated thereon,
o the title policy with respect to the related mortgaged property
(except for any title policies not returned from the title agent,
which will be delivered to the Trustee as soon as the same are
available to the Depositor),
o if applicable, all recorded intervening assignments of the
Mortgage and any riders or modifications to the Mortgage Note and
Mortgage (except for any documents not returned from the public
recording office, which will be delivered to the Trustee as soon
as the same are available to the Depositor), and
o an original recorded assignment of the Mortgage to the Trustee,
once returned from the public recording office (the items listed
in this bullet and the four bullets above are collectively
referred to as the "Mortgage File").
The Trustee will review each Mortgage File within the time periods
specified in the Pooling and Servicing Agreement. If any document in a Mortgage
File is found to be missing or defective in a material respect and the related
Seller does not cure the defect within the applicable cure period, as provided
in the Pooling and Servicing Agreement, that Seller will be obligated to either
repurchase the related Loan from the trust fund or remove the Loan (a "Deleted
Loan") from the trust fund and substitute in its place another mortgage loan (a
"Replacement Loan"). However, substitution is permitted only within two years of
the Closing Date and may not be made unless an opinion of counsel is provided to
the Trustee to the effect that the substitution will not disqualify any REMIC or
result in a prohibited transaction tax under the Internal Revenue Code of 1986,
as amended (the "Code").
S-44
Any Replacement Loan generally will, on the date of substitution, among
other characteristics set forth in the Pooling and Servicing Agreement,
o have a Stated Principal Balance not in excess of, and not more
than 10% less than, the Stated Principal Balance of the Deleted
Loan (the Stated Principal Balances to be measured as of the
respective Due Dates in the month of substitution, and the amount
of any shortfall to be deposited by the related Seller in the
Certificate Account and held for distribution to the
certificateholders on the related Distribution Date (a
"Substitution Adjustment Amount")),
o have a mortgage rate not lower than, and not more than 1% per
annum higher than, that of the Deleted Loan,
o have a Loan-to-Value Ratio not higher than that of the Deleted
Loan,
o have a debt-to-income ratio no higher than that of the Deleted
Loan,
o have been originated pursuant to the same underwriting standards
as the Deleted Loan,
o have a remaining term to maturity not greater than (and not more
than one year less than) that of the Deleted Loan, and
o comply with all of the representations and warranties set forth
in the Pooling and Servicing Agreement, as of the date of
substitution.
This cure, repurchase or substitution obligation constitutes the sole remedy
available to certificateholders or the Trustee for omission of, or a material
defect in, a Loan document.
Underwriting Standards
The following is a description of the underwriting procedures customarily
employed by Sellers with respect to mortgage loans.
Each Seller produces its mortgage loans through its retail origination
network of loan officers and managers. Each Seller also produces mortgage loans
through a wholesale network of mortgage brokers and other entities located
throughout the United States. Prior to the funding of any mortgage loan, each
Seller underwrites the related mortgage loan in accordance with the underwriting
standards that have been established by the Servicer and are consistent with
those utilized by mortgage lenders generally during the period of origination
for similar types of loans (the "Equity One Standards"). All Loans to be
included in the mortgage pool have been or will be underwritten by Equity One's
Central Credit office in accordance with the Equity One Standards.
Through its bulk purchase program, each Seller also purchases mortgage
loans that have been originated and closed by other lenders. The Sellers
purchase these mortgage loans in blocks that generally range from $1,000,000 to
$20,000,000. Prior to funding any bulk purchase, each loan package is
underwritten in accordance with the Equity One Standards. Bulk purchased loans
represent approximately 37.09% and 45.40% of the Group I Loans and Group II
Loans, respectively, as of the Cut-off Date.
The Equity One Standards are primarily intended to evaluate the value and
adequacy of the mortgaged property as collateral for the proposed mortgage loan,
but also take into consideration the borrower's credit standing and repayment
ability. The Equity One Standards typically differ from, and, with respect to a
substantial number of the Loans, are generally less stringent than, the
underwriting standards established by Fannie Mae and Freddie Mac, primarily with
respect to original principal balances, mortgagor income, credit history,
required documentation, mortgage rates, and property types. To the extent the
Equity One Standards are different from the underwriting standards of Fannie Mae
or Freddie Mac, the performance of the Loans thereunder may reflect higher
delinquency rates and credit losses.
Mortgage loans are originated or purchased under the Equity One Standards
through underwriting programs designated as Grade A Credits, Grade B Credits or
Grade C Credits. See "Specific Underwriting Criteria; Underwriting Programs" and
"Summary of Underwriting Requirements by Program" in the prospectus.
S-45
These underwriting programs and their underwriting criteria may change from
time to time. In addition, on a case-by-case basis, loans may be made to
borrowers not strictly qualifying under the specific criteria of an underwriting
program. Deviations from the specific criteria of an underwriting program are
permitted to reflect compensating factors such as local economic trends, real
estate valuations and other credit factors specific to each loan application
and/or each portfolio acquired, but the Equity One Standards do not include any
specific formula or assign any specific weight to compensating factors for
purposes of these determinations. We expect that some of the Loans in each of
Group I and Group II will have been originated based on those types of
underwriting exceptions. Overall, the Sellers' goal is to maintain the integrity
of these underwriting programs while simultaneously providing lending officers
and corresponding networks with the flexibility to consider the specific
circumstances of each loan.
Under the Equity One Standards, Sellers must use the Full Doc, the Lite
Doc, the SI or the AIV loan documentation program to verify a borrower's income.
The Lite Doc, SI and AIV loan documentation programs are all forms of
"non-income verifiable" or "NIV" programs. See "Specific Underwriting Criteria;
Underwriting Programs" in the prospectus.
As of the Cut-off Date, approximately 79.90% and 75.00% of the Group I
Loans and Group II Loans, respectively, have been underwritten pursuant to the
Full Doc program and approximately 20.10% and 25.00% of the Group I Loans and
Group II Loans, respectively, have been underwritten pursuant to either the Lite
Doc, SI or AIV programs.
The Equity One Standards require an independent appraisal that conforms to
Fannie Mae standards of each mortgaged property securing each mortgage loan in
excess of $15,000. All Loans in the mortgage pool have independent appraisals on
the related mortgaged properties. Each appraisal includes a market data analysis
based on recent sales of comparable homes in the area and, where deemed
appropriate, replacement cost analysis based on the current cost of constructing
a similar home. Every independent appraisal is reviewed by a representative of
the related Seller before the mortgage loan is funded, except appraisals
relating to mortgages acquired through bulk purchases. The maximum loan amount
varies depending upon a borrower's credit grade. Variations in maximum loan
amount limits are permitted based on compensating factors. Maximum loan amounts
for mortgage loans underwritten pursuant to the SI or AIV programs generally do
not exceed $500,000.
Title insurance has been obtained on all Loans in the mortgage pool. To the
best of the Servicer's knowledge, the improvements on each mortgaged property
securing a Loan in the mortgage pool are covered by hazard insurance with
extended coverage in an amount at least equal to the lesser of (1) the principal
balance of the Loan, and (2) the maximum insurable value of the improvements on
the mortgaged property.
SERVICING OF LOANS
General
The Servicer will service the Loans in accordance with the terms set forth
in the Pooling and Servicing Agreement. The Servicer may perform any of its
obligations under the Pooling and Servicing Agreement through one or more
sub-servicers. Notwithstanding any sub-servicing arrangement, the Servicer will
remain liable for its servicing duties and obligations under the Pooling and
Servicing Agreement as if the Servicer alone were servicing the Loans. As of the
Closing Date, the Servicer does not intend to service the Loans with
sub-servicing arrangements.
The Sellers have provided the information set forth in the following
sections through and including the section captioned "Foreclosure, Delinquency
and Loss Experience."
The Servicer
Equity One, Inc. ("Equity One"), a Delaware corporation and a wholly-owned
operating subsidiary of Popular North America, Inc., a Delaware corporation,
will act as the Servicer of the Loans pursuant to the Pooling and Servicing
Agreement. Equity One is engaged primarily in the mortgage banking and consumer
lending business, and in that capacity, originates, purchases, sells and
services mortgage and consumer loans. Equity One is
S-46
a Fannie Mae approved lender. It originates loans through a retail branch system
and through loan brokers and correspondents nationwide. Equity One's loans are
principally
o first- and second-lien, fixed or adjustable rate mortgage loans
secured by
o one- to four-family dwellings or
o multi-family properties and structures which include both
residential dwelling units and space used for retail,
professional or other commercial uses, and
o secured or unsecured consumer loans.
As of March 31, 2002, Equity One and its subsidiaries provided servicing
for approximately 50,768 mortgage loans (including mortgage loans serviced for
third parties) having an aggregate net unpaid principal balance of approximately
$3,710,878,000.
The principal executive offices of Equity One are located at 400 Lippincott
Drive, Marlton, NJ 08053. Its telephone number is (800) 461-8643. Equity One
conducts operations from its headquarters in Marlton and, through subsidiaries,
from offices throughout the nation.
Loan Servicing
Equity One services substantially all of the mortgage loans originated or
acquired by the Sellers, and also services mortgage loans for third parties like
the trust fund to which the Sellers transfer mortgage loans originated or
acquired by them from time to time. Equity One has established standard policies
for the servicing and collection of mortgage loans. Servicing includes, but is
not limited to, collecting and remitting mortgage loan payments, accounting for
principal and interest, preparation of tax related information in connection
with the mortgage loans, supervision of delinquent mortgage loans, making
inspections as required of the mortgaged properties, loss mitigation efforts,
foreclosure proceedings and, if applicable, the disposition of mortgaged
properties, and generally administering the mortgage loans, for which it
receives servicing fees.
Collection Procedures
When a borrower fails to make a payment on a mortgage loan, the Servicer
contacts the borrower in an attempt to get the borrower to cure the deficiency.
Pursuant to its servicing procedures, the Servicer generally mails to the
borrower a notice of intent to foreclose after the mortgage loan becomes 90 days
contractually past due (assuming 30 day months) (four payments due but not
received). Within 45 days thereafter, if the mortgage loan remains delinquent,
the Servicer will institute appropriate legal action to foreclose on the
mortgaged property. The Servicer may terminate these foreclosure proceedings if
the borrower cures the delinquency. Mortgage loans to borrowers in bankruptcy
proceedings may be restructured in accordance with law and with a view to
maximizing recovery on these mortgage loans, including any deficiencies.
Once foreclosure is initiated, the Servicer uses a foreclosure tracking
system to monitor the progress of the proceedings. The system includes state
specific parameters to monitor whether proceedings are progressing within the
time frame typical for the state in which the mortgaged property is located.
During the foreclosure proceeding, the Servicer determines the amount of the
foreclosure bid and whether to liquidate the mortgage loan.
After foreclosure, the Servicer may liquidate the mortgaged property and
charge-off the portion of the mortgage loan balance that was not recovered as
part of Liquidation Proceeds. If foreclosed, the mortgaged property is sold at a
public or private sale and may be purchased by the Servicer.
Servicing and charge-off policies and collection practices may change over
time in accordance with, among other things, the business judgment of the
Servicer, changes in the servicing portfolio and applicable laws and
regulations.
S-47
Foreclosure, Delinquency and Loss Experience
The following table summarizes the delinquency and loss experience of
mortgage loans owned and serviced by Equity One and its subsidiaries at or for
the years specified therein. A mortgage loan is characterized as delinquent if
the borrower has not paid the scheduled payment due by the due date. The table
below discloses delinquency percentages of mortgage loans 60 days or more past
due on a contractual basis and includes mortgage loans where the mortgage loan
is in foreclosure or the borrower has filed for bankruptcy, but excludes
mortgage loans which are real estate owned. You should not consider this
information as a basis for assessing the likelihood, amount, or severity of
delinquency or losses on the Loans, and no assurances can be given that the
foreclosure experience presented in the first paragraph below the table will be
indicative of the actual foreclosure experience on the Loans.
Loss and Delinquency Table(1)
(Dollars in Thousands)
At or for the At or for the
At or for the At or for the At or for the Four Months Four Months
Year Ended Year Ended Year Ended Ended Ended
November 30, 1999 November 30, 2000 November 30, 2001 March 31, 2001 March 31, 2002
----------------- ----------------- ----------------- -------------- --------------
Portfolio Unpaid $1,039,662 $1,484,867 $2,928,485 $1,957,007 $3,347,034
Principal Balance(2)
Average Portfolio $904,627 $1,303,052 $2,226,183 $1,713,174 $3,128,010
Unpaid Principal
Balance(3)
60+ Days Delinquent(4) 3.11% 4.29% 4.11% 3.50% 4.51%
Real Estate Owned(5) $11,944 $10,664 $13,002 $15,070 $12,219
Total Credit Losses(6) 0.28% 0.18% 0.25% 0.23%(7) 0.24%(7)
- -------------------------------
(1) This table includes only mortgage loans owned and serviced by Equity One
and its subsidiaries and real estate owned by Equity One and its
subsidiaries.
(2) Portfolio Unpaid Principal Balance is the net amount of (a) principal to be
paid on each mortgage loan, (b) loan origination fees, net of costs, (c)
unearned interest and (d) other miscellaneous deferred charges and fees;
and excludes the principal balance of each mortgage loan for which the
related mortgaged property had been acquired through foreclosure or deed in
lieu of foreclosure by that date.
(3) Average Portfolio Unpaid Principal Balances are calculated by summing
monthly Portfolio Unpaid Principal Balances and dividing by the number of
months summed (i.e., thirteen (13) in the case of the annual figures and
five (5) in the case of the four month figures).
(4) Delinquency percentages are calculated as the dollar amount of the unpaid
principal balance of the mortgage loans that are delinquent divided by the
Portfolio Unpaid Principal Balance. Delinquency percentages do not include
the principal balance of mortgage loans as to which the related mortgaged
property had been acquired through foreclosure or deed in lieu of
foreclosure by that date. For the columns entitled, "At or for the Year
Ended November 30, 2001," "At or for the Four Months Ended March 31, 2001"
and "At or for the Four Months Ended March 31, 2002" only,
S-48
delinquency percentages are calculated based on the number of days payments
are contractually past due and assumes 30-day months. Consequently, a
payment due on the first day of a month is not 30 days delinquent until the
first day of the following month.
(5) Real estate owned represents the aggregate estimated fair value of the
properties acquired through foreclosure or deed in lieu of foreclosure.
(6) Total Credit Losses includes charge-offs of principal, net of subsequent
recoveries, relating to mortgage loans written off as uncollectible and
initial write-downs of loans upon transfer to real estate owned. It does
not include (a) subsequent write downs of real estate owned balances, (b)
expenses associated with maintaining, repairing, and selling foreclosed
properties and real estate owned and (c) losses (gains) on the disposition
of real estate owned.
(7) Annualized.
Historically, a variety of factors, including the appreciation of real
estate values, have limited the loss and delinquency experience on mortgage
loans. There can be no assurance that factors beyond the Servicer's control,
like national or local economic conditions or downturn in the real estate
markets of its lending areas, will not result in increased rates of
delinquencies and foreclosure losses in the future.
Servicing Compensation and Payment of Expenses
The Servicer will be paid a monthly fee from interest collected with
respect to each Loan, as well as from any Liquidation Proceeds from a Liquidated
Loan that are applied to accrued and unpaid interest, equal to one-twelfth of
the Stated Principal Balance of the Loan multiplied by the Servicing Fee Rate
(the "Servicing Fee"). The "Servicing Fee Rate" for each Loan will equal 0.50%
per annum.
The "Adjusted Net Mortgage Rate" of any Loan is its mortgage rate, less the
sum of the Servicing Fee Rate, the per annum rate on each Loan payable to the
Trustee and the rate at which the Certificate Insurer's Monthly Premium accrues
(aggregating approximately 0.71% per annum) and, in the case of any Group II
Loan, an additional 0.50% per annum. The amount of the monthly Servicing Fee may
also be adjusted with respect to prepaid Loans, as described herein under
"--Adjustment to Servicing Fee in Connection with Certain Prepaid Loans."
The Servicer is also entitled to receive, as additional servicing
compensation, amounts in respect of interest paid in connection with any
principal prepayment of a Loan subsequent to its Due Date in any Prepayment
Period, which payment of interest is intended to cover the period on and after
the Due Date ("Prepayment Interest Excess"), all late payment fees, assumption
fees, prepayment penalties and other similar charges and, so long as no Event of
Default has occurred and is continuing under the Pooling and Servicing
Agreement, all reinvestment income earned on amounts on deposit in the
Certificate Account. The Servicer is obligated to pay certain ongoing expenses
associated with the Loans and incurred by the Trustee in connection with its
responsibilities under the Pooling and Servicing Agreement.
Adjustment to Servicing Fee in Connection with Certain Prepaid Loans
When a borrower prepays a Loan between Due Dates, the borrower only has to
pay interest on the amount prepaid through the date of prepayment and not
thereafter. If a borrower prepays a Loan in a particular group in whole or in
part during any Prepayment Period on a date that is prior to the Loan's Due
Date, the amount of interest that accrues on the amount of the prepayment will
be less than the corresponding amount of interest accruing on the related class
or classes of Certificates. Accordingly, there will be a shortfall in the amount
of interest to be distributed to certificateholders of the related class with
respect to those prepaid Loans.
Pursuant to the Pooling and Servicing Agreement, the Servicing Fee for any
month will be reduced, up to the full amount of the Servicing Fee, in order to
pass through to certificateholders the interest to which they would be entitled
in respect of each prepaid Loan in the group relating to that class on the
related Distribution Date. If the amount of shortfalls in interest resulting
from prepayments exceeds the amount of the Servicing Fee otherwise payable on
the related Distribution Date, the amount of interest to which
certificateholders will be entitled will be reduced by the amount of that
excess. See "Description of the Certificates--Interest."
S-49
Advances
Subject to the following limitations, the Servicer will be required to
advance (each, an "Advance") prior to each Distribution Date, from its own funds
or funds in the Certificate Account that are not Available Funds for that
Distribution Date, an amount equal to
o the aggregate of payments of principal and interest on the Loans,
net of the Servicing Fee with respect to those Loans, which were
due on the Due Date in the calendar month preceding the month of
that Distribution Date and which were still delinquent on the
Determination Date in the month of that Distribution Date, plus
o interest on each Loan as to which the trust fund has acquired the
related mortgaged property through foreclosure or deed-in-lieu of
foreclosure ("REO Property").
The "Determination Date" means, as to any Distribution Date, the 21st day
of the month of that Distribution Date, or, if that day is not a Business Day,
the next preceding Business Day; provided, however, that the Determination Date
in each month will be at least two Business Days preceding the related
Distribution Date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Offered Certificates rather than to guarantee or
insure against losses. The Servicer only has to make Advances with respect to
delinquent payments of principal of or interest on each Loan to the extent that
the Advances are, in its reasonable judgment, recoverable from future payments
and collections or insurance payments or proceeds of liquidation of the related
Loan.
If the Servicer decides on any Determination Date to make an Advance on a
Loan, that Advance will be included with the distribution on the related
Distribution Date to holders of Class AF Certificates, if the Advance was made
on a Group I Loan, or holders of Class AV-1 Certificates, if the Advance was
made on a Group II Loan. Failure by the Servicer to make an Advance required
under the Pooling and Servicing Agreement with respect to the Offered
Certificates will be an Event of Default thereunder, in which case the Trustee,
acting in the capacity of servicer, or the successor servicer will be obligated
to make that Advance, in accordance with the terms of the Pooling and Servicing
Agreement.
DESCRIPTION OF THE CERTIFICATES
General
The trust fund will issue the Certificates pursuant to the Pooling and
Servicing Agreement. Set forth below are descriptions of the material terms and
provisions pertaining to the issuance of the Certificates. When this document
refers to particular provisions or terms used in the Pooling and Servicing
Agreement, the actual provisions, including definitions of terms, are
incorporated in this document by reference.
The Mortgage Pass-Through Certificates, Series 2002-2, will consist of the
Class AF-1 Certificates, the Class AF-2 Certificates, the Class AF-3
Certificates, the Class AF-4 Certificates, the Class AV-1 Certificates, the
Class A-IO Certificates, the Class X Certificates and the Class R Certificates.
This document only offers the Class AF Certificates, the Class A-IO Certificates
and the Class AV-1 Certificates. Each of the Offered Certificates will have the
initial Class Certificate Balance or Notional Amount and will bear interest at
the rate per annum set forth or described on the cover page hereof, subject to
the applicable Net WAC Cap. However, the pass-through rates on the Class AF-4
Certificates and the Class AV-1 Certificates will increase in the circumstances
described under "--Interest." Interest on the Offered Certificates will be
subject to adjustment as described under "--Interest." The Class X Certificates
and the Class R Certificates, which are not being offered hereby, may be sold at
any time on or after the Closing Date in accordance with the Pooling and
Servicing Agreement.
The "Class Certificate Balance" of each class of Offered Certificates,
other than the Class A-IO Certificates, as of any Distribution Date is the
initial aggregate principal balance thereof reduced by all amounts previously
distributed to holders of that class of Offered Certificates as payments of
principal. The "Notional Amount" of the Class A-IO Certificates,
50
o as of any Distribution Date prior to and including the
Distribution Date in April 2004, will be the lesser of
o the aggregate principal balance of the Group I Loans as of
the first day of the related Due Period, and
o $19,000,000.
o as of any Distribution Date after the Distribution Date in April
2004, will be zero.
The Class AF Certificates and the Class AV-1 Certificates will have an
initial aggregate principal balance of approximately $287,552,000 and will
initially evidence in the aggregate a beneficial ownership interest of
approximately 100% of the principal of the trust fund. The Class AF Certificates
will have an initial aggregate principal balance of approximately $189,982,000
and will initially evidence in the aggregate a beneficial ownership interest of
approximately 100% of the principal of the Group I Loans. The Class AV-1
Certificates will have an initial aggregate principal balance of approximately
$97,570,000 and will initially evidence in the aggregate a beneficial ownership
interest of approximately 100% of the principal of the Group II Loans. The Class
A-IO Certificates will not have a principal balance but will accrue interest on
an aggregate notional balance equal to their Notional Amount. The trust fund
will initially issue the Offered Certificates in book-entry form.
Separate REMIC Structure
For federal income tax purposes, the trust fund, other than the Net WAC Cap
Account and the Reserve Fund, created by the Pooling and Servicing Agreement
will include multiple segregated asset pools, each of which will be treated as a
separate REMIC, creating a tiered REMIC structure. The Offered Certificates,
excluding any associated rights to receive payments from the Net WAC Cap Account
or Reserve Fund, will be designated as regular interests in a REMIC.
Book-Entry Certificates
The trust fund will issue the Offered Certificates in one or more
certificates that equal the aggregate initial Class Certificate Balance or
Notional Amount of the relevant class of Certificates and which will be held by
a nominee of The Depository Trust Company ("DTC"). Persons acquiring beneficial
ownership interests in the Offered Certificates ("Beneficial Owners") will hold
their Certificates indirectly through the book-entry facilities of DTC in the
United States or Clearstream, Luxembourg, or the Euroclear System in Europe, if
they are participants of those systems, or indirectly through participants of
those systems. Investors may hold their beneficial interests in the Offered
Certificates in minimum denominations representing an original principal amount
of $25,000 and integral multiples of $1 in excess thereof. One investor of each
class of the Offered Certificates may hold a beneficial interest therein that is
not an integral multiple of $1. DTC has informed the Depositor that its nominee
will be Cede & Co. ("Cede"). Accordingly, Cede is expected to be the holder of
record of the Offered Certificates. Except as described in the prospectus under
"Description of the Certificates--Book-Entry Certificates," no Beneficial Owner
of an Offered Certificate will be entitled to receive a physical certificate
representing that Certificate (a "Definitive Certificate").
Unless and until Definitive Certificates are issued, it is anticipated that
the only certificateholder of the Offered Certificates will be Cede, as nominee
of DTC. Beneficial Owners of the Offered Certificates will not be
"Certificateholders," as that term is used in the Pooling and Servicing
Agreement. Beneficial Owners are only permitted to exercise the rights of
certificateholders directly through DTC and DTC participants. Monthly and annual
reports on the trust fund provided to Cede, as nominee of DTC, may be made
available to Beneficial Owners upon request, in accordance with the rules,
regulations and procedures creating and affecting DTC, and to the DTC
participants to whose accounts the Offered Certificates of those Beneficial
Owners are credited.
For a description of the book-entry procedures generally applicable to the
Offered Certificates, see "Description of the Securities--Book-Entry
Registration of Securities" in the prospectus. For information with respect to
tax documentation procedures relating to the Certificates, see "Federal Income
Tax Consequences" herein
S-51
and "Global Clearance, Settlement and Tax Documentation Procedures--Certain U.S.
Federal Income Tax Documentation Requirements" in Annex I hereto.
Payments on Loans; Certificate and Distribution Accounts
On or prior to the Closing Date, the Servicer will establish an account
(the "Certificate Account") that will be maintained for the benefit of the
Trustee on behalf of the certificateholders and the Certificate Insurer. Funds
credited to the Certificate Account may be invested for the benefit and at the
risk of the Servicer in Permitted Investments that are scheduled to mature on or
prior to the business day preceding the next Distribution Date. "Permitted
Investments" will be specified in the Pooling and Servicing Agreement and will
be limited to the types of investments described in the prospectus under "Credit
Enhancement--Reserve Accounts."
All payments in respect of principal and interest, net of the related
Servicing Fee, on the Loans received by the Servicer subsequent to the
applicable Cut-off Date, other than principal and interest due on the Loans on
or before the applicable Cut-off Date, including Insurance Proceeds and
Liquidation Proceeds, net of Liquidation Expenses, are required to be paid into
the Certificate Account not later than the next Business Day following receipt
thereof. The Servicer may retain as additional servicing compensation Prepayment
Interest Excess, all late payment fees, assumption fees, prepayment penalties
and other similar charges and, so long as no Event of Default has occurred and
is continuing under the Pooling and Servicing Agreement, all reinvestment income
earned on amounts on deposit in the Certificate Account.
On or prior to the business day immediately preceding each Distribution
Date, the Servicer will withdraw from the Certificate Account the amount of
Distributable Funds with respect to that Distribution Date, and will deposit
this amount in an account established and maintained by the Trustee for the
benefit of the certificateholders and the Certificate Insurer (the "Distribution
Account").
Distributions
A. On each Distribution Date, the Trustee will distribute the following
amounts from Class AF Distributable Funds (provided that the Trustee may only
use any Insured Amounts for the items listed in clauses (4) and (5) below), to
the extent available, to the parties and in the priorities indicated:
(1) first, to the Certificate Insurer, the Certificate Insurer's
Monthly Premium based on the aggregate Class Certificate Balance of the Class AF
Certificates;
(2) second, to the Trustee, any amounts then due and owing
representing fees and expenses of the Trustee based upon the aggregate Stated
Principal Balance of the Group I Loans;
(3) third, to the Servicer, an amount equal to the sum of (a) the
Servicing Fee relating to the Group I Loans, except to the extent previously
paid with permitted withdrawals from the Certificate Account, and (b) any other
amounts expended by the Servicer in connection with the Group I Loans and
reimbursable thereto under the Pooling and Servicing Agreement but not
previously reimbursed;
(4) fourth, to the Class AF-1 Certificates, Class AF-2 Certificates,
Class AF-3 Certificates, Class AF-4 Certificates and Class A-IO Certificates,
the related Interest Distribution Amount, pro rata, based on the amount of
interest which each such class is entitled to receive on that Distribution Date;
(5) fifth, to the Class AF-1 Certificates, Class AF-2 Certificates,
Class AF-3 Certificates, and Class AF-4 Certificates, sequentially in that
order, the related Certificate Formula Principal Amount, until the Class
Certificate Balance of each such class has been reduced to zero;
(6) sixth, to the Certificate Insurer, any I&I Payments then due and
owing except to the extent previously paid pursuant to clause B.(6) below;
S-52
(7) seventh, to the Class AF-1 Certificates, Class AF-2 Certificates,
Class AF-3 Certificates and Class AF-4 Certificates, sequentially in that order,
the related Distributable Excess Spread, until the Class Certificate Balance of
each such class has been reduced to zero;
(8) eighth, to the Class AV-1 Certificates to fund any Class AV-1
Available Funds Shortfall in accordance with the distribution priorities set
forth in clause B below;
(9) ninth, for deposit into the Net WAC Cap Account, the amount equal
to (a) the Net WAC Cap Carryover relating to the Class AF-1 Certificates for
that Distribution Date (the amount so deposited as limited by available funds,
the "Class AF-1 Net WAC Cap Deposit Amount"), plus (b) the amount, if any,
sufficient to increase the aggregate amount on deposit in the Net WAC Cap
Account to $10,000 after giving effect to any payments pursuant to clause C.
below;
(10) tenth, to the holders of the Class X Certificates, the amount
required under the Pooling and Servicing Agreement;
(11) eleventh, to the Trustee any indemnity amounts relating to the
Group I Loans due and owing to the Trustee under the Pooling and Servicing
Agreement; and
(12) twelfth, to the holders of the Class R Certificates, any
remaining amount.
B. On each Distribution Date, the Trustee will distribute the following
amounts from Class AV-1 Distributable Funds (provided that the Trustee may only
use any Insured Amounts for the items listed in clauses (4) and (5) below), to
the extent available, to the parties and in the priorities indicated:
(1) first, to the Certificate Insurer, the Certificate Insurer's
Monthly Premium based on the Class Certificate Balance of the Class AV-1
Certificates;
(2) second, to the Trustee, any amounts then due and owing
representing fees and expenses of the Trustee based upon the aggregate Stated
Principal Balance of the Group II Loans;
(3) third, to the Servicer, an amount equal to the sum of (a) the
Servicing Fee relating to the Group II Loans, except to the extent previously
paid with permitted withdrawals from the Certificate Account, and (b) any other
amounts expended by the Servicer in connection with the Group II Loans and
reimbursable thereto under the Pooling and Servicing Agreement but not
previously reimbursed;
(4) fourth, to the Class AV-1 Certificates, the related Interest
Distribution Amount;
(5) fifth, to the Class AV-1 Certificates, the related Certificate
Formula Principal Amount, until the Class Certificate Balance of the Class AV-1
Certificates has been reduced to zero;
(6) sixth, to the Certificate Insurer, any I&I Payments then due and
owing except to the extent previously paid pursuant to clause A.(6) above;
(7) seventh, to the Class AV-1 Certificates, the related Distributable
Excess Spread, until the Class Certificate Balance of the Class AV-1
Certificates has been reduced to zero;
(8) eighth, to the Class AF and Class A-IO Certificates to fund any
Class AF Available Funds Shortfall in accordance with the distribution
priorities set forth in clause A. above;
(9) ninth, for deposit into the Net WAC Cap Account, the amount equal
to (a) the Net WAC Cap Carryover relating to the Class AV-1 Certificates for
that Distribution Date (the amount so deposited as limited by available funds,
the "Class AV-1 Net WAC Cap Deposit Amount"), plus (b) the amount, if any,
sufficient to increase the aggregate amount on deposit in the Net WAC Cap
Account to $10,000 after giving effect to any payments pursuant to clause D.
below;
S-53
(10) tenth, to the holders of the Class X Certificates, the amount
required under the Pooling and Servicing Agreement;
(11) eleventh, to the Trustee any indemnity amounts relating to the
Group II Loans due and owing to the Trustee under the Pooling and Servicing
Agreement; and
(12) twelfth, to the holders of the Class R Certificates, any
remaining amount.
C. On each Distribution Date, following all distributions and deposits made
pursuant to clauses A. and B. above, the Trustee will distribute an amount equal
to the lesser of (1) the Net WAC Cap Carryover relating to the Class AF-1
Certificates for that Distribution Date, if any, and (2) the Class AF-1 Net WAC
Cap Deposit Amount for that Distribution Date, from the Net WAC Cap Account, to
the holders of the Class AF-1 Certificates.
D. On each Distribution Date, following all distributions and deposits made
pursuant to clauses A., B. and C. above, the Trustee will distribute an amount
equal to the lesser of (1) the Net WAC Cap Carryover relating to the Class AV-1
Certificates for that Distribution Date, if any, and (2) the Class AV-1 Net WAC
Cap Deposit Amount for that Distribution Date, from the Net WAC Cap Account, to
the holders of the Class AV-1 Certificates.
E. On each Distribution Date, following all distributions and deposits made
pursuant to clauses A., B., C. and D. above, the Trustee will withdraw an amount
from the Reserve Fund (to the extent of available funds) and apply it in the
following priority:
(1) first, to reimburse the Certificate Insurer for any payments made
to holders of Class AV-1 Certificates under the Policy;
(2) second, to pay the Interest Distribution Amount payable to the
Class AV-1 Certificates, to the extent not covered by Available
Funds relating to the Class AV-1 Certificates (including payments
from the Net WAC Cap Account);
(3) third, to pay the Certificate Formula Principal Amount payable to
the Class AV-1 Certificates, to the extent not covered by
Available Funds relating to the Class AV-1 Certificates; and
(4) fourth, to the Certificate Insurer, any I&I Payments with respect
to the Class AV-1 Certificates then due and owing.
In addition, if on any Distribution Date, following all other distributions
and deposits required to be made on such Distribution Date, the sum of the
Overcollateralized Amount relating to the Class AV-1 Certificates (after giving
effect to distributions to be made on the Class AV-1 Certificates on that
Distribution Date) and the amount in the Reserve Fund is greater than the
Overcollateralization Target Amount relating to the Class AV-1 Certificates,
such excess will be withdrawn from the Reserve Fund (to the extent of available
funds) and paid as follows:
(1) first, to the Class AV-1 Certificates to pay any remaining Net
WAC Cap Carryover relating to the Class AV-1 Certificates, to the
extent not paid out of the Net WAC Cap Account on such
Distribution Date; and
(2) second, to the holders of the Class X Certificates.
The Trustee will make distributions on the Certificates on the 25th day of
each month, or if that day is not a business day, on the first business day
thereafter, commencing on May 28, 2002 (each, a "Distribution Date"), to the
persons in whose names (a) the Class AF-1 and Class AV-1 Certificates are
registered at the close of business on the business day preceding that
Distribution Date, and (b) the Class AF-2, Class AF-3, Class AF-4 and Class A-IO
Certificates are registered at the close of business on the last business day of
the calendar month immediately preceding that Distribution Date (or, with
respect to the first Distribution Date and each such class, at the close of
business on the Closing Date) (each, a "Record Date").
S-54
Distributions on each Distribution Date will be made by check mailed to the
address of the person entitled thereto as it appears on the applicable
certificate register or, in the case of a certificateholder who holds 100% of a
class of Certificates or who holds Certificates with an aggregate initial
Certificate Balance or Notional Amount of $1,000,000 or more and who has so
notified the Trustee in writing in accordance with the Pooling and Servicing
Agreement, by wire transfer in immediately available funds to the account of
that certificateholder at a bank or other depository institution having
appropriate wire transfer facilities. However, the final distribution in
retirement of the Certificates will be made only upon presentment and surrender
of the Certificates at the Corporate Trust Office of the Trustee.
On any Distribution Date, the amount available for distribution to the
Class AF Certificates and the Class A-IO Certificates generally will equal the
sum of
o Available Funds relating to the Class AF Certificates and the
Class A-IO Certificates, and
o any Insured Amounts for the Class AF Certificates and the Class
A-IO Certificates (collectively, "Class AF Distributable Funds").
On any Distribution Date, the amount available for distribution to the
Class AV-1 Certificates generally will equal the sum of
o Available Funds relating to the Class AV-1 Certificates, and
o any Insured Amounts for the Class AV-1 Certificates
(collectively, "Class AV-1 Distributable Funds" and, together
with Class AF Distributable Funds, "Distributable Funds").
"Available Funds" with respect to any Distribution Date and either the
Class AF Certificates and Class A-IO Certificates or the Class AV-1 Certificates
generally will be equal to the sum of
o all scheduled installments of interest and principal on the Group
I Loans, with respect to the Class AF Certificates and Class A-IO
Certificates, or the Group II Loans, with respect to the Class
AV-1 Certificates (each, an "Applicable Group"), due on the Due
Date in the calendar month preceding the month in which that
Distribution Date occurs and received prior to the related
Determination Date, together with any Advances in respect
thereof;
o all proceeds of any primary mortgage guaranty insurance policies
and any other insurance policies with respect to the Applicable
Group, to the extent those proceeds are not applied to the
restoration of the related mortgaged property or released to the
borrower in accordance with the Servicer's normal servicing
procedures (collectively, "Insurance Proceeds") and all other
cash amounts received and retained in connection with the
liquidation of defaulted Loans in the Applicable Group, by
foreclosure or otherwise (together with Insurance Proceeds,
"Liquidation Proceeds") during the calendar month preceding the
month of that Distribution Date (in each case, net of
unreimbursed expenses incurred in connection with a liquidation
or foreclosure and unreimbursed Advances, if any);
o all partial or full prepayments received on Loans in the
Applicable Group during the calendar month preceding the month of
that Distribution Date (the "Prepayment Period"); and
o amounts received with respect to that Distribution Date as the
Substitution Adjustment Amount or purchase price in respect of a
Deleted Loan in the Applicable Group or a Loan in the Applicable
Group repurchased by a Seller or the Servicer as of that
Distribution Date, reduced by amounts in reimbursement for
Advances previously made and other amounts as to which the
Servicer is entitled to be reimbursed from the Certificate
Account pursuant to the Pooling and Servicing Agreement.
The "Class AF Available Funds Shortfall" with respect to any Distribution
Date will equal the amount, if any, by which Available Funds relating to the
Class AF and Class A-IO Certificates for that Distribution Date is less than the
sum of (1) the aggregate amount required to be distributed pursuant to clauses
A.(1) through A.(6) above and (2) the amount, if any, required to be distributed
on that Distribution Date to satisfy the Overcollateralization
S-55
Target Amount relating to the Class AF Certificates. The "Class AV-1 Available
Funds Shortfall" with respect to any Distribution Date will equal the amount, if
any, by which Available Funds relating to the Class AV-1 Certificates for that
Distribution Date is less than the sum of (1) the aggregate amount required to
be distributed pursuant to clauses B.(1) through B.(6) above and (2) the amount,
if any, required to be distributed on that Distribution Date to satisfy the
Overcollateralization Target Amount relating to the Class AV-1 Certificates.
Interest
The "Pass-Through Rate" for each class of the Offered Certificates (other
than the Class A-IO Certificates) is the lesser of: (i) the rate per annum set
forth or described with respect to such class on the cover page hereof (the
"Formula Rate"), except that with respect to any Distribution Date after the
date on which the Servicer has the option to purchase, in whole, the Loans and
the REO Property, if any, in the Trust Fund at that time, as described under the
caption "--Optional Termination," the Formula Rate of the Class AF-4
Certificates shall increase to 7.039% per annum and the Formula Rate of the
Class AV-1 Certificates shall increase to One-Month LIBOR plus 0.560%, and (ii)
the applicable Net WAC Cap. The "Pass-Through Rate" for the Class A-IO
Certificates is the rate per annum set forth or described with respect to such
class on the cover page hereof. The Pass-Through Rate on the Class A-IO
Certificates is not subject to the Net WAC Cap.
The "Net WAC Cap" with respect to each Distribution Date is a rate equal to
o with respect to the Class AF-2, Class AF-3 and Class AF-4
Certificates, the weighted average Adjusted Net Mortgage Rate of
the Group I Loans as of the first day of the Due Period relating
to that Distribution Date, weighted on the basis of the aggregate
principal balance of the Group I Loans as of the first day of the
related Interest Accrual Period, reduced by a percentage equal to
the product of
o 6.000%, and
o a fraction, the numerator of which is the Notional Amount of
the Class A-IO Certificates for such Distribution Date, and
the denominator of which is the aggregate principal balance
of the Group I Loans before giving effect to any
distributions on such Distribution Date,
all calculated on the basis of a 360-day year made up of twelve
30-day months,
o with respect to the Class AF-1 Certificates, the weighted average
Adjusted Net Mortgage Rate of the Group I Loans as of the first
day of the Due Period relating to that Distribution Date,
weighted on the basis of the aggregate principal balance of the
Group I Loans as of the first day of the related Interest Accrual
Period, reduced by a percentage equal to the product of
o 6.000%, and
o a fraction, the numerator of which is the Notional Amount of
the Class A-IO Certificates for such Distribution Date, and
the denominator of which is the aggregate principal balance
of the Group I Loans before giving effect to any
distributions on such Distribution Date,
all calculated on the basis of a 360-day year and the actual
number of days elapsed in the related Interest Accrual Period,
and
o with respect to the Class AV-1 Certificates, the weighted average
Adjusted Net Mortgage Rate of the Group II Loans as of the first
day of the Due Period relating to that Distribution Date,
weighted on the basis of the aggregate principal balance of the
Group II Loans as of the first day of the related Interest
Accrual Period, calculated on the basis of a 360-day year and the
actual number of days elapsed in the related Interest Accrual
Period.
S-56
On each Distribution Date, to the extent of funds available therefor, the
Offered Certificates will be entitled to receive interest in an amount equal to
the Interest Distribution Amount with respect to the related Interest Accrual
Period. The "Interest Distribution Amount" for each class of the Offered
Certificates will be equal to the sum of:
o the amount of interest accrued at the Pass-Through Rate for that
class on the related Class Certificate Balance or Notional
Amount, less the amount of Net Interest Shortfalls applicable to
that class, as described below, and
o the sum of the amount, if any, by which the amount described in
the preceding bullet on each prior Distribution Date exceeded the
amount actually distributed to that class as interest on that
Distribution Date and not subsequently distributed, together with
interest accrued thereon at the Pass-Through Rate ("Unpaid
Interest Amounts").
The Class AF-1 and Class AV-1 Certificates will also be entitled to receive
any Net WAC Cap Carryover for each Distribution Date from the Net WAC Cap
Account to the extent of the available funds therein. The Class AV-1
Certificates may also be entitled to receive Net WAC Cap Carryover relating to
such class for each Distribution Date from the Reserve Fund as described below
under "--The Reserve Fund and the Yield Maintenance Agreement." The "Net WAC Cap
Carryover" payable to the Class AF-1 and Class AV-1 Certificates with respect to
each Distribution Date is the sum of:
o the excess, if any, of the Interest Distribution Amount for the
relevant class of Certificates for that Distribution Date,
calculated at the Formula Rate, over the actual Interest
Distribution Amount for the relevant class of Certificates for
that Distribution Date, and
o any Net WAC Cap Carryover relating to such class remaining unpaid
from prior Distribution Dates, together with one month of
interest accrued thereon at the Formula Rate.
With respect to each Distribution Date, the "Interest Accrual Period"
o for the Class AF-1 Certificates and Class AV-1 Certificates will be the
period commencing on the Distribution Date in the prior calendar month (or
on the Closing Date with respect to the first Distribution Date) and ending
on the day preceding each Distribution Date, and
o for the Class AF-2, Class AF-3, Class AF-4 and Class A-IO Certificates will
be the calendar month preceding each Distribution Date.
The interest entitlement described above for each class of Offered
Certificates for any Distribution Date will be reduced by the amount of Net
Interest Shortfalls applicable to that class. With respect to any Distribution
Date and any class of the Class AF Certificates or the Class A-IO Certificates,
"Net Interest Shortfalls" is a pro rata portion (based on the amount of interest
to which each such class would have been entitled notwithstanding those Net
Interest Shortfalls) of an amount equal to the sum of:
o the aggregate amount of interest that would otherwise have been
received with respect to each Group I Loan that was the subject
of a Relief Act Reduction during the calendar month preceding the
month of that Distribution Date, and
o any Net Prepayment Interest Shortfalls with respect to the Group
I Loans and that Distribution Date.
With respect to any Distribution Date and the Class AV-1 Certificates, "Net
Interest Shortfalls" is an amount equal to the sum of:
o the aggregate amount of interest that would otherwise have been
received with respect to each Group II Loan that was the subject
of a Relief Act Reduction during the calendar month preceding the
month of that Distribution Date, and
S-57
o any Net Prepayment Interest Shortfalls with respect to the Group
II Loans and that Distribution Date.
A "Relief Act Reduction" is a reduction in the amount of monthly interest
payment on a Loan pursuant to the Soldiers' and Sailors' Civil Relief Act of
1940. See "Legal Aspects of the Loans--Soldiers' and Sailors' Civil Relief Act"
in the prospectus. With respect to any Distribution Date, a "Net Prepayment
Interest Shortfall" is the amount by which the aggregate of Prepayment Interest
Shortfalls with respect to the Applicable Group during the calendar month
preceding the month of that Distribution Date exceeds the aggregate amount
payable on that Distribution Date by the Servicer with respect to that group of
Loans as described under "Servicing of Loans--Adjustment to Servicing Fee in
Connection with Certain Prepaid Loans." A "Prepayment Interest Shortfall" is the
amount by which interest paid by a borrower in connection with a prepayment of
principal on a Loan is less than one month's interest at the related mortgage
rate, net of the Servicing Fee Rate, on the Stated Principal Balance of that
Loan.
Subject to the terms of the Policy, any unpaid Interest Distribution Amount
allocable to the Offered Certificates will be covered under the Policy.
Notwithstanding the foregoing, if payments are not made as required under the
Policy, any interest losses may be allocated to the Offered Certificates. The
Policy does not cover interest losses due to Net Interest Shortfalls or
non-payment of the Net WAC Cap Carryover.
Accrued interest to be distributed on any Distribution Date will be
calculated on the basis of the related Class Certificate Balance or Notional
Amount immediately prior to that Distribution Date. Interest will be calculated
and payable on the basis of:
o with respect to the Class AF-1 Certificates and Class AV-1
Certificates, a 360-day year and the actual number of days
elapsed in the related Interest Accrual Period; and
o with respect to the Class AF-2, Class AF-3, Class AF-4 and Class
A-IO Certificates, a 360-day year divided into twelve 30-day
months.
Any Unpaid Interest Amount will be carried forward and added to the amount
holders of the relevant class of Offered Certificates will be entitled to
receive on the next Distribution Date. Such a shortfall could occur, for
example, if losses realized on the Loans in the Applicable Group were
exceptionally high or were concentrated in a particular month and the
Certificate Insurer defaulted on its obligations under the Policy.
Determination of One-Month LIBOR
On each LIBOR Determination Date, the trustee will determine One-Month
LIBOR for the next Interest Accrual Period for the Class AF-1 Certificates and
Class AV-1 Certificates.
"One-Month LIBOR" means, as of any LIBOR Determination Date, the London
interbank offered rate for one-month United States dollar deposits which appears
in the Dow Jones Telerate Page 3750 as of 11:00 a.m., London time, on that date.
If the rate does not appear on the Dow Jones Telerate Page 3750, the rate for
that day will be determined on the basis of the rates at which deposits in
United States dollars are offered by the Reference Banks at approximately 11:00
a.m. (London time), on that day to prime banks in the London interbank market.
The trustee will request the principal London office of each of the Reference
Banks to provide a quotation of its rate. If at least two quotations are
provided, the rate for that day will be the arithmetic mean of the quotations
(rounded upwards if necessary to the nearest whole multiple of 1/16%). If fewer
than two quotations are provided as requested, the rate for that day will be the
arithmetic mean of the rates quoted by major banks in New York City, selected by
the Trustee in consultation with the Servicer, at approximately 11:00 a.m. (New
York City time) on that day for loans in United States dollars to leading
European banks.
"LIBOR Determination Date" means, with respect to any Interest Accrual
Period for the Class AF-1 Certificates and Class AV-1 Certificates, the second
London business day preceding the commencement of that Interest Accrual Period.
For purposes of determining One-Month LIBOR, a "London business day" is any day
on which dealings in deposits of United States dollars are transacted in the
London interbank market.
S-58
"Reference Banks" means only three major banks that are engaged in
transactions in Eurodollar deposits in the international Eurocurrency market
selected by the Trustee after consultation with the Servicer and the Certificate
Insurer.
Principal
Offered Certificates. On each Distribution Date, the Trustee will
distribute the applicable Certificate Formula Principal Amount as a payment of
principal on each class of the Offered Certificates (other than the Class A-IO
Certificates) to the extent of the amount of funds available for the
distribution of principal on that class.
The "Certificate Formula Principal Amount" for any Distribution Date with
respect to each class of the Class AF Certificates will equal the excess of (a)
the sum of
o the principal portion of each Scheduled Payment due on each Group
I Loan on that Loan's Due Date in the Due Period related to that
Distribution Date,
o the Stated Principal Balance of each Group I Loan that was
repurchased by a Seller or another person pursuant to the Pooling
and Servicing Agreement as of that Distribution Date,
o the Substitution Adjustment Amount in connection with any Deleted
Loan that was formerly a Group I Loan received with respect to
that Distribution Date,
o any Insurance Proceeds or Liquidation Proceeds allocable to
recoveries of principal of Group I Loans that are not yet
Liquidated Loans received during the Due Period relating to that
Distribution Date,
o with respect to each Group I Loan that became a Liquidated Loan
during the calendar month preceding the month of that
Distribution Date, the amount of Liquidation Proceeds allocable
to principal received during the month preceding the month of
that Distribution Date with respect to that Loan,
o all partial and full principal prepayments by borrowers on Group
I Loans received during the related Prepayment Period, and
o the principal portion of any Loan Losses on Group I Loans
incurred during the calendar month preceding the month of that
Distribution Date,
over (b) the excess, if any, of the Overcollateralized Amount relating to the
Class AF Certificates (assuming that the amount described in clause (a) above
was distributed to the Class AF Certificates), over the Overcollateralization
Target Amount relating to the Class AF Certificates for that Distribution Date.
The "Certificate Formula Principal Amount" for any Distribution Date with
respect to the Class AV-1 Certificates will equal the excess of (a) the sum of
o the principal portion of each Scheduled Payment due on each Group
II Loan on that Loan's Due Date in the Due Period related to that
Distribution Date,
o the Stated Principal Balance of each Group II Loan that was
repurchased by a Seller or another person pursuant to the Pooling
and Servicing Agreement as of that Distribution Date,
o the Substitution Adjustment Amount in connection with any Deleted
Loan that was formerly a Group II Loan received with respect to
that Distribution Date,
o any Insurance Proceeds or Liquidation Proceeds allocable to
recoveries of principal of Group II Loans that are not yet
Liquidated Loans received during the Due Period relating to that
Distribution Date,
o with respect to each Group II Loan that became a Liquidated Loan
during the calendar month preceding the month of that
Distribution Date, the amount of Liquidation Proceeds allocable
S-59
to principal received during the month preceding the month of
that Distribution Date with respect to that Loan,
o all partial and full principal prepayments by borrowers on Group
II Loans received during the related Prepayment Period, and
o the principal portion of any Loan Losses on Group II Loans
incurred during the calendar month preceding the month of that
Distribution Date,
over (b) the excess, if any, of the sum of (i) the Overcollateralized Amount
relating to the Class AV-1 Certificates (assuming that the amount described in
clause (a) above was distributed to the Class AV-1 Certificates), plus (ii) the
amount on deposit in the Reserve Fund, over the Overcollateralization Target
Amount relating to the Class AV-1 Certificates for that Distribution Date.
With respect to each Distribution Date, the "Due Period" will be the
calendar month preceding the month of that Distribution Date.
"Liquidated Loan" means, with respect to any Distribution Date, a defaulted
Loan, including any REO Property, which was liquidated in the calendar month
preceding the month of that Distribution Date and as to which the Servicer has
determined, in accordance with the Pooling and Servicing Agreement, that it has
received all amounts it expects to receive in connection with the liquidation of
that Loan, including the final disposition of an REO Property.
"Loan Losses" means the aggregate amount, if any, by which (1) the
outstanding principal balance of each Loan that became a Liquidated Loan during
the calendar month preceding the month of the related Distribution Date (that
principal balance determined immediately before that Loan became a Liquidated
Loan) exceeds (2) the Liquidation Proceeds allocable to principal received
during the calendar month preceding the month of the related Distribution Date
in connection with the liquidation of that Loan which have not theretofore been
used to reduce the Stated Principal Balances of that Loan.
Class A-IO Certificates. The Class A-IO Certificates do not have a
principal balance and are not entitled to any payments of principal.
Residual Certificates. The Class R Certificates will remain outstanding for
so long as the trust fund exists, whether or not they are receiving current
distributions. On each Distribution Date, the holders of the Class R
Certificates will be entitled to receive any remaining Distributable Funds after
payment of the other distributions described in "--Distributions," including the
required deposits into the Net WAC Cap Account and the payment, if any, required
to be made to the holders of the Class X Certificates for that Distribution
Date.
Overcollateralization
The weighted average Adjusted Net Mortgage Rates of the Group I Loans are
generally expected to be higher than the Pass-Through Rates on the Class AF and
Class A-IO Certificates, and the weighted average Adjusted Net Mortgage Rates of
the Group II Loans are generally expected to be higher than the Pass-Through
Rates on the Class AV-1 Certificates. As a result, excess interest collections
with respect to the Group I Loans and Group II Loans will be generated and will
be applied with respect to the Class AF Certificates and Class AV-1
Certificates, respectively, to the extent not used to cover current period
losses with respect to Loans in the Applicable Group, in an amount equal to the
applicable Distributable Excess Spread, initially to principal distributions on
the relevant class or classes of Certificates. This acceleration feature creates
overcollateralization (i.e., the excess of the Group I Principal Balance over
the aggregate Class Certificate Balance of the Class AF Certificates, and the
excess of the Group II Principal Balance over the Class Certificate Balance of
the Class AV-1 Certificates). Once the Overcollateralization Target Amount
relating to either the Class AF Certificates or Class AV-1 Certificates is
reached, and subject to the provisions described in the next paragraph, the
acceleration feature with respect to those classes of Certificates will cease
until necessary to maintain the applicable Overcollateralization Target Amount.
S-60
The Pooling and Servicing Agreement provides that, subject to specified
floors, caps and triggers, the required level of overcollateralization for
either or both loan groups may increase or decrease over time. Any increase
would have the effect of increasing the amortization of the related class or
classes of Offered Certificates, while any decrease would have the effect of
decreasing the amortization of the related class or classes of Offered
Certificates.
The "Distributable Excess Spread" with respect to either the Class AF
Certificates or Class AV-1 Certificates and any Distribution Date is the lesser
of:
o excess interest available from the Applicable Group of Loans, and
o the amount, if any, required to be distributed on that
Distribution Date to satisfy the Overcollateralization Target
Amount relating to the applicable class or classes of
Certificates on that Distribution Date.
The "Overcollateralization Step-up Trigger Event" shall mean, for any
Distribution Date, and with respect to either the Class AF Certificates or Class
AV-1 Certificates, the occurrence of rates of cumulative losses with respect to
the Applicable Group during particular periods of time as specified in the
Pooling and Servicing Agreement.
The "Overcollateralization Target Amount" means,
o with respect to the Class AF Certificates
o on any Distribution Date occurring prior to the Stepdown
Date and as long as no Overcollateralization Step-Up Trigger
Event is in effect with respect to the Class AF
Certificates, an amount equal to the greatest of:
o 3.50% (provided, however, that if an
Overcollateralization Step-Up Trigger Event is in
effect with respect to the Class AF Certificates, the
applicable percentage shall be 5.50%) of the Cut-off
Date Group I Principal Balance,
o 80.00% of the aggregate principal balance of Balloon
Loans in Group I with original terms less than or equal
to 36 months which are 60 or more days contractually
past due (assuming 30 day months) (including Loans in
foreclosure and REO Properties), and
o the aggregate principal balance of the Group I Loans
which are 90 or more days contractually past due
(assuming 30 day months) (including Loans in
foreclosure and REO Properties); and
o on any Distribution Date occurring on or after the Stepdown
Date and as long as no Overcollateralization Step-Up Trigger
Event is in effect with respect to the Class AF
Certificates, an amount equal to the greatest of:
o 7.00% (provided, however, that if an
Overcollateralization Step-Up Trigger Event is in
effect with respect to the Class AF Certificates, the
applicable percentage shall be 11.00%) of the Group I
Principal Balance as of that Distribution Date,
o the sum of the outstanding principal balances of the
three largest Group I Loans as of that date,
o 0.50% of the Cut-off Date Group I Principal Balance,
S-61
o 80.00% of the aggregate principal balance of Balloon
Loans in Group I with original terms less than or equal
to 36 months which are 60 or more days contractually
past due (assuming 30 day months) (including Loans in
foreclosure and REO Properties), and
o the aggregate principal balance of the Group I Loans
which are 90 or more days contractually past due
(assuming 30 day months) (including Loans in
foreclosure and REO Properties), and
o with respect to the Class AV-1 Certificates
o on any Distribution Date occurring prior to the Stepdown
Date and as long as no Overcollateralization Step-Up Trigger
Event is in effect with respect to the Class AV-1
Certificates, an amount equal to the greatest of:
o 7.00% (provided, however, that if an
Overcollateralization Step-Up Trigger Event is in
effect with respect to the Class AV-1 Certificates, the
applicable percentage shall be 9.00%) of the Cut-off
Date Group II Principal Balance,
o 80.00% of the aggregate principal balance of Balloon
Loans in Group II with original terms less than or
equal to 36 months which are 60 or more days
contractually past due (assuming 30 day months)
(including Loans in foreclosure and REO Properties),
and
o the aggregate principal balance of the Group II Loans
which are 90 or more days contractually past due
(assuming 30 day months) (including Loans in
foreclosure and REO Properties); and
o on any Distribution Date occurring on or after the Stepdown
Date and as long as no Overcollateralization Step-Up Trigger
Event is in effect with respect to the Class AV-1
Certificates, an amount equal to the greatest of:
o 14.00% (provided, however, that if an
Overcollateralization Step-Up Trigger Event is in
effect with respect to the Class AV-1 Certificates, the
applicable percentage shall be 18.00%) of the Group II
Principal Balance as of that Distribution Date,
o the sum of the outstanding principal balances of the
three largest Group II Loans as of that date,
o 0.50% of the Cut-off Date Group II Principal Balance,
o 80.00% of the aggregate principal balance of Balloon
Loans in Group II with original terms less than or
equal to 36 months which are 60 or more days
contractually past due (assuming 30 day months)
(including Loans in foreclosure and REO Properties),
and
o the aggregate principal balance of the Group II Loans
which are 90 or more days contractually past due
(assuming 30 day months) (including Loans in
foreclosure and REO Properties).
S-62
The "Overcollateralized Amount" for any Distribution Date is
o with respect to the Class AF Certificates, the amount, if any, by
which
o the Group I Principal Balance on the last day of the
immediately preceding Due Period, exceeds
o the aggregate Class Certificate Balance of the Class AF
Certificates as of that Distribution Date after giving
effect to distributions to be made on the Class AF
Certificates on that Distribution Date, and
o with respect to the Class AV-1 Certificates, the amount, if any,
by which
o the Group II Principal Balance on the last day of the
immediately preceding Due Period, exceeds
o the Class Certificate Balance of the Class AV-1 Certificates
as of that Distribution Date after giving effect to
distributions to be made on the Class AV-1 Certificates on
that Distribution Date.
The "Stepdown Date" means
o with respect to the Class AF Certificates, the later to occur of
o the Distribution Date in November 2004 (the 31st
Distribution Date), and
o the date upon which the Group I Principal Balance has been
reduced to 50% of the Cut-off Date Group I Principal
Balance, and
o with respect to the Class AV-1 Certificates, the later to occur
of
o the Distribution Date in November 2004 (the 31st
Distribution Date), and
o the date upon which the Group II Principal Balance has been
reduced to 50% of the of the Cut-off Date Group II Principal
Balance.
Cross-Collateralization Provisions
The Pooling and Servicing Agreement provides for cross-collateralization
through the application of excess amounts generated by one group of Loans to
fund shortfalls in Available Funds for the other group of Loans, subject to
certain prior requirements of that group of Loans. Therefore, as to any
Distribution Date, the amount, if any, of the Class AF Distributable Funds
remaining after payment of all then applicable prior requirements relating to
the Class AF and Class A-IO Certificates will be used to fund any Class AV-1
Available Funds Shortfall for such Distribution Date. Likewise, as to any
Distribution Date, the amount, if any, of the Class AV-1 Distributable Funds
remaining after payment of all then applicable prior requirements relating to
the Class AV-1 Certificates will be used to fund any Class AF Available Funds
Shortfall for such Distribution Date. The payment of any amounts in respect of
cross-collateralization will be applied in the order specified above under
"--Distributions."
Net WAC Cap Account
The Pooling and Servicing Agreement provides for a reserve fund (the "Net
WAC Cap Account") which will be established with an initial deposit of $10,000
on the Closing Date and held by the Trustee for the benefit of the holders of
the Class AF-1 and Class AV-1 Certificates. To the extent of amounts on deposit
therein, on each Distribution Date holders of the Class AF-1 and Class AV-1
Certificates will be entitled to receive payments from
S-63
the Net WAC Cap Account equal to any Net WAC Cap Carryover applicable to those
classes. The amount required to be deposited in the Net WAC Cap Account on each
Distribution Date will equal any Net WAC Cap Carryover relating to the Class
AF-1 and Class AV-1 Certificates for that Distribution Date plus the amount, if
any, sufficient to increase the amount on deposit in the Net WAC Cap Account
(after giving effect to any payments to be made to the holders of the Class AF-1
and Class AV-1 Certificates from that account on that date) to $10,000, to the
extent of funds available therefor. Any investment earnings on amounts on
deposit in the Net WAC Cap Account will be paid to (and for the benefit of) the
holders of the Class X Certificates and will not be available to pay any Net WAC
Cap Carryover. The Net WAC Cap Account will not be included as an asset of any
REMIC.
The Reserve Fund and the Yield Maintenance Agreement
On the Closing Date, the Trustee will establish a reserve fund account (the
"Reserve Fund") to cover certain payments on the Class AV-1 Certificates. The
Reserve Fund will be an asset of the trust fund but not of any REMIC. Amounts on
deposit in the Reserve Fund will be invested in Permitted Investments. In
addition, on the Closing Date, a yield maintenance agreement (the "Yield
Maintenance Agreement") will be entered into by Wachovia Bank, National
Association, a national banking association, and the Trustee, as trustee for the
benefit of the Certificate Insurer and the holders of Class AV-1 Certificates.
Pursuant to the Yield Maintenance Agreement, on each Distribution Date, an
amount will be deposited in the Reserve Fund equal to the Reserve Fund Addition
(as defined below).
On each Distribution Date, to the extent required, the Trustee will
withdraw from available funds in the Reserve Fund an amount sufficient to cover
the following items, in the following order of priority:
o first, to reimburse the Certificate Insurer for any payments made
to holders of Class AV-1 Certificates under the Policy;
o second, to pay the Interest Distribution Amount payable to the
Class AV-1 Certificates, to the extent not covered by Available
Funds (including payments from the Net WAC Cap Account);
o third, to pay the Certificate Formula Principal Amount payable to
the Class AV-1 Certificates, to the extent not covered by
Available Funds; and
o fourth, to the Certificate Insurer, any I&I Payments with respect
to the Class AV-1 Certificates then due and owing.
In addition, if on any Distribution Date, following all other distributions
and deposits required to be made on such Distribution Date, the sum of the
Overcollateralized Amount relating to the Class AV-1 Certificates (after giving
effect to distributions to be made on the Class AV-1 Certificates on that
Distribution Date) and the amount in the Reserve Fund is greater than the Class
AV-1 Overcollateralization Target Amount, such excess will be withdrawn from the
Reserve Fund (to the extent of available funds) and paid as follows:
o first, to the Class AV-1 Certificates to pay any remaining Net
WAC Cap Carryover relating to the Class AV-1 Certificates, to the
extent not paid out of the Net WAC Cap Account on such
Distribution Date; and
o second, to the holders of the Class X Certificates.
With respect to any Distribution Date, the "Reserve Fund Addition" will
equal a monthly payment calculated at a per annum rate equal to the excess of
(1) One-Month LIBOR (determined as described above under "--Determination of
One-Month LIBOR"), over (2) the Strike Price, on an amount equal to the
Projected Principal Balance for that Distribution Date. The "Strike Price" will
equal One-Month LIBOR (as agreed upon by both counterparties) plus 0.50%. The
"Projected Principal Balance" will be determined pursuant to the schedule
attached to this prospectus supplement as Annex II.
S-64
The Projected Principal Balances set forth in Annex II to this prospectus
supplement are based on a prepayment assumption with respect to the Group II
Loans. There can be no assurance that the Group II Loans will pay at this rate
or at any other rate. See "Yield, Prepayment and Maturity Considerations"
herein.
The Yield Maintenance Agreement Counterparty
The counterparty to the Yield Maintenance Agreement will be Wachovia Bank,
National Association, a national banking association (the "Bank"), a subsidiary
of Wachovia Corporation, whose principal office is located in Charlotte, North
Carolina. Wachovia Corporation had approximately $330.5 billion in total assets
as of December 31, 2001.
The Bank is a national banking association with its principal office in
Charlotte, North Carolina and is subject to examination and primary regulation
by the Office of the Comptroller of the Currency of the United States. The Bank
is a commercial bank offering a wide range of banking, trust and other services
to its customers. As of December 31, 2001, the Bank had total assets of
approximately $232.8 billion, total net loans and leases of approximately $114.2
billion, total deposits of approximately $147.7 billion and total equity capital
of approximately $16.1 billion.
The Bank submits quarterly to the Federal Deposit Insurance Corporation
(the "FDIC") certain reports called "Consolidated Reports of Condition and
Income for a Bank With Domestic and Foreign Offices" (each, a "Call Report", and
collectively, the "Call Reports"). The publicly available portions of the Call
Reports with respect to the Bank are on file with the FDIC, and copies of such
portions of the Call Reports may be obtained from the FDIC, Disclosure Group,
Room F518, 550 17th Street, N.W., Washington, D.C. 20429, at prescribed rates.
In 1989, the United States Congress passed comprehensive financial
institutions legislation known as the Financial Institutions Reform, Recovery
and Enforcement Act ("FIRREA"). Pursuant to the provisions of FIRREA, an
FDIC-insured financial institution sharing common ownership with a failed
institution can be required to indemnify the FDIC for its losses resulting from
the insolvency of the failed institution, even if such indemnification causes
the affiliated institution also to become insolvent. As a result, the Bank, may
under certain circumstances, be obligated for the liabilities of the banking
subsidiaries of Wachovia Corporation.
NO BANKING OR OTHER AFFILIATE CONTROLLED BY WACHOVIA CORPORATION, EXCEPT
THE BANK, IS OBLIGATED TO MAKE PAYMENTS UNDER THE YIELD MAINTENANCE AGREEMENT.
The information contained in this section relates to and has been obtained
from the Bank and is furnished solely to provide limited introductory
information regarding the Bank and does not purport to be comprehensive.
Information regarding the Bank is qualified in its entirety by the detailed
information appearing in the documents and financial statements referenced
above.
The delivery hereof shall not create any implication that there has been no
change in the affairs of the Bank since the date hereof, or that the information
contained in this section is correct as of any time subsequent to its date.
Certificate Guaranty Insurance Policy
The following summary of the terms of the Certificate Guaranty Insurance
Policy to be issued by the Certificate Insurer (the "Policy") does not purport
to be complete and is qualified in its entirety by reference to the Policy. You
may obtain a form of the Policy, upon request, from the Depositor.
Simultaneously with the issuance of the Offered Certificates, the
Certificate Insurer will deliver the Policy to the Trustee for the benefit of
the holders of the Offered Certificates. Under the Policy, the Certificate
Insurer will irrevocably and unconditionally guarantee payment on each
Distribution Date to the Trustee for the benefit of the holders of the Offered
Certificates the full and complete payment of Insured Amounts with respect to
the Offered Certificates, calculated in accordance with the original terms of
the Offered Certificates when issued and without regard to any amendment or
modification of the Offered Certificates or the Pooling and Servicing Agreement
except amendments or modifications to which the Certificate Insurer has given
its prior written consent.
S-65
The "Insured Amount" for any Distribution Date shall equal any shortfall in
amounts available in the Distribution Account and the Reserve Fund to pay
o the applicable Interest Distribution Amounts for the related
Interest Accrual Period, plus
o the Guaranteed Principal Distribution Amount, plus
o without duplication of the amount specified in the immediately
preceding bullet, the aggregate Class Certificate Balance of the
Offered Certificates to the extent unpaid on the Last Scheduled
Distribution Date or earlier termination of the trust fund
pursuant to the terms of the Pooling and Servicing Agreement.
The "Guaranteed Principal Distribution Amount" for any Distribution Date
shall equal the sum of
o the amount, if any, by which the aggregate Class Certificate
Balance of the Class AF Certificates exceeds the Group I
Principal Balance as of that Distribution Date, plus
o the amount, if any, by which the Class Certificate Balance of the
Class AV-1 Certificates exceeds the Group II Principal Balance as
of that Distribution Date.
An Insured Amount with respect to any Distribution Date will also include
any Preference Amount which occurs prior to the related Determination Date. A
"Preference Amount" means any amount previously distributed to a
certificateholder that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the Bankruptcy Code in
accordance with a final nonappealable order of a court having competent
jurisdiction. The Policy does not cover any Net Interest Shortfalls or any Net
WAC Cap Carryover.
The Certificate Insurer will pay claims under the Policy following Receipt
by the Certificate Insurer of the appropriate notice for payment on the later to
occur of:
o 12:00 noon, New York City time, on the Business Day following
Receipt of the notice for payment, and
o 12:00 noon, New York City time, on the relevant Distribution
Date.
The terms "Receipt" and "Received," with respect to the Policy, mean actual
delivery to the Certificate Insurer prior to 12:00 p.m., New York City time, on
a Business Day; delivery either on a day that is not a Business Day or after
12:00 p.m., New York City time, shall be deemed to be Received on the next
succeeding Business Day. If any notice given under the Policy by the Trustee is
not in proper form or is not properly completed, executed or delivered, it shall
be deemed not to have been Received, and the Certificate Insurer shall promptly
so advise the Trustee and the Trustee may submit an amended or corrected notice.
Under the Policy, "Business Day" means any day other than
o a Saturday or Sunday, or
o a day on which banking institutions in the City of New York, New
York, the State of New York or in the city in which the corporate
trust office of the Trustee or the Certificate Insurer is
located, are authorized or obligated by law or executive order to
be closed.
The Certificate Insurer's obligations under the Policy to pay Insured Amounts
will be deemed to be discharged to the extent funds are transferred to the
Trustee as provided in the Policy, whether or not those funds are properly
applied by the Trustee.
The Certificate Insurer will be subrogated to the rights of the holders of
the Offered Certificates to receive payments of principal and interest, as
applicable, with respect to distributions on the Offered Certificates to the
extent of any payment by the Certificate Insurer under the Policy. To the extent
the Certificate Insurer pays Insured
S-66
Amounts, either directly or indirectly, as by paying through the Trustee, to the
holders of the Offered Certificates, the Certificate Insurer will be subrogated
to the rights of the holders of the Offered Certificates, as applicable, with
respect to those Insured Amounts and shall be deemed to the extent of the
payments so made to be a registered holder of Offered Certificates for purposes
of payment.
Claims under the Policy are direct unsecured and unsubordinated obligations
of the Certificate Insurer, and will rank equally with any other unsecured and
unsubordinated obligations of the Certificate Insurer. The terms of the Policy
cannot be modified, altered or affected by any other agreement or instrument, or
by the merger, consolidation or dissolution of the Depositor. The Policy by its
terms may not be canceled or revoked prior to distribution in full of all
Insured Amounts payable under the Policy. The Policy is governed by the laws of
the State of New York.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
To the fullest extent permitted by applicable law, the Certificate Insurer
agrees under the Policy not to assert, and waives, for the benefit of each
holder of Offered Certificates, all its rights whether acquired by subrogation,
assignment or otherwise, to the extent that those rights and defenses may be
available to the Certificate Insurer to avoid payment of its obligations under
the Policy in accordance with the express provisions of the Policy.
Rights and Obligations of the Certificate Insurer under the Pooling and
Servicing Agreement
Pursuant to the terms of the Pooling and Servicing Agreement, unless an
Certificate Insurer Default exists, the Certificate Insurer will be entitled to
exercise the rights of the holders of the Offered Certificates, without the
consent of those certificateholders, and the holders of the Offered Certificates
may exercise those rights only with the prior written consent of the Certificate
Insurer. Either a continuance of any failure by the Certificate Insurer to make
a required payment under the Policy or the existence of a proceeding in
bankruptcy by or against the Certificate Insurer will constitute an "Certificate
Insurer Default." See "--Voting Rights."
The Pooling and Servicing Agreement requires, on each Distribution Date,
the Trustee, on behalf of the Depositor, to pay to the Certificate Insurer a
premium with respect to the Policy (the "Certificate Insurer's Monthly Premium")
out of Distributable Funds. In addition, under the Insurance and Indemnity
Agreement to be executed by the Depositor, Equity One (as both a Seller and
Servicer), the Certificate Insurer and the Trustee, the Certificate Insurer is
entitled to receive payments out of Distributable Funds pursuant to the priority
of payments set forth under "--Priority of Distributions Among Certificates"
(or, in some instances, directly from the Depositor or Equity One) in
reimbursement for any Insured Amounts, together with interest thereon if not
repaid immediately, paid by the Certificate Insurer under the Policy as well as
some of the expenses of the Certificate Insurer and its counsel, and in
satisfaction of any indemnification obligations owed to the Certificate Insurer
(collectively, any "I&I Payments").
Optional Purchase of Defaulted Loans
The Servicer may, at its option, purchase from the trust fund any Loan that
is contractually past due (assuming 30 day months) in payment by 91 days or
more. Any purchase shall be at a price equal to 100% of the Stated Principal
Balance of the Loan plus accrued interest thereon at the applicable mortgage
rate, less the Servicing Fee Rate, from the date through which interest was last
paid by the related borrower or advanced, and not reimbursed, to the first day
of the month in which that amount is to be distributed.
Optional Termination
On any Distribution Date on which the Pool Principal Balance is less than
10% of the Cut-off Date Pool Principal Balance (an "Optional Termination Date"),
the Servicer will have the option to purchase, in whole, the Loans and the REO
Property, if any, remaining in the trust fund and, thereby, effect early
retirement of the Certificates. In the event the Servicer exercises this option,
the purchase price distributed with respect to the Offered Certificates will be
S-67
o with respect to the Class AF and Class AV-1 Certificates, 100% of
their then outstanding principal balance, and
o with respect to the Offered Certificates, the sum of:
o any accrued and unpaid interest on the applicable class of
Certificates at the applicable Pass-Through Rate (including
any Unpaid Interest Amounts) through the Distribution Date
on which the Servicer effects early retirement of the
Certificates, and
o any accrued and unpaid Net WAC Cap Carryover payable to that
class of Certificates as of that Distribution Date.
Distributions on the Certificates in respect of any optional termination will be
paid to the Certificates as described in "--Principal" and "--Interest."
The Trustee
JPMorgan Chase Bank will be the Trustee under the Pooling and Servicing
Agreement. The Depositor, the Servicer and the Sellers may maintain other
banking relationships in the ordinary course of business with JPMorgan Chase
Bank. Offered Certificates may be surrendered at the corporate trust office of
the Trustee located at 450 West 33rd Street, 14th Floor, New York, New York
10001, Attention: Institutional Trust Services, or at any other addresses that
the Trustee may designate from time to time.
Voting Rights
With respect to any date of determination, the Class AF and Class AV-1
Certificates shall be allocated 99% of all "Voting Rights" and the Class A-IO
Certificates shall be allocated 1% of all Voting Rights. The Voting Rights
allocated to each class of the Class AF Certificates and the Class AV-1
Certificates shall be the fraction, expressed as a percentage, the numerator of
which is the Class Certificate Balance of that class then outstanding and the
denominator of which is the aggregate Stated Principal Balance of the Loans then
outstanding. The Voting Rights allocated to each class of Certificates shall be
allocated among all holders of the class in proportion to the outstanding
principal balance or notional amount of those Certificates. Unless a Certificate
Insurer Default exists, the Certificate Insurer will be entitled to exercise the
rights of the holders of the Offered Certificates. The Class X Certificates and
the Class R Certificates will not have any Voting Rights.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
General
The effective yield to the holders of the Offered Certificates will be
lower than the yield otherwise produced by the applicable rate at which interest
is passed through to those holders and the purchase price of those Certificates
because monthly distributions will not be payable to those holders until the
25th day, or, if that day is not a business day, the following business day, of
the month following the month in which interest accrues on the Loans, without
any additional distribution of interest or earnings thereon in respect of that
delay.
Delinquencies on the Loans that are not advanced by or on behalf of the
Servicer, because those advances would be nonrecoverable, may adversely affect
the yield on the Offered Certificates. If the Certificate Insurer fails to make
payments required under the Policy, shortfalls resulting from delinquencies not
so advanced may be borne by the Offered Certificates. In addition, Net Interest
Shortfalls are not covered by the Policy and, therefore, will adversely affect
the yields on the Offered Certificates.
Prepayment Considerations and Risks
The rate of principal payments and the aggregate amount of distributions
on, and the yield to maturity of, the Offered Certificates will be related to
the rate and timing of payments of principal on the Loans in Group I with
S-68
respect to the Class AF Certificates and the Loans in Group II with respect to
the Class AV-1 Certificates. The rate of principal payments on the Loans will in
turn be affected by the amortization schedules of the Loans and by the rate of
principal prepayments, including for this purpose prepayments resulting from
refinancing, liquidations of the Loans due to defaults, casualties,
condemnations and repurchases by a Seller or the Servicer. The Loans may be
prepaid by the borrowers at any time, many without a prepayment penalty. The
Loans are subject to the due-on-sale provisions included therein. In addition,
the Servicer and its affiliates periodically conduct telemarketing and mass
mailings to their existing customers with respect to the refinancing of existing
mortgage loans. Although these marketing efforts are not specifically directed
to customers who have mortgage loans included in a trust fund, these customers
may receive the marketing materials as part of a broader mailing, which may
result in an increase in the rate of prepayments of mortgage loans included in a
trust fund through refinancings. See "The Mortgage Pool."
Prepayments, liquidations and purchases of the Loans, including any
optional purchase by the Servicer of a defaulted Loan and any optional
repurchase of the remaining Loans in connection with the termination of the
trust fund, in each case as described under "Description of the
Certificates--Optional Purchase of Defaulted Loans" and "--Optional
Termination," will result in distributions on the Offered Certificates of
principal amounts that would otherwise be distributed over the remaining terms
of the Loans. Since the rate of payment of principal of the Loans will depend on
future events and a variety of factors, no assurance can be given as to that
rate or the rate of principal prepayments. The extent to which the yield to
maturity of a class of Offered Certificates may vary from the anticipated yield
will depend upon the degree to which that Offered Certificate is purchased at a
discount or premium, and the degree to which the timing of payments thereon is
sensitive to prepayments, liquidations and purchases of the Loans in the
Applicable Group. Further, you should consider the risk that, in the case of an
Offered Certificate purchased at a discount, a slower than anticipated rate of
principal payments, including prepayments, on Loans in the Applicable Group
could result in you receiving an actual yield that is lower than your
anticipated yield. In the case of an Offered Certificate purchased at a premium,
a faster than anticipated rate of principal payments could result in you
receiving an actual yield that is lower than your anticipated yield.
The rate of principal payments, including prepayments, on pools of mortgage
loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including changes in borrowers'
housing needs, job transfers, unemployment, borrowers' net equity in the
mortgaged properties and servicing decisions. In general, if prevailing interest
rates were to fall significantly below the mortgage rates on the Loans, the
Loans could be subject to higher prepayment rates than if prevailing interest
rates were to remain at or above the mortgage rates on the Loans. Conversely, if
prevailing interest rates were to rise significantly, the rate of prepayments on
the Loans would generally be expected to decrease. No assurances can be given as
to the rate of prepayments on the Loans in stable or changing interest rate
environments.
The timing of changes in the rate of prepayments on Loans in the Applicable
Group may significantly affect your actual yield to maturity, even if the
average rate of principal payments is consistent with your expectation. In
general, the earlier a prepayment of principal on the Loans in the Applicable
Group occurs, the greater the effect on your yield to maturity. The effect on
your yield as a result of principal payments occurring at a rate higher or lower
than the rate that you anticipated during the period immediately following the
issuance of the Offered Certificates may not be offset by a subsequent like
decrease or increase in the rate of principal payments.
The Pass-Through Rates
The Pass-Through Rate for each class of Offered Certificates, other than
the Class A-IO Certificates, is subject to an applicable Net WAC Cap. If Loans
in the Applicable Group bearing higher mortgage rates were to prepay at rates
faster than Loans in the Applicable Group with lower mortgage rates, the Net WAC
Cap relating to your class of Certificates would be lower than otherwise would
be the case. Although the holders of Class AF-1 and Class AV-1 Certificates will
be entitled to receive the related Net WAC Cap Carryover to the extent funds are
available for that purpose as described and in the priority set forth in this
prospectus supplement, there is no assurance that sufficient funds will be
available. The Policy does not cover, and the ratings of the Offered
Certificates do not address the likelihood of, the payment of any Net WAC Cap
Carryover.
The yield to investors in the Class AF-1 Certificates and Class AV-1
Certificates will be sensitive to, among other things, the level of One-Month
LIBOR and the level of the index rate applicable to the Group II Loans. All of
the Group II Loans are 2/28 or 3/27 Loans, which will bear interest at fixed
mortgage rates for 24 months and
S-69
36 months, respectively, after origination of the Group II Loans. Although each
of the Group II Loans bears interest at an adjustable rate, this rate is subject
to a minimum rate, a maximum rate and a periodic rate cap. If Six-Month LIBOR,
the index rate for the Group II Loans, increases substantially between
Adjustment Dates, the adjusted mortgage rate on the related Group II Loan may
not equal Six-Month LIBOR plus the related gross margin due to the constraint of
the caps. In this event, the related mortgage rate will be less than would have
been the case in the absence of the caps. In addition, the mortgage rate
applicable to any Adjustment Date will be based on Six-Month LIBOR as of the
Adjustment Date. Thus, if the value of Six-Month LIBOR with respect to a Group
II Loan rises, the lag in time before the corresponding mortgage rate increases
will, all other things being equal, slow the upward adjustment of the Net WAC
Cap. Furthermore, Group II Loans that have not reached their first Adjustment
Date are more likely to be subject to the applicable periodic rate cap on their
first Adjustment Date. See "The Mortgage Pool" in this prospectus supplement.
Although the holders of Class AF-1 and Class AV-1 Certificates will be entitled
to receive the related Net WAC Cap Carryover to the extent funds are available
for that purpose as described and in the priority set forth in this prospectus
supplement, there is no assurance that sufficient funds will be available. The
Policy does not cover, and the ratings on the Offered Certificates do not
address the likelihood of, payment of any Net WAC Cap Carryover.
Although the mortgage rates on the Group II Loans are subject to
adjustment, the mortgage rates adjust less frequently than One-Month LIBOR and
adjust by reference to Six-Month LIBOR. Changes in One-Month LIBOR may not
correlate with changes in Six-Month LIBOR and either may not correlate with
prevailing interest rates. It is possible that an increased level of One-Month
LIBOR could occur simultaneously with a lower level of prevailing interest
rates, which would be expected to result in faster prepayments, thus reducing
the weighted average life of the Class AV-1 Certificates.
Yield Sensitivity of the Class A-IO Certificates
As the owner of interest-only strip securities, the holders of the Class
A-IO Certificates will be entitled to receive monthly distributions only of
interest, as described in this prospectus supplement. Because they will not
receive any distributions of principal, the holders of the Class A-IO
Certificates will generally be affected by prepayments, liquidations and other
dispositions, including optional purchases described in this prospectus
supplement, of the Loans to a greater degree than holders of the Class AF or
Class AV-1 Certificates. However, except in the case of very rapid prepayment
rates, the Notional Amount will not decline. Thus, the yield sensitivity of the
Class A-IO Certificates is likely to be more stable than if the Notional Amount
were calculated based on the amortization of the underlying Loans directly.
However, there can be no assurance that this will be the case. Holders of the
Class A-IO Certificates will not be entitled to any distributions after the
Distribution Date in April 2004.
Weighted Average Lives of the Offered Certificates
The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of the net reduction, if any, of the Class Certificate
Balance of that Certificate on each Distribution Date by the number of years
from the date of issuance to that Distribution Date, (2) summing the results and
(3) dividing the sum by the aggregate amount of the net reductions in Class
Certificate Balance of that Certificate referred to in clause (1).
For a discussion of the factors that may influence the rate of payments,
including prepayments, of the Loans, see "--Prepayment Considerations and Risks"
herein and "Prepayment and Yield Considerations" in the prospectus.
In general, the weighted average lives of the Offered Certificates will be
shortened if the level of prepayments of principal of the Applicable Group of
Loans increases. However, the weighted average lives of the Offered Certificates
will depend upon a variety of other factors, including, without limitation, the
timing of changes in the rate of principal payments, changes in the interest
rate environment and delays in realizing on REO Properties.
The interaction of the foregoing factors may have different effects on the
Offered Certificates at different times during the life of each class.
Accordingly, no assurance can be given as to the weighted average life of each
class of Offered Certificates. Further, to the extent the price of any class of
Offered Certificates represents a discount or premium to its original Class
Certificate Balance, variability in the weighted average life of that class of
S-70
Certificates will result in variability in its yield to maturity. For an example
of how the weighted average life of the Offered Certificates may be affected at
various constant percentages of Prepayment Assumption, see "--Decrement Tables"
below.
Structuring Assumptions
Unless otherwise specified, the information in the tables in this
prospectus supplement has been prepared on the basis of the following assumed
characteristics of the Loans and the following additional assumptions
(collectively, the "Structuring Assumptions"):
o the Group I Loans consist of 6 loans with initial payments
commencing during the first Interest Accrual Period with the
following characteristics:
GROUP I LOANS
Original Term Original Amortization Remaining Term
Principal Balance Mortgage Rate to Maturity (months) Term (months) to Maturity (months)
- ----------------- ------------- -------------------- ------------- --------------------
$1,163,800.93 9.787% 120 120 117
19,262,949.30 9.395 180 180 177
12,865,846.91 8.760 240 240 237
183,937.40 8.250 300 300 297
66,760,990.78 8.562 360 360 357
89,745,351.98 8.925 171 352 168
o the Group II Loans consist of 8 loans with initial payments
commencing during the first Interest Accrual period with the
characteristics set forth on page S-72.
S-71
GROUP II LOANS
Remaining Months to
Original Original Term to Next
Mortgage Term to Amortization Maturity Gross Adjustment Initial
Principal Balance Rate Maturity Term (month) (months) Margin Date Rate Cap
- ----------------- ---- -------- ------------ -------- ------ ---- --------
$124,175.07 7.990% 180 180 178 6.990% 22 2.000%
115,000.00 8.990 240 240 240 6.990 24 2.000
39,327,419.18 9.018 360 360 357 7.745 21 2.000
262,801.92 7.500 360 360 358 6.875 22 2.000
54,522,460.65 8.371 360 360 358 5.533 22 3.000
2,365,775.65 9.066 360 360 357 7.193 32 2.000
80,661.27 8.990 360 360 358 8.000 34 2.000
772,413.02 8.895 360 360 354 6.740 26 3.000
Mortgage
Maximum Minimum Rate
Periodic Mortgage Mortgage Adjustment
Principal Balance Rate Cap Rate Rate Index Frequency
- ----------------- -------- ---- ---- ----- ---------
$124,175.07 1.000% 14.990% 7.990% 6-Month LIBOR 6 months
115,000.00 1.000 15.990 8.990 6-Month LIBOR 6 months
39,327,419.18 1.000 15.686 8.987 6-Month LIBOR 6 months
262,801.92 2.000 13.500 7.500 6-Month LIBOR 6 months
54,522,460.65 1.500 14.405 8.370 6-Month LIBOR 6 months
2,365,775.65 1.000 15.881 9.066 6-Month LIBOR 6 months
80,661.27 2.000 14.990 8.990 6-Month LIBOR 6 months
772,413.02 1.500 15.710 8.895 6-Month LIBOR 6 months
S-72
o One-Month LIBOR and Six-Month LIBOR remain constant at 1.86% and
2.16%, respectively,
o The Servicing Fee Rate is 0.50% per annum and the Trustee's fee
is 0.02% per annum,
o the Loans prepay at the specified constant percentages of the
Prepayment Assumption,
o no Loan is ever delinquent and no Loan ever defaults,
o there are no Net Interest Shortfalls and all prepayments are
prepays in full and include 30 days interest thereon,
o the initial Class Certificate Balance of each class of Offered
Certificates is as set forth on the cover page hereof,
o interest accrues on the Offered Certificates at the Pass-Through
Rate set forth on the cover page hereof and as described under
"Description of the Certificates--Interest,"
o distributions in respect of the Offered Certificates are received
in cash on the 25th day of each month commencing in the calendar
month following the Closing Date,
o the Closing Date of the sale of the Offered Certificates is the
date set forth under "Summary of Terms--Closing Date," and
o only where indicated, the Servicer exercises the option to
repurchase the Loans described herein under "Description of the
Certificates--Optional Termination" at the earliest possible
date.
While it is assumed that each of the Loans prepays at the specified constant
percentages of the Prepayment Assumption, this is not likely to be the case.
Moreover, discrepancies may exist between the characteristics of the actual
Loans which will be delivered to the Trustee and characteristics of the Loans
used in preparing the tables herein.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The model used in this prospectus supplement for
the Group I Loans is the Standard Prepayment Assumption ("SPA") and for the
Group II Loans is a constant prepayment rate ("CPR" and together with SPA, the
"Prepayment Assumption"), which represents an assumed rate of prepayment each
month of the then outstanding principal balance of a pool of new mortgage loans.
The Prepayment Assumption does not purport to be either a historical description
of the prepayment experience of any pool of mortgage loans or a prediction of
the anticipated rate of prepayment of any pool of mortgage loans, including the
Loans. 100% of the Prepayment Assumption with respect to the Group I Loans
assumes prepayment rates of 4.00% per annum of the then unpaid principal balance
of the Group I Loans in the first month of the life of the Group I Loans and an
additional 1.727% (precisely 19/11%) per annum in each month thereafter (for
example, 5.727% per annum in the second month) until the 12th month. Beginning
in the 12th month and in each month thereafter during the life of the Group I
Loans, 100% of the Prepayment Assumption assumes a constant prepayment rate of
23.000% per annum. 100% of the Prepayment Assumption assumes a constant
prepayment rate of 28.000% per annum for the Group II Loans. 0% of the
Prepayment Assumption assumes no prepayments. There is no assurance that
prepayments will occur at any rate of the Prepayment Assumption or at any other
rate.
Decrement Tables
The following tables indicate the percentages of the initial Class
Certificate Balances of the Offered Certificates that would be outstanding after
each of the dates shown at various constant percentages of the Prepayment
Assumption and the corresponding weighted average lives of the Offered
Certificates. The tables have been prepared on the basis of the Structuring
Assumptions. It is not likely that the Loans will have the precise
characteristics described herein or that all of the Loans will prepay at a
constant percentage of the Prepayment Assumption. Moreover, the diverse
remaining terms to maturity of the Loans could produce slower or faster
principal distributions than indicated in the tables, which have been prepared
using the specified constant
S-73
percentages of the Prepayment Assumption, even if the remaining term to maturity
of the Loans is consistent with the remaining term to maturity of the Loans
specified in the Structuring Assumptions.
Class AF-1 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- ------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
4/25/2003 90 72 63 53 44 35
4/25/2004 88 47 29 11 0 0
4/25/2005 85 26 2 0 0 0
4/25/2006 82 8 0 0 0 0
4/25/2007 78 0 0 0 0 0
4/25/2008 74 0 0 0 0 0
4/25/2009 70 0 0 0 0 0
4/25/2010 66 0 0 0 0 0
4/25/2011 61 0 0 0 0 0
4/25/2012 56 0 0 0 0 0
4/25/2013 50 0 0 0 0 0
4/25/2014 44 0 0 0 0 0
4/25/2015 37 0 0 0 0 0
4/25/2016 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 9.46 2.04 1.46 1.15 0.96 0.83
Weighted Average
Life to Call
(Years)** 9.46 2.04 1.46 1.15 0.96 0.83
- ------------------------------------------------------------------------------------------------------------
**Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
S-74
Class AF-2 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- ------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
4/25/2003 100 100 100 100 100 100
4/25/2004 100 100 100 100 86 43
4/25/2005 100 100 100 46 0 0
4/25/2006 100 100 44 0 0 0
4/25/2007 100 75 0 0 0 0
4/25/2008 100 37 0 0 0 0
4/25/2009 100 4 0 0 0 0
4/25/2010 100 0 0 0 0 0
4/25/2011 100 0 0 0 0 0
4/25/2012 100 0 0 0 0 0
4/25/2013 100 0 0 0 0 0
4/25/2014 100 0 0 0 0 0
4/25/2015 100 0 0 0 0 0
4/25/2016 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 13.99 5.71 3.95 3.00 2.40 1.98
Weighted Average
Life to Call
(Years)** 13.99 5.71 3.95 3.00 2.40 1.98
- ------------------------------------------------------------------------------------------------------------
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
S-75
Class AF-3 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- ------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
4/25/2003 100 100 100 100 100 100
4/25/2004 100 100 100 100 100 100
4/25/2005 100 100 100 100 97 61
4/25/2006 100 100 100 86 44 11
4/25/2007 100 100 97 46 7 0
4/25/2008 100 100 64 15 0 0
4/25/2009 100 100 36 0 0 0
4/25/2010 100 78 14 0 0 0
4/25/2011 100 56 0 0 0 0
4/25/2012 100 37 0 0 0 0
4/25/2013 100 20 0 0 0 0
4/25/2014 100 5 0 0 0 0
4/25/2015 100 0 0 0 0 0
4/25/2016 72 0 0 0 0 0
4/25/2017 61 0 0 0 0 0
4/25/2018 54 0 0 0 0 0
4/25/2019 47 0 0 0 0 0
4/25/2020 39 0 0 0 0 0
4/25/2021 30 0 0 0 0 0
4/25/2022 21 0 0 0 0 0
4/25/2023 14 0 0 0 0 0
4/25/2024 6 0 0 0 0 0
4/25/2025 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 17.08 9.48 6.61 4.99 3.97 3.26
Weighted Average
Life to Call
(Years)** 17.08 9.48 6.61 4.99 3.97 3.26
- ------------------------------------------------------------------------------------------------------------
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
S-76
Class AF-4 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- ------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
4/25/2003 100 100 100 100 100 100
4/25/2004 100 100 100 100 100 100
4/25/2005 100 100 100 100 100 100
4/25/2006 100 100 100 100 100 100
4/25/2007 100 100 100 100 100 73
4/25/2008 100 100 100 100 76 47
4/25/2009 100 100 100 89 53 29
4/25/2010 100 100 100 67 36 18
4/25/2011 100 100 94 50 24 10
4/25/2012 100 100 76 37 16 5
4/25/2013 100 100 61 27 10 2
4/25/2014 100 100 48 19 6 *
4/25/2015 100 90 38 13 3 0
4/25/2016 100 35 12 2 0 0
4/25/2017 100 28 8 1 0 0
4/25/2018 100 23 6 0 0 0
4/25/2019 100 19 4 0 0 0
4/25/2020 100 15 2 0 0 0
4/25/2021 100 12 1 0 0 0
4/25/2022 100 9 * 0 0 0
4/25/2023 100 7 0 0 0 0
4/25/2024 100 5 0 0 0 0
4/25/2025 98 3 0 0 0 0
4/25/2026 86 2 0 0 0 0
4/25/2027 74 1 0 0 0 0
4/25/2028 61 0 0 0 0 0
4/25/2029 47 0 0 0 0 0
4/25/2030 30 0 0 0 0 0
4/25/2031 12 0 0 0 0 0
4/25/2032 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 26.59 15.21 12.13 9.64 7.78 6.38
Weighted Average
Life to Call
(Years)** 26.28 13.80 10.31 7.75 6.14 4.96
- ------------------------------------------------------------------------------------------------------------
* Less than 1% but greater than 0.
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
S-77
Class AV-1 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- ------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
4/25/2003 93 80 73 66 60 53
4/25/2004 91 66 54 44 35 26
4/25/2005 91 55 41 31 23 16
4/25/2006 90 46 32 22 15 9
4/25/2007 89 39 25 16 10 5
4/25/2008 88 33 20 11 6 3
4/25/2009 86 28 15 8 4 2
4/25/2010 85 24 12 6 2 1
4/25/2011 84 20 9 4 1 *
4/25/2012 82 17 7 3 1 0
4/25/2013 80 14 6 2 * 0
4/25/2014 78 12 4 1 0 0
4/25/2015 76 10 3 1 0 0
4/25/2016 74 8 2 * 0 0
4/25/2017 72 7 2 * 0 0
4/25/2018 69 6 1 0 0 0
4/25/2019 66 5 1 0 0 0
4/25/2020 63 4 1 0 0 0
4/25/2021 59 3 * 0 0 0
4/25/2022 56 3 * 0 0 0
4/25/2023 51 2 0 0 0 0
4/25/2024 47 1 0 0 0 0
4/25/2025 42 1 0 0 0 0
4/25/2026 37 1 0 0 0 0
4/25/2027 32 * 0 0 0 0
4/25/2028 27 * 0 0 0 0
4/25/2029 20 0 0 0 0 0
4/25/2030 14 0 0 0 0 0
4/25/2031 6 0 0 0 0 0
4/25/2032 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 19.02 5.36 3.61 2.65 2.05 1.63
Weighted Average
Life to Call
(Years)** 18.86 4.98 3.41 2.51 1.95 1.55
- ------------------------------------------------------------------------------------------------------------
* Less than 1% but greater than 0.
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
S-78
Last Scheduled Distribution Date
The "Last Scheduled Distribution Date" for the Class AF and Class AV-1
Certificates is the Distribution Date in October of 2032 and for the Class A-IO
Certificates is the Distribution Date in April of 2004. The Last Scheduled
Distribution Date for the Class AF and Class AV-1 Certificates is the
Distribution Date in the seventh month following the latest scheduled maturity
date for any of the Loans. The Last Scheduled Distribution Date for the Class
A-IO Certificates is the Distribution Date on which the Notional Amount of the
Class A-IO Certificates is reduced to zero. Since the rate of distributions in
reduction of the Class Certificate Balance of each of the classes of Class AF
and Class AV-1 Certificates will depend on the rate of payment, including
prepayments, of the Loans in the Applicable Group, the Class Certificate Balance
of any or all of the classes of Class AF and Class AV-1 Certificates could be
reduced to zero significantly earlier or later than the Last Scheduled
Distribution Date. The rate of payments on the Loans will depend on their
particular characteristics, as well as on prevailing interest rates from time to
time and other economic factors, and no assurance can be given as to the actual
payment experience of the Loans. See "Yield, Prepayment and Maturity
Considerations--Prepayment Considerations and Risks" and "--Weighted Average
Lives of the Offered Certificates" herein and "Prepayment and Yield
Considerations" in the prospectus.
THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer, for
inclusion in this prospectus supplement. No representation is made by the
Depositor, the Servicer, the Sellers, the Trustee, the Underwriter or any of
their affiliates as to the accuracy or completeness of this information.
The Certificate Insurer is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and the Territory of Guam. The
Certificate Insurer primarily insures newly-issued municipal and structured
finance obligations. The Certificate Insurer is a wholly-owned subsidiary of
Ambac Financial Group, Inc. (formerly, AMBAC Inc.), a 100% publicly-held
company. Moody's Investors Service, Inc., Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. and Fitch Ratings have each assigned
a triple-A financial strength rating to the Certificate Insurer.
The consolidated financial statements of the Certificate Insurer and
subsidiaries as of December 31, 2001 and December 31, 2000 and for each of the
years in the three-year period ended December 31, 2001 prepared in accordance
with accounting principles generally accepted in the United States of America,
included in the Annual Report on Form 10-K of Ambac Financial Group, Inc. (which
was filed with the Securities and Exchange Commission on March 26, 2002;
Securities and Exchange Commission File Number 1-10777), and Current Reports on
Form 8-K filed with the Securities and Exchange Commission on January 25, 2002
and April 18, 2002, as they related to the Certificate Insurer, are hereby
incorporated by reference into this prospectus supplement and shall be deemed to
be a part hereof. Any statement contained in a document incorporated in this
prospectus supplement by reference shall be modified or superseded for the
purposes of this prospectus supplement to the extent that a statement contained
in this prospectus supplement by reference in this prospectus supplement also
modifies or supersedes the statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this prospectus supplement.
All financial statements of the Certificate Insurer and subsidiaries
included in documents filed by Ambac Financial Group, Inc. with the Securities
and Exchange Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act, subsequent to the date of this prospectus supplement and prior to
the termination of the offering of the Offered Certificates shall be deemed to
be incorporated by reference into this prospectus supplement and to be a part
hereof from the respective dates of filing the documents.
The following table sets forth the capitalization of the Certificate
Insurer as of December 31, 2000, December 31, 2001, and March 31, 2002,
respectively, in conformity with accounting principles generally accepted in the
United States of America.
S-79
Ambac Assurance Corporation and Subsidiaries
Capitalization Table
(Dollars in Millions)
Dec. 31, 2000 Dec. 31, 2001 March 31, 2002
------------- ------------- --------------
(unaudited)
Unearned premiums............................ $1,556 $1,790 $1,817
Other liabilities............................ 581 888 835
------ ------ ------
Total liabilities............................ 2,137 2,678 2,652
------ ------ ------
Stockholder's equity:
Common stock............................... 82 82 82
Additional paid-in capital................. 760 928 928
Accumulated other comprehensive income..... 82 81 53
Retained earnings.......................... 2,002 2,386 2,488
------ ------ ------
Total stockholder's equity................... 2,926 3,477 3,551
------ ------ ------
Total liabilities and stockholder's equity... $5,063 $6,155 $6,203
====== ====== ======
For additional financial information concerning the Certificate Insurer,
see the audited financial statements of the Certificate Insurer incorporated by
reference in this prospectus supplement. Copies of the financial statements of
the Certificate Insurer incorporated by reference and copies of the Certificate
Insurer's annual statement for the year ended December 31, 2001 prepared in
accordance with statutory accounting standards are available, without charge,
from the Certificate Insurer. The address of the Certificate Insurer's
administrative offices and its telephone number are One State Street Plaza, 19th
Floor, New York, New York 10004 and (212) 668-0340.
The Certificate Insurer makes no representation regarding the Certificates
or the advisability of investing in the Certificates and makes no representation
regarding, nor has it participated in the preparation of, this prospectus
supplement other than the information supplied by the Certificate Insurer and
presented under the headings "Description of the Certificates -- Certificate
Guaranty Insurance Policy" and "The Certificate Insurer," and in the financial
statements incorporated in this prospectus supplement by reference.
USE OF PROCEEDS
The Depositor will use the net proceeds received by it from the sale of the
Offered Certificates to pay the purchase price of the Loans and for general
corporate purposes.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, multiple elections will be made to treat
some of the assets of the trust fund (exclusive of the Net WAC Cap Account and
the Reserve Fund) as several REMICs. Assuming those elections are timely made
and the terms of the Pooling and Servicing Agreement are complied with,
Stradley, Ronon, Stevens & Young, LLP, special tax counsel to the Depositor
("Tax Counsel") is of the opinion that the trust fund (exclusive of the Net WAC
Cap Account and the Reserve Fund) will qualify as several REMICs within the
meaning of the Code. The Offered Certificates (excluding any associated rights
to receive payments from the Net WAC Cap Account or the Reserve Fund) and the
Class X Certificates will constitute the "regular interests" in a REMIC. The
Class R Certificates will constitute the sole class of "residual interest" in
each REMIC. See "Federal Income Tax Consequences" in the prospectus.
The Offered Certificates (excluding any associated rights in respect of the
Class AF-1 and Class AV-1 Certificates to receive payments from the Net WAC Cap
Account or the Reserve Fund) will be treated as debt instruments for federal
income tax purposes. Income on the Offered Certificates must be reported under
an accrual method of accounting.
S-80
Although federal income tax law is not clear, the Class A-IO Certificates
may be treated as being issued with original issue discount ("OID"). OID is
generally equal to the difference between the stated redemption price at
maturity of a debt instrument over the instrument's issue price. The stated
redemption price of the Class A-IO Certificates will likely be equal to the sum
of the payments expected to be received on the Certificates. The issue price of
the Class A-IO Certificates will likely be the amount the certificateholder paid
for the Certificate, net of expenses. A Class A-IO certificateholder may be
allowed to deduct a loss equal to the amount by which the certificateholder's
basis in the Certificate exceeds the expected remaining payments on the
Certificate net of any expected payments that will not be realized due to
prepayments on assets a REMIC holds.
Holders of Class AF-1 and Class AV-1 Certificates must allocate their
purchase price for that Certificate among one or more of the following
components, as appropriate - the REMIC regular interest component, the right to
receive payment in the form of the Net WAC Cap Carryover (the "Net WAC Cap
component") and the right to receive payment from the Reserve Fund (the "Reserve
Fund component"). For information reporting purposes, it will be assumed that,
with respect to each of the Class AF-1 and Class AV-1 Certificates, the Net WAC
Cap component and the Reserve Fund component will have only nominal value
relative to the value of the regular interest component. The IRS could, however,
argue that the Net WAC Cap component or the Reserve Fund component or both have
a greater than de minimis value. If that argument was sustained, the regular
interest component in respect of the Class AF-1 and Class AV-1 Certificates
could be viewed as having been issued with OID (which could cause the total
amount of discount to exceed a statutorily defined de minimis amount).
Upon the sale, exchange, or other disposition of a Class AF-1 or Class AV-1
Certificate, the holder thereof must allocate the amount realized among the
appropriate components of the Class AF-1 or Class AV-1 Certificate based on the
relative fair market values of those components at the time of sale. Assuming
that a Class AF-1 or Class AV-1 Certificate is held as a "capital asset" within
the meaning of section 1221 of the Code, gain or loss on the disposition of an
interest in the Net WAC Cap component or the Reserve Fund component should be
capital gain or loss, and gain or loss on the disposition of the regular
interest should, subject to the limitation described below, be capital gain or
loss. Gain attributable to the regular interest component of a Class AF-1 or
Class AV-1 Certificate will be treated as ordinary income, however, to the
extent the gain does not exceed the excess, if any, of:
o the amount that would have been includible in the holder's gross
income with respect to the regular interest component had income
thereon accrued at a rate equal to 110% of the applicable federal
rate as defined in section 1274(d) of the Code determined as of
the date of purchase of that Certificate, over
o the amount actually included in the holder's income.
As indicated above, a portion of the purchase price paid by a
certificateholder to acquire a Class AF-1 or Class AV-1 Certificate may be
attributable to the Net WAC Cap component or Reserve Fund component of that
Certificate. The portion of the overall purchase price attributable to these
components must be amortized over the life of the Certificate taking into
account the declining balance of the related regular interest component.
Treasury regulations concerning notional principal contracts provide alternative
methods for amortizing the purchase price of an interest rate cap contract and
the consequences on the disposition of the contract. A disposition of the
contract would be deemed to occur, for example, upon the sale of a Class AF-1 or
Class AV-1 Certificate. Certificateholders are urged to consult their tax
advisors concerning the methods that can be employed to amortize the portion of
the purchase price paid for the Net WAC Cap component and Reserve Fund component
of a Class AF-1 or Class AV-1 Certificate.
Any interest payments made to a holder of a Class AF-1 or Class AV-1
Certificate in excess of the Net WAC Cap applicable to the Class AF-1
Certificates will be treated as periodic payments on an interest rate cap
contract. To the extent the sum of the periodic payments for any year exceed
that year's amortized cost of the contract rights, that excess is ordinary
income. If for any year the amount of that year's amortized cost exceeds the sum
of the periodic payments, that excess is allowable as an ordinary deduction,
subject, in the case of individuals to the potential application of certain
limitations with regard to miscellaneous itemized deductions.
S-81
The Offered Certificates, depending on their issue prices, as described in
the prospectus under "Federal Income Tax Consequences," may be treated as having
been issued with OID for federal income tax purposes. For purposes of
determining the amount and rate of accrual of OID and market discount, the trust
fund intends to assume that there will be prepayments on the Loans at a rate
equal to 100% of the Prepayment Assumption, as described under "Yield,
Prepayment and Maturity Considerations--Structuring Assumptions." No
representation is made as to whether the Loans will prepay at the foregoing rate
or any other rate. See "Yield, Prepayment and Maturity Considerations" herein
and "Federal Income Tax Consequences" in the prospectus.
If the holders of the Offered Certificates are treated as holding the
Certificates at a premium, those holders should consult their tax advisors
regarding the election to amortize bond premium and the method to be employed.
As is described more fully under "Federal Income Tax Consequences" in the
prospectus, the Offered Certificates (exclusive of any associated rights in
respect of the Class AF-1 or Class AV-1 Certificates to receive payments from
the Net WAC Cap Account or the Reserve Fund) will represent qualifying assets to
a Real Estate Investment Trust ("REIT") under Section 856(c)(4)(A) and to a
domestic building and loan association under Section 7701(a)(19)(C) of the Code.
Net interest income attributable to the Offered Certificates (exclusive of any
associated rights in respect of the Class AF-1 or Class AV-1 Certificates to
receive payments from the Net WAC Cap Account or the Reserve Fund) will be
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code for REIT qualification purposes, to
the extent the assets of the trust fund are assets described in those sections.
Mixed Use Loans may not qualify under Section 7701(a)(19) of the Code as loans
secured by an interest in residential real property for purposes of the asset
test applicable to domestic building and loan associations. The Offered
Certificates (other than the Class AF-1 and Class AV-1 Certificates) will
represent qualifying assets under Section 860G(a)(3) if acquired by a REMIC
within the prescribed time periods of the Code. The Class AF-1 and Class AV-1
Certificates will not be treated as qualifying assets under Section 860G(a)(3)
in their entirety and may not be appropriate investments for REMICs.
The owners of the Net WAC Cap Account are the holders of the Class X
Certificates. The Net WAC Cap Account and the Reserve Fund are outside reserve
funds and are not assets of any REMIC. Amounts transferred by a REMIC to the Net
WAC Cap Account are treated as amounts distributed by the applicable REMIC to
the holders of the Class X Certificates or transferees of the holders of the
Class X Certificates for all federal tax purposes.
ERISA CONSIDERATIONS
Any Plan fiduciary who proposes to cause a Plan (as defined below) to
acquire the Offered Certificates should consult with its counsel with respect to
the potential consequences under the Employee Retirement Income Security Act of
1974, as amended ("ERISA") and/or the Code, of the Plan's acquisition and
ownership of those Certificates. See "ERISA Considerations" in the prospectus.
Section 406 of ERISA and Section 4975 of the Code prohibit "parties in interest"
and "disqualified persons" with respect to an employee benefit or other plan or
arrangement, including, but not limited to, an individual retirement account,
that is subject to ERISA and/or the excise tax provisions set forth under
Section 4975 of the Code (a "Plan") from engaging in certain transactions
involving that 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 Plans
described under that Section. ERISA authorizes the imposition of civil penalties
for prohibited transactions involving Plans not subject to the requirements of
Section 4975 of the Code.
Some employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
those plans may be invested in the 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 plan that 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 who decides to
invest the assets of a
S-82
Plan in the Offered Certificates should consider, among other factors, the
extreme sensitivity of the investment to the rate of principal payments,
including prepayments, on the Loans.
The United States Department of Labor has granted an individual
administrative exemption to the Underwriter (Prohibited Transaction Exemption
96-22, Exemption Application No. D-10165, 61 Fed. Reg. 14828 (April 3, 1996))
(the "Underwriter Exemption") from some 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 receivables, loans and
other obligations that meet the conditions and requirements of the Underwriter
Exemption. The Underwriter Exemption applies to the Loans in the trust fund.
On July 21, 1997 and November 13, 2000, the Department of Labor published
in the Federal Register amendments to the Underwriter Exemption. The November
13, 2000 amendment to the Underwriter Exemption permits Plans to invest in
certain investment grade (i.e., securities which are rated at the time of
issuance in one of the four highest generic rating categories by at least one
rating agency) mortgage-backed securities and asset-backed securities which are
either senior or subordinated. The amendment also permits the use of eligible
interest rate swaps (both ratings dependent and non-rating dependent) under
certain circumstances; permits the use of yield supplements which involve
notional principal amounts; and makes other changes to the Underwriter Exemption
that reflect the Department's current interpretation of the Underwriter
Exemption.
For a general description of the Underwriter Exemption, as amended on July
21, 1997 and November 13, 2000, and the conditions that must be satisfied for
the Underwriter Exemption to apply, see "ERISA Considerations" in the
prospectus.
It is expected that the Underwriter Exemption will apply to the acquisition
and holding by Plans of Offered Certificates and that all conditions of the
Underwriter Exemption other than those within the control of the investors will
be met. In addition, as of the date hereof, there is no single borrower that is
the obligor on five percent (5%) of the Loans included in the trust fund by
aggregate unamortized principal balance of the assets of the trust fund.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the effect of the Plan Asset
Regulation described in the prospectus, the applicability of Prohibited
Transaction Exemption 83-1, described in the prospectus, and the Underwriter
Exemption, and the potential consequences in their specific circumstances, prior
to making an investment in any of the Offered Certificates. Moreover, each Plan
fiduciary should determine whether under the general fiduciary standards of
investment prudence and diversification, an investment in any of 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.
LEGAL INVESTMENT
The Offered Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Enhancement Act of 1984. Accordingly,
many institutions with legal authority to invest in "mortgage related
securities" may not be legally authorized to invest in the Offered Certificates.
The appropriate characterization of the Offered Certificates under various
legal investment restrictions, and thus the ability of investors subject to
those restrictions to purchase Offered Certificates, may be subject to
significant interpretive uncertainties. Accordingly, institutions whose
investment activities are subject to review by federal or state regulatory
authorities should consult with their counsel or the applicable authorities to
determine whether an investment in the Offered Certificates complies with
applicable guidelines, policy statements or restrictions. See "Legal Investment"
in the prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
dated April 25, 2002 (the "Underwriting Agreement") among the Depositor, Equity
One and First Union Securities, Inc., an indirect, wholly-owned subsidiary of
Wachovia Corporation (the "Underwriter"), the Depositor has agreed to sell to
the Underwriter
S-83
and the Underwriter has agreed to purchase from the Depositor all of the Offered
Certificates. Wachovia Corporation conducts its investment banking,
institutional, and capital markets businesses through its various bank,
broker-dealer and non-bank subsidiaries (including First Union Securities, Inc.)
under the trade name Wachovia Securities. Any references to Wachovia Securities
in this prospectus supplement, however, do not include Wachovia Securities,
Inc., member NASD/SIPC, a separate broker-dealer subsidiary of Wachovia
Corporation, and an affiliate of First Union Securities, Inc. which may or may
not be participating as a selling group member in the distribution of the
Offered Certificates. The Offered Certificates will be offered by the
Underwriter when, as and if issued and sold by the Depositor to the Underwriter,
subject to the Underwriter's right to reject any subscription in whole or in
part.
The Underwriter has informed the Depositor that it proposes to offer the
Offered Certificates for sale to the public at the prices listed on the cover
page of this prospectus supplement. The Underwriter may effect those
transactions by selling the Offered Certificates to or through dealers, and
those dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter. In connection with the sale of
the Offered Certificates, the Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting compensation. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters and
any commissions received by them and any profit on the resale of the Offered
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended (the "Securities Act"). After the
initial public offering of the Offered Certificates, the public offering prices
and concessions may be changed.
No Offered Certificate will have an established trading market when issued.
The Underwriter may, from time to time, act as a broker or purchase and sell
Offered Certificates in the secondary market, but the Underwriter is under no
obligation to do so and there can be no assurance that there will be a secondary
market for the Offered Certificates or liquidity in the secondary market if one
does develop.
Until the distribution of the Offered Certificates is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriter
and certain selling group members to bid for and purchase the Offered
Certificates. As an exception to these rules, the Underwriter is permitted to
engage in certain transactions that stabilize the price of the Offered
Certificates. Those transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Offered Certificates.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of those purchases.
Neither the Depositor nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above, if engaged in, may have on the prices of the Offered
Certificates. In addition, neither the Depositor nor the Underwriter makes any
representation that the Underwriter will engage in those transactions or that
those transactions, once commenced, will not be discontinued without notice.
Equity One and the Depositor have agreed to indemnify the Underwriter
against, or make contributions to the Underwriter with respect to specific
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Certificates, including specific federal income tax
consequences with respect thereto, will be passed upon for the Depositor by
Stradley, Ronon, Stevens & Young, LLP, Philadelphia, Pennsylvania. Sidley Austin
Brown & Wood LLP will pass upon certain legal matters on behalf of the
Underwriter.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation and
subsidiaries as of December 31, 2001 and 2000 and for each of the years in the
three year period ended December 31, 2001 are incorporated by reference herein
and in the Registration Statement in reliance upon the report of KPMG LLP,
independent certified
S-84
public accountants, incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing.
RATINGS
It is a condition to the issuance of the Offered Certificates that they be
rated "AAA" by Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's") and "Aaa" by Moody's Investors Service,
Inc. ("Moody's" and, together with Standard & Poor's, the "Rating Agencies").
The ratings that the Rating Agencies assign to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which they are entitled. The rating process addresses
structural and legal aspects associated with the Offered Certificates, including
the nature of the underlying mortgage loans. The ratings assigned to mortgage
pass-through certificates do not represent any assessment of the likelihood that
principal prepayments will be made by the borrowers or the degree to which the
prepayments will differ from that originally anticipated. The rating of the
Offered Certificates will depend primarily on an assessment by the Rating
Agencies of the Loans and upon the claims-paying ability of the Certificate
Insurer. Any change in the ratings of the Certificate Insurer by any of the
Rating Agencies may result in a change in the ratings on the Offered
Certificates. The ratings do not address the possibility that certificate
holders might suffer a lower than anticipated yield due to non-credit events,
and do not address the likelihood that holders of the Class AF-1 and Class AV-1
Certificates will receive the Net WAC Cap Carryover.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Offered Certificates are subsequently lowered for any reason, no person or
entity is obligated to provide any additional credit support or credit
enhancement with respect to the Offered Certificates.
The Depositor has not requested that any rating agency rate the Offered
Certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the Offered Certificates, or, if it
does, what rating would be assigned by that rating agency. A rating on the
Offered Certificates by another rating agency, if assigned at all, may be lower
than the ratings assigned to the Offered Certificates as stated above.
S-85
INDEX OF DEFINED TERMS
Adjusted Net Mortgage Rate.........................49 Guaranteed Principal Distribution Amount...........66
Adjustment Date....................................24 I&I Payments.......................................67
Advance............................................50 Initial Rate Cap...................................24
Applicable Group...................................55 Insurance Proceeds.................................55
Available Funds....................................55 Insured Amount.....................................66
Balloon Loans......................................23 Interest Accrual Period............................57
Bank...............................................65 Interest Distribution Amount.......................57
Beneficial Owners..................................51 Last Scheduled Distribution Date...................79
Business Day.......................................66 LIBOR Determination Date...........................58
Call Reports.......................................65 Liquidated Loan....................................60
Cede...............................................51 Liquidation Proceeds...............................55
Certificate Account................................52 Loan Losses........................................60
Certificate Formula Principal Amount...............59 Loans..............................................22
Certificate Insurer................................22 Loan-to-Value Ratio................................24
Certificate Insurer Default........................67 Margin.............................................24
Certificate Insurer's Monthly Premium..............67 Maximum Mortgage Rate..............................24
Certificates.......................................22 Minimum Mortgage Rate..............................24
Class AF Available Funds Shortfall.................55 Mixed Use Loan.....................................22
Class AF Certificates..............................22 Moody's............................................85
Class AF Distributable Funds.......................55 Mortgage...........................................44
Class AF-1 Net WAC Cap Deposit Amount..............53 Mortgage File......................................44
Class AV-1 Available Funds Shortfall...............56 Mortgage Notes.....................................22
Class AV-1 Distributable Funds.....................55 Net Interest Shortfalls............................57
Class AV-1 Net WAC Cap Deposit Amount..............53 Net Prepayment Interest Shortfall..................58
Class Certificate Balance..........................50 Net WAC Cap........................................56
Closing Date.......................................23 Net WAC Cap Account................................63
Code...............................................44 Net WAC Cap Carryover..............................57
Collateral Value...................................24 Notional Amount....................................50
CPR................................................73 Offered Certificates...............................22
Cut-off Date.......................................22 OID................................................81
Cut-off Date Group I Principal Balance.............23 One-Month LIBOR....................................58
Cut-off Date Group II Principal Balance............23 Optional Termination Date..........................67
Cut-off Date Pool Principal Balance................23 Overcollateralization Step-up Trigger Event........61
Definitive Certificate.............................51 Overcollateralization Target Amount................61
Deleted Loan.......................................44 Overcollateralized Amount..........................63
Depositor..........................................22 Pass-Through Rate..................................56
Determination Date.................................50 Periodic Rate Cap..................................24
Distributable Excess Spread........................61 Permitted Investments..............................52
Distributable Funds................................55 Plan...............................................82
Distribution Account...............................52 Policy.............................................65
Distribution Date..................................54 Pool Principal Balance.............................23
DTC................................................51 Pooling and Servicing Agreement....................22
Due Date...........................................23 Preference Amount..................................66
Due Period.........................................60 Prepayment Assumption..............................73
Equity One.........................................46 Prepayment Interest Excess.........................49
Equity One Standards...............................45 Prepayment Interest Shortfall......................58
ERISA..............................................82 Prepayment Period..................................55
FDIC...............................................65 Projected Principal Balance........................64
FIRREA.............................................65 Rating Agencies....................................85
Formula Rate.......................................56 Receipt............................................66
Group I Loans......................................22 Received...........................................66
Group I Principal Balance..........................23 Record Date........................................54
Group II Loans.....................................22 Reference Banks....................................59
Group II Principal Balance.........................23 Refinance Loan.....................................24
S-86
REIT...............................................82 SPA................................................73
Relief Act Reduction...............................58 Standard & Poor's..................................85
REO Property.......................................50 Stated Principal Balance...........................23
Replacement Loan...................................44 Stepdown Date......................................63
Reserve Fund.......................................64 Strike Price.......................................64
Reserve Fund Addition..............................64 Structuring Assumptions............................71
Residential Loan...................................22 Substitution Adjustment Amount.....................45
Scheduled Payments.................................23 Tax Counsel........................................80
Securities Act.....................................84 Trustee............................................22
Seller and Sellers.................................22 Underwriter........................................83
Servicer...........................................22 Underwriter Exemption..............................83
Servicing Fee......................................49 Underwriting Agreement.............................83
Servicing Fee Rate.................................49 Unpaid Interest Amounts............................57
Six-Month LIBOR....................................25 Yield Maintenance Agreement........................64
S-87
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in specific limited circumstances, the globally offered Mortgage
Pass-Through Certificates, Series 2002-2 (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
the Global Securities through any of The Depository Trust Company ("DTC"),
Clearstream, Luxembourg or the Euroclear System ("Euroclear"). The Global
Securities will be tradable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream, Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and similar issues of mortgage pass-through
certificates.
Secondary cross-market trading between Clearstream, Luxembourg or Euroclear
and DTC participants holding Certificates will be effected on a
delivery-against-payment basis through the respective depositaries of
Clearstream, Luxembourg and Euroclear (in that capacity) 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 certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect participants in DTC. As a result, Clearstream, Luxembourg and
Euroclear will hold positions on behalf of their participants through their
respective depositaries, which in turn will hold positions in accounts as DTC
participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to similar issues of mortgage pass-through
certificates. Investor's securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream,
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to similar issues
of mortgage pass-through certificates in same-day funds.
Trading between Clearstream, Luxembourg and/or Euroclear participants.
Secondary market trading between Clearstream, Luxembourg participants or
Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
A-1
Trading between DTC seller and Clearstream, Luxembourg or Euroclear
purchaser. When Global Securities are to be transferred from the account of a
DTC participant to the account of a Clearstream, Luxembourg participant or a
Euroclear participant, the purchaser will send instructions to Clearstream,
Luxembourg or Euroclear through a Clearstream, Luxembourg participant or
Euroclear participant at least one business day before settlement. Clearstream,
Luxembourg or Euroclear will instruct its 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
distribution date to but excluding the settlement date, on the basis of either
the actual number of days in that accrual period and a year assumed to consist
of 360 days or a 360-day year of twelve 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 but excluding the first day of
the following month. Payment will then be made by the respective depositary of
the DTC participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream, Luxembourg participant's or Euroclear
participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream, Luxembourg or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream, Luxembourg participants and Euroclear participants will need
to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the Global Securities are credited
to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended a
line of credit to them, Clearstream, Luxembourg participants or Euroclear
participants can elect not to pre-position funds and allow that credit line to
be drawn upon to finance settlement. Under this procedure, Clearstream,
Luxembourg participants or Euroclear participants purchasing Global Securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the Global Securities were credited to their accounts. However, interest on
the Global Securities would accrue from the value date. Therefore, in many cases
the investment income on the Global Securities earned during that one-day period
may substantially reduce or offset the amount of the overdraft charges, although
this result will depend on each Clearstream, Luxembourg participant's or
Euroclear participant's particular cost of funds.
Since the settlement will take place during New York business hours, DTC
participants can employ their usual procedures for sending Global Securities to
the respective European depositary for the benefit of Clearstream, Luxembourg
participants or Euroclear participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to DTC participants a cross-market
transaction will settle no differently than a trade between two DTC
participants.
Trading between Clearstream, Luxembourg or Euroclear seller and DTC
purchaser. Due to time zone differences in their favor, Clearstream, Luxembourg
participants and Euroclear participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective depositary, to a DTC
participant. The seller will send instructions to Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg participant or Euroclear participant
at least one business day prior to settlement. In these cases Clearstream,
Luxembourg or Euroclear will instruct the respective depositary, as appropriate,
to deliver the Global Securities to the DTC participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last distribution date to but excluding the settlement date, on
the basis of either the actual number of days in that accrual period and a year
assumed to consist of 360 days or a 360-day year of twelve 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 but excluding
the first day of the following month. The payment will then be reflected in the
account of the Clearstream, Luxembourg participant or Euroclear participant the
following day, and receipt of the cash proceeds in the Clearstream, Luxembourg
participant's or Euroclear participant's account would be back-valued to the
value
A-2
date (which would be the preceding day, when settlement occurred in New York).
Should the Clearstream, Luxembourg participant or Euroclear participant have a
line of credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Clearstream, Luxembourg participant's or Euroclear
participant's account would instead be valued as of the actual settlement date.
Finally, day traders that use Clearstream, Luxembourg or Euroclear and that
purchase Global Securities from DTC participants for delivery to Clearstream,
Luxembourg participants or Euroclear participants should note that these trades
would automatically fail on the sale side unless affirmative action were taken.
At least three techniques should be readily available to eliminate this
potential problem:
(1) borrowing through Clearstream, Luxembourg or Euroclear for one day
(until the purchase side of the day trade is reflected in their
Clearstream, Luxembourg or Euroclear accounts) in accordance with the
clearing system's customary procedures;
(2) 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 Clearstream, Luxembourg
or Euroclear account in order to settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is at
least one day prior to the value date for the sale to the Clearstream,
Luxembourg participant or Euroclear participant.
Certain U.S. Federal Income Tax Documentation Requirements
A Beneficial Owner of Global Securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons (as defined below) (or U.S. backup
withholding tax at a rate of 30.5% after August 6, 2001 for calendar year 2001,
30% for calendar years 2002 and 2003, 29% for calendar years 2004 and 2005, and
28% for calendar years 2006 and thereafter), 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 (as defined below) (Form W-8BEN). Beneficial
owners of Global Securities that are non-U.S. Persons may be able to obtain a
complete exemption from the withholding tax by filing a signed Form W-8BEN
(Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). If the information shown on Form W-8BEN changes, a new Form W-8BEN
must be filed within 30 days of the change.
Exemption for non-U.S. Persons with effectively connected income (Form
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, may be able to obtain an exemption
from the withholding tax by filing Form W-8ECI (Certificate of Foreign Person's
Claim for Exemption From Withholding on Income Effectively Connected With the
Conduct of a Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form W-8BEN). Non-U.S. Persons that are Beneficial Owners residing in a country
that has a tax treaty with the United States may be able to obtain an exemption
or reduced tax rate (depending on the treaty terms) by filing Form W-8BEN.
Exemption for U.S. Persons (Form W-9). U.S. Persons may be able to obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
A-3
U.S. Federal Income Tax Reporting Procedure. The Beneficial Owner of a
Global Security files by submitting the appropriate form to the person through
whom it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8BEN and Form W-8ECI are generally
effective for three calendar years.
The term "U.S. Person" means:
(1) a citizen or resident of the United States;
(2) a corporation or partnership organized in or under the laws of the
United States, any state thereof or the District of Columbia (other than a
partnership that is not treated as a United States person under any applicable
Treasury regulations);
(3) an estate the income of which is includible in gross income for
United States tax purposes, regardless of its source; or
(4) a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons have authority to control all substantial decisions of the trust.
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 all aspects of Treasury regulations relating to tax documentation
requirements. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities, the right to receive any Net WAC Cap Carryover and the U.S. federal
income tax documentation requirements (described above) related to the same.
A-4
ANNEX II
PROJECTED PRINCIPAL BALANCE SCHEDULE
------------------------------------
The Projected Principal Balance relating to the Yield Maintenance Agreement
is expected to be determined pursuant to the following schedule:
Projected Aggregate
Date Principal Balance
-------------- -----------------------
04/30/2002 $97,570,706.76
05/25/2002 94,878,610.19
06/25/2002 92,260,357.41
07/25/2002 89,713,931.42
08/25/2002 87,237,370.13
09/25/2002 84,828,764.85
10/25/2002 82,486,258.93
11/25/2002 80,208,461.51
12/25/2002 77,993,180.03
01/25/2003 75,838,706.20
02/25/2003 73,940,770.18
03/25/2003 72,346,790.17
04/25/2003 70,786,813.98
05/25/2003 69,260,615.15
06/25/2003 67,766,968.79
07/25/2003 66,305,185.37
08/25/2003 64,874,589.83
09/25/2003 63,474,521.40
10/25/2003 62,104,333.20
11/25/2003 60,763,392.07
12/25/2003 59,451,078.12
01/25/2004 58,166,784.60
02/25/2004 56,912,320.27
03/25/2004 1,843,656.07
04/25/2004 1,803,892.33
05/25/2004 1,764,976.52
06/25/2004 1,726,890.67
07/25/2004 1,689,617.48
08/25/2004 1,653,139.47
09/25/2004 1,617,439.79
10/25/2004 1,582,501.96
11/25/2004 1,548,309.85
A-5
Prospectus dated March 8, 2002
EQUITY ONE ABS, INC.
Depositor
Asset Backed Certificates
Asset Backed Notes
(Issuable in Series)
-------------------------------
Equity One ABS, Inc., as depositor, may offer from time to time under this
prospectus and related prospectus supplements securities that are asset-backed
certificates or asset-backed notes. The depositor will sell these securities
from time to time in one or more series, each of which will be issued in one or
more classes.
- ----------------------------
Before buying securities, The related prospectus supplement will set forth
consider carefully the the specific assets of the trust fund and the
risk factors beginning on seller or sellers from whom the assets are
page 5 of this prospectus. acquired.
Neither the securities Each trust fund's assets may include--
of any series nor the
underlying loans will o one or more pools of
be insured or
guaranteed by any o mortgage loans secured by first liens on
governmental agency one- to four-family residential
or instrumentality, properties,
or by any other
entity. o mortgage loans secured by first and/or
subordinate liens on mixed
The securities of commercial/residential use properties
each series will and other multi-family residential
represent interests properties, and
in the related trust
fund only and will o closed-end and/or revolving home equity
not represent interests loans or balances thereof secured by
in or be obligations first and/or subordinate liens on one-
of any other entity. to four-family residential properties,
This prospectus may o all monies due under the above assets, which
be used to offer and may be net of some of the amounts payable to
sell any series of the servicer, and
securities only if it
is accompanied by the o other funds, credit enhancements and other
prospectus supplement assets.
for that series.
- ---------------------------- The assets in the trust fund may be divided into
one or more asset groups and each class of the
related series will evidence beneficial ownership
of the corresponding asset group.
The prospectus supplement will state if the trust
fund will make one or more REMIC or FASIT
elections for federal income tax purposes.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Information about the securities is presented in two separate documents
that progressively provide more detail:
o this prospectus, which provides general information, some of which may
not apply to your series of securities, and
o the accompanying prospectus supplement, which will describe the
specific terms of your series of securities, including:
o the principal balances and interest rates of each class;
o the timing and priority of interest and principal payments;
o statistical and other information about the loans;
o information about credit enhancement, if any, for each class;
o the ratings for each class; and
o the method for selling the securities.
We strongly encourage you to read both this prospectus and the accompanying
prospectus supplement in full. You should rely only on the information contained
or incorporated by reference in this prospectus and the accompanying prospectus
supplement. We have not authorized anyone to provide you with different
information.
If the description of the terms of your securities varies between this
prospectus and the accompanying prospectus supplement, you should rely on the
information in the prospectus supplement.
We are not offering securities in any state where the offer is not
permitted.
We do not claim that the information in this prospectus and the
accompanying prospectus supplement is accurate as of any date other than the
dates stated on the cover of each document.
We have made cross-references to captions in this prospectus and the
accompanying prospectus supplement under which you can find further related
discussions. The following table of contents and the table of contents in the
related prospectus supplement indicate where these captions are located.
--------------------------------
For means of acquiring additional information about us or a series of
securities, see "Available Information" and "Incorporation of Certain Documents
by Reference" beginning on page 100.
2
TABLE OF CONTENTS
RISK FACTORS............................................................................................5
You will have only limited recourse to sellers, depositor and servicer...............................5
The depositor has limited assets.....................................................................5
Limited liquidity may result in delays in liquidation or lower returns...............................6
Credit enhancement may not be sufficient to protect you from losses..................................6
Prepayments of loans and other factors may result in a lower yield on the securities.................6
Junior liens may result in losses in foreclosure proceedings.........................................7
Declines in property values may adversely affect you.................................................7
Delays in liquidation may adversely affect you.......................................................7
The disproportionate impact of liquidation expenses on smaller loans may adversely affect you........8
Consumer protection laws may adversely affect you....................................................8
Balloon payment mortgages in the trust fund may pose a higher risk of loss...........................8
The liquidation proceeds of mixed use loans may take longer to recover...............................9
You could be adversely affected by violations of environmental laws..................................9
The ratings of the securities do not assure their payment............................................9
Book-entry securities may pose limitations..........................................................10
Book-entry securities may result in delayed receipt of distributions................................10
Bankruptcy or insolvency may affect the timing and amount of distributions on the securities........10
The principal amount of the securities may exceed the market value of the trust fund assets.........11
You may receive a prepayment of principal from unused amounts in any pre-funding account............11
Some of the securities may be issued with original issue discount...................................12
THE TRUST FUND.........................................................................................13
General.............................................................................................13
The Loans...........................................................................................14
Substitution of Trust Fund Assets...................................................................17
USE OF PROCEEDS........................................................................................17
THE DEPOSITOR..........................................................................................18
LOAN PROGRAM...........................................................................................18
Underwriting Standards..............................................................................18
Specific Underwriting Criteria; Underwriting Programs...............................................19
Summary of Underwriting Requirements by Program.....................................................20
Qualifications of Sellers and Servicer..............................................................23
Representations by Sellers; Repurchases.............................................................23
DESCRIPTION OF THE SECURITIES..........................................................................24
General.............................................................................................25
Distributions on Securities.........................................................................26
Advances............................................................................................28
Reports to Securityholders..........................................................................29
Categories of Classes of Securities.................................................................30
Indices Applicable to Floating Rate and Inverse Floating Rate Classes...............................33
Book-Entry Registration of Securities...............................................................35
CREDIT ENHANCEMENT.....................................................................................39
General.............................................................................................39
Subordination.......................................................................................39
Letter of Credit....................................................................................40
Insurance Policies, Surety Bonds and Guaranties.....................................................40
Over-Collateralization..............................................................................41
Reserve Accounts....................................................................................41
Pool Insurance Policies.............................................................................43
Cross-Collateralization.............................................................................44
YIELD AND PREPAYMENT CONSIDERATIONS....................................................................44
THE AGREEMENTS.........................................................................................46
Assignment of the Trust Fund Assets.................................................................47
Payments on Loans; Deposits to Security Account.....................................................48
Pre-Funding Account.................................................................................50
3
Sub-Servicing by Sellers............................................................................50
Collection Procedures...............................................................................51
Hazard Insurance....................................................................................51
Realization Upon Defaulted Loans....................................................................53
Servicing and Other Compensation and Payment of Expenses............................................54
Evidence as to Compliance...........................................................................54
Certain Matters Regarding the Servicer and the Depositor............................................54
Events of Default; Rights Upon Event of Default.....................................................55
Amendment...........................................................................................57
Termination; Optional Termination...................................................................58
The Trustee.........................................................................................59
LEGAL ASPECTS OF THE LOANS.............................................................................59
General.............................................................................................59
Foreclosure/Repossession............................................................................60
Environmental Risks.................................................................................61
Rights of Redemption................................................................................62
Anti-Deficiency Legislation; Bankruptcy Laws; Tax Liens.............................................62
Due-on-Sale Clauses.................................................................................63
Enforceability of Prepayment and Late Payment Fees..................................................64
Equitable Limitations on Remedies...................................................................64
Applicability of Usury Laws.........................................................................64
Soldiers' and Sailors' Civil Relief Act.............................................................64
Junior Mortgages; Rights of Senior Mortgagees.......................................................65
The Title I Program.................................................................................65
Consumer Protection Laws............................................................................68
FEDERAL INCOME TAX CONSEQUENCES........................................................................69
General.............................................................................................69
Taxation of Debt Securities.........................................................................69
Taxation of the REMIC and its Holders...............................................................74
REMIC Expenses; Single Class REMICs.................................................................74
Taxation of the REMIC...............................................................................75
Administrative Matters..............................................................................79
Financial Asset Securitization Investment Trust Qualification.......................................79
Qualification as a FASIT............................................................................79
Consequences of Failing to Comply with FASIT Requirements...........................................80
Taxation of the FASIT...............................................................................81
Taxation of Regular Interest Holders................................................................81
Taxation of Ownership Interest Holders..............................................................81
Tax Status as a Grantor Trust.......................................................................82
Sale or Exchange....................................................................................85
Miscellaneous Tax Aspects...........................................................................85
Tax Treatment of Foreign Investors..................................................................86
Tax Characterization of the Trust Fund as a Partnership.............................................86
Tax Consequences to Holders of the Notes............................................................87
Tax Consequences to Holders of the Certificates Issued by a Partnership.............................89
STATE TAX CONSIDERATIONS...............................................................................93
ERISA CONSIDERATIONS...................................................................................93
LEGAL INVESTMENT.......................................................................................97
METHOD OF DISTRIBUTION.................................................................................98
LEGAL MATTERS..........................................................................................99
FINANCIAL INFORMATION..................................................................................99
RATING.................................................................................................99
AVAILABLE INFORMATION.................................................................................100
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................................................100
INDEX OF DEFINED TERMS................................................................................101
4
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of securities.
You will have only limited recourse to sellers, depositor and servicer.
The only obligations, if any, of the depositor to the securities of any
series will be pursuant to representations and warranties made by the depositor.
The depositor does not have, and is not expected in the future to have, any
significant assets with which to meet any obligation to repurchase primary
assets with respect to which there has been a breach of any representation or
warranty. If, for example, the depositor were required to repurchase a primary
asset, its only source of funds to make the repurchase would be funds obtained
from the enforcement of a corresponding obligation, if any, on the part of the
originator of the primary assets, the servicer or a seller, as the case may be,
or from a reserve fund established to provide funds for these repurchases.
The only obligations of the servicer, other than its servicing obligations,
to the assets of the trust fund or the securities of any series will be pursuant
to representations and warranties made by the servicer. The servicer may be
required to repurchase or replace any loan with respect to which its
representations and warranties are breached. There is no assurance, however,
that the servicer will have the financial ability to effect any repurchase or
substitution of loans.
The only obligations of any seller of loans (and Equity One, Inc., where
the seller is a subsidiary or affiliate of Equity One, Inc.) to assets of the
trust fund or the securities of any series will be pursuant to representations
and warranties made by the relevant entity and document delivery requirements. A
seller (and Equity One, Inc., where the seller is a subsidiary or affiliate of
Equity One, Inc.) may be required to repurchase or replace any loan with respect
to which its representations and warranties or document delivery requirements
are breached. There is no assurance, however, that a seller (and Equity One,
Inc., where the seller is a subsidiary or affiliate of Equity One, Inc.) will
have the financial ability to effect a repurchase or substitution.
We refer you to "Loan Program--Representations by Sellers; Repurchases."
The depositor has limited assets.
The depositor does not have, nor is it expected to have, any significant
assets. The securities of a series will be payable solely from the assets of the
trust fund for those securities. There will be no recourse to the depositor or
any other person for any default on the notes or any failure to receive
distributions on the certificates.
Further, unless otherwise stated in the related prospectus supplement, at
the times set forth in the related prospectus supplement, some of the primary
assets and any balance remaining in the security account or distribution account
immediately after making all payments due on the securities of the related
series and other payments specified in the related prospectus supplement, may be
promptly released or remitted to the depositor, the servicer, the provider of
any credit enhancement or any other person entitled thereto and will no longer
be available for making payments to holders of securities. Consequently, holders
of securities of each series must rely solely upon payments from the primary
assets and the other assets constituting the trust fund for a series of
securities, including, if applicable, any amounts available pursuant to any
credit enhancement for that series, for the payment of principal of and interest
on the securities of that series.
Holders of notes will be required under the indenture for their series to
proceed only against the primary assets and other assets constituting the
related trust fund in the case of a default on the notes and may not proceed
against any assets of the depositor. If payments from the assets securing a
series of notes, including any credit enhancement, were to become insufficient
to make payments on those notes, no other assets would be available for payment
of the deficiency and you may experience a loss.
5
Limited liquidity may result in delays in liquidation or lower returns.
There will be no market for the securities of any series prior to their
issuance, and there can be no assurance that a secondary market will develop or,
if it does develop, that it will provide holders with liquidity of investment or
that any market will continue for the life of the securities of any series. Any
underwriter(s) specified in the related prospectus supplement may make a
secondary market in the securities, but have no obligation to do so. Absent a
secondary market for the securities you may experience a delay if you choose to
sell your securities or the price you receive may be less than that which is
offered for a comparable liquid security.
Credit enhancement may not be sufficient to protect you from losses.
Credit enhancement is intended to reduce the effect of loan losses. Credit
enhancements may benefit only some classes of a series of securities, however,
and the amount of any credit enhancement will be limited as described in the
applicable prospectus supplement. The amount of a credit enhancement may decline
over time pursuant to a schedule or formula or otherwise, and could be depleted
from payments or for other reasons before the securities covered by the credit
enhancement are paid in full. In addition, a credit enhancement may not cover
all potential sources of loss. For example, a credit enhancement may or may not
cover fraud or negligence by a loan originator or other parties. Also, the
trustee may be permitted to reduce, substitute for, or even eliminate all or a
portion of a credit enhancement so long as the rating agencies that have rated
the securities at the request of the depositor indicate that that would not
cause them to change adversely their rating of the securities. Consequently,
securityholders may suffer losses even though a credit enhancement exists and
its provider does not default.
We refer you to "Credit Enhancement."
Prepayments of loans and other factors may result in a lower yield on the
securities.
The timing of principal payments of the securities of a series will be
affected by a number of factors, including:
o the extent of prepayments of the loans underlying that series of
securities, which may be influenced by a variety of factors (including
prepayments resulting from refinancing or liquidations of loans due to
defaults, casualties, condemnations and repurchases by the depositor,
the servicer or a seller due to material breaches of their
representations and warranties regarding the loans),
o the manner of allocating principal payments among the classes of
securities of a series as specified in the related prospectus
supplement,
o the exercise by the party entitled thereto of any right of optional
termination of a series of securities, and
o the rate and timing of payment defaults and losses incurred on the
assets underlying the series.
The yields to maturity and weighted average lives of a series of securities will
be affected primarily by the rate and timing of prepayment of the loans
representing assets underlying a series. The yields to maturity and weighted
average lives of securities will also be affected by the distribution of amounts
remaining in any pre-funding account following the end of the related funding
period. Any reinvestment risks resulting from a faster or slower incidence of
prepayments of loans held by a trust fund will be borne entirely by the holders
of one or more classes of a related series of securities.
We refer you to "Loan Program--Representations by Sellers; Repurchases,"
"Yield and Prepayment Considerations" and "The Agreements--Pre-Funding Account."
Interest payable on the securities of a series on each distribution date
will include all interest accrued during the period specified in the related
prospectus supplement. If interest accrues during the calendar month prior to a
distribution date, the effective yield to holders will be reduced from the yield
that would otherwise be obtainable if
6
interest payable on the security were to accrue through the day immediately
preceding each distribution date, and the effective yield (at par) to holders
will be less than the indicated coupon rate.
We refer you to "Description of the Securities--Distributions on
Securities--Distributions of Interest."
Junior liens may result in losses in foreclosure proceedings.
Some of the mortgages serving as collateral for your series of securities
may be junior liens subordinate to the rights of the mortgagee under the related
senior mortgage or mortgages. The proceeds from any liquidation, insurance or
condemnation proceedings in connection with a mortgage will be available to
satisfy the outstanding balance of the junior mortgage only after the claims of
all senior mortgagees have been satisfied in full, including any related
foreclosure costs. In addition, a junior mortgagee may not foreclose on the
property securing a junior mortgage unless it forecloses subject to the senior
mortgages, in which case it must either pay the entire amount due on the senior
mortgages to the senior mortgagees at or prior to the foreclosure sale or
undertake the obligation to make payments on the senior mortgages in the event
the mortgagor is in default thereunder. The trust fund will not have any source
of funds to satisfy any senior mortgages or make payments due to any senior
mortgagees and may therefore be prevented from foreclosing on the related
underlying property.
We refer you to "Legal Aspects of the Loans--Junior Mortgages; Rights of
Senior Mortgagees."
Declines in property values may adversely affect you.
The value of the properties underlying the loans held in the trust fund may
decline over time. Among the factors that could adversely affect the value of
the properties are:
o an overall decline in the residential real estate market in the areas
in which they are located;
o a decline in their general condition from the failure of borrowers to
maintain their property adequately; and
o natural disasters that are not covered by insurance like earthquakes
and floods.
In the case of home equity loans, declining property values could diminish or
extinguish the value of a junior mortgage before reducing the value of a senior
mortgage on the same property.
If property values decline, the actual rates of delinquencies,
foreclosures, and losses on all underlying loans could be higher than those
currently experienced in the mortgage lending industry in general. These losses,
to the extent not otherwise covered by credit enhancement, will be borne by the
holder of one or more classes of securities.
We refer you to "The Trust Fund--The Loans--Additional Information."
Delays in liquidation may adversely affect you.
Even if the properties underlying the loans held in the trust fund provide
adequate security for the loans, substantial delays could occur before defaulted
loans are liquidated and their proceeds are forwarded to investors. Property
foreclosure actions are regulated by state statutes and rules and are subject to
many of the delays and expenses of other lawsuits if defenses or counterclaims
are made, sometimes requiring several years to complete. Furthermore, in some
states if the proceeds of the foreclosure are insufficient to repay the loan,
the borrower is not liable for the deficit. Thus, if a borrower defaults, these
restrictions may impede the trust's ability to dispose of the property and
obtain sufficient proceeds to repay the loan in full. In addition, the servicer
will be entitled to deduct from liquidation proceeds all expenses reasonably
incurred in attempting to recover on the defaulted loan, including legal fees
and costs, real estate taxes, and property maintenance and preservation
expenses.
We refer you to "Yield and Prepayment Considerations."
7
The disproportionate impact of liquidation expenses on smaller loans may
adversely affect you.
Liquidation expenses of defaulted loans generally do not vary directly with
the outstanding principal balance of the loan at the time of default. Therefore,
if a servicer takes the same steps for a defaulted loan having a small remaining
principal balance as it does for a defaulted loan having a large remaining
principal balance, the amount realized after expenses is smaller as a percentage
of the outstanding principal balance of the small loan than it is for the
defaulted loan having a large remaining principal balance.
Consumer protection laws may adversely affect you.
State laws generally regulate interest rates and other charges, require
specified disclosures, and require licensing of mortgage loan originators and
servicers. In addition, most states have other laws and public policies for the
protection of consumers that prohibit unfair and deceptive practices in the
origination, servicing, and collection of mortgage loans. Depending on the
particular law and the specific facts involved, violations may limit the ability
to collect all or part of the principal or interest on the underlying loans held
in the trust fund. In some cases, the borrower may even be entitled to a refund
of amounts previously paid.
The loans held in the trust fund may also be subject to federal laws,
including:
o the Federal Truth in Lending Act and its regulations, which require
disclosures to the borrowers regarding the terms of any mortgage loan;
o the Equal Credit Opportunity Act and its regulations, which prohibit
discrimination in the extension of credit 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; and
o the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience.
Home Equity Loan Consumer Protection Act. For loans that were originated or
closed after November 7, 1989, the Home Equity Loan Consumer Protection Act of
1988, which requires additional application disclosures, limits changes that may
be made to the loan documents without the borrower's consent and restricts a
lender's ability to declare a default or to suspend or reduce a borrower's
credit limit.
The Riegle Act. Some loans may be subject to the Riegle Community
Development and Regulatory Improvement Act of 1994, known as the Riegle Act,
which incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money mortgage loans with high interest rates or high
up-front fees and charges. The provisions of the Riegle Act apply on a mandatory
basis to all mortgage loans originated on or after October 1, 1995. These
provisions can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including the right to rescind the mortgage loan.
Some violations of these federal laws may limit the ability to collect the
principal or interest on the loans held in the trust fund, and in addition could
subject the trust fund to damages and administrative enforcement. Losses on
loans from the application of those laws that are not otherwise covered by a
credit enhancement will be borne by the holders of one or more classes of
securities.
We refer you to "Legal Aspects of the Loans."
Balloon payment mortgages in the trust fund may pose a higher risk of loss.
Some of the mortgage loans held in the trust fund may not be fully
amortizing over their terms to maturity and, thus, will require substantial
principal payments (that is, balloon payments) at their stated maturity. Loans
with balloon payments involve a greater degree of risk than fully amortizing
loans because typically the borrower must be
8
able to refinance the loan or sell the property to make the balloon payment at
maturity. The ability of a borrower to do this will depend on various factors
including mortgage rates at the time of sale or refinancing, the borrower's
equity in the property, the relative strength of the local housing market, the
financial condition of the borrower, and tax laws. Losses on these loans that
are not otherwise covered by a credit enhancement will be borne by the holders
of one or more classes of certificates.
The liquidation proceeds of mixed use loans may take longer to recover.
Mixed use loans are mortgage loans secured by multi-family properties and
structures that include both residential dwelling units and space used for
retail, professional or other commercial uses. Due to the limited market for the
type of properties securing mixed use loans, in the event of a foreclosure we
expect that it will take longer to recover proceeds from the liquidation of a
mixed use loan than it would for a mortgage loan secured by a one- to
four-family dwelling.
We refer you to "The Trust Fund--The Loans--General."
You could be adversely affected by violations of environmental laws.
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 like those that secure the loans
held in the trust fund. Failure to comply with these laws and regulations can
result in fines and penalties that could be assessed against the trust fund as
owner of the related property. In some states, a lien on the property due to
contamination has priority over the lien of an existing mortgage. Also, a
mortgage lender may be held liable as an 'owner' or 'operator' for costs
associated with the release of petroleum from an underground storage tank under
certain circumstances. If the trust is considered the owner or operator of a
property, it will suffer losses as a result of any liability imposed for
environmental hazards on the property.
We refer you to "Legal Aspects of the Loans--Environmental Risks."
The ratings of the securities do not assure their payment.
Any class of securities issued under this prospectus and the accompanying
prospectus supplement may be rated by one or more nationally recognized rating
agencies. A rating is based on the adequacy of the value of the trust assets and
any credit enhancement for that class, and reflects the rating agency's
assessment of how likely it is that holders of the class of securities will
receive the payments to which they are entitled. A rating does not constitute an
assessment of how likely it is that principal prepayments on the underlying
loans will be made, the degree to which the rate of prepayments might differ
from that originally anticipated, or the likelihood that the securities will be
redeemed early. A rating is not a recommendation to purchase, hold, or sell
securities because it does not address the market price of the securities or the
suitability of the securities for any particular investor.
A rating may not remain in effect for any given period of time and the
rating agency could lower or withdraw the rating entirely in the future. For
example, the rating agency could lower or withdraw its rating due to:
o a decrease in the adequacy of the value of the trust assets or any
related credit enhancement;
o an adverse change in the financial or other condition of a credit
enhancement provider; or
o a change in the rating of the credit enhancement provider's long-term
debt.
The amount, type, and nature of credit enhancement established for a class
of securities will be determined on the basis of criteria established by each
rating agency rating classes of the securities. These criteria are sometimes
based upon an actuarial analysis of the behavior of similar loans in a larger
group. That analysis is often the basis upon which each rating agency determines
the amount of credit enhancement required for a class. The historical data
supporting any actuarial analysis may not accurately reflect future experience,
and the data derived from a large pool of similar loans may not accurately
predict the delinquency, foreclosure, or loss experience of any particular pool
of
9
mortgage loans. Mortgaged properties may not retain their values. If residential
real estate markets experience an overall decline in property values such that
the outstanding principal balances of the loans held in a particular trust fund
and any secondary financing on the related mortgaged properties become equal to
or greater than the value of the mortgaged properties, the rates of
delinquencies, foreclosures, and losses could be higher than those now generally
experienced in the mortgage lending industry. In addition, adverse economic
conditions may affect timely payment by mortgagors on their loans whether or not
the conditions affect real property values and, accordingly, the rates of
delinquencies, foreclosures, and losses in any trust fund. Losses from this that
are not covered by a credit enhancement will be borne, at least in part, by the
holders of one or more classes of securities.
We refer you to "Rating."
Book-entry securities may pose limitations.
If the securities are issued in book-entry form, you may have difficulty
selling your securities in the secondary trading market since investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates. In addition, since transactions in book-entry securities can be
effected only through The Depository Trust Company's participating
organizations, indirect participants and some banks, your ability to pledge your
securities to persons or entities that do not participate in The Depository
Trust Company system may be limited due to lack of a physical certificate
representing your securities.
We refer you to "Description of the Securities--Book-Entry Registration of
Securities."
Book-entry securities may result in delayed receipt of distributions.
As a beneficial owner of book-entry securities, you may experience some
delay in receiving payments on your securities since these payments will be:
o forwarded by the trustee to The Depository Trust Company;
o credited by The Depository Trust Company to the accounts of The
Depository Trust Company's participants; and
o ultimately credited to your account by one of The Depository Trust
Company's participants.
We refer you to "Description of the Securities--Book-Entry Registration of
Securities."
Bankruptcy or insolvency may affect the timing and amount of distributions on
the securities.
The servicer, the sellers and the depositor will treat each conveyance of
loans by the sellers to the depositor or, in the case of subsequently conveyed
loans, the trust fund as a sale of those loans. The depositor will treat each
conveyance of loans from the depositor to the trust fund as a sale of those
loans. If the conveyance of the loans by the sellers to the depositor or, in the
case of subsequently conveyed loans, the trust fund is treated as a sale, those
loans would not be part of the related seller's bankruptcy estate and would not
be available to that seller's creditors. If a seller becomes bankrupt or
insolvent, however, the bankruptcy trustee, a conservator or a receiver of the
seller or another person may attempt to recharacterize the sale of the loans as
a borrowing by the seller, secured by a pledge of the loans. Similarly, if the
conveyance of the loans by the depositor to the trust fund is treated as a sale,
those loans would not be part of the depositor's bankruptcy estate and would not
be available to the depositor's creditors. In the event of the bankruptcy or
insolvency of the depositor, however, the bankruptcy trustee, a conservator or a
receiver of the depositor or another person may attempt to recharacterize the
sale of the loans as a borrowing by the depositor, secured by a pledge of the
loans. In either case, this position, if argued before or accepted by a court,
could prevent timely payments of amounts due on your securities and result in a
reduction of payments due on your securities.
In addition, we anticipate that the trustee will hold original promissory
notes for each of the loans, together with assignments of each of the mortgages,
and the assignments of mortgages will be filed of public record.
10
In the event of a bankruptcy or insolvency of the servicer, the bankruptcy
trustee or a conservator or receiver of the servicer may have the power to
prevent the trustee or the securityholders from appointing a successor servicer.
In addition, federal and state statutory provisions, including the
Bankruptcy Reform Act of 1978, as amended, and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage lender
to realize upon its security. For example, in a proceeding under the Bankruptcy
Reform Act of 1978, as amended, a lender may not foreclose on a mortgaged
property without the permission of the bankruptcy court. If the mortgaged
property is not the debtor's principal residence and the court determines that
the value of the mortgaged property is less than the principal balance of the
mortgage loan, the debtor's proposed rehabilitation plan may provide for the
reduction of the secured indebtedness to the value of the mortgaged property as
of the date of the commencement of the bankruptcy, rendering the lender a
general unsecured creditor for the difference. The debtor's proposed plan may
also reduce the monthly payments due under the mortgage loan, change the rate of
interest and/or alter the mortgage loan repayment schedule. These proceedings
under the Bankruptcy Reform Act of 1978, as amended, including but not limited
to any automatic stay, could cause delays in receiving payments on the loans
underlying a series of securities and possible reductions in, or eliminations
of, the aggregate amount of these payments.
The principal amount of the securities may exceed the market value of the trust
fund assets.
There is no assurance that the market value of the primary assets or any
other assets for a series of securities will at any time be equal to or greater
than the aggregate principal amount of the securities of that series then
outstanding, plus accrued interest thereon. In addition, upon an event of
default under the indenture for a series of notes and a sale of the assets in
the trust fund or upon a sale of the assets of a trust fund for a series of
certificates, the trustee, the servicer, if any, the credit enhancer and any
other service provider specified in the related prospectus supplement generally
will be entitled to receive the proceeds of the sale to the extent of unpaid
fees and other amounts owing to those persons under the related agreement prior
to distributions to holders of securities. Upon any sale of trust fund assets,
the proceeds from the sale may be insufficient to pay in full the principal of
and interest on the securities of the related series.
Liquidation expenses for defaulted loans do not vary directly with the
outstanding principal balance of the loan at the time of default. Therefore,
assuming that a servicer took the same steps in realizing upon a defaulted loan
having a small remaining principal balance as it would in the case of a
defaulted loan having a larger principal balance, the amount realized after
expenses of liquidation would be smaller as a percentage of the outstanding
principal balance of the smaller loan than would be the case with a larger loan.
Because the average outstanding principal balances of the loans are small
relative to the size of the loans in a typical pool of first mortgages,
realizations net of liquidation expenses on defaulted loans may also be smaller
as a percentage of the principal amount of the loans than in the case of a
typical pool of first mortgage loans. The payment of these expenses will reduce
the portion of the amount realized that will be available to make payments on
the securities and may result in the related securityholders suffering a loss.
We refer you to "Yield and Prepayment Considerations."
You may receive a prepayment of principal from unused amounts in any pre-funding
account.
If the prospectus supplement relating to your series of securities provides
for pre-funding, on the closing date the depositor will deposit a specified
amount of cash into a pre-funding account. The amount of cash deposited will not
exceed 25% of the initial aggregate principal amount of the related series of
securities. The deposited cash will be used to purchase loans from the seller or
sellers specified in the related prospectus supplement, or from the depositor
(which, in turn, will acquire these loans from the seller or sellers specified
in the related prospectus supplement), during the funding period, which is a
period which will begin on the related closing date and will end on the date
specified in the related prospectus supplement, which in no event will be later
than the earliest to occur of:
o the date the amount on deposit in the pre-funding account is less than
the minimum dollar amount, if any, specified in the agreement(s)
relating to that series;
11
o the date an event of default occurs under the related agreement(s); or
o the date which is the later of three months or 90 days after the
related closing date.
These subsequently purchased loans will be required to conform to the
requirements set forth in the related agreement(s) and described in the related
prospectus supplement. The trustee will maintain the pre-funding account for the
related series of securities for the sole purpose of holding funds to be paid by
the trustee during the above-described funding period to the depositor or the
applicable seller(s) to cover the purchase price of these loans. Monies on
deposit in the pre-funding account will not be available to cover losses on or
in respect of the related loans. To the extent that the entire amount of cash in
the pre-funding account has not been used to purchase loans by the end of the
related funding period, any amounts remaining in the pre-funding account will be
distributed as a prepayment of principal to holders of securities on the
distribution date immediately following the end of the funding period, in the
amounts and pursuant to the priorities set forth in the related prospectus
supplement. The holders of the related class of securities will bear any
reinvestment risk resulting from this prepayment.
Some of the securities may be issued with original issue discount.
Some classes of securities may be issued with original issue discount for
federal income tax purposes. If you hold securities issued with original issue
discount, you will be required to include original issue discount in ordinary
gross income for federal income tax purposes as it accrues, in advance of
receipt of the cash attributable to that income. Accrued but unpaid interest on
securities that are accrual securities generally will be treated as original
issue discount for this purpose.
We refer you to "Federal Income Tax Consequences--Taxation of Debt
Securities--Interest and Acquisition Discount" and "--Market Discount."
12
THE TRUST FUND
General
The certificates of each series will represent interests in the assets of a
related trust fund, and the notes of each series will be secured by the pledge
of the assets of a related trust fund. The entity named in the related
prospectus supplement as trustee will hold the trust fund for a series of
securities for the benefit of the related securityholders. Each trust fund will
consist of a group of assets (the "Trust Fund Assets"), including a pool of
loans and payments in respect of these loans, as specified in the related
prospectus supplement.1 The pool of loans will be created on the first day of
the month of the issuance of the related series of securities or another date
specified in the related prospectus supplement. The securities will be entitled
to payment from the assets of the related trust fund or funds or other assets
pledged for the benefit of the securityholders, as specified in the related
prospectus supplement, and will not be entitled to payments in respect of the
assets of any other trust fund established by the depositor.
The depositor will acquire the Trust Fund Assets, either directly or
through affiliates, from originators or sellers that may be affiliates of the
depositor pursuant to a pooling and servicing agreement (each, a "Pooling and
Servicing Agreement") for a series consisting solely of certificates, or a
purchase agreement (each, a "Purchase Agreement") for a series consisting of
certificates and notes. The depositor will then convey the Trust Fund Assets
without recourse to the related trust fund. The depositor will acquire loans
that were either originated or acquired by affiliates of the depositor in
accordance with the underwriting criteria specified below under "Loan
Program--Underwriting Standards," "--Specific Underwriting Criteria;
Underwriting Programs" and "--Summary of Underwriting Requirements by Program."
We refer you to "Loan Program--Underwriting Standards," "--Specific Underwriting
Criteria; Underwriting Programs" and "--Summary of Underwriting Requirements by
Program."
The depositor will cause the Trust Fund Assets to be conveyed to the
trustee for the benefit of the holders of the securities of the related series.
The entity named as servicer in the related prospectus supplement, which may be
an affiliate of the depositor, will service the Trust Fund Assets, either
directly or through other servicing institutions called sub-servicers, pursuant
to a Pooling and Servicing Agreement for a series consisting solely of
certificates, or a master servicing agreement (each, a "Master Servicing
Agreement") between the trust fund and the servicer for a series consisting of
certificates and notes. The servicer will receive a fee for these services. We
refer you to "Loan Program" and "The Agreements." If the servicer services Trust
Fund Assets through a sub-servicer, the servicer will remain liable for its
servicing obligations under the related Agreement as if the servicer alone were
servicing the Trust Fund Assets.
As used herein, "Agreement" means, for a series consisting solely of
certificates, the Pooling and Servicing Agreement, and for a series consisting
of certificates and notes, the Purchase Agreement, the Trust Agreement, the
Indenture and the Master Servicing Agreement, as the context requires.
If so specified in the related prospectus supplement, a trust fund relating
to a series of securities may be a business trust formed under the laws of the
state specified in the related prospectus supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the depositor and the trustee of
the trust fund.
No trust fund will have any assets or liabilities prior to the initial
offering of the related series of securities. No trust fund is expected to
engage in any activities other than purchasing, managing and holding the related
Trust Fund Assets and other assets contemplated herein or specified in the
related prospectus supplement and the proceeds thereof, issuing securities,
making payments and distributions on securities and related activities. No trust
fund is expected to have any source of capital other than its assets and any
related credit enhancement.
- --------
* Whenever the terms "pool," "certificates," "notes" and "securities" are
used in this prospectus, they will be deemed to apply, unless the context
indicates otherwise, to one specific pool and the securities of one series
including the certificates representing certain undivided interests in, and/or
notes secured by the assets of, a single trust fund consisting primarily of the
loans in such pool. Similarly, the term "Pass-Through Rate" will refer to the
Pass-Through Rate borne by the certificates and the term "interest rate" will
refer to the interest rate borne by the notes of one specific series, as
applicable, and the term "trust fund" will refer to one specific trust fund.
13
Unless otherwise specified in the applicable prospectus supplement, the
depositor's only obligations with respect to a series of securities will be to
obtain specific representations and warranties from Equity One, Inc., a Delaware
corporation ("Equity One"), and the sellers and to assign to the trustee for
that series of securities the depositor's rights relating to those
representations and warranties. We refer you to "Loan Program--Representations
by Sellers; Repurchases" and "The Agreements--Assignment of the Trust Fund
Assets." The servicer's obligations with respect to the Trust Fund Assets will
consist principally of its contractual servicing obligations under the related
Agreement (including its obligation to enforce the obligations of the
sub-servicers or sellers, or both, as more fully described herein under "Loan
Program--Representations by Sellers; Repurchases" and "The
Agreements--Sub-Servicing by Sellers" and "--Assignment of the Trust Fund
Assets") and its obligation, if any, to make cash advances in the event of
delinquencies in payments on or with respect to the loans in the amounts
described herein under "Description of the Securities--Advances." The servicer's
obligation to make advances may be subject to limitations, to the extent
provided herein and in the related prospectus supplement.
The following is a brief description of the assets expected to be included
in the trust funds. If specific information respecting the Trust Fund Assets is
not known at the time the related series of securities initially is offered,
more general information of the nature described below will be provided in the
related prospectus supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Securities and Exchange Commission
("SEC") within fifteen days after the initial issuance of the securities. A copy
of the Agreement for each series of securities will be attached to the Form 8-K
and will be available for inspection at the corporate trust office of the
trustee specified in the related prospectus supplement. A schedule of the loans
relating to that series will be attached to the Agreement delivered to the
trustee upon delivery of the securities.
The Loans
General. Loans will consist of
o mortgage loans secured by first liens on one- to four-family
residential properties,
o mortgage loans secured by first and/or subordinate liens on mixed
commercial/residential use properties and other multi-family
residential properties, and
o closed-end and/or revolving home equity loans or balances thereof
secured by first and/or subordinate liens on one- to four-family
residential properties.
Except with respect to Subsequent Loans, as described herein under "The
Agreements--Pre-Funding Account," all loans will be purchased by the depositor,
either directly or through an affiliate, from one or more sellers. The sellers
will have either originated the loans or purchased the loans from other lenders.
As more fully described in the related prospectus supplement, the loans may be
"conventional" loans or loans that are insured or guaranteed by a governmental
agency like the Federal Housing Administration ("FHA") or Department of Veterans
Affairs ("VA").
All of the loans will have monthly payments due on a set day, but not
necessarily the first day, of each 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 (or a combination thereof), all as
described below or in the related prospectus supplement:
o Interest may be payable at a fixed rate, a rate adjustable from time
to time in relation to an index (which will be specified in the
related prospectus supplement), a rate that is fixed for a period of
time or under specific circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to time, or a rate that
is convertible from an adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of these limitations. Accrued interest
may be deferred and added to the principal of a loan for the periods
and under the circumstances as may be specified in the related
prospectus supplement. Loans may provide for the payment of interest
at a rate lower than the specified interest rate of the loan for a
period of time or for the life of the loan, and the amount of any
difference may be contributed from funds supplied by the seller of the
mortgaged property or
14
another source.
o Principal may be payable in equal installments over the term of the
loan, may be calculated on the basis of an assumed term to maturity
that is significantly longer than the actual term to maturity
(resulting in the need to make a larger "balloon" payment upon final
maturity) or on an interest rate that is different from the loan's
specified interest rate, or may not be payable during all or a portion
of the original term. Payment of all or a substantial portion of the
principal may be due on maturity, called a balloon payment. Principal
may include interest that has been deferred and added to the principal
balance of the loan.
o Monthly payments of principal and interest may be fixed for the life
of the loan, may increase over a specified period of time or may
change from period to period. Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may
include maximum or minimum amounts of monthly payments.
o The loans generally may be prepaid at any time. Prepayments of
principal may be subject to a prepayment fee, which may be fixed for
the life of the loan or may decline over time, and may be prohibited
for the life of the loan or for specific periods, which are called
lockout periods. Some loans may permit prepayments after expiration of
the applicable lockout period and may require the payment of a
prepayment fee in connection with any subsequent prepayment. Other
loans may permit prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The loans may include
"due on sale" clauses which permit the mortgagee to demand payment of
the entire loan in connection with the sale or transfer of the related
mortgaged property. Other loans may be assumable by persons meeting
the then applicable underwriting standards of the related seller.
The loans will be secured by mortgages or deeds of trust or other similar
security instruments creating a lien on the related mortgaged property. In the
case of home equity loans, these liens generally will be subordinated to one or
more senior liens on the related mortgaged properties as described in the
related prospectus supplement.
Loans with specified Combined 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 will be
described in the applicable prospectus supplement.
The aggregate principal balance of loans secured by mortgaged properties
that are owner-occupied will be disclosed in the related prospectus supplement.
The applicable prospectus supplement may provide for the basis for
representations relating to Single Family Properties, but if it does not, the
sole basis for a representation that a given percentage of the loans is secured
by Single Family Properties that are owner-occupied will be either
o the making of a representation by the borrower at origination of the
loan that the underlying mortgaged property will be used by the
borrower for a period of at least six months every year, or that the
borrower intends to use the mortgaged property as a primary residence,
or
o a finding that the address of the underlying mortgaged property is the
borrower's mailing address.
The mortgaged properties relating to residential loans and home equity
loans will consist of detached or semi-detached one- to four-family dwelling
units, townhouses, rowhouses, individual condominium units, individual units in
planned unit developments, and some other one- to four-family dwelling units
("Single Family Properties"). The mortgaged properties relating to mixed use
loans will consist of other multi-family properties and structures which include
residential dwelling units and space used for retail, professional or other
commercial uses ("Mixed Use Properties"). Mortgaged properties may include
vacation and second homes and investment properties and may be located in any
one of the fifty states, the District of Columbia, Puerto Rico or any territory
of the United States.
Home Equity Loans. Some of the loans may be non-purchase money loans
secured by the borrower's equity in his or her home. These home equity loans may
consist of closed-end loans and/or revolving credit line loans. As more fully
described in the related prospectus supplement, interest on each revolving
credit line loan,
15
excluding introductory rates offered from time to time during promotional
periods, is computed and payable monthly on the average daily outstanding
principal balance of the loan. Principal amounts on a revolving credit line loan
may be drawn down (up to a maximum amount as set forth in the related prospectus
supplement) or repaid under each revolving credit line loan from time to time,
but may be subject to a minimum periodic payment. The full amount of a
closed-end loan is advanced at the inception of the loan and, except to the
extent provided in the related prospectus supplement, generally is repayable in
equal (or substantially equal) installments of an amount to fully amortize the
loan by its stated maturity. Except to the extent provided in the related
prospectus supplement, the original terms to stated maturity of closed-end loans
will not exceed 360 months. Under some circumstances, under either a revolving
credit line loan or a closed-end loan, a borrower may choose an interest-only
payment option and is obligated to pay only the amount of interest which accrues
on the loan during the billing cycle. An interest-only payment option may be
available for a specified period before the borrower must begin paying at least
the minimum monthly payment of a specified percentage of the average outstanding
principal balance of the loan.
Additional Information. Each prospectus supplement will contain
information, as of the date of that prospectus supplement and to the extent then
specifically known to the depositor, regarding the loans constituting Trust Fund
Assets of the related trust fund, including
o the aggregate outstanding principal balance and the average
outstanding principal balance of the loans as of the applicable
cut-off date,
o the type of property securing the loan (e.g., Single Family
Properties, Mixed Use Properties, or other real property),
o the original terms to maturity of the loans,
o the largest principal balance and the smallest principal balance of
any of the loans,
o the earliest origination date and latest maturity date of any of the
loans,
o the Combined Loan-to-Value Ratios of the loans,
o the stated interest rates or annual percentage rates ("APR"), or range
of stated interest rates or APRs, of the loans,
o the maximum and minimum per annum interest rates of the loans, and
o the geographic location of the mortgaged properties.
If specific information respecting the loans is not known to the depositor at
the time the related securities are initially offered, more general information
of the nature described above will be provided in the related prospectus
supplement, and specific information will be set forth in a report on Form 8-K
to be filed with the SEC fifteen days after the initial issuance of the
securities.
The "Combined Loan-to-Value Ratio" of a loan at any given time is the
fraction, expressed as a percentage,
o the numerator of which is the sum of
o the principal balance of that loan at the date of origination
(or, in the case of a revolving credit line loan, the maximum
amount thereof available) plus
o the outstanding principal balance, at the date of origination of
the loan, of any senior mortgage loan(s) or, in the case of any
open-ended senior mortgage loan, the maximum available line of
credit for that mortgage loan, regardless of any lesser amount
actually outstanding at the date of origination of the loan, and
o the denominator of which is the Collateral Value of the related
mortgaged property.
16
The "Collateral Value" of the mortgaged property, other than for some loans
the proceeds of which were used to refinance an existing mortgage loan (each, a
"Refinance Loan"), is the lesser of
o the appraised value of that mortgaged property based on an appraisal
obtained by the originator at origination of that loan, and,
o if the loan was originated either in connection with the acquisition
of the mortgaged property by the borrower or within one year after
acquisition of the mortgaged property by the borrower, the purchase
price paid by the borrower for the mortgaged property.
In the case of Refinance Loans, the "Collateral Value" of the related
mortgaged property is the appraised value thereof determined in an appraisal
obtained at the time of refinancing.
No assurance can be given that values of the mortgaged properties have
remained or will remain at their levels on the dates of origination of the
related loans. If the residential real estate market experiences an overall
decline in property values causing the sum of the outstanding principal balances
of the loans and any primary or secondary financing on the mortgaged properties,
as applicable, in a particular trust fund to become equal to or greater than the
value of the mortgaged properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions and
other factors (which may or may not affect real property values), including
without limitation, loss of employment, illness or other personal difficulties
suffered by obligors on the loans, may affect the timely payment by borrowers of
scheduled payments of principal and interest on the loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses on any group of loans. To
the extent that these losses are not covered by subordination provisions or
alternative arrangements, the losses will be borne, at least in part, by the
holders of the securities of the related series.
Substitution of Trust Fund Assets
Substitution of Trust Fund Assets will be permitted if the representations
and warranties regarding any original Trust Fund Asset are breached or if the
documentation regarding any Trust Fund Asset is determined by the trustee to be
incomplete. The related prospectus supplement will generally set forth the
period during which substitution will be permitted. Substituted Trust Fund
Assets generally will comply with all of the representations and warranties and
satisfy the criteria set forth in the related Agreement and described in the
related prospectus supplement as of the date of substitution. We refer you to
"Loan Program--Representations by Sellers; Repurchases" and "The
Agreements--Assignment of the Trust Fund Assets."
USE OF PROCEEDS
The depositor will use all or substantially all of the net proceeds from
the sale of each series of securities for one or more of the following purposes:
o to purchase the related Trust Fund Assets;
o to establish any pre-funding account, capitalized interest account or
reserve accounts described in the related prospectus supplement;
o to pay costs of structuring and issuing the securities, including the
costs of obtaining credit enhancement, if any; and
o to serve any other corporate purpose specifically permitted by its
certificate of incorporation.
The depositor expects to sell securities in series from time to time, but the
timing and amount of offerings of securities will depend on a number of factors,
including the volume of Trust Fund Assets acquired by the depositor, prevailing
interest rates, availability of funds and general market conditions.
17
THE DEPOSITOR
Equity One ABS, Inc., a Delaware corporation, the depositor, was
incorporated in March of 1997 for the limited purpose of acquiring, owning and
transferring Trust Fund Assets and selling interests therein or bonds secured
thereby. The depositor is a limited purpose wholly-owned finance subsidiary of
Equity One. Equity One is a wholly-owned operating subsidiary of Popular North
America, Inc., a Delaware corporation ("PNA"). PNA is an indirect wholly-owned
subsidiary of Popular, Inc., a diversified, publicly owned bank holding company
incorporated under the General Corporation Law of Puerto Rico ("Popular"). The
depositor and Equity One are subject to comprehensive regulation by the Board of
Governors of the Federal Reserve System ("Federal Reserve"). No obligations of
the depositor are insured by any governmental agency. The depositor maintains
its principal office at 103 Springer Building, 3411 Silverside Road, Wilmington,
Delaware 19810. Its telephone number is (302) 478-6160.
Neither the depositor nor any of the depositor's affiliates will insure or
guarantee distributions on the securities of any series.
LOAN PROGRAM
Except with respect to Subsequent Loans, as described herein under "The
Agreements--Pre-Funding Account," the loans will have been purchased by the
depositor, either directly or through affiliates, from the sellers. The
applicable prospectus supplement may provide for the underwriting criteria used
in originating the loans, but if it does not, the loans so purchased by the
depositor will have been either originated or acquired by the sellers in
accordance with the underwriting criteria specified below under "Underwriting
Standards," "Specific Underwriting Criteria; Underwriting Programs" and "Summary
of Underwriting Requirements by Program." All of the loans will be underwritten
by Equity One's central credit office.
Underwriting Standards
Each seller operates under underwriting standards that have been approved
by Equity One and are consistent with those utilized by mortgage lenders
generally during the period of origination for similar types of loans (the
"Equity One Standards"). Equity One and each seller will represent and warrant
that all loans conveyed by it to the depositor or one of its affiliates have
been underwritten in accordance with the Equity One Standards. As to any loan
insured by the FHA or partially guaranteed by the VA, each seller will represent
that it has complied with underwriting policies of the FHA or the VA, as the
case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related mortgaged property as collateral. In general, a prospective
borrower applying for a loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent information regarding
the applicant's liabilities, income, credit history, including the principal
balance and payment history regarding any senior mortgage, and employment
history, as well as other personal information which, to the extent specified in
the related prospectus supplement, has been verified by the related seller. In
addition, to the extent specified in the related prospectus supplement, each
seller, as part of its quality control system, will have reverified information
regarding the foregoing matters that has been provided by a mortgage brokerage
company prior to funding a loan and periodically audit files based on a random
sample of closed loans. Each borrower is generally required to provide an
authorization to apply for a credit report which summarizes the borrower's
credit history with local and national merchants and lenders, installment debt
payments and any record of defaults, bankruptcies, repossessions, suits or
judgments. In most cases, an employment verification is obtained either in
writing or verbally from the borrower's employer, which verification reports,
among other things, the length of employment with that organization and the
borrower's current salary. If a prospective borrower is self-employed, the
borrower may be required to submit copies of signed tax returns.
In determining the adequacy of the property to be used as collateral, a
full or drive by appraisal will generally be made of each property considered
for financing in an amount in excess of $15,000. The appraiser is generally
required to inspect the property, issue a report on its condition and, if
applicable, verify construction, if new, has been completed. The appraisal is
based on the market value of comparable homes, the estimated rental
18
income (if considered applicable by the appraiser) and the cost of replacing the
home. The value of the property being financed, as indicated by the appraisal,
must be high enough to currently support, and be anticipated to support in the
future, the outstanding loan balance.
Once all applicable employment, credit and property information is
received, a determination generally is made, with the assistance of a
Debt-to-Income Ratio, as to whether the prospective borrower has sufficient
monthly income available
o to meet the borrower's monthly obligations on the proposed mortgage
loan (generally determined on the basis of the monthly payments due in
the year of origination) and other expenses related to the property
(such as property taxes and hazard insurance), and
o to meet other financial obligations and monthly living expenses.
The "Debt-to-Income Ratio" is the ratio of the borrower's total monthly payments
to the borrower's gross monthly income. The maximum monthly Debt-to-Income Ratio
varies depending upon a borrower's credit grade and loan documentation level (as
described below) but does not generally exceed 50%. Variations in the monthly
Debt-to-Income Ratio limit are permitted based on compensating factors. The
underwriting standards applied by sellers, particularly regarding the level of
loan documentation and the borrower's income and credit history, may be varied
in appropriate cases where factors such as a low Combined Loan-to-Value Ratio or
other favorable credit factors exist.
Some of the types of loans that may be included in a trust fund are
recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, some loans may provide for escalating
or variable payments by the borrower. These types of loans are underwritten on
the basis of a judgment that the borrowers have the ability to make the monthly
payments required initially. In some instances, a borrower's income may not be
sufficient to permit continued loan payments as payment amounts increase. These
types of loans may also be underwritten primarily upon the basis of low Combined
Loan-to-Value Ratios or other favorable credit factors. A trust fund may also
include both first and second lien loans made to a borrower at the same time on
the same mortgaged property, provided that each of those loans must separately
satisfy the Equity One Standards.
Specific Underwriting Criteria; Underwriting Programs
The Equity One Standards allow for the origination and purchase of loans
generally under three underwriting programs, known as Grade A Credits, Grade B
Credits and Grade C Credits, all of which are summarized below. These programs
and their underwriting criteria may change from time to time. Deviations from
the specific criteria of an underwriting program are permitted to reflect local
economic trends and real estate valuations, as well as other credit factors
specific to each loan application and/or each portfolio acquired. Some loans may
be to borrowers whose creditworthiness may not coincide with all program
criteria. Overall, the goal is to maintain the integrity of these programs and
simultaneously provide lending officers and correspondent networks with the
flexibility to consider the specific circumstances of each loan.
Under the Equity One Standards, the following four types of income
documentation programs are used:
o full income documentation ("Full Doc");
o stated income ("SI");
o alternative income verification ("AIV"); and
o light income documentation ("Lite Doc").
Under the Full Doc program, income is verified by reviewing the borrower's
W-2s for the past two years and two of the borrower's current paystubs. Under
the SI program, the borrower is not required to submit any income documentation.
Under the AIV program, the borrower must submit bank statements for the past
twenty-four months to verify the average monthly income used to qualify the
borrower. Under the Lite Doc program,
19
the borrower must submit bank statements for the past six months. Tax returns
are generally not required under any income documentation program, however, each
lender always has the right to require tax returns if that is the only means of
verifying income or cash flow.
Underwriting with the SI, AIV or Lite Doc program is reserved for Grade A
Credits and Grade B Credits loans, and offers an alternative for self-employed
and employed applicants with supplemental income, who are either unable to or do
not wish to produce income documentation to substantiate all of their income.
For loans underwritten pursuant to the SI or Lite Doc program, the
Debt-to-Income Ratio is based on a maximum of 50% of stated income as disclosed
on the loan application. For loans underwritten pursuant to the AIV program, the
Debt-to-Income Ratio is based on a maximum of 50% of average monthly income over
the past twenty-four months, as verified through monthly bank statements.
Summary of Underwriting Requirements by Program
Grade A Credits. For Grade A Credits, the following criteria generally
apply:
o An in-file credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history is
required. Typically, a good to excellent credit history of at least
one year is required, and prior credit history may be rated on a
case-by-case basis. The credit history should reflect that existing
and previous debts were paid in a timely manner. A Chapter 7
bankruptcy that has been discharged for a minimum of five years is
acceptable if the borrower has since established a payment history,
notwithstanding the bankruptcy, consistent with this underwriting
program. A Chapter 13 bankruptcy that has been discharged for a
minimum of two years is acceptable if the borrower has since
established a payment history, notwithstanding the bankruptcy,
consistent with this underwriting program. Unpaid charge-offs,
collections, liens or judgments may not exceed $500 in the aggregate.
During the most recent 12 month period, the borrower may not have more
than
o one 30 day delinquency in his or her mortgage payment history
(consecutive 30 day delinquencies are treated as one 30 day
account),
o three 30 day delinquencies on major credit cards and installment
debt, and
o four 30 day delinquencies on retail credit cards.
o Generally, the borrower must have
o been employed for not less than two years with the same employer
or
o established comparable stability in a particular field of work.
o Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform
to the following criteria (except that the Combined Loan-to-Value
Ratio may exceed the maximum indicated below up to a maximum of 100%
solely as a result of including credit insurance premiums and discount
points financed as part of the loan in the calculation of the ratio):
Maximum Combined Maximum Debt-
Loan-to-Value-Ratio to-Income Ratio
------------------- ---------------
Property Type
- -------------
Owner occupied one- to four-family
dwellings, townhouses, condominiums,
true second homes 95% 50%
Non-owner occupied single family
dwellings, townhouses,
20
Maximum Combined Maximum Debt-
Loan-to-Value-Ratio to-Income Ratio
------------------- ---------------
Property Type
- -------------
condominiums 80% 50%
Non-owner occupied two- to
four-family dwellings 75% 50%
Mixed use: Purchase 75% Minimum Debt
Refinance 70% Service Coverage 1.15
Grade B Credits. For Grade B Credits, the following criteria generally
apply:
o An in-file credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history is
required. Typically, a satisfactory to good credit history of at least
one year is required, and prior credit history may be rated on a
case-by-case basis. The credit history should reflect that existing
and previous debts were paid in a predominately timely manner. A
Chapter 7 bankruptcy, if discharged for two years, is acceptable if
there are two years of re-established credit and a satisfactory
written explanation. A Chapter 13 bankruptcy with a minimum of a two
year satisfactory payment plan and one year of reestablished credit is
acceptable. All unpaid charge-offs, liens or judgments in the last two
years must be paid in full. During the most recent twelve month
period, the borrower may not have more than
o two 30 day delinquencies in his or her mortgage payment history
(consecutive 30 day delinquencies are treated as one 30 day
account),
o three 30 day delinquencies on major credit cards and installment
debt,
o four 30 day delinquencies on retail credit cards, and
o one 60 day delinquency on retail credit cards.
o Generally, the borrower must have
o been employed for not less than two years with the same employer
or
o established comparable stability in a particular field of work.
o Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform
to the following criteria (except that the Combined Loan-to-Value
Ratio may exceed the maximum indicated below up to a maximum of 100%
solely as a result of including credit insurance premiums and discount
points financed as part of the loan in the calculation of the ratio):
Maximum Combined Maximum Debt-
Loan-to-Value-Ratio to-Income Ratio
------------------- ---------------
Property Type
- -------------
Owner occupied one- to four-family
dwellings, townhouses, condominiums 95% 50%
21
Maximum Combined Maximum Debt-
Loan-to-Value-Ratio to-Income Ratio
------------------- ---------------
Property Type
- -------------
True second homes 90% 50%
Non-owner occupied single family
dwellings, townhouses, condominiums 80% 50%
Non-owner occupied two- to
four-family dwellings 75% 50%
Mixed use: Purchase 75% Minimum Debt
Refinance 70% Service Coverage 1.15
Grade C Credits. For Grade C Credits, the following criteria generally
apply:
o An in-file credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit
history is required. Typically, a fair to satisfactory credit
history of at least one year is required. A discharged Chapter 7
bankruptcy is acceptable with one year of re-established credit.
A non-discharged Chapter 13 bankruptcy will be considered with a
minimum of a two year satisfactory payment plan, one year of
re-established credit and trustee permission. A written
explanation of derogatory credit is required. Mortgage payment
history may not reflect any more than four 30 day delinquencies
and one 60 day delinquency during the most recent 12 months
(consecutive 30 day delinquencies are treated as one 30 day
account). In addition, all accounts that are delinquent for 60
days or longer must be paid from proceeds.
o Generally, the borrower must have
o been employed for not less than one year with the same
employer or
o established comparable stability in a particular field of
work.
o Combined Loan-to-Value Ratios and Debt-to-Income Ratios must
conform to the following criteria (except that the Combined
Loan-to-Value Ratio may exceed the maximum indicated below up to
a maximum of 90% solely as a result of including credit insurance
premiums and discount points financed as part of the loan in the
calculation of the ratio):
Maximum Combined Maximum Debt-
Loan-to-Value-Ratio to-Income Ratio
------------------- ---------------
Property Type
- -------------
Owner occupied single family
dwellings, townhouses 80% 50%
Owner occupied two- to four-family
dwellings 75% 50%
Owner occupied condominiums 75% 50%
22
Maximum Combined Maximum Debt-
Loan-to-Value-Ratio to-Income Ratio
------------------- ---------------
Property Type
- -------------
True second homes 75% 50%
Non-owner occupied one- to
four-family dwellings, townhouses, 70% 50%
condominiums
If the Combined Loan-to-Value Ratio of a particular borrower's loan exceeds
85%, in determining the credit grade of the borrower's loan each seller will
also analyze standardized credit history data available from credit bureaus in
the form of a credit "score" of the borrower based on the borrower's past credit
history. Generally, a higher credit score signifies that a borrower has a better
credit history. Currently, the sellers employ the credit scoring system of the
Fair Isaac Credit Bureau, known as FICO scores, in assessing borrowers under
these circumstances. If a borrower's credit score becomes relevant because the
borrower's loan has a high Combined Loan-to-Value Ratio, the borrower's loan may
receive a lower credit grade from a seller if his or her credit score does not
meet a minimum threshold. The sellers also periodically analyze the FICO scores
of borrowers after their loans have been underwritten together with the payment
history of the borrowers on their loans as part of the continuing assessment of
the accuracy and effectiveness of the Equity One Standards.
Qualifications of Sellers and Servicer
Each seller is required to be an institution experienced in originating
loans of the type contained in the related trust fund in accordance with
accepted practices and prudent guidelines and must maintain satisfactory
facilities to originate those loans. The servicer is required to be an
institution experienced in originating and servicing loans of the type contained
in the related trust fund in accordance with accepted practices and prudent
guidelines and must maintain satisfactory facilities to originate and service
those loans. Each seller must maintain all of the licenses necessary for the
conduct of its business.
Representations by Sellers; Repurchases
Each seller (and Equity One, where a seller is a subsidiary or affiliate of
Equity One) will make representations and warranties in respect of the loans
sold by the seller to a trust fund. These representations and warranties may
include, among other things:
o that (except for loans in amounts less than $15,000) title insurance
(or in the case of mortgaged properties located in areas where these
policies are generally not available, an attorney's certificate of
title) and any required hazard insurance policy were effective at
origination of each loan and that the title insurance (or certificate
of title as applicable) remained in effect on the date of purchase of
the loan from the seller by or on behalf of the depositor;
o that the seller had good title to each loan and that each loan was
subject to no offsets, defenses, counterclaims or rights of rescission
except to the extent that any buydown agreement may forgive some
indebtedness of a borrower;
o that each loan constituted a valid lien on, or a perfected security
interest attaching to the mortgaged property (subject only to
permissible liens disclosed, if applicable, title insurance
exceptions, if applicable, and other exceptions described in the
Agreement) and that the mortgaged property was free from damage and
was in acceptable condition;
o that there were no delinquent tax or assessment liens against the
mortgaged property;
23
o that no required payment on a loan was contractually delinquent more
than the number of days specified in the related prospectus
supplement; and
o that each loan was made in compliance with all applicable local, state
and federal laws and regulations in all material respects.
The servicer or the trustee, if the servicer is the seller, will promptly
notify the relevant seller (and Equity One, if it is not the servicer or the
seller) of any breach of any representation or warranty made by it in respect of
a loan which materially and adversely affects the interests of holders of the
securities secured by the loan. If the seller cannot cure a breach within 90
days following notice from the servicer or the trustee, as the case may be, then
the seller will be obligated either to
o repurchase the loan from the trust fund at a price (the "Purchase
Price") equal to 100% of the unpaid principal balance thereof as of
the date of the repurchase plus accrued interest thereon to the first
day of the month following the month of repurchase at the loan's
stated interest rate (less any advances or amount payable as related
servicing compensation if the seller is the servicer) or
o substitute for the loan a replacement loan that satisfies the criteria
specified in the related Agreement and described in the related
prospectus supplement.
If a REMIC or FASIT election is to be made for a trust fund, the servicer or a
holder of the related residual certificate generally will be obligated to pay
any prohibited transaction tax which may arise in connection with any repurchase
or substitution and the trustee must have received a satisfactory opinion of
counsel that the repurchase or substitution will not cause the trust fund to
lose its status as a REMIC or FASIT or otherwise subject the trust fund to a
prohibited transaction tax. The servicer may be entitled to reimbursement for
any payment from the assets of the related trust fund or from any holder of the
related residual certificate. We refer you to "Description of the
Securities--General." Except in those cases in which the servicer is the seller,
the servicer will be required under the applicable Agreement to enforce this
obligation for the benefit of the trustee and the holders of the securities,
following the practices it would employ in its good faith business judgment were
it the owner of the loan. This repurchase or substitution obligation will
constitute the sole remedy available to holders of securities or the trustee for
a breach of representation by a seller.
If Equity One makes a representation or warranty on behalf of a seller,
Equity One will be obligated to purchase or substitute a loan if a seller
defaults on its obligation to do so, but no assurance can be given that Equity
One will carry out its purchase or substitution obligations for loans. Neither
the depositor nor the servicer (unless the servicer is a seller) will be
obligated to purchase or substitute a loan if a seller defaults on its
obligation to do so, and no assurance can be given that sellers will carry out
their respective repurchase or substitution obligations for loans. However, to
the extent that a breach of a representation and warranty of a seller may also
constitute a breach of a representation made by the servicer, the servicer may
have a repurchase or substitution obligation as described below under "The
Agreements--Assignment of Trust Fund Assets."
DESCRIPTION OF THE SECURITIES
Each series of certificates will be issued pursuant to either
o a Pooling and Servicing Agreement among the depositor, the servicer,
the trustee and the sellers, or
o a Trust Agreement between the depositor and the trustee.
A form of Pooling and Servicing Agreement and Trust 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 pursuant to an indenture (an "Indenture")
between the related trust fund established by the depositor and the trustee, and
the related loans will be serviced by the servicer pursuant to a Master
Servicing Agreement. A form of Indenture and Master Servicing Agreement has been
filed as an exhibit to the registration statement of which this prospectus forms
a part. A series of securities may consist of both notes and certificates. Each
Agreement, dated as of the related cut-off date, will be among various parties
which may include, without limitation, the depositor, the servicer, the sellers
and/or the
24
trustee for the benefit of the holders of the securities of that series. The
provisions of each Agreement will vary depending upon the nature of the
securities to be issued thereunder and the nature of the related trust fund. The
following are descriptions of the material provisions which may appear in each
Agreement. The descriptions are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement for each series of
securities and the applicable prospectus supplement.
General
The securities of each series will be issued in book-entry or fully
registered form as specified in the related prospectus supplement, in the
authorized denominations specified in the related prospectus supplement, and
will, in the case of asset-backed certificates, evidence specified beneficial
ownership interests in, and in the case of asset-backed notes, be secured by the
assets of the related trust fund created pursuant to each Agreement and will not
be entitled to payments in respect of the assets included in any other trust
fund established by the depositor. The securities will not represent obligations
of the depositor or any affiliate of the depositor. Some of the loans may be
guaranteed or insured as set forth in the related prospectus supplement. Each
trust fund will consist of, to the extent provided in the related Agreement:
o the Trust Fund Assets, as from time to time are subject to the related
Agreement (exclusive of any amounts specified in the related
prospectus supplement (each, a "Retained Interest")), including all
payments of interest and principal received on the loans after the
cut-off date (to the extent not applied in computing the principal
balance of the loans as of the cut-off date (the "Cut-off Date
Principal Balance")),
o assets that from time to time are required to be deposited in the
related Security Account, as described below under "The
Agreements--Payments on Loans; Deposits to Security Account,"
o property which secured a loan and which is acquired on behalf of the
holders of securities of the related series by foreclosure or deed in
lieu of foreclosure, and
o any insurance policies or other forms of credit enhancement required
to be maintained pursuant to the related Agreement.
If so specified in the related prospectus supplement, a trust fund may also
include one or more of the following: reinvestment income on payments received
on the Trust Fund Assets, a reserve account, a mortgage pool insurance policy, a
special hazard insurance policy, a bankruptcy bond, one or more letters of
credit, a surety bond, guaranties or similar instruments.
Each series of securities will be issued in one or more classes. Each class
of asset-backed certificates of a series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on, and each class of asset-backed notes of a series will be secured
by, the related Trust Fund Assets. A series of securities may include one or
more classes that are senior in right to payment to one or more other classes of
securities of that series. Some series or classes of securities may be covered
by insurance policies, surety bonds or other forms of credit enhancement, in
each case as described under "Credit Enhancement" herein and in the related
prospectus supplement. One or more classes of securities of a series may be
entitled to receive distributions of principal, interest or any combination
thereof. Distributions on one or more classes of a series of securities may be
made prior to one or more other classes, after the occurrence of specified
events, in accordance with a schedule or formula or on the basis of collections
from designated portions of the related Trust Fund Assets, in each case as
specified in the related prospectus supplement. The timing and amounts of
distributions may vary among classes or over time as specified in the related
prospectus supplement.
Distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related securities will be made by the trustee on
each distribution date (i.e., monthly, quarterly, semi-annually or at other
intervals and on other dates as specified in the related prospectus supplement)
in proportion to the percentages specified in the related prospectus supplement.
Distributions will be made to the persons in whose names the securities are
registered at the close of business on the dates specified in the related
prospectus supplement (each, a
25
"Record Date"). Distributions will be made in the manner specified in the
related prospectus supplement to the persons entitled thereto at the address
appearing in the register maintained for holders of securities; provided,
however, that the final distribution in retirement of the securities will be
made only upon presentation and surrender of the securities at the office or
agency of the trustee or other person specified in the notice to securityholders
of the final distribution.
The securities will be freely transferable and exchangeable at the
corporate trust office of the trustee as set forth in the related prospectus
supplement. No service charge will be made for any registration of exchange or
transfer of securities of any series, but the trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of either interest or principal on the related
loans or a class of securities entitled to receive payments of interest and
principal on the loans only after payments to other classes or after the
occurrence of specified events by or on behalf of any employee benefit plan or
other retirement arrangement (including individual retirement accounts and
annuities, Keogh plans and collective investment funds in which plans, accounts
or arrangements are invested) subject to provisions of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") or the Internal Revenue Code
of 1986, as amended (the "Code"), may result in prohibited transactions, within
the meaning of ERISA and the Code. We refer you to "ERISA Considerations." The
applicable prospectus supplement may provide for the conditions for transferring
securities of this type of class, but if it does not, the transfer of securities
of this type of class will not be registered unless the transferee
o represents that it is not, and is not purchasing on behalf of, any
plan, account or arrangement, or
o provides an opinion of counsel satisfactory to the trustee and the
depositor that the purchase of securities of that class by or on
behalf of the plan, account or arrangement is permissible under
applicable law and will not subject the trustee, the servicer, the
sellers or the depositor to any obligation or liability in addition to
those undertaken in the Agreements.
An election may be made to treat the trust fund related to each series or
designated portions thereof as a "real estate mortgage investment conduit" or
"REMIC" or as a "financial asset securitization investment trust" or "FASIT,"
each as defined in the Code. The related prospectus supplement will specify
whether a REMIC or FASIT election is to be made. Alternatively, the Agreement
for a series may provide that a REMIC or FASIT election may be made at the
discretion of the depositor or the servicer and may only be made if specific
conditions are satisfied. The terms and provisions applicable to the making of a
REMIC or FASIT election for a particular series will be set forth in the related
prospectus supplement. If a REMIC or FASIT election is made for a series, one of
the classes will be designated as evidencing the sole class of "residual
interests" in the related REMIC or the sole ownership interest in the FASIT,
each as defined in the Code. All other classes of securities in that series will
constitute "regular interests" in the related REMIC or FASIT, as defined in the
Code. If a REMIC or FASIT election is made for a particular series, the servicer
or a holder of the related residual certificate will be obligated to take all
actions required in order to comply with applicable laws and regulations and
will be obligated to pay any prohibited transaction taxes. The servicer, unless
otherwise provided in the related prospectus supplement, will be entitled to
reimbursement for any payment from the assets of the trust fund or from any
holder of the related residual certificate.
Distributions on Securities
General. In general, the method of determining the amount of distributions
on a particular series of securities will depend on the type of credit
enhancement, if any, that is used for that series. We refer you to "Credit
Enhancement." Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the securities of a particular
series. The prospectus supplement for each series of securities will describe
the method to be used in determining the amount of distributions on the
securities of that series.
Distributions allocable to principal and interest on the securities will be
made by the trustee out of, and only to the extent of, funds in the related
Security Account, including any funds transferred from any reserve account or
26
other cash account established and available therefor. The related prospectus
supplement will describe the method for allocating distributions made on any
distribution date among securities of different classes and between
distributions of principal (and, if applicable, between distributions of
Principal Prepayments, as defined below, and scheduled payments of principal)
and interest. The prospectus supplement will also describe the method for
allocating distributions among securities of a particular class.
Available Funds. All distributions on the securities of each series on each
distribution date will be made from the Available Funds described below, in
accordance with the terms described in the related prospectus supplement and
specified in the Agreement. "Available Funds" for each distribution date will
generally equal the amount on deposit in the related Security Account on that
distribution date (net of related fees and expenses payable by the related trust
fund) other than amounts to be held therein for distribution on future
distribution dates.
Distributions of Interest. Interest will accrue on the aggregate principal
balance (or, in the case of securities entitled only to distributions allocable
to interest, the aggregate notional amount) of each class of securities entitled
to interest from the date, at the Pass-Through Rate or interest rate, as
applicable (which in either case may be a fixed rate or rate adjustable as
specified in the related prospectus supplement), and for the periods specified
in the related prospectus supplement. "Pass-Through Rate" means a rate equal to
the interest rate borne by the underlying loans net of the aggregate servicing
fees and any other amounts specified in the related prospectus supplement. To
the extent funds are available therefor, interest accrued during each specified
period on each class of securities entitled to interest (other than a class of
securities that provides for interest that accrues, but is not currently
payable, referred to hereafter as "Accrual Securities") will be distributable on
the distribution dates specified in the related prospectus supplement until the
aggregate principal balance of that class of securities has been distributed in
full or, in the case of securities entitled only to distributions allocable to
interest, until the aggregate notional amount of those securities is reduced to
zero or for the period of time designated in the related prospectus supplement.
The original aggregate principal balance of each class of securities will equal
the aggregate distributions allocable to principal to which that security is
entitled. Distributions allocable to interest on each security that is not
entitled to distributions allocable to principal will be calculated based on the
notional amount of that security. The notional amount of a security will not
evidence an interest in or entitlement to distributions allocable to principal
but will be used solely for convenience in expressing the calculation of
interest and for other specified purposes.
Interest payable on the securities of a series on a distribution date will
include all interest accrued during the period specified in the related
prospectus supplement. In the event interest accrues over a period ending two or
more days prior to a distribution date, the effective yield to securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the security were to accrue through the day immediately preceding
that distribution date, and the effective yield (at par) to securityholders will
be less than the indicated coupon rate.
If specified in the related prospectus supplement, any interest that has
accrued on a class of Accrual Securities but is not paid on a given distribution
date will be added to the aggregate principal balance of that class of Accrual
Securities on that distribution date. Distributions of interest on any class of
Accrual Securities will commence only after the occurrence of the events
specified in the related prospectus supplement. Until distribution of interest
commences, the beneficial ownership interest in the trust fund or the principal
balance, as applicable, of that class of Accrual Securities, will increase on
each distribution date by the amount of interest that accrued on that class of
securities during the preceding interest accrual period but was not distributed
to that class on that distribution date. Each class of Accrual Securities will
thereafter accrue interest on its outstanding aggregate principal balance as so
adjusted.
Distributions of Principal. The related prospectus supplement will specify
the method by which the amount of principal to be distributed on the securities
on each distribution date will be calculated and the manner in which principal
will be allocated among the classes of securities entitled to distributions of
principal. The aggregate principal balance of any class of securities entitled
to distributions of principal generally will be the initial aggregate principal
balance of that class of securities specified in the related prospectus
supplement, reduced by all distributions reported to the holders of those
securities as allocable to principal and,
27
o in the case of Accrual Securities, increased by all interest accrued
but not then distributable on the Accrual Securities, and
o in the case of adjustable rate securities, subject to the effect of
negative amortization, if applicable.
If so provided in the related prospectus supplement, one or more classes of
securities will be entitled to receive all or a disproportionate percentage of
the payments of principal which are received from borrowers in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of these payments ("Principal Prepayments") in the
percentages and under the circumstances or for the periods specified in the
related prospectus supplement. Any allocation of Principal Prepayments to a
class or classes of securities will have the effect of accelerating the
amortization of those securities while increasing the interests evidenced by one
or more other classes of securities in the trust fund. Increasing the interests
of the other classes of securities relative to that of specific securities is
intended to preserve the availability of the subordination provided by the other
securities. See "Credit Enhancement--Subordination."
Unscheduled Distributions. If specified in the related prospectus
supplement, the securities will be subject to receipt of distributions before
the next scheduled distribution date under the circumstances and in the manner
described below and in the prospectus supplement. If applicable, the trustee
will be required to make unscheduled distributions on the day and in the amount
specified in the related prospectus supplement if, due to substantial payments
of principal (including Principal Prepayments) on the Trust Fund Assets, the
trustee or the servicer determines that the funds available or anticipated to be
available from the Security Account and, if applicable, any reserve account, may
be insufficient to make required distributions on the securities on that
distribution date. The applicable prospectus supplement may provide for limits
on the amount of any unscheduled distribution, but if it does not, the amount of
any unscheduled distribution that is allocable to principal will not exceed the
amount that would otherwise have been required to be distributed as principal on
the securities on the next distribution date. The applicable prospectus
supplement may specify whether unscheduled distributions will include interest,
but if it does not, unscheduled distributions will include interest at the
applicable Pass-Through Rate (if any) or interest rate (if any) on the amount of
the unscheduled distribution allocable to principal for the period and to the
date specified in the related prospectus supplement.
Advances
To the extent provided in the related prospectus supplement, the servicer
will be required to advance on or before each distribution date (from its own
funds, funds advanced by sub-servicers or funds held in the Security Account for
future distributions to the holders of securities of the related series), an
amount equal to the aggregate of payments of interest and/or principal that were
delinquent on the related Determination Date (as that term is defined in the
related prospectus supplement), subject to the servicer's determination that the
advances may be recoverable out of late payments by borrowers, Liquidation
Proceeds, Insurance Proceeds or otherwise.
In making advances, the servicer will endeavor to maintain a regular flow
of scheduled interest and principal payments to holders of the securities,
rather than to guarantee or insure against losses. If advances are made by the
servicer from cash being held for future distribution to securityholders, the
servicer will replace these funds on or before any future distribution date to
the extent that funds in the applicable Security Account on that distribution
date would be less than the amount required to be available for distributions to
securityholders on that date. Each advance will be reimbursable to the servicer
out of recoveries on the specific loans with respect to which the advances were
made (e.g., late payments made by the related borrower, any related Insurance
Proceeds, Liquidation Proceeds or proceeds of any loan purchased by the
depositor, a sub-servicer or a seller pursuant to the related Agreement).
Advances also will be reimbursable to the servicer from cash otherwise
distributable to securityholders (including the holders of Senior Securities) to
the extent that the servicer determines that any advances previously made are
not ultimately recoverable as described above. To the extent provided in the
related prospectus supplement, the servicer also will be obligated to make
advances, to the extent recoverable out of Insurance Proceeds, Liquidation
Proceeds or otherwise, for some taxes and insurance premiums not paid by
borrowers on a timely basis. These advances are reimbursable to the servicer to
the extent permitted by the related Agreement. The obligations of the servicer
to make advances may be supported by a cash advance reserve fund, a surety bond
or other arrangement of the type described herein under "Credit Enhancement," in
each case as described in the related prospectus supplement.
28
In the event the servicer fails to make a required advance, the applicable
prospectus supplement may specify whether another party will have advancing
obligations, but if it does not, the trustee will be obligated to make the
advance in its capacity as successor servicer. If the trustee makes an advance,
it will be entitled to be reimbursed for the advance to the same extent and
degree as the servicer is entitled to be reimbursed for advances. We refer you
to "Description of the Securities--Distributions on Securities."
Reports to Securityholders
Prior to or concurrently with the distribution of funds on a distribution
date, the servicer or the trustee will furnish to each securityholder of record
of the related series (if applicable to that series of securities) a statement
setting forth the following information as well as other specified information:
o the amount of the distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and if
so specified in the related prospectus supplement, any applicable
prepayment penalties included therein;
o the amount of the distribution allocable to interest;
o the amount of any advance;
o the aggregate amount
o otherwise allocable to Subordinated Securities on that
distribution date, and
o withdrawn from the reserve account, if any, that is included in
the amounts distributed to the Senior Securities;
o the outstanding principal balance or notional amount of each class of
the related series after giving effect to the distribution of
principal on that distribution date;
o the percentage of principal payments on the loans (excluding Principal
Prepayments), if any, which each class will be entitled to receive on
the following distribution date;
o the percentage of Principal Prepayments on the loans, if any, which
each class will be entitled to receive on the following distribution
date;
o the related amount of the servicing compensation retained or withdrawn
from the Security Account by the servicer, and the amount of
additional servicing compensation received by the servicer
attributable to penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
o the number and aggregate principal balances of loans
o contractually delinquent (exclusive of loans in foreclosure)
o 1 to 30 days,
o 31 to 60 days,
o 61 to 90 days, and
o 91 or more days, and
o in foreclosure and contractually delinquent
o 1 to 30 days,
o 31 to 60 days,
o 61 to 90 days, and
o 91 or more days,
as of the close of business on the last day of the calendar month
preceding that distribution date;
o the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure;
29
o the Pass-Through Rate or interest rate, as applicable, if adjusted
from the date of the last statement, of any class expected to be
applicable to the next distribution to that class;
o if applicable, the amount remaining in any reserve account at the
close of business on the distribution date;
o the Pass-Through Rate or interest rate, as applicable, as of the day
prior to the immediately preceding distribution date; and
o any amounts remaining under letters of credit, pool policies or other
forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single security of the relevant class having the Percentage Interest
specified in the related prospectus supplement. The report to securityholders
for any series of securities may include additional or other information of a
similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the servicer or the trustee will mail to each securityholder of
record at any time during that calendar year a report
o as to the aggregate of amounts reported pursuant to the first two
items above for that calendar year or, in the event that person was a
securityholder of record during a portion of that calendar year, for
the applicable portion of that year, and
o other customary information deemed necessary or desirable for
securityholders to prepare their tax returns.
Categories of Classes of Securities
The securities of any series may be comprised of one or more classes. The
different classes of securities in a series, in general, will fall into
different categories. The following chart identifies and generally defines some
of the more typical categories. The prospectus supplement for a series of
securities may identify the classes which comprise that series by reference to
the following categories.
Categories of Classes Definition
PRINCIPAL TYPES
Accretion Directed Class............... A class that receives principal payments
from the accreted interest from
specified Accrual Classes. An accretion
directed class also may receive
principal payments from principal paid
on the underlying Trust Fund Assets for
the related series.
Component Class........................ A class consisting of "components." The
components of a component class may have
different principal and/or interest
payment characteristics but together
constitute a single class. Each
component of a component class may be
identified as falling into one or more
of the categories in this chart.
Notional Amount Class.................. A class having no principal balance and
bearing interest on the related notional
amount. The notional amount is used for
purposes of the determination of
interest distributions.
30
Planned Principal Class
(also sometimes referred
to as a "PAC")................ A class that is designed to receive
principal payments using a predetermined
principal balance schedule derived by
assuming two constant prepayment rates
for the underlying Trust Fund Assets.
These two rates are the endpoints for
the "structuring range" for the planned
principal class. The planned principal
classes in any series of securities may
be subdivided into different categories
(e.g., primary planned principal
classes, secondary planned principal
classes and so forth) having different
effective structuring ranges and
different principal payment priorities.
The structuring range for the secondary
planned principal class of a series of
securities will be narrower than that
for the primary planned principal class
of that series. The prospectus
supplement relating to each planned
principal class will disclose the
principal balance schedule pertaining to
that class and the pricing and
prepayment assumptions based upon which
the schedule will have been prepared,
including the actual characteristics of
the underlying loans, the assumptions
regarding original terms to maturity,
the remaining terms to maturity, and
interest rates of the underlying loans,
and the assumptions some the rate of
prepayment on the underlying loans.
Scheduled Principal Class.............. A class that is designed to receive
principal payments using a predetermined
principal balance schedule but is not
designated as a planned principal class
or targeted principal class. In many
cases, the schedule is derived by
assuming two constant prepayment rates
for the underlying Trust Fund Assets.
These two rates are the endpoints for
the "structuring range" for the
scheduled principal class.
Sequential Pay Class................... Classes that receive principal payments
in a prescribed sequence, that do not
have predetermined principal balance
schedules and that under all
circumstances receive payments of
principal continuously from the first
distribution date on which they receive
principal until they are retired. A
single class that receives principal
payments before or after all other
classes in the same series of securities
may be identified as a sequential pay
class.
Strip Class............................ A class that receives a constant
proportion, or "strip," of the principal
payments on the underlying Trust Fund
Assets.
Support Class (also
sometimes referred to
as a "Companion Class")................ A class that receives principal payments
on any distribution date only if
scheduled payments have been made on
specified planned principal classes,
31
targeted principal classes and/or
scheduled principal classes.
Targeted Principal Class
(also sometimes
referred to as a "TAC")................ A class that is designed to receive
principal payments using a predetermined
principal balance schedule derived by
assuming a single constant prepayment
rate for the underlying Trust Fund
Assets. The prospectus supplement
relating to each targeted principal
class will disclose the principal
balance schedule pertaining to that
class and the pricing and prepayment
assumptions based upon which the
schedule will have been prepared,
including the actual characteristics of
the underlying loans, the assumptions
regarding original terms to maturity,
the remaining terms to maturity, and
interest rates of the underlying loans,
and the assumptions regarding the rate
of prepayment on the underlying loans.
Non-amortizing Sequential Class........ A class that generally receives no
principal payments for a designated
number of distribution dates and then
receives a disproportionately small or
large portion of the funds available for
principal payments on subsequent
distribution dates.
INTEREST TYPES
Fixed Rate Class....................... A class with an interest rate that is
fixed throughout the life of the class.
Floating Rate Class.................... A class with an interest rate that
resets periodically based upon a
designated index and that varies
directly with changes in that index.
Inverse Floating Rate Class............ A class with an interest rate that
resets periodically based upon a
designated index and that varies
inversely with changes in that index.
Variable Rate Class.................... A class with an interest rate that
resets periodically and is calculated by
reference to the rate or rates of
interest applicable to specified assets
or instruments (e.g., the interest rates
borne by the underlying loans).
Interest Only Class.................... A class that receives some or all of the
interest payments made on the underlying
Trust Fund Assets and little or no
principal. Interest only classes have
either a nominal principal balance or a
notional amount. A nominal principal
balance represents actual principal that
will be paid on the class. It is
referred to as nominal since it is
extremely small compared to other
classes. A notional amount is the amount
used as a reference to calculate the
amount
32
of interest due on an interest only
class that is not entitled to any
distributions in respect of principal.
Principal Only Class................... A class that does not bear interest and
is entitled to receive only
distributions in respect of principal.
Partial Accrual Class.................. A class that accretes a portion of the
amount of accrued interest thereon,
which amount will be added to the
principal balance of that class on each
applicable distribution date, with the
remainder of accrued interest to be
distributed currently as interest to
that class. This accretion may continue
until a specified event has occurred or
until the partial accrual class is
retired.
Accrual Class.......................... A class that accretes the amount of
accrued interest otherwise distributable
on the class, which amount will be added
as principal to the principal balance of
the class on each applicable
distribution date. This accretion may
continue until some specified event has
occurred or until the accrual class is
retired.
Indices Applicable to Floating Rate and Inverse Floating Rate Classes
General. Except as otherwise specified in the related prospectus
supplement, the indices applicable to Floating Rate and Inverse Floating Rate
Classes will be limited to the indices described below.
LIBOR. The applicable prospectus supplement may specify some other basis
for determining LIBOR, but if it does not, on the LIBOR Determination Date (as
this term is defined in the related prospectus supplement) for each class of
securities of a series as to which the applicable interest rate or Pass-Through
Rate is determined by reference to an index denominated as LIBOR, the person
designated in the related Agreement as the calculation agent will determine
LIBOR in accordance with one of the two methods described below (which method
will be specified in the related prospectus supplement):
LIBO Method. If using this method to calculate LIBOR, the calculation agent
will determine LIBOR by reference to the quotations, as set forth on the Reuters
Screen LIBO Page (as defined in the International Swaps and Derivatives
Association, Inc. Code of Standard Wording, Assumptions and Provisions for
Swaps, 1986 Edition), offered by the principal London office of each of the
designated reference banks meeting the criteria set forth herein for making
United States dollar deposits of the applicable duration in leading banks in the
London Interbank market, as of 11:00 a.m. (London time) on the LIBOR
Determination Date. In lieu of relying on the quotations for those reference
banks that appear at that time on the Reuters Screen LIBO Page, the calculation
agent will request each of the reference banks to provide the offered quotations
at that time.
LIBOR will be established by the calculation agent on each LIBOR
Determination Date as follows:
o If on any LIBOR Determination Date two or more reference banks provide
offered quotations, LIBOR for the next interest accrual period shall
be the arithmetic mean of the offered quotations (rounded upwards if
necessary to the nearest whole multiple of 1/32%).
o If on any LIBOR Determination Date only one or none of the reference
banks provides offered quotations, LIBOR for the next interest accrual
period shall be whichever is the higher of
o LIBOR as determined on the previous LIBOR Determination
Date, or
o the reserve interest rate.
The reserve interest rate shall be the rate per annum which the
calculation agent determines to be either
33
o the arithmetic mean (rounded upwards if necessary to the nearest
whole multiple of 1/32%) of the one-month United States dollar
lending rates that New York City banks selected by the
calculation agent are quoting, on the relevant LIBOR
Determination Date, to the principal London offices of at least
two of the reference banks to which these quotations are, in the
opinion of the calculation agent, being so made, or
o if the calculation agent can not determine the arithmetic mean,
the lowest one-month United States dollar lending rate which New
York City banks selected by the calculation agent are quoting on
that LIBOR Determination Date to leading European banks.
o If on any LIBOR Determination Date for a class specified in the
related prospectus supplement, the calculation agent is required but
is unable to determine the reserve interest rate in the manner
provided above, LIBOR for the next interest accrual period shall be
LIBOR as determined on the preceding LIBOR Determination Date, or, in
the case of the first LIBOR Determination Date, LIBOR shall be deemed
to be the per annum rate specified in the related prospectus
supplement.
Each reference bank
o must be a leading bank engaged in transactions in Eurodollar deposits
in the international Eurocurrency market,
o may not control, be controlled by, or be under common control with the
calculation agent, and
o must have an established place of business in London.
If any reference bank is unwilling or unable to act in that capacity or if
appointment of any reference bank is terminated, another leading bank meeting
the criteria specified above will be appointed.
BBA Method. If using this method of determining LIBOR, the calculation
agent will determine LIBOR on the basis of the British Bankers' Association
"Interest Settlement Rate" for one-month deposits in United States dollars as
found on Telerate page 3750 as of 11:00 a.m. London time on each LIBOR
Determination Date. Interest Settlement Rates currently are based on rates
quoted by eight British Bankers' Association designated banks as being, in the
view of those banks, the offered rate at which deposits are being quoted to
prime banks in the London interbank market. Interest Settlement Rates are
calculated by eliminating the two highest rates and the two lowest rates,
averaging the four remaining rates, carrying the result (expressed as a
percentage) out to six decimal places, and rounding to five decimal places.
If on any LIBOR Determination Date, the calculation agent is unable to
calculate LIBOR in accordance with the method set forth in the immediately
preceding paragraph, LIBOR for the next interest accrual period shall be
calculated in accordance with the LIBOR method described above under "--LIBO
Method."
The establishment of LIBOR on each LIBOR Determination Date by the
calculation agent and its calculation of the rate of interest for the applicable
classes for the related interest accrual period shall (in the absence of
manifest error) be final and binding.
Treasury Index. The applicable prospectus supplement may specify some other
basis for determining and defining the Treasury Index, but if it does not, on
the Treasury Index Determination Date (as this term is defined in the related
prospectus supplement) for each class of securities of a series as to which the
applicable interest rate is determined by reference to an index denominated as a
"Treasury Index," the calculation agent will ascertain the Treasury Index for
U.S. Treasury securities of the maturity and for the period (or, if applicable,
date) specified in the related prospectus supplement. The Treasury Index for any
period means the average of the yield for each business day during the period
specified therein (and for any date means the yield for that date), expressed as
a per annum percentage rate, on U.S. Treasury securities adjusted to the
"constant maturity" (as further described below) specified in the related
prospectus supplement or if no "constant maturity" is so specified, U.S.
Treasury securities trading on the secondary market having the maturity
specified in the related prospectus supplement, in each case as published by the
Federal Reserve Board in its Statistical Release No. H.15 (519). Statistical
Release No. H.15 (519) is published on Monday or Tuesday of each week and may be
obtained by writing or calling the Publications Department at the Board of
Governors of the Federal Reserve System, 21st and C Streets, Washington, D.C.
20551
34
(202) 452-3244. If the calculation agent has not yet received Statistical
Release No. H.15 (519) for that week, then it will use the Statistical Release
from the immediately preceding week.
Yields on U.S. Treasury securities at "constant maturity" are derived from
the U.S. Treasury's daily yield curve. This curve, which relates the yield on a
security to its time to maturity, is based on the closing market bid yields on
actively traded U.S. Treasury securities in the over-the-counter market. These
market yields are calculated from composites of quotations reported by five
leading U.S. government securities dealers to the Federal Reserve Bank of New
York. This method provides a yield for a given maturity even if no security with
that exact maturity is outstanding. If the Treasury Index is no longer
published, a new index based upon comparable data and methodology will be
designated in accordance with the Agreement relating to the particular series of
securities. The calculation agent's determination of the Treasury Index, and its
calculation of the rates of interest for the applicable classes for the related
interest accrual period shall (in the absence of manifest error) be final and
binding.
Prime Rate. The applicable prospectus supplement may specify the party
responsible for determining the Prime Rate, but if it does not, on the Prime
Rate Determination Date (as this term is defined in the related prospectus
supplement) for each class of securities of a series as to which the applicable
interest rate is determined by reference to an index denominated as the Prime
Rate, the calculation agent will ascertain the Prime Rate for the related
interest accrual period. The applicable prospectus supplement may provide for
the means for determining the Prime Rate, but if it does not, the Prime Rate for
an interest accrual period will be the "Prime Rate" as published in the "Money
Rates" section of The Wall Street Journal (or if not so published, the "Prime
Rate" as published in a newspaper of general circulation selected by the
calculation agent in its sole discretion) on the related Prime Rate
Determination Date. If a prime rate range is given, then the average of the
range will be used. If the Prime Rate is no longer published, a new index based
upon comparable data and methodology will be designated in accordance with the
Agreement relating to the particular series of securities. The calculation
agent's determination of the Prime Rate and its calculation of the rates of
interest for the related interest accrual period shall (in the absence of
manifest error) be final and binding.
The interest rate index or indices applicable to floating rate and inverse
floating rate classes of any series (the "Securities Index") may not be equal to
the actual index or indices employed under applicable loan documents in
calculating the interest rates on loans in the relevant class or classes of
securities (the "Loan Indices"). If this type of interest rate mismatch occurs,
the amounts available for payment of interest on the relevant class or classes
of securities may increase or decrease depending upon the divergence between
performance of the applicable Securities Index and the composite performance of
the applicable Loan Indices. While it might be possible, through the use of a
reserve account, interest rate swaps, financial derivative contracts or other
means, to hedge against the risk that divergences between the Securities Index
and the Loan Indices might result in insufficient interest payments being
generated from loans backing the relevant class or classes of securities to pay
the interest accruing on those class or classes of securities, the availability
of interest rate hedging protection, if any, will only be as disclosed in the
related prospectus supplement.
Book-Entry Registration of Securities
As described in the related prospectus supplement, if not issued in fully
registered form, each class of securities will be registered as book-entry
securities. Persons acquiring beneficial ownership interests in book-entry
securities ("Beneficial Owners") will hold their book-entry securities through
The Depository Trust Company ("DTC") in the United States, or Clearstream
Banking, Luxembourg, S.A. ("Clearstream, Luxembourg") or Euroclear System
("Euroclear") in Europe, if they are participants of those systems, or
indirectly through organizations which are participants in those systems.
Book-entry securities will be issued in one or more certificates which equal the
aggregate principal balance of the relevant class of securities and will
initially be registered in the name of Cede & Co., the nominee of DTC.
Clearstream, Luxembourg and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Clearstream,
Luxembourg's and Euroclear's names on the books of their respective depositories
which in turn will hold omnibus positions in customers' securities accounts in
the depositories' names on the books of DTC. Citibank, N.A., will act as
depository for Clearstream, Luxembourg and JPMorgan Chase Bank will act as
depository for Euroclear. Except as described below, no Beneficial Owner will be
entitled to receive a physical certificate representing his or her security.
Unless and until physical certificates are issued, it is anticipated that the
only record holder of book-entry
35
securities will be Cede & Co., as nominee of DTC. Beneficial Owners are only
permitted to exercise their rights in book-entry securities indirectly through
DTC participants and DTC.
Each Beneficial 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 that purpose. In turn, the Financial
Intermediary's ownership of a book-entry security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC participant, and on
the records of Clearstream, Luxembourg or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, book-entry securities from the trustee through DTC and DTC
participants. While the securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among DTC participants on whose behalf it acts for
book-entry securities and is required to receive and transmit distributions of
principal of, and interest on, book-entry securities. DTC participants and
indirect participants with whom Beneficial Owners have accounts for their
book-entry securities are similarly required to make book-entry transfers and
receive and transmit 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 interest. The Rules are
on file with the SEC.
Beneficial Owners will not receive or be entitled to receive physical
certificates representing their respective interests in the securities, except
under the limited circumstances described below. Unless and until certificated
securities are issued, Beneficial Owners who are not DTC participants may
transfer ownership of securities only through DTC participants and indirect
participants by instructing DTC participants and indirect participants to
transfer securities, by book-entry transfer, through DTC for the account of the
purchasers of the securities, which account is maintained with their respective
DTC participants. 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 DTC participants will be debited and
credited. Similarly, the DTC participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the selling
and purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a DTC
participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. These credits or any
transactions in the securities settled during processing will be reported to the
relevant Euroclear participants or Clearstream, Luxembourg customers on that
business day. Cash received in Clearstream, Luxembourg or Euroclear as a result
of sales of securities by or through a Clearstream, Luxembourg customer 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,
Luxembourg or Euroclear cash account only as of the business day following
settlement in DTC.
Transfers between DTC participants will occur in accordance with the Rules.
Transfers between Clearstream, Luxembourg customers 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,
Luxembourg customers or Euroclear participants, on the other, will be effected
by DTC in accordance with the Rules on behalf of Clearstream, Luxembourg or
Euroclear, as the case may be, by its depository. However, these cross-market
transactions will require delivery of instructions to Clearstream, Luxembourg or
Euroclear, as the case may be, by the counterparty in that system in accordance
with its rules and procedures and within its established deadlines (European
time). If the transaction meets its settlement requirements, Clearstream,
Luxembourg or Euroclear, as the case may be, will deliver instructions to its
depository 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.
36
Clearstream, Luxembourg customers and Euroclear participants may not deliver
instructions directly to the depositories.
DTC is a limited purpose trust company organized under the laws of the
State of New York, and is a member of the Federal Reserve System. DTC is a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code and a "clearing agency" registered pursuant to Section 17A of the
Securities and Exchange Act of 1934, as amended. DTC was created to hold
securities for its participants and to facilitate the clearance and settlement
of securities transactions between participants through electronic book-entry
changes in participants' accounts, thereby eliminating the need for physical
movement of securities. Direct participants of DTC include securities brokers
and dealers (who may include the underwriters of any series), banks, trust
companies, clearing corporations and some other organizations. DTC is owned by a
number of its direct participants and by the New York Stock Exchange, Inc., the
Nasdaq-Amex Market Group and the National Association of Securities Dealers,
Inc. Indirect access to the DTC system is also available to others including
Financial Intermediaries that clear through or maintain a custodial relationship
with a direct DTC participant, either directly or indirectly.
Clearstream, Luxembourg holds securities for its customers and facilitates
the clearance and settlement of securities transactions between Clearstream,
Luxembourg customers through electronic book-entry changes in accounts of
Clearstream, Luxembourg customers, thereby eliminating the need for physical
movement of securities. Transactions may be settled by Clearstream, Luxembourg
in any of over 40 currencies, including United States dollars. Clearstream,
Luxembourg provides to its customers, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream, Luxembourg also
deals with domestic securities markets in over 30 countries through established
depository and custodial relationships. Clearstream, Luxembourg is registered as
a bank in Luxembourg, subject to regulation by the Commission de Surveillance du
Secteur Financier, which supervises Luxembourg banks. Clearstream, Luxembourg's
customers are world-wide financial institutions including underwriters,
securities brokers and dealers, banks, trust companies and clearing
corporations. Clearstream, Luxembourg's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream, Luxembourg has
approximately 2,500 customers located in over 80 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Euroclear Bank S.A./N.V. in Brussels as the operator of the Euroclear System
(the "Euroclear Operator") to facilitate settlement of trades between
Clearstream, Luxembourg and Euroclear. In November 2000, Clearstream, Luxembourg
and Euroclear signed an agreement to establish a new daytime transactions
processing capability to supplement the existing overnight bridge between
Clearstream, Luxembourg and Euroclear. The new daytime bridge is expected to
become automated by the end of 2001.
Clearstream, Luxembourg and Euroclear customers are world-wide financial
institutions, including underwriters, securities brokers and dealers, banks,
trust companies and clearing corporations. Indirect access to Clearstream,
Luxembourg and Euroclear is available to other institutions that clear through
or maintain a custodial relationship with an account holder of either system.
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 physical movement of securities and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of over 40 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. The Euroclear
Operator, a market owned bank incorporated under the laws of the Kingdom of
Belgium and licensed by the Belgian Banking and Finance Commission, assumed the
operating and banking functions of the Euroclear System as of January 1, 2001.
All operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator. The Euroclear Operator establishes policy for Euroclear on
behalf of Euroclear participants. Euroclear participants include central banks,
commercial 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.
37
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments on securities in Euroclear. All
securities in Euroclear are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
participants, and has no record of or relationship with persons holding through
Euroclear participants.
Distributions on the book-entry securities will be made on each
distribution date by the trustee to DTC. DTC will be responsible for crediting
the amount of those payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing payments to the Beneficial Owners of the book-entry
securities that it represents and to each Financial Intermediary for which it
acts as agent. Each Financial Intermediary will be responsible for disbursing
funds to the Beneficial Owners of the book-entry securities that it represents.
Under a book-entry format, Beneficial Owners of the book-entry securities
may experience some delay in their receipt of payments, since these payments
will be forwarded by the trustee to Cede & Co., as nominee of DTC. Distributions
on securities held through Clearstream, Luxembourg or Euroclear will be credited
to the cash accounts of Clearstream, Luxembourg customers or Euroclear
participants in accordance with the relevant system's rules and procedures, to
the extent received by the applicable depository. These distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. See "Federal Income Tax Consequences--Tax Treatment of Foreign
Investors" and "--Tax Consequences to Holders of the Notes--Backup Withholding."
Because DTC can only act on behalf of Financial Intermediaries, the ability of a
Beneficial Owner to pledge book-entry securities to persons or entities that do
not participate in the Depository system may be limited due to the lack of
physical certificates for book-entry securities. In addition, issuance of the
book-entry securities in book-entry form may reduce the liquidity of these
securities in the secondary market since some potential investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the trust fund will be provided to Cede &
Co., as nominee of DTC, and may be made available by Cede & Co. to Beneficial
Owners upon request, in accordance with the Rules, and to the Financial
Intermediaries to whose DTC accounts the book-entry securities of the Beneficial
Owners are credited.
DTC has advised the trustee that, unless and until certificated securities
are issued, DTC will take any action permitted to be taken by the holders of the
book-entry securities under the applicable Agreement only at the direction of
one or more Financial Intermediaries to whose DTC accounts the book-entry
securities are credited, to the extent that these actions are taken on behalf of
Financial Intermediaries whose holdings include book-entry securities.
Clearstream, Luxembourg or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a securityholder under the Agreement
on behalf of a Clearstream, Luxembourg customer or Euroclear participant only in
accordance with its relevant rules and procedures and subject to the ability of
its depository to effect these actions on its behalf through DTC. DTC may take
actions, at the direction of the related DTC participants, for some securities
which conflict with actions taken for other securities.
Certificated securities will be issued to securityholders only if
o the servicer advises the applicable trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities as
depository for the securities and the trustee is unable to locate a
qualified successor,
o the servicer at its option, elects to terminate the book-entry system
through DTC, or
o after the occurrence of an Event of Default or the resignation or
removal of the servicer for these securities, holders representing at
least a majority of the outstanding principal amount of the related
securities of that series advise DTC, either directly or through DTC
participants, in writing (with instructions to notify the applicable
trustee in writing) that the continuation of a book-entry system
38
through DTC (or a successor thereto) for those securities is no longer
in the best interest of the holders of the securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all Beneficial
Owners of the occurrence of the event and the availability through DTC of
certificated securities. Upon surrender by DTC of the global certificate or
certificates representing the book-entry
securities and instructions for re-registration, the trustee will issue
certificated securities, and thereafter the trustee will recognize the holders
of the certificated securities as securityholders under the applicable
Agreement.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of securities among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform these procedures and they may be
discontinued at any time.
None of the servicer, the depositor or the trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry securities held by
Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing any
records relating to beneficial ownership interests.
CREDIT ENHANCEMENT
General
Credit enhancement may be provided for one or more classes of a series of
securities or for the related Trust Fund Assets. Credit enhancement may be in
the form of a limited financial guaranty policy issued by an entity named in the
related prospectus supplement, the subordination of one or more classes of the
securities of that series, the establishment of one or more reserve accounts,
the use of a cross-collateralization feature, use of a mortgage pool insurance
policy, FHA insurance, VA guaranty, bankruptcy bond, special hazard insurance
policy, surety bond, letter of credit, guaranteed investment contract,
over-collateralization, or another method of credit enhancement contemplated
herein and described in the related prospectus supplement, or any combination of
the foregoing. To the extent described in the related prospectus supplement,
credit enhancement will not provide protection against all risks of loss and
will not guarantee repayment of the entire principal balance of the securities
and interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement, securityholders
will bear their allocable share of any deficiencies.
Subordination
If so specified in the related prospectus supplement, one or more classes
of a series of securities (the "Senior Securities") may be credit enhanced by
granting Senior Securities the preferential right to receive distributions of
scheduled principal, Principal Prepayments, interest or any combination thereof
prior to holders of one or more other classes of that series ("Subordinated
Securities") as specified in the related prospectus supplement. Protection may
also be afforded to the holders of Senior Securities of a series by:
o reducing the ownership interest (if applicable) of the related
Subordinated Securities;
o a combination of the immediately preceding sentence and the first
bullet above; or
o as further described in the related prospectus supplement.
If so specified in the related prospectus supplement, delays in receipt of
scheduled payments on the loans and losses on defaulted loans may be borne first
by the various classes of Subordinated Securities and thereafter by the various
classes of Senior Securities, in each case under the circumstances and subject
to the limitations specified in the related prospectus supplement. The aggregate
distributions in respect of delinquent payments on the loans over the lives of
the securities or at any time, the aggregate losses in respect of defaulted
loans which must be borne by the Subordinated Securities by virtue of
subordination and the amount of the distributions otherwise distributable to the
holders of Subordinated Securities that will be distributable to holders of
Senior Securities on any distribution date may be limited as specified in the
related prospectus supplement. If aggregate distributions in respect of
delinquent
39
payments on the loans or aggregate losses in respect of the loans were to exceed
an amount specified in the related prospectus supplement, holders of Senior
Securities would experience losses on the securities.
In addition to or in lieu of the foregoing, if so specified in the related
prospectus supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Securities on any distribution date may instead be
deposited into one or more reserve accounts established with the trustee or
distributed to holders of Senior Securities. These deposits may be made on each
distribution date, for specified periods or until the balance in the reserve
account has reached a specified amount and, following payments from the reserve
account to holders of Senior Securities or otherwise, thereafter to the extent
necessary to restore the balance in the reserve account to required levels, in
each case as specified in the related prospectus supplement. Amounts on deposit
in the reserve account may be released to the holders of some classes of
securities at the times and under the circumstances specified in the related
prospectus supplement.
If specified in the related prospectus supplement, various classes of
Senior Securities and Subordinated Securities may themselves be subordinate in
their right to receive some distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-collateralization
mechanism or otherwise.
Distributions may be allocated among classes of Senior Securities and among
classes of Subordinated Securities
o in the order of their scheduled final distribution dates,
o in accordance with a schedule or formula,
o in relation to the occurrence of events, or
o otherwise, in each case as specified in the related prospectus
supplement.
Letter of Credit
The letter of credit, if any, for a series of securities will be issued by
the bank or financial institution specified in the related prospectus supplement
(the "L/C Bank"). Under the letter of credit, the L/C Bank will be obligated to
honor drawings thereunder in an aggregate fixed dollar amount, net of
unreimbursed payments thereunder, equal to the percentage specified in the
related prospectus supplement of the aggregate principal balance of the loans on
the related cut-off date or of one or more classes of securities (the "L/C
Percentage"). If so specified in the related prospectus supplement, the letter
of credit may permit drawings in the event of losses not covered by insurance
policies or other credit support, including losses arising from damage not
covered by standard hazard insurance policies, losses resulting from the
bankruptcy of a borrower and the application of some provisions of the
Bankruptcy Reform Act of 1978, as amended, and related rules promulgated
thereunder (collectively, the "Bankruptcy Code"), or losses resulting from
denial of insurance coverage due to misrepresentations in connection with the
origination of a loan. The amount available under the letter of credit will, in
all cases, be reduced to the extent of the unreimbursed payments thereunder. The
obligations of the L/C Bank under the letter of credit for each series of
securities will expire at the earlier of the date specified in the related
prospectus supplement or the termination of the related trust fund. We refer you
to "The Agreements--Termination; Optional Termination." A copy of the letter of
credit for a series, if any, will be filed with the SEC as an exhibit to a
Current Report on Form 8-K to be filed within 15 days of issuance of the
securities of the related series.
Insurance Policies, Surety Bonds and Guaranties
If so provided in the prospectus supplement for a series of securities,
deficiencies in amounts otherwise payable on those securities or some classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. These instruments may cover timely
distributions of interest and/or full distributions of principal for one or more
classes of securities of the related series 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
40
o maintaining timely payments or providing additional protection against
losses on the assets included in the trust fund,
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.
These arrangements may include agreements under which securityholders are
entitled to receive amounts deposited in various accounts held by the trustee
upon the terms specified in the related prospectus supplement. A copy of any
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 within 15 days of 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 may be applied as an additional
distribution in respect of principal to reduce the principal balance of a
specific class or classes of securities and, thus, accelerate the rate of
payment of principal on those securities. Reducing the principal balance of the
securities without a corresponding reduction in the principal balance of the
underlying Trust Fund Assets will result in over-collateralization.
Reserve Accounts
If specified in the related prospectus supplement, credit enhancement for a
series of securities will be provided by the establishment and maintenance with
the trustee for that series of securities, in trust, of one or more reserve
accounts for that series. The related prospectus supplement will specify whether
or not any reserve accounts will be included in the trust fund for that series.
The reserve account for a series will be funded
o by the deposit therein of cash, U.S. Treasury securities, instruments
evidencing ownership of principal or interest payments thereon,
letters of credit, demand notes, certificates of deposit or a
combination thereof in the aggregate amount specified in the related
prospectus supplement,
o by the deposit therein from time to time of amounts, as specified in
the related prospectus supplement to which the holders of Subordinated
Securities, if any, would otherwise be entitled, or
o in another manner specified in the related prospectus supplement.
Any amounts on deposit in the reserve account and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in "Permitted
Investments" which may include
o obligations of the United States or any agency thereof, provided these
obligations are backed by the full faith and credit of the United
States,
o general obligations of or obligations guaranteed by any state of the
United States or the District of Columbia receiving the highest
long-term debt rating of each Rating Agency rating the related series
of securities, or a lower rating that will not result in the
downgrading or withdrawal of the ratings then assigned to that
securities by each Rating Agency,
o commercial or finance company paper which is then receiving the
highest commercial or finance company paper rating of each Rating
Agency, or a lower rating that will not result in the downgrading or
withdrawal of the ratings then assigned to that securities by each
Rating Agency,
o certificates of deposit, demand or time deposits, or bankers'
acceptances issued by any depository institution or trust company
incorporated under the laws of the United States or of any state
thereof and subject to supervision and examination by federal and/or
state banking authorities, provided that the commercial paper and/or
long term unsecured debt obligations of that depository institution or
trust company (or in the case of the principal depository institution
in a holding company system, the commercial paper or long-term
unsecured debt obligations of that holding company, but only if
41
Moody's Investors Service, Inc. ("Moody's") is not a Rating Agency for
that series of securities) are then rated one of the two highest
long-term and the highest short-term ratings of each Rating Agency for
those securities, or any lower ratings that will not result in the
downgrading or withdrawal of the rating then assigned to those
securities by any Rating Agency,
o demand or time deposits or certificates of deposit issued by any bank
or trust company or savings institution to the extent that the
deposits are fully insured by the FDIC,
o guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation containing, at the time of the issuance
of the agreements, terms and conditions that will not result in the
downgrading or withdrawal of the rating then assigned to those
securities by any Rating Agency,
o repurchase obligations for any security described in the first two
bullets above, in either case entered into with a depository
institution or trust company (acting as principal) described in the
fourth bullet above,
o securities (other than stripped bonds, stripped coupons or instruments
sold at a purchase price in excess of 115% of the face amount thereof)
bearing interest or sold at a discount issued by any corporation
incorporated under the laws of the United States or any state thereof
which, at the time of that investment, have one of the two highest
ratings of each Rating Agency (except if the Rating Agency is Moody's,
the rating shall be the highest commercial paper rating of Moody's for
those securities), or a lower rating that will not result in the
downgrading or withdrawal of the rating then assigned to those
securities by any Rating Agency, as evidenced by a signed writing
delivered by each Rating Agency,
o interests in any money market fund which at the date of acquisition of
the interests in the fund and throughout the time those interests are
held in the fund has the highest applicable rating by each Rating
Agency or a lower rating that will not result in the downgrading or
withdrawal of the ratings then assigned to those securities by each
Rating Agency,
o short term investment funds sponsored by any trust company or national
banking association incorporated under the laws of the United States
or any state thereof which on the date of acquisition has been rated
by each Rating Agency in their respective highest applicable rating
category or a lower rating that will not result in the downgrading or
withdrawal of the ratings then assigned to those securities by each
Rating Agency, and
o other investments having a specified stated maturity and bearing
interest or sold at a discount acceptable to each Rating Agency as
will not result in the downgrading or withdrawal of the rating then
assigned to those securities by any Rating Agency, as evidenced by a
signed writing delivered by each Rating Agency; provided that no
instrument shall be a Permitted Investment if the instrument evidences
the right to receive interest-only payments on the obligations
underlying that instrument; and provided further, that no investment
specified in the ninth or tenth bullet above will be a Permitted
Investment for any pre-funding account or any related capitalized
interest account.
If a letter of credit is deposited with the trustee, the letter of credit will
be irrevocable. Any instrument deposited therein will name the trustee, in its
capacity as trustee for the holders of the securities, as beneficiary and will
be issued by an entity acceptable to each Rating Agency that rates the
securities of the related series. Additional information regarding instruments
deposited in the reserve accounts will be set forth in the related prospectus
supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the reserve account for distribution to the
holders of securities of the related series for the purposes, in the manner and
at the times specified in the related prospectus supplement.
Pool Insurance Policies
If specified in the related prospectus supplement, a separate pool
insurance policy will be obtained for the loans in a particular trust fund and
issued by the insurer (the "Pool Insurer") named in the related prospectus
supplement. Each pool insurance policy will, subject to the limitations
described below, cover loss by reason of default in payment on loans in the
trust fund in an amount equal to a percentage specified in the related
prospectus supplement of the aggregate principal balance of the loans on the
cut-off date which are not covered as to the entire
42
outstanding principal balances by primary mortgage insurance policies. As more
fully described below, the servicer will present claims thereunder to the Pool
Insurer on behalf of itself, the trustee and the holders of the securities of
the related series. The pool insurance policies, however, are not blanket
policies against loss, since claims thereunder may only be made respecting
particular defaulted loans and only upon satisfaction of the conditions
precedent described below. The applicable prospectus supplement may provide for
the extent of coverage provided by the related pool insurance policy, but if it
does not, the pool insurance policies will not cover losses due to a failure to
pay or denial of a claim under a primary mortgage insurance policy.
The applicable prospectus supplement may provide for the conditions for the
presentation of claims under a pool insurance policy, but if it does not, the
pool insurance policy will provide that no claims may be validly presented
unless
o any required primary mortgage insurance policy is in effect for the
defaulted loan and a claim thereunder has been submitted and settled,
o hazard insurance on the related mortgaged property has been kept in
force and real estate taxes and other protection and preservation
expenses have been paid,
o if there has been physical loss or damage to the mortgaged property,
it has been restored to its physical condition (reasonable wear and
tear excepted) at the time of issuance of the policy, and
o the insured has acquired good and merchantable title to the mortgaged
property free and clear of liens except specific permitted
encumbrances.
Upon satisfaction of these conditions, the Pool Insurer will have the option
either
o to purchase the property securing the defaulted loan at a price equal
to the principal balance thereof plus accrued and unpaid interest at
the loan's interest rate to the date of the purchase and specified
expenses incurred by the servicer on behalf of the trustee and
securityholders, or
o to pay the amount by which the sum of the principal balance of the
defaulted loan plus accrued and unpaid interest at the loan's interest
rate to the date of payment of the claim and the aforementioned
expenses exceeds the proceeds received from an approved sale of the
mortgaged property,
in either case net of specified amounts paid or assumed to have been paid under
the related primary mortgage insurance policy. If any mortgaged property
securing a defaulted loan is damaged and proceeds, if any, from the related
hazard insurance policy or the applicable special hazard insurance policy are
insufficient to restore the damaged mortgaged property to a condition sufficient
to permit recovery under the pool insurance policy, the servicer will not be
required to expend its own funds to restore the damaged mortgaged property
unless it determines that
o restoration will increase the proceeds to securityholders on
liquidation of the loan after reimbursement of the servicer for its
expenses, and
o these expenses will be recoverable by it through proceeds of the sale
of the mortgaged property or proceeds of the related pool insurance
policy or any related primary mortgage insurance policy.
The applicable prospectus supplement may provide for a pool insurance
policy covering losses resulting from defaults, but if it does not, the pool
insurance policy will not insure (and many primary mortgage insurance policies
do not insure) against losses sustained by reason of a default arising from,
among other things,
o fraud or negligence in the origination or servicing of a loan,
including misrepresentation by the borrower, the originator or persons
involved in the origination thereof, or
o failure to construct any building or structure located on a mortgaged
property in accordance with plans and specifications.
A failure of coverage attributable to one of the foregoing events might result
in a breach of the related seller's representations described above and might
give rise to an obligation on the part of the seller to repurchase the defaulted
loan if the breach cannot be cured by the seller. No pool insurance policy will
cover (and many primary mortgage insurance policies do not cover) a claim in
respect of a defaulted loan occurring when the servicer of that loan, at the
time of default or thereafter, was not approved by the applicable insurer.
43
The applicable prospectus supplement may provide for a pool insurance
policy featuring a fixed amount of coverage over the life of the policy, but if
it does not, the original amount of coverage under each pool insurance policy
will be reduced over the life of the related securities by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims paid
will include some expenses incurred by the servicer as well as accrued interest
on delinquent loans to the date of payment of the claim. Accordingly, if
aggregate net claims paid under any pool insurance policy reach the original
policy limit, coverage under that pool insurance policy will be exhausted and
any further losses will be home by the related securityholders.
Cross-Collateralization
If specified in the related prospectus supplement, different classes of the
related series of securities may hold the sole beneficial ownership interest in
separate groups of Trust Fund Assets. In this case, credit enhancement may be
provided by a cross-collateralization feature requiring that distributions be
made on 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 some excess amounts generated by one or more asset
groups to one or more other asset groups within the same trust fund or
o the allocation of losses on one or more asset groups to one or more
other asset groups within the same trust fund.
These excess amounts will be applied and/or these 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 this cross-collateralization feature.
If specified in the related prospectus supplement, the coverage provided by
one or more of the forms of credit enhancement described in this prospectus may
apply concurrently to two or more separate trust funds. If applicable, the
related prospectus supplement will identify the trust funds to which the credit
enhancement relates and the manner of determining the amount of coverage
provided to those trust funds thereby and of the application of that coverage to
the identified trust funds.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the securities will be
affected primarily by the amount and timing of principal payments received on or
in respect of the Trust Fund Assets included in the related trust fund. The
original terms to maturity of the loans in a given trust fund will vary
depending upon the type of loans included therein. Each prospectus supplement
will contain information regarding the type and maturities of the loans in the
related trust fund. The related prospectus supplement will specify the
circumstances, if any, under which the related loans will be subject to
prepayment penalties. The prepayment experience on the loans in a trust fund
will affect the weighted average life of the related series of securities.
The rate of prepayment on the loans cannot be predicted. 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. 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 senior
mortgage loans, and the use of first mortgage loans as long-term financing for
home purchase and subordinate mortgage loans as shorter-term financing for a
variety of purposes, including home improvement, education expenses and
purchases of consumer durables such as automobiles. Accordingly, these loans may
experience a higher rate of prepayment than traditional fixed-rate mortgage
loans. In addition, any future limitations on the right of borrowers to deduct
interest payments on home equity loans for federal income tax purposes may
further increase the rate of prepayments of the loans. The enforcement of a
"due-on-sale" provision (as described below) will have the same effect as a
prepayment of the related loan. We refer you to "Legal Aspects of the Loans--
44
Due-on-Sale Clauses." In addition, the servicer and its affiliates periodically
conduct mass mailings to their existing customers with respect to the
refinancing of existing mortgage loans. Although these marketing efforts are not
specifically directed to customers who have mortgage loans included in a trust
fund, these customers may receive the marketing materials as part of a broader
mailing, which may result in an increase in the rate of prepayments of mortgage
loans included in a trust fund through refinancings. The yield to an investor
who purchases securities in the secondary market at a price other than par will
vary from the anticipated yield if the rate of prepayment on the loans is
actually different than the rate anticipated by the investor at the time the
securities were purchased.
Collections on revolving credit line loans may vary because, among other
things, borrowers may
o make payments during any month as low as the minimum monthly payment
for that month or, during the interest-only period for some revolving
credit line loans with respect to which an interest-only payment
option has been selected, the interest and the fees and charges for
that month, or
o make payments as high as the entire outstanding principal balance plus
accrued interest and the fees and charges thereon.
It is possible that borrowers may fail to make the required periodic payments.
In addition, collections on the loans may vary due to seasonal purchasing and
the payment habits of borrowers.
To the extent specified in the related prospectus supplement, conventional
loans will contain due-on-sale provisions permitting the mortgagee to accelerate
the maturity of the loan upon sale or some transfers by the borrower of the
related mortgaged property. Loans insured by the FHA, and loans on Single Family
Properties partially guaranteed by the VA, are assumable with the consent of the
FHA and the VA, respectively. Thus, the rate of prepayments on these loans may
be lower than that of conventional loans bearing comparable interest rates. The
servicer generally will enforce any due-on-sale or due-on-encumbrance clause, to
the extent it has knowledge of the conveyance or further encumbrance or the
proposed conveyance or proposed further encumbrance of the mortgaged property
and reasonably believes that it is entitled to do so under applicable law;
provided, however, that the servicer will not take any enforcement action that
would impair or threaten to impair any recovery under any related insurance
policy. We refer you to "The Agreements--Collection Procedures" and "Legal
Aspects of the Loans" for a description of some provisions of each Agreement and
some legal developments that may affect the prepayment experience on the loans.
The rate of prepayments on conventional mortgage loans has fluctuated
significantly in recent years. In general, if prevailing rates fall
significantly below the interest rates borne by the loans, the loans are more
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above those interest rates. Conversely, if prevailing
interest rates rise appreciably above the interest rates borne by the loans, the
loans are more likely to experience a lower prepayment rate than if prevailing
rates remain at or below those loan interest rates. However, there can be no
assurance that this will be the case.
When a full prepayment is made on a loan, the borrower is charged interest
on the principal amount of the loan so prepaid only for the number of days in
the month actually elapsed up to the date of the prepayment, rather than for a
full month. The effect of prepayments in full will be to reduce the amount of
interest passed through or paid in the following month to holders of securities
because interest on the principal amount of any loan so prepaid will generally
be paid only to the date of prepayment. Partial prepayments in a given month may
be applied to the outstanding principal balances of the loans so prepaid on the
first day of the month of receipt or the month following receipt. In the latter
case, partial prepayments will not reduce the amount of interest passed through
or paid in that month. Prepayments will be passed through or paid as described
in the related prospectus supplement.
Even assuming that the mortgaged properties provide adequate security for
the loans, substantial delays could be encountered in connection with the
liquidation of defaulted loans and corresponding delays in the receipt of
related proceeds by securityholders could occur. An action to foreclose on a
mortgaged property securing a loan is regulated by state statutes and rules and
is subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a default
by a borrower, these restrictions among other things, may impede the ability of
the servicer to foreclose on or sell the mortgaged property or to obtain
Liquidation Proceeds sufficient to repay all amounts due on the related loan. In
addition, the servicer will be entitled to deduct from related Liquidation
Proceeds all expenses reasonably
45
incurred in attempting to recover amounts due on defaulted loans and not yet
repaid, including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses for defaulted mortgage loans do not vary directly with
the outstanding principal balance of the loan at the time of default. Therefore,
assuming that a servicer took the same steps in realizing upon a defaulted
mortgage loan having a small remaining principal balance as it would in the case
of a defaulted mortgage loan having a large remaining principal balance, the
amount realized after expenses of liquidation would be smaller as a percentage
of the remaining principal balance of the small mortgage loan than would be the
case with the other defaulted mortgage loan having a large remaining principal
balance.
Applicable state laws generally regulate interest rates and other charges,
require specified disclosures, and require licensing of some originators and
servicers of loans. In addition, most have other laws, public policy and general
principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices which may apply to the origination, servicing
and collection of the loans. Depending on the provisions of the applicable law
and the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the servicer to collect all or
part of the principal of or interest on the loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the servicer
to damages and administrative sanctions.
If the rate at which interest is passed through or paid to the holders of
securities of a series is calculated on a loan-by-loan basis, disproportionate
principal prepayments among loans with different interest rates will affect the
yield on those securities. In most cases, the effective yield to securityholders
will be lower than the yield otherwise produced by the applicable Pass-Through
Rate or interest rate and purchase price, because while interest will accrue on
each loan in each month, the distribution of interest will not be made earlier
than the month following the month of accrual.
Under some circumstances, the servicer, the holders of the residual
interests in a REMIC or ownership interest in a FASIT or any person specified in
the related prospectus supplement may have the option to purchase the assets of
a trust fund thereby causing earlier retirement of the related series of
securities. We refer you to "The Agreements--Termination; Optional Termination."
The relative contribution of the various factors affecting prepayment may
vary from time to time. There can be no assurance as to the rate of payment of
principal of the Trust Fund Assets at any time or over the lives of the
securities.
The prospectus supplement relating to a series of securities will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted average
lives and maturities of those securities.
THE AGREEMENTS
Set forth below is a description of the material provisions of each
Agreement which is not described elsewhere in this prospectus. The description
is subject to, and qualified in its entirety by reference to, the provisions of
each Agreement. Where particular provisions or terms used in the Agreements are
referred to, the provisions or terms are as specified in the Agreements.
Assignment of the Trust Fund Assets
Conveyance of the Loans. At the time of issuance of the securities of a
series, the depositor will cause the loans comprising the related trust fund to
be conveyed to the trustee, without recourse, together with all principal and
interest received by or on behalf of the depositor on or with respect to those
loans after the cut-off date, other than principal and interest due on or before
the cut-off date and other than any Retained Interest specified in the related
prospectus supplement. The trustee will, concurrently with the conveyance,
deliver the securities to the depositor in exchange for the loans. Each loan
will be identified in a schedule appearing as an exhibit to the related
Agreement. This schedule will include information as to the outstanding
principal balance of each loan after
46
application of payments due on or before the cut-off date, as well as
information regarding the interest rate or APR, the maturity of the loan, the
Combined Loan-to-Value Ratio at origination and other specified information.
The Agreement will require that, within the time period specified therein,
the depositor will also deliver or cause to be delivered to the trustee (or to
the custodian hereinafter referred to) as to each loan, among other things:
o the mortgage note or contract endorsed without recourse in blank or to
the order of the trustee,
o the mortgage, deed of trust or similar instrument (a "Mortgage") with
evidence of recording indicated thereon (except for any Mortgage not
returned from the public recording office, in which case the depositor
will deliver or cause to be delivered a copy of the Mortgage together
with a certificate stating that the original of the Mortgage was
delivered to that recording office),
o an assignment of the Mortgage to the trustee, which assignment will be
in recordable form in the case of a Mortgage assignment,
o other assignments deemed necessary by the trustee, including
assignments of title insurance policies covering the mortgaged
properties, and
o any other security documents, including those relating to any senior
interests in the mortgaged property, as may be specified in the
related prospectus supplement or the related Agreement.
The trustee (or the custodian hereinafter referred to) will review these
loan documents within the time period specified in the related prospectus
supplement after receipt thereof, and the trustee will hold those documents in
trust for the benefit of the related securityholders. If any loan document is
found to be missing or defective in any material respect, the trustee (or the
custodian) will notify the servicer and the depositor, and the servicer will
notify the related seller. If the seller cannot cure the omission or defect
within the time period specified in the related prospectus supplement after
receipt of the notice, the seller will be obligated to either
o purchase the related loan from the trust fund at the Purchase Price,
or
o if so specified in the related prospectus supplement, remove the loan
from the trust fund and substitute in its place one or more other
loans that meets the requirements set forth in the related Agreement
and described in the related prospectus supplement.
There can be no assurance that a seller will fulfill this purchase or
substitution obligation. Although the servicer may be obligated to enforce this
obligation to the extent described above under "Loan Program--Representations by
Sellers; Repurchases," neither the servicer nor the depositor will be obligated
to purchase or replace the loan if the seller defaults on its obligation, unless
the breach also constitutes a breach of the representations or warranties of the
servicer or the depositor, as the case may be. The applicable prospectus
supplement may provide other remedies, but if it does not, this obligation to
cure, purchase or substitute constitutes the sole remedy available to the
securityholders or the trustee for omission of, or a material defect in, a
constituent document.
The trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the loans as agent of the trustee.
The servicer will make representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
Agreement. Upon a breach of any representation of the servicer which materially
and adversely affects the interests of the securityholders in a loan, the
servicer will be obligated either to cure the breach in all material respects or
to purchase (at the Purchase Price) or if so specified in the related prospectus
supplement, replace the loan. The applicable prospectus supplement may provide
other remedies, but if it does not, this obligation to cure, purchase or
substitute constitutes the sole remedy available to the securityholders or the
trustee for a breach of a representation by the servicer.
Notwithstanding the foregoing provisions, no purchase or substitution of a
loan will be made for a trust fund which has made a REMIC or FASIT election if
the purchase or substitution would result in a prohibited transaction tax under
the Code.
47
No Recourse to Sellers, Depositor or Servicer. As described above under
"--Conveyance of the Loans," the depositor will cause the loans comprising the
related trust fund to be conveyed to the trustee, without recourse. However,
each seller (and Equity One, where the seller is a subsidiary or affiliate of
Equity One) will be obligated to repurchase or substitute for any loan as to
which certain representations and warranties are breached or for failure to
deliver certain documents relating to the loans as described herein under
"--Conveyance of the Loans" and "Loan Program--Representations by Sellers;
Repurchases." In addition, the servicer and the depositor will be obligated to
purchase or substitute for any loan as to which certain representations and
warranties are breached as described herein under "--Conveyance of the Loans."
The applicable prospectus supplement may provide other remedies, but if it does
not, these obligations to purchase or substitute constitute the sole remedy
available to the securityholders of the related series or the trustee for a
breach of any representation or failure to deliver a constituent document.
Payments on Loans; Deposits to Security Account
The servicer will establish and maintain or cause to be established and
maintained for the related trust fund a separate account or accounts for the
collection of payments on the related Trust Fund Assets in the trust fund (the
"Security Account"). The applicable prospectus supplement may provide for other
requirements for the Security Account, but if it does not, the Security Account
must be one of the following:
o maintained with a depository institution the debt obligations of which
(or in the case of a depository institution that is the principal
subsidiary of a holding company, the obligations of which) are rated
in one of the two highest rating categories by the Rating Agency or
Rating Agencies that rated one or more classes of the related series
of securities;
o an account or accounts the deposits in which are fully insured by the
Bank Insurance Fund (the "BIF") of the FDIC or the Savings Association
Insurance Fund (as successor to the Federal Savings and Loan Insurance
Corporation (the "SAIF"));
o an account or accounts the deposits in which are insured by the BIF or
the SAIF (to the limits established by the FDIC), and the uninsured
deposits in which are otherwise secured so that, as evidenced by an
opinion of counsel, the securityholders have a claim on the funds in
the Security Account or a perfected first priority security interest
against any collateral securing these funds that is superior to the
claims of any other depositors or general creditors of the depository
institution with which the Security Account is maintained; or
o an account or accounts otherwise acceptable to each Rating Agency.
The collateral eligible to secure amounts in the Security Account is limited to
Permitted Investments. A Security Account may be maintained as an
interest-bearing account or the funds held therein may be invested pending each
succeeding distribution date in Permitted Investments. The servicer or its
designee will be entitled to receive any interest or other income earned on
funds in the Security Account as additional compensation and will be obligated
to deposit in the Security Account the amount of any loss immediately as
realized. The Security Account may be maintained with the servicer or with a
depository institution that is an affiliate of the servicer, provided it meets
the standards set forth above.
The servicer will deposit or cause to be deposited in the Security Account
for each trust fund, to the extent applicable and provided in the Agreement, the
following payments and collections received or advances made by or on behalf of
it subsequent to the cut-off date (other than payments due on or before the
cut-off date and exclusive of any amounts representing Retained Interest):
o all payments on account of principal, including Principal Prepayments
and, if specified in the related prospectus supplement, any applicable
prepayment penalties, on the loans;
o all payments on account of interest on the loans, net of applicable
servicing compensation;
o all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ("Insured Expenses") incurred,
and unreimbursed advances made, by the servicer, if any) of the hazard
insurance policies and any primary mortgage insurance policies, to the
extent these proceeds are not applied to the restoration of the
property or released to the mortgagor in accordance with the
servicer's
48
normal servicing procedures (collectively, "Insurance Proceeds") and
all other cash amounts (net of unreimbursed expenses incurred in
connection with liquidation or foreclosure ("Liquidation Expenses")
and unreimbursed advances made, by the servicer, if any) received and
retained in connection with the liquidation of defaulted loans, by
foreclosure or otherwise ("Liquidation Proceeds"), together with any
net proceeds received on a monthly basis on any properties acquired on
behalf of the securityholders by foreclosure or deed in lieu of
foreclosure;
o all proceeds of any loan or property in respect thereof purchased by
the servicer, the depositor or any seller as described under "Loan
Program--Representations by Sellers; Repurchases" or "--Assignment of
the Trust Fund Assets" and all proceeds of any loan repurchased as
described under "--Termination; Optional Termination;"
o all payments required to be deposited in the Security Account in order
to satisfy any deductible clause in any blanket insurance policy
described under "--Hazard Insurance;"
o any amount required to be deposited by the servicer in connection with
losses realized on investments for the benefit of the servicer of
funds held in the Security Account and, to the extent specified in the
related prospectus supplement, any payments required to be made by the
servicer in connection with prepayment interest shortfalls; and
o all other amounts required to be deposited in the Security Account
pursuant to the Agreement.
The servicer (or the depositor, as applicable) may from time to time direct
the institution that maintains the Security Account to withdraw funds from the
Security Account for the following purposes:
o to pay to the servicer the servicing fees described in the related
prospectus supplement (subject to reduction) and, as additional
servicing compensation, earnings on or investment income on funds in
the amounts in the Security Account credited thereto;
o to reimburse the servicer for advances, this right of reimbursement
for any loan being limited to amounts received that represent late
recoveries of payments of principal and/or interest on the loan (or
Insurance Proceeds or Liquidation Proceeds with respect thereto) with
respect to which that advance was made;
o to reimburse the servicer for any advances previously made which the
servicer has determined to be nonrecoverable;
o to reimburse the servicer from Insurance Proceeds for expenses
incurred by the servicer and covered by the related insurance
policies;
o to reimburse the servicer for unpaid servicing fees and unreimbursed
out-of-pocket costs and expenses incurred by the servicer in the
performance of its servicing obligations, the right of reimbursement
being limited to amounts received representing late recoveries of the
payments for which the advances were made;
o to pay to the servicer, for each loan or property acquired in respect
thereof that has been purchased by the servicer pursuant to the
Agreement, all amounts received thereon and not taken into account in
determining the principal balance of the repurchased loan;
o to reimburse the servicer or the depositor for expenses incurred and
reimbursable pursuant to the Agreement;
o to withdraw any amount deposited in the Security Account and not
required to be deposited therein; and
o to clear and terminate the Security Account upon termination of the
Agreement.
In addition, on or prior to the business day immediately preceding each
distribution date, the servicer shall withdraw from the Security Account the
amount of Available Funds, to the extent on deposit, for deposit in an account
maintained by the trustee for the related series of securities.
49
Pre-Funding Account
If so provided in the related prospectus supplement, the servicer will
establish and maintain a pre-funding account, in the name of the related trustee
on behalf of the related securityholders, into which the depositor will deposit
cash in an amount (the "Pre-Funded Amount") specified in the related prospectus
supplement on the related closing date. The pre-funding account will be
maintained with the trustee for the related series of securities and is designed
solely to hold funds to be applied by the trustee during the period from the
related closing date to a date specified in the related prospectus supplement
(the "Funding Period") to pay to the depositor or the applicable sellers, as the
case may be, the purchase price for subsequent loans ("Subsequent Loans")
acquired as Trust Fund Assets. Subsequent Loans will be required to conform to
the requirements set forth in the related Agreement and described in the related
prospectus supplement. Monies on deposit in the pre-funding account will not be
available to cover losses on or in respect of the related loans. The Pre-Funded
Amount will not exceed 25% of the initial aggregate principal amount of the
certificates and notes of the related series. The Pre-Funded Amount will be used
by the related trustee to purchase Subsequent Loans from the depositor or the
applicable sellers, as the case may be, from time to time during the Funding
Period. The Funding Period, if any, for a trust fund will begin on the related
closing date and will end on the date specified in the related prospectus
supplement, which in no event will be later than the date that is the earliest
to occur of
o the date the amount on deposit in the pre-funding account is less than
the minimum dollar amount, if any, specified in the related Agreement;
o the date on which an event of default occurs under the related
Agreement, or
o the date which is the later of three months or 90 days after the
related closing date.
Monies on deposit in the pre-funding account may be invested in Permitted
Investments under the circumstances and in the manner described in the related
Agreement. Earnings on investment of funds in the pre-funding account will be
deposited into the related Security Account or another trust account specified
in the related prospectus supplement and losses will be charged against the
funds on deposit in the pre-funding account. Any amounts remaining in the
pre-funding account at the end of the Funding Period will be distributed to the
related securityholders in the manner and priority specified in the related
prospectus supplement, as a prepayment of principal of the related securities.
In addition, if so provided in the related prospectus supplement, on the
related closing date the depositor will deposit in a capitalized interest
account cash in the amount necessary to cover shortfalls in interest on the
related series of securities that may arise as a result of utilization of the
pre-funding account as described above. The capitalized interest account shall
be maintained with the trustee for the related series of securities and is
designed solely to cover the above-mentioned interest shortfalls. Monies on
deposit in the capitalized interest account will not be available to cover
losses on or in respect of the related loans. To the extent that the entire
amount on deposit in the capitalized interest account has not been applied to
cover shortfalls in interest on the related series of securities by the end of
the Funding Period any amounts remaining in the capitalized interest account
will be paid to the depositor.
Sub-Servicing by Sellers
Each seller of a loan or any other servicing entity may act as the
sub-servicer for the loan pursuant to a sub-servicing agreement, which will not
contain any terms inconsistent with the related Agreement. While each
sub-servicing agreement will be a contract solely between the servicer and the
sub-servicer, the Agreement pursuant to which a series of securities is issued
will provide that, if for any reason the servicer for the series of securities
is no longer the servicer of the related loans, the trustee or any successor
servicer must recognize the sub-servicer's rights and obligations under the
sub-servicing agreement. Notwithstanding any sub-servicing arrangement, unless
otherwise provided in the related prospectus supplement, the servicer will
remain liable for its servicing duties and obligations under the Master
Servicing Agreement as if the servicer alone were servicing the loans.
Collection Procedures
50
The servicer, directly or through one or more sub-servicers, will make
reasonable efforts to collect all payments called for under the loans and will,
consistent with each Agreement and any pool insurance policy, primary mortgage
insurance policy, FHA insurance, VA guaranty, bankruptcy bond or alternative
arrangements, follow collection procedures that are customary for loans
comparable to the loans. Consistent with the above, the servicer may, in its
discretion, waive any assumption fee, late payment or other charge in connection
with a loan and, to the extent not inconsistent with the coverage of the loan by
a pool insurance policy, primary mortgage insurance policy, FHA insurance, VA
bond or alternative arrangements, if applicable, arrange with a borrower a
schedule for the liquidation of delinquencies running for no more than 125 days
after the applicable due date for each payment. To the extent the servicer is
obligated to make or cause to be made advances, the obligation will remain
during any period of this arrangement.
In any case in which property securing a loan has been, or is about to be,
conveyed by the mortgagor or obligor, the servicer will, to the extent it has
knowledge of the conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of the loan under any
due-on-sale clause applicable thereto, but only if the exercise of these rights
is permitted by applicable law and will not impair or threaten to impair any
recovery under any primary mortgage insurance policy. If these conditions are
not met or if the servicer reasonably believes it is unable under applicable law
to enforce the due-on-sale clause or if the loan is a mortgage loan insured by
the FHA or partially guaranteed by the VA, the servicer will enter into or cause
to be entered into an assumption and modification agreement with the person to
whom the property has been or is about to be conveyed, pursuant to which that
person becomes liable for repayment of the loan and, to the extent permitted by
applicable law, the mortgagor remains liable thereon. Any fee collected by or on
behalf of the servicer for entering into an assumption agreement will be
retained by or on behalf of the servicer as additional servicing compensation.
We refer you to "Legal Aspects of the Loans--Due-on-Sale Clauses." In connection
with any of this type, the terms of the related loan may not be changed.
Hazard Insurance
Except as otherwise specified in the related prospectus supplement, the
servicer will require the mortgagor or obligor on each loan to maintain a hazard
insurance policy providing for no less than the coverage of the standard form of
fire insurance policy with extended coverage customary for the type of mortgaged
property in the state in which that mortgaged property is located. Except as
otherwise specified in the related prospectus supplement, this coverage will be
in an amount equal to at least the lesser of
o the sum of the original principal balance of the loan and the original
principal balance of any other loan on the mortgaged property having
lien priority over the loan, if any, and
o the greater of
o the maximum insurable value of the improvements on the mortgaged
property and
o an amount sufficient to ensure that the proceeds of the policy
will prevent the mortgagor and/or the mortgagee from becoming a
co-insurer.
All amounts collected by the servicer under any hazard policy (except for
amounts to be applied to the restoration or repair of the mortgaged property or
released to the mortgagor or obligor in accordance with the servicer's normal
servicing procedures) will be deposited in the related Security Account. In the
event that the servicer maintains a blanket policy insuring against hazard
losses on all the loans comprising part of a trust fund, it will conclusively be
deemed to have satisfied its obligation relating to the maintenance of hazard
insurance. This blanket policy may contain a deductible clause, in which case
the servicer will be required to deposit from its own funds into the related
Security Account the amounts which would have been deposited therein but for
this clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a loan by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated
51
by respective state laws, and most of these policies 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 some cases, vandalism. The foregoing
list is merely indicative of some kinds of uninsured risks and is not intended
to be all inclusive. If the mortgaged property securing a loan is located in a
federally designated special flood area at the time of origination, the servicer
will require the mortgagor or obligor to obtain and maintain flood insurance.
The hazard insurance policy covering each mortgaged property securing each
loan typically contains a clause which in effect requires the insured at all
times to carry insurance in an amount which is the lesser of
o the replacement value of the mortgaged property, or
o the principal amount of the loan.
Most insurance policies provide that if the insured's coverage falls below a
specified percentage (usually 80% to 90%), then the insurer's liability in the
event of partial loss will not exceed the larger of
o the actual cash value (generally defined as replacement cost at the
time and place of loss, less physical depreciation) of the
improvements damaged or destroyed, or
o the same proportion of the loss as the amount of insurance carried
bears to the specified percentage of the full replacement cost of
these improvements.
Since the amount of hazard insurance the servicer may cause to be maintained on
the improvements securing the loans declines as the principal balances owing
thereon decrease, and since improved real estate generally has appreciated in
value over time in the past, the effect of this requirement in the event of
partial loss may be that hazard insurance proceeds will be insufficient to
restore fully the damaged property. If specified in the related prospectus
supplement, a special hazard insurance policy will be obtained to insure against
some of the uninsured risks described above. We refer you to "Credit
Enhancement."
If the mortgaged property securing a defaulted loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged mortgaged property, the servicer is not required to expend
its own funds to restore the damaged mortgaged property unless it determines
o that the restoration will increase the proceeds to securityholders on
liquidation of the loan after reimbursement of the servicer for its
expenses, and
o that these expenses will be recoverable by it from related Insurance
Proceeds or Liquidation Proceeds.
If recovery on a defaulted loan under any related insurance policy is not
available for the reasons set forth in the preceding paragraph, or if the
defaulted loan is not covered by an insurance policy, the servicer will be
obligated to follow or cause to be followed normal practices and procedures that
it deems necessary or advisable to realize upon the defaulted loan. If the
proceeds of any liquidation of the mortgaged property securing the defaulted
loan are less than the principal balance of the loan plus interest accrued
thereon that is payable to securityholders, the trust fund will realize a loss
in the amount of the difference plus the aggregate of expenses incurred by the
servicer in connection with these proceedings and which are reimbursable under
the Agreement. In the unlikely event that any proceedings result in a total
recovery which is, after reimbursement to the servicer of its expenses, in
excess of the principal balance of the loan plus interest accrued thereon that
is payable to securityholders, the servicer will be entitled to withdraw or
retain from the Security Account amounts representing its normal servicing
compensation for the loan and amounts representing the balance of the excess,
exclusive of any amount required by law to be forwarded to the related borrower,
as additional servicing compensation.
If the servicer or its designee recovers Insurance Proceeds which, when
added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the servicer, exceed the principal balance of a loan
plus interest accrued thereon that is payable to securityholders, the servicer
will be entitled to withdraw or retain
52
from the Security Account amounts representing its normal servicing compensation
resulting from that loan. In the event that the servicer has expended its own
funds to restore the damaged mortgaged property and these funds have not been
reimbursed under the related hazard insurance policy, it will be entitled to
withdraw from the Security Account out of related Liquidation Proceeds or
Insurance Proceeds an amount equal to the expenses incurred by it, in which
event the trust fund may realize a loss up to the amount so charged. Since
Insurance Proceeds cannot exceed deficiency claims and certain expenses incurred
by the servicer, no payment or recovery will result in a recovery to the trust
fund which exceeds the principal balance of the defaulted loan together with
accrued interest thereon. We refer you to "Credit Enhancement."
The proceeds from any liquidation of a loan will be applied in the
following order of priority:
o first, to reimburse the servicer for any unreimbursed expenses
incurred by it to restore the related mortgaged property and any
unreimbursed servicing compensation payable to the servicer relating
to the loan,
o second, to reimburse the servicer for any unreimbursed advances
relating to the loan,
o third, to accrued and unpaid interest (to the extent no advance has
been made for this amount) on the loan; and
o fourth, as a recovery of principal of the loan.
Realization Upon Defaulted Loans
FHA Insurance, VA Guaranties. Loans designated in the related prospectus
supplement as insured by the FHA will be insured by the FHA as authorized under
the United States Housing Act of 1937, as amended. In addition to the Title I
Program of the FHA (see "Certain Legal Aspects of the Loans--Title I Program")
some loans will be insured under various FHA programs including the standard FHA
203(b) program to finance the acquisition of one- to four-family housing units
and the FHA 245 graduated payment mortgage program. These programs generally
limit the principal amount and interest rates of the mortgage loans insured.
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 may have an interest rate or original principal
amount exceeding the applicable FHA limits at the time of origination of the
loan.
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 of 1944, as amended,
permits a veteran (or in some instances the spouse of a veteran) to obtain a
mortgage loan guaranty by the VA covering a portion of the mortgage financing
for the purchase or refinancing of a dwelling to be used as the veteran's home
at interest rates permitted by the VA. Loans made under the program cannot
exceed the reasonable value of the property or certain lower limits in the case
of refinancing loans. The program requires no down payment from the purchaser
and permits the guaranty of mortgage loans of up to 30 years' duration. No loan
guaranteed by the VA will have an original principal amount greater than five
times the partial VA guaranty for the loan. 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 3703, as amended.
Primary Mortgage Insurance Policies. If so specified in the related
prospectus supplement, the servicer will maintain or cause to be maintained, as
the case may be, in full force and effect, a primary mortgage insurance policy
with regard to each loan for which the coverage is required. Primary mortgage
insurance policies reimburse certain losses sustained by reason of defaults in
payments by borrowers. The servicer will not cancel or refuse to renew any
primary mortgage insurance policy in effect at the time of the initial issuance
of a series of securities that is required to be kept in force under the
applicable Agreement unless the replacement primary mortgage insurance policy
for a cancelled or nonrenewed policy is maintained with an insurer whose
claims-paying ability is sufficient to maintain the current rating of the
classes of securities of that series that have been rated.
53
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the servicer in respect
of its servicing activities for each series of securities will be equal to the
percentage per annum described in the related prospectus supplement (which may
vary under some circumstances) of the outstanding principal balance of each
loan, and this compensation will be retained by it from collections of interest
on the loan in the related trust fund. As compensation for its servicing duties,
a sub-servicer or, if there is no sub-servicer, the servicer will be entitled to
a monthly servicing fee as described in the related prospectus supplement. In
addition, the servicer or sub-servicer will retain all prepayment charges,
assumption fees and late payment charges, to the extent collected from
borrowers, and any benefit that may accrue as a result of the investment of
funds in the applicable Security Account.
The servicer will pay or cause to be paid certain ongoing expenses
associated with each trust fund and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any credit enhancement
arrangements, payment of the fees and disbursements of the trustee, any
custodian appointed by the trustee, the certificate registrar and any paying
agent, and payment of expenses incurred in enforcing the obligations of
sub-servicers and sellers. The servicer will be entitled to reimbursement of
expenses incurred in enforcing the obligations of sub-servicers and sellers
under limited circumstances.
Evidence as to Compliance
Each 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 to the effect that, on the basis of the examination by that firm
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for the
Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac"), the servicing
by or on behalf of the servicer of mortgage loans or private asset-backed
securities, or under pooling and servicing agreements substantially similar to
each other (including the related Agreement) was conducted in compliance with
these agreements except for any significant exceptions or errors in records
that, in the opinion of the firm, the Audit Program for Mortgages serviced for
FHLMC, or the Uniform Single Attestation Program for Mortgage Bankers, it is
required to report. In rendering its statement the firm may rely, as to matters
relating to the direct servicing of loans by sub-servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC (rendered within one year of the statement) of
firms of independent public accountants with respect to the related
sub-servicer.
Each Agreement will also provide for delivery to the trustee, on or before
a specified date in each year, of an annual statement signed by two officers of
the servicer to the effect that the servicer has fulfilled its obligations under
the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of the servicer may be obtained by securityholders of the related series without
charge upon written request to the servicer at the address set forth in the
related prospectus supplement.
Certain Matters Regarding the Servicer and the Depositor
The servicer under each Pooling and Servicing Agreement or Master Servicing
Agreement, as applicable, will be named in the related prospectus supplement.
The entity serving as servicer may have normal business relationships with the
depositor or the depositor's affiliates.
Each Agreement will provide that the servicer may not resign from its
obligations and duties under the Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. The servicer
may, however, be removed from its obligations and duties as set forth in the
Agreement. No resignation will become effective until the trustee or a successor
servicer has assumed the servicer's obligations and duties under the Agreement.
54
Each Agreement will further provide that neither the servicer, the
depositor nor any director, officer, employee, or agent of the servicer or the
depositor will be under any liability to the related trust fund or
securityholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the servicer, the depositor nor any director,
officer, employee, or agent of the servicer or the depositor will be protected
against any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. Each Agreement will further provide that the servicer, the depositor
and any director, officer, employee or agent of the servicer or the depositor
will be entitled to indemnification by the related trust fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the securities, other than any loss,
liability or expense related to any specific loan or loans (except any loss,
liability or expense otherwise reimbursable pursuant to the Agreement) 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, each
Agreement will provide that neither the 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 Agreement and which in
its opinion may involve it in any expense or liability. The servicer or the
depositor may, however, in its discretion undertake any action which it may deem
necessary or desirable under the Agreement and the rights and duties of the
parties thereto and the interests of the securityholders thereunder. If this
occurs, the legal expenses and costs of the action and any liability resulting
therefrom will be expenses, costs and liabilities of the trust fund and the
servicer or the depositor, as the case may be, will be entitled to be reimbursed
therefor out of funds otherwise distributable to securityholders.
Except as otherwise specified in the related prospectus supplement, any
person into which the servicer may be merged or consolidated, or any person
resulting from any merger or consolidation to which the servicer is a party, or
any person succeeding to the business of the servicer, will be the successor of
the servicer under each Agreement, provided that the person is qualified to sell
mortgage loans to, and service mortgage loans on behalf of, the Federal National
Mortgage Association ("FNMA" or "Fannie Mae") or FHLMC and further provided that
the merger, consolidation or succession does not adversely affect the then
current rating or ratings of the class or classes of securities of that series
that have been rated.
Events of Default; Rights Upon Event of Default
Pooling and Servicing Agreement; Master Servicing Agreement. Except as
otherwise specified in the related prospectus supplement, "Events of Default"
under each Agreement will consist of
o any failure by the servicer to distribute or cause to be distributed
to securityholders of any class any required payment (other than an
advance) which continues unremedied for five days after the giving of
written notice of failure to the servicer by the trustee or the
depositor, or to the servicer, the depositor and the trustee by the
holders of securities of that class evidencing not less than 25% of
the total distributions allocated to that class ("Percentage
Interests"),
o any failure by the servicer to make an advance as required under the
Agreement, unless cured as specified therein,
o any failure by the servicer duly to observe or perform in any material
respect any of its other covenants or agreements in the Agreement
which continues unremedied for thirty days after the giving of written
notice of failure to the servicer by the trustee or the depositor, or
to the servicer, the depositor and the trustee by the holders of
securities of any class evidencing not less than 25% of the aggregate
Percentage Interests constituting that class, and
o certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and certain actions by
or on behalf of the servicer indicating its insolvency, reorganization
or inability to pay its obligations.
If specified in the related prospectus supplement, the Agreement will
permit the trustee to sell the Trust Fund Assets and the other assets of a trust
fund described under "Credit Enhancement" herein if payments from these sources
are insufficient to make all payments required in the Agreement. The assets of a
trust fund will be sold only under the circumstances and in the manner specified
in the related prospectus supplement.
55
Unless otherwise provided in the related prospectus supplement, so long as
an event of default under an Agreement remains unremedied, the depositor or the
trustee may, and at the direction of holders of securities of any class
evidencing not less than 25% of the aggregate Percentage Interests under any
other circumstances specified in the Agreement, the trustee will terminate all
of the rights and obligations of the servicer under the Agreement relating to
that trust fund and in and to the related Trust Fund Assets, The trustee will
then succeed to all of the responsibilities, duties and liabilities of the
servicer under the Agreement, including, if specified in the related prospectus
supplement, the obligation to make advances, and will be entitled to similar
compensation arrangements. If the trustee is unwilling or unable so to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, a mortgage loan servicing institution with a net worth of at least
$10,000,000 to act as successor to the servicer under the Agreement. Pending
this appointment, the trustee is obligated to act as a successor to the
servicer. The trustee and any successor to the servicer may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the servicer under the Agreement.
Unless otherwise provided in the related prospectus supplement, no
securityholder, solely by virtue of the holder's status as a securityholder,
will have any right under any Agreement to institute any proceeding relating to
the Agreement, unless the holder previously has given to the trustee written
notice of default and unless the holders of securities of any class of that
series evidencing not less than 25% of the aggregate Percentage Interests
constituting the class have made a written request of 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 any proceeding.
Indenture. Except as otherwise specified in the related prospectus
supplement, events of default under the Indenture for each series of
asset-backed notes shall include:
o a default in the payment of any principal of or interest on any note
of that series which continues unremedied for five days after written
notice of default is given as specified in the related prospectus
supplement,
o failure to perform in any material respect any other covenant of the
depositor or the trust fund in the Indenture which continues for a
period of thirty (30) days after notice thereof 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, or
o any other event of default provided for notes of that series including
but not limited to certain defaults on the part of the issuer, if any,
of a credit enhancement instrument supporting the notes.
If an event of default on the notes of any series at the time outstanding
occurs and is continuing, either the trustee or the holders of a majority of the
then aggregate outstanding amount of the notes of that series may declare the
principal amount (or, if the notes of that series have an interest rate of 0%,
the portion of the principal amount as may be specified in the terms of that
series, as provided in the related prospectus supplement) of all the notes of
that series to be due and payable immediately. The declaration may, under
certain circumstances, be rescinded and annulled by the holders of more than 50%
of the Percentage Interests of the notes of that series.
If, following an event of default on any series of notes, the notes of that
series have been declared to be due and payable, the trustee may, in its
discretion, notwithstanding acceleration, elect to maintain possession of the
collateral securing the notes of that series and to continue to apply
distributions on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes of that series as they would
have become due if there had not been a declaration. In addition, the trustee
may not sell or otherwise liquidate the collateral securing the notes of a
series following an event of default, other than a default in the payment of any
principal or interest on any notes of that series for five days or more, unless
o the holders of 100% of the Percentage Interests of the notes of that
series consent to the sale,
56
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 that series at the date of the sale, or
o the trustee determines that the collateral would not be sufficient on
an ongoing basis to make all payments on the notes as these payments
would have become due if the notes had not been declared due and
payable, and the trustee obtains the consent of the holders of 66% of
the Percentage Interests of the notes of that series.
If the trustee liquidates the collateral in connection with an event of
default involving a default for five days or more in the payment of principal of
or interest on the notes of a series, the Indenture provides that the trustee
will have a prior lien on the proceeds of any liquidation for unpaid fees and
expenses. As a result, upon the occurrence of a payment-related event of
default, the amount available for distribution to the holders of notes would be
less than would otherwise be the case. However, the trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the holders of notes after the occurrence of this type of an event of default.
Except as otherwise specified in the related prospectus supplement, if the
principal of the notes of a series is declared due and payable, as described
above, the holders of any notes issued at a discount from par may be entitled to
receive no more than the unpaid principal amount thereof less the amount of the
discount that is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
trustee, in case an event of default relating to a series of notes occurs and is
continuing, the trustee will have no obligation to exercise any of the rights or
powers under the Indenture at the request or direction of any of the holders of
notes of that series, unless the holders offer to the trustee security or
indemnity satisfactory to it against the costs, expenses and liabilities which
might be incurred by it in complying with the request or direction. Subject to
these provisions for indemnification and specific limitations contained in the
Indenture, the holders of a majority of the then aggregate outstanding amount of
the notes of that series shall have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the trustee or
exercising any trust or power conferred on the trustee relating to the notes of
that series, and the holders of a majority of the then aggregate outstanding
amount of the notes of that series may, in some cases, waive any default with
respect thereto, 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 the holders of the outstanding
notes of that series affected thereby.
Amendment
Except as otherwise specified in the related prospectus supplement, each
Agreement may be amended by the depositor, the servicer and the trustee, with
the consent of the provider of credit enhancement for the related series of
securities, if any, but without the consent of any of the securityholders,
o to cure any ambiguity,
o to correct or supplement any provision therein which may be defective
or inconsistent with any other provision therein, or
o to make any other revisions relating to matters or questions arising
under the Agreement which are not inconsistent with its provisions,
provided that the amendment will not adversely affect in any material respect
the interests of any securityholder. An amendment will be deemed not to
adversely affect in any material respect the interests of the securityholders if
the person requesting the amendment obtains a letter from each Rating Agency
requested to rate the class or classes of securities of that series stating that
the amendment will not result in the downgrading or withdrawal of the respective
ratings then assigned to those securities.
In addition, to the extent provided in the related Agreement, an Agreement
may be amended without the consent of any of the securityholders to change the
manner in which the Security Account is maintained, provided
57
that the change does not adversely affect the then current rating on the class
or classes of securities of that series that have been rated. In addition, if a
REMIC or FASIT election is made for a trust fund, the related Agreement may be
amended to modify, eliminate or add to any of its provisions to the extent
necessary to maintain the qualification of the related trust fund as a REMIC or
FASIT or to avoid or minimize the risk of imposition of any tax on the REMIC or
FASIT, provided that the trustee has received an opinion of counsel to the
effect that the action is necessary or helpful to maintain the qualification,
avoid or minimize that risk or comply with those requirements, as applicable.
Except as otherwise specified in the related prospectus supplement, each
Agreement may also be amended by the depositor, the servicer and the trustee
with consent of holders of securities of that series evidencing not less than
66% of the aggregate Percentage Interests of each class affected thereby for the
purpose of adding any provisions to or changing in an manner or eliminating any
of the provisions of the Agreement or of modifying in any manner the rights of
the holders of the related securities; provided, however, that no amendment may
o reduce in any manner the amount of or delay the timing of, payments
received on loans which are required to be distributed on any security
without the consent of the holder of the security, or
o reduce the aforesaid percentage of securities of any class the holders
of which are required to consent to the amendment without the consent
of the holders of all securities of that class covered by the
Agreement then outstanding.
If a REMIC or FASIT election is made for a trust fund, the trustee will not be
entitled to consent to an amendment to the related Agreement without having
first received an opinion of counsel to the effect that the amendment will not
cause the trust fund to fail to qualify as a REMIC or FASIT.
Termination; Optional Termination
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling and
Servicing Agreement and Trust Agreement for each series of certificates will
terminate upon the payment to the related holders of certificates of all amounts
held in the Security Account or by the servicer and required to be paid to them
pursuant to that Agreement following the later of
o the final payment of or other liquidation of the last of the Trust
Fund Assets subject thereto or the disposition of all property
acquired upon foreclosure of any Trust Fund Assets remaining in the
trust fund, or
o the purchase by the servicer or, if REMIC or FASIT treatment has been
elected and if specified in the related prospectus supplement, by the
holder of the residual interest in the REMIC or ownership interest in
the FASIT from the related trust fund of all of the remaining Trust
Fund Assets and all property acquired in respect of those Trust Fund
Assets.
Unless otherwise specified in the related prospectus supplement, any
purchase of Trust Fund Assets and property acquired in respect of Trust Fund
Assets evidenced by a series of asset-backed certificates will be made at the
option of the servicer, the holders of certificates or, if applicable, a holder
of the REMIC residual interest or FASIT ownership interest, at a price specified
in the related prospectus supplement. The exercise of this right will effect
early retirement of the asset-backed certificates of that series, but the right
of the servicer, the holders of certificates or, if applicable, a holder of the
REMIC residual interest or FASIT ownership interest, to so purchase is subject
to the principal balance of the related Trust Fund Assets being less than the
percentage specified in the related prospectus supplement of the aggregate
principal balance of the Trust Fund Assets at the cut-off date for the series.
The foregoing is subject to the provision that if a REMIC or FASIT election is
made for a trust fund, any purchase pursuant to the second bullet above will be
made only in connection with a "qualified liquidation" of the REMIC or FASIT
within the meaning of Section 860F(a)(4) of the Code, as made applicable to a
FASIT through Section 860L(e)(3)(A)(i) of the Code.
Indenture. The Indenture will be discharged for a series of notes (except
for continuing rights specified in the Indenture) upon the delivery to the
trustee for cancellation of all the notes of that series or, with certain
limitations, upon deposit with the trustee of funds sufficient for the payment
in full of all of the notes of that series.
58
The Indenture will also provide that, if so specified for the notes of any
series, the related trust fund will be discharged from any and all obligations
to the notes of that series (except for certain obligations relating to
temporary notes and exchanges of notes, to register the transfer of or exchange
notes of that series, to replace stolen, lost or mutilated notes of that series,
to maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States which through the payment of
interest and principal in respect thereof 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 of that series on the last scheduled
distribution date for those notes and any installment of interest on those notes
in accordance with the terms of the Indenture and the notes of that series. In
the event of any defeasance and discharge of notes of that series, holders of
notes of that series would be able to look only to that money and/or direct
obligations for payment of principal and interest, if any, on their notes until
maturity.
The Trustee
The trustee under each Agreement will be named in the applicable prospectus
supplement. The commercial bank or trust company serving as trustee may have
normal banking relationships with the depositor, the servicer and any of their
respective affiliates.
LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the loans. Because these legal aspects are
governed primarily by applicable state law (which laws may differ
substantially), the descriptions do not, except as expressly provided below,
reflect the laws of any particular jurisdiction, or encompass the laws of all
jurisdictions in which the security for the loans is situated. The descriptions
are qualified in their entirety by reference to applicable federal laws and the
appropriate laws of the jurisdictions in which loans may be originated.
General
The loans for a series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the property subject to the loan is located. A mortgage
creates a lien upon the real property encumbered by the mortgage that is
generally not prior to the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the order of recording
with a state or county office. There are two parties to a mortgage: the
mortgagor, who is the borrower and owner of the mortgaged property, and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. Although a deed of
trust is similar to a mortgage, a deed of trust formally has three parties, the
borrower-property owner called the trustor (similar to a mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. A security deed and a deed to
secure debt are special types of deeds which indicate on their face that they
are granted to secure an underlying debt. By executing a security deed or deed
to secure debt, the grantor conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee until the underlying debt is
repaid. The trustee's authority under a deed of trust, the mortgagee's authority
under a mortgage and the grantee's authority under a security deed or deed to
secure debt are governed by law and, for some deeds of trust, the directions of
the beneficiary.
Foreclosure/Repossession
Deeds of Trust and Security Deeds. Foreclosure of a deed of trust or a
security deed is generally accomplished by a non-judicial sale under a specific
provision in the deed of trust or security deed which authorizes the trustee or
grantee to sell the property at public auction upon any default by borrower
under the terms of the note, deed of trust or security deed. In some states,
foreclosure also may be accomplished by judicial sale in the manner provided for
foreclosure of mortgages.
59
Mortgages. Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property.
Actions prior to Commencement of Foreclosure. Many states require notices,
sometimes in prescribed form, be given to borrowers prior to commencement of
foreclosure proceedings in addition to any notice requirements contained in the
mortgage or deed of trust. In some states, a notice of default must be recorded
and a copy sent to the borrower and any other party with an interest in the
property. In some states, the borrower has the right to reinstate the loan at
any time following default until shortly before the sale. If a deed of trust,
security deed or mortgage 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 specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest of record in the real property.
Foreclosure Proceedings. In the case of foreclosure of a security deed,
deed of trust or mortgage, delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. Judicial
foreclosure proceedings are often not contested by any of the parties, but when
the mortgagee's right to foreclose is contested, the legal proceedings necessary
to resolve the issue can be time consuming. After completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure and
the court either appoints or directs a referee, sheriff, or other court 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. Deeds of trust and security deeds are generally foreclosed by the
trustee or grantee in a non-judicial sale.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee, referee, sheriff, or other court officer, for an amount equal to the
principal amount outstanding under the loan, accrued and unpaid interest and the
expenses of foreclosure in which event the mortgagor's debt will be
extinguished. However, the lender may purchase for a lesser amount in some
jurisdictions which only require a minimum bid, or, in states where a deficiency
judgment is available, in order to preserve its right to seek a deficiency
judgment. Thereafter, subject to the right of the borrower in some states to
remain in possession during the redemption period, the lender will assume the
burden of ownership, including obtaining hazard insurance and making repairs
necessary to render the property suitable for sale at its own expense. 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.
Courts have imposed equitable principles upon foreclosure, which are
generally designed to mitigate the legal consequences to the borrower of the
borrower's default under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
Right of Redemption. In many states, the borrower, or any other person
having a junior encumbrance on the real estate, may, during a statutorily
prescribed reinstatement period, cure a monetary default by paying the entire
amount in arrears plus other designated costs and expenses incurred in enforcing
the obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender. After
the reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
60
redeem becomes a part of the indebtedness secured by the junior mortgage or deed
of trust. We refer you to "--Junior Mortgages; Rights of Senior Mortgagees."
Environmental Risks
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of some states, contamination of a property
may give rise to a lien on the property to assure the payment of the costs of
clean-up. In several states this lien has priority over the lien of an existing
mortgage against the property. In addition, under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), the United States Environmental Protection Agency ("EPA") may impose
a lien on property where EPA has incurred clean-up costs. However, a CERCLA lien
is subordinate to preexisting, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
secured lender may be held liable as an "owner" or "operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
mortgaged property, even though the environmental damage or threat was caused by
a prior or current owner or operator. CERCLA imposes liability for these costs
on any and all "responsible parties," including an owner or operator as that
term is therein defined. In 1996, however, Congress passed the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
which substantially modified the definition of "owner or operator" to make
several important exclusions relating to persons who hold indicia of facility
ownership primarily as a means to protect that person's security interest in the
facility (the "Secured Creditor Exclusion"). This exclusion contains several
restrictions, however, under which the lender holding the security interest must
operate to insure that it is not "participating in management" of the facility.
Thus, if a lender's activities begin to encroach on the actual management of a
contaminated facility or property while the borrower is still in possession of
the facility or property, the lender may incur liability as an "owner or
operator" under CERCLA. Similarly, if a lender forecloses and takes title to a
contaminated facility or property, the lender may incur CERCLA liability in
various circumstances, including, but not limited to, when it holds the facility
or property as an investment, or fails to market or lease the property at the
earliest practicable, commercially reasonable time, on commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements.
This new legislation also provides that in order to be deemed to have
participated in the management of a mortgaged property, a lender must actually
participate in the operational affairs of the property or the borrower. The
legislation provides that participation in the management of the property does
not include "merely having the capacity to influence, or unexercised right to
control" operations, which had been one of the major concerns arising from the
Eleventh Circuit's decision in U.S. v. Fleet Factors Corp., 901 F. 2d 1550 (11th
Cir. 1990). A lender does not "participate in the management," the standard for
incurring owner and operator liability under CERCLA, unless it:
o exercises decision-making control over environmental compliance
related to the property while the borrower is still in possession of
the property or facility;
o actually participates in the management or operational affairs of the
facility; or
o exercises control over substantially all of the non-environmental
compliance operational functions of the property (as opposed to
financial or administrative functions).
These amendments do not, however, affect the potential for liability under other
federal or state laws which impose liability on "owners or operators" but do not
provide any protection for secured creditors.
If a lender is or becomes liable, it can bring an action for contribution
against any other "responsible parties," including a previous owner or operator,
who created the environmental hazard, but those persons or entities may be
bankrupt or otherwise judgment-proof. The costs associated with environmental
cleanup may be substantial. It is conceivable that costs arising from the
circumstances set forth above would result in a loss to securityholders.
CERCLA does not apply to petroleum products, and the Secured Creditor
Exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource
61
Conservation and Recovery Act ("RCRA"), which regulates underground petroleum
storage tanks (except heating oil tanks). The EPA has adopted a lender liability
rule for underground storage tanks under Subtitle I of RCRA which also contains
a liability exclusion analogous to the Secured Creditor Exclusion. It should be
noted, however, that liability for cleanup of petroleum contamination may be
governed by state law, which may not provide for any specific protection for
secured creditors. Moreover, several states impose strict liability upon
homeowners and property owners for discharges of oil from residential heating
oil tanks that are not governed by CERCLA or RCRA, and the remediation of these
tanks can impose a significant economic burden upon a borrower. It is possible
that if a lender forecloses and takes ownership of a property impacted by an
underground storage tank, it could be held directly liable for the cost of
remediation since the statutory protections afforded to lenders under RCRA and
CERCLA do not extend to tanks that are not within the jurisdiction of those
statutes.
In the case of residential loans, at the time of origination, no
environmental assessment of the mortgaged properties was conducted. In the case
of mixed use loans, except as otherwise specified in the related prospectus
supplement, at the time of origination, no environmental assessment of the
mortgaged properties was conducted.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some other
states, this right of redemption applies only to sales following judicial
foreclosure, and not to sales pursuant to a non-judicial power of sale. In most
states where the right of redemption is available, statutory redemption may
occur upon payment of the foreclosure purchase price, accrued interest and
taxes. 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 from
the lender subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to retain the property and pay the expenses of ownership until the
redemption period has run. In some states, there is no right to redeem property.
Anti-Deficiency Legislation; Bankruptcy Laws; Tax Liens
Some states have imposed statutory restrictions 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 borrowers financing the purchase of their residence
or following sale under a deed of trust or certain other foreclosure
proceedings. A deficiency judgment is a personal judgment against the borrower
equal in most cases to the difference between the amount due to the lender and
the fair market value of the real property at the time of the foreclosure sale.
As a result of these prohibitions, it is anticipated that in most instances the
servicer will utilize the non-judicial foreclosure remedy and will not seek
deficiency judgments against defaulting borrowers.
Some state 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 some 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 relating 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. In some states, exceptions to the anti-deficiency statutes are
provided for in certain instances where the value of the lender's security has
been impaired by acts or omissions of the borrower, for example, in the event of
waste of the property. 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 anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the
62
Bankruptcy Code, a lender may not foreclose on a mortgaged property without the
permission of the bankruptcy court. The rehabilitation plan proposed by the
debtor may provide, if the mortgaged property is not the debtor's principal
residence and the court determines that the value of the mortgaged property is
less than the principal balance of the mortgage loan, for the reduction of the
secured indebtedness to the value of the mortgaged property as of the date of
the commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference, and also may reduce the monthly payments due under
the mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. The effect of any proceedings under the Bankruptcy Code,
including but not limited to any automatic stay, could result in delays in
receiving payments on the loans underlying a series of securities and possible
reductions in the aggregate amount of these payments.
The federal tax laws provide priority to certain tax liens over the
lien of a mortgage or secured party.
Due-on-Sale Clauses
To the extent specified in the related prospectus supplement, conventional
loans will contain due-on-sale clauses which will generally provide that if the
mortgagor or obligor sells, transfers or conveys the mortgaged property, the
loan or contract may be accelerated by the mortgagee or secured party. Court
decisions and legislative actions have placed substantial restriction on the
right of lenders to enforce these clauses in many states. However, the Garn-St
Germain Depository Institutions Act of 1982 (the "Garn-St Germain Act"), subject
to certain exceptions, preempts state constitutional, statutory and case law
prohibiting the enforcement of due-on-sale clauses. 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 these
clauses over mortgage loans that were
o 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
o 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 for 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.
As to loans secured by an owner-occupied residence, the Garn-St Germain Act
sets forth nine specific instances in which a mortgagee covered thereunder may
not exercise its rights under a due-on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the related mortgaged property to
an uncreditworthy person, which could increase the likelihood of default or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
loans and the number of loans which may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from the bankruptcy proceeding.
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 some states, there are
or may be specific limitations upon the late charges which a lender may collect
from a borrower for delinquent payments. Some states also limit the amounts that
a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under some state laws, prepayment charges may not be imposed after a
specified period of time following the origination of mortgage loans when the
prepayments are made on loans secured by liens encumbering owner-
63
occupied residential properties. Since many of the mortgaged properties will be
owner-occupied, it is anticipated that prepayment charges may not be imposed on
many of the loans. The absence of a restraint on prepayment, particularly on
fixed rate loans having higher interest rates, may increase the likelihood of
refinancing or other early retirement of these loans or contracts. Late charges
and prepayment fees are typically retained by servicers as additional servicing
compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate a borrower suffering from temporary financial disability. In other
cases, courts have limited the right of a lender to realize upon the lender's
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 some cases
involving the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to afford
constitutional protection to the borrower.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980, as amended ("Title V") provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. Fifteen
states adopted this type of law prior to the April 1, 1983 deadline. In
addition, even where Title V was not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Some states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of the borrower's loan (including a borrower who is a
member of the National Guard or is in reserve status at the time of the
origination of the loan and is later called to active duty) may not be charged
interest above an annual rate of 6% during the period of the borrower's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that the interest rate limitation could have an effect, for an
indeterminate period of time, on the ability of the servicer to collect full
amounts of interest on some of the loans. Unless otherwise provided in the
related prospectus supplement, any shortfall in interest collections resulting
from the application of the Relief Act could result in losses to
securityholders. The Relief Act also imposes limitations which would impair the
ability of the servicer to foreclose on an affected loan during the borrower's
period of active duty status. Moreover, the Relief Act permits the extension of
a loan's maturity and the re-adjustment of its payment schedule beyond the
completion of military service. Thus, in the event that a loan goes into
default, there may be delays and losses occasioned by the inability to realize
upon the mortgaged property in a timely fashion.
Junior Mortgages; Rights of Senior Mortgagees
64
To the extent that the loans comprising a trust fund for a series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the trust fund (and therefore the
securityholders), as mortgagee under any junior mortgage, are subordinate to
those of any mortgagee under any senior mortgage. The senior mortgagee has the
right to receive hazard insurance and condemnation proceeds and to cause the
property securing the loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure a 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 these proceeds and awards to any indebtedness secured
by the mortgage, in the order determined by the mortgagee. 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 senior mortgages will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the senior mortgages. Proceeds in excess of the amount
of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste 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.
The Title I Program
General. Some of the loans contained in a trust fund may be loans insured
under the Title I Credit Insurance program created pursuant to Sections I and
2(a) of the National Housing Act of 1934, as amended (the "Title I Program").
Under the Title I Program, the Secretary of the Department of Housing and Urban
Development ("HUD") is authorized and empowered to insure qualified lending
institutions against losses on eligible loans. The Title I Program operates as a
coinsurance program in which the Secretary of HUD insures up to 90% of certain
losses incurred on an individual insured loan, including the unpaid principal
balance of the loan, but only to the extent of the insurance coverage available
in the lender's insurance coverage reserve account. The owner of the loan bears
the uninsured loss on each loan.
The types of loans which are eligible for insurance by the Secretary of HUD
under the Title I Program include property improvement loans ("Property
Improvement Loans" or "Title I Loans"). A Property Improvement Loan or Title I
Loan means a loan made to finance actions or items that substantially protect or
improve the basic livability or utility of a property and includes single family
improvement loans.
There are two basic methods of lending or originating these loans which
include a "direct loan" or a "dealer loan." For a direct loan, the borrower
makes application directly to a lender without any assistance from a dealer,
which application may be filled out by the borrower or by a person acting at the
direction of the borrower who does not have a financial interest in the loan
transaction, and the lender may disburse the loan proceeds solely to the
borrower or jointly to the borrower and other parties to the transaction. For a
dealer loan, the dealer, who has a direct or indirect financial interest in the
loan transaction, assists the borrower in preparing the loan application or
otherwise assists the borrower in obtaining the loan from lender and the lender
may distribute proceeds solely to the dealer or the borrower or jointly to the
borrower and the dealer or other parties. For a dealer Title I Loan, a dealer
may include a seller, a contractor or supplier of goods or services.
65
Loans insured under the Title I Program are required to have fixed interest
rates and, generally, provide for equal installment payments due weekly,
biweekly, semi-monthly or monthly, except that a loan may be payable quarterly
or semi-annually in order to correspond with the borrower's irregular flow of
income. The first or last payments (or both) may vary in amount but may not
exceed 150% of the regular installment payment, and the first payment may be due
no later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
must be negotiated and agreed to by the borrower and lender and must be fixed
for the term of the loan and recited in the note. Interest on an insured loan
must accrue from the date of the loan and be calculated on a simple interest
basis. The lender must assure that the note and all other documents evidencing
the loan are in compliance with applicable federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of HUD.
Under the Title I Program, the Secretary of HUD does not review or approve
for qualification for insurance the individual loans insured thereunder at the
time of approval by the lending institution (as is typical) the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the
Secretary of HUD. In this case, provided that the validity of any lien on the
property has not been impaired, the insurance of the loan under the Title I
Program will not be affected unless the material misstatement of fact or misuse
of loan proceeds was caused by (or was knowingly sanctioned by) the lender or
its employees.
Requirements for Title I Loans. The maximum principal amount for Title I
Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that the maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I Loan may not be less
than six months nor greater than 20 years and 32 days. A borrower may obtain
multiple Title I Loans on multiple properties, and a borrower may obtain more
than one Title I Loan on a single property, in each case as long as the total
outstanding balance of all Title I Loans in the same property does not exceed
the maximum loan amount for the type of Title I Loan thereon having the highest
permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have at
least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property. Any Title I Loan in excess of $7,500 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or deed
of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend the list of items and activities. Before the lender may disburse funds on
any dealer Title I Loan, the lender must have in its possession a completion
certificate on a HUD approved form, signed by the borrower and the dealer. For a
direct Title I Loan, the lender is required to obtain, promptly upon completion
of the improvements but not later than six months after disbursement of the loan
proceeds with one six month extension if necessary, a completion certificate,
signed by the borrower. The lender is required to conduct an on-site inspection
on any Title I Loan where the principal obligation is $7,500 or more, and on any
direct Title I Loan where the borrower fails to submit a completion certificate.
HUD Insurance Coverage. Under the Title I Program the Secretary of HUD
establishes an insurance coverage reserve account for each lender which has been
granted a Title I insurance contract. The amount of
66
insurance coverage in this account is 10% of the amount disbursed, advanced or
expended by the lender in originating or purchasing eligible loans registered
with the Secretary of HUD for Title I insurance, with certain adjustments. The
balance in the insurance coverage reserve account is the maximum amount of
insurance claims the FHA is required to pay. Loans to be insured under the Title
I Program will be registered for insurance by the Secretary of HUD and the
insurance coverage attributable to these loans will be included in the insurance
coverage reserve account for the originating or purchasing lender following the
receipt and acknowledgment by the Secretary of HUD of a timely filed loan report
on the prescribed form pursuant to the Title I regulations. The Secretary of HUD
charges a fee of 0.50% of the loan amount multiplied by the number of years in
the loan term for any eligible loan so reported and acknowledged for insurance.
For loans with maturities of 25 months or less, payment of the entire insurance
premium is due 25 days after the Secretary of HUD acknowledges the loan report.
For loans with a term longer than 25 months, payment of the insurance premium is
made in annual installments beginning 25 days after the Secretary of HUD
acknowledges the loan report. If an insured loan is prepaid during the year, FHA
will not refund or abate portions of the insurance premium already paid. Refunds
and abatements are allowed only in limited circumstances.
Under the Title I Program the Secretary of HUD will reduce the insurance
coverage available in the lender's insurance coverage reserve account for loans
insured under the lender's contract of insurance by
o the amount of insurance claims approved for payment relating to
insured loans and
o the amount of insurance coverage attributable to insured loans sold by
the lender.
The balance of the lender's insurance coverage reserve account will be further
adjusted as required under Title I or by the Secretary of HUD. Originations and
acquisitions of new eligible loans will continue to increase a lender's
insurance coverage reserve account balance by 10% of the amount disbursed,
advanced or expended in originating or acquiring eligible loans registered with
the Secretary of HUD for insurance under the Title I Program. The Secretary of
HUD may transfer insurance coverage between insurance coverage reserve accounts
with earmarking relating to a particular insured loan or group of insured loans
when a determination is made that it is in the Secretary of HUD's interest to do
so.
The lender may transfer insured loans and loans reported for insurance only
to another qualified lender under a valid Title I contract of insurance (except
as collateral in a bona fide transaction). Unless an insured loan is transferred
with recourse or with a guaranty or repurchase agreement, the Secretary of HUD,
upon receipt of the loan report required upon transfer in accordance with the
Title I regulations, will transfer from the transferor's insurance coverage
reserve account to the transferee's insurance coverage reserve account an
amount, if available, equal to 10% of the actual purchase price or the net
unpaid principal balance of the loan (whichever is less). However, under the
Title I Program not more than $5,000 in insurance coverage shall be transferred
to or from a lender's insurance coverage reserve account during any October 1 to
September 30 period without the prior approval of the Secretary of HUD.
Claims Procedures Under Title I. Under the Title I Program the lender may
accelerate an insured loan following a default on the loan only after the lender
or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, in addition to complying with applicable state and local notice
requirements, the lender will notify the borrower in writing that, unless within
30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the lender
may either
o proceed against the property under any security instrument, or
o make a claim under the lender's contract of insurance.
67
If the lender chooses to proceed against the property under a security
instrument (or if it accepts a voluntary conveyance or surrender of the
property), the lender may file an insurance claim only with the prior approval
of the Secretary of HUD.
When a lender files an insurance claim with the Secretary of HUD under the
Title I Program, the Secretary of HUD reviews the claim, the complete loan file
and documentation of the lender's efforts to obtain recourse against any dealer
who has agreed thereto, certification of compliance with applicable state and
local laws in carrying out any foreclosure or repossession, and evidence that
the lender has properly filed proofs of claims, where the borrower is bankrupt
or deceased. Generally, a claim for reimbursement for loss on any Property
Improvement Loan must be filed with the Secretary of HUD no later than nine
months after the date of default of the loan. Concurrently with filing the
insurance claim, the lender shall assign to the United States the lender's
entire interest in the loan note (or a judgment in lieu of the note), in any
security held and in any claim filed in any legal proceedings. If the Secretary
of HUD has reason to believe that the note is not valid or enforceable against
the borrower, the Secretary of HUD may deny the claim and reassign the note to
the lender. If either of these defects is discovered after the Secretary of HUD
has paid a claim, the Secretary of HUD may require the lender to repurchase the
paid claim and to accept a reassignment of the loan note. If the lender
subsequently obtains a valid and enforceable judgment against the borrower, the
lender may resubmit a new insurance claim with an assignment of the judgment.
The Secretary of HUD may contest any insurance claim and make a demand for
repurchase of the loan at any time up to two years from the date the claim was
certified for payment and may do so thereafter in the event of fraud or
misrepresentation on the part of the lender.
Under the Title I Program the amount of an insurance claim payment, when
made, is equal to the Claimable Amount, up to the amount of insurance coverage
in the lender's insurance coverage reserve account. For the purposes hereof, the
"Claimable Amount" means an amount equal to 90% of the sum of
o the unpaid loan obligation (net unpaid principal and the uncollected
interest earned to the date of default) with adjustments thereto if
the lender has proceeded against property securing the loan,
o the interest on the unpaid amount of the loan obligation from the date
of default to the date of the claim's initial submission for payment
plus 15 calendar days (but not to exceed 9 months from the date of
default), calculated at the rate of 7% per annum,
o the uncollected court costs,
o the attorney's fees not to exceed $500, and
o the expenses for recording the assignment of the security to the
United States.
Consumer Protection Laws
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination, servicing
and enforcement of loans secured by Single-Family Properties. These laws include
the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, the
Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act and
Regulation B promulgated thereunder, the Fair Credit Billing Act, the Fair
Credit Reporting Act, the Homeowners Protection Act and related statutes and
regulations. In particular, Regulation Z requires certain disclosures to the
borrowers regarding the terms of the loans; the Equal Credit Opportunity Act and
Regulation B promulgated thereunder 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; the Fair Credit Reporting Act regulates the use
and reporting of information related to the borrower's credit experience; and
the Homeowners Protection Act requires the cancellation of private mortgage
insurance once specified equity levels are reached. Some provisions of these
laws impose specific statutory liabilities upon lenders who fail to comply
therewith. In addition, violations of these laws may limit the ability of the
sellers to collect all or part of the principal of or interest on the loans and
could subject the sellers and in some cases their assignees to damages and
administrative enforcement.
68
FEDERAL INCOME TAX CONSEQUENCES
General
The following is a summary of the anticipated material federal income tax
consequences of the purchase, ownership, and disposition of the securities
offered hereby and represents the opinion of Stradley, Ronon, Stevens & Young,
LLP, special counsel to the depositor. The summary is based upon the provisions
of the 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, possibly
retroactively, or possible differing interpretations.
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, or with certain types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily on investors
who will hold securities as "capital assets" (generally, property held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. Prospective investors are
advised to consult their own tax advisers concerning the federal, state, local
and any other tax consequences to them of the purchase, ownership and
disposition of the securities.
The federal income tax consequences to holders will vary depending on
whether
o the securities of a series are classified as indebtedness for federal
income tax purposes,
o one or more elections are made to treat certain assets of the trust
fund relating to a particular series of securities as a REMIC or FASIT
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, or
o for federal income tax purposes the Trust Fund relating to a
particular series of certificates is classified as a partnership or is
disregarded as an entity separate from its owner.
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 for that series. Prior to the
issuance of each series of securities, the depositor shall file with the SEC a
Form 8-K on behalf of the related trust fund containing an opinion and related
consent of Stradley, Ronon, Stevens & Young, LLP regarding the validity of the
information set forth under "Federal Income Tax Consequences" herein and in the
related prospectus supplement.
Taxation of Debt Securities
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC or a FASIT ("Regular Interest Securities") are taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC or
FASIT. Stated interest on the Regular Interest Securities 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 Regular Interest Securities)
that 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. Securities characterized as debt for federal income tax purposes
and Regular Interest Securities will be referred to hereinafter collectively as
"Debt Securities."
Debt Securities that are Accrual Securities will, and some of the other
Debt Securities may, be issued with "original issue discount" ("OID"). The
following discussion is based in part on the rules governing OID which are set
forth in Part V of Subchapter P of Chapter 1 of Subtitle A of the Code and the
Treasury Department regulations issued thereunder (the "OID Regulations"). A
holder should be aware, however, that the OID Regulations do not adequately
address certain issues relevant to prepayable securities like the Debt
Securities.
69
OID, if any, is the difference of the stated redemption price at maturity
of a Debt Security over its issue price. A holder of a Debt Security must
include OID in gross income as ordinary interest income as it accrues. The
amount of OID the holder must accrue is determined under the constant yield
method. 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 related 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 these 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 these 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
reasonable remedies exist to compel timely payment or the debt instrument
otherwise provides terms and conditions that make the likelihood of late payment
(other than late payment that occurs within a reasonable grace period) or
nonpayment of interest a remote contingency. Some Debt Securities may provide
for default remedies in the event of late payment or nonpayment of interest. The
interest on Debt Securities will be unconditionally payable and constitute
qualified stated interest, not OID. However, absent clarification of the OID
Regulations, where Debt Securities do not provide for default remedies, the
interest payments may be included in the Debt Security's stated redemption price
at maturity and taxed as OID. Interest is payable at a single fixed rate only if
the rate appropriately takes into account the length of the interval between
payments. Distributions of interest on Debt Securities with respect to which
deferred interest will accrue, will not constitute qualified stated interest
payments, in which case the stated redemption price at maturity of the 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 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. 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 generally will be
considered to be zero if 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 this 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" (discussed below) under a
constant interest method.
OID on debt instruments, including Debt Securities, the principal of which
may be repaid on an earlier than scheduled basis (a "Pay-Through Security"), is
determined under section 1272(a)(6) of the Code. The Treasury Department, to
date, has not issued any regulations under section 1272(a)(6). The Treasury
Department and the Internal Revenue Service (the "IRS") have issued final
regulations prescribing the calculation of OID on debt instruments the payments
on which are subject to a contingency. These regulations, however, expressly do
not apply to debt instruments, including the Debt Securities, falling within the
scope of section 1272(a)(6). Consequently, the trustee will calculate the OID,
if any, arising under the Debt Securities, in accordance with the methodology
prescribed under section 1272(a)(6). This methodology generally requires taking
into account an anticipated amount of prepayments (the "Prepayment Assumption").
OID is determined by allocating to each day of the accrual period, the ratable
portion of the excess (if any) of the sum of the present values of all payments
expected to be received on the outstanding Debt Securities or Pay-Through
Securities at the close of the period
70
(taking into account the Prepayment Assumption) and the payments during the
accrual period of amounts included in the stated redemption price of the
securities over the adjusted issue price of the securities at the beginning of
the period. For this purpose, the present values of the expected payments are
computed in accordance with the methodology the Code prescribes.
The holder of a Debt Security issued with OID must include in gross income,
for all days during the holder's taxable year in which it holds the Debt
Security, the sum of the "daily portions" of the OID. The amount of OID
includible in income by a holder will be computed by allocating to each day
during the holder's taxable year a pro rata portion of the original issue
discount that accrued during that period. In the case of a Debt Security that is
not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the loans, the amount of
OID includible in income of a holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of the issue price of the Debt Security plus
prior accruals of OID, reduced by the total payments made on the Debt Security
in all prior periods, other than qualified stated interest payments.
The effect of this method is to increase the portions of OID required to be
included in income by a holder to take into account prepayments on the loans at
a rate that exceeds the Prepayment Assumption, and to decrease (but not below
zero for any period) the portions of original issue discount required to be
included in income by a holder of a Pay-Through Security to take into account
prepayments on the loans at a rate that is slower than the Prepayment
Assumption. Although original issue discount 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.
Some classes of Regular Interest Securities may represent more than one
class of REMIC or FASIT regular interests. Unless otherwise provided in the
related prospectus supplement, the trustee intends, based on the OID
Regulations, to calculate OID on these 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 subsequent 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 the
OID by comparable economic accruals of portions of the excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income from the Debt 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 any
accrual of interest on a security is uncollectible. The IRS, in a 1995 Technical
Advice Memorandum, ruled that holders of a debt instrument having OID must
continue to accrue OID, as distinguished from the accrual of interest, even when
there is no reasonable expectation that the instrument will be redeemed
according to its terms due to the issuer's financial condition. As a result, the
amount of income (including OID) reported by a holder of this type of 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 these losses or reductions in
income are uncertain and, accordingly, holders of securities should consult
their own tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be accrued
for Regular Interest Securities or Debt Securities representing interest strips
of all or a portion of the underlying qualified mortgages held by the REMIC or
loans supporting Pass-Through Certificates (the "Interest Weighted Securities").
The Issuer 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 of OID
should be calculated by including the aggregate amount of all payments in the
stated redemption price, and thus treating none of the payments under the
instrument as qualified stated interest. However, in the case of Interest
Weighted Securities that are entitled to some payments of principal and that are
Regular Interest Securities the IRS could assert that income derived from an
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
71
over its stated principal amount, if any. Under this approach, a holder would be
entitled to amortize the premium only if it has in effect an election under
Section 171 of the Code for all taxable debt instruments held by the 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. We refer
you to "--Tax Status as a Grantor Trust--Discount or Premium on Pass-Through
Certificates."
Variable Rate Debt Securities. Debt Securities may provide for interest
based on a qualified variable rate ("Variable Rate Debt Securities"). Under the
OID Regulations, interest generally is 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 by more than a specified de minimis
amount,
o interest is based on one or more "qualified floating rates," a single
fixed rate and one or more "qualified floating rates," a single
"objective rate," or single fixed rate and a single "objective rate"
that is a "qualified inverse floating rate," where each qualified
floating rate or objective rate is set at a current value of the rate,
and
o the Debt Security does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in
the second bullet above.
In the case of Accrual Securities, certain Interest Weighted Securities,
and some 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. In the case of
Variable Rate Debt Securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that
o the yield to maturity of the Debt Securities, and
o 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 these securities if the rate on the Security is a "qualified
floating rate" or "qualified inverse floating rate" or at a value that reflects
the reasonably expected yield of the Security if the rate on the Security is an
"objective rate" (other than a "qualified inverse floating rate"). 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 the securities for federal
income tax purposes.
A variable rate is a qualified floating rate if variations in the value of
the rate can reasonably be expected to measure contemporaneous variations in the
cost of newly borrowed funds in the currency in which the debt instrument is
denominated. The rate may measure contemporaneous variations in borrowing costs
for the issuer of the debt instrument or for issuers in general. Generally, a
multiple of a qualified floating rate is not a qualified floating rate. If a
debt instrument provides for two or more qualified floating rates that can
reasonably be expected to have approximately the same values throughout the term
of the instrument, the qualified floating rates together constitute a single
qualified floating rate. Two or more qualified floating rates will be
conclusively presumed to meet the requirements of the preceding sentence if the
values of all rates on the issue date are within .25 percentage points of each
other.
An objective rate, for debt instruments issued on or after August 13, 1996,
generally is a rate (other than a qualified floating rate) that is determined
using a single fixed formula and that is based on objective financial or
economic information. An objective rate is a qualified inverse floating rate if
the rate is equal to a fixed rate minus a
72
qualified floating rate and the variations in the rate can reasonably be
expected to inversely reflect contemporaneous variations in the qualified
floating rate disregarding certain restrictions on the rate.
Market Discount. A Debt Security may be a "market discount bond." A "market
discount bond" is generally any evidence of indebtedness, including a Debt
Security, having market discount. A Debt Security will have market discount if
the stated redemption price at maturity of the Debt Security exceeds the amount
the purchaser paid to acquire it from a person other than the original issuer.
If the amount of market discount is less than .25% of the stated redemption
price at maturity of the Debt Security multiplied by the number of complete
years to maturity of the Debt Security, then the amount of market discount is de
minimis and is considered to be zero. If a Debt Security is a market discount
bond, the holder generally must recognize on its disposition, any gain to the
extent it does not exceed the accrued market discount on the bond as ordinary
income. Market discount is accrued on a ratable basis unless the holder elects
to accrue the discount under the constant yield method. As an alternative to the
rule requiring recognition of ordinary gain treatment on the disposal of a
market discount bond, the holder may elect to currently include in income any
accrued market discount. If elected, the amount of market discount the holder
must include in income must be determined under the constant yield method.
If a holder uses the proceeds of a loan to acquire a Debt Security having
market discount, the "net interest expense" the holder is allowed to deduct may
be limited to the excess of the amount that the "net interest expense" exceeds
the portion of the market discount allocable to the days during the taxable year
for which the holder held the Debt Security. A holder's "net interest expense"
is the amount of interest paid or accrued during the taxable year on
indebtedness which is incurred or continued to purchase or carry the Debt
Security over the aggregate amount of interest (including original issue
discount) includible in the holder's gross income for the taxable year with
respect to the Debt Security. The holder generally may deduct any disallowed
portion of net interest expense in the taxable year the holder disposes of the
Debt Security in a recognition transaction unless the holder elects to deduct
the disallowed interest expense in a taxable year in which the holder realizes
"net investment income" on the Debt Security. A holder's "net investment income"
is equal to the excess of the aggregate amount of interest (including original
issue discount) includible in the holder's gross income for the taxable year
with respect to the Debt Security over the amount of interest the holder paid or
accrued during the taxable year on indebtedness which is incurred or continued
to purchase or carry the Debt Security. If the Debt Security is disposed of in a
nonrecognition transaction, special rules apply.
Premium. 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 securities similar to the securities have been issued, the
legislative history of the Code 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 that class. Premium on a Pay-Through
Security that is not amortized pursuant to an election under Code Section 171 is
allocated among the principal payments to be made on the Pay-Through Security
and is allowed as an interest offset (or possibly as a loss deduction). 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.
The IRS has issued final regulations (the "Amortizable Bond Premium
Regulations") dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code Section
1272(a)(6), such as the securities. Absent further guidance from the IRS, the
trustee intends to account for amortizable bond premium in the manner described
above. Prospective purchasers of the 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 a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and
73
premium in income as interest, based on a constant yield method for Debt
Securities acquired on or after April 4, 1994. If this type of election were to
be made for 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 relating to all other debt instruments having market discount
that the holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a 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 on 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 for a Debt Security may be
revoked only with the IRS's approval.
Taxation of the REMIC and its Holders
General. In the opinion of Stradley, Ronon, Stevens & Young, LLP, special
counsel to the depositor, if a REMIC election is made for 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 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 for a series of securities, (1) securities held by a
domestic building and loan association will constitute "a regular or a residual
interest in a REMIC" within the meaning of Code Section 7701(a)(19)(C)(xi)
(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 (2) securities held by a
real estate investment trust will constitute "real estate assets" within the
meaning of Code Section 856(c)(5)(B), and income from the securities will be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section 856(c)(3)(B)
(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 (1) or (2) above, then a security will qualify for the tax
treatment described in (1) and (2) in the proportion that the REMIC assets are
qualifying assets.
REMIC Expenses; Single Class REMICs
As a general rule, 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 Department
regulations, among the holders of the Regular Interest Securities and the
holders of the Residual Interest Securities (as defined herein) 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 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
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 that
taxable year.
For tax years beginning after 2009, the current limitation on itemized
deductions, which is generally applicable to higher income individuals, will be
repealed. The repeal will be phased in over a five year period beginning in
2006. When the repeal is complete, affected individuals will no longer be
required to reduce the amount of their itemized deductions if their adjusted
gross income exceeds a statutorily prescribed amount as current law requires.
The phase out will be accomplished in stages over a five year period. The
limitation will be reduced by one-third for tax years beginning in either of
calendar years 2006 and 2007, reduced by an additional one-third for tax years
beginning in either of calendar years 2008 and 2009, and will be fully phased
out through a final one-third reduction effective for tax years beginning after
December 31, 2009.
74
For taxable years beginning after December 31, 1997, in the case of a
partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70% of that partnership's miscellaneous itemized
deductions will be disallowed, although the remaining deductions will generally
be allowed at the partnership level and will not be subject to the 2% floor that
would otherwise be applicable to individual partners. The reduction or
disallowance of this deduction may have a significant impact on the yield of the
Regular Interest Security to a holder with that level of income. In general
terms, a single class REMIC is one that either (1) would qualify, under existing
Treasury Department 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 (2) is similar to a grantor trust
and is structured with the principal purpose of avoiding the single class REMIC
rules. Unless otherwise stated in the applicable Prospectus Supplement, the
expenses of the REMIC will be allocated to holders of the related residual
interest securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, 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
residual interests. As described above, the regular interests are taxable as
debt issued by the REMIC.
Tiered REMIC Structures. For some series of certificates, two or more
separate elections may be made to treat designated portions of the related trust
fund as multiple REMICs ("Tiered REMICs") for federal income tax purposes. Upon
the issuance of any series of certificates of this type, counsel to the
depositor will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the Tiered REMICs will each qualify as a REMIC and the REMIC certificates issued
by the Tiered REMICs, respectively, will be considered to evidence ownership of
Regular Interest Securities or Residual Interest Securities in the related REMIC
within the meaning of the REMIC provisions.
Solely for purposes of determining whether the REMIC certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code, and
"loans...secured by an interest in real property" under Section
7701(a)(19)(C)(v) of the Code, and whether the income on the REMIC certificates
is interest described in Section 856(c)(3)(B) of the Code, the Tiered REMICs
will be treated as one REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between
o the gross income produced by the REMIC's assets, including stated
interest and any OID or market discount on loans and other assets, and
o deductions, including stated interest and OID accrued on Regular
Interest Securities, amortization of any premium relating to loans,
and servicing fees and other expenses of the REMIC.
A holder of a 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 (i.e., the day on which the REMIC issues all of its regular and residual
interests). 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 made by 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 the loans
will be equivalent to the
75
method under which holders of Pay-Through Securities accrue original issue
discount (i.e., under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include the market discount in income currently, as it accrues, on
a constant yield basis. The REMIC will deduct OID accruing on the Regular
Interest Securities it issues in the same manner that the holders of the Regular
Interest Securities include the discount in income, but without regard to the de
minimis rules. See "--Taxation of Debt Securities."
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 Other Possible Taxes. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include
o subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC,
o subject to a limited exception, the sale or other disposition of a
cash flow investment,
o the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code, or
o the receipt of any fees or other compensation for services rendered by
the REMIC.
It is anticipated that a REMIC will not engage in any prohibited transaction 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. REMICs also are subject to federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. "Net income
from foreclosure property" generally means gain from the sale of foreclosure
property that is inventory property, and gross income from foreclosure property,
other than qualifying rents and other income that would be qualifying income
under the Code provisions applicable to real estate investment trusts. Unless
otherwise disclosed in the related Prospectus Supplement, it is not anticipated
that any REMIC will recognize "net income from foreclosure property" subject to
federal income taxation. The holders of Residual Interest Securities will
generally be responsible for the payment of any taxes imposed on the REMIC. To
the extent not paid by the holders or otherwise, however, 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
The holder of a security representing a residual interest (a "Residual
Interest Security") 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 the 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.
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 that income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which 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 issued without
any discount or at an insubstantial discount (if this occurs, it is likely that
cash distributions will exceed taxable income in later years). Taxable income
may
76
also be greater in earlier years of certain REMIC issues as a result of the fact
that interest expense deductions, as a percentage of outstanding principal on
REMIC Regular Interest Securities, will typically increase over time as lower
yielding securities are paid, whereas interest income from loans will generally
remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will be greater or less than 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 the Residual Interest Security may be less than that of that type of
bond or instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the end
of the calendar quarter in which the loss arises. A holder's basis in a Residual
Interest Security will initially equal the holder's purchase price, and will
subsequently be increased by the amount of the REMIC's taxable income allocated
to the holder, and decreased (but not below zero) by the amount of distributions
made and the amount of the REMIC's net loss allocated to the holder. Any
disallowed loss may be carried forward indefinitely, but may be used only to
offset income of the REMIC generated by the same REMIC. The ability of holders
of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which those holders should consult
their tax advisers.
Distributions. Distributions on a 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 a Residual Interest
Security. If the amount of the payment exceeds a 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. A holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a 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 the sale or exchange.
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 the disposition.
Excess Inclusions. 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 Code Section 511 (e.g., an organization described under Code
Section 401(a) or 501(c), with some limited exceptions), the holder's excess
inclusion income will be treated as unrelated business taxable income of the
holder. In addition, under Treasury Department 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 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. We refer you to "--Tax Treatment of Foreign Investors."
The Small Business Job Protection Act of 1996 has eliminated the special rule
permitting Section 593 institutions ("Thrift Institutions") to use net operating
losses and other allowable deductions to offset their excess inclusion income
from REMIC residual certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates continuously
held by a Thrift Institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect of excess inclusions on the alternative minimum
taxable income of a residual holder. 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. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
the excess inclusion for the year. Third, the amount of any alternative minimum
tax net operating loss
77
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 these rules apply to tax years beginning after August 20,
1996.
A REMIC residual interest holder's excess inclusion for any given calendar
quarter is generally the excess (if any) of the amount of the sum of the ratable
daily portion of the net income the residual holder takes into account for the
quarter over the sum of the daily accruals with respect to the interest for the
days during the quarter the holder held the interest. For this purpose, the
daily accruals are determined by allocating to each day in the calendar quarter
a ratable portion of the product of the adjusted issue price of the residual
interest at the beginning of the quarter and 120 percent of the applicable
federal rate, adjusted as the Code prescribes. 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 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, in certain circumstances, transfers of
Residual Securities may be disregarded. We refer you to "--Restrictions on
Ownership and Transfer of Residual Interest Securities" and "--Tax Treatment of
Foreign Investors."
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent a "Disqualified Organization" from holding a REMIC residual interest.
Disqualified Organizations include the United States, any 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 federal income tax (other than a farmers' cooperative
described in Code Section 521), if the entity is not subject to tax on its
unrelated business income. Accordingly, the applicable Pooling and Servicing
Agreement will prohibit Disqualified Organizations from owning a Residual
Interest Security. In addition, no transfer of a Residual Interest Security will
be permitted unless the proposed transferee shall have furnished to the trustee
an affidavit representing and warranting that it is neither a Disqualified
Organization nor an agent or nominee acting on behalf of a Disqualified
Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of the Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (1) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs, and (2) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest is disregarded, the transferor would be liable
for any federal income tax imposed upon taxable income derived by the transferee
from the REMIC. The IRS, in the year 2000, issued a notice of proposed
rulemaking to clarify the two part test set out in the immediately preceding
sentence. Under this clarification, this provision of the regulations is
unavailable unless the present value of the anticipated tax liabilities
associated with holding the residual interest does not exceed the sum of: (1)
the present value of any consideration given to the transferee to acquire the
interest, (2) the present value of the expected future distributions on the
interest, and (3) the present value of the anticipated tax savings associated
with holding the interest. This proposed regulation has not
78
been finalized. In the year 2001, however, the IRS issued a revenue procedure
that sets forth a revised safe harbor for establishing the lack of improper
knowledge for transfers of noneconomic residual interests under the REMIC
Regulations. Under this revenue procedure a transferor of a residual interest in
a REMIC is presumed not to have improper knowledge under the REMIC Regulations
if: (1) the transferor conducted, at the time of the transfer, a reasonable
investigation of the transferee's financial condition and as a result of the
investigation, the transferor found that the transferee had historically paid
its debts as they came due and found no significant evidence to indicate that
the transferee will not continue to pay its debts as they come due in the
future, (2) the transferee represents to the transferor that it understands
that, as the holder of the residual interest, the transferee may incur tax
liabilities in excess of any cash flows the interest generates and that the
transferee intends to pay taxes associated with holding the residual interest as
they become due, and (3) one of two additional tests set forth in the procedure
is satisfied.
A similar type of limitation exists for certain transfers of residual
interests by Foreign Persons to United States Persons. We refer you to "--Tax
Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual Interest
Security should be aware that the Treasury Department has issued final
regulations (the "Mark-to-Market Regulations") which provide that a REMIC
Residual Interest Security acquired after January 3, 1995 cannot be
marked-to-market. The Mark-to-Market Regulations replace the temporary
regulations which allowed a REMIC Residual Interest Security to be
marked-to-market provided that it was not a negative value residual interest and
did not have the same economic effect as a negative value residual interest.
Prospective purchasers of a REMIC Residual Interest Security should consult
their tax advisors regarding the application of the Mark-to-Market Regulations.
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.
Financial Asset Securitization Investment Trust Qualification
The Trust Fund may elect to be a FASIT in lieu of making the election to be
a REMIC. A FASIT is a statutorily authorized vehicle that is modeled on the
REMIC but is distinguished from the REMIC based on the types of assets which it
may hold (and therefore, against which its interests may be written) among other
factors. If a FASIT election is made, the securities representing interests in
the FASIT will be designated either as "regular interests" or the ownership
interest. A regular interest, in turn, may be either "high yield" regular
interest or regular interest other than a high yield regular interest. If the
regular interest is a "high yield" regular interest, then it will be so
identified in the prospectus supplement and the certificate evidencing the
interest.
Qualification as a FASIT
The provisions governing the election to be treated as a FASIT and the
federal income tax treatment of a FASIT generally are set forth in Sections
860H-860L of the Code. The Treasury Department issued proposed regulations to
implement these statutory provisions in February 2000, but these proposed
regulations do not have the force and effect of law and may be revised before
they are issued in final form. At this time, it is not certain when final
regulations may be issued. To qualify as a FASIT, an entity, such as the Trust
Fund, must elect to be treated as a FASIT and must satisfy certain tests that
are briefly summarized below.
Interests. A FASIT is permitted to issue regular interests and one and only
one interest designated as the "ownership interest." The ownership interest must
at all times be held by a single "eligible corporation" which is generally a
taxable domestic "C corporation" that is not a regulated investment company, a
real estate investment trust, a REMIC, or a subchapter T cooperative. Apart from
being held by an eligible corporation and being designated as the ownership
interest, there are no other formal requirements for an ownership interest.
79
A FASIT regular interest is any interest a FASIT issues on or after its
startup day which is designated as a regular interest and that: (1)
unconditionally entitles the interest holder to receive a specified principal
amount (or other similar amount), (2) provides for interest payments that are
computed on a fixed rate or "permitted" variable rate, (3) has a stated maturity
(including renewal periods) of 30 years or less, (4) has an issue price not
exceeding 125% of its stated principal amount, and (5) has a yield to maturity
that is less than the applicable federal rate in effect for the month the
interest is issued plus 5%. A "high yield interest" is any interest that would
otherwise qualify as a regular interest but for the failure of the interest to
meet any one or more of conditions (1), (4), or (5), above, or condition (2),
above, but then only if the interest payments on the interest consist of a
specified portion of the interest payments on assets the FASIT is permitted to
hold and the portion does not vary during the period the interest is
outstanding. Special rules apply to ensure that a "high yield interest" is held
only by either an eligible corporation or another FASIT.
Assets. As of the close of the third month beginning on the day after the
FASIT is created, substantially all of a FASIT's assets must be "permitted
assets." A "permitted asset" is defined to include the following categories of
assets:
o cash or cash equivalents,
o any instrument that qualifies as a debt instrument for purposes of
federal income tax law as long as any interest is payable on the
instrument at a fixed or variable rate that satisfies the prescribed
requirements for a REMIC regular interest and the instrument is not
issued by the holder of the ownership interest or a person "related"
to the holder,
o property that is received as a result of a foreclosure on a debt
instrument the FASIT holds,
o assets that are used to guarantee the FASIT's interests or hedge
against the FASIT's risks associated with its being the obligor on the
interests the FASIT issues,
o contract rights to acquire debt instruments, guarantees, or hedges the
FASIT is otherwise permitted to hold,
o regular interests another FASIT issues, or
o regular interests a REMIC issues.
Consequences of Failing to Comply with FASIT Requirements
If the Trust Fund makes the FASIT election but subsequently fails to comply
with the FASIT statutory requirements, and if appropriate, regulatory
requirements, during any taxable year, the Trust Fund may lose its status as a
FASIT for that year and all succeeding years. If the Trust Fund were to lose its
FASIT status, it may be taxed as a corporation.
Taxation of the FASIT
A FASIT is not subject to federal income tax. Therefore, if the Trust Fund
elects to be treated as a FASIT, it will not be subject to federal income tax
and will not be treated as a trust, partnership, or corporation for federal
income tax purposes.
Taxation of Regular Interest Holders
Assuming the Trust Fund elects and continues to qualify as a FASIT, any
regular interests the FASIT issues will be treated as debt for federal income
tax purposes. This treatment, and the treatment of regular interests issued or
acquired at discount or premium generally will accord with the treatment of
REMIC regular interests. For a more complete discussion, please see the material
under the heading "Taxation of Debt Securities."
80
Regular interest holders are required to report any amount includible in
the holder's gross income on an accrual method of accounting regardless of the
holder's usual method of accounting. Thus, a holder who normally uses the cash
receipts and disbursements method of accounting must nonetheless report any
interest income on the regular interest as it accrues, regardless of whether or
when the payment is actually received.
The Code contains special rules applicable to holders of "high yield"
regular interests. The taxable income of a "high yield" regular interest cannot
be less than the sum of the holder's taxable income determined solely with
respect to the interest and any excess inclusion for the taxable year. For this
purpose, taxable income determined with respect to the interest includes any
gains and losses from the sale or exchange of high yield interests. For purposes
of applying the rules on excess inclusions, the Code specifically incorporates
the rules applicable to REMIC residual interests. For a discussion on the excess
inclusion rules, please see the material under the heading "Taxation of the
Holders of Residual Interest Securities." In addition, a "high yield" interest
holder's income attributable to the interest cannot be offset by any current net
operating losses or net operating loss carryovers.
If a "high yield" regular interest is transferred to a disqualified holder
(generally any holder other than an eligible corporation or a dealer in
securities that holds the interest for sale to customers in the ordinary course
of the dealer's business), the disqualified holder does not include in income
any income other than gain attributable to the interest. Rather, any income not
included in the disqualified person's income is included in the gross income of
the last person to hold the interest that was not a disqualified person. If a
dealer in securities that is not a domestic C corporation acquires a "high
yield" regular interest but later ceases to be a dealer in securities or ceases
to hold the interest for sale to customers, the dealer may be subject to a
penalty tax.
If a pass-through entity, such as a partnership, issues any interest (debt
or equity) in the entity that has the characteristics of a "high-yield" regular
interest, the interest in the entity is backed by a FASIT regular interest, and
the yield on the interest in the entity exceeds both the yield on the regular
interest and the applicable federal rate in effect for the month the interest is
issued plus 5%, then the entity will be subject to a penalty tax.
Taxation of Ownership Interest Holders
The FASIT ownership interest represents the residual equity interest in a
FASIT. In determining its taxable income, the holder of the FASIT ownership
interest treats all of the FASIT's assets and liabilities as its own. The holder
of the FASIT ownership interest also must treat as its own any of the FASIT's
items of income, gain, loss, deduction and credit (other than items of income,
gain or deduction attributable to a prohibited transaction). Any interest that
would otherwise be exempt from tax under the Code must be included in the income
of the holder of the ownership interest as ordinary income. The holder of the
ownership interest must apply the constant yield method under an accrual method
of accounting in determining all interest, acquisition discount, original issue
discount, and market discount, and all premium deductions or adjustments with
respect to each debt instrument the FASIT holds. The holder of the ownership
interest is subject to the same restrictions on the use of net operating losses
and net operating loss carryovers to offset FASIT income as the holder of a
"high yield" regular interest. We refer you to "Taxation of Regular Interest
Holders," above. For purposes of the alternative minimum tax, the taxable income
of the holder of the ownership interest is determined without regard to the
minimum FASIT income. The alternative minimum taxable income of the holder of
the ownership interest also cannot be less than the FASIT income for that year,
and the alternative minimum tax net operating loss deduction is computed without
regard to the minimum FASIT income. The Code specifically makes applicable to
FASIT ownership interests the "wash sale" rules applicable to dispositions of
REMIC residual interests. Thus, any loss realized on the disposition of the
FASIT ownership interest will be disallowed where the holder acquires within the
time span of six months before or after the disposition date, an ownership
interest in another FASIT that is economically equivalent to the ownership
interest disposed. The holder of a noneconomic ownership interest in a FASIT is
liable to similar transfer restrictions as apply to the holder of a noneconomic
REMIC residual interest. For the discussion on a newly promulgated safe harbor
concerning transfers of noneconomic ownership interests, please see the
discussion under the heading "Taxation of Holders of Residual Interest
Securities," above.
The holder of the ownership interest will be subject to a penalty tax on
the net income derived from a prohibited transaction. The tax is equal to 100%
of the net income derived from a prohibited transaction. A prohibited
transaction includes:
81
o the receipt of any income derived from any asset other than a
permitted asset,
o except for certain allowed dispositions, the disposition of a
permitted asset,
o the receipt of any income derived from any loan the FASIT originates,
and
o except as permitted, the receipt of any income representing a fee or
other compensation for services.
Tax Status as a Grantor Trust
General. As specified in the related prospectus supplement if a REMIC,
FASIT or partnership election is not made, in the opinion of Stradley, Ronon,
Stevens & Young, LLP, special counsel to the depositor, the trust fund relating
to a series of securities will be classified for federal income tax purposes as
a grantor trust under Subpart E of Part I of Subchapter J of the Code and not as
an association taxable as a corporation (the securities of that series, the
"Pass-Through Certificates"). 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 other cases (the "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.
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 fees
to the trustee and the servicer and similar fees (collectively, the "Servicing
Fee")), at the same time and in the same manner as these 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 on the
loans, and paid directly its share of the Servicing Fees. In the case of
Pass-Through Certificates other than Stripped Securities, this 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, this 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 these Servicing Fees under Section 162 or Section 212 of the Code to
the extent that these Servicing Fees represent "reasonable" compensation for the
services rendered by the trustee and the servicer (or third parties that are
compensated for the performance of services). In the case of a noncorporate
holder, however, Servicing 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 these 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, 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.
For a discussion of the repeal and phase out of the current limitation on
itemized deductions, please see the discussion under the heading "REMIC
Expenses; Single Class REMICs," above.
Discount or Premium on Pass-Through Certificates. The holder's purchase
price of a Pass-Through Certificate 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. To the extent that the portion of the purchase
price of a Pass-Through Certificate allocated to a loan (other than to a right
to receive any accrued interest thereon and any undistributed principal
payments) is less than or greater than the portion of the principal balance of
the loan allocable to the Pass-Through Certificate, the interest in the loan
allocable to the Pass-Through Certificate 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 a
82
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 on 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 Certificates, market discount is calculated
based upon the loans underlying the Pass-Through Certificate, rather than the
Pass-Through Certificate 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. We refer you to "--Taxation of
Debt Securities--Market Discount" and "--Premium."
In the case of market discount on a Pass-Through Certificate attributable
to loans originated on or before July 18, 1984, the holder generally will be
required to allocate (e.g., on a ratable or straight line basis) 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 initially at a faster 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. Some Stripped Securities (the "Ratio Strip 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" when referring to principal
payments and "stripped coupons" when referring 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 the 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 ("Excess Servicing")
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 principal balance) or
the securities are initially sold with a de minimis discount (assuming no
prepayment assumption is required), any non-de minimis discount arising from a
subsequent transfer of the securities should be treated as market discount. The
IRS appears to require that reasonable servicing fees be calculated on a loan by
loan basis, which could result in some loans being treated as having more than
100 basis points of interest stripped off.
In the case of any pool of debt instruments, such as Stripped Securities
and other Pass-Through Certificates, the yield on which may be affected by
reason of prepayments, the daily portion of the OID will be determined, using a
reasonable prepayment assumption, by allocating to each day in any accrual
period its ratable portion of the excess (if any) of
o the sum of the present value of all remaining payments under the debt
instrument as of the close of that period and the payments during the
accrual period of amounts included in the stated redemption price of
the debt instrument, over
o the adjusted issue price of the debt instrument at the beginning of
that period.
If the loans prepay at a rate faster than the Prepayment Assumption a
holder's recognition of income may be accelerated. If, however, the loans prepay
at a rate slower that the prepayment assumption, in some circumstances a
holder's recognition of income may be decelerated.
In the case of a Stripped Security that is an Interest Weighted Security,
the trustee intends, absent contrary authority, to report income to security
holders as OID, in the manner described above for Interest Weighted Securities.
83
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 final
regulations prescribing the calculation of OID on debt instruments the
payments on which are subject to a contingency, 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.
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 these circumstances. Pass-Through Certificates will be, and,
although the matter is not free from doubt, Stripped Securities should be
considered to represent "real estate assets" within the meaning of Section
856(c)(5)(B) of the Code and "loans secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; and interest income
attributable to the 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 regarding trust funds as to which a
partnership election is made, a holder's tax basis in its security is the price
the holder pays for a security, plus amounts of original issue 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. 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 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 the holder's holding
period, over
o the amount of ordinary income actually recognized by the holder from
the Regular Interest Security.
For taxable years beginning after December 31, 1992, the maximum tax rate on
ordinary income for individual taxpayers is 39.6%. For taxable years beginning
after December 31, 1997, the maximum tax rate on long-term capital gains for
these taxpayers is generally 20%. The maximum tax rate on both ordinary income
and long-term capital gains of corporate taxpayers is 35%.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below regarding trust
funds as to which a partnership election is made, a holder, other than a holder
of a Residual Interest Security or FASIT ownership interest, may, under certain
circumstances, be subject to "backup withholding" for distributions or the
proceeds of a sale
84
of certificates to or through brokers that represent interest or OID on the
securities. When withholding is required, the rate will be 30.5% after August 6,
2001 for calendar year 2001, 30% for calendar years 2002 and 2003, 29% for
calendar years 2004 and 2005, and 28% for calendar years 2006 and thereafter.
This withholding generally applies if the holder of a security
o fails to furnish the trustee with its taxpayer identification number
("TIN"),
o furnishes the trustee an incorrect TIN,
o fails to report properly interest, dividends or other "reportable
payments" as defined in the Code, and/or
o under certain circumstances, fails to provide the trustee or the
holder's securities broker with a certified statement, signed under
penalty of perjury, that the TIN provided is its correct number, that
the holder is not subject to backup withholding and that the holder is
a U.S. person (including a U.S. resident alien).
Backup withholding will not apply, however, to certain payments made to holders,
including payments to certain exempt recipients (for example, exempt
organizations) and to certain Foreign Persons who provide appropriate ownership
statements as to status as a Foreign Person. Holders should consult their tax
advisers as to their qualification for exemption from backup withholding and the
procedure for obtaining the exemption.
The trustee will report to the holders and to the servicer for each
calendar year the amount of any "reportable payments" during that year and the
amount of tax withheld, if any, from payments on the securities.
Tax Treatment of Foreign Investors
The term "United States Person" means a citizen or resident of the United
States, a corporation or partnership (or other entity properly treated as a
corporation or partnership for federal income tax purposes) created or organized
in or under the laws of the United States or any political subdivision thereof,
an estate whose income is subject to United States federal income tax regardless
of its source of income, or 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. A "Foreign Person" is any person that is not a United
States Person.
Subject to the discussion below regarding trust funds 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 or FASIT ownership
interest) is considered to be "effectively connected" with a trade or business
conducted in the United States by a Foreign Person, the interest will normally
qualify as portfolio interest (except where (1) the recipient is a holder,
directly or by attribution, of 10% or more of the capital or profits interest in
the issuer, or (2) the recipient is a controlled foreign corporation to which
the issuer is a related person) and will be exempt from federal income tax. Upon
receipt of appropriate ownership statements as to status as a Foreign Person,
the issuer normally will be relieved of obligations to withhold tax from these
interest payments. These provisions supersede the generally applicable
provisions of United States law that would otherwise require the issuer to
withhold at a 30% rate (unless the 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 Foreign Persons. Holders of
Pass-Through Certificates 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. They will, however, generally be subject to the regular
United States income tax.
Payments to holders of 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 this income does
not qualify for exemption from United States withholding tax as "portfolio
interest." It is clear
85
that, to the extent that a payment represents a portion of REMIC taxable income
that constitutes excess inclusion income, a 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 Department has statutory
authority, however, to promulgate regulations that would require these amounts
to be taken into account at an earlier time in order to prevent the avoidance of
tax. These 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 Foreign Person 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 these 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 Foreign Person transfers a Residual
Interest Security to a United States Person, and if the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. We refer you to "--Taxation of Holders of Residual Interest
Securities--Excess Inclusions"
Foreign Persons normally use Form W-8BEN to certify their status.
Tax Characterization of the Trust Fund as a Partnership
In the opinion of Stradley, Ronon, Stevens & Young, LLP, special counsel to
the depositor, a trust fund for which a partnership election is made should not
be an association (or publicly traded partnership or taxable mortgage pool)
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,
including the requirement that the trust fund file with the IRS a protective
election to be classified as a partnership, will be complied with, and on
counsel's conclusions that
o the trust fund will be eligible to be classified as a partnership, and
o 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 securities 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, 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 corporate income tax could
materially reduce cash available to make payments on the notes and distributions
on the certificates, and certificateholders could be liable for any tax of this
type 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
holders of asset-backed notes will agree by their purchase of notes, to treat
the notes as debt for federal income tax purposes. Special counsel to the
depositor will, except as otherwise provided in the related prospectus
supplement, advise the depositor that the notes will be classified as debt for
federal income tax purposes. The discussion below assumes this characterization
of the notes is correct.
Assumptions Regarding the Notes. The discussion below assumes that all
payments on the notes are denominated in United States dollars, and that the
notes are not Stripped Securities. 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., generally 0.25% of their principal amount
multiplied by their
86
terms to maturity), all within the meaning of the OID regulations. If these
conditions are not satisfied for any given series of notes, additional tax
considerations relating 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, the notes will not be considered issued
with OID. The stated interest thereon 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, under certain circumstances,
include OID in income, on a pro rata basis, as principal payments are made on
the note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
A holder of a note that has a fixed maturity date of not more than one year
from the issue date of the note (a "Short-Term Note") 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 received (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 received 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. Special
rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. 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 resulting from 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 on the
note. Any gain or loss of this type 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 (which is ordinary in
character). Capital losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a noteholder who is
a Foreign 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
asset-backed 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 owner trustee or other person who is otherwise required
to withhold United States tax from payments on the notes with an
appropriate statement (on Form W-8BEN or a similar form), signed under
penalties of perjury, certifying that the Beneficial Owner of the note
is a Foreign Person and providing the Foreign Person's name and
address.
If a note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide the relevant
signed statement to the withholding agent; in that case, however, the signed
statement must be accompanied by a Form W-8BEN or substitute form provided by
the Foreign Person that owns
87
the note. If this interest is not portfolio interest, 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
o the gain is not effectively connected with the conduct of a trade or
business in the United States by the Foreign Person, and
o 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,
including a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or Foreign Person who
provides certification as to status as a Foreign Person) will be required to
provide, under penalties or perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number, a statement that the
holder is not subject to backup withholding and a statement that the holder is a
U.S. person (including a U.S. resident alien). Should a nonexempt noteholder
fail to provide the required certification, the trust fund will be required to
withhold a portion of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability. When withholding is required, the rate will be 30.5% after August 6,
2001 for calendar year 2001, 30% for calendar years 2002 and 2003, 29% for
calendar years 2004 and 2005, and 28% for calendar years 2006 and thereafter.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the depositor, 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 special counsel to the
depositor, 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 a
publicly traded partnership could have adverse tax consequences to some holders.
For example, income to certain tax-exempt entities (including pension funds)
might be "unrelated business taxable income," income to foreign holders
generally would be subject to United States tax and United States tax return
filing and withholding requirements, and individual holders might be subject to
limitations on their ability to deduct their share of the trust fund's expenses.
Tax Consequences to Holders of the Certificates Issued by a Partnership
Treatment of the Trust Fund as a Partnership. The trust fund and the
servicer will agree, and the holders of asset-backed certificates will agree by
their purchase of the 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, if any, the partners of the partnership being
the certificateholders (or if there is a single certificateholder for federal
income tax purposes, to disregard the trust fund as an entity separate from the
single certificateholder). However, the proper characterization of the
arrangement involving the trust fund, the certificates, the notes, if any, 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 some features characteristic of debt, the
certificates might be considered debt of the trust fund. Generally, provided
that the certificates are issued at or close to face value, any characterization
of this type 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.
You should note that the federal tax law is unclear with respect to the
status of certificates issued by a partnership qualifying as "loans secured by
an interest in real property." A partnership may be regarded as an aggregate of
its partners or an entity separate and apart from its partners. If it is
determined that the partnership is an
88
entity and the certificates represent equity in the partnership, it is unlikely
that the certificates will constitute loans secured by an interest in real
property under Code Section 7701(a)(19)(C). If, however, it is determined that
the partnership is an aggregate of its partners, certificates classified as
equity in the partnership might constitute loans secured by an interest in real
property as defined in Code Section 7701(a)(19)(C) to the extent that the assets
held by the partnership qualify as such. If the certificates are classified as
debt it is unlikely that the certificates will qualify as loans secured by an
interest in real property within the meaning of Code Section 7701(a)(19)(C). The
following discussion assumes that the certificates represent equity interests in
a partnership.
Assumptions Regarding the Certificates. The following discussion assumes
that all payments on the certificates are denominated in United States dollars,
none of the certificates are Stripped Securities, and that a series of
securities includes a single class of certificates. If these conditions are not
satisfied for any given series of certificates, additional tax considerations
relating to those certificates will be disclosed in the applicable prospectus
supplement.
Partnership Taxation. As a partnership, the trust fund will not be subject
to federal income tax. Rather, each certificateholder will be required to
separately take into account the holder's allocable 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 on the notes, servicing and other fees,
and losses or deductions upon collection or disposition of loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury Department 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 that month, including interest accruing at the Pass-Through
Rate for that month and interest on amounts previously due on the
certificates but not yet distributed,
o any trust fund income attributable to discount on the loans that
corresponds to any excess of the principal amount of the certificates
over their initial issue price,
o prepayment premium payable to the certificateholders for that month,
and
o any other amounts of income payable to the certificateholders for that
month.
This allocation will be reduced by any amortization by the trust fund of premium
on loans that corresponds to any excess of the issue price of certificates over
their principal amount. All remaining taxable income of the trust fund will be
allocated to the certificateholders. Based on the economic arrangement of the
parties, this approach for allocating trust fund income should be permissible
under applicable Treasury Department regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to certificateholders. Moreover, even under 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 this 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 these
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.
The taxable income allocated to a certificateholder that is a pension,
profit sharing or employee benefit plan or other tax-exempt entity (including an
individual retirement account) will constitute "unrelated business taxable
income" generally taxable to this type of holder under the Code to the extent
that the certificateholder's share of the
89
taxable income is derived from, or on account of, debt financed securities. The
notes will constitute acquisition indebtedness of the trust fund for this
purpose under Code Section 514.
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. These deductions might be disallowed to the individual in whole or
in part and might result in the 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 these 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.
Section 708 Termination. 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. If a termination of this type occurs, the trust fund will be
considered to contribute its assets and liabilities to a new partnership in
exchange for interests in that new partnership, and the trust fund (as part of
the termination) would be treated as distributing the newly-created partnership
interests to the partners in liquidation. The trust fund may not be able to
comply with technical requirements that might apply when a constructive
termination occurs due to a lack of data. As a result, the trust fund may be
subject to tax penalties and may incur additional expenses if it is required to
comply with those requirements.
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, the
loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the trust fund will make this calculation on an aggregate
basis, but might be required to recompute it on a loan by loan basis.)
If the trust fund acquires the loans at a market discount or premium, the
trust fund will elect to include any discount in income currently as it accrues
over the life of the loans or to offset any premium against interest income on
the loans. As indicated above, a portion of market discount income or premium
deduction may be allocated to certificateholders.
Disposition of Certificates. Generally, 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 on 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
those certificates, and, upon sale or other disposition of some of the
certificates, allocate a portion of that 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 these 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
90
certificateholders in proportion to the principal amount of certificates owned
by them as of the close of the last day of that month. As a result, a holder
purchasing certificates may be allocated tax items (which will affect its tax
liability and tax basis) attributable to periods before the actual transaction.
The use of this type of 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. If a certificateholder sells its certificates at a
profit (loss), the purchasing certificateholder will have a higher (lower) basis
in the certificates than had the selling certificateholder. 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 that 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. These 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-1 information to nominees that fail to provide
the trust fund with the information statement described below and these nominees
will be required to forward this 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 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 information on the nominee, the Beneficial Owners
and the certificates so held. This information includes
o the name, address and taxpayer identification number of the nominee,
and
o as to each Beneficial Owner
o the name, address and identification number of the person,
o whether the person is a United States Person, a tax-exempt
entity or a foreign government, an international
organization, or any wholly owned agency or instrumentality
of either of the foregoing, and
o information on certificates that were held, bought or sold
on behalf of the 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 and Exchange Act of 1934, as
amended, is not required to furnish any information statement to the trust fund.
The information referred to above for any calendar year must be furnished to the
trust fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the trust fund with the information
described above may be subject to penalties.
The depositor will be designated as the tax matters partner in the related
Trust Agreement and, in that capacity, 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
91
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 from the perspective of
Foreign 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 these 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 certificateholders who are not Foreign
Persons pursuant to Section 1446 of the Code, as if this income were effectively
connected to a United States trade or business, at a rate of 35% for holders
that are Foreign Persons taxable as corporations and 39.6% for all other holders
who are Foreign Persons. Subsequent adoption of Treasury Department 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, IRS Form W-9 or the holder's
certification of foreign status signed under penalties of perjury.
Each holder who is a Foreign Person might be required to file a United
States 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 holder who is a Foreign Person 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 holder who is a Foreign
Person generally would be entitled to file with the IRS a claim for refund on
taxes withheld by the trust fund taking the position that no taxes were due
because the trust fund was not engaged in a United States 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
the 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 this case, a holder who is a Foreign Person would only be
entitled to claim a refund for that portion of the taxes in excess of the taxes
that should be withheld from the guaranteed payments.
Backup Withholding. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to a "backup" withholding tax
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. When withholding is required, the rate will
be 30.5% after August 6, 2001 for calendar year 2001, 30% for calendar years
2002 and 2003, 29% for calendar years 2004 and 2005, and 28% for calendar years
2006 and thereafter.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," 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 regarding the various state and
local tax consequences of an investment in the securities.
92
ERISA CONSIDERATIONS
The following describes considerations under ERISA and the Code, which
apply only to securities of a series that are not divided into subclasses. If
securities are divided into subclasses the related prospectus supplement will
contain information concerning considerations relating to ERISA and the Code
that are applicable to those securities.
ERISA imposes 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 these plans, accounts or arrangements are invested) (collectively,
"Plans") subject to ERISA and on persons who are fiduciaries of those 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 those Plans. ERISA also imposes duties on
persons who are fiduciaries of Plans. Under ERISA, any person who exercises any
authority or control respecting the management or disposition of the assets of a
Plan is considered to be a fiduciary of the Plan (subject to exceptions not here
relevant). Some employee benefit plans, such as governmental plans (as defined
in ERISA Section 3(32)) and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in ERISA Section 3(33)), are not subject
to ERISA requirements. Accordingly, assets of these plans may be invested in
securities without regard to the ERISA considerations described above and below,
subject to the provisions of applicable state law. Any governmental or church
plan which is qualified and exempt from taxation under Code Sections 401(a) and
501(a), however, is subject to the prohibited transaction rules set forth in
Code Section 503.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan (Labor Reg. Section 2510.3-101). Under this regulation, the
underlying assets and properties of corporations, partnerships 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.
However, the regulation provides that, generally, the assets of a corporation,
partnership or other entity in which a Plan invests will not be deemed for
purposes of ERISA to be assets of the Plan if the equity interest acquired by
the investing Plan is a publicly-offered security. A publicly-offered security,
as defined in the Labor Reg. Section 2510.3-101, is, in general, a security that
is widely held, freely transferable and registered under the Securities and
Exchange Act of 1934, as amended. No assurance can be given to potential Plan
investors that the securities will constitute "publicly-offered securities"
within the meaning of the DOL regulations.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA prohibits a broad range of transactions
involving Plan assets and persons ("Parties in Interest") having certain
specified relationships to a Plan and imposes additional prohibitions where
Parties in Interest are fiduciaries of the Plan. Because loans held by the trust
fund may be deemed Plan assets of each Plan that purchases securities, an
investment in the securities by a Plan might be a prohibited transaction under
ERISA Sections 406 and 407 and subject to an excise tax under Code Section 4975
unless a statutory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's prohibited
transaction rules specified transactions relating to the operation of
residential mortgage pool investment trusts and the purchase, sale and holding
of "mortgage pool pass-through certificates" in the initial issuance of those
certificates. PTE 83-1 permits, subject to specified conditions, transactions
which might otherwise be prohibited between Plans and Parties in Interest of
those Plans related to the origination, maintenance and termination of mortgage
pools consisting of mortgage loans secured by first or second mortgages or deeds
of trust on single-family residential property, and the acquisition and holding
of certain mortgage pool pass-through certificates representing an interest in
those mortgage pools by Plans. If the general conditions (discussed below) of
PTE 83-1 are satisfied, investments by a Plan in certificates that represent
interests in a pool consisting of loans ("Single Family Securities") will be
exempt from the prohibitions of ERISA Sections 406(a) and 407 (relating
generally to transactions with Parties in Interest who are not fiduciaries) if
the Plan purchases the Single Family Securities at no more than fair market
value and will be exempt from the prohibitions of ERISA Sections 406(b)(1) and
(2) (relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid to
the pool sponsor, the Plan does not purchase more than 25% of all Single Family
Securities, and at least 50% of all Single Family Securities are purchased by
93
persons independent of the pool sponsor or pool trustee. PTE 83-1 does not
provide an exemption for transactions involving Subordinated Securities.
Accordingly, unless otherwise provided in the related prospectus supplement, no
transfer of a Subordinated Security or a security which is not a Single Family
Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. The depositor believes that, for purposes of PTE 83-1,
the term "mortgage pass-through certificate" would include (1) securities issued
in a series consisting of only a single class of securities; and (2) securities
issued in a series in which there is only one class of those securities;
provided that the securities in the case of clause (1), or the securities in the
case of clause (2), evidence the beneficial ownership of both a specified
percentage of future interest payments (greater than 0%) and a specified
percentage (greater than 0%) of future principal payments on the loans. It is
not clear whether a class of securities that evidences the beneficial ownership
in a trust fund divided into loan groups, beneficial ownership of a specified
percentage of interest payments only or principal payments only, or a notional
amount of either principal or interest payments, or a class of securities
entitled to receive payments of interest and principal on the loans only after
payments to other classes or after the occurrence of specified events would be a
"mortgage pass-through certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption:
o the maintenance of a system of insurance or other protection for
the pooled mortgage loans and property securing those loans, and
for indemnifying securityholders against reductions in
pass-through payments due to property damage or defaults in loan
payments in an amount not less than the greater of 1% of the
aggregate principal balance of all covered pooled mortgage loans
or the principal balance of the largest covered pooled mortgage
loan;
o the existence of a pool trustee who is not an affiliate of the
pool sponsor; and
o a limitation on the amount of the payment retained by the pool
sponsor, together with other funds inuring to its benefit, to not
more than adequate consideration for selling the mortgage loans
plus reasonable compensation for services provided by the pool
sponsor to the pool.
The depositor believes that the first general condition referred to above will
be satisfied for the securities in a series issued without a subordination
feature and for the securities in a series issued with a subordination feature,
provided that the subordination and reserve account, subordination by shifting
of interests, the pool insurance or other form of credit enhancement described
under "Credit Enhancement" herein (this subordination, pool insurance or other
form of credit enhancement being the system of insurance or other protection
referred to above) relating to a series of securities is maintained in an amount
not less than the greater of 1% of the aggregate principal balance of the loans
or the principal balance of the largest loan. See "Description of the
Securities." In the absence of a ruling that the system of insurance or other
protection for a series of securities satisfies the first general condition
referred to above, there can be no assurance that these features will be so
viewed by the DOL. The trustee will not be affiliated with the depositor.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Securities
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraphs, of PTE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the 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.
The DOL has granted certain underwriters individual administrative
exemptions (the "Underwriter Exemptions") from some 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 securities which are certificates in pass-through trusts that
consist of receivables, loans and other obligations that meet the conditions and
requirements of the Underwriter Exemptions. The Underwriter Exemptions contain
several requirements, some of which differ from those in PTE 83-1. The
Underwriter Exemptions, as amended by the DOL
94
on July 21, 1997 and November 13, 2000, contain an expanded definition of
"security" which includes a pass-through certificate or trust certificate that
represents a beneficial ownership interest in the assets of an issuer which is a
trust which entitles the holder to pass-through payments of principal, interest
and/or other payments. The Underwriter Exemption also provides that the term
"security" includes a debt instrument that is issued by, and is an obligation
of, an issuer with respect to which the underwriter is either (i) the sole
underwriter or the manager or co-manager of the underwriting syndicate, or (ii)
a selling or placement agent. The Underwriter Exemptions contain an expanded
definition of "trust" which means an issuer which is a trust, including an owner
trust, grantor trust or a REMIC or FASIT which is operated as a trust.
The Underwriter Exemptions defines the term "designated transaction" as
meaning a securitization transaction in which the assets of the issuer consist
of secured consumer receivables, secured credit instruments or secured
obligations that bear interest or are purchased at a discount and are:
o motor vehicle, home equity and/or manufactured housing consumer
receivables; and/or
o motor vehicle credit instruments in transactions by or between
business entities; and/or
o single-family residential, multi-family residential, home equity,
manufactured housing and/or commercial mortgage obligations that
are secured by single-family residential, multi-family
residential, commercial real property or leasehold interests
therein.
While each Underwriter Exemption is an individual exemption separately
granted to a specific underwriter, the terms and conditions which generally
apply to the Underwriter Exemptions are substantially the following:
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 Plan
as they would be in an arm's-length transaction with an unrelated
party;
o the rights and interest evidenced by the securities acquired by the
Plan are not subordinated to the rights and interests evidenced by
other securities of the same issuer, unless the securities are issued
in a "designated transaction," as defined above;
o the securities acquired by the Plan have received a rating at the time
of the acquisition that is one of the three (or in the case of
"designated transactions," four) highest generic rating categories
from Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies ("S&P"), Moody's, Duff & Phelps Credit Rating Co. ("DCR") or
Fitch, Inc. ("Fitch") or any successors thereto;
o the trustee must not be an affiliate of any other member of the
Restricted Group as defined below;
o the sum of all payments made to and retained by the underwriters in
connection with the distribution or placement of the securities
represents not more than reasonable compensation for underwriting or
placing the securities; the sum of all payments made to and retained
by the pool sponsor pursuant to the assignment of the obligations (or
interests therein) to the issuer represents not more than the fair
market value of the loans; the sum of all payments made to and
retained by the servicer represents not more than reasonable
compensation for that person's services under the agreement pursuant
to which the obligations (or interests therein) are pooled and
reimbursements of that person's reasonable expenses in connection
therewith;
o the Plan investing in the certificates is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the SEC under the
Securities Act of 1933, as amended; and
o in the event that the obligations used to fund an issuer have not been
transferred to the issuer on the closing date, additional obligations
(as specified in the Underwriter Exemptions) may be transferred to the
issuer during the Funding Period in exchange for amounts credited to
the pre-funding account, provided that the Pre-Funded Amount does not
exceed 25% of the initial aggregate principal amount of the securities
and provided that other conditions set forth in the Underwriter
Exemptions are satisfied.
95
The Underwriter Exemptions provide that the term "issuer" means an
investment pool, the corpus or assets of which are held in trust (including a
grantor or owner trust) or whose assets are held by a partnership, special
purpose corporation or limited liability company (including a REMIC or FASIT);
and the corpus or assets of which consist solely of:
o secured consumer receivables that bear interest or are purchased at a
discount (including, but not limited to, home equity loans and
obligations secured by shares issued by a cooperative housing
association); and/or
o secured credit instruments that bear interest or are purchased at a
discount in transactions by or between business entities (including,
but not limited to, certain "qualified equipment notes secured by
leases"); and/or
o obligations that bear interest or are purchased at a discount and
which are secured by single-family residential, multi-family
residential and/or commercial real property (including obligations
secured by leasehold interests on residential or commercial real
property); and/or
o obligations that bear interest or are purchased at a discount and
which are secured by motor vehicles or equipment, or certain
"qualified motor vehicle leases;" and/or
o fractional undivided interests in any of the obligations described in
the four bullet clauses above; and/or
o guaranteed governmental mortgage pool certificates, as defined in 29
CFR 2510.3-101(i)(2).
Moreover, the Underwriter Exemptions generally provide relief from
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire securities as to which the fiduciary
(or its affiliate) is an obligor on the receivables contained in the issuer
provided that, among other requirements:
o in the case of an acquisition in connection with the initial issuance
of securities, at least 50% of each class of securities in which Plans
have invested is acquired by persons independent of the Restricted
Group and at least 50% of the aggregate interest in the issuer is
acquired by persons independent of the Restricted Group,
o the fiduciary (or its affiliate) is an obligor with respect to 5% or
less of the fair market value of the obligations or receivables
contained in the issuer,
o the Plan's investment in each class of securities 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
the Plan with respect to which the person is a fiduciary is invested
in securities representing an interest in an issuer containing assets
sold or serviced by the same entity.
The Underwriter Exemptions do not apply to Plans sponsored by the depositor, the
related Underwriter, the trustee, the servicer, any insurer for the loans, any
obligor for more than 5% of the fair market value of obligations or receivables
contained in the issuer, or any affiliate of these parties (the "Restricted
Group").
The prospectus supplement for each series of securities will indicate the
classes of securities, if any, offered thereby as to which it is expected that
an Underwriter Exemption will apply.
Any Plan fiduciary who proposes to cause a Plan to purchase securities
should consult with its counsel concerning the impact of ERISA and the Code, the
applicability of PTE 83-1 and the Underwriter Exemptions, and the potential
consequences in their specific circumstances, prior to making this investment.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment in
the securities is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
96
LEGAL INVESTMENT
The related prospectus supplement for each series of securities will
specify which, if any, of the classes of securities offered thereby constitute
`mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended ("SMMEA"). Classes of securities that
qualify as "mortgage related securities" will be legal investments for persons,
trusts, corporations, partnerships, associations, business trusts, and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulations to the same extent
as, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any of those entities. Under SMMEA, if a
state enacts legislation prior to October 4, 1991 specifically limiting the
legal investment authority of any of those entities relating to "mortgage
related securities," securities will constitute legal investments for entities
subject to the legislation only to the extent provided therein. Approximately
twenty-one states adopted this legislation prior to the October 4, 1991
deadline. SMMEA provides, however, that in no event will the enactment of any
legislation affect the validity of any contractual commitment to purchase, hold
or invest in securities, or require the sale or other disposition of securities,
so long as the contractual commitment was made or the securities were acquired
prior to the enactment of the legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to any regulations prescribed by the
applicable federal authority. In this connection, federal credit unions should
review the National Credit Union Administration ("NCUA") Letter to Credit Unions
No. 96, as modified by Letter to Credit Unions No. 108, which includes
guidelines to assist federal credit unions in making investment decisions for
mortgage related securities and the NCUA's regulation "Investment and Deposit
Activities" (12 C.F.R. Part 703), which sets forth restrictions on investment by
federal credit unions in mortgage related securities (in each case whether or
not the class of securities under consideration for purchase constituted a
"mortgage related security").
All depository institutions considering an investment in the securities
(whether or not the class of securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement") setting forth, in relevant part, securities trading and
sales practices deemed unsuitable for an institution's investment portfolio, and
guidelines for (and restrictions on) investing in mortgage derivative products,
including "mortgage related securities," which are "high-risk mortgage
securities" as defined in the Policy Statement. According to the Policy
Statement, these "high-risk mortgage securities" include securities not entitled
to distributions allocated to principal or interest, or Subordinated Securities.
Under the Policy Statement, it is the responsibility of each depository
institution to determine, prior to purchase (and at stated intervals
thereafter), whether a particular mortgage derivative product is a "high-risk
mortgage security," and whether the purchase (or retention) of this type of
product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," or in securities that are issued in book-entry
form.
There may be other restrictions on the ability of some types of investors,
including depository institutions, either to purchase securities or to purchase
securities representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the securities constitute legal investments for those
investors.
97
METHOD OF DISTRIBUTION
Securities are being offered hereby in series from time to time (each
series evidencing or relating to a different trust fund) through any of the
following methods:
o by negotiated firm commitment underwriting and public reoffering by
underwriters;
o by agency placements through one or more placement agents primarily
with institutional investors and dealers; and
o by placement directly by the depositor with institutional investors.
A prospectus supplement will be prepared for each series which will
describe the method of offering being used for that series and will set forth
the identity of any underwriters thereof and either the price at which the
series is being offered, the nature and amount of any underwriting discounts or
additional compensation to the underwriters and the proceeds of the offering to
the depositor, or the method by which the price at which the underwriters will
sell the securities will be determined. Each prospectus supplement for an
underwritten offering will also contain information regarding the nature of the
underwriters' obligations, any material relationship between the depositor and
any underwriter and, where appropriate, information regarding any discounts or
concessions to be allowed or reallowed to dealers or others and any arrangements
to stabilize the market for the securities so offered. In firm commitment
underwritten offerings, the underwriters will be obligated to purchase all of
the securities of that series if any securities of that type are purchased.
Securities may be acquired by the underwriters for their own accounts and may be
resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale.
Underwriters and agents may be entitled under agreements entered into with
the depositor to indemnification by the depositor against specified civil
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribution with respect to payments which the underwriters or agents may
be required to make in respect thereof.
If a series is offered other than through underwriters, the prospectus
supplement relating thereto will contain information regarding the nature of the
offering and any agreements to be entered into between the depositor and
purchasers of securities of that series.
LEGAL MATTERS
The validity of the securities of each series, including certain federal
income tax consequences with respect thereto, will be passed upon for the
depositor by Stradley, Ronon, Stevens & Young, LLP, 2600 One Commerce Square,
Philadelphia, PA 19103.
FINANCIAL INFORMATION
A new trust fund will be formed with respect to each series of securities
and no trust fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of securities.
Accordingly, no financial statements with respect to any trust fund will be
included in this prospectus or in the related prospectus supplement.
RATING
It is a condition to the issuance of the securities of each series offered
hereby and by the related 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 (each, a "Rating Agency") specified in the
related prospectus supplement.
Any rating of the securities offered hereby would be based on, among other
things, the adequacy of the value of the Trust Fund Assets and any credit
enhancement of that class and will reflect that Rating Agency's assessment
solely of the likelihood that holders of a class of securities of that class
will receive payments to which those securityholders are entitled under the
related Agreement. The rating will not constitute an assessment of the
98
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 series of
securities. The 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. Each security rating should be evaluated
independently of any other security rating. The rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause the 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
Rating Agency in the future if in its judgment circumstances in the future so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement of a
series, the rating might also be lowered or withdrawn among other reasons,
because of an adverse change in the financial or other condition of a credit
enhancement provider or a change in the rating of that credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established for
a series of securities will be determined on the basis of criteria established
by each Rating Agency rating classes of that series. These criteria are
sometimes based upon an actuarial analysis of the behavior of mortgage loans in
a larger group. This analysis is often the basis upon which each Rating Agency
determines the amount of credit enhancement required for each class. There can
be no assurance that the historical data supporting any actuarial analysis will
accurately reflect future experience nor any assurance that the data derived
from a large pool of mortgage loans accurately predicts the delinquency,
foreclosure or loss experience of any particular pool of loans. No assurance can
be given that values of any mortgaged properties have remained or will remain at
their levels on the respective dates of origination of the related loans. If the
residential real estate markets should experience an overall decline in property
values resulting in the outstanding principal balances of the loans in a
particular trust fund and any secondary financing on the related mortgaged
properties becoming equal to or greater than the value of the mortgaged
properties, the rates of delinquencies, foreclosures and losses could be higher
than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by mortgagors of scheduled payments of
principal and interest on the loans and, accordingly, the rates of
delinquencies, foreclosures and losses of any trust fund. To the extent that
these losses are not covered by credit enhancement, the losses will be borne, at
least in part, by the holders of one or more classes of the securities of the
related series.
AVAILABLE INFORMATION
Copies of the registration statement of which this prospectus forms a part
and the exhibits to the registration statement are on file at the offices of the
SEC in Washington, D.C. The depositor is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and files
reports and other information with the SEC. Reports and information on file with
the SEC, including the registration statement and filings made by the depositor
can be inspected without charge at the public reference facilities maintained by
the SEC or may be copied at rates prescribed by the SEC. The public reference
facilities are at:
o 450 Fifth Street, N.W., Washington, D.C. 20549;
o Midwest Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and
o Northeast Regional Office, 233 Broadway, New York, NY 10279.
You may obtain information on the operation of the above-listed public
reference facilities by calling the SEC at 1-800-SEC-0330. 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.
99
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the trust fund referred
to in the accompanying prospectus supplement with the SEC pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
after the date of this prospectus and prior to the termination of any offering
of the securities issued by the trust fund shall be deemed to be incorporated by
reference in this prospectus and to be a part of this prospectus from the date
of the filing of these documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for all purposes of this prospectus to the extent that
a statement contained herein (or in the accompanying prospectus supplement) or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference modifies or replaces that statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this prospectus. Neither the depositor nor the servicer
for any series intends to file with the SEC periodic reports for the related
trust fund following completion of the reporting period required by Rule 15d-1
or Regulation 15D under the Securities and Exchange Act of 1934, as amended.
The trustee or any other entity specified in the related prospectus
supplement on behalf of any trust fund will provide without charge to each
person to whom this prospectus is delivered, on the written or oral request of
that person, a copy of any or all of the documents referred to above that have
been or may be incorporated by reference in this prospectus (not including
exhibits to the information that is incorporated by reference unless the
exhibits are specifically incorporated by reference into the information that
this prospectus incorporates). Additionally, the trustee will provide a copy of
the Agreement (without exhibits) relating to any series without charge upon
written request of a holder of record of a security of that series. These
requests should be directed to the corporate trust office of the trustee or the
address of the other entity specified in the accompanying prospectus supplement.
Included in the accompanying prospectus supplement is the name, address,
telephone number, and, if available, facsimile number of the office or contact
person at the corporate trust office of the trustee or that other entity.
100
INDEX OF DEFINED TERMS
Accrual Securities.....................27 Loan Indices...........................35
Agreement..............................13 Mark-to-Market Regulations.............79
AIV....................................19 Master Servicing Agreement.............13
Amortizable Bond Premium Regulations...73 Mixed Use Properties...................15
APR....................................16 Moody's................................41
Available Funds........................27 Mortgage...............................47
Bankruptcy Code........................40 NCUA...................................97
Beneficial Owners......................35 OID....................................70
BIF....................................48 OID Regulations........................70
CERCLA.................................61 Parties in Interest....................94
Claimable Amount.......................68 Pass-Through Certificates..............82
Clearstream, Luxembourg................35 Pass-Through Rate......................27
Code...................................26 Pay-Through Security...................70
Collateral Value.......................17 Percentage Interests...................55
Combined Loan-to-Value Ratio...........16 Permitted Investments..................41
Cut-off Date Principal Balance.........25 Plans..................................93
DCR....................................96 PNA....................................18
Debt Securities........................70 Policy Statement.......................98
Debt-to-Income Ratio...................19 Pool Insurer...........................43
Disqualified Organization..............78 Pooling and Servicing Agreement........13
DOL....................................93 Popular................................18
DTC....................................35 Pre-Funded Amount......................50
EPA....................................61 Prepayment Assumption..................71
Equity One.............................14 Prime Rate.............................35
Equity One Standards...................18 Principal Prepayments..................28
ERISA..................................26 Property Improvement Loans.............65
Euroclear..............................35 PTE 83-1...............................94
Euroclear Operator.....................37 Purchase Agreement.....................13
Excess Servicing.......................83 Purchase Price.........................24
Fannie Mae.............................55 Rating Agency..........................99
FASIT..................................26 Ratio Strip Securities.................83
Federal Reserve........................18 RCRA...................................62
FHA....................................14 Record Date............................26
FHLMC..................................54 Refinance Loan.........................17
Financial Intermediary.................36 Regular Interest Securities............69
Fitch..................................96 Relief Act.............................64
FNMA...................................55 REMIC..................................26
Foreign Person.........................86 Residual Interest Security.............77
Freddie Mac............................54 Restricted Group.......................97
Full Doc...............................19 Retained Interest......................25
Funding Period.........................50 Rules..................................36
Garn-St Germain Act....................63 S&P....................................96
HUD....................................65 SAIF...................................48
Indenture..............................24 SEC....................................14
Insurance Proceeds.....................49 Secured Creditor Exclusion.............61
Insured Expenses.......................49 Securities Index.......................35
Interest Weighted Securities...........72 Security Account.......................48
IRS....................................71 Senior Securities......................39
L/C Bank...............................40 Servicing Fee..........................82
L/C Percentage.........................40 Short-Term Note........................87
Liquidation Expenses...................49 SI ....................................19
Liquidation Proceeds...................49 Single Family Properties...............15
Lite Doc...............................19 Single Family Securities...............94
101
SMMEA..................................97 Title I Program........................65
Stripped Securities....................82 Title V................................64
Subordinated Securities................39 Treasury Index.........................34
Subsequent Loans.......................50 Trust Agreement........................13
Terms and Conditions...................37 Trust Fund Assets......................13
Thrift Institutions....................78 Underwriter Exemptions.................95
Tiered REMICs..........................75 United States Person...................86
TIN....................................85 VA ....................................14
Title I Loans..........................65 Variable Rate Debt Securities..........72
Equity One Mortgage Pass-Through Trust 2002-2
$287,552,000 Mortgage Pass-Through Certificates, Series 2002-2
Equity One ABS, Inc.
as Depositor
Equity One, Inc.
as Servicer
[EQUITY ONE LOGO]
-------------------------------------------------
PROSPECTUS SUPPLEMENT
Dated April 25, 2002
-------------------------------------------------
Wachovia Securities