Prospectus Supplement dated May 4, 2001 (to Prospectus dated May 4, 2001)
$481,538,000 (Approximate)
ACE SECURITIES CORP. Home Equity Loan Trust, Series 2001-AQ1
Asset Backed Pass-Through Certificates
Ace Securities Corp.
Depositor
Ameriquest Mortgage Company
Servicer
- ------------------------------------------------------------------------------
You should consider carefully the risk factors beginning on page S-7 in this
prospectus supplement.
This prospectus supplement may be used to offer and sell the offered
certificates only if accompanied by the prospectus.
- ------------------------------------------------------------------------------
Offered Certificates The trust created for the Series 2001-AQ1
certificates will hold a pool of one- to four-family
adjustable-rate residential first lien mortgage
loans. The trust will issue four classes of Offered
Certificates. You can find a list of these classes,
together with their initial certificate principal
balances and pass-through rates, in the table below.
Credit enhancement for all of the Offered
Certificates will be provided in the form of
subordination and overcollateralization.
Initial Certificate Pass-Through
Class Principal Balance(1) Rate(2)
--------------------------------------------------------------
A-1.............. $445,241,000 LIBOR + 0.260%
A-IO............. (3) 6.750%
M-1.............. $ 21,778,000 LIBOR + 0.670%
M-2.............. $ 14,519,000 LIBOR + 1.150%
- ----------------
(1) Approximate.
(2) The pass-through rate on each class of Offered Certificates is
based on one-month LIBOR plus the applicable spread shown above,
subject to the Net WAC Pass-Through Rate as described in this
prospectus supplement under "Description of the
Certificates--Glossary."
(3) Interest will accrue on the notional amount of this class,
initially equal to $125,000,000, calculated as described in
"Description of the Certificates - Interest Distributions on the
Offered Certificates" in this prospectus supplement.
The certificates offered by this prospectus supplement will be purchased by
Deutsche Banc Alex. Brown Inc. from the Depositor, and are being offered by
Deutsche Banc Alex. Brown Inc. from time to time for sale to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of these certificates
will be approximately $493,933,413, plus accrued interest on the Class A-IO
Certificates, before deducting expenses.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Offered Certificates or
determined that this prospectus supplement or the prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
The Attorney General of the State of New York has not passed on or endorsed
the merits of this offering. Any representation to the contrary is unlawful.
Deutsche Banc Alex. Brown
Important notice about information presented in this prospectus
supplement and the accompanying prospectus
---------------------------------------------------------------
You should rely only on the information contained in this document. We have
not authorized anyone to provide you with different information.
We provide information to you about the Offered Certificates in two separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general information,
some of which may not apply to this series of certificates; and
o this prospectus supplement, which describes the specific terms of
this series of certificates.
Ace Securities Corp.'s principal offices are located at 6707 Fairview Road,
Suite D, Charlotte, North Carolina 28210 and its phone number is 704-365-0569.
Table of Contents
Prospectus Supplement
SUMMARY OF PROSPECTUS SUPPLEMENT...........................................S-2
RISK FACTORS...............................................................S-7
USE OF PROCEEDS...........................................................S-13
THE MORTGAGE POOL.........................................................S-13
UNDERWRITING STANDARDS....................................................S-26
YIELD ON THE CERTIFICATES.................................................S-30
DESCRIPTION OF THE CERTIFICATES...........................................S-39
THE ORIGINATOR AND SERVICER...............................................S-59
POOLING AND SERVICING AGREEMENT...........................................S-63
FEDERAL INCOME TAX CONSEQUENCES...........................................S-68
METHOD OF DISTRIBUTION....................................................S-70
SECONDARY MARKET..........................................................S-71
LEGAL OPINIONS............................................................S-71
RATINGS...................................................................S-71
LEGAL INVESTMENT..........................................................S-72
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS.................................S-72
ANNEX I...................................................................I-1
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is a very broad overview of the certificates
offered by this prospectus supplement and the accompanying prospectus and does
not contain all of the information that you should consider in making your
investment decision. To understand the terms of the Offered Certificates,
carefully read this entire prospectus supplement and the entire accompanying
prospectus.
Title of Series................ ACE Securities Corp. Home Equity Loan
Trust, Series 2001-AQ1 Asset Backed
Pass-Through Certificates.
Cut-off Date................... April 1, 2001.
Closing Date................... On or about May 9, 2001.
Depositor...................... Ace Securities Corp., a Delaware
corporation. See "The Depositor" in the
prospectus.
Originator..................... Ameriquest Mortgage Company, a Delaware
corporation. See "The Originator" in this
prospectus supplement.
Servicer....................... Ameriquest Mortgage Company, a Delaware
corporation. Generally, any obligation
specified to be performed by the master
servicer in the prospectus is an obligation
to be performed by the servicer with
respect to the mortgage loans. See "Pooling
and Servicing Agreement--The Servicer" in
this prospectus supplement.
Trustee........................ U.S. Bank National Association, a national
banking association, will be the trustee of
the trust. See "Pooling and Servicing
Agreement--The Trustee" in this prospectus
supplement.
Trust Administrator............ Bankers Trust Company of California, N.A.,
a national banking association, will
perform certain administrative functions on
behalf of the Trustee and will act as the
initial paying agent and certificate
registrar. See "Pooling and Servicing
Agreement--Trust Administrator" in this
prospectus supplement.
Distribution Dates............. Distributions on the Offered Certificates
will be made on the 25th day of each month,
or, if that day is not a Business Day, on
the next succeeding Business Day, beginning
in May 2001.
Offered Certificates........... Only the certificates listed on the cover
of this prospectus supplement are being
offered by this prospectus supplement. Each
class of Offered Certificates will have the
initial certificate principal balance and
pass-through rate set forth or described in
the table appearing on the cover of this
prospectus supplement.
The Trust
The Depositor will establish a trust with respect to the certificates under
the pooling and servicing agreement dated as of the Cut-off Date among the
Depositor, the Servicer, the Trust Administrator and the Trustee. There are
several classes of certificates, in addition to the Offered Certificates,
representing the trust. See "Description of the Certificates" in this
prospectus supplement.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust. Distributions of interest and principal on the Offered
Certificates will be made primarily from payments received in connection with
the mortgage loans.
The Mortgage Loans
References to percentages of the mortgage loans under this section are
calculated based on the aggregate principal balance of the mortgage loans as
of the Cut-off Date.
The trust will contain 4,052 conventional, one- to four-family,
adjustable-rate mortgage loans secured by first liens on residential real
properties. Information about the characteristics of the mortgage loans is
described under "The Mortgage Pool" in this prospectus supplement.
The mortgage loans have an aggregate principal balance of approximately
$483,958,213 as of the Cut-off Date. The mortgage loans have original terms to
maturity of not greater than 30 years and the following characteristics as of
the Cut-off Date:
Range of mortgage rates: 6.99% to 14.99%.
Weighted average mortgage rate : 10.33%.
Range of gross margins: 5.00% to 7.13%.
Weighted averaged gross margin: 6.65%.
Range of minimum mortgage rates: 6.99% to 14.99%.
Weighted average minimum mortgage 10.33%.
rate:
Range of maximum mortgage rates: 12.99% to 20.99%.
Weighted average maximum mortgage 16.33%.
rate:
Weighted average remaining term to 29 years and 1 month.
stated maturity:
Range of principal balances: $17,988.20 to $553,040.23.
Average principal balance: $119,436.87
Range of original loan-to-value 10.00% to 90.97%.
ratios:
Weighted average original 75.00%.
loan-to-value ratio:
Weighted average next adjustment date: December 2002.
The mortgage rate on each mortgage loan will adjust semi-annually on each
adjustment date to equal the sum of six-month LIBOR and the related gross
margin, subject to periodic and lifetime limitations, as described under "The
Mortgage Pool" in this prospectus supplement. See also "The Mortgage Pool--The
Index" in this prospectus supplement.
The first adjustment date on the mortgage loans will occur only after an
initial period of approximately two years, as more fully described under "The
Mortgage Pool" in this prospectus supplement.
For additional information regarding the mortgage loans, see "The Mortgage
Pool" in this prospectus supplement.
The Certificates
Offered Certificates. The Class A-1 Certificates, the Class A-IO Certificates,
the Class M-1 Certificates and the Class M-2 Certificates are the only classes
of certificates offered by this prospectus supplement. The Offered
Certificates will have the characteristics shown in the table on the cover of
this prospectus supplement and as described in this prospectus supplement.
The pass-through rate on each class of Offered Certificates is variable and
will be calculated for each Distribution Date as described under "Description
of the Certificates--Pass- Through Rate" in this prospectus supplement. The
pass-through rate on each class of Offered Certificates will be the lesser of
(a) the Net WAC Pass-Through Rate and (b) One-Month LIBOR plus a spread. The
initial spread relating to the Class A-1 Certificates is 0.260% per annum. The
initial spread relating to the Class M-1 Certificates is 0.670% per annum. The
initial spread relating to the Class M-2 Certificates is 1.150% per annum.
Each spread is subject to increase as more fully described under "Description
of the Certificates--Pass-Through Rates" in this prospectus supplement.
The Offered Certificates will be sold by the Depositor to Deutsche Banc Alex.
Brown Inc. (the "Underwriter") on the Closing Date.
The Offered Certificates will initially be represented by one or more global
certificates registered in the name of a nominee of the Depository Trust
Company in the United States, or Clearstream and the Euroclear System (each,
as defined herein), in Europe in minimum denominations of $50,000 and integral
multiples of $1,000 in excess of the minimum denominations. See "Description
of the Certificates --Registration of the Offered Certificates" in this
prospectus supplement.
Other Certificates. The Class X/N Certificates will represent the right to
receive principal and interest as described in the Pooling and Servicing
Agreement. The Class X/N Certificates initially evidence an interest of
approximately 0.50% in the trust. The Class X/N Certificates will also be
entitled to all prepayment charges received on the mortgage loans. The Class
X/N Certificates will initially be purchased by the Underwriter.
The Class R Certificates (the "Residual Certificates") are not offered by this
prospectus supplement and are the classes of certificates representing the
residual interests in the trust. The Residual Certificates will initially be
purchased by the Underwriter.
Credit Enhancement
The credit enhancement provided for the benefit of the holders of the Offered
Certificates consists of subordination and overcollateralization, each as
described in this section and under "Description of the Certificates--Credit
Enhancement" and "--Overcollateralization Provisions" in this prospectus
supplement.
Subordination. The rights of the holders of the Class M-1 Certificates and the
Class M-2 Certificates (collectively, the "Mezzanine Certificates") and the
Class X/N Certificates to receive distributions (other than prepayment
charges) will be subordinated, to the extent described in this prospectus
supplement, to the rights of the holders of the Class A-1 Certificates and the
Class A-IO Certificates.
In addition, to the extent described under "Description of the
Certificates--Allocation of Losses; Subordination" in this prospectus
supplement,
o the rights of the holders of the Class M-2 Certificates and the
Class X/N Certificates (other than the right to receive prepayment
charges) will be subordinated to the rights of the holders of the
Class M-1 Certificates; and
o the rights of the holders of the Class X/N Certificates (other
than the right to receive prepayment charges) will be subordinated
to the rights of the holders of the Class M-2 Certificates.
Subordination is intended to enhance the likelihood of regular distributions
on the more senior certificates in respect of interest and principal and to
afford the more senior certificates protection against realized losses on the
mortgage loans, as described under "Description of the
Certificates--Allocation of Losses; Subordination" in this prospectus
supplement.
Overcollateralization. The aggregate principal balance of the mortgage loans
as of the Cut-off Date will exceed the aggregate certificate principal balance
of the Class A-1 Certificates and the Mezzanine Certificates on the Closing
Date by approximately $2,420,213, which will be allocated to the Class X/N
Certificates. This amount represents approximately 0.50% of the aggregate
principal balance of the mortgage loans as of the Cut-off Date, and is the
initial amount of overcollateralization required to be provided by the
mortgage pool under the pooling and servicing agreement. See "Description of
the Certificates --Overcollateralization Provisions" in this prospectus
supplement.
Allocation of Losses. If, on any Distribution Date, there is not sufficient
excess interest or overcollateralization (allocable to the Class X/N
Certificates) to absorb realized losses on the mortgage loans as described
under "Description of the Certificates--Overcollateralization Provisions" in
this prospectus supplement, then realized losses on the mortgage loans will be
allocated to the Class M-2 Certificates and the Class M-1 Certificates, in
that order. The pooling and servicing agreement does not permit the allocation
of realized losses on the mortgage loans to the Class A-1 Certificates and
Class A-IO Certificates; however, investors in the Class A-1 Certificates and
Class A-IO Certificates should realize that under certain loss scenarios,
there will not be enough principal and interest on the mortgage loans to pay
the Class A-1 Certificates all interest and principal amounts to which these
certificates are then entitled or to pay the Class A-IO Certificates all
interest amounts to which these certificates are then entitled. See
"Description of the Certificates --Allocation of Losses; Subordination" in
this prospectus supplement.
Once realized losses are allocated to the Mezzanine Certificates, their
certificate principal balances will be permanently reduced by the amount so
allocated. However, the amount of any realized losses allocated to the
Mezzanine Certificates may be paid with interest to the holders of these
certificates according to the priorities set forth under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement.
P&I Advances
The Servicer is required to advance delinquent payments of principal and
interest on the mortgage loans, subject to the limitations described under
"Description of the Certificates--P&I Advances" in this prospectus supplement.
The Servicer is entitled to be reimbursed for these advances, and therefore
these advances are not a form of credit enhancement. See "Description of the
Certificates--P&I Advances" in this prospectus supplement and "Description of
the Securities--Advances in Respect of Delinquencies" in the prospectus.
Optional Termination
At its option, the Servicer may purchase all of the mortgage loans, together
with any properties in respect of the mortgage loans acquired on behalf of the
trust, and thereby effect termination and early retirement of the
certificates, after the aggregate principal balance of the mortgage loans (and
properties acquired in respect of the mortgage loans), remaining in the trust
has been reduced to less than 10% of the aggregate principal balance of the
mortgage loans as of the Cut-off Date. See "Pooling and Servicing
Agreement--Termination" in this prospectus supplement and "Description of the
Securities-- Termination" in the prospectus.
Federal Income Tax Consequences
Multiple elections will be made to treat designated portions of the trust as
real estate mortgage investment conduits for federal income tax purposes. See
"Material Federal Income Tax Considerations--REMICs--Characterization of
Investments in REMIC Securities" in the prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Federal Income Tax Consequences"
in this prospectus supplement and "Material Federal Income Tax Considerations"
in the prospectus.
Ratings
It is a condition to the issuance of the certificates that the Offered
Certificates receive the following ratings from Moody's Investors Service,
Inc. and Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"):
Offered
Certificates S&P Moody's
------------ --- -------
Class A-1 AAA Aaa
Class A-IO AAA Aaa
Class M-1 AA Aa2
Class M-2 A A2
A security rating does not address the frequency of prepayments on the
mortgage loans or the corresponding effect on yield to investors. In addition,
the ratings on the Class A-1, Class M-1 and Class M-2 Certificates do not
address the likelihood of receipt by the holders of such certificates of any
amounts in respect of Basis Risk Shortfalls. See "Yield on the Certificates"
and "Ratings" in this prospectus supplement and "Yield Considerations" in the
prospectus.
Legal Investment
The Class A-1 Certificates, Class A-IO Certificates and the Class M-1
Certificates will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"), for so long as
they are rated not lower than the second highest rating category by one or
more nationally recognized statistical rating organizations and therefore,
will be legal investments for those entities to the extent provided in SMMEA
and applicable state laws. The Class M-2 Certificates will not constitute
"mortgage related securities" for purposes of SMMEA. See "Legal Investment" in
this prospectus supplement and in the prospectus.
Considerations for Benefit Plan Investors
It is expected that the Offered Certificates may be purchased by a pension or
other employee benefit plan subject to the Employee Retirement Income Security
Act of 1974 or Section 4975 of the Internal Revenue Code of 1986, as amended
(the "Code") so long as certain conditions are met including the requirement
that the plan be a "Qualified Plan Investor", as defined in "Considerations
for Benefit Plan Investors" in this prospectus supplement. A fiduciary of an
employee benefit plan must determine that the purchase of a certificate is
consistent with its fiduciary duties under applicable law and does not result
in a nonexempt prohibited transaction under applicable law. See
"Considerations for Benefit Plan Investors" in this prospectus supplement and
in the prospectus.
RISK FACTORS
The following information, which you should carefully consider,
identifies significant sources of risk associated with an investment in the
certificates. You should also carefully consider the information set forth
under "Risk Factors" in the prospectus.
The mortgage loans were underwritten to standards which do not conform to the
standards of Fannie Mae or Freddie Mac
The Originator's underwriting standards are intended to assess the value
of the mortgaged property and to evaluate the adequacy of the property as
collateral for the mortgage loan. The Originator considers, among other
things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the type and use of the mortgaged
property. The Originator provides loans primarily to borrowers who do not
qualify for loans conforming to Fannie Mae and Freddie Mac guidelines. The
Originator's underwriting standards do not prohibit a mortgagor from obtaining
at the time of origination of the Originator's first lien (or at any time
thereafter) additional financing which is subordinate to such first lien,
which subordinate financing would reduce the equity the mortgagor would
otherwise have in the related mortgaged property as indicated in the
Originator's loan-to-value ratio determination for the Originator's first
lien.
As a result of the Originator's underwriting standards, the mortgage
loans in the mortgage pool are likely to experience rates of delinquency,
foreclosure and bankruptcy that are higher, and that may be substantially
higher, than those experienced by mortgage loans underwritten in a more
traditional manner.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the mortgage loans in the mortgage pool than on mortgage loans originated
in a more traditional manner. No assurance can be given that the values of the
related mortgaged properties have remained or will remain at the levels in
effect on the dates of origination of the related mortgage loans. See "The
Originator--Underwriting Standards of the Originator and Representations
Concerning the Mortgage Loans" in this prospectus supplement.
Mortgage loans with high loan-to-value ratios leave the related borrower with
little or no equity in the related mortgaged property
Approximately 29.00% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, had a loan-to-value ratio at origination in
excess of 80%. No Mortgage Loan had a loan-to-value ratio exceeding 90.97% at
origination. Mortgage loans with higher loan-to-value ratios may present a
greater risk of loss. In addition, an overall decline in the residential real
estate market, a rise in interest rates over a period of time and the
condition of a mortgaged property, as well as other factors, may have the
effect of reducing the value of the mortgaged property from the appraised
value at the time the mortgage loan was originated. If there is a reduction in
value of the mortgaged property, the loan-to-value ratio may increase over
what it was at the time the mortgage loan was originated. Such an increase may
reduce the likelihood of liquidation or other proceeds being sufficient to
satisfy the mortgage loan, and any losses to the extent not covered by the
credit enhancement may affect the yield to maturity of your certificates.
There can be no assurance that the value of a mortgaged property estimated in
any appraisal or review is equal to the actual value of that mortgaged
property at the time of that appraisal or review. Investors should note that
the values of the mortgaged properties may be insufficient to cover the
outstanding principal balance of the mortgage loans. There can be no assurance
that the loan-to-value ratio of any mortgage loan determined at any time after
origination will be less than or equal to its loan-to-value ratio at
origination.
Certain mortgage loans may be delinquent as of the Cut-off Date, which may
present a greater risk of loss relating to such mortgage loans
Approximately 3.64% of the Mortgage Loans, by aggregate principal balance
as of the Cut-off Date, were delinquent in their monthly payments as of March
31, 2001. However, investors should realize that approximately 1.85% of the
Mortgage Loans, by aggregate principal balance as of the Cut-off Date, have a
first payment date occurring on or after March 31, 2001 and therefore, such
mortgage loans could not have been delinquent with respect to any monthly
payment due on or before March 31, 2001.
The mortgage loans are concentrated in the State of California, which may
present a greater risk of loss relating to these mortgage loans
Approximately 25.22% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, are secured by mortgaged properties located in
the State of California. The aggregate principal balance of Mortgage Loans in
the California zip code with the largest amount of such mortgage loans, by
aggregate principal balance of the Mortgage Loans as of the Cut-off Date, was
$1,635,529.75. If the California residential real estate market should
experience an overall decline in property values after the dates of
origination of the mortgage loans, the rates of delinquencies, foreclosures,
bankruptcies and losses on the mortgage loans may increase over historical
levels of comparable type loans, and may increase substantially. In addition,
properties located in California may be more susceptible than homes located in
other parts of the country to certain types of uninsured hazards, such as
earthquakes, as well as floods, mudslides and other natural disasters.
The Mezzanine Certificates will be more sensitive to losses on the mortgage
loans than the Class A-1 Certificates and the Class A-IO Certificates because
they are subordinate to the Class A-1 Certificates and the Class A-IO
Certificates
The weighted average lives of, and the yields to maturity on, the Class
M-1 Certificates and the Class M-2 Certificates will be progressively more
sensitive, in that order, to the rate and timing of mortgagor defaults and the
severity of ensuing losses on the mortgage loans. If the actual rate and
severity of losses on the mortgage loans is higher than those assumed by an
investor in these certificates, the actual yield to maturity of these
certificates may be lower than the yield anticipated by the holder based on
such assumption. The timing of losses on the mortgage loans will also affect
an investor's actual yield to maturity, even if the rate of defaults and
severity of losses over the life of the mortgage pool are consistent with an
investor's expectations. In general, the earlier a loss occurs, the greater
the effect on an investor's yield to maturity. Realized losses on the mortgage
loans, to the extent they exceed the amount of excess interest and
overcollateralization following distributions of principal on the related
Distribution Date, will reduce the certificate principal balance of the
Mezzanine Certificate then outstanding with the lowest payment priority. As a
result of such reductions, less interest will accrue on such class of
Mezzanine Certificates than otherwise would be the case. Once a realized loss
is allocated to a Mezzanine Certificate, no amounts will be distributable with
respect to such written down amount. However, the amount of any realized
losses allocated to the Mezzanine Certificates may be paid to the holders of
the Mezzanine Certificates together with accrued interest on such amount
according to the priorities set forth under "Description of the Certificates
- --Overcollateralization Provisions" in this prospectus supplement.
The Mezzanine Certificates will generally not be entitled to receive principal
payments until May 2004 which may result in a greater risk of loss relating to
these certificates
Unless the certificate principal balance of the Class A-1 Certificates
has been reduced to zero, the Mezzanine Certificates will not be entitled to
any principal distributions until at least May 2004 or a later date as
provided in this prospectus supplement or during any period in which
delinquencies on the mortgage loans exceed the levels set forth under
"Description of the Certificates--Principal Distributions on the Offered
Certificates" in this prospectus supplement. As a result, the weighted average
lives of these certificates will be longer than would be the case if
distributions of principal were allocated among all of the certificates at the
same time. As a result of the longer weighted average lives of these
certificates, the holders of these certificates have a greater risk of
suffering a loss on their investments. Further, because such certificates
might not receive any principal if the delinquency levels set forth under
"Description of the Certificates--Principal Distributions on the Offered
Certificates" in this prospectus supplement are exceeded, it is possible for
such certificates to receive no principal distributions on a particular
Distribution Date even if no losses have occurred on the mortgage pool.
Your certificates will be limited obligations solely of the trust fund and not
of any other party
The Offered Certificates will not represent an interest in or obligation
of the Depositor, the Servicer, the Originator, the Seller, the Trustee, the
Trust Administrator or any of their respective affiliates. Neither the
certificates nor the underlying mortgage loans will be guaranteed or insured
by any governmental agency or instrumentality, or by the Depositor, the
Servicer, the Originator, the Trustee, the Trust Administrator or any of their
respective affiliates. Proceeds of the assets included in the trust will be
the sole source of payments on the Offered Certificates, and there will be no
recourse to the Depositor, the Servicer, the Originator, the Seller, the
Trustee, the Trust Administrator or any other entity in the event that these
proceeds are insufficient or otherwise unavailable to make all payments
provided for under the Offered Certificates.
The difference between the pass-through rates on the Offered Certificates and
the mortgage rates on the mortgage loans may result in interest shortfalls on
the Offered Certificates
The yield to maturity on the Offered Certificates may be affected by the
resetting of the mortgage rates on the mortgage loans on their related
adjustment dates. In addition, because the mortgage rate for each mortgage
loan is based on six-month LIBOR plus a fixed percentage amount, such rate
could be higher than prevailing market interest rates, and this may result in
an increase in the rate of prepayments on the mortgage loans after their
adjustments. Finally, the mortgage rates on the mortgage loans are based on
six-month LIBOR (and the mortgage loans, by aggregate principal balance of the
mortgage loans as of the Cut-off Date, will not have their mortgage rates
adjusted for two years from the dates of their origination), while the
pass-through rates on the Offered Certificates are based on one-month LIBOR.
Consequently, the application to such certificates of the rate cap, which is
equal to the weighted average coupon on the mortgage loans after payment of
certain fees, could adversely affect the yield to maturity on such
Certificates. In addition, the rate cap will decrease if mortgage loans with
relatively high mortgage rates prepay at a faster rate than mortgage loans
with relatively low mortgage rates. If the pass-through rates on the Class A-1
Certificates, Class A-IO Certificates or the Mezzanine Certificates are
limited for any Distribution Date, the resulting basis risk shortfalls may be
recovered by the holders of these certificates on the same Distribution Date
or on future Distribution Dates on a subordinated basis to the extent that on
such Distribution Date or future Distribution Dates there are available funds
remaining after certain other distributions on the Offered Certificates and
the payment of certain fees and expenses of the trust. See "Yield on the
Certificates--Special Yield Considerations" in this prospectus supplement.
The rate and timing of principal distributions on the Offered Certificates
will be affected by prepayment speeds and by the priority of payment on such
certificates
The rate and timing of distributions allocable to principal on the
Offered Certificates will depend, in general, on the rate and timing of
principal payments (including prepayments and collections upon defaults,
liquidations and repurchases) on the mortgage loans and the allocation thereof
to pay principal on such certificates as described in "Description of the
Certificates--Principal Distributions on the Offered Certificates" in this
prospectus supplement. As is the case with mortgage pass-through certificates
generally, the Offered Certificates are subject to substantial inherent
cash-flow uncertainties because the mortgage loans may be prepaid at any time.
However, with respect to approximately 65.45% of the mortgage loans, by
aggregate principal balance of the mortgage loans as of the Cut-off Date, a
voluntary prepayment in full may subject the related mortgagor to a prepayment
charge. A prepayment charge may or may not act as a deterrent to prepayment of
the related mortgage loan. See "The Mortgage Pool" in this prospectus
supplement.
Generally, when prevailing interest rates are increasing, prepayment
rates on mortgage loans tend to decrease; a decrease in the prepayment rates
on the mortgage loans will result in a reduced rate of return of principal to
investors in the Offered Certificates at a time when reinvestment at such
higher prevailing rates would be desirable. Conversely, when prevailing
interest rates are declining, prepayment rates on mortgage loans tend to
increase; an increase in the prepayment rates on the mortgage loans will
result in a greater rate of return of principal to investors in the Offered
Certificates at a time when reinvestment at comparable yields may not be
possible.
Distributions of principal will be made to the holders of the Mezzanine
Certificates according to the priorities described in this prospectus
supplement. The timing of commencement of principal distributions and the
weighted average life of each such class of certificates will be affected by
the rates of prepayment on the mortgage loans experienced both before and
after the commencement of principal distributions on such class. For further
information regarding the effect of principal prepayments on the weighted
average lives of the Offered Certificates, see "Yield on the Certificates" in
this prospectus supplement, including the table entitled "Percent of Initial
Certificate Principal Balance Outstanding at the Specified Percentages of
CPR."
The yield to maturity on the Offered Certificates will depend on a variety of
factors
The yield to maturity on the Offered Certificates will depend on:
o the applicable pass-through rate thereon from time to time;
o the applicable purchase price;
o the rate and timing of principal payments (including prepayments and
collections upon defaults, liquidations and repurchases) and the
allocation thereof to reduce the certificate principal balance of
such certificates; and
o the rate, timing and severity of realized losses on the mortgage
loans; adjustments to the mortgage rates on the mortgage loans, the
amount of excess interest generated by the mortgage loans and the
allocation to the Offered Certificates of some types of interest
shortfalls.
In general, if the Offered Certificates are purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if the Offered Certificates
are purchased at a discount and principal distributions thereon occur at a
rate slower than that anticipated at the time of purchase, the investor's
actual yield to maturity will be lower than that originally assumed.
In addition, the Class A-IO Certificates receive only payments of
interest and are especially sensitive to variations in the rate of
prepayments. If you purchase a Class A-IO Certificate and the rate of
prepayments is faster than you expected, your yield may be lower than expected
and you may not fully recoup your initial investment.
The proceeds to the Depositor from the sale of the Offered Certificates
were determined based on a number of assumptions, including a prepayment
assumption of 28% of the Constant Prepayment Rate model as described in this
prospectus supplement under "Yield on the Certificates" and weighted average
lives corresponding thereto. No representation is made that the mortgage loans
will prepay at such rate or at any other rate. The yield assumptions for the
Offered Certificates will vary as determined at the time of sale.
The yield to maturity on the Mezzanine Certificates will be particularly
sensitive to the rate of prepayments on the mortgage loans
The multiple class structure of the Mezzanine Certificates causes the
yield of such classes to be particularly sensitive to changes in the rates of
prepayment of the mortgage loans. Because distributions of principal will be
made to the holders of such certificates according to the priorities described
in this prospectus supplement, the yield to maturity on such classes of
certificates will be sensitive to the rates of prepayment on the mortgage
loans experienced both before and after the commencement of principal
distributions on such classes. The yield to maturity on such classes of
certificates will also be extremely sensitive to losses due to defaults on the
mortgage loans (and the timing thereof), to the extent these losses are not
covered by excess cashflow otherwise payable to the Class X/N Certificates or
to a class of Mezzanine Certificates with a lower payment priority.
Furthermore, as described in this prospectus supplement, the timing of receipt
of principal and interest by the Mezzanine Certificates may be adversely
affected by losses even if these classes of certificates do not ultimately
bear such loss.
Early termination of the Cap Agreement may reduce amounts payable on your
certificates
Under certain circumstances, the Cap Agreement may be terminated early
and a termination payment may be payable from net monthly excess cashflow
otherwise payable to the Offered Certificates. Any such termination payment
may be substantial.
Violation of consumer protection laws may result in losses on the mortgage
loans and your certificates
Applicable state laws regulate interest rates and other charges, require
certain disclosure, and require licensing of the Originator. In addition,
other state laws, public policy and general principles of equity relating to
the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the mortgage loans.
The mortgage loans are also subject to federal laws, including
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require disclosures to the borrowers regarding the
terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer
Credit Protection Act, in the extension of credit; and
o the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience; and
o the Depository Institutions Deregulation and Monetary Control Act of
1980, which preempts under certain conditions some state usury laws;
and
o the Alternative Mortgage Transaction Parity Act of 1982, which
preempts under certain circumstances some state lending laws which
regulate alternative mortgage transactions.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws,
policies and principles may limit the ability of the trust 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 Originator to damages and administrative enforcement.
The Originator will represent that each mortgage loan originated by the
Originator was originated in compliance with applicable federal and state laws
and regulations. In the event of a breach of this representation, the
Originator will be obligated to cure the breach or repurchase the affected
mortgage loan in the manner described in the prospectus.
The liquidity of your certificates may be limited
The Underwriter has no obligation to make a secondary market in the
classes of Offered Certificates. There is therefore no assurance that a
secondary market will develop or, if it develops, that it will continue.
Consequently, you may not be able to sell your certificates readily or at
prices that will enable you to realize your desired yield. The market values
of the certificates are likely to fluctuate; these fluctuations may be
significant and could result in significant losses to you.
The secondary markets for asset-backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
Legal actions are pending against the Originator
Because the nature of the sub prime mortgage lending and servicing
business involves the collection of numerous accounts, the validity of liens
and compliance with state and federal lending laws, sub prime lenders and
servicers, including the Originator, are subject to numerous claims and legal
actions in the ordinary course of its business. These claims include lawsuits
styled as class actions and alleging violations of various federal and state
consumer protection laws. While it is impossible to estimate with certainty
the ultimate legal and financial liability with respect to claims and actions,
and an adverse judgment in a claim or action may have a significant adverse
financial effect on the Originator, the Originator believes that the aggregate
amount of liabilities will not result in monetary damages which in the
aggregate would have a material adverse effect on the financial condition or
results of the Originator.
Ratings on your certificates are dependent on the creditworthiness of Mortgage
Guaranty Insurance Corporation
The ratings assigned to your certificates by the rating agencies will be
based in part on ratings assigned to Mortgage Guaranty Insurance Corporation,
the mortgage insurance provider with respect to covered mortgage loans. It is
expected that not less than 75.58% of the mortgage loans will be covered
mortgage loans. Any reduction in the ratings assigned to the mortgage
insurance provider by the rating agencies could result in the reduction of the
ratings assigned to your certificates. This reduction in ratings could
adversely affect the liquidity and market value of your certificates.
The rating by each of the rating agencies of your certificates is not a
recommendation to purchase, hold or sell your certificates because the rating
does not address the market price of the certificates or the suitability for a
particular investor.
The rating agencies may suspend, lower or withdraw the ratings on your
certificates at anytime. Any reduction in, or suspension or withdrawal of, the
ratings assigned to your certificates would probably reduce the market value
of your certificates and may affect your ability to sell them.
The capitalized terms used in this prospectus supplement regarding
payments on the Offered Certificates will have the meanings assigned to them
under "Description of the Certificates--Glossary."
USE OF PROCEEDS
Deutsche Bank AG New York Branch (the "Seller") will sell the mortgage
loans to the Depositor and the Depositor will convey the mortgage loans to the
trust fund in exchange for and concurrently with the delivery of the
certificates. Net proceeds from the sale of the Offered Certificates will be
applied by the Depositor to the purchase of the mortgage loans from the
Seller. Such net proceeds, together with the cash proceeds from the sale of
the Class X/N Certificates and the Residual Certificates, will represent the
purchase price to be paid by the Depositor to the Seller for the mortgage
loans. The Mortgage Loans had been previously sold by the Originator.
THE MORTGAGE POOL
General
The pool of mortgage loans (the "Mortgage Pool") will consist of 4,052
conventional, one- to four-family, adjustable-rate mortgage loans (the
"Mortgage Loans") secured by first liens on residential real properties (the
"Mortgaged Properties") and having an aggregate principal balance as of the
Cut-off Date of $483,958,213.16 after application of scheduled payments due on
or before the Cut-off Date whether or not received and subject to a permitted
variance of plus or minus 5%. The Mortgage Loans have original terms to
maturity of not greater than 30 years.
The Mortgage Loans are secured by first mortgages or deeds of trust or
other similar security instruments creating first liens on residential
properties. The Mortgaged Properties consist of attached, detached or
semi-detached, one- to four-family dwelling units, townhouses, individual
condominium units, individual units in planned unit developments and
manufactured housing.
Information about the characteristics of the Mortgage Loans is described
under "--The Mortgage Loans" below. References to percentages of the Mortgage
Loans, unless otherwise noted, are calculated based on the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date.
The mortgage rate (the "Mortgage Rate") on each Mortgage Loan is the per
annum rate of interest specified in the related mortgage note. Each Mortgage
Loan provides for semi-annual adjustment to its Mortgage Rate; provided, that
for each Mortgage Loan the first adjustment will not occur until after an
initial period of approximately two years from the date of origination of
those Mortgage Loans (each such Mortgage Loan, a "Delayed First Adjustment
Mortgage Loan"). In connection with each Mortgage Rate adjustment, the
Mortgage Loans have corresponding adjustments to their monthly payment amount,
in each case on each applicable adjustment date (each such date, an
"Adjustment Date"). On each Adjustment Date, the Mortgage Rate on each
Mortgage Loan will be adjusted to equal the sum, rounded to the nearest
multiple of 0.125%, of the Index (as described below) and a fixed percentage
amount (the "Gross Margin") for that Mortgage Loan specified in the related
mortgage note. The Mortgage Rate on each Mortgage Loan, however, including
each Delayed First Adjustment Mortgage Loan, will generally not increase or
decrease by more than the periodic rate cap (the "Periodic Rate Cap")
specified in the related mortgage note, which is 1% per annum, on any related
Adjustment Date and will not exceed a specified maximum mortgage rate (the
"Maximum Mortgage Rate") over the life of the mortgage loan or be less than a
specified minimum mortgage rate (the "Minimum Mortgage Rate") over the life of
the Mortgage Loan. Effective with the first monthly payment due on each
Mortgage Loan after each related Adjustment Date, the monthly payment amount
will be adjusted to an amount that will fully amortize the outstanding
principal balance of the related Mortgage Loan over its remaining term and pay
interest at the Mortgage Rate as so adjusted. Due to the application of the
Periodic Rate Caps and the Maximum Mortgage Rates, the Mortgage Rate on each
Mortgage Loan, as adjusted on any related Adjustment Date, may be less than
the sum of the Index, calculated as described in this prospectus supplement,
and the related Gross Margin. See "--The Index" in this prospectus supplement.
None of the Mortgage Loans permits the related mortgagor to convert the
adjustable mortgage rate thereon to a fixed Mortgage Rate.
The Mortgage Loans have scheduled monthly payments due on the first day
of the month (with respect to each Mortgage Loan, the "Due Date"). Each
Mortgage Loan will contain a customary "due-on-sale" clause which provides
that, subject to certain statutory exceptions, the Mortgage Loan must be
repaid at the time of a sale of the related Mortgaged Property or assumed by a
creditworthy purchaser of the related Mortgaged Property.
Approximately 65.45% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment charge (a "Prepayment Charge") in limited
circumstances on voluntary prepayments in full as provided in the related
mortgage note. Generally, each such Mortgage Loan provides for payment of a
Prepayment Charge on all voluntary prepayments in full made within a specified
period not in excess of five years from the date of origination of the
Mortgage Loan, as provided in the related mortgage note. The amount of the
Prepayment Charge is as provided in the related mortgage note, but, in most
cases, is equal to six month's interest on 100% of the current Principal
Balance when any voluntary prepayment in excess of 20% of the original
principal balance of the related Mortgage Loan is made in any 12 month period,
as permitted by law. The holders of the Class X/N Certificates will be
entitled to all Prepayment Charges received on the Mortgage Loans, and these
amounts will not be available for distribution on the other classes of
certificates. Under the limited instances described under the terms of the
pooling and servicing agreement, the Servicer may waive the payment of any
otherwise applicable Prepayment Charge. Investors should conduct their own
analysis of the effect, if any, that the Prepayment Charges, and decisions by
the Servicer with respect to the waiver of the Prepayment Charges, may have on
the prepayment performance of the Mortgage Loans. The Depositor makes no
representation as to the effect that the Prepayment Charges, and decisions by
the Servicer with respect to the waiver of the Prepayment Charges, may have on
the prepayment performance of the Mortgage Loans.
None of the Mortgage Loans are buydown mortgage loans.
The PMI Policy
Approximately 75.58% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date (the "PMI Mortgage Loans"), will be insured by
Mortgage Guaranty Insurance Corporation ("MGIC" or the "PMI Insurer") pursuant
to a primary mortgage insurance policy (the "PMI Policy").
MGIC, a Wisconsin corporation with its principal offices in Milwaukee,
Wisconsin, is a monoline private mortgage insurance company and a wholly-owned
subsidiary of MGIC Investment Corporation. MGIC is licensed in 50 states and
the District of Columbia to offer such insurance and is approved as a private
mortgage insurer by Fannie Mae and Freddie Mac. MGIC is rated "AA+" by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc., "AA+" by
Fitch, Inc. and "Aa2" by Moody's Investors Service, Inc. with respect to its
insurer financial strength. The rating agency issuing the insurer financial
strength rating can withdraw or change its rating at any time. As of December
31, 2000, MGIC reported on a statutory accounting basis, assets of
approximately $4,135,757,000, policyholders' surplus of approximately
$919,901,000 and a statutory contingency reserve of approximately
$2,537,183,000. As of December 31, 2000, MGIC reported direct primary
insurance in force of approximately $160.2 billion and direct pool risk in
force of approximately $1.7 billion. An Annual Statement for MGIC for the year
ended December 31, 2000, prepared on the Convention Form prescribed by the
National Association of Insurance Commissioners, is available upon written
request to the Trustee.
The amount of coverage provided by the PMI Policy, which is also referred
to below as the "insured percentage of the claim," varies based on
loan-to-value stratifications which provide coverage that ranges between 17%
and 48% based upon the original loan-to-value ratio of the mortgage loan.
Approximately 75.58% of the Mortgage Loans, by aggregate principal balance as
of the Cut-off Date, are PMI Mortgage Loans.
The PMI Policy is required to remain in force with respect to each PMI
Mortgage Loan until (i) the Principal Balance of the PMI Mortgage Loan is paid
in full, (ii) the Principal Balance of the PMI Mortgage Loan has amortized
down to a level that results in a loan-to-value ratio for the mortgage loan of
50% or less; provided, however, that no coverage of any PMI Mortgage Loan
under the PMI Policy is required where prohibited by applicable law or (iii)
any event specified in the PMI Policy occurs that allows for the termination
of the PMI Policy by the PMI Insurer. In addition, the aggregate amount of
coverage under the PMI Policy will not exceed 19% of the aggregate initial
Principal Balance of the Offered Certificates (other than the Class A-IO
Certificates).
The PMI Policy may not be assigned or transferred without the prior
written consent of the PMI Insurer, provided, however that the PMI Insurer has
previously provided written consent to the assignment of the PMI Policy from
the original insured to the Trustee. The PMI Insurer has also given consent
for the assignment of coverage on individual loans from the Trustee to the
Seller in connection with any Mortgage Loan repurchased by the Seller.
The PMI Policy generally requires that delinquencies on any PMI Mortgage
Loan must be reported to the PMI Insurer within four months of default, and
appropriate proceedings to obtain title to the property securing the PMI
Mortgage Loan must be commenced within six months of default. The PMI Policy
under which the PMI Mortgage Loans are insured contains provisions
substantially as follows: (i) for the insured to present a claim, the insured
must have acquired, and tendered to the PMI Insurer, good and merchantable
title to the property securing the PMI Mortgage Loan, free and clear of all
liens and encumbrances, including, but not limited to, any right of redemption
by the mortgagor unless such acquisition of good and merchantable title is
excused under the terms of the PMI Policy; (ii) a claim generally includes
unpaid principal, accrued interest to the date of such tender to the PMI
Insurer by the insured, and certain expenses; (iii) when a claim is presented
the PMI Insurer will have the option of either (A) paying the claim in full,
taking title to the property securing the PMI Mortgage Loan, and arranging for
its sale or (B) paying the insured percentage of the claim and with the
insured retaining title to the property securing the PMI Mortgage Loan; (iv)
claims generally must be filed within 60 days after the insured has acquired
good and merchantable title to the property securing the PMI Mortgage Loan and
(v) a claim generally must be paid within 60 days after the claim is filed by
the insured.
No payment for a loss will be made under the PMI Policy unless the
property securing the PMI Mortgage Loan is in the same physical condition as
when the PMI Mortgage Loan was originally insured, except for reasonable wear
and tear and unless premiums on the standard homeowner's insurance policy,
real estate taxes and foreclosure protection and preservation expenses have
been advanced by or on behalf of the insured.
Unless approved in writing by the PMI Insurer, the insured under the PMI
Policy may not make any change in the terms of a PMI Mortgage Loan, including
the borrowed amount, interest rate, term or amortization schedule of the PMI
Mortgage Loan, except as specifically permitted by terms of the PMI Mortgage
Loan; nor make any change in the property or other collateral securing the PMI
Mortgage Loan; nor release any mortgagor under the PMI Mortgage Loan from
liability. If a PMI Mortgage Loan is assumed with the insured's approval, the
PMI Insurer's liability for coverage of the PMI Mortgage Loan under the PMI
Policy generally will terminate as of the date of such assumption. unless the
PMI Insurer approves the assumption in writing.
The PMI Policy specifically excludes coverage of: (1) any claim resulting
from a default existing at the inception of coverage or occurring after lapse
or cancellation of coverage; (2) certain claims where there is an
environmental condition which existed on the property securing the PMI
Mortgage Loan (whether or not known by the person or persons submitting an
application for coverage of the PMI Mortgage Loan) as of the effective date of
coverage; (3) any claim involving a PMI Mortgage Loan which is for the
purchase of the mortgaged property, and for which the mortgagor did not make a
down payment as described in the application for coverage; (4) any claim, if
the mortgage, deed of trust or other similar instrument did not provide the
insured at origination with a first lien on the property securing the PMI
Mortgage Loan; and (5) certain claims involving or arising out of any breach
by the insured of its obligations under, or its failure to comply with the
terms of, the PMI Policy or of its obligations as imposed by operation of law.
The PMI Policy will not insure against a loss sustained by reason of a default
arising from or involving certain matters, including (i) fraud or negligence
in origination or servicing of the PMI Mortgage Loans, including, but not
limited to, misrepresentation by the lender or certain other persons involved
in the origination of the PMI Mortgage Loan or the application for insurance;
(ii) failure to construct a property securing a PMI Mortgage Loan in
accordance with specified plans or (iii) physical damage to a property
securing a PMI Mortgage Loan. In issuing the PMI Policy, the PMI Insurer has
relied upon certain information and data regarding the PMI Mortgage Loans
furnished to the PMI Insurer by the Seller.
The preceding description of the PMI Policy is only a brief outline and
does not purport to summarize or describe all of the provisions, terms and
conditions of the PMI Policy. For a more complete description of these
provisions, terms and conditions, reference is made to the PMI Policy, a copy
of which is available upon request from the Trustee.
The Mortgage Loans
The Mortgage Pool consists of 4,052 Mortgage Loans which have an
aggregate principal balance as of the Cut-off Date of $483,958,213.16.
The average principal balance of the Mortgage Loans at origination was
$119,690.05. No Mortgage Loan had a principal balance at origination greater
than $555,000.00 or less than $18,000.00. The average principal balance of the
Mortgage Loans as of the Cut-off Date was $119,436.87. No Mortgage Loan had a
principal balance as of the Cut-off Date greater than $553,040.23 or less than
$17,988.20.
The Mortgage Loans had Mortgage Rates as of the Cut-off Date ranging from
approximately 6.99% per annum to approximately 14.99% per annum, and the
weighted average Mortgage Rate was approximately 10.33% per annum. As of the
Cut-off Date, the Mortgage Loans had Gross Margins ranging from approximately
5.00% to approximately 7.13%, Minimum Mortgage Rates ranging from
approximately 6.99% per annum to approximately 14.99% per annum and Maximum
Mortgage Rates ranging from approximately 12.99% per annum to approximately
20.99% per annum. As of the Cut-off Date, the weighted average Gross Margin
was approximately 6.65%, the weighted average Minimum Mortgage Rate was
approximately 10.33% per annum and the weighted average Maximum Mortgage Rate
was approximately 16.33% per annum. The latest first Adjustment Date following
the Cut-off Date on any Mortgage Loan occurs in March 2003 and the weighted
average next Adjustment Date for all of the Mortgage Loans following the
Cut-off Date is December 2002.
The weighted average current loan-to-value ratio of the Mortgage Loans at
origination was approximately 75.00%. At origination, no Mortgage Loan had a
loan-to-value ratio greater than approximately 90.97% or less than
approximately 10.00%.
The weighted average remaining term to stated maturity of the Mortgage
Loans was approximately 29 years and 1 month as of the Cut-off Date. None of
the Mortgage Loans will have a first due date prior to October 2000 or after
April 2001, will have a remaining term to stated maturity of less than 14
years and 6 months or greater than 30 years as of the Cut-off Date. The latest
maturity date of any Mortgage Loan is March 2031.
The Mortgage Loans are expected to have the following characteristics as
of the Cut-off Date (the sum in any column may not equal the total indicated
due to rounding):
Principal Balances of the Mortgage Loans at Origination
Number of Aggregate % of Aggregate
Principal Balance Mortgage Principal Balance at Principal Balance at
at Origination ($) Loans Origination Origination
- ----------------- -------- -------------------- --------------------
0.01 - 25,000.00 2 $ 42,000.00 0.01%
25,000.01 - 50,000.00 450 19,652,665.00 4.05
50,000.01 - 75,000.00 811 50,822,917.00 10.48
75,000.01 - 100,000.00 751 65,594,905.00 13.53
100,000.01 - 125,000.00 621 69,483,507.00 14.33
125,000.01 - 150,000.00 410 56,283,726.00 11.61
150,000.01 - 175,000.00 309 50,029,837.00 10.32
175,000.01 - 200,000.00 198 36,935,686.00 7.62
200,000.01 - 225,000.00 162 34,217,102.00 7.06
225,000.01 - 250,000.00 124 29,728,754.00 6.13
250,000.01 - 275,000.00 46 12,199,750.00 2.52
275,000.01 - 300,000.00 40 11,522,750.00 2.38
300,000.01 - 350,000.00 55 17,896,800.00 3.69
350,000.01 - 400,000.00 38 14,440,549.00 2.98
400,000.01 - 450,000.00 17 7,312,250.00 1.51
450,000.01 - 500,000.00 16 7,723,893.00 1.59
500,000.01 - 550,000.00 1 542,000.00 0.11
550,000.01 - 600,000.00 1 555,000.00 0.11
----- ----------------- ------
Total 4,052 $484,984,091.00 100.00%
===== ============== ======
Principal Balances of the Mortgage Loans as of the Cut-off Date
Aggregate % of Aggregate
Number of Principal Balance Principal Balance Outstanding
Principal Balance as of Mortgage Outstanding as of as of
the Cut-off Date ($) Loans the Cut-off Date the Cut-off Date
- ----------------- -------- -------------------- --------------------
0.01 - 25,000.00 2 $ 41,958.57 0.01%
25,000.01 - 50,000.00 456 19,875,852.15 4.11
50,000.01 - 75,000.00 808 50,618,601.64 10.46
75,000.01 - 100,000.00 762 66,636,476.59 13.77
100,000.01 - 125,000.00 609 68,189,994.56 14.09
125,000.01 - 150,000.00 417 57,256,498.38 11.83
150,000.01 - 175,000.00 302 48,932,361.54 10.11
175,000.01 - 200,000.00 204 38,116,576.99 7.88
200,000.01 - 225,000.00 154 32,558,024.68 6.73
225,000.01 - 250,000.00 124 29,666,172.60 6.13
250,000.01 - 275,000.00 47 12,453,331.11 2.57
275,000.01 - 300,000.00 39 11,228,238.91 2.32
300,000.01 - 350,000.00 55 17,866,575.62 3.69
350,000.01 - 400,000.00 38 14,410,485.66 2.98
400,000.01 - 450,000.00 17 7,300,972.12 1.51
450,000.01 - 500,000.00 16 7,712,207.83 1.59
500,000.01 - 550,000.00 1 540,843.98 0.11
550,000.01 - 600,000.00 1 553,040.23 0.11
----- -------------- ------
Total 4,052 $483,958,213.16 100.00%
===== ============== ======
Mortgage Rates of the Mortgage Loans as of the Cut-off Date
Aggregate % of Aggregate
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Mortgage Rate (%) Loans The Cut-off Date the Cut-off Date
- ----------------- -------- -------------------- --------------------
6.501 - 7.000 2 $ 366,395.96 0.08%
7.001 - 7.500 2 321,143.91 0.07
7.501 - 8.000 16 3,370,953.70 0.77
8.001 - 8.500 88 18,190,840.15 3.76
8.501 - 9.000 263 39,742,120.77 8.21
9.001 - 9.500 401 54,708,502.75 11.30
9.501 - 10.000 815 113,460,063.63 23.44
10.001 - 10.500 561 71,466,553.96 14.77
10.501 - 11.000 697 74,850,176.54 15.47
11.001 - 11.500 348 34,203,625.36 7.07
11.501 - 12.000 359 32,824,138.33 6.78
12.001 - 12.500 102 8,913,480.07 1.84
12.501 - 13.000 162 14,143,625.27 2.92
13.001 - 13.500 50 3,692,268.15 0.76
13.501 - 14.000 98 6,783,979.96 1.40
14.001 - 14.500 25 1,814,957.81 0.38
14.501 - 15.000 63 4,745,386.84 0.98
----- -------------- ------
Total 4,052 $483,958,213.16 100.00%
===== ============== ======
Gross Margins of the Mortgage Loans
Aggregate % of Aggregate
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Gross Margin (%) Loans the Cut-off Date the Cut-off Date
- ----------------- -------- -------------------- --------------------
4.501 - 5.000 2 $ 269,429.39 0.06%
5.001 - 5.500 79 8,411,565.91 1.74
5.501 - 6.000 84 9,654,696.10 1.99
6.001 - 6.500 1,464 209,394,365.46 43.27
6.501 - 7.000 1,162 138,997,291.16 28.72
7.001 - 7.500 1,261 117,230,865.14 24.22
----- -------------- ------
Total 4,052 $483,958,213.16 100.00%
===== ============== ======
Maximum Mortgage Rates of the Mortgage Loans
Aggregate % of Aggregate
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Maximum Mortgage Rate (%) Loans the Cut-off Date the Cut-off Date
- ---------------------- ----------- ------------------- --------------------
12.001 - 13.000 2 $ 366,395.96 0.08%
13.001 - 14.000 18 4,052,097.61 0.84
14.001 - 15.000 351 57,932,960.92 11.97
15.001 - 16.000 1,216 168,168,566.38 34.75
16.001 - 17.000 1,258 146,316,730.50 30.23
17.001 - 18.000 707 67,027,763.69 13.85
18.001 - 19.000 264 23,057,105.34 4.76
19.001 - 20.000 148 10,476,248.11 2.16
20.001 - 21.000 88 6,560,344.65 1.36
----- -------------- ------
Total 4,052 $483,958,213.16 100.00%
===== ============== ======
Minimum Mortgage Rates of the Mortgage Loans
Aggregate % of Aggregate
Number of Principal Balance Principal Balance
Mortgage Outstanding as of Outstanding as of
Minimum Mortgage Rate (%) Loans the Cut-off Date the Cut-off Date
- ------------------------- -------- -------------------- --------------------
6.001 - 7.000 2 $ 366,395.96 0.08%
7.001 - 8.000 18 4,052,097.61 0.84
8.001 - 9.000 351 57,932,960.92 11.97
9.001 - 10.000 1,216 168,168,566.38 34.75
10.001 - 11.000 1,258 146,316,730.50 30.23
11.001 - 12.000 707 67,027,763.69 13.85
12.001 - 13.000 264 23,057,105.34 4.76
13.001 - 14.000 148 10,476,248.11 2.16
14.001 - 15.000 88 6,560,344.65 1.36
----- -------------- ------
Total 4,052 $483,958,213.16 100.00%
===== ============== ======
Original Loan-to-Value Ratios of the Mortgage Loans
Aggregate % of Aggregate
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Original Loan-to-Value Ratio (%) Loans The Cut-off Date the Cut-off Date
- -------------------------------- ----------- -------------------- --------------------
5.01 - 10.00 1 $ 59,894.56 0.01%
10.01 - 15.00 2 95,756.40 0.02
15.01 - 20.00 3 167,683.55 0.03
20.01 - 25.00 8 373,510.79 0.08
25.01 - 30.00 14 812,857.61 0.17
30.01 - 35.00 26 1,965,226.94 0.41
35.01 - 40.00 28 2,401,376.66 0.50
40.01 - 45.00 48 3,391,856.78 0.70
45.01 - 50.00 82 7,010,234.18 1.45
50.01 - 55.00 111 10,856,851.04 2.24
55.01 - 60.00 337 31,685,745.40 6.55
60.01 - 65.00 249 29,210,855.31 6.04
65.01 - 70.00 556 61,997,879.67 12.81
70.01 - 75.00 746 88,338,555.70 18.25
75.01 - 80.00 818 105,226,635.58 21.74
80.01 - 85.00 666 89,733,114.28 18.54
85.01 - 90.00 355 50,422,127.79 10.42
90.01 - 95.00 2 208,050.92 0.04
----- -------------- ------
Total 4,052 $483,958,213.16 100.00%
===== ============== ======
Geographic Distribution of the Mortgaged Properties of the Mortgage Loans
Aggregate % of Aggregate
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Location Loans The Cut-off Date the Cut-off Date
- ----------------- ----------- -------------------- --------------------
Alabama 78 6,192,682.83 1.28%
Alaska 3 451,289.24 0.09
Arizona 63 6,187,326.70 1.28
Arkansas 5 303,108.89 0.06
California 678 122,047,346.58 25.22
Colorado 125 15,947,741.52 3.30
Connecticut 71 7,980,708.34 1.65
Delaware 4 323,656.42 0.07
District of Columbia 4 868,157.36 0.18
Florida 145 13,060,885.89 2.70
Georgia 59 6,184,153.88 1.28
Hawaii 23 4,117,240.60 0.85
Idaho 4 248,618.44 0.05
Illinois 243 26,948,550.51 5.57
Indiana 66 5,555,110.80 1.15
Iowa 39 2,691,078.14 0.56
Kansas 32 3,188,793.07 0.66
Kentucky 11 910,060.08 0.19
Louisiana 28 2,232,977.89 0.46
Maine 25 2,164,355.67 0.45
Maryland 46 6,071,452.83 1.25
Massachusetts 225 32,980,855.17 6.81
Michigan 343 32,297,699.26 6.67
Minnesota 286 32,435,226.65 6.70
Mississippi 5 362,893.90 0.07
Missouri 95 8,000,180.48 1.65
Montana 1 96,734.06 0.02
Nebraska 30 2,320,756.58 0.48
Nevada 17 1,916,804.14 0.40
New Hampshire 19 1,886,037.72 0.39
New Jersey 200 29,077,048.09 6.01
New Mexico 12 832,171.35 0.17
New York 194 27,932,281.94 5.77
North Carolina 1 87,516.59 0.02
North Dakota 1 57,415.02 0.01
Ohio 109 9,867,882.62 2.04
Oklahoma 27 1,648,680.01 0.34
Oregon 18 2,267,585.22 0.47
Pennsylvania 94 7,593,518.32 1.57
Rhode Island 29 3,336,808.96 0.69
South Carolina 12 732,759.59 0.15
South Dakota 3 203,562.63 0.04
Tennessee 10 956,497.93 0.20
Texas 408 33,612,601.38 6.95
Utah 43 4,815,026.66 0.99
Vermont 6 449,310.80 0.09
Washington 103 13,205,478.76 2.73
Wisconsin 1 375,361.18 0.08
Wyoming 8 925,222.47 0.19
----- -------------- ------
Total 4,052 $483,958,213.16 100.00%
===== ============== ======
Mortgaged Property Types of the Mortgage Loans
Aggregate % of Aggregate
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Property Type Loans The Cut-off Date the Cut-off Date
- ----------------- ----------- -------------------- --------------------
Single Family 3,463 $408,449,857.05 84.40%
Two-to-Four Family 179 24,472,600.77 5.06
Planned Unit Development 199 25,595,750.33 5.29
Condominium 152 20,557,639.76 4.25
Manu. Housing / Mobile 35 2,499,479.65 0.52
Single Family Attached 15 1,386,871.47 0.29
Attached PUD 9 996,014.13 0.21
----- ------------- -----
Total 4,052 $483,958,213.16 100.00%
===== ============== ======
Occupancy Status of the Mortgage Loans
Aggregate % of Aggregate
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Occupancy Status Loans The Cut-off Date the Cut-off Date
- ----------------- ----------- -------------------- --------------------
Primary 3,824 $462,960,862.47 95.66%
Non-Owner Occupied 196 17,519,283.53 3.62
Second Home 32 3,478,067.16 0.72
----- -------------- ------
Total 4,052 $483,958,213.16 100.00%
===== ============== ======
The occupancy status of a Mortgaged Property is as represented by the mortgagor in its loan application.
Loan Purpose of the Mortgage Loans
Aggregate % of Aggregate
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Loan Purpose Loans The Cut-off Date the Cut-off Date
- ----------------- ----------- -------------------- --------------------
Equity-out Refinance 2,343 $258,004,067.99 53.31%
Rate-term Refinance 1,665 218,639,972.40 45.18
Purchase 44 7,314,172.77 1.51
----- -------------- ------
Total 4,052 $483,958,213.16 100.00%
===== ============== ======
Loan Programs of the Mortgage Loans
Aggregate % of Aggregate
Number Principal Balance Principal Balance
Of Mortgage Outstanding as of Outstanding as of
Loan Program Loans The Cut-off Date the Cut-off Date
- ----------------- ----------- -------------------- --------------------
Full Documentation Program 3,150 $362,898,192.68 74.99
Fast Trac Program 413 61,482,678.73 12.70
Stated Documentation Program 489 59,577,341.75 12.31
----- ------------- -----
Total 4,052 $483,958,213.16 100.00%
===== ============== ======
Risk Categories of the Mortgage Loans
Aggregate % of Aggregate
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Risk Categories Loans the Cut-off Date the Cut-off Date
- ----------------- ----------- -------------------- --------------------
AAA 856 $119,294,864.95 24.65%
AA 1,179 147,928,256.57 30.57
A 534 62,356,696.84 12.88
B 741 81,359,666.63 16.81
C 508 52,202,322.65 10.79
D 234 20,816,405.52 4.30
----- -------------- ------
Total 4,052 $483,958,213.16 100.00%
===== ============== ======
Next Adjustment Dates for the Mortgage Loans
Aggregate % of Aggregate
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Month of Next Adjustment Date Loans the Cut-off Date the Cut-off Date
- ----------------------------- ----------- -------------------- --------------------
September 2002 75 $ 8,049,460.89 1.66%
October 2002 77 7,047,239.57 1.46
November 2002 535 50,337,792.88 10.40
December 2002 1,399 171,164,172.64 35.37
January 2003 1,336 172,138,739.29 35.57
February 2003 549 66,279,476.48 13.70
March 2003 81 8,941,331.41 1.85
----- -------------- ------
Total 4,052 $483,958,213.16 100.00%
===== ============== ======
Initial Periodic Rate Caps of the Mortgage Loans
Aggregate % of Aggregate
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Initial Periodic Rate Cap (%) Loans The Cut-off Date the Cut-off Date
- ----------------------------- ----------- -------------------- --------------------
2.000 4,052 $483,958,213.16 100.00%
----- -------------- ------
Total 4,052 $483,958,213.16 100.00%
===== ============== ======
Subsequent Periodic Rate Caps of the Mortgage Loans
Aggregate % of Aggregate
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Subsequent Periodic Rate Cap (%) Loans the Cut-off Date the Cut-off Date
- -------------------------------- ----------- -------------------- --------------------
1.000 4,052 $483,958,213.16 100.00%
----- -------------- ------
Total 4,052 $483,958,213.16 100.00%
===== ============== ======
The Index
As of any Adjustment Date, the "Index" applicable to the determination of
the Mortgage Rate on each Mortgage Loan will generally be the average of the
interbank offered rates for six-month United States dollar deposits in the
London market as published in The Wall Street Journal and as most recently
available as specified in the related mortgage note as of the first business
day 45 days prior to that Adjustment Date. In the event that the Index becomes
unavailable or otherwise unpublished, the Servicer will select a comparable
alternative index over which it has no direct control and which is readily
verifiable.
Additional Information Concerning the Mortgage Loans
The description in this prospectus supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted as of
the close of business on the Cut-off Date, as adjusted for the scheduled
principal payments due on or before such date. Prior to the issuance of the
certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise if the Depositor deems the removal
necessary or desirable, and may be prepaid at any time. A limited number of
other mortgage loans may be included in the Mortgage Pool prior to the
issuance of the certificates unless including these mortgage loans would
materially alter the characteristics of the Mortgage Pool as described in this
prospectus supplement. The Depositor believes that the information set forth
in this prospectus supplement will be representative of the characteristics of
the Mortgage Pool as it will be constituted at the time the certificates are
issued, although the range of Mortgage Rates and maturities and other
characteristics of the Mortgage Loans may vary.
UNDERWRITING STANDARDS
The Originator provided the information in the following paragraphs. None
of the Depositor, the Seller, the Trustee, the Underwriters, or any of their
respective affiliates have made or will make any representations as to the
accuracy or completeness of such information. The following is a description
of the underwriting standards used by the Originator in connection with its
acquisition of the Mortgage Loans.
All of the Mortgage Loans were originated or acquired by the Originator,
generally in accordance with the underwriting criteria described below.
The Mortgage Loans were originated generally in accordance with
guidelines (the "Underwriting Guidelines") established by the Originator under
the "Full Documentation", "Fast Trac Documentation" or "Stated Income"
residential loan programs (the "Underwriting Programs"). The Underwriting
Guidelines are primarily intended to evaluate the value and adequacy of the
mortgaged property as collateral and are also intended to consider the
applicant's credit standing and repayment ability. On a case-by-case basis,
the Originator may determine that, based upon compensating factors, a
prospective applicant not strictly qualifying under one of the Risk Categories
described below warrants an exception to the requirements set forth in the
Underwriting Guidelines. Compensating factors may include, but are not limited
to, loan-to-value ratio, debt-to-income ratio, good credit history, stable
employment and time in residence at the applicant's current address. It is
expected that a substantial number of the Mortgage Loans to be included in the
Mortgage Pool will represent such underwriting exceptions.
All of the Mortgage Loans originated or acquired by the Originator are
based on loan application packages submitted by a prospective applicant. Each
applicant completes an application which includes information with respect to
the applicant's liabilities, income, credit history and employment history, as
well as certain other personal information. The Originator obtains a credit
report on each applicant from a credit reporting company. The report typically
contains the reported information relating to such matters as credit history
with local and national merchants and lenders, installment debt payments and
reported records of default, bankruptcy, repossession and judgments. The
applicant must generally provide to the Originator a letter explaining all
late payments on mortgage debt and, generally, consumer (i.e. non-mortgage)
debt.
Under the Underwriting Programs, during the underwriting process, the
Originator reviews and verifies the loan applicant's sources of income (except
under the Stated Income and Fast Trac Documentation residential loan
programs), calculates the amount of income from all such sources indicated on
the loan application, reviews the credit history of the applicant, calculates
the debt-to-income ratio to determine the applicant's ability to repay the
loan, and reviews the mortgaged property for compliance with the Underwriting
Guidelines. The Underwriting Guidelines are applied in accordance with a
procedure which complies with applicable federal and state laws and
regulations and requires (i) an appraisal of the mortgaged property which
conforms to Uniform Standards of Professional Appraisal Practice standards and
(ii) a review of such appraisal, which review may be conducted by a
representative of the Originator or a fee appraiser and, depending upon the
original principal balance and loan-to-value ratio of the mortgaged property,
may include a desk review of the original appraisal or a drive-by review
appraisal of the mortgaged property. The Underwriting Guidelines permit loans
with loan-to-value ratios at origination of up to 90%. The maximum allowable
loan-to-value ratio varies based upon the income documentation, property type,
creditworthiness, debt service-to-income ratio of the applicant and the
overall risks associated with the loan decision. Under the Underwriting
Programs, the maximum loan-to-value ratio, including any second deeds of trust
subordinate to the Originator's first deed of trust, is 100%.
Underwriting Programs (Income Documentation Types)
Full Documentation. The Full Documentation residential loan program is
generally based upon current year to date income documentation as well as the
previous year's income documentation (i.e. tax returns and/or W-2 forms). The
documentation required is specific to the applicant's sources of income. The
applicant's employment and/or business licenses are generally verified.
Fast Trac Documentation. The Fast Trac Documentation residential loan
program is generally based on bank statements from the past twelve months
supported by additional documentation provided by the applicant or current
year to date documentation. The applicant's employment and/or business
licenses are generally verified.
Stated Income. The Stated Income residential loan program requires the
applicant's employment and income sources to be stated on the application. The
applicant's income as stated must be reasonable for the related occupation in
the loan underwriter's discretion. However, the applicant's income as stated
on the application is not independently verified. Verbal verification of
employment is generally obtained for salaried applicants.
Property Requirements
Properties that are to secure mortgage loans are appraised by qualified
independent appraisers who are approved by the Originator's in-house appraisal
department. In most cases, properties below average standards in condition and
repair (including properties requiring major deferred maintenance) are not
acceptable as security for mortgage loans in the Underwriting Programs. Each
appraisal includes a market data analysis based on recent sales of comparable
homes in the area and, where deemed appropriate, replacement cost analysis
based on the current cost of constructing a similar home. Every independent
appraisal is reviewed by a representative of the Originator or a fee appraiser
before the loan is funded. The Originator requires that all mortgage loans
have title insurance. The Originator also requires that fire and extended
coverage casualty insurance be maintained on the secured property in an amount
equal to the lesser of the principal balance of the mortgage loan or the
replacement cost of the property.
Underwriting Guidelines
The Underwriting Guidelines are less stringent than the standards
generally acceptable to Fannie Mae and Freddie Mac with regard to the property
offered as collateral and the applicant's credit standing and repayment
ability. Applicants who qualify under the Underwriting Programs generally have
payment histories and debt ratios which would not satisfy Fannie Mae and
Freddie Mac underwriting guidelines and may have a record of major derogatory
credit items such as outstanding judgments or prior bankruptcies. The
Underwriting Guidelines establish the maximum permitted loan-to-value ratio
for each loan type based upon these and other risk factors.
Risk Categories
Under the Underwriting Programs, various risk categories are used to
grade the likelihood that the mortgagor will satisfy the repayment conditions
of the mortgage loan. These risk categories establish the maximum permitted
loan-to-value ratio and loan amount, given the occupancy status of the
mortgaged property and the mortgagor's credit history and debt ratio. In
general, higher credit risk mortgage loans are graded in categories which
permit higher debt ratios and more (or more recent) major derogatory credit
items such as outstanding judgments or prior bankruptcies; however, the
Underwriting Programs establish lower maximum loan-to-value ratios and lower
maximum loan amounts for loans graded in such categories.
The Underwriting Guidelines have the following categories and criteria
for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan:
Credit Grade: "AAA". Under the "AAA" credit grade, the applicant
generally must have a minimum FICO score of 620 and no late payments within
the last 12 months are permitted on any existing mortgage loan. No bankruptcy,
discharge, or notice of default filings may have occurred during the preceding
thirty-six months. Generally, the debt service-to-income ratios must be equal
to or less than 50% (unless the applicant has a gross disposable income of
$3,000 or more, in which case the maximum debt service-to-income ratio is
55%). A maximum loan-to-value ratio of 90% is permitted on any purchase money
and/or refinance transaction.
Credit Grade: "AA". Under the "AA" credit grade, the applicant generally
must have (1) a minimum FICO score of 620 and a maximum of three 30-day late
payments within the last 12 months on an existing mortgage loan or (2) a
minimum FICO score of 550 and no late payments within the last 12 months on an
existing mortgage loan. No bankruptcy, discharge, or notice of default filings
may have occurred during the preceding twenty-four months. Generally, the debt
service-to-income ratio must be equal to or less than 50% (unless the
applicant has a gross disposable income of $3,000 or more, in which case the
maximum debt service-to-income ratio is 55%). A maximum loan-to-value ratio of
85% is permitted for purchase money and/or refinance transactions.
Credit Grade: "A". Under the "A" credit grade, the applicant generally
must have (1) a minimum FICO score of 550 and a maximum of three 30-day late
payments within the last 12 months on an existing mortgage loan or (2) a
minimum FICO score of 620 with a maximum of one 60-day late payment within the
last 12 months on an existing mortgage loan. No bankruptcy, discharge, or
notice of default filings may have occurred during the preceding twenty-four
months. Generally, the debt service-to-income ratio must be equal to or less
than 50%. A maximum loan-to-value ratio of 80% is permitted for purchase money
and/or refinance transactions.
Credit Grade: "B". Under the "B" credit grade, the applicant generally
must have (1) a minimum FICO score of 550 and a maximum of one 60-day late
payment within the last 12 months on an existing mortgage loan or (2) a
minimum FICO score of 500 and a maximum of three 30-day late payments within
the last 12 months on an existing mortgage loan. Additionally, one 90-day late
payment is permitted within the last 12 months on an existing mortgage loan
for a "B" credit grade provided the applicant has a minimum FICO score of 670.
No bankruptcy, discharge, or notice of default filings may have occurred
during the last 12 months. Generally, the debt service-to-income ratio must be
equal to or less than 55%. A maximum loan-to-value ratio of 75% is permitted
for purchase money and/or refinance transactions.
Credit Grade: "C". Under the "C" credit grade, the maximum number of late
payments permitted within the last 12 months on an existing mortgage varies in
relation to the applicant's FICO score as follows: (1) one 120-day late
payment acceptable with a FICO score of 580 or higher; (2) one 90-day late
payment acceptable with a FICO score of 520 or higher; (3) one 60-day late
payment acceptable with a FICO score of 520 or higher; or (4) up to three
30-day late payments without a FICO score. The applicant must not currently be
in bankruptcy or foreclosure. Generally, the debt service-to-income ratio must
be equal to or less than 55%. A maximum loan-to-value ratio of 70% is
permitted for purchase money and/or refinance transactions.
Credit Grade: "D". Under the "D" credit grade, the applicant's derogatory
consumer and mortgage credit history may be waived if a reasonable explanation
for the problem is provided. The problem that caused the derogatory items to
occur must no longer exist or must be resolved through the loan transaction.
Generally, the debt-to-service income ratio must be equal to or less than 60%.
A maximum loan-to-value ratio of 60% is permitted for purchase money and/or
refinance transactions.
YIELD ON THE CERTIFICATES
Certain Shortfalls in Collections of Interest
When a principal prepayment in full is made on a mortgage loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of the prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan,
the mortgagor is not charged interest on the amount of the prepayment for the
month in which the prepayment is made. In addition, the application of the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief
Act"), to any Mortgage Loan will adversely affect, for an indeterminate period
of time, the ability of the Servicer to collect full amounts of interest on
such Mortgage Loans. The Servicer is obligated to pay from its own funds only
those interest shortfalls attributable to full prepayments by the mortgagors
on the Mortgage Loans, but only to the extent of its Servicing Fee for the
related Due Period. Accordingly, the effect of (i) any principal prepayments
on the Mortgage Loans, to the extent that any resulting shortfall (a
"Prepayment Interest Shortfall") exceeds any payments by the Servicer from its
own funds ("Compensating Interest") or (ii) any shortfalls resulting from the
application of the Relief Act, will be to reduce the aggregate amount of
interest collected that is available for distribution to certificateholders.
Any such shortfalls will be allocated among the certificates as provided under
"Description of the Certificates--Interest Distributions on the Offered
Certificates" and "--Overcollateralization Provisions" in this prospectus
supplement. See "Certain Legal Aspects of the Mortgage Loans--Soldiers' and
Sailors' Civil Relief Act of 1940" in the prospectus.
General Prepayment Considerations
The rate of principal payments on the Offered Certificates, the aggregate
amount of distributions on the Offered Certificates and the yield to maturity
of the Offered Certificates will be related to the rate and timing of payments
of principal on the Mortgage Loans. The rate of principal payments on the
Mortgage Loans will in turn be affected by the amortization schedules of the
Mortgage Loans as they change from time to time to accommodate changes in the
Mortgage Rates and by the rate of principal prepayments thereon (including for
this purpose, payments resulting from refinancings, liquidations of the
Mortgage Loans due to defaults, casualties, condemnations and repurchases,
whether optional or required, by the Depositor, the Originator or the
Servicer). The Mortgage Loans may be prepaid by the mortgagors at any time;
however, as described under "The Mortgage Pool" in this prospectus supplement,
with respect to approximately 65.45% of the Mortgage Loans, by aggregate
principal balance of the Mortgage Loans as of the Cut-off Date, a prepayment
may subject the related mortgagor to a Prepayment Charge.
Prepayments, liquidations and repurchases of the Mortgage Loans will
result in distributions in respect of principal to the holders of the class or
classes of Offered Certificates then entitled to receive distributions that
otherwise would be distributed over the remaining terms of the Mortgage Loans.
Since the rates of payment of principal on the Mortgage 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 any class of Offered Certificates may vary from the anticipated
yield will depend upon the degree to which the Offered Certificates are
purchased at a discount or premium and the degree to which the timing of
payments thereon is sensitive to prepayments on the Mortgage Loans. Further,
an investor should consider, in the case of any Offered Certificate purchased
at a discount, the risk that a slower than anticipated rate of principal
payments on the Mortgage Loans could result in an actual yield to the investor
that is lower than the anticipated yield. In the case of any such certificate
purchased at a premium, the risk that a faster than anticipated rate of
principal payments could result in an actual yield to the investor that is
lower than the anticipated yield. In general, the earlier a prepayment of
principal is made on the Mortgage Loans, the greater the effect on the yield
to maturity of the Offered Certificates. As a result, the effect on an
investor's yield of principal payments occurring at a rate higher (or lower)
than the rate anticipated by the investor during the period immediately
following the issuance of the Class A-1 Certificates, the Class A-IO
Certificates and the Mezzanine Certificates would not be fully offset by a
subsequent like reduction or increase in the rate of principal payments.
It is highly unlikely that the Mortgage Loans will prepay at any constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate. Moreover, the timing of prepayments on the Mortgage Loans may
significantly affect the yield to maturity on the Offered Certificates, even
if the average rate of principal payments experienced over time is consistent
with an investor's expectation.
The rate of payments (including prepayments), on pools of mortgage loans
is influenced by a variety of economic, geographic, social and other factors.
If prevailing mortgage rates fall significantly below the Mortgage Rates on
the Mortgage Loans, the rate of prepayment and refinancing would be expected
to increase. Conversely, if prevailing mortgage rates rise significantly above
the Mortgage Rates on the Mortgage Loans, the rate of prepayment on the
Mortgage Loans would be expected to decrease. Other factors affecting
prepayment of mortgage loans include changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties
and servicing decisions. The prepayment experience of the Delayed First
Adjustment Mortgage Loans may differ from that of the other Mortgage Loans.
The Delayed First Adjustment Mortgage Loans may be subject to greater rates of
prepayments as they approach their initial Adjustment Dates even if market
interest rates are only slightly higher or lower than the Mortgage Rates on
the Delayed First Adjustment Mortgage Loans as borrowers seek to avoid changes
in their monthly payments. In addition, the existence of the applicable
Periodic Rate Cap, Maximum Mortgage Rate and Minimum Mortgage Rate may affect
the likelihood of prepayments resulting from refinancings. There can be no
certainty as to the rate of prepayments on the Mortgage Loans during any
period or over the life of the certificates. See "Yield Considerations" in the
prospectus.
Because principal distributions are paid to certain classes of Offered
Certificates before other classes, holders of classes of Offered Certificates
having a later priority of payment bear a greater risk of losses than holders
of classes having earlier priorities for distribution of principal. This is
because the certificates having later priority will represent an increasing
percentage interest in the trust fund during the period prior to the
commencement of distributions of principal on these certificates. As described
under "Description of the Certificates--Principal Distributions on the Offered
Certificates" in this prospectus supplement, prior to the Stepdown Date, all
principal payments on the Mortgage Loans will be allocated to the Class A-1
Certificates. Thereafter, as further described in this prospectus supplement,
during certain periods, subject to certain delinquency triggers described in
this prospectus supplement, all principal payments on the Mortgage Loans will
be allocated among all classes of Offered Certificates in the priorities
described under "Description of the Certificates--Principal Distributions on
the Offered Certificates" in this prospectus supplement.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years. In addition, default rates may be higher for
mortgage loans used to refinance an existing mortgage loan. In the event of a
mortgagor's default on a Mortgage Loan, there can be no assurance that
recourse will be available beyond the specific Mortgaged Property pledged as
security for repayment. See "The Mortgage Pool--Underwriting Standards of the
Originator and Representations Concerning the Mortgage Loans" in this
prospectus supplement.
Special Yield Considerations
The Mortgage Rates on the Mortgage Loans adjust semi-annually based upon
the Index, whereas the Pass-Through Rate on the Offered Certificates (other
than the Class A-IO Certificates) adjusts monthly based upon One-Month LIBOR
determined as described under "Description of the Certificates--Calculation of
One-Month LIBOR" in this prospectus supplement, subject to the Net WAC
Pass-Through Rate, with the result that increases in the Pass-Through Rates on
such certificates may be limited for extended periods in a rising interest
rate environment. Investors should note that all of the Mortgage Loans are
Delayed First Adjustment Mortgage Loans. The interest due on the Mortgage
Loans during any Due Period, net of the expenses of the trust, may not equal
the amount of interest that would accrue at One-Month LIBOR plus the
applicable spread on the Offered Certificates (other than the Class A-IO
Certificates) during the related Interest Accrual Period; however, any
shortfall of this kind will be payable to the holders of such certificates as
limited by the Maximum Pass-Through Rate, but only to the extent and in the
priority described under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement.
In addition, the Index and One-Month LIBOR may respond differently to economic
and market factors. Thus, it is possible, for example, that if both One-Month
LIBOR and the Index rise during the same period, One-Month LIBOR may rise more
rapidly than the Index, potentially resulting in the application of the Net
WAC Pass-Through Rate on the Offered Certificates (other than the Class A-IO
Certificates), which would adversely affect the yield to maturity on such
certificates.
As described under "Description of the Certificates--Allocation of
Losses; Subordination," amounts otherwise distributable to holders of the
Mezzanine Certificates may be made available to protect the holders of the
Class A-1 Certificates and the Class A-IO Certificates against interruptions
in distributions due to certain mortgagor delinquencies, to the extent not
covered by P&I Advances. Such delinquencies may affect the yield to investors
in the Mezzanine Certificates and, even if subsequently cured, will affect the
timing of the receipt of distributions by the holders of the Mezzanine
Certificates. In addition, the rate of delinquencies or losses will affect the
rate of principal payments on the Mezzanine Certificates. See "Description of
the Certificates--Principal Distributions on the Offered Certificates" in this
prospectus supplement.
Weighted Average Lives
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of that
security will be repaid to the investor. The weighted average life of each
class of Offered Certificates will be influenced by the rate at which
principal on the Mortgage Loans is paid, which may be in the form of scheduled
payments or prepayments (including repurchases and prepayments of principal by
the borrower as well as amounts received by virtue of condemnation, insurance
or foreclosure with respect to the Mortgage Loans), and the timing of these
payments.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement
(the "Prepayment Assumption") assumes a prepayment rate for the mortgage loans
of 28% CPR. To assume 28% CPR or any other CPR percentage is to assume that
the stated percentage of the outstanding principal balance of the pool is
prepaid over the course of a year. No representation is made that the Mortgage
Loans will prepay at 28% CPR or any other rate.
The tables entitled "Percent of Initial Certificate Principal Balance
Outstanding at the Specified Percentages of CPR" indicate the percentage of
the initial Certificate Principal Balance of the Class A-1 Certificates and
the Mezzanine Certificates that would be outstanding after each of the dates
shown at various percentages of CPR and the corresponding weighted average
lives of these certificates. The tables are based on the following assumptions
(the "Modeling Assumptions"): (i) the Mortgage Pool consists of 16 mortgage
loans with the characteristics set forth below; (ii) distributions on the
certificates are received, in cash, on the 25th day of each month, commencing
in May 2001; (iii) the Mortgage Loans prepay at the percentages of CPR
indicated; (iv) no defaults or delinquencies occur in the payment by
mortgagors of principal and interest on the Mortgage Loans and no shortfalls
due to the application of the Relief Act are incurred; (v) none of the
Depositor, the Servicer or any other person purchases from the trust fund any
Mortgage Loan under any obligation or option under the Pooling and Servicing
Agreement, except as indicated in footnote two in the tables; (vi) scheduled
monthly payments on the Mortgage Loans are received on the first day of each
month commencing in May 2001, and are computed prior to giving effect to any
prepayments received in the prior month; (vii) prepayments representing
payment in full of individual Mortgage Loans are received on the last day of
each month commencing in April 2001, and include 30 days' interest thereon;
(viii) the scheduled monthly payment for each Mortgage Loan is calculated
based on its principal balance, Mortgage Rate, original term to stated
maturity and remaining term to stated maturity so that the Mortgage Loan will
amortize in amounts sufficient to repay the remaining principal balance of the
Mortgage Loan by its remaining term to stated maturity; (ix) the certificates
are purchased on May 9, 2001; (x) the Servicing Fee Rate is equal to 0.50% per
annum and the rate at which fees and expenses are payable to the Trust
Administrator and the Trustee is equal to 0.01% per annum; (xi) the Index
remains constant at 4.2500% per annum and the Mortgage Rate on each Mortgage
Loan is adjusted on the next Adjustment Date and on subsequent Adjustment
Dates, if necessary, to equal the Index plus the applicable Gross Margin,
subject to the applicable Periodic Rate Cap; (xii) One-Month LIBOR remains
constant at 4.3825% per annum; (xiii) the monthly payment on each Mortgage
Loan is adjusted on the Due Date immediately following the next Adjustment
Date and on subsequent Adjustment Dates, if necessary, to equal a fully
amortizing monthly payment.
Assumed Mortgage Loan Characteristics
Principal Gross Remaining Weighted Initial Subsequent
Balance Mortgage Term to Average Months to Gross Maximum Minimum Periodic Periodic Adjustment
as of the Rate Maturity Age Next Margin Mortgage Mortgage Rate Rate Frequency
No. Cut-off Date (%) (Months) (Months) Adjustment (%) Rate(%) Rate(%) Cap(%) Cap(%) (Months)
1 $1,604,618.14 11.5327 357 0 24 6.8514 17.5327 11.5327 2 1 6
2 $29,950,485.95 10.5930 339 1 23 6.7202 16.5930 10.5930 2 1 6
3 $60,943,832.55 10.5281 347 2 22 6.6735 16.5281 10.5281 2 1 6
4 $52,702,517.71 10.4617 349 3 21 6.6384 16.4617 10.4617 2 1 6
5 $11,350,684.08 10.5989 346 4 20 6.6790 16.5989 10.5989 2 1 6
6 $3,676,052.18 11.5883 326 5 19 6.8892 17.5883 11.5883 2 1 6
7 $3,852,004.05 11.2133 319 6 18 6.8301 17.2133 11.2133 2 1 6
8 $7,336,713.27 10.5283 353 0 24 6.6326 16.5283 10.5283 2 1 6
9 $32,642,938.55 10.4353 350 1 23 6.6855 16.4353 10.4353 2 1 6
10 $108,067,957.95 10.1048 351 2 22 6.5908 16.1048 10.1048 2 1 6
11 $114,597,400.47 10.2935 352 3 21 6.6499 16.2935 10.2935 2 1 6
12 $38,277,192.16 10.4535 350 4 20 6.6682 16.4535 10.4535 2 1 6
13 $3,371,187.39 11.3587 355 5 19 6.8059 17.3587 11.3587 2 1 6
14 $3,820,175.14 10.6056 345 6 18 6.6438 16.6056 10.6056 2 1 6
15 $3,138,956.94 8.0722 344 2 22 6.4075 14.0722 8.0722 2 1 6
16 $8,625,496.63 8.0829 354 2 22 6.5183 14.0829 8.0829 2 1 6
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the tables. Any
discrepancy may have an effect upon the percentages of the initial Certificate
Principal Balance outstanding, and the weighted average lives, of the Offered
Certificates set forth in the tables. In addition, since the actual Mortgage
Loans will have characteristics that differ from those assumed in preparing
the tables and since it is not likely the level of the Index or One-Month
LIBOR will remain constant as assumed, the Offered Certificates may mature
earlier or later than indicated by the tables. In addition, as described under
"Description of the Certificates--Principal Distributions on the Offered
Certificates" in this prospectus supplement, the occurrence of the Stepdown
Date or a Trigger Event will have the effect of accelerating or decelerating
the amortization of the Offered Certificates, affecting the weighted average
lives of such certificates. Based on the foregoing assumptions, the tables
indicate the weighted average lives of the Class A-1 Certificates and each
class of Mezzanine Certificates and set forth the percentages of the initial
Certificate Principal Balance of such certificates that would be outstanding
after each of the Distribution Dates shown, at various percentages of CPR.
Neither the prepayment model used in this prospectus supplement nor any other
prepayment model or assumption purports to be an historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Mortgage Loans. Variations in the
prepayment experience and the balance of the Mortgage Loans that prepay may
increase or decrease the percentages of initial Certificate Principal
Balances, and weighted average lives, shown in the following tables. These
variations may occur even if the average prepayment experience of all the
Mortgage Loans equals any of the specified percentages of CPR.
Percent of Initial Certificate Principal Balance Outstanding
at the Specified Percentages of CPR
Class A-1
Distribution Date 0% 15% 28% 35% 45%
Initial Percentage 100 100 100 100 100
April 25, 2002...................... 99 83 69 62 51
April 25, 2003...................... 99 69 47 37 24
April 25, 2004...................... 98 57 31 21 9
April 25, 2005...................... 97 47 24 16 8
April 25, 2006...................... 96 39 17 10 4
April 25, 2007...................... 95 33 12 7 2
April 25, 2008...................... 94 28 9 4 1
April 25, 2009...................... 93 23 6 3 *
April 25, 2010...................... 92 20 4 2 0
April 25, 2011...................... 90 16 3 1 0
April 25, 2012...................... 89 14 2 * 0
April 25, 2013...................... 87 11 1 * 0
April 25, 2014...................... 85 10 1 0 0
April 25, 2015...................... 83 8 * 0 0
April 25, 2016...................... 80 7 * 0 0
April 25, 2017...................... 77 5 0 0 0
April 25, 2018...................... 74 4 0 0 0
April 25, 2019...................... 71 4 0 0 0
April 25, 2020...................... 67 3 0 0 0
April 25, 2021...................... 62 2 0 0 0
April 25, 2022...................... 58 2 0 0 0
April 25, 2023...................... 52 1 0 0 0
April 25, 2024...................... 46 1 0 0 0
April 25, 2025...................... 40 * 0 0 0
April 25, 2026...................... 34 * 0 0 0
April 25, 2027...................... 27 0 0 0 0
April 25, 2028...................... 19 0 0 0 0
April 25, 2029...................... 11 0 0 0 0
April 25, 2030...................... 2 0 0 0 0
April 25, 2031...................... 0 0 0 0 0
Weighted Average Life (Years) to
Maturity(1)......................... 20.69 5.35 2.76 2.09 1.46
Weighted Average Life (Years) to
Optional Termination(1)(2).......... 20.65 4.95 2.52 1.91 1.32
* Indicates a percentage greater than 0.0% but less than 0.5%
(1) The weighted average life of a certificate is determined by
(a) multiplying the amount of each distribution of principal by the
number of years from the date of issuance of the certificate to the
related distribution date, (b) adding the results and (c) dividing
the sum by the initial Certificate Principal Balance of the
certificate.
(2) Assumes the Servicer exercises its option to purchase the
mortgage loans on the earliest possible distribution date on which it
is permitted to exercise this option. See "Pooling and Servicing
Agreement--Termination" in this prospectus supplement.
Percent of Initial Certificate Principal Balance Outstanding
at the Specified Percentages of CPR
Class M-1
Distribution Date 0% 15% 28% 35% 45%
Initial Percentage.................. 100 100 100 100 100
April 25, 2002...................... 100 100 100 100 100
April 25, 2003...................... 100 100 100 100 100
April 25, 2004...................... 100 100 100 100 100
April 25, 2005...................... 100 100 52 35 18
April 25, 2006...................... 100 86 37 22 6
April 25, 2007...................... 100 72 27 14 0
April 25, 2008...................... 100 61 19 5 0
April 25, 2009...................... 100 51 13 0 0
April 25, 2010...................... 100 43 6 0 0
April 25, 2011...................... 100 36 1 0 0
April 25, 2012...................... 100 30 0 0 0
April 25, 2013...................... 100 25 0 0 0
April 25, 2014...................... 100 21 0 0 0
April 25, 2015...................... 100 17 0 0 0
April 25, 2016...................... 100 14 0 0 0
April 25, 2017...................... 100 10 0 0 0
April 25, 2018...................... 100 6 0 0 0
April 25, 2019...................... 100 3 0 0 0
April 25, 2020...................... 100 * 0 0 0
April 25, 2021...................... 100 0 0 0 0
April 25, 2022...................... 100 0 0 0 0
April 25, 2023...................... 100 0 0 0 0
April 25, 2024...................... 100 0 0 0 0
April 25, 2025...................... 88 0 0 0 0
April 25, 2026...................... 75 0 0 0 0
April 25, 2027...................... 59 0 0 0 0
April 25, 2028...................... 42 0 0 0 0
April 25, 2029...................... 24 0 0 0 0
April 25, 2030...................... 0 0 0 0 0
April 25, 2031...................... 0 0 0 0 0
Weighted Average Life (Years) to
Maturity(1)......................... 26.40 9.24 4.95 4.16 3.77
Weighted Average Life (Years) to
Optional Termination(1)(2).......... 26.32 8.68 4.63 3.92 3.59
* Indicates a percentage greater than 0.0% but less than 0.5%
(1) The weighted average life of a certificate is determined by
(a) multiplying the amount of each distribution of principal by the
number of years from the date of issuance of the certificate to the
related distribution date, (b) adding the results and (c) dividing
the sum by the initial Certificate Principal Balance of the
certificate.
(2) Assumes the Servicer exercises its option to purchase the
mortgage loans on the earliest possible distribution date on which it
is permitted to exercise this option. See "Pooling and Servicing
Agreement--Termination" in this prospectus supplement.
Percent of Initial Certificate Principal Balance Outstanding
at the Specified Percentages of CPR
Class M-2
Distribution Date 0% 15% 28% 35% 45%
Initial Percentage.................. 100 100 100 100 100
April 25, 2002...................... 100 100 100 100 100
April 25, 2003...................... 100 100 100 100 100
April 25, 2004...................... 100 100 100 100 100
April 25, 2005...................... 100 100 44 24 4
April 25, 2006...................... 100 83 27 10 0
April 25, 2007...................... 100 68 14 * 0
April 25, 2008...................... 100 54 6 0 0
April 25, 2009...................... 100 43 0 0 0
April 25, 2010...................... 100 33 0 0 0
April 25, 2011...................... 100 25 0 0 0
April 25, 2012...................... 100 18 0 0 0
April 25, 2013...................... 100 13 0 0 0
April 25, 2014...................... 100 8 0 0 0
April 25, 2015...................... 100 3 0 0 0
April 25, 2016...................... 100 0 0 0 0
April 25, 2017...................... 100 0 0 0 0
April 25, 2018...................... 100 0 0 0 0
April 25, 2019...................... 100 0 0 0 0
April 25, 2020...................... 100 0 0 0 0
April 25, 2021...................... 100 0 0 0 0
April 25, 2022...................... 100 0 0 0 0
April 25, 2023...................... 100 0 0 0 0
April 25, 2024...................... 100 0 0 0 0
April 25, 2025...................... 87 0 0 0 0
April 25, 2026...................... 70 0 0 0 0
April 25, 2027...................... 53 0 0 0 0
April 25, 2028...................... 33 0 0 0 0
April 25, 2029...................... 11 0 0 0 0
April 25, 2030...................... 0 0 0 0 0
April 25, 2031...................... 0 0 0 0 0
Weighted Average Life (Years) to
Maturity(1)......................... 26.02 7.99 4.25 3.60 3.24
Weighted Average Life (Years) to
Optional Termination(1)(2).......... 26.01 7.93 4.22 3.57 3.22
* Indicates a percentage greater than 0.0% but less than 0.5%
(1) The weighted average life of a certificate is determined by
(a) multiplying the amount of each distribution of principal by the
number of years from the date of issuance of the certificate to the
related distribution date, (b) adding the results and (c) dividing
the sum by the initial Certificate Principal Balance of the
certificate.
(2) Assumes the Servicer exercises its option to purchase the
mortgage loans on the earliest possible distribution date on which it
is permitted to exercise this option. See "Pooling and Servicing
Agreement--Termination" in this prospectus supplement.
There is no assurance that prepayments of the Mortgage Loans included
will conform to any of the levels of CPR indicated in the immediately
preceding tables, or to any other level, or that the actual weighted average
lives of the Offered Certificates will conform to any of the weighted average
lives set forth in the immediately preceding tables. Furthermore, the
information contained in the tables with respect to the weighted average lives
of the Offered Certificates is not necessarily indicative of the weighted
average lives that might be calculated or projected under different or varying
prepayment assumptions.
The characteristics of the Mortgage Loans will differ from those assumed
in preparing the immediately preceding tables. In addition, it is unlikely
that any Mortgage Loan will prepay at any constant percentage until maturity,
that all of the Mortgage Loans will prepay at the same rate. The timing of
changes in the rate of prepayments may significantly affect the actual yield
to maturity to investors, even if the average rate of principal prepayments is
consistent with the expectations of investors.
Yield Sensitivity of the Class A-IO Certificates
The yield to investors on the Class A-IO Certificates will be sensitive
to the rate of principal payments (including prepayments) of the mortgage
loans. The mortgage loans generally can be prepaid at any time.
Based on the Modeling Assumptions, a purchase price of 9.93% of the
Certificate Notional Amount, plus accrued interest, and a constant level of
CPR, the yield to optional termination on the Class A-IO Certificates remains
constant if the constant level of CPR is below approximately 54% CPR. Based on
the Modeling Assumptions, a purchase price of 9.93% of the Certificate
Notional Amount, plus accrued interest, and a constant level of CPR of
approximately 58% CPR, the yield to optional termination on the Class A-IO
Certificates approximates 0%.
Yield Sensitivity of the Mezzanine Certificates
If the Certificate Principal Balances of the Class X/N Certificates and
the Class M-2 Certificates have been reduced to zero, the yield to maturity on
the Class M-1 Certificates will become extremely sensitive to losses on the
Mortgage Loans (and the timing thereof) that are covered by subordination,
because the entire amount of any Realized Losses (to the extent not covered by
Net Monthly Excess Cashflow) will be allocated to the Class M-1 Certificates.
If the Certificate Principal Balances of the Class X/N Certificates have been
reduced to zero, the yield to maturity on the Class M-2 Certificates will
become extremely sensitive to losses on the Mortgage Loans (and the timing
thereof) that are covered by subordination, because the entire amount of any
Realized Losses (to the extent not covered by Net Monthly Excess Cashflow)
will be allocated to the Class M-2 Certificates. The initial undivided
interests in the trust fund evidenced by the Class M-1 Certificates, the Class
M-2 Certificates and the Class X/N Certificates are approximately 4.50%,
approximately 3.00% and approximately 0.50%, respectively. Investors in the
Mezzanine Certificates should fully consider the risk that Realized Losses on
the Mortgage Loans could result in the failure of investors to fully recover
their investments. In addition, once Realized Losses have been allocated to
the Mezzanine Certificates, their Certificate Principal Balances will be
permanently reduced by the amounts so allocated. Therefore, the amounts of
Realized Losses allocated to the Mezzanine Certificates will no longer accrue
interest nor will these amounts be reinstated thereafter. However, Allocated
Realized Loss Amounts may be paid to the holders of the Mezzanine Certificates
from Net Monthly Excess Cashflow in the priorities set forth under
"Description of the Certificates --Overcollateralization Provisions" in this
prospectus supplement.
Unless the Certificate Principal Balance of the Class A-1 Certificates
has been reduced to zero, the Mezzanine Certificates will not be entitled to
any principal distributions until the Stepdown Date or during any period in
which a Trigger Event is in effect. As a result, the weighted average lives of
the Mezzanine Certificates will be longer than would otherwise be the case if
distributions of principal were allocated on a pro rata basis among all of the
Offered Certificates. As a result of the longer weighted average lives of the
Mezzanine Certificates, the holders of such certificates have a greater risk
of suffering a loss on their investments. Further, because a Trigger Event is
based on delinquencies and not losses, it is possible for the Mezzanine
Certificates to receive no principal distributions (unless the Certificate
Principal Balance of the Class A-1 Certificates has been reduced to zero) on
and after the Stepdown Date even if no losses have occurred on the Mortgage
Pool. For additional considerations relating to the yield on the Mezzanine
Certificates, see "Yield Considerations" in the prospectus.
DESCRIPTION OF THE CERTIFICATES
General
The Ace Securities Corp. Home Equity Loan Trust, Series 2001-AQ1, Asset
Backed Pass-Through Certificates will consist of seven classes of
certificates, designated as (i) the Class A-1 Certificates; (ii) the Class
A-IO Certificates, (iii) the Class M-1 Certificates and the Class M-2
Certificates (the "Mezzanine Certificates"); (iv) the Class N Certificates and
the Class X Certificates (collectively, the Class X/N Certificates", and
together with the Mezzanine Certificates, the "Subordinate Certificates"); and
(v) the Class R Certificates (the "Residual Certificates"). Only the Class A-1
Certificates, the Class A-IO Certificates and the Mezzanine Certificates
(collectively, the "Offered Certificates") are offered by this prospectus
supplement. The Class X/N Certificates and the Residual Certificates, which
are not being offered by this prospectus supplement, will be purchased by the
Underwriter, which has informed the Depositor that it intends to sell these
certificates to an affiliate of the Servicer.
Distributions on the Offered Certificates will be made on the 25th day of
each month, or, if that day is not a Business Day, on the next succeeding
Business Day, beginning in May 2001 to the persons in whose names such
certificates are registered at the close of business on the Record Date. The
"Record Date" for the Offered Certificates is the Business Day immediately
preceding such Distribution Date, for so long as the Offered Certificates are
held in book-entry form and the last Business Day of the month immediately
preceding the month in which the related Distribution Date occurs if the
Offered Certificates are held in physical form.
The certificates represent in the aggregate the entire beneficial
ownership interest in the trust fund consisting primarily of the Mortgage Pool
of conventional, one- to four-family, adjustable-rate, first lien mortgage
loans having original terms to maturity of not greater than 30 years. The
certificates (other than the Class A-IO Certificates) have an aggregate
principal balance as of the Cut-off Date of approximately $481,538,000,
subject to a permitted variance as described under "The Mortgage Pool" in this
prospectus supplement.
Each class of Offered Certificates (other than the Class A-IO
Certificates) will have the initial Certificate Principal Balance set forth in
the table appearing on the cover of this prospectus supplement. The
Pass-Through Rates on the Offered Certificates will be calculated for each
Distribution Date as described under "--Pass-Through Rate" below. The Class
A-1 Certificates evidence an initial undivided interest of approximately
92.00% in the trust fund, the Class M-1 Certificates and the Class M-2
Certificates evidence initial undivided interests of approximately 4.50%, and
approximately 3.00%, respectively, in the trust fund and the Class X/N
Certificates evidence an initial undivided interest of approximately 0.50% in
the trust fund.
Book-Entry Certificates
The Offered Certificates will be book-entry Certificates (for so long as
they are registered in the name of the applicable depository or its nominee,
the "Book-Entry Certificates"). Persons acquiring beneficial ownership
interests in the Book-Entry Certificates ("Certificate Owners") will hold such
certificates through The Depository Trust Company ("DTC") in the United
States, or Clearstream Banking, societe anonyme ("Clearstream"), or the
Euroclear System ("Euroclear") in Europe, if they are participants of such
systems, or indirectly through organizations which are participants in such
systems. The Book-Entry Certificates will be issued in one or more
certificates which equal the aggregate Certificate Principal Balance of such
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. Clearstream and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Clearstream's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank will act as
depositary for Clearstream and The Chase Manhattan Bank will act as depositary
for Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations of $50,000.
Except as described below, no Certificate Owner acquiring a Book-Entry
Certificate (each, a "beneficial owner") will be entitled to receive a
physical certificate representing such Certificate (a "Definitive
Certificate"). Unless and until Definitive Certificates are issued, it is
anticipated that the only "Certificateholder" of the Offered Certificates will
be Cede & Co., as nominee of DTC. Certificate Owners will not be
Certificateholders as that term is used in the Pooling and Servicing
Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through DTC and participants of DTC ("DTC Participants").
The Certificate Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on
the records of DTC (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the records
of DTC, if the beneficial owner's Financial Intermediary is not a DTC
Participant and on the records of Clearstream or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trust Administrator through
DTC and DTC Participants. While the Book-Entry Certificates are outstanding
(except under the circumstances described below), under the rules, regulations
and procedures creating and affecting DTC and its operations (the "Rules"),
DTC is required to make book-entry transfers among DTC Participants on whose
behalf it acts with respect to the Book-Entry Certificates and is required to
receive and transmit distributions of principal of, and interest on, the
Book-Entry Certificates. DTC Participants and indirect participants with whom
Certificate Owners have accounts with respect to Book-Entry Certificates are
similarly required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates representing their
respective interests in the Book-Entry Certificates, the Rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interest.
Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless
and until Definitive Certificates are issued, Certificate Owners who are not
DTC Participants may transfer ownership of Book-Entry Certificates only
through DTC Participants and indirect participants by instructing such DTC
Participants and indirect participants to transfer Book-Entry Certificates, by
book-entry transfer, through DTC for the account of the purchasers of such
Book-Entry Certificates, which account is maintained with their respective DTC
Participants. Under the Rules and in accordance with DTC's normal procedures,
transfers of ownership of Book-Entry Certificates will be executed through DTC
and the accounts of the respective DTC Participants at DTC will be debited and
credited. Similarly, the DTC Participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Certificate Owners.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a DTC Participant
will be made during subsequent securities settlement processing and dated the
Business Day following the DTC settlement date. Such credits or any
transactions in such securities settled during such processing will be
reported to the relevant Euroclear Participants or Clearstream Participants
(each as defined below) on such Business Day. Cash received in Clearstream or
Euroclear as a result of sales of securities by or through a Clearstream
Participant or Euroclear Participant to a DTC Participant will be received
with value on the DTC settlement date but will be available in the relevant
Clearstream or Euroclear cash account only as of the Business Day following
settlement in DTC. For information with respect to tax documentation
procedures relating to the Certificates, see "Global Clearance, Settlement and
Tax Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Clearstream Participants and Euroclear Participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC has advised the Depositor that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the U.S.
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered pursuant to
the provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. DTC Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system is available to
others, such as banks, brokers, dealers and trust companies, that clear
through or maintain a custodial relationship with a DTC participant, either
directly or indirectly.
Clearstream is incorporated under the laws of Luxembourg and is a global
securities settlement clearing house. Clearstream holds securities for its
participating organizations ("Clearstream Participants") and facilitates the
clearance and settlement of securities transactions between Clearstream
Participants through electronic book-entry changes in accounts of Clearstream
Participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in Clearstream in any of 28
currencies, including United States dollars. Clearstream provides to its
Clearstream Participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities,
and securities lending and borrowing. Clearstream interfaces with domestic
markets in several countries. Clearstream is regulated as a bank by the
Luxembourg Monetary Institute. Clearstream Participants are recognized
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. Indirect access to Clearstream is also available to
others, such as banks, brokers, dealers and trust companies, that clear
through or maintain a custodial relationship with a Clearstream Participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of the
Euroclear system ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need of physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in any of 27 currencies,
including United States dollars. The Euroclear system includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries. Euroclear is operated by the Euroclear
Bank S.A./N.V. (the "Euroclear Operator"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts maintained with the Euroclear Operator.
The Euroclear Operator holds a banking license granted to it, and is
regulated, by the Belgian Banking and Finance Commission. Euroclear
Participants include banks (including central banks), securities brokers and
dealers, and other professional financial intermediaries. Indirect access to
the Euroclear system is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trust Administrator to Cede & Co. DTC will be
responsible for crediting the amount of such payments to the accounts of the
applicable DTC Participants in accordance with DTC's normal procedures. Each
DTC Participant will be responsible for disbursing such payments to the
Certificate Owners of the Book-Entry Certificates that it represents and to
each Financial Intermediary for which it acts as agent. Each such Financial
Intermediary will be responsible for disbursing funds to the Certificate
Owners of the Book-Entry Certificates that it represents.
Under a book-entry format, Certificate Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since
such payments will be forwarded by the Trust Administrator to Cede & Co.
Distributions with respect to Certificates held through Clearstream or
Euroclear will be credited to the cash accounts of Clearstream Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "Material Federal Income Tax
Considerations--REMICS--Taxation of Certain Foreign Investors" in the
Prospectus. Because DTC can only act on behalf of Financial Intermediaries,
the ability of a Certificate Owner to pledge Book-Entry Certificates to
persons or entities that do not participate in the Depository system, or
otherwise take actions in respect of such Book-Entry Certificates, may be
limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
DTC has advised the Trust Administrator that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing
Agreement only at the direction of one or more Financial Intermediaries to
whose DTC accounts the Book-Entry Certificates are credited, to the extent
that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Book-Entry Certificates. Clearstream or the Euroclear
Operator, as the case may be, will take any other action permitted to be taken
by a Certificateholder under the Pooling Agreement on behalf of a Clearstream
Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to the ability of the Relevant Depositary to
effect such actions on its behalf through DTC. DTC may take actions, at the
direction of the related DTC Participants, with respect to some Book-Entry
Certificates which conflict with actions taken with respect to other
Book-Entry Certificates.
Definitive Certificates will be issued to Certificate Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC or its nominee,
only if (a) DTC or the Depositor advises the Trust Administrator in writing
that DTC is no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the Book-Entry
Certificates and the Depositor or the Trust Administrator is unable to locate
a qualified successor, (b) the Depositor, at its sole option, with the consent
of the Trust Administrator, elects to terminate a book-entry system through
DTC or (c) after the occurrence of a Servicer Event of Default (as defined in
the Pooling and Servicing Agreement), Certificate Owners having percentage
interests aggregating not less than 51% of the Book-Entry Certificates advise
the Trust Administrator and DTC through the Financial Intermediaries and the
DTC Participants in writing that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the best interests of
Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trust Administrator will be required to notify all
Certificate Owners of the occurrence of such event and the availability
through DTC of Definitive Certificates. Upon surrender by DTC of the global
certificate or certificates representing the Book-Entry Certificates and
instructions for re-registration, the Trust Administrator will issue
Definitive Certificates, and thereafter the Trust Administrator will recognize
the holders of such Definitive Certificates as Certificateholders under the
Pooling Agreement.
In the event any Definitive Certificates are issued, surrender of such
Definitive Certificates shall occur at the office designated from time to time
for such purposes by the certificate registrar. As of the Closing Date, the
certificate registrar designates its offices located at 123 Washington Street,
New York, New York 10006 for this purpose.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among
DTC Participants of DTC, Clearstream and Euroclear, they are under no
obligation to perform or continue to perform such procedures and such
procedures may be discontinued at any time.
None of the Depositor, the Servicer, the Trust Administrator or the
Trustee will have any responsibility for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the
Book-Entry Certificates held by Cede & Co., as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
Pass-Through Rates
The pass-through rate (the "Pass-Through Rate") on the Class A-1
Certificates will be a rate per annum equal to the lesser of (i) One-Month
LIBOR plus 0.260% in the case of each Distribution Date through and including
the Distribution Date on which the aggregate principal balance of the Mortgage
Loans (and properties acquired in respect thereof) remaining in the trust fund
is reduced to less than 10% of the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date, or One-Month LIBOR plus 0.520%, in the case of
any Distribution Date thereafter and (ii) the Net WAC Pass-Through Rate for
the Distribution Date.
The Pass-Through Rate on the Class M-1 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 0.670% in the case of
each Distribution Date through and including the Distribution Date on which
the aggregate principal balance of the Mortgage Loans (and properties acquired
in respect thereof) remaining in the trust fund is reduced to less than 10% of
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date,
or One-Month LIBOR plus 1.005%, in the case of any Distribution Date
thereafter and (ii) the Net WAC Pass-Through Rate for the Distribution Date.
The Pass-Through Rate on the Class M-2 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 1.150% in the case of
each Distribution Date through and including the Distribution Date on which
the aggregate principal balance of the Mortgage Loans (and properties acquired
in respect thereof) remaining in the trust fund is reduced to less than 10% of
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date,
or One-Month LIBOR plus 1.725%, in the case of any Distribution Date
thereafter and (ii) the Net WAC Pass-Through Rate for the Distribution Date.
Glossary
"Accrual Rate": With respect to the Class A-1 Certificates and the
Mezzanine Certificates and any Distribution Date, the per annum rate equal to
the lesser of (i) the Pass-Through Rate payable if clause (i) of the related
definition of Pass-Through Rate were used to calculate interest and (ii) the
Maximum Pass-Through Rate.
"Allocated Realized Loss Amount": With respect to the Mezzanine
Certificates and any Distribution Date, the sum of (i) any realized loss
allocated to the class of Mezzanine Certificates on the Distribution Date and
(ii) any Allocated Realized Loss Amount for that class remaining unpaid from
the previous Distribution Date plus accrued interest at the related
Pass-Through Rate on that class of certificates for the most recently ended
Interest Accrual Period.
"Available Distribution Amount": The Available Distribution Amount for
any Distribution Date is equal to the sum, net of amounts reimbursable
therefrom to the Servicer, the Trust Administrator or the Trustee and net of
the Cap Premium for such Distribution Date, of an amount equal to (i) the
aggregate amount of scheduled monthly payments on the Mortgage Loans due on
the related Due Date and received on or prior to the related Determination
Date, after deduction of the Servicing Fee, the Administration Fee and the PMI
Policy Premium; (ii) unscheduled payments in respect of the Mortgage Loans
(including prepayments, insurance proceeds, liquidation proceeds and proceeds
from repurchases of and substitutions for the Mortgage Loans occurring during
the Prepayment Period and (iii) all P&I Advances with respect to the Mortgage
Loans received for the Distribution Date.
"Basic Principal Distribution Amount": The Basic Principal Distribution
Amount for any Distribution Date will be the sum of (i) the Principal
Remittance Amount minus (ii) the amount of any Overcollateralization Reduction
Amount for the Distribution Date.
"Basis Risk Shortfall": With respect to the Class A-1 Certificates and
the Mezzanine Certificates and any Distribution Date on which the Pass-Through
Rate is limited to the Net WAC Pass-Through Rate, an amount equal to interest
accrued during the related Interest Accrual Period on the aggregate
Certificate Principal Balance of the certificates immediately prior to the
related Distribution Date at a per annum rate equal to the excess of (i) the
Accrual Rate for the Distribution Date over (ii) the Net WAC Pass-Through Rate
for the Distribution Date.
"Business Day" Any day other than a Saturday, a Sunday or a day on which
banks and foreign exchange markets located in Charlotte, North Carolina,
London, England, New York, New York, Santa Ana, California or St. Paul,
Minnesota are authorized or required by law or governmental action to close.
"Cap Premium": For any distribution date beginning June 2001, an amount
equal to $31,750, through and including the distribution date in February
2003.
"Certificate Notional Amount": The Certificate Notional Amount of the
Class A-IO Certificates as of any date of determination is equal to the lesser
of (i) the then aggregate principal balance of the Mortgage Loans with Expense
Adjusted Mortgage Rates equal to or greater than 6.75% and (ii) (a) through
the distribution date in December 2001, $125,000,000, (b) from but excluding
the distribution date in December 2001 to and including the distribution date
in December 2002, $80,000,000, (c) from but excluding the distribution date in
December 2002 to and including the distribution date in April 2004,
$35,000,000, and (d) after the distribution date in April 2004, $0.
"Certificate Principal Balance": The Certificate Principal Balance of an
Offered Certificate outstanding at any time represents the then maximum amount
that the holder of such certificate is entitled to receive as distributions
allocable to principal from the cash flow on the Mortgage Loans and the other
assets in the trust fund. The Certificate Principal Balance of any class of
Offered Certificates as of any date of determination is equal to the initial
Certificate Principal Balance of such certificate reduced by the aggregate of
(i) all amounts allocable to principal previously distributed with respect to
that certificate and (ii) any reductions in the Certificate Principal Balance
of such certificate deemed to have occurred in connection with allocations of
Realized Losses in the manner described in this prospectus supplement. The
Certificate Principal Balance of the Class X/N Certificates as of any date of
determination is equal to the excess, if any, of (i) the then aggregate
principal balance of the Mortgage Loans over (ii) the then aggregate
Certificate Principal Balance of the Class A-1 Certificates and the Mezzanine
Certificates.
"Class A-1 Principal Distribution Amount": The Class A-1 Principal
Distribution Amount is an amount equal to the excess of (x) the Certificate
Principal Balance of the Class A-1 Certificates immediately prior to the
Distribution Date over (y) the lesser of (A) the product of (i) approximately
84% and (ii) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period and (B) the aggregate principal balance of
the Mortgage Loans as of the last day of the related Due Period minus
approximately $2,419,791.
"Class M-1 Principal Distribution Amount": The Class M-1 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of (i) the
Certificate Principal Balance of the Class A-1 Certificates after taking into
account the payment of the Class A-1 Principal Distribution Amount on the
Distribution Date and (ii) the Certificate Principal Balance of the Class M-1
Certificates immediately prior to the Distribution Date over (y) the lesser of
(A) the product of (i) approximately 93% and (ii) the aggregate principal
balance of the Mortgage Loans as of the last day of the related Due Period and
(B) the aggregate principal balance of the Mortgage Loans as of the last day
of the related Due Period minus approximately $2,419,791.
"Class M-2 Principal Distribution Amount": The Class M-2 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of (i) the
Certificate Principal Balance of the Class A-1 Certificates after taking into
account the payment of the Class A-1 Principal Distribution Amount on the
Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date and (iii) the Certificate
Principal Balance of the Class M-2 Certificates immediately prior to the
Distribution Date over (y) the lesser of (A) the product of (i) approximately
99% and (ii) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period and (B) the aggregate principal balance of
the Mortgage Loans as of the last day of the related Due Period minus
approximately $2,419,791.
"Credit Enhancement Percentage": The Credit Enhancement Percentage for
any Distribution Date is the percentage obtained by dividing (x) the aggregate
Certificate Principal Balance of the Class M-1, M-2 and X/N Certificates by
(y) the aggregate principal balance of the Mortgage Loans, calculated after
taking into account distributions of principal on the Mortgage Loans and
distribution of the Principal Distribution Amount to the holders of the
certificates then entitled to distributions of principal on the Distribution
Date. "Determination Date": The Determination Date with respect to any
Distribution Date is on the 10th day of the month in which the Distribution
Date occurs or, if such day is not a Business Day, on the immediately
preceding Business Day.
"Due Period": The Due Period with respect to any Distribution Date
commences on the second day of the month immediately preceding the month in
which the Distribution Date occurs and ends on the first day of the month in
which the Distribution Date occurs.
"Expense Adjusted Maximum Mortgage Rate": The Expense Adjusted Maximum
Mortgage Rate on any Mortgage Loan is equal to the Maximum Mortgage Rate
thereon minus the sum of (i) the Administration Fee Rate, (ii) the Servicing
Fee Rate and (iii) if such Mortgage Loan is a PMI Mortgage Loan, the PMI
Policy Premium.
"Expense Adjusted Mortgage Rate": The Expense Adjusted Mortgage Rate on
any Mortgage Loan is equal to the then applicable Mortgage Rate on the
Mortgage Loan minus the sum of (i) the Administration Fee Rate, (ii) the
Servicing Fee Rate and (iii) if such Mortgage Loan is a PMI Mortgage Loan, the
PMI Policy Premium..
"Extra Principal Distribution Amount": The Extra Principal Distribution
Amount for any Distribution Date will be the lesser of (i) the Net Monthly
Excess Cashflow for such Distribution Date and (ii) the Overcollateralization
Increase Amount.
"Interest Accrual Period": The Interest Accrual Period for the Class A-1
Certificates and the Mezzanine Certificates and any Distribution Date is the
period commencing on the Distribution Date of the month immediately preceding
the month in which such Distribution Date occurs (or, in the case of the first
period, commencing on the Closing Date), and ending on the day preceding such
Distribution Date. All distributions of interest on such certificates will be
based on a 360-day year and the actual number of days in the applicable
Interest Accrual Period. The Interest Accrual Period for the Class A-IO
Certificates and any Distribution Date is the calendar month preceding the
month of such Distribution Date based on a 360-day year consisting of twelve
30-day months.
"Interest Carry Forward Amount": The Interest Carry Forward Amount with
respect to any class of Offered Certificates and any Distribution Date is
equal to the amount, if any, by which the Interest Distribution Amount for
that class of certificates for the immediately preceding Distribution Date
exceeded the actual amount distributed on the certificates in respect of
interest on the immediately preceding Distribution Date, together with any
Interest Carry Forward Amount with respect to the certificates remaining
unpaid from the previous Distribution Date, plus interest accrued thereon at
the related Pass-Through Rate on the certificates for the most recently ended
Interest Accrual Period.
"Interest Distribution Amount": The Interest Distribution Amount for the
Offered Certificates of any class on any Distribution Date is equal to
interest accrued during the related Interest Accrual Period on the Certificate
Principal Balance (or Certificate Notional Amount, in the case of the Class
A-IO Certificates) of that class immediately prior to the Distribution Date at
the Pass-Through Rate for that class, reduced, to not less than zero, in the
case of each class, by the allocable share, if any, for that class of
Prepayment Interest Shortfalls to the extent not covered by Compensating
Interest paid by the Servicer and shortfalls resulting from the application of
the Relief Act.
"Interest Remittance Amount": The Interest Remittance Amount for any
Distribution Date is that portion of the Available Distribution Amount for
that Distribution Date that represents interest received or advanced on the
Mortgage Loans.
"Maximum Pass-Through Rate": The Maximum Pass-Through Rate for any
Distribution Date is a rate per annum equal to the weighted average of the
Expense Adjusted Maximum Mortgage Rates on the then outstanding Mortgage
Loans, weighted based on their Scheduled Principal Balances as of the first
day of the calendar month preceding the month in which the Distribution Date
occurs multiplied by a fraction, the numerator of which is 30 and the
denominator of which is the actual number of days elapsed in the related
Interest Accrual Period.
"Net Monthly Excess Cashflow": The Net Monthly Excess Cashflow for any
Distribution Date is equal to the sum of (i) any Overcollateralization
Reduction Amount and (ii) the excess of (x) the Available Distribution Amount
for the Distribution Date over (y) the sum for the Distribution Date of the
aggregate of the Senior Interest Distribution Amount payable to the holders of
the Class A-1 Certificates, the aggregate of the Interest Distribution Amount
payable to the holders of the Class A-IO Certificates, the aggregate of the
Interest Distribution Amount payable to the holders of the Mezzanine
Certificates and the Principal Remittance Amount.
"Net WAC Pass-Through Rate": The Net WAC Pass-Through Rate for any
Distribution Date is a rate per annum equal to (i) the weighted average of the
Expense Adjusted Mortgage Rates on the then outstanding Mortgage Loans,
weighted based on their Scheduled Principal Balances as of the first day of
the calendar month preceding the month in which the Distribution Date occurs
multiplied by a fraction, the numerator of which is 30 and the denominator of
which is the actual number of days elapsed in the related Interest Accrual
Period minus, (ii) the product of (a) the Interest Distribution Amount for the
Class A-IO Certificates for such Distribution Date multiplied by a fraction,
the numerator of which is 12 and the denominator of which is the Stated
Principal Balance of the Mortgage Loans as of the first day of the month
preceding the month of such Distribution Date and (b) a fraction, the
numerator of which is 30 and the denominator of which is the actual number of
days elapsed in the related Interest Accrual Period minus, (iii) the Cap
Premium for such Distribution Date expressed as a per annum rate.
"Overcollateralization Increase Amount": An Overcollateralization Increase
Amount with respect to the Offered Certificates and any Distribution Date is
any amount of Net Monthly Excess Cashflow actually applied as an accelerated
payment of principal to the extent the Required Overcollateralized Amount
exceeds the Overcollateralized Amount.
"Overcollateralization Reduction Amount": An Overcollateralization Reduction
Amount for any Distribution Date is the amount by which the Overcollateralized
Amount exceeds the Required Overcollateralized Amount after taking into
account all other distributions to be made on the Distribution Date.
"Overcollateralized Amount": The Overcollateralized Amount with respect to any
Distribution Date is the excess, if any, of (x) the aggregate stated principal
balance of the Mortgage Loans, as defined in the pooling and servicing
agreement, immediately following the related Distribution Date over (y) the
sum of the aggregate Certificate Principal Balances of the Class A-1
Certificates and the Mezzanine Certificates, after taking into account the
payment of the Basic Principal Distribution Amount on the related Distribution
Date.
"PMI Policy Premium" The premium payable to the PMI Insurer pursuant to the
PMI Policy.
"Prepayment Period": The Prepayment Period with respect to any Distribution
Date is the calendar month immediately preceding the month in which the
Distribution Date occurs.
"Principal Distribution Amount": With respect to the Class A-1 Certificates,
the Basic Principal Distribution Amount plus the related portion of the Extra
Principal Distribution Amount.
"Principal Remittance Amount": The Principal Remittance Amount for any
Distribution Date is the sum of (i) the principal portion of all scheduled
monthly payments on the Mortgage Loans actually received or advanced on or
prior to the related Determination Date; (ii) the principal portion of all
proceeds received in respect of the repurchase of a Mortgage Loan, as required
by the Pooling and Servicing Agreement during the related Prepayment Period;
and (iii) the principal portion of all other unscheduled collections,
including insurance proceeds, liquidation proceeds and all full and partial
principal prepayments, received during the related Prepayment Period net of
reimbursements, including reimbursements to the Trustee, the Trust
Administrator and the Servicer, to the extent applied as recoveries of
principal on the Mortgage Loans.
"Required Overcollateralization Amount": With respect to any Distribution Date,
approximately $2,419,791.
"Scheduled Principal Balance": The Scheduled Principal Balance of any Mortgage
Loan as of any date of determination is equal to the principal balance of the
Mortgage Loan as of the Cut-off Date, after application of all scheduled
principal payments due on or before the Cut-off Date, whether or not received,
reduced by (i) the principal portion of all monthly payments due on or before
the date of determination, whether or not received; (ii) all amounts allocable
to unscheduled principal that were received prior to the calendar month in
which the date of determination occurs and (iii) any Bankruptcy Loss occurring
out of a Deficient Valuation that was incurred prior to the calendar month in
which the date of determination occurs.
"Senior Interest Distribution Amount": The Senior Interest Distribution Amount
for any Distribution Date is equal to the Interest Distribution Amount for
such Distribution Date for the Class A-1 Certificates and the Class A-IO
Certificates and the Interest Carry Forward Amount, if any, for such
Distribution Date for the Class A-1 Certificates and the Class A-IO
Certificates.
"Stepdown Date": The Stepdown Date is the earlier to occur of (i) the later to
occur of (x) the Distribution Date occurring in May 2004 and (y) the first
Distribution Date on which the Credit Enhancement Percentage (calculated for
this purpose only after taking into account distributions of principal on the
Mortgage Loans, but prior to any distribution of the Principal Distribution
Amount to the holders of the certificates then entitled to distributions of
principal on the Distribution Date), is greater than or equal to approximately
16% and (ii) the first Distribution Date on which the Certificate Principal
Balance of the Class A-1 Certificates has been reduced to zero.
"Trigger Event": With respect to any Distribution Date, a Trigger Event is in
effect if the percentage obtained by dividing (i) the principal amount of
Mortgage Loans delinquent 60 days or more by (ii) the aggregate principal
balance of the Mortgage Loans, in each case, as of the last day of the
previous calendar month exceeds the lesser of (x) 40.00% of the Credit
Enhancement Percentage and (y) 6.40%.
"Unpaid Basis Risk Shortfall": With respect to the Class A-1 Certificates, the
Class A-IO Certificates and the Mezzanine Certificates and any Distribution
Date, an amount equal to (i) the Basis Risk Shortfall for the previous
Distribution Date plus (ii) the unpaid Basis Risk Shortfall for the previous
Distribution Date, to the extent not paid on the previous Distribution Date
plus (iii) interest accrued on the unpaid amount for the most recently ended
Interest Accrual Period at the applicable Accrual Rate.
Interest Distributions on the Offered Certificates
Holders of the Offered Certificates will be entitled to receive on each
Distribution Date, interest distributions in an aggregate amount equal to
interest accrued during the related Interest Accrual Period on the Certificate
Principal Balances (or Certificate Notional Amount, in the case of the Class
A-IO Certificates) thereof at the then-applicable Pass-Through Rates thereon,
in the priorities set forth below.
On each Distribution Date, the Interest Remittance Amount will be
distributed in the following order of priority:
first, concurrently to the holders of the Class A-1 Certificates and the
Class A-IO Certificates, the Senior Interest Distribution Amount, pro rata,
based on accrued interest thereon;
second, to the holders of the Class M-1 Certificates, the Interest
Distribution Amount allocable to the Class M-1 Certificates; and
third, to the holders of the Class M-2 Certificates, the Interest
Distribution Amount allocable to the Class M-2 Certificates.
On any Distribution Date, any shortfalls resulting from the application
of the Relief Act and any Prepayment Interest Shortfalls to the extent not
covered by Compensating Interest paid by the Servicer will be allocated first,
to Net Monthly Excess Cashflow according to the priorities set forth under
"Description of the Certificates--Overcollateralization Provisions" in this
prospectus supplement, second, to the Class M-2 Certificates, third, to the
Class M-1 Certificates, and fourth, to the Class A-1 Certificates and the
Class A-IO Certificates, pro rata, based on accrued interest. The holders of
the Offered Certificates will be entitled to reimbursement for any of these
interest shortfalls, subject to available funds, in the priorities described
under "--Overcollateralization Provisions" in this prospectus supplement.
With respect to any Distribution Date, to the extent that the aggregate
Interest Distribution Amount exceeds the Interest Remittance Amount, a
shortfall in interest distributions on one or more classes of Offered
Certificates will result and payments of Interest Carry Forward Amount to the
Offered Certificates will be made. The Interest Carry Forward Amount with
respect to the Class A-1 Certificates and the Class A-IO Certificates, if any,
is distributed as part of the Senior Interest Distribution Amount on each
Distribution Date. The Interest Carry Forward Amount with respect to the
Mezzanine Certificates, if any, may be carried forward to succeeding
Distribution Dates and, subject to available funds, will be distributed in the
manner set forth in "--Overcollateralization Provisions" in this prospectus
supplement.
If on any Distribution Date, as a result of the foregoing allocation
rules, the Class A-1 Certificates or Class A-IO Certificates do not receive
the related Senior Interest Distribution Amount, if any, then such unpaid
amounts will be recoverable by the holders of the Class A-1 Certificates or
Class A-IO Certificates, with interest thereon, on future Distribution Dates,
as Interest Carry Forward Amounts, subject to the priorities described in this
prospectus supplement.
Except as otherwise described in this prospectus supplement, on any
Distribution Date, distributions of the Interest Distribution Amount for a
class of certificates will be made in respect of that class of certificates,
to the extent provided in this prospectus supplement, on a pari passu basis,
based on the Certificate Principal Balance of the certificates of each class.
Calculation of One-Month LIBOR
With respect to each Interest Accrual Period (other than the initial
Interest Accrual Period) and each class of Offered Certificates, on the second
business day preceding such Interest Accrual Period, (each such date, an
"Interest Determination Date"), the Trust Administrator will determine
One-Month LIBOR for such Interest Accrual Period. With respect to the initial
Interest Accrual Period, on the Closing Date, the Trust Administrator will
determine One-Month LIBOR for such Interest Accrual Period based on
information available on the second business day preceding the Closing Date
(the related "Interest Determination Date"). "One Month LIBOR" means, as of
any Interest Determination Date, the London interbank offered rate for
one-month U.S. dollar deposits which appears on Telerate Page 3750 (as defined
herein) as of 11:00 a.m. (London time) on such date. If such rate does not
appear on Telerate Page 3750, the rate for that day will be determined on the
basis of the offered rates of the Reference Banks (as defined herein) for
one-month U.S. dollar deposits, as of 11:00 a.m. (London time) on such
Interest Determination Date. The Trust Administrator will request the
principal London office of each of the Reference Banks to provide a quotation
of its rate. If on such Interest Determination Date two or more Reference
Banks provide such offered quotations, One-Month LIBOR for the related
Interest Accrual Period shall be the arithmetic mean of such offered
quotations (rounded upwards if necessary to the nearest whole multiple of
0.0625%). If on such Interest Determination Date fewer than two Reference
Banks provide such offered quotations, One-Month LIBOR for the related
Interest Accrual Period shall be the higher of (x) One-Month LIBOR as
determined on the previous Interest Determination Date and (y) the Reserve
Interest Rate (as defined herein).
As used in this section for the purpose of LIBOR, "business day" means a
day on which banks are open for dealing in foreign currency and exchange in
London and New York City; "Telerate Page 3750" means the display page
currently so designated on the Dow Jones Telerate Capital Markets Report (or
such other page as may replace that page on that service for the purpose of
displaying comparable rates or prices); "Reference Banks" means leading banks
selected by the Trust Administrator (after consultation with the Depositor)
and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (i) with an established place of business in London, (ii)
which have been designated as such by the Trust Administrator (after
consultation with the Depositor) and (iii) not controlling, controlled by, or
under common control with, the Depositor or the Servicer; and "Reserve
Interest Rate" shall be the rate per annum that the Trust Administrator
determines to be either (i) the arithmetic mean (rounded upwards if necessary
to the nearest whole multiple of 0.0625%) of the one-month U.S. dollar lending
rates which New York City banks selected by the Trust Administrator (after
consultation with the Depositor) are quoting on the relevant Interest
Determination Date to the principal London offices of leading banks in the
London interbank market or, (ii) in the event that the Trust Administrator can
determine no such arithmetic mean, the lowest one-month U.S. dollar lending
rate which New York City banks selected by the Trust Administrator (after
consultation with the Depositor) are quoting on such Interest Determination
Date to leading European banks.
The establishment of One-Month LIBOR on each Interest Determination Date
by the Trust Administrator and the Trust Administrator's calculation of the
rate of interest applicable to the Class A-1 Certificates and the Mezzanine
Certificates for the related Interest Accrual Period shall (in the absence of
manifest error) be final and binding.
Principal Distributions on the Offered Certificates
On each Distribution Date, the Principal Distribution Amount will be
distributed to the holders of the Offered Certificates then entitled to
principal distributions. In no event will the Principal Distribution Amount
with respect to any Distribution Date be (i) less than zero or (ii) greater
than the then outstanding aggregate Certificate Principal Balance of the
Offered Certificates.
On each Distribution Date (a) prior to the Stepdown Date or (b) on which
a Trigger Event is in effect, the Basic Principal Distribution Amount shall be
distributed to the Class A-1 Certificates, until the Certificate Principal
Balance of the Class A-1 Certificates has been reduced to zero.
On each Distribution Date (a) prior to the Stepdown Date or (b) on which
a Trigger Event is in effect, any remaining Principal Distribution Amount
shall be distributed:
first, to the Class M-1 Certificates, until the Certificate
Principal Balance of the Class M-1 Certificates has been reduced to
zero; and
second, to the Class M-2 Certificates, until the Certificate
Principal Balance of the Class M-2 Certificates has been reduced to
zero.
On each Distribution Date (a) on or after the Stepdown Date and (b) on
which a Trigger Event is not in effect, the Basic Principal Distribution
Amount shall be distributed to the Class A-1 Certificates, the lesser of (x)
the Basic Principal Distribution Amount and (y) the Class A-1 Principal
Distribution Amount, until the Certificate Principal Balance of the Class A-1
Certificates has been reduced to zero.
On each Distribution Date (a) on or after the Stepdown Date and (b) on
which a Trigger Event is not in effect, any remaining Basic Principal
Distribution Amount shall be distributed:
first, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the amount distributed to the holders
of the Class A-1 Certificates above, and (y) the Class M-1 Principal
Distribution Amount, shall be distributed to the holders of the Class
M-1 Certificates, until the Certificate Principal Balance of the
Class M-1 Certificates has been reduced to zero; and
second, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the sum of the amounts distributed to
the holders of the Class A-1 Certificates above and to the holders of
the Class M-1 Certificates under clause first above, and (y) the
Class M-2 Principal Distribution Amount, shall be distributed to the
holders of the Class M-2 Certificates, until the Certificate
Principal Balance of the Class M-2 Certificates has been reduced to
zero.
The allocation of distributions in respect of principal to the Class A-1
Certificates on each Distribution Date (a) prior to the Stepdown Date or (b)
on which a Trigger Event has occurred, will have the effect of accelerating
the amortization of the Class A-1 Certificates while, in the absence of
Realized Losses, increasing the respective percentage interest in the
principal balance of the Mortgage Loans evidenced by the Subordinate
Certificates. Increasing the respective percentage interest in the trust fund
of the Mezzanine Certificates relative to that of the Class A-1 Certificates
is intended to preserve the availability of the subordination provided by the
Mezzanine Certificates.
Credit Enhancement
The credit enhancement provided for the benefit of the holders of the
Class A-1 Certificates and Class A-IO Certificates consists of subordination,
as described in this section, and overcollateralization, as described under
"--Overcollateralization Provisions" in this prospectus supplement.
The rights of the holders of the Subordinate Certificates to receive
distributions will be subordinated, to the extent described in this section,
to the rights of the holders of the Class A-1 Certificates and the Class A-IO
Certificates. This subordination is intended to enhance the likelihood of (i)
regular receipt by the holders of the Class A-1 Certificates of the full
amount of their scheduled monthly payments of interest and principal, and (ii)
the likelihood of a regular receipt by the holders of the Class A-IO
Certificates of the full amount of their scheduled monthly payments of
interest, and to afford these holders protection against Realized Losses.
The protection afforded to the holders of the Class A-1 Certificates and
Class A-IO Certificates by means of the subordination of the Subordinate
Certificates will be accomplished by (i) the preferential right of the holders
of the Class A-1 Certificates and Class A-IO Certificates to receive on any
Distribution Date, prior to distribution on the Subordinate Certificates,
distributions in respect of applicable interest and principal, subject to
available funds and (ii) if necessary, the right of the holders of the Class
A-1 Certificates to receive future distributions of amounts that would
otherwise be payable to the holders of the Subordinate Certificates.
In addition, (i) the rights of the holders of the Class M-1 Certificates
will be senior to the rights of holders of the Class M-2 Certificates and the
Class X/N Certificates and (ii) the rights of the holders of the Class M-2
Certificates will be senior to the rights of the holders of the Class X/N
Certificates. This subordination is intended to enhance the likelihood of
regular receipt by the holders of more senior certificates of distributions in
respect of interest and principal and to afford these holders protection
against Realized Losses.
Overcollateralization Provisions
To the extent the weighted average Expense Adjusted Mortgage Rate for the
Mortgage Loans is higher than the weighted average of the Pass-Through Rates
on the Offered Certificates, excess interest collections will be generated
which, in the absence of Realized Losses, will not be necessary to fund
interest distributions on the Offered Certificates. Additional excess interest
will be generated by the portion of the Mortgage Pool represented by the
Overcollateralized Amount. The Pooling and Servicing Agreement requires that,
on each Distribution Date, the Net Monthly Excess Cashflow, if any, be applied
on the related Distribution Date as an accelerated payment of principal on the
class or classes of Offered Certificates then entitled to receive
distributions in respect of principal, but only to the limited extent
described in this section.
With respect to any Distribution Date, any Net Monthly Excess Cashflow
(or, in the case of clause second below, the Net Monthly Excess Cashflow
exclusive of any Overcollateralization Reduction Amount) shall be paid as
follows:
first, to the holders of the Class X/N Certificates any termination
payment owing to the Counterparty under the Cap Agreement; provided
that such amount will be deposited into the Reserve Fund (the
"Reserve Fund") established in accordance with the terms of the
Pooling and Servicing Agreement and paid to the Counterparty pursuant
to the Pooling and Servicing Agreement;
second, to the holders of the class or classes of certificates then
entitled to receive distributions in respect of principal, in an
amount equal to any Extra Principal Distribution Amount, payable to
such holders in accordance with the priorities set forth under
"--Allocation of Extra Principal Distribution Amount" below;
third, to the holders of the Class M-1 Certificates, in an amount
equal to the Interest Carry Forward Amount allocable to the Class M-1
Certificates;
fourth, to the holders of the Class M-1 Certificates, in an amount
equal to the Allocated Realized Loss Amount allocable to the Class
M-1 Certificates;
fifth, to the holders of the Class M-2 Certificates, in an amount
equal to the Interest Carry Forward Amount allocable to the Class M-2
Certificates;
sixth, to the holders of the Class M-2 Certificates, in an amount
equal to the Allocated Realized Loss Amount allocable to the Class
M-2 Certificates;
seventh, to the holders of the Class A-1 Certificates and Class A-IO
Certificates, in an amount equal to such certificates' allocated
share of any Prepayment Interest Shortfalls on the Mortgage Loans to
the extent not covered by Compensating Interest paid by the Servicer
and any shortfalls resulting from the application of the Relief Act
with respect to the Mortgage Loans;
eighth, to the holders of the Class M-1 Certificates, in an amount
equal to the Class M-1 Certificates' allocated share of any
Prepayment Interest Shortfalls on the Mortgage Loans to the extent
not covered by Compensating Interest paid by the Servicer and any
shortfalls resulting from the application of the Relief Act with
respect to the Mortgage Loans;
ninth, to the holders of the Class M-2 Certificates, in an amount
equal to the Class M-2 Certificates' allocated share of any
Prepayment Interest Shortfalls on the Mortgage Loans to the extent
not covered by Compensating Interest paid by the Servicer and any
shortfalls resulting from the application of the Relief Act with
respect to the Mortgage Loans;
tenth, to the Reserve Fund and then from that Reserve Fund, to pay to
the holders of (a) the Class A-1 Certificates and Class A-IO
Certificates, pro rata, based on accrued interest thereon, (b) the
Class M-1 Certificates and (c) the Class M-2 Certificates, in that
order, any Basis Risk Shortfall and any Unpaid Basis Risk Shortfall;
eleventh, to the holders of the Class X/N Certificates as provided
in the Pooling and Servicing Agreement; and
twelfth, to the holders of the Residual Certificates, any remaining
amounts.
As of the Closing Date, the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date will exceed the sum of the aggregate Certificate
Principal Balances of the Class A-1 Certificates and the Mezzanine
Certificates by an amount equal to approximately $2,420,213, which is equal to
the initial Certificate Principal Balance of the Class X/N Certificates. This
amount represents approximately 0.50% of the aggregate principal balance of
the Mortgage Loans as of the Cut-off Date, which is the initial amount of
overcollateralization required to be provided by the Mortgage Pool under the
Pooling and Servicing Agreement. Under the Pooling and Servicing Agreement,
the Overcollateralized Amount is required to be maintained at the Required
Overcollateralized Amount. In the event that Realized Losses are incurred on
the Mortgage Loans, such Realized Losses may result in an
overcollateralization deficiency since the Realized Losses will reduce the
principal balance of the Mortgage Loans without a corresponding reduction to
the aggregate Certificate Principal Balances of the Offered Certificates. In
the event of an overcollateralization deficiency, the Pooling and Servicing
Agreement requires the payment from Net Monthly Excess Cashflow, subject to
available funds, of an amount equal to the overcollateralization deficiency,
which shall constitute a principal distribution on the Offered Certificates in
reduction of the Certificate Principal Balances of the Offered Certificates.
This has the effect of accelerating the amortization of the Offered
Certificates relative to the amortization of the Mortgage Loans, and of
increasing the Overcollateralized Amount.
On and after the Stepdown Date and provided that a Trigger Event is not
in effect, the required Overcollateralized Amount may be permitted to decrease
("step down"), below the approximate initial $2,420,213 level to a level equal
to approximately 1.00% of the then current aggregate outstanding principal
balance of the Mortgage Loans (after giving effect to principal payments to be
distributed on the related Distribution Date), subject to a floor of
approximately $2,419,791. In the event that the Required Overcollateralized
Amount is permitted to step down on any Distribution Date, the Pooling and
Servicing Agreement provides that a portion of the principal which would
otherwise be distributed to the holders of the Offered Certificates on the
related Distribution Date shall be distributed to the holders of the Class X/N
Certificates pursuant to the priorities set forth above.
With respect to each Distribution Date, the Overcollateralization
Reduction Amount, after taking into account all other distributions to be made
on the related Distribution Date, shall be distributed as Net Monthly Excess
Cashflow pursuant to the priorities set forth above. This has the effect of
decelerating the amortization of the Offered Certificates relative to the
amortization of the Mortgage Loans, and of reducing the Overcollateralized
Amount. However, if on any Distribution Date a Trigger Event is in effect, the
Required Overcollateralized Amount will not be permitted to step down on the
related Distribution Date.
Allocation of Extra Principal Distribution Amount
On each Distribution Date (a) prior to the Stepdown Date or (b) on which
a Trigger Event is in effect, the Extra Principal Distribution Amount shall be
distributed first, to the Class A-1 Certificates until the Certificate
Principal Balance of the Class A-1 Certificates has been reduced to zero;
second, to the Class M-1 Certificates, until the Certificate Principal Balance
of the Class M-1 Certificates has been reduced to zero; and third, to the
Class M-2 Certificates, until the Certificate Principal Balance of the Class
M-2 Certificates has been reduced to zero.
On each Distribution Date (a) on or after the Stepdown Date and (b) on
which a Trigger Event is not in effect, the holders of each class of Offered
Certificates shall be entitled to receive distributions in respect of
principal to the extent of the Extra Principal Distribution Amount in the
following amounts and order of priority:
first, the lesser of (x) the Principal Distribution Amount and (y)
the Class A-1 Principal Distribution Amount, shall be distributed to
the holders of the Class A-1 Certificates until the Certificate
Principal Balance of the Class A-1 Certificates has been reduced to
zero;
second, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the amount distributed to the holders
of the Class A-1 Certificates under clause first above, and (y) the
Class M-1 Principal Distribution Amount, shall be distributed to the
holders of the Class M-1 Certificates, until the Certificate
Principal Balance of the Class M-1 Certificates has been reduced to
zero; and
third, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amounts distributed to the holders of
the Class A-1 Certificates under clause first above and to the
holders of the Class M-1 Certificates under clause second above, and
(y) the Class M-2 Principal Distribution Amount, shall be distributed
to the holders of the Class M-2 Certificates, until the Certificate
Principal Balance of the Class M-2 Certificates has been reduced to
zero.
Allocation of Losses; Subordination
With respect to any defaulted Mortgage Loan that is finally liquidated
through foreclosure sale, disposition of the related Mortgaged Property (if
acquired on behalf of the certificateholders by deed in lieu of foreclosure or
otherwise), the amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, if any, plus interest thereon through the
last day of the month in which the related Mortgage Loan was finally
liquidated, after application of all amounts recovered (net of amounts
reimbursable to the Servicer for P&I Advances, servicing advances and other
related expenses, including attorneys' fees) towards interest and principal
owing on the Mortgage Loan. The amount of loss realized and any Bankruptcy
Losses are referred to in this prospectus supplement as "Realized Losses." In
the event that amounts recovered in connection with the final liquidation of a
defaulted Mortgage Loan are insufficient to reimburse the Servicer for P&I
Advances and servicing advances, these amounts may be reimbursed to the
Servicer out of any funds in the distribution account prior to the
distribution on the certificates.
Any Realized Losses on the Mortgage Loans will be allocated on any
Distribution Date: first, to Net Monthly Excess Cashflow, second, to the Class
X/N Certificates, until the Certificate Principal Balance of the Class X/N
Certificates has been reduced to zero, third, to the Class M-2 Certificates
and fourth, to the Class M-1 Certificates.
The Pooling and Servicing Agreement does not permit the allocation of
Realized Losses to the Class A-1 Certificates and Class A-IO Certificates.
Investors in the Class A-1 Certificates and Class A-IO Certificates should
note that although Realized Losses cannot be allocated to the Class A-1
Certificates and Class A-IO Certificates, under certain loss scenarios there
will not be enough principal and interest on the Mortgage Loans to pay the
Class A-1 Certificates all interest and principal amounts to which they are
then entitled, or pay the Class A-IO Certificates all of the interest amounts
to which they are then entitled.
Once Realized Losses have been allocated to the Mezzanine Certificates,
such amounts with respect to these certificates will no longer accrue interest
nor will such amounts be reinstated thereafter. However, Allocated Realized
Loss Amounts may be paid to the holders of the Mezzanine Certificates from Net
Monthly Excess Cashflow, according to the priorities set forth under
"--Overcollateralization Provisions" above.
Any allocation of a Realized Loss to a certificate will be made by
reducing the Certificate Principal Balance of that certificate by the amount
so allocated as of the Distribution Date in the month following the calendar
month in which the Realized Loss was incurred. Notwithstanding anything to the
contrary described in this prospectus supplement, in no event will the
Certificate Principal Balance of any certificate be reduced more than once in
respect of any particular amount both (i) allocable to the certificate in
respect of Realized Losses and (ii) payable as principal to the holder of the
certificate from Net Monthly Excess Cashflow.
A "Bankruptcy Loss" is a Deficient Valuation or a Debt Service Reduction.
With respect to any Mortgage Loan, a "Deficient Valuation" is a valuation by a
court of competent jurisdiction of the Mortgaged Property in an amount less
than the then outstanding indebtedness under the Mortgage Loan, which
valuation results from a proceeding initiated under the United States
Bankruptcy Code. A "Debt Service Reduction" is any reduction in the amount
which a mortgagor is obligated to pay on a monthly basis with respect to a
Mortgage Loan as a result of any proceeding initiated under the United States
Bankruptcy Code, other than a reduction attributable to a Deficient Valuation.
The Cap Agreement
The Trust will have the benefit of an interest rate cap agreement
documented pursuant to an ISDA Master Agreement (Multicurrency-Cross Border),
together with a Schedule and a Confirmation (the "Cap Agreement") pursuant to
which Westdeutsche Landesbank Girozentrale, New York Branch (together with any
successor, the "Counterparty") will agree to pay to the Trust a monthly
payment in an amount equal to the product of:
(1) the excess, if any, of One-Month LIBOR over 5.8825%;
(2) the Scheduled Notional Amount; and
(3) a fraction, the numerator of which is the actual number of days
elapsed from the previous Distribution Date to but excluding the current
Distribution Date (or, for the first Distribution Date, the actual number of
days elapsed from the Closing Date to but excluding the first Distribution
Date), and the denominator of which is 360.
The "Scheduled Notional Amounts" with respect to each Distribution Date
will be specified in the Cap Agreement. The initial Scheduled Notional Amount
will be 479,686,470. The Scheduled Notional Amount will be reduced each month
as specified in the Cap Agreement and the Cap Agreement will terminate after
the Distribution Date in February 2003.
The Cap Agreement will be governed by and construed in accordance with
the law of the State of New York and will be documented on the ISDA Master
Agreement, as supplemented by a schedule and a confirmation. The obligations
of the Counterparty are limited to those specifically set forth in the Cap
Agreement.
The Counterparty is a branch of Westdeutsche Landesbank Girozentrale
("WestLB"). WestLB was created by the merger of two central banks, or
Landesbanks (German State Banks), in the State of North Rhine-Westphalia,
Germany on January 1, 1969. As a German universal bank, WestLB provides
commercial and investment banking services regionally, nationally and
internationally to public, corporate and bank customers. WestLB currently has
a long-term unsecured credit rating of "AA+" from Standard & Poor's, a
division of The McGraw-Hill Companies, Inc., "Aa1" from Moody's and "AAA" from
Fitch.
The Counterparty is licensed and subject to supervision and regulation by
the Superintendent of Banks of the State of New York. The Counterparty is
examined by the New York State Banking Department and is subject to banking
laws and regulations applicable to a foreign bank that operates a New York
branch.
Upon written request, the Counterparty will provide without charge to
each person to whom this prospectus supplement is delivered a copy of WestLB's
most recent annual report. Written requests for such annual reports should be
directed to Westdeutsche Landesbank Girozentrale, New York Branch, 1211 Avenue
of the Americas, New York, New York 10036, Attention: Branch Management.
The Agreement will contain provisions permitting the Trustee to enter
into any amendment to the Cap Agreement requested by the Counterparty to cure
any ambiguity in, or correct or supplement any provision of, the Cap
Agreement, so long as the Trustee determines that the amendment will not
adversely affect the interests of the Certificateholders. The written consent
of the Counterparty will be required before certain amendments are made to the
Agreement.
The respective obligations of the Counterparty and the Trust to pay
specified amounts due under the Cap Agreement will be subject to the following
conditions precedent: (1) no Cap Default (as defined below) or event that with
the giving of notice or lapse of time or both would become a Cap Default shall
have occurred and be continuing with respect to the Cap Agreement and (2) no
Termination Event (as defined below) has occurred or been effectively
designated with respect to the Cap Agreement.
"Events of Default" under the Cap Agreement (each a "Cap Default") are
limited to the following standard events of default under the ISDA Master
Agreement:
o "Failure to Pay,"
o "Breach of Agreement,"
o "Misrepresentation,"
o "Bankruptcy," and
o "Merger without Assumption,"
as described in Sections 5(a)(i), 5(a)(ii), 5(a)(iv), 5(a)(vii), and
5(a)(viii) of the ISDA Master Agreement.
"Termination Events" under the Cap Agreement consist of the following
standard events under the ISDA Master Agreement: "Illegality" (which generally
relates to changes in law causing it to become unlawful for either party to
perform its obligations under the Cap Agreement), "Tax Event" (which generally
relates to either party to the Cap Agreement receiving a payment under the Cap
Agreement from which an amount has been deducted or withheld for or on account
of taxes), "Tax Event Upon Merger" (which generally relates to either party to
the Cap Agreement receiving a payment under the Cap Agreement from which an
amount has been deducted or withheld for or on account of taxes resulting from
a merger) and "Credit Event Upon Merger" (which generally relates to the Trust
or the Counterparty and an entity providing credit support for it becoming
weaker as a result of a merger) as described in Sections 5(b)(i), 5(b)(ii),
5(b)(iii) and 5(b)(iv) of the ISDA Master Agreement. In addition, there are
additional Termination Events relating to the Trust if the Trust should
terminate or if the Pooling and Servicing Agreement or other transaction
documents are amended in a manner adverse to the Counterparty without the
consent of the Counterparty.
If the Trust fails to pay a Cap Premium on any Distribution Date, the
Counterparty, in addition to the other remedies available to it under the Cap
Agreement (which include the right to terminate the Cap Agreement), can
set-off the amount of such Cap Premium against the Counterparty's obligations
under the Cap Agreement. In addition, interest will accrued on any unpaid Cap
Premiums at the default rate, as defined in the Cap Agreement, compounded
daily.
Upon the occurrence of any Cap Default under the Cap Agreement, the
non-defaulting party will have the right to designate an Early Termination
Date (as defined in the ISDA Master Agreement) upon the occurrence of the Cap
Default. The Trust may not designate an Early Termination Date without the
consent of the controlling party specified in the Agreement. With respect to
Termination Events, an Early Termination Date may be designated by one of the
parties (as specified in the Cap Agreement) and will occur only upon notice
and, in some circumstances, after any affected party has used reasonable
efforts to transfer its rights and obligations under the Cap Agreement to a
related entity within a limited period after notice has been given of the
Termination Event, all as set forth in the Cap Agreement. The occurrence of an
Early Termination Event Date under the Cap Agreement will constitute a "Cap
Early Termination."
Upon any Cap Early Termination of the Cap Agreement, the Trust or the
Counterparty may be liable to make a termination payment to the other
(regardless, if applicable, of which of the parties has caused the
termination). The amount of the termination payment will be based on the value
of the Cap Agreement computed in accordance with the procedures set forth in
the Cap Agreement. Any payment could be substantial. In the event that the
Trust is required to make a termination payment, the payment will be payable
from funds otherwise available to pay the Cap Premium and Net Monthly Excess
Cashflow prior to distribution thereof on the Offered Certificates; provided,
however, that, in the event that a termination payment is owed to the
Counterparty following a Cap Default resulting from a default of the
Counterparty where the Counterparty is the sole defaulting party or a
Termination Event where the Counterparty is the sole affected party, the
termination payment will be subordinate to the right of the Offered
Certificateholders to receive full payment of principal of and interest on the
Offered Certificates. Accordingly, termination payments, if required to be
made by the Trust, could result in delays in distributions to Offered
Certificateholders.
If, following an Early Termination Date, a termination payment is owed by
the Trust to the Counterparty and the Trust receives a payment (an "Assumption
Payment") from a successor counterparty to assume the position of the
Counterparty, the portion of the Assumption Payment that does not exceed the
amount of the termination payment owed by the Trust to the Counterparty will
be paid by the Trust to the Counterparty and will not be available to make
distributions to Offered Certificateholders. Following the payment, the amount
of the termination payment owed by the Trust to the Counterparty will be
reduced by the amount of the payment.
If the rating of the Counterparty (or any successor credit support
provider) is withdrawn or reduced below "A-" by S&P or "A3" by Moody's or such
other higher rating specified in the Cap Agreement (this withdrawal or
reduction, a "Cap Rating Agency Downgrade"), the Counterparty is required, no
later than the 30th day following the Cap Rating Agency Downgrade (unless
within 30 days after such Cap Rating Agency Downgrade, each Rating Agency has
reconfirmed its ratings of the Offered Certificates), at the Counterparty's
expense, either to (1) obtain a substitute Counterparty that has a
counterparty rating of at least "A-" by S&P and "A3" by Moody's or such other
higher rating specified in the Cap Agreement or (2) enter into arrangements
reasonably satisfactory to the Trustee, including collateral arrangements,
guarantees or letters of credit, which arrangements will result in the total
negation of the effect or impact of the Cap Rating Agency Downgrade on the
holders of the Offered Certificates.
P&I Advances
Subject to the limitations set forth in the following paragraph, the
Servicer will be obligated to advance or cause to be advanced on or before
each Distribution Date its own funds, or funds in the distribution account
that are not included in the Available Distribution Amount for the
Distribution Date. The amount of the Servicer's advance will be equal to the
aggregate of all payments of principal and interest, net of the Servicing Fee,
that were due during the related Due Period on the Mortgage Loans and that
were delinquent on the related Determination Date, plus amounts representing
assumed payments not covered by any current net income on the Mortgaged
Properties acquired by foreclosure or deed in lieu of foreclosure (any such
advance, a "P&I Advance.")
P&I Advances are required to be made only to the extent they are deemed
by the Servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making the P&I Advances is to
maintain a regular cash flow to the certificateholders, rather than to
guarantee or insure against losses. The Servicer will not be required to make
any P&I Advances with respect to reductions in the amount of the monthly
payments on the Mortgage Loans due to bankruptcy proceedings or the
application of the Relief Act.
All P&I Advances will be reimbursable to the Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage
Loan as to which the unreimbursed P&I Advance was made. In addition, any P&I
Advances previously made in respect of any Mortgage Loan that are deemed by
the Servicer to be nonrecoverable from related late collections, insurance
proceeds or liquidation proceeds may be reimbursed to the Servicer out of any
funds in the distribution account prior to the distributions on the
certificates. In the event that the Servicer fails in its obligation to make
any required advance, the Trust Administrator or other successor servicer
(which may be the Trustee) will be obligated to make the advance, in each
case, to the extent required in the Pooling and Servicing Agreement.
Reports to Certificateholders
On each Distribution Date, the Trust Administrator will provide or make
available to each holder of a Certificate a statement (based on information
received from the Servicer) setting forth, among other things, the information
set forth in the prospectus under "Description of the Securities--Reports to
Securityholders." The Trust Administrator will make such statement (and, at
its option, any additional files containing the same information in an
alternative format) available each month to via the Trust Administrator's
internet website. The Trust Administrator's internet website shall initially
be located at "http:\\www.apps.gis.deutsche-bank.com/invr". Assistance in
using the website can be obtained by calling the Trust Administrator's
customer service desk at 1-800-735-7777. Parties that are unable to use the
above distribution options are entitled to have a paper copy mailed to them
via first class mail by calling the customer service desk and indicating such.
The Trust Administrator shall have the right to change the way such statements
are distributed in order to make such distribution more convenient and/or more
accessible to the above parties and the Trust Administrator shall provide
timely and adequate notification to all above parties regarding any such
changes.
In addition, within a reasonable period of time after the end of each
calendar year, the Trust Administrator will prepare and deliver to each holder
of a Certificate of record during the previous calendar year a statement
containing information necessary to enable Certificateholders to prepare their
tax returns. Such statements will not have been examined and reported upon by
an independent public accountant.
THE ORIGINATOR AND SERVICER
Ameriquest Mortgage Company provided the information set forth in the
following paragraphs. None of the Depositor, the Seller, the Trustee, the
Underwriters or any of their respective affiliates have made or will make any
representation as to the accuracy or completeness of such information.
Ameriquest Mortgage Company (sometimes referred to herein as
"Ameriquest," the "Originator" or the "Servicer"), a Delaware corporation, is
a specialty finance company engaged in the business of originating, purchasing
and selling sub-prime mortgage loans secured by one- to four-family
residences. Ameriquest's mortgage business was begun in 1979 by Long Beach
Savings and Loan Association (later known as Long Beach Bank, F.S.B.,
together, the "Bank"). To gain greater operating flexibility and improve its
ability to compete against other financial services companies, in October
1994, the Bank ceased operations, voluntarily surrendered its federal thrift
charter and transferred its mortgage banking business to a new Delaware
corporation called Long Beach Mortgage Company ("Old Long Beach"). In May
1997, Old Long Beach sold its wholesale operations and reorganized its retail
lending and servicing operations under the name of "Ameriquest Mortgage
Company" (the "Reorganization")
Pursuant to the Pooling and Servicing Agreement, Ameriquest will serve as
the Servicer for the Mortgage Loans. Ameriquest is approved as a
seller/servicer for Fannie Mae and Freddie Mac and as a non-supervised
mortgagee by the U.S. Department of Housing and Urban Development. As of March
31, 2001, Ameriquest had 184 offices, consisting of 43 loan origination
centers located in California and 141 loan origination centers located
throughout the rest of the United States.
Lending Activities and Loan Sales. Ameriquest Mortgage Company currently
originates real estate loans through its network of retail offices and loan
origination centers. Ameriquest also participates in secondary market
activities by originating and selling mortgage loans while continuing to
service the majority of the loans sold. In other cases Ameriquest's whole loan
sale agreements provide for the transfer of servicing rights.
Ameriquest's primary lending activity is funding loans to enable
mortgagors to purchase or refinance residential real property, which loans are
secured by first or second liens on the related real property. Ameriquest's
single-family real estate loans are predominantly "conventional" mortgage
loans, meaning that they are not insured by the Federal Housing Administration
or partially guaranteed by the U.S. Department of Veterans Affairs.
The following table summarizes Ameriquest's retail originated one- to
four-family residential mortgage loan origination and sales activity for the
periods shown below. Sales activity may include sales of mortgage loans
purchased by Ameriquest from other loan originators.
YEAR ENDED DECEMBER 31,
(Dollars in thousands)
Purpose 1997 1998 1999 2000 March 31, 2001
------------------- ---------------- ----------------- ---------------- ---------------- -----------------
Originations $2,025,447 $3,344,176 $4,245,083 $3,716,937 $1,017,596
Sales $1,905,839 $ 2,852,481 $ 4,566,087 $3,740,295 $1,001,602
Loan Servicing. Ameriquest services all of the mortgage loans it
originates which are retained in its portfolio and continues to service at
least a majority of the loans that have been sold to investors. Servicing
includes collecting and remitting loan payments, accounting for principal and
interest, contacting delinquent mortgagors, and supervising foreclosure in the
event of unremedied defaults. Ameriquest's servicing activities are audited
periodically by applicable regulatory authorities. Certain financial records
of Ameriquest relating to its loan servicing activities are reviewed annually
as part of the audit of Ameriquest's financial statements conducted by its
independent accountants.
Collection Procedures; Delinquency and Loss Experience. When a mortgagor
fails to make a required payment on a residential mortgage loan, Ameriquest
attempts to cause the deficiency to be cured by corresponding or making
telephone contact with the mortgagor. Pursuant to Ameriquest's customary
procedures for residential mortgage loans serviced by it for its own account,
Ameriquest generally mails a notice of intent to foreclose to the mortgagor
within ten days after the loan has become 31 days past due (two payments due
but not received) and upon expiration of the notice of intent to foreclose,
generally one month thereafter, if the loan remains delinquent, typically
institutes appropriate legal action to foreclose on the property securing the
loan. If foreclosed, the property is sold at a public or private sale.
Ameriquest, in its capacity as servicer, typically enters a bid based upon an
analysis of the property value, estimated marketing and carrying costs and
presence of junior liens, which may be equal to or less than the full amount
owed. In the event the property is acquired at the foreclosure sale by
Ameriquest, as servicer, it is placed on the market for sale through local
real estate brokers experienced in the sale of similar properties.
Ameriquest Residential Loan Servicing Portfolio. The following table sets
forth the delinquency and loss experience at the dates indicated for
residential (one- to four-family and multifamily) retail first lien mortgage
loans serviced by Ameriquest that were originated or purchased by Ameriquest
(including loans originated or purchased by the Bank and Old Long Beach prior
to the Reorganization):
AT DECEMBER 31,
1997 1998 1999 2000 March 31, 2001
---------------------------------------------------------------------- -----------------
(DOLLARS IN THOUSANDS)
----------------------------------------------------------------------------------------
Total Outstanding Principal Balance $2,841,644 $3,800,247 $6,525,485 $6,627,984 $7,126,260
Number of Loans 32,610 44,610 75,353 72,684 75,758
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance $47,708 $60,819 $85,863 $146,623 $90,684
Number of Loans 554 748 1,125 1,763 1,083
Delinquency as a Percentage of Total
Outstanding Principal Balance 1.68% 1.60% 1.32% 2.21% 1.27%
Delinquency as a Percentage of Number
of Loans 1.70% 1.68% 1.49% 2.43% 1.43%
61-90 Days
Principal Balance $22,480 $40,939 $49,939 $75,657 $54,609
Number of Loans 260 473 626 907 647
Delinquency as a Percentage of Total
Outstanding Principal Balance 0.79% 1.08% 0.77% 1.14% 0.77%
Delinquency as a Percentage of Number
of Loans 0.80% 1.06% 0.83% 1.25% 0.85%
91 Days or More
Principal Balance $92,171 $157,562 $259,658 $324,110 $377,104
Number of Loans 1,022 1,933 3,340 4,123 4,602
Delinquency as a Percentage of Total
Outstanding Principal Balance 3.24% 4.15% 3.98% 4.89% 5.29%
Delinquency as a Percentage of Number
of Loans 3.13% 4.33% 4.43% 5.67% 6.07%
Total Delinquencies:
Principal Balance $162,359 $259,320 $395,460 $546,390 $522,397
Number of Loans 1,836 3,154 5,091 6,793 6,332
Delinquency as a Percentage of Total
Outstanding Principal Balance 5.71% 6.82% 6.06% 8.24% 7.33%
Delinquency as a Percentage of Number
of Loans 5.63% 7.07% 6.76% 9.35% 8.36%
FORECLOSURES PENDING(1)
Principal Balance $93,042 $162,616 $242,586 $275,390 $334,095
Number of Loans 1,038 2,006 3,108 3,477 4,029
Foreclosures as a Percentage of Total
Outstanding Principal Balance 3.27% 4.28% 3.72% 4.15% 4.69%
Foreclosures as a Percentage of
Number of Loans 3.18% 4.50% 4.12% 4.78% 5.32%
NET LOAN LOSSES for the Period(2) $11,828 $15,899 $26,566 $37,530 $13,027
NET LOAN LOSSES as a Percentage of Total
Outstanding Principal Balance 0.42% 0.42% 0.48% 0.54% 0.76%
- ---------------------------------------------------------------------------------------------------------------------------------
- ------------------
(1) Includes mortgage loans which are in foreclosure but as to which title to
the mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set
forth above.
(2) Net Loan Losses is calculated for loans conveyed to REMIC trust funds
as the aggregate of the net loan loss for all such loans liquidated
during the period indicated. The net loan loss for any such loan is equal
to the difference between (a) the principal balance plus accrued interest
through the date of liquidation plus all liquidation expenses related to
such loan and (b) all amounts received in connection with the liquidation
of such loan. The majority of residential loans serviced by Ameriquest
have been conveyed to REMIC trust funds.
As of March 31, 2001, 1106 one- to four-family residential properties
relating to loans in Ameriquest's retail servicing portfolio had been acquired
through foreclosure or deed in lieu of foreclosure and were not liquidated.
There can be no assurance that the delinquency and loss experience of the
Mortgage Loans will correspond to the loss experience of Ameriquest's mortgage
portfolio set forth in the foregoing table. The statistics shown above
represent the delinquency and loss experience for Ameriquest's total servicing
portfolio only for the years presented, whereas the aggregate delinquency and
loss experience on the Mortgage Loans will depend on the results obtained over
the life of the Trust Fund. Ameriquest's portfolio includes mortgage loans
with payment and other characteristics that are not representative of the
payment and other characteristics of the Mortgage Loans. A substantial number
of the Mortgage Loans may also have been originated based on Ameriquest
Guidelines that are less stringent than those generally applicable to the
servicing portfolio reflected in the foregoing table. If the residential real
estate market should experience an overall decline in property values, the
actual rates of delinquencies, foreclosures and losses could be higher than
those previously experienced by Ameriquest. In addition, adverse economic
conditions (which may or may not affect real property values) may affect the
timely payment by mortgagors of scheduled payments of principal and interest
on the Mortgage Loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to the Mortgage Loans.
The delinquency and loss experience percentages set forth above in the
immediately preceding table are calculated on the basis of the total mortgage
loans serviced as of the end of the periods indicated. However, because the
total outstanding principal balance of residential loans serviced by
Ameriquest has increased from $2,841,644,000 at December 31, 1997 to
$7,126,260,040 at March 31, 2001 at December 31, 2000, the total outstanding
principal balance of retail originated loans serviced as of the end of any
indicated period includes many loans that will not have been outstanding long
enough to give rise to some or all of the indicated periods of delinquency. In
the absence of such substantial and continual additions of newly originated
loans to the total amount of loans serviced, the percentages indicated above
would be higher and could be substantially higher. The actual delinquency
percentages with respect to the Mortgage Loans may be expected to be
substantially higher than the delinquency percentages indicated above because
the composition of the Mortgage Loans will not change.
POOLING AND SERVICING AGREEMENT
General
The certificates will be issued under the Pooling and Servicing Agreement
(the "Pooling and Servicing Agreement"), dated as of April 1, 2001 among the
Depositor, the Servicer, the Trustee and the Trust Administrator, a form of
which is filed as an exhibit to the registration statement. A Current Report
on Form 8-K relating to the certificates containing a copy of the Pooling and
Servicing Agreement as executed will be filed by the Depositor with the
Securities and Exchange Commission ("SEC") within fifteen days of the initial
issuance of the certificates. The trust fund created under the Pooling and
Servicing Agreement will consist of (i) all of the Depositor's right, title
and interest in the Mortgage Loans, the related mortgage notes, mortgages and
other related documents; (ii) all payments on or collections in respect of the
Mortgage Loans due after the Cut-off Date, together with any proceeds of the
Mortgage Loans; (iii) any Mortgaged Properties acquired on behalf of
certificateholders by foreclosure or by deed in lieu of foreclosure, and any
revenues received on these mortgaged properties; (iv) the rights of the
Trustee under all insurance policies required to be maintained under the
Pooling and Servicing Agreement; (v) the rights of the Depositor under the
Mortgage Loan Purchase Agreement; and (vi) the rights under the Cap Agreement
and the Reserve Fund and any amounts on deposit in the Reserve Fund from time
to time and any proceeds thereof. Reference is made to the prospectus for
important information in addition to that set forth in this prospectus
supplement regarding the trust fund, the terms and conditions of the Pooling
and Servicing Agreement and the Offered Certificates. The Depositor will
provide to a prospective or actual certificateholder without charge, on
written request, a copy, without exhibits, of the Pooling and Servicing
Agreement. Requests should be addressed to 6707 Fairview Road, Suite D,
Charlotte, North Carolina 28210.
Assignment of the Mortgage Loans
On the Closing Date, the Depositor will transfer to the trust all of its
right, title and interest in and to each Mortgage Loan, the related mortgage
note, mortgage, assignment of mortgage in recordable form to the Trustee and
other related documents (collectively, the "Related Documents"), including all
scheduled payments with respect to each such Mortgage Loan due after the
Cut-off Date. The Trust Administrator, concurrently with such transfer, will
deliver the certificates to the Depositor. Each Mortgage Loan transferred to
the trust will be identified on a schedule (the "Mortgage Loan Schedule")
delivered to the Trust Administrator and the Trustee pursuant to the Pooling
and Servicing Agreement. The Mortgage Loan Schedule will include information
such as the principal balance of each Mortgage Loan as of the Cut-off Date,
its Mortgage Rate as well as other information with respect to each Mortgage
Loan.
The Pooling and Servicing Agreement will require that, within the time
period specified therein, the Depositor will deliver or cause to be delivered
to the Trustee (or a custodian, as the Trustee's agent for such purpose) the
mortgage notes endorsed to the Trustee on behalf of the certificateholders and
the Related Documents. In lieu of delivery of original mortgages or mortgage
notes, if such original is not available or lost, the Depositor may deliver or
cause to be delivered true and correct copies thereof, or, with respect to a
lost mortgage note, a lost note affidavit. The assignments of mortgage are
generally required to be recorded by or on behalf of the Depositor in the
appropriate offices for real property records.
Prior to 90 days following the Closing Date, the Trustee will review the
Mortgage Loans and the Related Documents pursuant to the Pooling and Servicing
Agreement and if any Mortgage Loan or Related Document is found to not comply
with the requirements of the Pooling and Servicing Agreement and such
non-conformance is not cured within 120 days following notification thereof to
the Originator by the Trustee, the Originator will be obligated to cure such
defect or purchase such Mortgage Loan at a price (the "Purchase Price") equal
to the outstanding principal balance of such Mortgage Loan as of the date of
purchase, plus all accrued and unpaid interest thereon, computed at the
Mortgage Rate through the end of the calendar month in which the purchase is
effected, plus the amount of any unreimbursed P&I Advances and servicing
advances made by the Servicer. The Purchase Price will be required to be
remitted to the Servicer for deposit in the Collection Account (as defined
herein) on or prior to the next succeeding Determination Date after such
obligation arises. The obligation of the Originator to repurchase a Deleted
Mortgage Loan (as defined herein) is the sole remedy regarding any defects in
the Mortgage Loans and Related Documents available to the certificateholders.
The Originator will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee and the Trust Administrator with respect to each Mortgage Loan. Upon
discovery of a breach of any such representation and warranty which materially
and adversely affects the interests of the certificateholders in the related
Mortgage Loan and Related Documents, the Originator (or the Servicer, in the
event of a breach of the Servicer's representation) will have a period of 120
days after the earlier of discovery or receipt of written notice of the breach
to effect a cure. If the breach cannot be cured within the 120-day period, the
Originator or the Servicer will be obligated to purchase such Deleted Mortgage
Loan from the trust. The same procedure and limitations that are set forth
above for the substitution or purchase of Deleted Mortgage Loans as a result
of deficient documentation relating thereto will apply to the substitution or
purchase of a Deleted Mortgage Loan as a result of a breach of a
representation or warranty in the Mortgage Loan Purchase Agreement that
materially and adversely affects the interests of the certificateholders.
Mortgage Loans required to be transferred to the Originator as described
in the preceding paragraphs are referred to as "Deleted Mortgage Loans."
Payments on Mortgage Loans; Deposits to Collection Account and
Distribution Account
The Servicer shall establish and maintain or cause to be maintained a
separate trust account (the "Collection Account") for the benefit of the
certificateholders. The Collection Account will be an Eligible Account (as
defined in the Pooling and Servicing Agreement). Upon receipt by the Servicer
of amounts in respect of the Mortgage Loans (excluding amounts representing
the Servicing Fee or other servicing compensation, reimbursement for P&I
Advances and servicing advances and insurance proceeds to be applied to the
restoration or repair of a Mortgaged Property or similar items), the Servicer
will deposit such amounts in the Collection Account. Amounts so deposited may
be invested in Permitted Investments (as defined in the Pooling and Servicing
Agreement) maturing no later than one Business Day prior to the date on which
the amount on deposit therein is required to be deposited in the Distribution
Account. The Trust Administrator will establish an account (the "Distribution
Account") into which will be deposited amounts withdrawn from the Collection
Account for distribution to certificateholders on a Distribution Date and
payment of certain fees and expenses of the trust. The Distribution Account
will be an Eligible Account. Amounts on deposit therein may be invested in
Permitted Investments maturing on or before the Business Day prior to the
related Distribution Date unless such Permitted Investments are invested in
investments managed or advised by the Trust Administrator or an affiliate
thereof, in which case such Permitted Investments may mature on the related
Distribution Date.
The Trustee
U.S. Bank National Association, a national banking association, will act
as trustee for the certificates under the Pooling and Servicing Agreement. The
Trustee's offices for notices under the Pooling and Servicing Agreement are
located at 180 East Fifth Street, St. Paul, Minnesota 55101, and its telephone
number is 612-973-5800. In the event the Trust Administrator advises the
Trustee that it is unable to continue to perform its obligations pursuant to
the terms of the Pooling and Servicing Agreement prior to the appointment of a
successor, the Trustee is obligated to perform such obligations until a new
trust administrator is appointed.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Pooling and Servicing Agreement will be equal to the
related portion of accrued interest at the rate of approximately 0.01% (the
"Administration Fee Rate") per annum on the Scheduled Principal Balance of the
Mortgage Loans (the "Administration Fee"). The Pooling and Servicing Agreement
will provide that the Trustee and any director, officer, employee or agent of
the Trustee will be indemnified by the trust fund and will be held harmless
against any loss, liability or expense (not including expenses, disbursements
and advances incurred or made by the Trustee, including the compensation and
the expenses and disbursements of its agents and counsel, in the ordinary
course of the Trustee's performance in accordance with the provisions of the
Pooling and Servicing Agreement), incurred by the Trustee in connection with
any pending or threatened claim or legal action arising out of or in
connection with the acceptance or administration of its obligations and duties
under the Pooling and Servicing Agreement, other than any loss, liability or
expense (i) for which the Trustee is indemnified by the Servicer or the Trust
Administrator under the Pooling and Servicing Agreement, (ii) that constitutes
a specific liability of the Trustee under the Pooling and Servicing Agreement
or (iii) incurred by reason of willful misfeasance, bad faith or negligence in
the performance of the Trustee's duties under the Pooling and Servicing
Agreement or as a result of a breach, or by reason of reckless disregard, of
the Trustee's obligations and duties under the Pooling and Servicing
Agreement.
The Trust Administrator
Bankers Trust Company of California, N.A., a national banking
association, will act as Trust Administrator for the certificates pursuant to
the Pooling and Servicing Agreement. The Trust Administrator's offices for
notices under the Pooling and Servicing Agreement are located at 1761 East St.
Andrew Place, Santa Ana, California, 92705-4934, and its telephone number is
714-247-6000. The Trust Administrator will perform certain administrative
functions on behalf of the Trustee and will act as initial paying agent and
certificate registrar.
The principal compensation to be paid to the Trust Administrator in
respect of its obligations under the Pooling and Servicing Agreement will be
equal to the related portion of the Administration Fee. The Pooling and
Servicing Agreement will provide that the Trust Administrator and any
director, officer, employee or agent of the Trust Administrator will be
indemnified by the trust fund and will be held harmless against any loss,
liability or expense (including but not limited to expenses, disbursements and
advances incurred or made by the Trust Administrator, including the
compensation and the expenses and disbursements of its agents and counsel, in
the ordinary course of the Trust Administrator's performance in accordance
with the provisions of the Pooling and Servicing Agreement) incurred by the
Trust Administrator in connection with any pending or threatened claim or
legal action arising out of or in connection with the acceptance or
administration of its obligations and duties under the Pooling and Servicing
Agreement, other than any loss, liability or expense (i) for which the Trust
Administrator is indemnified by the Servicer or the Trustee under the Pooling
and Servicing Agreement, (ii) that constitutes a specific liability of the
Trust Administrator under the Pooling and Servicing Agreement or (iii)
incurred by reason of willful misfeasance, bad faith or negligence in the
performance of the Trust Administrator's duties under the Pooling and
Servicing Agreement or as a result of a breach, or by reason of reckless
disregard, of the Trust Administrator's obligations and duties under the
Pooling and Servicing Agreement.
Servicing and Other Compensation and Payment of Expenses
The principal compensation to be paid to the Servicer in respect of its
servicing activities for the certificates will be equal to accrued interest at
the Servicing Fee Rate of 0.50% per annum with respect to each Mortgage Loan
on the Scheduled Principal Balance of each Mortgage Loan (the "Servicing
Fee"). As additional servicing compensation, the Servicer is entitled to
retain all assumption fees, late payment charges, and other miscellaneous
servicing fees in respect of the Mortgage Loans (with the exception of
Prepayment Charges, which will be distributed to the holders of the Class X/N
Certificates), to the extent collected from mortgagors, together with any
interest or other income earned on funds held in the collection account and
any escrow accounts.
The Servicer is obligated to offset any Prepayment Interest Shortfall on
any Distribution Date, with Compensating Interest to the extent of its
Servicing Fee for each Distribution Date. The Servicer is obligated to pay
insurance premiums and other ongoing expenses associated with the Mortgage
Pool incurred by the Servicer in connection with its responsibilities under
the Pooling and Servicing Agreement and is entitled to reimbursement for these
expenses as provided in the Pooling and servicing agreement. See "Description
of the Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Retained Interest; Servicing Compensation and
Payment of Expenses" in the prospectus for information regarding expenses
payable by the Servicer and "Federal Income Tax Consequences" in this
prospectus supplement regarding taxes payable by the Servicer.
Events of Default
In addition to those events of default described under "Description of
the Agreements --Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Events of Default under the Agreement and
- --Rights Upon Events of Default under the Agreements" in the prospectus, upon
the occurrence of loss triggers with respect to the Mortgage Loans, the
Servicer may be removed as Servicer of the Mortgage Loans in accordance with
the terms of the Pooling and Servicing Agreement.
Any successor to the Servicer appointed under the Pooling and Servicing
Agreement must be a housing loan servicing institution, acceptable to each
rating agency, with a net worth at the time of the appointment of at least
$15,000,000. See "Description of the Agreements --Material Terms of the
Pooling and Servicing Agreements and Underlying Servicing Agreements--Events
of Default under the Agreement and --Rights Upon Events of Default under the
Agreements" in the prospectus.
Voting Rights
With respect to any date of determination, 1% of all voting rights will
be allocated among the holders of the Class A-IO Certificates until the
Certificate Notional Amount thereof is equal to $0 and thereafter the holders
of the Class A-IO Certificates will have no voting rights. 100% of all Voting
Rights not allocated to the Class A-IO will be allocated among the holders of
the Class A-1 Certificates, the Mezzanine Certificates and the Class X/N
Certificates in proportion to the then outstanding Certificate Principal
Balances of their respective Certificates.
Termination
The circumstances under which the obligations created by the Pooling and
Servicing Agreement will terminate in respect of the certificates are
described in "Description of the Securities--Termination" in the prospectus.
The Servicer will have the right to purchase all remaining Mortgage Loans and
any properties acquired in respect thereof and thereby effect early retirement
of the certificates on any Distribution Date following the Due Period during
which the aggregate principal balance of the Mortgage Loans and properties
acquired in respect thereof remaining in the trust fund at the time of
purchase is reduced to less than 10% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date. In the event the Servicer exercises the
option, the purchase price payable in connection with the option will be equal
to the greater of par or the fair market value of the Mortgage Loans and such
properties, plus accrued interest for each Mortgage Loan at the related
Mortgage Rate to but not including the first day of the month in which the
repurchase price is distributed, together with any amounts due to the Servicer
for unpaid Servicing Fees and any unreimbursed advances. In the event the
Servicer exercises this option, the portion of the purchase price allocable to
the Offered Certificates will be, to the extent of available funds, (i) 100%
of the then outstanding Certificate Principal Balance of the Offered
Certificates, plus (ii) one month's interest on the then outstanding
Certificate Principal Balance of the Offered Certificates at the then
applicable Pass-Through Rate for the class, plus (iii) any previously accrued
but unpaid interest thereon to which the holders of the Offered Certificates
are entitled, together with the amount of any Basis Risk Shortfalls and Unpaid
Basis Risk Shortfalls, plus (iv) in the case of the Mezzanine Certificates,
any previously unpaid Allocated Realized Loss Amount. The holders of the
Residual Certificates shall pledge any amount received in a termination in
excess of par to the holders of the Class X/N Certificates. In no event will
the trust created by the Pooling and Servicing Agreement continue beyond the
expiration of 21 years from the death of the survivor of the persons named in
the Pooling and Servicing Agreement. See "Description of the
Securities--Termination" in the prospectus.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Sidley Austin Brown & Wood LLP, counsel to the
Depositor, assuming compliance with the provisions of the Pooling and
Servicing Agreement, for federal income tax purposes, each of the REMICs
established under the Pooling and Servicing Agreement will qualify as a REMIC
under the Code.
For federal income tax purposes (i) the Residual Certificates will
represent the sole classes of "residual interests" in each REMIC elected by
the trust and (ii) the Offered Certificates (exclusive of any right of the
holder of such certificates to receive payments from the Reserve Fund in
respect of Basis Risk Shortfalls) and the Class X Certificates will represent
the "regular interests" of, and will be treated as debt instruments of, a
REMIC. See "Material Federal Income Tax Considerations --REMICs" in the
prospectus.
For federal income tax purposes, the Offered Certificates may be treated
as having been issued with original issue discount. The prepayment assumption
that will be used in determining the rate of accrual of original issue
discount, market discount and premium, if any, for federal income tax purposes
will be based on the assumption that, subsequent to the date of any
determination the Mortgage Loans will prepay at a rate equal to 28% of CPR. No
representation is made that the Mortgage Loans will prepay at that rate or at
any other rate. See "Material Federal Income Tax Considerations--General" and
"--REMICs--Taxation of Owners of Regular Securities" in the prospectus.
The holders of the Offered Certificates will be required to include in
income interest on their certificates in accordance with the accrual method of
accounting.
The Internal Revenue Service (the "IRS") has issued original issue
discount regulations (the "OID Regulations") under sections 1271 to 1275 of
the Code that address the treatment of debt instruments issued with original
issue discount. Purchasers of the Offered Certificates should be aware that
the OID Regulations do not adequately address certain issues relevant to, or
are not applicable to, prepayable securities such as the Offered Certificates.
In addition, there is considerable uncertainty concerning the application of
the OID Regulations to REMIC Regular Certificates that provide for payments
based on an adjustable rate such as the Offered Certificates. Because of the
uncertainty concerning the application of Section 1272(a)(6) of the Code to
such certificates and because the rules of the OID Regulations relating to
debt instruments having an adjustable rate of interest are limited in their
application in ways that could preclude their application to such certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert
that the Offered Certificates should be treated as issued with original issue
discount or should be governed by the rules applicable to debt instruments
having contingent payments or by some other method not yet set forth in
regulations. Prospective purchasers of the Offered Certificates are advised to
consult their tax advisors concerning the tax treatment of such certificates.
In certain circumstances the OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, the holder of an Offered
Certificate may be able to select a method for recognizing original issue
discount that differs from that used by the Trust in preparing reports to the
certificateholders and the IRS.
Certain of the certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of a
certificate will be treated as holding such certificate with amortizable bond
premium will depend on such certificateholder's purchase price and the
distributions remaining to be made on such certificate at the time of its
acquisition by such certificateholder. Holders of such certificates should
consult their own tax advisors regarding the possibility of making an election
to amortize such premium. See "Material Federal Income Tax Considerations--
REMICs--Taxation of Owners of Regular Securities" in the Prospectus.
Each holder of a Class A-1 Certificate and a Mezzanine Certificate is
deemed to own an undivided beneficial ownership interest in two assets, a
REMIC Regular Interest and the right to receive payments from an outside
Reserve Fund in respect of Basis Risk Shortfalls. The Reserve Fund is not an
asset of any REMIC. The treatment of amounts received by a holder of Class A-1
or Mezzanine Certificate under that certificateholder's right to receive a
Basis Risk Shortfall will depend on the portion, if any, of the
certificateholder's purchase price allocable thereto. Under the REMIC
Regulations, each holder of a Class A-1 Certificate or Mezzanine Certificate
must allocate its purchase price for such certificate between its undivided
interest in the regular interest of a REMIC and its undivided interest in the
right to receive payments from the Reserve Fund in respect of Basis Risk
Shortfalls in accordance with the relative fair market values of each such
property right on the Closing Date. The Trust Administrator intends to treat
payments made to the holders of the Class A-1 Certificates and the Mezzanine
Certificates with respect to a Basis Risk Shortfall as includible in income
based on the regulations relating to notional principal contracts. The OID
regulations provide that the trust's allocation of the issue price is binding
on all holders unless the holder explicitly discloses on its tax return that
its allocation is different from the trust's allocation. For tax reporting
purposes, the Trust Administrator intends to treat the right to receive
payments from the Reserve Fund in respect of Basis Risk Shortfalls as having a
de minimis value. However, this assignment of value is not binding on the IRS
and the IRS could argue that a greater value should have been allocated to the
right to receive payments from the Reserve Fund in respect of Basis Risk
Shortfalls. If an argument of this kind were to be sustained, the Class A-1
Certificates and the Mezzanine Certificates could be viewed as having been
issued with original issue discount. Under the REMIC Regulations, the Trust
Administrator is required to account for the REMIC Regular Interest and the
right to receive payments from the Reserve Fund in respect of Basis Risk
Shortfalls as discrete property rights. Holders of the Offered Certificates
are advised to consult their own tax advisors regarding the allocation of
issue price, timing, character and source of income and deductions resulting
from the ownership of the Offered Certificates. Treasury regulations have been
promulgated under Section 1275 of the Code generally providing for the
integration of a "qualifying debt instrument" with a hedge if the combined
cash flows of the components are substantially equivalent to the cash flows on
a variable rate debt instrument. However, these regulations specifically
disallow integration of debt instruments subject to Section 1272(a)(6) of the
Code. Therefore, holders of the Offered Certificates will be unable to use the
integration method provided for under these regulations with respect to the
Offered Certificates. Ownership of the right to Basis Risk Shortfalls will
nevertheless entitle the owner to amortize the separate price paid for the
right to Basis Risk Shortfalls under the regulations relating to notional
principal contracts if this right is treated as a "notional principal
contract."
Upon the sale of a Class A-1 Certificate or Mezzanine Certificate the
amount of the sale allocated to the selling certificateholder's right to
receive payments from the Reserve Fund in respect of the Basis Risk Shortfalls
would be considered a "termination payment" under the regulations relating to
Notional Principal Contracts allocable to the related certificate. A
certificateholder will have gain or loss from a termination of the right to
receive payments from the Reserve Fund in respect of Basis Risk Shortfalls
equal to (i) any termination payment it received or is deemed to have received
minus (ii) the unamortized portion of any amount paid (or deemed paid) by the
certificateholder upon entering into or acquiring its interest in the right to
receive payments from the Reserve Fund in respect of Basis Risk Shortfalls.
Gain or loss realized upon the termination of the right to receive
payments from the Reserve Fund in respect of Basis Risk Shortfalls will
generally be treated as capital gain or loss. Moreover, in the case of a bank
or thrift institution, Code Section 582(c) would likely not apply to treat
such gain or loss as ordinary.
This paragraph applies to the Class A-1 Certificates and the Mezzanine
Certificates exclusive of any rights in the Reserve Fund. The Offered
Certificates will be treated as assets described in Section 7701(a)(19)(C) of
the Code and "real estate assets" under Section 856(c)(4)(A) of the Code
generally in the same proportion that the assets of the trust would be so
treated. In addition, interest on the Offered Certificates will be treated as
"interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Code to the extent that the Offered Certificates are
treated as "real estate assets" under Section 856(c)(4)(A) of the Code.
Moreover, the Offered Certificates will be "qualified mortgages" within the
meaning of Section 860G(a)(3) of the Code if transferred to another REMIC on
its startup day in exchange for a regular or residual interest therein.
However, as mentioned above, no portion of a Class A-1 or Mezzanine
Certificateholder's basis or income allocable to a Basis Risk Arrangement will
qualify for such treatment. As a result, those Certificates are not suitable
investments for inclusion in another REMIC. See "Pooling and Servicing
Agreement--Termination" in this prospectus supplement and "Material Federal
Income Tax Considerations--REMICs-- Characterization of Investments in REMIC
Securities" in the prospectus.
The holders of the Offered Certificates will be required to include in
income interest on their certificates in accordance with the accrual method of
accounting. As noted above, each holder of a Class A-1 Certificate or a
Mezzanine Certificate will be required to allocate a portion of the purchase
price paid for such certificates to the right to receive payments from the
Reserve Fund in respect of Basis Risk Shortfalls. The value of the right to
receive any Basis Risk Shortfall is a question of fact which could be subject
to differing interpretations. Because Basis Risk Shortfalls are treated as a
separate right of the Class A-1 Certificates and Mezzanine Certificates not
payable by the REMIC, this right will not be treated as a qualifying asset for
any certificateholder that is a mutual savings bank, domestic building and
loan association, real estate investment trust, or real estate mortgage
investment conduit and any amounts received from the reserve fund will not be
qualifying real estate income for real estate investment trusts.
For further information regarding federal income tax consequences of
investing in the Offered Certificates, see "Material Federal Income Tax
Considerations--REMICs" in the prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated May 4, 2001 (the "Underwriting Agreement"), between the
Underwriter and the Depositor, the Depositor has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase from the Depositor,
the Offered Certificates.
Distribution of the Offered Certificates will be made from time to time
in negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the Depositor, will be
approximately $493,933,413, plus accrued interest on the Class A-IO
Certificates, before deducting expenses. In connection with the purchase and
sale of the Offered Certificates, the Underwriter may be deemed to have
received compensation from the Depositor in the form of underwriting
discounts.
The Offered Certificates are offered subject to receipt and acceptance by
the Underwriter, to prior sale and to the Underwriter's right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Offered Certificates will be made
through the facilities of DTC, Clearstream and the Euroclear System on or
about the Closing Date. The Offered Certificates will be offered in Europe and
the United States of America.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against those civil liabilities set forth in the Underwriting
Agreement, including liabilities under the Securities Act of 1933, as amended,
or will contribute to payments the Underwriter may be required to make in
respect of these liabilities.
The Underwriter is an affiliate of the Depositor, the Seller and the
Trust Administrator.
SECONDARY MARKET
There is currently no secondary market for the Offered Certificates and
there can be no assurance that a secondary market for the Offered Certificates
will develop or, if it does develop, that it will continue. The Underwriter
intends to establish a market in the Offered Certificates but it is not
obligated to do so. There can be no assurance that any additional information
regarding the Offered Certificates will be available through any other source.
In addition, the Depositor is not aware of any source through which price
information about the Offered Certificates will be available on an ongoing
basis. The limited nature of the information regarding the Offered
Certificates may adversely affect the liquidity of the Offered Certificates,
even if a secondary market for the Offered Certificates becomes available. The
primary source of information available to investors concerning the Offered
Certificates will be the monthly statements discussed in herein under
"Description of the Certificates--Reports to Certificateholders" which will
include information as to the outstanding principal balance of the Offered
Certificates and the status of the applicable form of credit enhancement.
LEGAL OPINIONS
Legal matters relating to the Offered Certificates will be passed upon
for the Depositor and the Underwriter by Sidley Austin Brown & Wood LLP, New
York, New York.
RATINGS
It is a condition to the issuance of the certificates that the Class A-1
Certificates be rated "Aaa." by Moody's Investors Service, Inc. ("Moody's")
and "AAA" by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"), that the Class A-IO Certificates be rated as least "AAA" by S&P and
"Aaa" by Moody's, that the Class M-1 Certificates be rated as least "AA" by
S&P and "Aa2" by Moody's and that the Class M-2 Certificates be rated at least
"A" by S&P and "A2" by Moody's.
The ratings assigned to mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions to which
the certificateholders are entitled. The rating process addresses structural
and legal aspects associated with the certificates, including the nature of
the underlying mortgage loans. The ratings assigned to mortgage pass-through
certificates do not represent any assessment of the likelihood that principal
prepayments will be made by the mortgagors or the degree to which such
prepayments will differ from that originally anticipated. The ratings do not
address the possibility that certificateholders might suffer a lower than
anticipated yield due to non-credit events. In addition, the ratings on the
Class A-1 Certificates and the Mezzanine Certificates do not address the
likelihood of receipt by the holders of such certificates of any amounts in
respect of Basis Risk Shortfalls or Unpaid Basis Risk Shortfalls.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently of
any other security rating. In the event that the ratings initially assigned to
the Offered Certificates are subsequently lowered for any reason, no person or
entity is obligated to provide any additional credit support or credit
enhancement with respect to the Offered Certificates.
The Depositor has not requested that any rating agency rate the Offered
Certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the Offered Certificates, or, if
it does, what rating would be assigned by any other rating agency. A rating on
the Offered Certificates by another rating agency, if assigned at all, may be
lower than the ratings assigned to the Offered Certificates as stated in this
section.
LEGAL INVESTMENT
The Class A-1 Certificates, Class A-IO Certificates and the Class M-1
Certificates will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") for so long as
they are rated not lower than the second highest rating category by a rating
agency, and, therefore, will be legal investments for those entities to the
extent provided in SMMEA. SMMEA, however, provides for state limitation on the
authority of entities to invest in "mortgage related securities" provided that
the restrictive legislation was enacted prior to October 3, 1991. There are
ten states that have enacted legislation which overrides the preemption
provisions of SMMEA. The Class M-2 Certificates will not constitute "mortgage
related securities" for purposes of SMMEA.
The Depositor makes no representations as to the proper characterization
of any class of Offered Certificates for legal investment or other purposes,
or as to the ability of particular investors to purchase any class of Offered
Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their
legal advisors in determining whether and to what extent any class of Offered
Certificates constitutes a legal investment or is subject to investment,
capital or other restrictions. See "Legal Investment" in the Prospectus.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "Plan"), or any other person
investing plan assets of a Plan, including an insurance company, whether
investing through its general or separate accounts,, should carefully review
with its legal advisors whether the purchase or holding of Offered
Certificates could give rise to a transaction prohibited or not otherwise
permissible under ERISA or Section 4975 of the Code. The purchase or holding
of the Offered Certificates by or on behalf of, or with Plan assets of, a Plan
may qualify for exemptive relief under the Underwriters' Exemption, as
currently in effect and as described under "ERISA Considerations" in the
prospectus. The Underwriters' Exemption relevant to the Offered Certificates
was granted by the Department of Labor as Prohibited Transaction Exemption
("PTE") 94-84 and FAN 97-03E, (December 9, 1996) as amended by PTE. 97-34 at
62.F.R. 39021, and amended on November 13, 2000 by PTE 2000-58 at 65 F.R.
67765. However, the Underwriters' Exemption contains a number of conditions
which must be met for the exemption to apply, including the requirements that
the Offered Certificates be rated at least "BBB-" (or its equivalent) by
Moody's or S&P at the time of the Plan's purchase and that the investing Plan
must be an "accredited investor" as defined in Rule 501(a)(1) of Regulation D
of the SEC under the Securities Act and a "Qualified Plan Investor, as defined
in the Underwriters' Exemption. A fiduciary of a Plan contemplating purchasing
an Offered Certificate must make its own determination that the conditions set
forth in the Underwriters' Exemption will be satisfied with respect to the
those certificates.
A "Qualified Plan Investor" is a plan investor or group of plans
investors on whose behalf the decision to purchase Offered Certificates is
made by an independent fiduciary that is (i) qualified to analyze and
understand the terms and conditions of the Cap Contract and the effect of the
Cap Contract on the credit ratings of the Offered Certificates, and (ii) a
"qualified professional asset manager", as defined in Part V(a) of PTE 84-14,
an "in-house asset manager" as defined in Part IV(a) of PTE 96-23, or a plan
fiduciary with a total Plan and non-Plan assets under management of at least
$100 million at the time of the acquisition of the Offered Certificates.
Each beneficial owner of an Offered Certificate or any interest therein
shall be deemed to have represented, by virtue of its acquisition or holding
of that certificate or interest therein, that either (i) it is not a plan
investor, (ii) it has acquired and is holding such Offered Certificate in
reliance on the Underwriters' Exemption, and that it understands that there
are certain conditions to the availability of the Underwriters' Exemption,
including that the Offered Certificates must be rated, at the time of
purchase, not lower than "BBB-" (or its equivalent) by Moody's or S&P and that
the plan investor must be an "accredited investor" as defined in Rule
501(a)(i) of Regulation D under the Securities Act and a "Qualified Plan
Investor" as defined in the Underwriters' Exemption or (iii) (1) it is an
insurance company, (2) the source of funds used to acquire or hold the
certificate or interest therein is an "insurance company general account," as
such term is defined in PTCE 95-60, and (3) the conditions in Sections I and
III of PTCE 95-60 have been satisfied.
If any Offered Certificate or any interest therein is acquired or held in
violation of the conditions described in the preceding paragraph, the next
preceding permitted beneficial owner will be treated as the beneficial owner
of that Offered Certificate, retroactive to the date of transfer to the
purported beneficial owner. Any purported beneficial owner whose acquisition
or holding of any such certificate or interest therein was effected in
violation of the conditions described in the preceding paragraph shall
indemnify and hold harmless the Depositor, the Trustee, the Trust
Administrator, the Servicer, any subservicer, and the trust fund from and
against any and all liabilities, claims, costs or expenses incurred by those
parties as a result of that acquisition or holding.
Any fiduciary or other investor of Plan assets that proposes to acquire
or hold the Offered Certificates on behalf of or with Plan assets of any Plan
should consult with its counsel with respect to: (i) whether, with respect to
the Offered Certificates, the specific and general conditions and the other
requirements in the Underwriters' Exemption would be satisfied and (ii) the
potential applicability of the general fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of
the Internal Revenue Code to the proposed investment. See "ERISA
Considerations" in the prospectus.
The sale of any of the Offered Certificates to a Plan is in no respect a
representation by the Depositor or the related underwriter that an investment
in the Offered Certificates meets all relevant legal requirements relating to
investments by Plans generally or any particular Plan, or that an investment
in the Offered Certificates is appropriate for Plans generally or any
particular Plan.
$481,538,000 (Approximate)
ACE Securities Corp.
Depositor
ACE Securities Corp. Home Equity Loan Trust, Series 2001-AQ1
Asset Backed Pass-Through Certificates
Prospectus Supplement
Dated May 4, 2001
Ameriquest Mortgage Company
Servicer
Deutsche Banc Alex. Brown
Underwriter
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the certificates offered by this prospectus supplement in
any state where the offer is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus
when acting as underwriters of the certificates offered by this prospectus
supplement and with respect to their unsold allotments or subscriptions. In
addition, all dealers selling the Offered Certificates, whether or not
participating in this offering, may be required to deliver a prospectus
supplement and prospectus until August 4, 2001.
ANNEX I
GLOBAL CLEARANCE AND SETTLEMENT AND DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered Certificates will be
offered globally (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, Clearstream or Euroclear. The Global Securities
will be tradable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle in
same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream and Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, Clearstream and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
Trading between Clearstream and/or Euroclear Participants. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in
same-day funds.
Trading between DTC seller and Clearstream or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant
to the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day
prior to settlement. Clearstream or Euroclear will instruct the respective
Depositary, as the case may be, to receive the Global Securities against
payment. Payment will include interest accrued on the Global Securities from
and including the last coupon payment date to and excluding the settlement
date, on the basis of the actual number of days in such accrual period and a
year assumed to consist of 360 days. For transactions settling on the 31st of
the month, payment will include interest accrued to and excluding the first
day of the following month. Payment will then be made by the respective
Depositary of the DTC Participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Clearstream Participant's or
Euroclear Participant's account. The securities credit will appear the next
day (European time) and the cash debt will be back-valued to, and the interest
on the Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Clearstream
or Euroclear cash debt will be valued instead as of the actual settlement
date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect
not to preposition funds and allow that credit line to be drawn upon the
finance settlement. Under this procedure, Clearstream Participants or
Euroclear Participants purchasing Global Securities would incur overdraft
charges for one day, assuming they cleared the overdraft when the Global
Securities were credited to their accounts. However, interest on the Global
Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period
may substantially reduce or offset the amount of such overdraft charges,
although this result will depend on each Clearstream Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two
DTC Participants.
Trading between Clearstream or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global
Securities from and including the last coupon payment to and excluding the
settlement date on the basis of the actual number of days in such accrual
period and a year assumed to consist of 360 days. For transactions settling on
the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. The payment will then be reflected in
the account of the Clearstream Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Clearstream
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Clearstream Participant or Euroclear Participant have a line
of credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Clearstream Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Clearstream
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through Clearstream or Euroclear for one day (until the
purchase side of the day trade is reflected in their Clearstream or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) 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 or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Clearstream Participant or
Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons, unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the
ordinary course of its trade or business in the chain of intermediaries
between such beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (ii) such beneficial
owner takes one of the following steps to obtain an exemption or reduced tax
rate:
Exemption for non-U.S. Persons (Form W-8BEN). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8BEN (Certificate of Foreign Status
of Beneficial Owner for United States Tax Withholding). If the information
shown on Form W-8BEN changes, a new Form W-8BEN must be filed within 30 days
of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form W-8ECI (Certificate of Foreign
Person's Claim for Exemption from Withholding on Income Effectively Connected
with the Conduct of a Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form W-8BEN). Non-U.S. Persons that are Certificate Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States
Tax Withholding). Form W-8BEN may be filed by the Certificate Owners or his
agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security 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 effective
until the third succeeding calendar year from the date such form is signed.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a
corporation or partnership for United States federal income tax purposes
organized in or under the laws of the United States or any state thereof or
the District of Columbia (unless, in the case of a partnership, Treasury
regulations provide otherwise) or (iii) an estate the income of which is
includible in gross income for United States tax purposes, regardless of its
source, or (iv) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more United States persons have authority to control all substantial decisions
of the trust. Notwithstanding the preceding sentence, to the extent provided
in Treasury regulations, certain trusts in existence on August 20, 1996, and
treated as United States persons prior to such date, that elect to continue to
be treated as United States persons will also be a U.S. Person. This summary
does not deal with all aspects of U.S. Federal income tax withholding that may
be relevant to foreign holders of the Global Securities. Investors are advised
to consult their own tax advisors for specific tax advice concerning their
holding and disposing of the Global Securities.
PROSPECTUS
Asset Backed Certificates
Asset Backed Notes
(Issuable in Series)
ACE Securities Corp.,
Depositor
The Trust Funds:
Each trust fund will be established to hold assets transferred to it
by ACE Securities Corp. The assets in each trust fund will generally
consist of one or more of the following:
o mortgage loans secured by one- to four-family residential
properties;
o unsecured home improvement loans;
o manufactured housing installment sale contracts;
o mortgage pass-through securities issued or guaranteed by Ginnie Mae,
Fannie Mae, or Freddie Mac; or
o previously issued asset-backed or mortgage-backed securities backed
by mortgage loans secured by residential properties or
participations in those types of loans.
The assets in your trust fund are specified in the prospectus supplement
for that particular trust fund, while the types of assets that may be included
in a trust fund, whether or not in your trust fund, are described in greater
detail in this prospectus.
The Securities:
ACE Securities Corp. will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each
having is own distinct designation. Each series will be issued in one or more
classes and will evidence beneficial ownership of, or be secured by, the
assets in the trust fund that the series relates to. A prospectus supplement
for a series will specify all of the terms of the series and of each of the
classes in the series.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
The date of this prospectus is May 4, 2001.
TABLE OF CONTENTS
Description of the Trust Funds............................................3
Use of Proceeds..........................................................20
Yield Considerations.....................................................20
The Depositor............................................................28
Description of the Securities............................................28
Description of the Agreements............................................46
Description of Credit Support............................................74
Certain Legal Aspects of Mortgage Loans..................................78
Certain Legal Aspects of the Contracts...................................94
Material Federal Income Tax Considerations...............................99
State and Other Tax Considerations......................................149
Legal Investment........................................................158
Methods of Distribution.................................................160
Additional Information..................................................162
Incorporation of Certain Documents by Reference.........................163
Legal Matters...........................................................163
Financial Information...................................................163
Rating..................................................................163
Index of Defined Terms..................................................165
Description of the Trust Funds
Assets
The primary assets of each trust fund (the "Assets") will include some or
all of the following types of assets:
o mortgage loans on residential properties, which may include Home
Equity Loans, home improvement contracts and Land Sale Contracts
(each as defined in this prospectus);
o home improvement installment sales contracts or installment
loans that are unsecured called unsecured home improvement Loans;
o manufactured housing installment sale contracts or installment
loan agreements referred to as contracts;
o any combination of "fully modified pass-through" mortgage-backed
certificates guaranteed by the Government National Mortgage
Association ("Ginnie Mae"), guaranteed mortgage pass-through
securities issued by Fannie Mae ("Fannie Mae") and mortgage
participation certificates issued by the Federal Home Loan Mortgage
Corporation ("Freddie Mac") (collectively, "Agency Securities");
o previously issued asset-backed certificates, collateralized
mortgage obligations or participation certificates (each, and
collectively, "Mortgage Securities") evidencing interests in, or
collateralized by, mortgage loans or Agency Securities; or
o a combination of mortgage loans, unsecured home improvement
loans, contracts, Agency Securities and/or Mortgage Securities.
The mortgage loans will not be guaranteed or insured by ACE Securities
Corp. or any of its affiliates. The mortgage loans will be guaranteed or
insured by a governmental agency or instrumentality or other person only if
and to the extent expressly provided in the prospectus supplement. The
depositor will select each Asset to include in a trust fund from among those
it has purchased, either directly or indirectly, from a prior holder (an
"Asset Seller"), which may be an affiliate of the depositor and which prior
holder may or may not be the originator of that mortgage loan.
The Assets included in the trust fund for your series may be subject to
various types of payment provisions:
o "Level Payment Assets," which may provide for the payment of
interest, and full repayment of principal, in level monthly payments
with a fixed rate of interest computed on their declining principal
balances;
o "Adjustable Rate Assets," which may provide for periodic
to their rates of interest to equal the sum of a fixed margin and an
index;
o "Buy Down Assets," which are Assets for which funds have been
provided by someone other than the related borrowers to reduce the
borrowers' monthly payments during the early period after
origination of those Assets;
o "Increasing Payment Assets," as described below;
o "Interest Reduction Assets," which provide for the one-time
reduction of the interest rate payable on these Assets;
o "GEM Assets," which provide for (1) monthly payments during the
first year after origination that are at least sufficient to pay
interest due on these Assets, and (2) an increase in those monthly
payments in later years at a predetermined rate resulting in full
repayment over a shorter term than the initial amortization terms of
those Assets;
o "GPM Assets," which allow for payments during a portion of their
terms which are or may be less than the amount of interest due on
their unpaid principal balances, and this unpaid interest will be
added to the principal balances of those Assets and will be paid,
together with interest on the unpaid interest, in later years;
o "Step-up Rate Assets" which provide for interest rates that
increase over time;
o "Balloon Payment Assets;"
o "Convertible Assets" which are Adjustable Rate Assets subject to
provisions pursuant to which, subject to limitations, the related
borrowers may exercise an option to convert the adjustable interest
rate to a fixed interest rate; and
o "Bi-weekly Assets," which provide for payments to be made by
borrowers on a bi-weekly basis.
An "Increasing Payment Asset" is an Asset that provides for monthly
payments that are fixed for an initial period to be specified in the
prospectus supplement and which increase thereafter (at a predetermined rate
expressed as a percentage of the monthly payment during the preceding payment
period, subject to any caps on the amount of any single monthly payment
increase) for a period to be specified in the prospectus supplement from the
date of origination, after which the monthly payment is fixed at a
level-payment amount so as to fully amortize the Asset over its remaining term
to maturity. The scheduled monthly payment for an Increasing Payment Asset is
the total amount required to be paid each month in accordance with its terms
and equals the sum of (1) the borrower's monthly payments referred to in the
preceding sentence and (2) payments made by the respective servicers pursuant
to buy-down or subsidy agreements. The borrower's initial monthly payments for
each Increasing Payment Asset are set at the level-payment amount that would
apply to an otherwise identical Level Payment Asset having an interest rate
some number of percentage points below the Asset Rate of that Increasing
Payment Asset. The borrower's monthly payments on each Increasing Payment
Asset, together with any payments made on the Increasing Payment Asset by the
related servicers pursuant to buy-down or subsidy agreements, will in all
cases be sufficient to allow payment of accrued interest on the Increasing
Payment Asset at the related interest rate, without negative amortization. A
borrower's monthly payments on an Increasing Payment Asset may, however, not
be sufficient to result in any reduction of the principal balance of that
Asset until after the period when those payments may be increased.
The Notes or Certificates, as applicable, will be entitled to payment
only from the assets of the related trust fund and will not be entitled to
payments from the assets of any other trust fund established by the depositor.
The assets of a trust fund may consist of certificates representing beneficial
ownership interests in, or indebtedness of, another trust fund that contains
the Assets, if specified in the prospectus supplement.
Mortgage Loans
General
Each mortgage loan will generally be secured by a lien on (1) a one- to
four-family residential property (including a manufactured home) or a security
interest in shares issued by a cooperative housing corporation (a "Single
Family Property") or (2) a primarily residential property that consists of
five or more residential dwelling units, referred to as a multifamily
property, which may include limited retail, office or other commercial space
("Multi Family Property" and together with Single Family Property, "Mortgaged
Properties"). The mortgage loans will be secured by first and/or junior
mortgages or deeds of trust or other similar security instruments creating a
first or junior lien on Mortgaged Property.
The Mortgaged Properties may also include:
o Apartment buildings owned by cooperative housing corporations
("Cooperatives"); and
o Leasehold interests in properties, the title to which is held by
third party lessors. The term of these leaseholds will exceed the
term of the related mortgage note by at least five years or some
other time period specified in the prospectus supplement.
The principal balance of mortgage loans secured by Mortgaged Property
consisting of Multi Family Property or apartment buildings owned by
Cooperatives shall not exceed 5% of the principal balance of all mortgage
loans conveyed to the trust fund.
The mortgage loans may include:
o Closed-end and/or revolving home equity loans or balances of these
home equity loans ("Home Equity Loans");
o Secured home improvement installment sales contracts and secured
installment loan agreements, known as home improvement contracts;
and
o Mortgage loans evidenced by contracts ("Land Sale Contracts") for
the sale of properties pursuant to which the borrower promises to
pay the amount due on the mortgage loans to the holder of the Land
Sale Contract with fee title to the related property held by that
holder until the borrower has made all of the payments required
pursuant to that Land Sale Contract, at which time fee title is
conveyed to the borrower.
The originator of each mortgage loan will have been a person other than
the depositor. The prospectus supplement will indicate if any originator is an
affiliate of the depositor. The mortgage loans will be evidenced by mortgage
notes secured by mortgages, deeds of trust or other security instruments (the
"Mortgages") creating a lien on the Mortgaged Properties. The Mortgaged
Properties will be located in any one of the fifty states, the District of
Columbia, Guam, Puerto Rico or any other territory of the United States. If
provided in the prospectus supplement, the mortgage loans may include loans
insured by the Federal Housing Administration (the "FHA") or partially
guaranteed by the Veteran's Administration (the "VA"). See "--FHA Loans and VA
Loans" below.
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a mortgage loan at any particular time is
the ratio (expressed as a percentage) of the then outstanding principal
balance of the mortgage loan to the Value of the related Mortgaged Property.
The "Value" of a Mortgaged Property, other than for Refinance Loans, is
generally the lesser of (a) the appraised value determined in an appraisal
obtained by the originator at origination of that loan and (b) the sales price
for that property. "Refinance Loans" are loans made to refinance existing
loans. Unless otherwise specified in the prospectus supplement, the Value of
the Mortgaged Property securing a Refinance Loan is the appraised value of the
Mortgaged Property determined in an appraisal obtained at the time of
origination of the Refinance Loan. The value of a Mortgaged Property as of the
date of initial issuance of the related series may be less than the Value at
origination and will fluctuate from time to time based upon changes in
economic conditions and the real estate market.
Mortgage Loan Information in the Prospectus Supplements
Your prospectus supplement will contain information, as of the dates
specified in that prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to the mortgage loans,
including:
o the total outstanding principal balance and the largest,
smallest and average outstanding principal balance of the mortgage
loans as of, unless otherwise specified in that prospectus
supplement, the close of business on the first day of the month of
formation of the related trust fund (the "Cut-off Date");
o the type of property securing the mortgage loans;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the mortgage loans;
o the range of maturity dates of the mortgage loans;
o the range of the Loan-to-Value Ratios at origination of the
mortgage loans;
o the mortgage rates or range of mortgage rates and the weighted
average mortgage rate borne by the mortgage loans;
o the state or states in which most of the Mortgaged Properties
are located;
o information regarding the prepayment provisions, if any, of the
mortgage loans;
o for mortgage loans with adjustable mortgage rates ("ARM Loans"),
the index, the frequency of the adjustment dates, the range of margins
added to the index, and the maximum mortgage rate or monthly payment
variation at the time of any adjustment of and over the life of the
ARM Loan;
o information regarding the payment characteristics of the mortgage
loans, including balloon payment and other amortization provisions;
o the number of mortgage loans that are delinquent and the number
of days or ranges of the number of days those mortgage loans are
delinquent; and
o the material underwriting standards used for the mortgage loans.
If specific information respecting the mortgage loans is unknown to the
depositor at the time the Notes or Certificates, as applicable, are initially
offered, more general information of the nature described above will be
provided in the prospectus supplement, and specific information will be set
forth in a report that will be available to purchasers of the related Notes or
Certificates, as applicable, at or before the initial issuance of that
Security and will be filed as part of a Current Report on Form 8-K with the
Securities and Exchange Commission (the "Commission") within fifteen days
after that initial issuance. The characteristics of the mortgage loans
included in a trust fund will not vary by more than five percent (by total
principal balance as of the Cut-off Date) from the characteristics of the
mortgage loans that are described in the prospectus supplement.
The prospectus supplement will specify whether the mortgage loans include
(1) Home Equity Loans, which may be secured by Mortgages that are junior to
other liens on the related Mortgaged Property and/or (2) home improvement
contracts originated by a home improvement contractor and secured by a
mortgage on the related mortgaged property that is junior to other liens on
the mortgaged property. The home improvements purchased with the home
improvement contracts typically include replacement windows, house siding,
roofs, swimming pools, satellite dishes, kitchen and bathroom remodeling
goods, solar heating panels, patios, decks, room additions and garages. The
prospectus supplement will specify whether the home improvement contracts are
FHA loans and, if so, the limitations on any FHA insurance. In addition, the
prospectus supplement will specify whether the mortgage loans contain some
mortgage loans evidenced by Land Sale Contracts.
Payment Provisions of the Mortgage Loans
All of the mortgage loans will provide for payments of principal,
interest or both, on due dates that occur monthly, quarterly or semi-annually
or at some other interval as is specified in the prospectus supplement or for
payments in another manner described in the prospectus supplement. Each
mortgage loan may provide for no accrual of interest or for accrual of
interest on the mortgage loan at a mortgage rate that is fixed over its term
or that adjusts from time to time, or that may be converted from an adjustable
to a fixed mortgage rate or a different adjustable mortgage rate, or from a
fixed to an adjustable mortgage rate, from time to time pursuant to an
election or as otherwise specified in the related mortgage note, in each case
as described in the prospectus supplement. Each mortgage loan may provide for
scheduled payments to maturity or payments that adjust from time to time to
accommodate changes in the mortgage rate or to reflect the occurrence of
particular events or that adjust on the basis of other methodologies, and may
provide for negative amortization or accelerated amortization, in each case as
described in the prospectus supplement. Each mortgage loan may be fully
amortizing or require a balloon payment due on its stated maturity date, in
each case as described in the prospectus supplement. Each mortgage loan may
contain prohibitions on prepayment (a "Lock-out Period" and, the date of
expiration thereof, a "Lock-out Date") or require payment of a premium or a
yield maintenance penalty (a "Prepayment Premium") in connection with a
prepayment, in each case as described in the prospectus supplement. If the
holders of any class or classes of Offered Notes or Offered Certificates, as
applicable, are entitled to all or a portion of any Prepayment Premiums
collected from the mortgage loans, the prospectus supplement will specify the
method or methods by which any of these amounts will be allocated. See
"--Assets" above.
Revolving Credit Line Loans
As more fully described in the prospectus supplement, the mortgage loans
may consist, in whole or in part, of revolving Home Equity Loans or balances
of these Home Equity Loans ("Revolving Credit Line Loans"). Interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of that loan. From time to time
before the expiration of the related draw period specified in a Revolving
Credit Line Loan, principal amounts on that Revolving Credit Line Loan may be
drawn down (up to a maximum amount as set forth in the prospectus supplement)
or repaid. If specified in the prospectus supplement, new draws by borrowers
under the Revolving Credit Line Loans will automatically become part of the
trust fund described in the prospectus supplement. As a result, the total
balance of the Revolving Credit Line Loans will fluctuate from day to day as
new draws by borrowers are added to the trust fund and principal payments are
applied to those balances and those amounts will usually differ each day, as
more specifically described in the prospectus supplement. Under some
circumstances, under a Revolving Credit Line Loan, a borrower may, during the
related draw period, choose an interest only payment option, during which the
borrower is obligated to pay only the amount of interest that accrues on the
loan during the billing cycle, and may also elect to pay all or a portion of
the principal. An interest only payment option may terminate at the end of the
related draw period, after which the borrower must begin paying at least a
minimum monthly portion of the average outstanding principal balance of the
loan.
Unsecured Home Improvement Loans
The unsecured home improvement loans may consist of conventional
unsecured home improvement loans, unsecured installment loans and unsecured
home improvement loans that are FHA loans. Except as otherwise described in
the prospectus supplement, the unsecured home improvement loans will be fully
amortizing and will bear interest at a fixed or variable annual percentage
rate.
Unsecured Home Improvement Loan Information in Prospectus Supplements
Each prospectus supplement will contain information, as of the dates
specified in the prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to any unsecured home
improvement loans, including:
o the total outstanding principal balance and the largest, smallest
and average outstanding principal balance of the unsecured home
improvement loans as of the applicable cut-off date;
o the weighted average, by principal balance, of the original and
remaining terms to maturity of the unsecured home improvement loans;
o the earliest and latest origination date and maturity date of the
unsecured home improvements loans;
o the interest rates or range of interest rates and the weighted
average interest rates borne by the unsecured home improvement
loans;
o the state or states in which most of the unsecured home
improvement loans were originated.
o information regarding the prepayment provisions, if any, of the
unsecured home improvement loans;
o with respect to the unsecured home improvement loans with
adjustable interest rates, called ARM unsecured home improvement
loans, the index, the frequency of the adjustment dates, the rage of
margins added to the index, and the maximum interest rate or monthly
payment variation at the time of any adjustment thereof and over the
life of the ARM unsecured home improvement loan;
o information regarding the payment characteristics of the
unsecured home improvement loans;
o the number of unsecured home improvement loans that are
delinquent and the number of days or ranges of the number of days
that unsecured home improvement loans are delinquent; and
o the material underwriting standards used for the unsecured home
improvement loans.
If specific information respecting the unsecured home improvement loans
is unknown to the depositor at the time Notes or Certificates, as applicable,
are initially offered, more general information of the nature described above
will be provided in the prospectus supplement, and specific information will
be set forth in a report that will be available to purchasers of the related
Notes or Certificates, as applicable, at or before the initial issuance
thereof and will be filed as part of a Current Report on Form 8-K with the
Commission within fifteen days after the related initial issuance. The
characteristics of the unsecured home improvement loans included in a trust
fund will not vary by more than five percent, by total principal balance as of
the cut-off date, from the characteristics thereof that are described in the
prospectus supplement.
Contracts
General
To the extent provided in the prospectus supplement, each contract will
be secured by a security interest in a new or used manufactured home, called a
Manufactured Home. The contracts may include contracts that are FHA loans. The
method of computing the Loan-to-Value Ratio of a contract will be described in
the prospectus supplement.
Contract Information in Prospectus Supplements
Each prospectus supplement relating to a trust fund whose assets include
a substantial proportion of contracts will contain certain information, as of
the dates specified in that prospectus supplement and to the extent then
applicable and specifically known to the depositor, with respect to any
contracts, including:
o the total outstanding principal balance and the largest, smallest
and average outstanding principal balance of the contracts as of the
applicable cut-off date;
o whether the manufactured homes were new or used as of the
origination of the related contracts;
o the weighted average, by principal balance, of the original and
remaining terms to maturity of the contracts;
o the range of maturity dates of the contracts;
o the range of the Loan-to-Value Ratios at origination of the
contracts;
o the annual percentage rate on each contract, called a contract
rate, or range of contract rates and the weighted average contract
rate borne by the contracts;
o the state or states in which most of the manufactured homes are
located at origination;
o information regarding the prepayment provisions, if any, of the
contracts;
o for contracts with adjustable contract rates, referred to as ARM
contracts, the index, the frequency of the adjustment dates, and the
maximum contract rate or monthly payment variation at the time of
any adjustment thereof and over the life of the ARM contract;
o the number of contracts that are delinquent and the number of
days or ranges of the number of days those contracts are delinquent;
o information regarding the payment characteristics of the
contracts; and
o the material underwriting standards used for the contracts.
If specific information respecting the contracts is unknown to the
depositor at the time the Notes or Certificates, as applicable, are initially
offered, more general information of the nature described above will be
provided i the prospectus supplement, and specific information will be set
forth in a report that will be available to purchasers of the related Notes or
Certificates, as applicable, at or before the initial issuance thereof and
will be filed as part of a Current Report on Form 8-K with the Commission
within fifteen days after the related initial issuance. The characteristics of
the contracts included in a trust fund will not vary by more than five percent
(by total principal balance as of the cut-off date) from the characteristics
thereof that are described in the prospectus supplement.
The information described above regarding the contracts in a trust fund
may be presented in the prospectus supplement in combination with similar
information regarding the mortgage loans in the trust fund.
Payment Provisions of the Contracts
All of the contracts will provide for payments of principal, interest or
both, on due dates that occur monthly or at some other interval as is
specified in the prospectus supplement or form payments in another manner
described in the prospectus supplement. Each contract may provide for no
accrual of interest or for accrual of interest thereon at a contract rate that
is fixed over its term or that adjusts from time to time, or as otherwise
specified in the prospectus supplement. Each contract may provide for
scheduled payments to maturity or payments that adjust from time to time to
accommodate changes in the contract rate as otherwise described in the
prospectus supplement.
Agency Securities
The Agency Securities will consist of any combination of Ginnie Mae
certificates, Fannie Mae certificates and Freddie Mac certificates, which may
include Stripped Agency Securities, as described below.
Ginnie Mae
Ginnie Mae is a wholly-owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. Section 306(g)
of Title III of the Housing Act authorizes Ginnie Mae to guarantee the timely
payment of the principal of and interest on certificates that are based on and
backed by a pool of FHA loans, VA loans or by pools of other eligible
residential loans.
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts that may
be required to be paid under any guaranty under this subsection." To meet its
obligations under that guaranty, Ginnie Mae is authorized, under Section
306(d) of the National Housing Act of 1934 (the "Housing Act"), to borrow from
the United States Treasury with no limitations as to amount, to perform its
obligations under its guarantee.
Ginnie Mae Certificates
Each Ginnie Mae certificate will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by an issuer approved by
Ginnie Mae or Fannie Mae as a seller-servicer of FHA loans or VA loans, except
as described below regarding Stripped Agency Securities (as defined below).
The loans underlying Ginnie Mae certificates may consist of FHA loans, VA
loans and other loans eligible for inclusion in loan pools underlying Ginnie
Mae certificates. Ginnie Mae certificates may be issued under either or both
of the Ginnie Mae I program and the Ginnie Mae II program, as described in the
prospectus supplement. If the trust fund includes Ginnie Mae certificates,
your prospectus supplement will include any material additional information
regarding the Ginnie Mae guaranty program, the characteristics of the pool
underlying those Ginnie Mae certificates, the servicing of the related pool,
the payment of principal and interest on Ginnie Mae certificates and other
relevant matters regarding the Ginnie Mae certificates.
Except as otherwise specified in the prospectus supplement or as
described below with respect to Stripped Agency Securities, each Ginnie Mae
certificate will provide for the payment, by or on behalf of the issuer, to
the registered holder of that Ginnie Mae certificate of monthly payments of
principal and interest equal to the holder's proportionate interest in the
total amount of the monthly principal and interest payments on each related
FHA loan or VA loan, minus servicing and guaranty fees totaling the excess of
the interest on that FHA loan or VA loan over the Ginnie Mae certificates'
interest rate. In addition, each payment to a holder of a Ginnie Mae
certificate will include proportionate pass-through payments to that holder of
any prepayments of principal of the FHA loans or VA loans underlying the
Ginnie Mae certificate and the holder's proportionate interest in the
remaining principal balance in the event of a foreclosure or other disposition
of any related FHA loan or VA loan.
The Ginnie Mae certificates do not constitute a liability of, or evidence
any recourse against, the issuer of the Ginnie Mae certificates, the depositor
or any affiliates of the depositor, and the only recourse of a registered
holder (for example, the trustee) is to enforce the guaranty of Ginnie Mae.
Ginnie Mae will have approved the issuance of each of the Ginnie Mae
certificates included in a trust fund in accordance with a guaranty agreement
or contract between Ginnie Mae and the issuer of the Ginnie Mae certificates.
Pursuant to that agreement, that issuer, in its capacity as servicer, is
required to perform customary functions of a servicer of FHA loans and VA
loans, including collecting payments from borrowers and remitting those
collections to the registered holder, maintaining escrow and impoundment
accounts of borrowers for payments of taxes, insurance and other items
required to be paid by the borrower, maintaining primary hazard insurance, and
advancing from its own funds to make timely payments of all amounts due on the
Ginnie Mae certificate, even if the payments received by that issuer on the
loans backing the Ginnie Mae certificate are less than the amounts due. If the
issuer is unable to make payments on a Ginnie Mae certificate as they become
due, it must promptly notify Ginnie Mae and request Ginnie Mae to make that
payment. Upon that notification and request, Ginnie Mae will make those
payments directly to the registered holder of the Ginnie Mae certificate. In
the event no payment is made by the issuer and the issuer fails to notify and
request Ginnie Mae to make that payment, the registered holder of the Ginnie
Mae certificate has recourse against only Ginnie Mae to obtain that payment.
The trustee or its nominee, as registered holder of the Ginnie Mae
certificates included in a trust fund, is entitled to proceed directly against
Ginnie Mae under the terms of the guaranty agreement or contract relating to
the Ginnie Mae certificates for any amounts that are unpaid when due under
each Ginnie Mae certificate.
The Ginnie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above so long as the
Ginnie Mae certificates and underlying residential loans meet the criteria of
the rating agency or agencies. The Ginnie Mae certificates and underlying
residential loans will be described in the prospectus supplement.
Fannie Mae
Fannie Mae is a federally chartered and stockholder-owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended (the "Charter Act"). Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market by purchasing mortgage
loans from lenders. Fannie Mae acquires funds to purchase loans from many
capital market investors, thus expanding the total amount of funds available
for housing. Operating nationwide, Fannie Mae helps to redistribute mortgage
funds from capital-surplus to capital-short areas. In addition, Fannie Mae
issues mortgage-backed securities primarily in exchange for pools of mortgage
loans from lenders. Fannie Mae receives fees for its guaranty of timely
payment of principal and interest on its mortgage-backed securities.
Fannie Mae Certificates
Fannie Mae certificates are Guaranteed Mortgage Pass-Through Certificates
typically issued pursuant to a prospectus that is periodically revised by
Fannie Mae. Fannie Mae certificates represent fractional undivided interests
in a pool of mortgage loans formed by Fannie Mae. Each mortgage loan must meet
the applicable standards of the Fannie Mae purchase program. Mortgage loans
comprising a pool are either provided by Fannie Mae from its own portfolio or
purchased pursuant to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae certificates included in a trust fund
will consist of conventional mortgage loans, FHA loans or VA loans. If the
trust fund includes Fannie Mae certificates, your prospectus supplement will
include any material additional information regarding the Fannie Mae program,
the characteristics of the pool underlying the Fannie Mae certificates, the
servicing of the related pool, payment of principal and interest on the Fannie
Mae certificates and other relevant matters about the Fannie Mae certificates.
Except as described below with respect to Stripped Agency Securities,
Fannie Mae guarantees to each registered holder of a Fannie Mae certificate
that it will distribute amounts representing that holder's proportionate share
of scheduled principal and interest at the applicable interest rate provided
for by that Fannie Mae certificate on the underlying mortgage loans, whether
or not received, and that holder's proportionate share of the full principal
amount of any prepayment or foreclosed or other finally liquidated mortgage
loan, whether or not the related principal amount is actually recovered.
The obligations of Fannie Mae under its guarantees are obligations solely
of Fannie Mae and are not backed by, nor entitled to, the full faith and
credit of the United States. If Fannie Mae were unable to satisfy those
obligations, distributions to the holders of Fannie Mae certificates would
consist solely of payments and other recoveries on the underlying loans and,
accordingly, monthly distributions to the holders of Fannie Mae certificates
would be affected by delinquent payments and defaults on those loans.
Fannie Mae certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae certificates backed by
pools containing graduated payment mortgage loans or multifamily loans) are
available in book-entry form only. For a Fannie Mae certificate issued in
book-entry form, distributions on the Fannie Mae certificate will be made by
wire, and for a fully registered Fannie Mae certificate, distributions will be
made by check.
The Fannie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above, as long as
the Fannie Mae certificates and underlying mortgage loans meet the criteria of
the rating agency or agencies rating the Certificates. The Fannie Mae
certificates and underlying mortgage loans will be described in the prospectus
supplement.
Freddie Mac
Freddie Mac is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended
(the "Freddie Mac Act"). Freddie Mac was established primarily for the purpose
of increasing the availability of mortgage credit for the financing of needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of Freddie Mac
currently consists of the purchase of first lien, conventional residential
mortgage loans or participation interests in those mortgage loans and the
resale of the mortgage loans so purchased in the form of mortgage securities,
primarily Freddie Mac certificates. Freddie Mac is confined to purchasing, so
far as practicable, mortgage loans and participation interests in mortgage
loans which it deems to be of the quality, type and class as to meet generally
the purchase standards imposed by private institutional mortgage investors.
Freddie Mac Certificates
Each Freddie Mac certificate represents an undivided interest in a pool
of residential loans that may consist of first lien conventional residential
loans, FHA loans or VA loans (the "Freddie Mac Certificate Group"). Each of
these mortgage loans must meet the applicable standards set forth in the
Freddie Mac Act. A Freddie Mac Certificate Group may include whole loans,
participation interests in whole loans and undivided interests in whole loans
and/or participations comprising another Freddie Mac Certificate Group. If the
trust fund includes Freddie Mac certificates, your prospectus supplement will
include any material additional information regarding the Freddie Mac guaranty
program, the characteristics of the pool underlying that Freddie Mac
certificate, the servicing of the related pool, payment of principal and
interest on the Freddie Mac certificate and any other relevant matters about
the Freddie Mac certificates.
Except as described below with respect to Stripped Agency Securities,
Freddie Mac guarantees to each registered holder of a Freddie Mac certificate
the timely payment of interest on the underlying mortgage loans to the extent
of the applicable interest rate on the registered holder's pro rata share of
the unpaid principal balance outstanding on the underlying mortgage loans in
the Freddie Mac Certificate Group represented by that Freddie Mac certificate,
whether or not received. Freddie Mac also guarantees to each registered holder
of a Freddie Mac certificate collection by that holder of all principal on the
underlying mortgage loans, without any offset or deduction, to the extent of
that holder's pro rata share of the principal, but does not, except if and to
the extent specified in the prospectus supplement, guarantee the timely
payment of scheduled principal. Pursuant to its guarantees, Freddie Mac also
guarantees ultimate collection of scheduled principal payments, prepayments of
principal and the remaining principal balance in the event of a foreclosure or
other disposition of a mortgage loan. Freddie Mac may remit the amount due on
account of its guarantee of collection of principal at any time after default
on an underlying mortgage loan, but not later than 30 days following the
latest of
(1) foreclosure sale;
(2) payment of the claim by any mortgage insurer; and
(3) the expiration of any right of redemption, but in any event no
later than one year after demand has been made upon the borrower for
accelerated payment of principal.
In taking actions regarding the collection of principal after default on
the mortgage loans underlying Freddie Mac certificates, including the timing
of demand for acceleration, Freddie Mac reserves the right to exercise its
servicing judgment for the mortgage loans in the same manner as for mortgage
loans that it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies
with the particular circumstances of each borrower, and Freddie Mac has not
adopted servicing standards that require that the demand be made within any
specified period.
Freddie Mac certificates are not guaranteed by the United States or by
any Federal Home Loan Bank and do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The obligations of Freddie Mac
under its guarantee are obligations solely of Freddie Mac and are not backed
by, nor entitled to, the full faith and credit of the United States. If
Freddie Mac were unable to satisfy those obligations, distributions to holders
of Freddie Mac certificates would consist solely of payments and other
recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of Freddie Mac certificates would be affected by
delinquent payments and defaults on those mortgage loans.
The Freddie Mac certificates included in a trust fund may have other
characteristics and terms, different from those described above, so long as
the Freddie Mac certificates and underlying mortgage loans meet the criteria
of the rating agency or agencies rating the Notes or Certificates, as
applicable. The Freddie Mac certificates and underlying mortgage loans will be
described in the prospectus supplement.
Stripped Agency Securities
The Ginnie Mae certificates, Fannie Mae certificates or Freddie Mac
certificates may be issued in the form of certificates ("Stripped Agency
Securities") that represent an undivided interest in all or part of either the
principal distributions (but not the interest distributions) or the interest
distributions (but not the principal distributions), or in some specified
portion of the principal or interest distributions (but not all of those
distributions), on an underlying pool of mortgage loans or other Ginnie Mae
certificates, Fannie Mae certificates or Freddie Mac certificates. Ginnie Mae,
Fannie Mae or Freddie Mac, as applicable, will guarantee each Stripped Agency
Security to the same extent as that entity guarantees the underlying
securities backing the Stripped Agency Securities or to the extent described
above for a Stripped Agency Security backed by a pool of mortgage loans,
unless otherwise specified in the prospectus supplement. If the trust fund
includes Stripped Agency Securities, your prospectus supplement will include
any material additional information regarding the characteristics of the
assets underlying the Stripped Agency Securities, the payments of principal
and interest on the Stripped Agency Securities and other relevant matters
about the Stripped Agency Securities.
Mortgage Securities
The Mortgage Securities will represent beneficial interests in loans of
the type that would otherwise be eligible to be mortgage loans, unsecured home
improvement loans, contract or Agency Securities, or collateralized
obligations secured by mortgage loans, unsecured home improvement loans,
contract or Agency Securities. The Mortgage Securities will have been
(1) issued by an entity other than the depositor or its affiliates;
(2) acquired in bona fide secondary market transactions from persons
other than the issuer of the Mortgage Securities or its affiliates; and
(3) (a) offered and distributed to the public pursuant to an
effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of
the issuer of those securities at the time of sale (nor an affiliate of
the issuer at any time during the preceding three months); provided a
period of two years elapsed since the later of the date the securities
were acquired from the issuer.
Although individual Underlying Loans may be insured or guaranteed by the
United States or an agency or instrumentality of the United States, they need
not be, and Mortgage Securities themselves will not be so insured or
guaranteed. Except as otherwise set forth in the prospectus supplement,
Mortgage Securities will generally be similar to Notes or Certificates, as
applicable, offered under this prospectus.
The prospectus supplement for the Notes or Certificates, as applicable,
of each series evidencing interests in a trust fund including Mortgage
Securities will include a description of the Mortgage Securities and any
related credit enhancement, and the related mortgage loans, unsecured home
improvement loans, contracts, or Agency Securities will be described together
with any other mortgage loans or Agency Securities included in the trust fund
of that series. As used in this prospectus, the terms "mortgage loans,"
unsecured home improvement loans, contracts, include the mortgage loans,
unsecured home improvement loans, contracts, as applicable, underlying the
Mortgage Securities in your trust fund. References in this prospectus to
advances to be made and other actions to be taken by the master servicer in
connection with the Assets may include any advances made and other actions
taken pursuant to the terms of the applicable Mortgage Securities.
FHA Loans and VA Loans
FHA loans will be insured by the FHA as authorized under the Housing Act,
and the United States Housing Act of 1937, as amended. One- to four-family FHA
loans will be insured under various FHA programs including the standard FHA
203-b programs to finance the acquisition of one- to four-family housing units
and the FHA 245 graduated payment mortgage program. The FHA loans generally
require a minimum down payment of approximately 5% of the original principal
amount of the FHA loan. No FHA loan may have an interest rate or original
principal balance exceeding the applicable FHA limits at the time of
origination of that FHA loan.
Mortgage loans, unsecured home improvement loans, contracts, that are FHA
loans are insured by the FHA (as described in the prospectus supplement, up to
an amount equal to 90% of the sum of the unpaid principal of the FHA loan, a
portion of the unpaid interest and other liquidation costs) pursuant to Title
I of the Housing Act.
There are two primary FHA insurance programs that are available for
multifamily loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD
to insure multifamily loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of those loans made under Sections
221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of this type of multifamily loan may be up to 40 years and the ratio of
the loan amount to property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure multifamily loans
made for the purchase or refinancing of existing apartment projects that are
at least three years old. Section 244 also provides for co-insurance of
mortgage loans made under Section 223(f). Under Section 223(f), the loan
proceeds cannot be used for substantial rehabilitation work, but repairs may
be made for up to, in general, the greater of 15% of the value of the project
and a dollar amount per apartment unit established from time to time by HUD.
In general the loan term may not exceed 35 years and a loan-to-value ratio
refinancing of a project.
VA loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act").
The Servicemen's Readjustment Act permits a veteran (or in some instances the
spouse of a veteran) to obtain a mortgage loan guarantee by the VA covering
mortgage financing of the purchase of a one- to four-family dwelling unit at
interest rates permitted by the VA. The program has no mortgage loan limits,
requires no down payment from the purchasers and permits the guarantee of
mortgage loans of up to 30 years' duration. However, no VA loan will have an
original principal amount greater than five times the partial VA guarantee for
that VA loan. The maximum guarantee that may be issued by the VA under this
program will be set forth in the prospectus supplement.
Pre-Funding Accounts
To the extent provided in a prospectus supplement, a portion of the
proceeds of the issuance of Notes or Certificates, as applicable, may be
deposited into an account maintained with the trustee (a "Pre-Funding
Account"). In that case, the depositor will be obligated to sell at a
predetermined price - and the trust fund for the related series of Notes or
Certificates, as applicable, will be obligated to purchase - additional Assets
(the "Subsequent Assets") from time to time, and as frequently as daily,
within the period (not to exceed three months) specified in the prospectus
supplement (the "Pre-Funding Period") after the issuance of the Notes or
Certificates, as applicable, having a total principal balance approximately
equal to the amount on deposit in the Pre-Funding Account (the "Pre-Funded
Amount") for that series on the date of its issuance. The Pre-Funded Amount
for a series will be specified in the prospectus supplement, and will not in
any case exceed 50% of the total initial Security Balance of the related Notes
or Certificates, as applicable. Any Subsequent Assets will be required to
satisfy specific eligibility criteria more fully set forth in the prospectus
supplement, which criteria will be consistent with the eligibility criteria of
the Assets initially included in the trust fund, subject to those exceptions
that are expressly stated in the prospectus supplement. In addition, specific
conditions must be satisfied before the Subsequent Assets are transferred into
the trust fund, for example, the delivery to the rating agencies and to the
trustee of any required opinions of counsel. See "ERISA
Considerations--Pre-Funding Accounts" for additional information regarding
Pre-Funding Accounts.
Except as set forth in the following sentence, the Pre-Funded Amount will
be used only to purchase Subsequent Assets. Any portion of the Pre-Funded
Amount remaining in the Pre-Funding Account at the end of the Pre-Funding
Period will be used to prepay one or more classes of Notes or Certificates, as
applicable, in the amounts and in the manner specified in the prospectus
supplement. In addition, if specified in the prospectus supplement, the
depositor may be required to deposit cash into an account maintained by the
trustee (the "Capitalized Interest Account") for the purpose of assuring the
availability of funds to pay interest on the Notes or Certificates, as
applicable, during the Pre-Funding Period. Any amount remaining in the
Capitalized Interest Account at the end of the Pre-Funding Period will be
remitted as specified in the prospectus supplement.
Amounts deposited in the Pre-Funding and Capitalized Interest Accounts
will be permitted to be invested, pending application, only in eligible
investments authorized by each applicable rating agency.
Accounts
Each trust fund will include one or more accounts, established and
maintained on behalf of the securityholders into which the person or persons
designated in the prospectus supplement will, to the extent described in this
prospectus and in the prospectus supplement deposit all payments and
collections received or advanced with respect to the Assets and other assets
in the trust fund. This type of account may be maintained as an interest
bearing or a non-interest bearing account, and funds held in that account may
be held as cash or invested in some short-term, investment grade obligations,
in each case as described in the prospectus supplement. See "Description of
the Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Collection Account and Related Accounts."
Credit Support
If so provided in the prospectus supplement, partial or full protection
against some defaults and losses on the Assets in the related trust fund may
be provided to one or more classes of Notes or Certificates, as applicable, in
the related series in the form of subordination of one or more other classes
of Notes or Certificates, as applicable, in that series or by one or more
other types of credit support, for example, a letter of credit, insurance
policy, guarantee, reserve fund or another type of credit support, or a
combination of these (any of these types of coverage for the Notes or
Certificates, as applicable, of any series, is referred to generally as
"credit support"). The amount and types of coverage, the identification of the
entity providing the coverage (if applicable) and related information for each
type of credit support, if any, will be described in the prospectus supplement
for a series of Notes or Certificates, as applicable. See "Description of
Credit Support."
Cash Flow Agreements
If so provided in the prospectus supplement, the trust fund may include
guaranteed investment contracts pursuant to which moneys held in the funds and
accounts established for the related series will be invested at a specified
rate. The trust fund may also include other agreements, for example, interest
rate swap agreements, interest rate cap or floor agreements, currency swap
agreements or similar agreements provided to reduce the effects of interest
rate or currency exchange rate fluctuations on the Assets or on one or more
classes of Notes or Certificates, as applicable. (Currency swap agreements
might be included in the trust fund if some or all of the Assets were
denominated in a non-United States currency.) The principal terms of any
related guaranteed investment contract or other agreement (any of these types
of agreement, a "Cash Flow Agreement"), including provisions relating to the
timing, manner and amount of payments under these documents and provisions
relating to the termination of these documents, will be described in the
prospectus supplement for the related series. In addition, the prospectus
supplement will provide information with respect to the borrower under any
Cash Flow Agreement.
Use of Proceeds
The net proceeds to be received from the sale of the Notes or
Certificates, as applicable, will be applied by the depositor to the purchase
of Assets, or the repayment of the financing incurred in that purchase, and to
pay for some of the expenses incurred in connection with that purchase of
Assets and sale of Notes or Certificates, as applicable. The depositor expects
to sell the Notes or Certificates, as applicable, from time to time, but the
timing and amount of offerings of Notes or Certificates, as applicable, will
depend on a number of factors, including the volume of Assets acquired by the
depositor, prevailing interest rates, availability of funds and general market
conditions.
Yield Considerations
General
The yield on any Offered Security will depend on the price paid by the
securityholder, the Interest Rate of the Security, the receipt and timing of
receipt of distributions on the Security and the weighted average life of the
Assets in the related trust fund (which may be affected by prepayments,
defaults, liquidations or repurchases).
Interest Rate
Notes or Certificates, as applicable, of any class within a series may
have fixed, variable or adjustable Interest Rates, which may or may not be
based upon the interest rates borne by the Assets in the related trust fund.
The prospectus supplement for any series will specify the Interest Rate for
each class of Notes or Certificates, as applicable, or, in the case of a
variable or adjustable Interest Rate, the method of determining the Interest
Rate; the effect, if any, of the prepayment of any Asset on the Interest Rate
of one or more classes of Notes or Certificates, as applicable,; and whether
the distributions of interest on the Notes or Certificates, as applicable, of
any class will be dependent, in whole or in part, on the performance of any
borrower under a Cash Flow Agreement.
If specified in the prospectus supplement, the effective yield to
maturity to each holder of Notes or Certificates, as applicable, entitled to
payments of interest will be below that otherwise produced by the applicable
Interest Rate and purchase price of that Security because, while interest may
accrue on each Asset during a period (each, an "Accrual Period"), the
distribution of that interest will be made on a day that may be several days,
weeks or months following the period of accrual.
Timing of Payment of Interest
Each payment of interest on the Notes or Certificates, as applicable,
entitled to distributions of interest (or addition to the Security Balance of
a class of Accrual Securities) will be made by or on behalf of the trustee
each month on the date specified in the related prospectus supplement (each
date, a "Distribution Date"), and will include interest accrued during the
Accrual Period for that Distribution Date. As indicated above under
"--Interest Rate," if the Accrual Period ends on a date other than the day
before a Distribution Date for the related series, the yield realized by the
holders of those Notes or Certificates, as applicable, may be lower than the
yield that would result if the Accrual Period ended on the day before the
Distribution Date.
Payments of Principal; Prepayments
The yield to maturity on the Notes or Certificates, as applicable, will
be affected by the rate of principal payments on the Assets (or, in the case
of Mortgage Securities and Agency Securities, the underlying assets related to
the Mortgage Securities and Agency Securities), including principal
prepayments resulting from both voluntary prepayments by the borrowers and
involuntary liquidations. The rate at which principal prepayments occur will
be affected by a variety of factors, including the terms of the Assets (or, in
the case of Mortgage Securities and Agency Securities, the underlying assets
related to the Mortgage Securities and Agency Securities), the level of
prevailing interest rates, the availability of mortgage credit and economic,
demographic, geographic, tax, legal and other factors.
In general, however, if prevailing interest rates fall significantly
below the interest rates on the Assets in a particular trust fund (or, in the
case of Mortgage Securities and Agency Securities, the underlying assets
related to the Mortgage Securities and Agency Securities), those assets are
likely to be the subject of higher principal prepayments than if prevailing
rates remain at or above the rates borne by those assets. However, you should
note that some Assets (or, in the case of Mortgage Securities and Agency
Securities, the underlying assets related to the Mortgage Securities and
Agency Securities) may consist of loans with different interest rates. The
rate of principal payment on Mortgage Securities will also be affected by the
allocation of principal payments on the underlying assets among the Mortgage
Securities or Agency Securities and other Mortgage Securities or Agency
Securities of the same series. The rate of principal payments on the Assets in
the related trust fund (or, in the case of Mortgage Securities and Agency
Securities, the underlying assets related to the Mortgage Securities and
Agency Securities) is likely to be affected by the existence of any Lock-out
Periods and Prepayment Premium provisions of the mortgage loans underlying or
comprising those Assets, and by the extent to which the servicer of any of
these mortgage loans is able to enforce these provisions. Mortgage loans with
a Lock-out Period or a Prepayment Premium provision, to the extent
enforceable, generally would be expected to experience a lower rate of
principal prepayments than otherwise identical mortgage loans without those
provisions, with shorter Lock-out Periods or with lower Prepayment Premiums.
Because of the depreciating nature of manufactured housing, which limits
the possibilities for refinancing, and because the terms and principal amounts
of manufactured housing contracts are generally shorter and smaller than the
terms and principal amounts of mortgage loans secured by site-built homes,
changes in interest rates have a correspondingly small effect on the amount of
the monthly payments on mortgage loans secured by site-built homes.
Consequently, changes in interest rates may play a smaller role in prepayment
behavior of manufactured housing contracts than they do in the prepayment
behavior of loans secured by mortgage on site-built homes. Conversely, local
economic conditions and some of the other factors mentioned above may play a
larger role in the prepayment behavior of manufactured housing contracts than
they do in the prepayment behavior of loans secured by mortgages on site-built
homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets (or, in
the case of Mortgage Securities and Agency Securities, the underlying assets
related to the Mortgage Securities and Agency Securities), the actual yield to
maturity will be lower than that so calculated. Conversely, if the purchaser
of a Security offered at a premium calculates its anticipated yield to
maturity based on an assumed rate of distributions of principal that is slower
than that actually experienced on the Assets (or, in the case of Mortgage
Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities), the actual yield to maturity will
be lower than that so calculated. In either case, if so provided in the
prospectus supplement for a series of Notes or Certificates, as applicable,
the effect on yield on one or more classes of the Notes or Certificates, as
applicable, of that series of prepayments of the Assets in the related trust
fund may be mitigated or exacerbated by any provisions for sequential or
selective distribution of principal to those classes.
When a full prepayment is made on a mortgage loan or a contract, the
borrower is charged interest on the principal amount of the mortgage loan or a
contract so prepaid for the number of days in the month actually elapsed up to
the date of the prepayment or some other period specified in the prospectus
supplement. Generally, the effect of prepayments in full will be to reduce the
amount of interest paid in the following month to holders of Notes or
Certificates, as applicable, entitled to payments of interest because interest
on the principal amount of any mortgage loan or a contract so prepaid will be
paid only to the date of prepayment rather than for a full month. A partial
prepayment of principal is applied so as to reduce the outstanding principal
balance of the related mortgage loan or a contract as of its due date in the
month in which the partial prepayment is received or some other date as is
specified in the prospectus supplement.
The timing of changes in the rate of principal payments on the Assets
(or, in the case of Mortgage Securities and Agency Securities, the underlying
assets related to the Mortgage Securities and Agency Securities) may
significantly affect an investor's actual yield to maturity, even if the
average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
mortgage loans and distributed on a Security, the greater the effect on that
investor's yield to maturity. The effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by
the investor during a particular period may not be offset by a similar
decrease (or increase) in the rate of principal payments at a later time.
The securityholder will bear the risk of not being able to reinvest
principal received from a Security at a yield at least equal to the yield on
that Security.
Prepayments--Maturity and Weighted Average Life
The rates at which principal payments are received on the Assets included
in or comprising a trust fund and the rate at which payments are made from any
credit support or Cash Flow Agreement for the related series of Notes or
Certificates, as applicable, may affect the ultimate maturity and the weighted
average life of each class of that series. Prepayments on the mortgage loans
or contracts comprising or underlying the Assets in a particular trust fund
will generally accelerate the rate at which principal is paid on some or all
of the classes of the Notes or Certificates, as applicable, of the related
series.
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, one or more classes of Notes or Certificates, as
applicable, may have a final scheduled Distribution Date, which is the date on
or before which the Security Balance of the class of Notes or Certificates, as
applicable, is scheduled to be reduced to zero, calculated on the basis of the
assumptions applicable to that series. Weighted average life refers to the
average amount of time that will elapse from the date of issue of a security
until each dollar of principal of that security will be repaid to the
investor. The weighted average life of a class of Notes or Certificates, as
applicable, of a series will be influenced by the rate at which principal on
the Assets is paid to that class, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
prepayments, in whole or in part, and liquidations due to default).
In addition, the weighted average life of the Notes or Certificates, as
applicable, may be affected by the varying maturities of the Assets in a trust
fund. If any Assets in a particular trust fund have actual terms to maturity
less than those assumed in calculating final scheduled Distribution Dates for
the classes of Notes or Certificates, as applicable, of the related series,
one or more classes of these Notes or Certificates, as applicable, may be
fully paid before their respective final scheduled Distribution Dates, even in
the absence of prepayments. Accordingly, the prepayment experience of the
Assets will, to some extent, be a function of the mix of mortgage rates or
contract rates and maturities of the mortgage loans or contracts comprising or
underlying those Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment
model or the Standard Prepayment Assumption ("SPA") prepayment model. CPR
represents a constant assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of loans for the life of those
loans. SPA represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of loans. A prepayment assumption
of 100% of SPA assumes prepayment rates of 0.2% per annum of the then
outstanding principal balance of those loans in the first month of the life of
the loans and an additional 0.2% per annum in each month thereafter until the
thirtieth month. Starting in the thirtieth month and in each month thereafter
during the life of the loans, 100% of SPA assumes a constant prepayment rate
of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the mortgage
loans or contracts underlying or comprising the Assets.
The prospectus supplement for each series of Notes or Certificates, as
applicable, may contain tables, if applicable, setting forth the projected
weighted average life of each class of Offered Notes or Offered Certificates,
as applicable, of that series and the percentage of the initial Security
Balance of each class that would be outstanding on specified Distribution
Dates based on the assumptions stated in the prospectus supplement, including
assumptions that prepayments on the mortgage loans comprising or underlying
the related Assets are made at rates corresponding to various percentages of
CPR, SPA or some other standard specified in the prospectus supplement. These
tables and assumptions are intended to illustrate the sensitivity of the
weighted average life of the Notes or Certificates, as applicable, to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted average life of the
Notes or Certificates, as applicable. It is unlikely that prepayment of any
mortgage loans or contracts comprising or underlying the Assets for any series
will conform to any particular level of CPR, SPA or any other rate specified
in the prospectus supplement.
Other Factors Affecting Weighted Average Life
Type of Asset
If specified in the prospectus supplement, a number of mortgage loans may
have balloon payments due at maturity (which, based on the amortization
schedule of those mortgage loans, may be a substantial amount), and because
the ability of a borrower to make a balloon payment typically will depend on
its ability either to refinance the loan or to sell the related Mortgaged
Property, there is a risk that a number of Balloon Payment Assets may default
at maturity. The ability to obtain refinancing will depend on a number of
factors prevailing at the time refinancing or sale is required, including real
estate values, the borrower's financial situation, prevailing mortgage loan
interest rates, the borrower's equity in the related Mortgaged Property, tax
laws and prevailing general economic conditions. Neither the depositor, the
servicer, the master servicer, nor any of their affiliates will be obligated
to refinance or repurchase any mortgage loan or to sell the Mortgaged Property
except to the extent provided in the prospectus supplement. In the case of
defaults, recovery of proceeds may be delayed by, among other things,
bankruptcy of the borrower or adverse conditions in the market where the
property is located. To minimize losses on defaulted mortgage loans, the
servicer may modify mortgage loans that are in default or as to which a
payment default is reasonably foreseeable. Any defaulted balloon payment or
modification that extends the maturity of a mortgage loan will tend to extend
the weighted average life of the Notes or Certificates, as applicable, and may
thus lengthen the period of time elapsed from the date of issuance of a
Security until it is retired.
For some mortgage loans, including ARM Loans, the mortgage rate at
origination may be below the rate that would result if the index and margin
relating to the mortgage loan were applied at origination. For some contracts,
the contract rate may be stepped up during its terms or may otherwise vary or
be adjusted. Under the applicable underwriting standards, the borrower under
each mortgage loan or contract generally will be qualified on the basis of the
mortgage rate or contract rate or contract rate in effect at origination. The
repayment of any of these mortgage loans or contracts may therefore be
dependent on the ability of the borrower to make larger level monthly payments
following the adjustment of the mortgage rate or contract rate. In addition,
some mortgage loans may be subject to temporary buydown plans ("Buydown
Mortgage Loans") pursuant to which the monthly payments made by the borrower
during the early years of the mortgage loan will be less than the scheduled
monthly payments on the mortgage loan (the "Buydown Period"). The periodic
increase in the amount paid by the borrower of a Buydown Mortgage Loan during
or at the end of the applicable Buydown Period may create a greater financial
burden for the borrower, who might not have otherwise qualified for a
mortgage, and may accordingly increase the risk of default for the related
mortgage loan.
The mortgage rates on some ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial mortgage rates are generally lower than the sum of
the applicable index at origination and the related margin over that index at
which interest accrues), the amount of interest accruing on the principal
balance of those mortgage loans may exceed the amount of the minimum scheduled
monthly payment on the mortgage loans. As a result, a portion of the accrued
interest on negatively amortizing mortgage loans may be added to the principal
balance of those mortgage loans and will bear interest at the applicable
mortgage rate. The addition of any deferred interest to the principal balance
of any related class or classes of Notes or Certificates, as applicable, will
lengthen the weighted average life of those Notes or Certificates, as
applicable, and may adversely affect yield to holders of those Notes or
Certificates, as applicable, depending on the price at which those Notes or
Certificates, as applicable, were purchased. In addition, for some ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on this type
of mortgage loan would exceed the amount of scheduled principal and accrued
interest on the principal balance of that mortgage loan, and since that excess
will be applied to reduce the principal balance of the related class or
classes of Notes or Certificates, as applicable, the weighted average life of
those Notes or Certificates, as applicable, will be reduced and may adversely
affect yield to holders of those Notes or Certificates, as applicable,
depending on the price at which those Notes or Certificates, as applicable,
were purchased.
As may be described in the prospectus supplement, the related Agreement
may provide that all or a portion of the principal collected on or with
respect to the related mortgage loans may be applied by the related trustee to
the acquisition of additional Revolving Credit Line Loans during a specified
period (rather than used to fund payments of principal to securityholders
during that period) with the result that the related Notes or Certificates, as
applicable, possess an interest-only period, also commonly referred to as a
revolving period, which will be followed by an amortization period. Any of
these interest-only or revolving periods may, upon the occurrence of
particular events to be described in the prospectus supplement, terminate
before the end of the specified period and result in the earlier than expected
amortization of the related Notes or Certificates, as applicable.
In addition, and as may be described in the prospectus supplement, the
related Agreement may provide that all or some of this collected principal may
be retained by the trustee (and held in specific temporary investments,
including mortgage loans) for a specified period before being used to fund
payments of principal to securityholders.
The result of the retention and temporary investment by the trustee of
this principal would be to slow the amortization rate of the related Notes or
Certificates, as applicable, relative to the amortization rate of the related
mortgage loans, or to attempt to match the amortization rate of the related
Notes or Certificates, as applicable, to an amortization schedule established
at the time the Notes or Certificates, as applicable, are issued. Any similar
feature applicable to any Notes or Certificates, as applicable, may end on the
occurrence of events to be described in the prospectus supplement, resulting
in the current funding of principal payments to the related securityholders
and an acceleration of the amortization of these Notes or Certificates, as
applicable.
Termination
If specified in the prospectus supplement, a series of Notes or
Certificates, as applicable, may be subject to optional early termination
through the repurchase of the Assets in the related trust fund by the party
specified in the prospectus supplement, on any date on which the total
Security Balance of the Notes or Certificates, as applicable, of that series
declines to a percentage specified in the prospectus supplement (generally not
to exceed 10%) of the Initial Security Balance, under the circumstances and in
the manner set forth therein. In addition, if so provided in the prospectus
supplement, some classes of Notes or Certificates, as applicable, may be
purchased or redeemed in the manner set forth therein. See "Description of the
Securities--Termination."
Defaults
The rate of defaults on the Assets will also affect the rate, timing and
amount of principal payments on the Assets and thus the yield on the Notes or
Certificates, as applicable. In general, defaults on mortgage loans or
contracts are expected to occur with greater frequency in their early years.
The rate of default on mortgage loans that are refinance or limited
documentation mortgage loans, and on mortgage loans with high Loan-to-Value
Ratios, may be higher than for other types of mortgage loans. Furthermore, the
rate and timing of prepayments, defaults and liquidations on the mortgage
loans or contracts will be affected by the general economic condition of the
region of the country in which the related Mortgage Properties or manufactured
homes are located. The risk of delinquencies and loss is greater and
prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment
or falling property values.
Foreclosures
The number of foreclosures or repossessions and the principal amount of
the mortgage loans or contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the number and principal amount of
mortgage loans or contracts that are repaid in accordance with their terms
will affect the weighted average life of the mortgage loans or contracts
comprising or underlying the Assets and that of the related series of Notes or
Certificates, as applicable.
Refinancing
At the request of a borrower, the servicer may allow the refinancing of a
mortgage loan or contract in any trust fund by accepting prepayments on the
mortgage loan and permitting a new loan secured by a mortgage on the same
property. In the event of that refinancing, the new loan would not be included
in the related trust fund and, therefore, that refinancing would have the same
effect as a prepayment in full of the related mortgage loan or contract. A
servicer may, from time to time, implement programs designed to encourage
refinancing. These programs may include modifications of existing loans,
general or targeted solicitations, the offering of pre-approved applications,
reduced origination fees or closing costs, or other financial incentives. In
addition, servicers may encourage the refinancing of mortgage loans or
contracts, including defaulted mortgage loans or contracts, that would permit
creditworthy borrowers to assume the outstanding indebtedness of those
mortgage loans or contracts.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of transfers of underlying
Mortgaged Property is another factor affecting prepayment rates that may not
be reflected in the prepayment standards or models used in the relevant
prospectus supplement. A number of the mortgage loans comprising or underlying
the Assets, other than FHA loans and VA loans, may include "due-on-sale
clauses" that allow the holder of the mortgage loans to demand payment in full
of the remaining principal balance of the mortgage loans upon sale, transfer
or conveyance of the related Mortgaged Property.
For any mortgage loans, except as set forth in the prospectus supplement,
the servicer will generally enforce any due-on-sale clause to the extent it
has knowledge of the conveyance or proposed conveyance of the underlying
Mortgaged Property and it is entitled to do so under applicable law; provided,
however, that the servicer will not take any action in relation to the
enforcement of any due-on-sale provision that would adversely affect or
jeopardize coverage under any applicable insurance policy. See "Certain Legal
Aspects of Mortgage Loans--Due-on-Sale Clauses" and "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Due-on-Sale Provisions."
The contracts, in general, prohibit the sale or transfer of the related
manufactured homes without the consent of the servicer and permit the
acceleration of the maturity of the contracts by the servicer upon any sale or
transfer that is not consented to. It is expected that the servicer will
permit most transfers of manufactured homes and not accelerate the maturity of
the related contracts. In some cases, the transfer may be made by a delinquent
borrower to avoid a repossession of the manufactured home. In the case of a
transfer of a manufactured home after which the servicer desires to accelerate
the maturity of related contract, the servicer's ability to do so will depend
on the enforceability under state law of the due-on-sale clause.
The Depositor
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own
and sell mortgage loans and financial assets; to issue, acquire, own, hold and
sell securities and notes secured by or representing ownership interests in
mortgage loans and other financial assets, collections on the mortgage loans
and related assets; and to engage in any acts that are incidental to, or
necessary, suitable or convenient to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by Altamont
Holdings Corp., a Delaware corporation.
Description of the Securities General
The Asset-backed certificates (the "Certificates") of each series
(including any class of Certificates not offered by this prospectus) will
represent the entire beneficial ownership interest in the trust fund created
pursuant to the related Agreement. The Asset-backed notes (the "Notes," and
together with the Certificates, the "Securities"), will represent indebtedness
of the related trust fund and will be issued and secured pursuant to an
indenture. Each series of Notes or Certificates, as applicable, will consist
of one or more classes of Notes or Certificates, as applicable, that may:
o provide for the accrual of interest on the series of Notes or
Certificates, as applicable, based on fixed, variable or adjustable
rates;
o be senior ("Senior Notes" or "Senior Certificates," and
collectively, "Senior Securities") or subordinate ("Subordinate
Notes" or "Subordinate Certificates," and collectively, "Subordinate
Securities") to one or more other classes of Notes or Certificates,
as applicable, in respect of distributions on the Notes or
Certificates, as applicable;
o be entitled either to (A) principal distributions, with
disproportionately low, nominal or no interest distributions or (B)
interest distributions, with disproportionately low, nominal or no
principal distributions (collectively, "Strip Securities");
o provide for distributions of accrued interest on the series of Notes
or Certificates, as applicable, which begin only following the
occurrence of specific events, that as the retirement of one or more
other classes of Notes or Certificates, as applicable, of that
series (collectively, "Accrual Securities");
o provide for payments of principal as described in the prospectus
supplement, from all or only a portion of the Assets in that trust
fund, to the extent of available funds, in each case as described in
the prospectus supplement; and/or
o provide for distributions based on a combination of two or more
components of the Notes or Certificates, as applicable, with one or
more of the characteristics described in this paragraph including a
Strip Security component.
If specified in the prospectus supplement, distributions on one or more
classes of a series of Notes or Certificates, as applicable, may be limited to
collections from a designated portion of the Assets in the related trust fund
(each portion of the Assets, an "Asset Group"). Any of these classes may
include classes of Offered Notes or Offered Certificates, as applicable.
Each class of Notes or Certificates, as applicable, offered by this
prospectus and the related prospectus supplement (the "Offered Notes" and the
"Offered Certificates," respectively, and together, the "Offered Securities")
will be issued in minimum denominations corresponding to the Security Balances
or, in the case of some classes of Strip Securities, notional amounts or
percentage interests specified in the prospectus supplement. The transfer of
any Offered Notes or Offered Certificates, as applicable, may be registered
and those Notes or Certificates, as applicable, may be exchanged without the
payment of any service charge payable in connection with that registration of
transfer or exchange, but the depositor or the trustee or any agent of the
depositor or the trustee may require payment of a sum sufficient to cover any
tax or other governmental charge. One or more classes of Notes or
Certificates, as applicable, of a series may be issued in fully registered,
certificated form ("Definitive Notes" or "Definitive Certificates," and
collectively, "Definitive Securities") or in book-entry form ("Book-Entry
Notes" or "Book-Entry Certificates," and collectively, "Book-Entry
Securities"), as provided in the prospectus supplement. See "Description of
the Securities--Book-Entry Registration and Definitive Securities." Definitive
Notes or Definitive Certificates, as applicable, will be exchangeable for
other Notes or Certificates, as applicable, of the same class and series of a
similar total Security Balance, notional amount or percentage interest but of
different authorized denominations.
Distributions
Distributions on the Notes or Certificates, as applicable, of each series
will be made by or on behalf of the trustee on each Distribution Date as
specified in the prospectus supplement from the Available Distribution Amount
for that series and that Distribution Date. Distributions (other than the
final distribution) will be made to the persons in whose names the Notes or
Certificates, as applicable, are registered at the close of business on,
unless a different date is specified in the prospectus supplement, the last
business day of the month preceding the month in which the Distribution Date
occurs (the "Record Date"), and the amount of each distribution will be
determined as of the close of business on the date specified in the prospectus
supplement (the "Determination Date"). All distributions for each class of
Notes or Certificates, as applicable, on each Distribution Date will be
allocated pro rata among the outstanding securityholders in that class or by
random selection or as described in the prospectus supplement. Payments will
be made either by wire transfer in immediately available funds to the account
of a securityholder at a bank or other entity having appropriate facilities
for these payments, if that securityholder has so notified the trustee or
other person required to make those payments no later than the date specified
in the prospectus supplement (and, if so provided in the prospectus
supplement, holds Notes or Certificates, as applicable, in the requisite
amount specified in the prospectus supplement), or by check mailed to the
address of the person entitled to the payment as it appears on the Security
Register; provided, however, that the final distribution in retirement of the
Notes or Certificates, as applicable, will be made only upon presentation and
surrender of the Notes or Certificates, as applicable, at the location
specified in the notice to securityholders of that final distribution.
Available Distribution Amount
All distributions on the Notes or Certificates, as applicable, of each
series on each Distribution Date will be made from the Available Distribution
Amount described below, subject to the terms described in the prospectus
supplement. Generally, the "Available Distribution Amount" for each
Distribution Date equals the sum of the following amounts:
(1) the total amount of all cash on deposit in the related
Collection Account as of the corresponding Determination Date, exclusive,
unless otherwise specified in the prospectus supplement, of:
(a) all scheduled payments of principal and interest collected
but due on a date after the related Due Period (unless a different
period is specified in the prospectus supplement, a "Due Period "
for any Distribution Date will begin on the second day of the month
in which the immediately preceding Distribution Date occurs, or the
Cut-off Date in the case of the first Due Period, and will end on
the first day of the month of the related Distribution Date),
(b) all prepayments, together with related payments of the
interest thereon and related Prepayment Premiums, all proceeds of
any FHA insurance, VA Guaranty Policy or insurance policies to be
maintained for each Asset (to the extent that proceeds are not
applied to the restoration of the Asset or released in accordance
with the normal servicing procedures of a servicer, subject to the
terms and conditions applicable to the related Asset) (collectively,
"Insurance Proceeds"), all other amounts received and retained in
connection with the liquidation of Assets in default in the trust
fund ("Liquidation Proceeds"), and other unscheduled recoveries
received after the related Due Period, or other period specified in
the prospectus supplement,
(c) all amounts in the Collection Account that are due or
reimbursable to the depositor, the trustee, an Asset Seller, a
servicer, the master servicer or any other entity as specified in
the prospectus supplement or that are payable in respect of
particular expenses of the related trust fund, and
(d) all amounts received for a repurchase of an Asset from the
trust fund for defective documentation or a breach of representation
or warranty received after the related Due Period, or other period
specified in the prospectus supplement;
(2) if the prospectus supplement so provides, interest or investment
income on amounts on deposit in the Collection Account, including any net
amounts paid under any Cash Flow Agreements;
(3) all advances made by a servicer or the master servicer or any
other entity as specified in the prospectus supplement for that
Distribution Date;
(4) if and to the extent the prospectus supplement so provides,
amounts paid by a servicer or any other entity as specified in the
prospectus supplement with respect to interest shortfalls resulting from
prepayments during the related Prepayment Period; and
(5) to the extent not on deposit in the related Collection Account
as of the corresponding Determination Date, any amounts collected under,
from or in respect of any credit support for that Distribution Date.
As described below, unless otherwise specified in the prospectus
supplement, the entire Available Distribution Amount will be distributed among
the related Notes or Certificates, as applicable, (including any Notes or
Certificates, as applicable, not offered by this prospectus) on each
Distribution Date, and accordingly will be released from the trust fund and
will not be available for any future distributions.
The prospectus supplement for a series of Notes or Certificates, as
applicable, will describe any variation in the calculation or distribution of
the Available Distribution Amount for that series.
Distributions of Interest on the Securities
Each class of Notes or Certificates, as applicable, (other than classes
of Strip Securities which have no Interest Rate) may have a different Interest
Rate, which will be a fixed, variable or adjustable rate at which interest
will accrue on that class or a component of that class (the "Interest Rate" in
the case of Certificates). The prospectus supplement will specify the Interest
Rate for each class or component or, in the case of a variable or adjustable
Interest Rate, the method for determining the Interest Rate. Interest on the
Notes or Certificates, as applicable, will be calculated on the basis of a
360-day year consisting of twelve 30-day months unless the prospectus
supplement specifies a different basis.
Distributions of interest on the Notes or Certificates, as applicable, of
any class will be made on each Distribution Date (other than any class of
Accrual Securities, which will be entitled to distributions of accrued
interest starting only on the Distribution Date, or under the circumstances,
specified in the prospectus supplement, and any class of Strip Securities that
are not entitled to any distributions of interest) based on the Accrued
Security Interest for that class and that Distribution Date, subject to the
sufficiency of the portion of the Available Distribution Amount allocable to
that class on that Distribution Date. Before any interest is distributed on
any class of Accrual Securities, the amount of Accrued Security Interest
otherwise distributable on that class will instead be added to the Security
Balance of that class on each Distribution Date.
For each class of Notes or Certificates, as applicable, and each
Distribution Date (other than some classes of Strip Securities), "Accrued
Security Interest" will be equal to interest accrued during the related
Accrual Period on the outstanding Security Balance of the class of Notes or
Certificates, as applicable, immediately before the Distribution Date, at the
applicable Interest Rate, reduced as described below. Accrued Security
Interest on some classes of Strip Securities will be equal to interest accrued
during the related Accrual Period on the outstanding notional amount of the
Strip Security immediately before each Distribution Date, at the applicable
Interest Rate, reduced as described below, or interest accrual in the manner
described in the prospectus supplement. The method of determining the notional
amount for a particular class of Strip Securities will be described in the
prospectus supplement. Reference to notional amount is solely for convenience
in some of the calculations and does not represent the right to receive any
distributions of principal. Unless otherwise provided in the prospectus
supplement, the Accrued Security Interest on a series of Notes or
Certificates, as applicable, will be reduced in the event of prepayment
interest shortfalls, which are shortfalls in collections of interest for a
full accrual period resulting from prepayments before the due date in that
accrual period on the mortgage loans or contracts comprising or underlying the
Assets in the trust fund for that series. The particular manner in which these
shortfalls are to be allocated among some or all of the classes of Notes or
Certificates, as applicable, of that series will be specified in the
prospectus supplement. The prospectus supplement will also describe the extent
to which the amount of Accrued Security Interest that is otherwise
distributable on (or, in the case of Accrual Securities, that may otherwise be
added to the Security Balance of) a class of Offered Notes or Offered
Certificates, as applicable, may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on the
mortgage loans or contracts comprising or underlying the Assets in the related
trust fund. Unless otherwise provided in the prospectus supplement, any
reduction in the amount of Accrued Security Interest otherwise distributable
on a class of Notes or Certificates, as applicable, by reason of the
allocation to that class of a portion of any deferred interest on the mortgage
loans or contracts comprising or underlying the Assets in the related trust
fund will result in a corresponding increase in the Security Balance of that
class. See "Yield Considerations."
Distributions of Principal of the Securities
The Notes or Certificates, as applicable, of each series, other than some
classes of Strip Securities, will have a "Security Balance" which, at any
time, will equal the then maximum amount that the holder will be entitled to
receive on principal out of the future cash flow on the Assets and other
assets included in the related trust fund. The outstanding Security Balance of
a Security will be reduced:
o to the extent of distributions of principal on that Security from
time to time and
o if and to the extent provided in the prospectus supplement, by the
amount of losses incurred on the related Assets.
The outstanding Security Balance of a Security:
o may be increased in respect of deferred interest on the related
mortgage loans, to the extent provided in the prospectus supplement
and
o in the case of Accrual Securities, will be increased by any related
Accrued Security Interest up until the Distribution Date on which
distributions of interest are required to begin.
If specified in the prospectus supplement, the initial total Security
Balance of all classes of Notes or Certificates, as applicable, of a series
will be greater than the outstanding total principal balance of the related
Assets as of the applicable Cut-off Date. The initial total Security Balance
of a series and each class of the series will be specified in the prospectus
supplement. Distributions of principal will be made on each Distribution Date
to the class or classes of Notes or Certificates, as applicable, in the
amounts and in accordance with the priorities specified in the prospectus
supplement. Some classes of Strip Securities with no Security Balance are not
entitled to any distributions of principal.
If specified in the related prospectus supplement, the trust fund may
issue notes or certificates, as applicable, from time to time and use proceeds
of this issuance to make principal payments with respect to a series.
Revolving Period
The applicable prospectus supplement may provide that all or a portion of
the principal collections may be applied by the trustee to the acquisition of
subsequent Revolving Credit Line Loans during a specified period rather than
used to distribute payments of principal to securityholders during that
period. These notes or certificates, as applicable, would then possess an
interest only period, also commonly referred to as a "Revolving Period", which
will be followed by an "Amortization Period", during which principal will be
paid. Any interest only revolving period may terminate prior to the end of the
specified period and result in the earlier than expected principal repayment
of the notes or certificates, as applicable.
Components
To the extent specified in the prospectus supplement, distribution on a
class of Notes or Certificates, as applicable, may be based on a combination
of two or more different components as described under "--General" above. To
that extent, the descriptions set forth under "--Distributions of Interest on
the Securities" and "--Distributions of Principal of the Securities" above
also relate to components of the component class of Notes or Certificates, as
applicable. References in those sections to Security Balance may refer to the
principal balance, if any, of these components and reference to the Interest
Rate may refer to the Interest Rate, if any, on these components.
Distributions on the Securities of Prepayment Premiums
If so provided in the prospectus supplement, Prepayment Premiums that are
collected on the mortgage loans in the related trust fund will be distributed
on each Distribution Date to the class or classes of Notes or Certificates, as
applicable, entitled to the distribution as described in the prospectus
supplement.
Allocation of Losses and Shortfalls
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, consisting of one or more classes of Subordinate
Notes or Subordinate Certificates, as applicable, on any Distribution Date in
respect of which losses or shortfalls in collections on the Assets have been
incurred, the amount of those losses or shortfalls will be borne first by a
class of Subordinate Notes or Subordinate Certificates, as applicable, in the
priority and manner and subject to the limitations specified in the prospectus
supplement. See "Description of Credit Support" for a description of the types
of protection that may be included in a trust fund against losses and
shortfalls on Assets comprising that trust fund. The prospectus supplement for
a series of Notes or Certificates, as applicable, will describe the
entitlement, if any, of a class of Notes or Certificates, as applicable, whose
Security Balance has been reduced to zero as a result of distributions or the
allocation of losses on the related Assets to recover any losses previously
allocated to that class from amounts received on the Assets. However, if the
Security Balance of a class of Notes or Certificates, as applicable, has been
reduced to zero as the result of principal distributions, the allocation of
losses on the Assets, an optional termination or an optional purchase or
redemption, that class will no longer be entitled to receive principal
distributions from amounts received on the assets of the related trust fund,
including distributions in respect of principal losses previously allocated to
that class.
Advances in Respect of Delinquencies
If so provided in the prospectus supplement, the servicer or another
entity described in the prospectus supplement will be required as part of its
servicing responsibilities to advance on or before each Distribution Date its
own funds or funds held in the related Collection Account that are not
included in the Available Distribution Amount for that Distribution Date, in
an amount equal to the total of payments of (1) principal (other than any
balloon payments) and (2) interest (net of related servicing fees and Retained
Interest) that were due on the Assets in that trust fund during the related
Due Period and were delinquent on the related Determination Date, subject to a
good faith determination that the advances will be reimbursable from Related
Proceeds (as defined below). In the case of a series of Notes or Certificates,
as applicable, that includes one or more classes of Subordinate Notes or
Subordinate Certificates, as applicable, and if so provided in the prospectus
supplement, the servicer's (or another entity's) advance obligation may be
limited only to the portion of those delinquencies necessary to make the
required distributions on one or more classes of Senior Notes or Senior
Certificates, as applicable, and/or may be subject to a good faith
determination that advances will be reimbursable not only from Related
Proceeds but also from collections on other Assets otherwise distributable on
one or more classes of those Subordinate Notes or Subordinate Certificates, as
applicable. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Notes or
Certificates, as applicable, entitled to the payments, rather than to
guarantee or insure against losses. Advances of the servicer's (or another
entity's) funds will be reimbursable only out of related recoveries on the
Assets (including amounts received under any form of credit support)
respecting which those advances were made (as to any Assets, "Related
Proceeds") and from any other amounts specified in the prospectus supplement,
including out of any amounts otherwise distributable on one or more classes of
Subordinate Notes or Subordinate Certificates, as applicable, of that series;
provided, however, that any advance will be reimbursable from any amounts in
the related Collection Account before any distributions being made on the
Notes or Certificates, as applicable, to the extent that the servicer (or some
other entity) determines in good faith that that advance (a "Nonrecoverable
Advance") is not ultimately recoverable from Related Proceeds or, if
applicable, from collections on other Assets otherwise distributable on the
Subordinate Notes or Subordinate Certificates, as applicable. If advances have
been made by the servicer from excess funds in the related Collection Account,
the servicer is required to replace these funds in that Collection Account on
any future Distribution Date to the extent that funds in that Collection
Account on that Distribution Date are less than payments required to be made
to securityholders on that date. If specified in the prospectus supplement,
the obligations of the servicer (or another entity) to make advances may be
secured by a cash advance reserve fund, a surety bond, a letter of credit or
another form of limited guaranty. If applicable, information regarding the
characteristics of and the identity of any borrower on any surety bond will be
set forth in the prospectus supplement.
If and to the extent so provided in the prospectus supplement, the
servicer (or another entity) will be entitled to receive interest at the rate
specified in the prospectus supplement on its outstanding advances and will be
entitled to pay itself this interest periodically from general collections on
the Assets before any payment to securityholders or as otherwise provided in
the related Agreement and described in the prospectus supplement.
If specified in the prospectus supplement, the master servicer or the
trustee will be required to make advances, subject to specific conditions
described in the prospectus supplement, in the event of a servicer default.
Reports to Securityholders
With each distribution to holders of any class of Notes or Certificates,
as applicable, of a series, the servicer, the master servicer or the trustee,
as provided in the prospectus supplement, will forward or cause to be
forwarded to each holder, to the depositor and to any other parties as may be
specified in the related Agreement, a statement containing the information
specified in the prospectus supplement, or if no information is specified in
the prospectus supplement, generally setting forth, in each case to the extent
applicable and available:
(1) the amount of that distribution to holders of Notes or
Certificates, as applicable, of that class applied to reduce the Security
Balance of the Notes or Certificates, as applicable,;
(2) the amount of that distribution to holders of Notes or
Certificates, as applicable, of that class allocable to Accrued Security
Interest;
(3) the amount of that distribution allocable to Prepayment
Premiums;
(4) the amount of related servicing compensation and any other
customary information as is required to enable securityholders to prepare
their tax returns;
(5) the total amount of advances included in that distribution, and
the total amount of unreimbursed advances at the close of business on
that Distribution Date;
(6) the total principal balance of the Assets at the close of
business on that Distribution Date;
(7) the number and total principal balance of mortgage loans in
respect of which
(a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent,
(c) three or more scheduled payments are delinquent and
(d) foreclosure proceedings have begun;
(8) for any mortgage loan or contract liquidated during the related
Due Period, (a) the portion of the related liquidation proceeds payable
or reimbursable to a servicer (or any other entity) in respect of that
mortgage loan and (b) the amount of any loss to securityholders;
(9) with respect to collateral acquired by the trust fund through
foreclosure or otherwise (an "REO Property") relating to a mortgage loan
or contract and included in the trust fund as of the end of the related
Due Period, the date of acquisition;
(10) for each REO Property relating to a mortgage loan or contract and
included in the trust fund as of the end of the related Due Period,
(a) the book value,
(b) the principal balance of the related mortgage loan or
contract immediately following that Distribution Date
(calculated as if that mortgage loan or contract were
still outstanding taking into account limited
modifications to the terms of the mortgage loan specified
in the Agreement),
(c) the total amount of unreimbursed servicing expenses and
unreimbursed advances in respect of the REO Property and
(d) if applicable, the total amount of interest accrued and
payable on related servicing expenses and related
advances;
(11) for any REO Property sold during the related Due Period
(a) the total amount of sale proceeds,
(b) the portion of those sales proceeds payable or
reimbursable to the master servicer in respect of that REO
Property or the related mortgage loan or contract and
(c) the amount of any loss to securityholders in respect of
the related mortgage loan;
(12) the total Security Balance or notional amount, as the case may
be, of each class of Notes or Certificates, as applicable, (including any
class of Notes or Certificates, as applicable, not offered by this
prospectus) at the close of business on that Distribution Date,
separately identifying any reduction in that Security Balance due to the
allocation of any loss and increase in the Security Balance of a class of
Accrual Securities if any Accrued Security Interest has been added to
that balance;
(13) the total amount of principal prepayments made during the
related Due Period;
(14) the amount deposited in the reserve fund, if any, on that
Distribution Date;
(15) the amount remaining in the reserve fund, if any, as of the
close of business on that Distribution Date;
(16) the total unpaid Accrued Security Interest, if any, on each
class of Notes or Certificates, as applicable, at the close of business
on that Distribution Date;
(17) in the case of Notes or Certificates, as applicable, with a
variable Interest Rate, the Interest Rate applicable to that Distribution
Date, and, if available, the immediately succeeding Distribution Date, as
calculated in accordance with the method specified in the prospectus
supplement;
(18) in the case of Notes or Certificates, as applicable, with an
adjustable Interest Rate, for statements to be distributed in any month
in which an adjustment date occurs, the adjustable Interest Rate
applicable to that Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with the method
specified in the prospectus supplement;
(19) as to any series that includes credit support, the amount of
coverage of each instrument of credit support included as of the close of
business on that Distribution Date;
(20) during the Pre-Funding Period, the remaining Pre-Funded Amount
and the portion of the Pre-Funding Amount used to acquire Subsequent
Assets since the preceding Distribution Date;
(21) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account; and
(22) the total amount of payments by the borrowers of
(a) default interest,
(b) late charges and
(c) assumption and modification fees collected during the
related Due Period.
Within a reasonable period of time after the end of each calendar year,
the servicer, the master servicer or the trustee, as provided in the
prospectus supplement, will furnish to each securityholder of record at any
time during the calendar year the information required by the Code and
applicable regulations under the Code to enable securityholders to prepare
their tax returns. See "Description of the Securities--Book-Entry Registration
and Definitive Securities."
Termination
The obligations created by the related Agreement for each series of Notes
or Certificates, as applicable, will terminate upon the payment to
securityholders of that series of all amounts held in the Collection Accounts
or by a servicer, the master servicer, if any, or the trustee and required to
be paid to them pursuant to that Agreement following the earlier of (1) the
final payment or other liquidation of the last Asset subject to the related
Agreement or the disposition of all property acquired upon foreclosure of any
mortgage loan or contract subject to the Agreement and (2) the purchase of all
of the assets of the trust fund by the party entitled to effect that
termination, under the circumstances and in the manner set forth in the
prospectus supplement. In no event, however, will the trust fund continue
beyond the date specified in the prospectus supplement. Written notice of
termination of the Agreement will be given to each securityholder, and the
final distribution will be made only upon presentation and surrender of the
Notes or Certificates, as applicable, at the location to be specified in the
notice of termination.
If specified in the prospectus supplement, a series of Notes or
Certificates, as applicable, may be subject to optional early termination
through the purchase of the Assets in the related trust fund by the party
specified in the prospectus supplement, under the circumstances and in the
manner set forth in the prospectus supplement. If so provided in the
prospectus supplement, upon the reduction of the Security Balance of a
specified class or classes of Notes or Certificates, as applicable, by a
specified percentage, the party specified in the prospectus supplement will
solicit bids for the purchase of all assets of the trust fund, or of a
sufficient portion of those assets to retire that class or classes or purchase
that class or classes at a price set forth in the prospectus supplement, in
each case, under the circumstances and in the manner set forth in the
prospectus supplement. That price will at least equal the outstanding Security
Balances and any accrued and unpaid interest on the Security Balances
(including any unpaid interest shortfalls for prior Distribution Dates). Any
sale of the Assets of the trust fund will be without recourse to the trust
fund or the securityholders. Any purchase or solicitation of bids may be made
only when the total Security Balance of that class or classes declines to a
percentage of the Initial Security Balance of those Notes or Certificates, as
applicable, (not to exceed 10%) specified in the prospectus supplement. In
addition, if so provided in the prospectus supplement, some classes of Notes
or Certificates, as applicable, may be purchased or redeemed in the manner set
forth in the prospectus supplement at a price at least equal to the
outstanding Security Balance of each class so purchased or redeemed and any
accrued and unpaid interest on the Security Balance (including any unpaid
interest shortfalls for prior Distribution Dates).
Optional Purchases
Subject to the provisions of the applicable Agreement, the depositor, the
servicer or any other party specified in the prospectus supplement may, at
that party's option, repurchase any mortgage loan that is in default or as to
which default is reasonably foreseeable if, in the depositor's, the servicer's
or any other party's judgment, the related default is not likely to be cured
by the borrower or default is not likely to be averted, at a price equal to
the unpaid principal balance of the mortgage loan plus accrued interest on the
mortgage loan and under the conditions set forth in the prospectus supplement.
Book-Entry Registration and Definitive Securities
General
If provided for in the prospectus supplement, one or more classes of the
Offered Notes or Offered Certificates, as applicable, of any series will be
issued as Book-Entry Notes or Book-Entry Certificates, as applicable, and each
of these classes will be represented by one or more single Notes or
Certificates, as applicable, registered in the name of a nominee for the
depository, The Depository Trust Company ("DTC") and, if provided in the
prospectus supplement, additionally through Clearstream Luxembourg, societe
anonyme ("Clearstream Luxembourg") or the Euroclear System ("Euroclear"). Each
class of Book-Entry Notes or Book-Entry Certificates, as applicable, will be
issued in one or more certificates or notes, as the case may be, that equal
the initial principal amount of the related class of Offered Notes or Offered
Certificates, as applicable, and will initially be registered in the name of
Cede & Co.
No person acquiring an interest in a Book-Entry Security (each, a
"Beneficial Owner") will be entitled to receive a Definitive Security, except
as set forth below under "--Definitive Securities." Unless and until
Definitive Notes or Definitive Certificates, as applicable, are issued for the
Book-Entry Notes or Book-Entry Certificates, as applicable, under the limited
circumstances described in the applicable prospectus supplement or this
prospectus, all references to actions by securityholders with respect to the
Book-Entry Notes or Book-Entry Certificates, as applicable, will refer to
actions taken by DTC, Clearstream Luxembourg or Euroclear upon instructions
from their Participants (as defined below), and all references in this
prospectus to distributions, notices, reports and statements to
securityholders with respect to the Book-Entry Notes or Book-Entry
Certificates, as applicable, will refer to distributions, notices, reports and
statements to DTC, Clearstream Luxembourg or Euroclear, as applicable, for
distribution to Beneficial Owners by DTC in accordance with the procedures of
DTC and if applicable, Clearstream Luxembourg and Euroclear.
Beneficial Owners will hold their Book-Entry Notes or Book-Entry
Certificates, as applicable, through DTC in the United States, or, if the
Offered Notes or Offered Certificates, as applicable, are offered for sale
globally, through Clearstream Luxembourg or Euroclear in Europe if they are
participating organizations ("Participants") of those systems. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include some other organizations. Indirect access to the
DTC, Clearstream Luxembourg and Euroclear systems also is available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
DTC
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). DTC was
created to hold securities for its Participants, some of which (and/or their
representatives) own DTC, and facilitate the clearance and settlement of
securities transactions between its Participants through electronic book-entry
changes in their accounts, thus eliminating the need for physical movement of
securities. In accordance with its normal procedures, DTC is expected to
record the positions held by each of its Participants in the Book-Entry Notes
or Book-Entry Certificates, as applicable, whether held for its own account or
as a nominee for another person. In general, beneficial ownership of
Book-Entry Notes or Book-Entry Certificates, as applicable, will be subject to
the rules, regulations and procedures governing DTC and its Participants as in
effect from time to time.
Clearstream Luxembourg
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January
10, 2000, Cedelbank's parent company, Cedel International, societe anonyme
("CI") merged its clearing, settlement and custody business with that of
Deutsche Borse Clearing AG ("DBC"). The merger involved the transfer by CI of
substantially all of its assets and liabilities (including its shares in CB)
to a new Luxembourg company, New Cedel International, societe anonyme ("New
CI"), which is 50% owned by CI and 50% owned by DBC's parent company Deutsche
Borse AG. The shareholders of these two entities are banks, securities dealers
and financial institutions. Cedel International currently has 92 shareholders,
including U.S. financial institutions or their subsidiaries. No single entity
may own more than 5 percent of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel International
decided to rename the companies in the group in order to give them a cohesive
brand name. The new brand name that was chosen is "Clearstream". With effect
from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This means
that there are now two entities in the corporate group headed by Clearstream
International which share the name "Clearstream Banking", the entity
previously named "Cedelbank" and the entity previously named "Deutsche Brse
Clearing AG".
Clearstream, Luxembourg holds securities for its customers ("Clearstream,
Luxembourg Participants") 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 certificates.
Transactions may be settled by Clearstream, Luxembourg in any of 36
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, and as such is subject to regulation by the
Commission de Surveillance du Secteur Financier, "CSSF", 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 U.S.
customers are limited to securities brokers and dealers, and banks. Currently,
Clearstream, Luxembourg has approximately 2,000 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 Morgan Guaranty Trust Company of New
York as the Operator of the Euroclear System (MGT/EOC) in Brussels to
facilitate settlement of trades between Clearstream, Luxembourg and MGT/EOC.
Euroclear
Euroclear was created in 1968 to hold securities for its Participants and
to clear and settle transactions between its Participants through simultaneous
electronic book-entry delivery against payment, thus 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 32
currencies, including United States dollars. Euroclear includes various other
services, including securities lending and borrowing, and interfaces with
domestic markets in several countries generally similar to the arrangements
for cross-market transfers with DTC described above. Euroclear is operated by
the Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative Corporation"). All
operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with
the Euroclear Operator, not the Cooperative Corporation. The Cooperative
Corporation establishes policy for Euroclear on behalf of its Participants.
Euroclear Participants include banks (including central banks), securities
brokers and dealers and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Participant of Euroclear, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System, and is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific securities to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of its Participants, and has no record of or
relationship with persons holding through Participants of Euroclear.
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 depositaries which in turn will hold positions in customers'
securities accounts in the depositaries names on the books of DTC. Citibank
will act as depositary for Clearstream Luxembourg and The Chase Manhattan Bank
will act as depositary for Euroclear (individually the "Relevant Depositary"
and collectively, the "European Depositaries").
Beneficial Ownership of Book-Entry Securities
Except as described below, no Beneficial Owner will be entitled to
receive a physical certificate representing a Certificate, or note
representing a Note. Unless and until Definitive Notes or Definitive
Certificates, as applicable, are issued, it is anticipated that the only
"securityholder" of the Offered Notes or Offered Certificates, as applicable,
will be Cede & Co., as nominee of DTC. Beneficial Owners will not be
"Certificateholders" as that term is used in any Agreement, nor "Noteholders"
as that term is used in any indenture. Beneficial Owners are only permitted to
exercise their rights indirectly through Participants, DTC, Clearstream
Luxembourg or Euroclear, as applicable.
The 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 Participant that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC,
if the Beneficial Owner's Financial Intermediary is not a Participant of DTC
and on the records of Clearstream Luxembourg or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Notes or Offered Certificates, as applicable, from
the trustee through DTC and its Participants. While the Offered Notes or
Offered Certificates, as applicable, 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 Participants on whose behalf it acts with
respect to the Offered Notes or Offered Certificates, as applicable, and is
required to receive and transmit distributions of principal of, and interest
on, the Offered Notes or Offered Certificates, as applicable. Participants and
Indirect Participants with whom Beneficial Owners have accounts with respect
to Offered Notes or Offered Certificates, as applicable, 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 certificates or notes, the Rules provide a
mechanism by which Beneficial Owners will receive distributions and will be
able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive certificates
or notes representing their respective interests in the Offered Notes or
Offered Certificates, as applicable, except under the limited circumstances
described below. Unless and until Definitive Notes or Definitive Certificates,
as applicable, are issued, Beneficial Owners who are not Participants may
transfer ownership of Offered Notes or Offered Certificates, as applicable,
only through Participants and Indirect Participants by instructing the
Participants and Indirect Participants to transfer Offered Notes or Offered
Certificates, as applicable, by book-entry transfer, through DTC for the
account of the purchasers of the Offered Notes or Offered Certificates, as
applicable, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfer of
ownership of Book-Entry Notes or Book-Entry Certificates, as applicable, will
be executed through DTC and the accounts of the respective Participants at DTC
will be debited and credited. Similarly, the Participants and Indirect
Participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Beneficial Owners.
Because of time zone differences, any credits of securities received in
Clearstream Luxembourg or Euroclear as a result of a transaction with a
Participant will be made during subsequent securities settlement processing
and dated the business day following the DTC settlement date. These credits or
any transactions in securities settled during this processing will be reported
to the relevant Participants of Clearstream Luxembourg or Euroclear on that
business day. Cash received in Clearstream Luxembourg or Euroclear as a result
of sales of securities by or through a Participant of Clearstream Luxembourg
or Euroclear to a Participant of DTC 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. For information with respect to tax documentation procedures relating to
the Notes or Certificates, as applicable, see "Material Federal Income Tax
Considerations -- Tax Treatment of Foreign Investors" in this prospectus and,
if the Book-Entry Notes or Book-Entry Certificates, as applicable, are
globally offered and the prospectus supplement so provides, see "Global
Clearance, Settlement and Tax Documentation Procedures -- Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I to the prospectus
supplement.
Transfers between Participants of DTC will occur in accordance with DTC
Rules. Transfers between Participants of Clearstream Luxembourg or Euroclear
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 Participants
of Clearstream Luxembourg or Euroclear, on the other, will be effected in DTC
in accordance with the DTC Rules on behalf of the relevant European
international clearing system by the Relevant Depositary; however,
cross-market transactions will require delivery of instructions to the
relevant European international clearing system by the counterparty in that
system in accordance with its rules and procedures and within its established
deadlines (European time). The relevant European international clearing system
will, if the transaction meets its settlement requirements, deliver
instructions to the Relevant Depositary to take action to effect final
settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same day
funds settlement applicable to DTC. Participants of Clearstream Luxembourg or
Euroclear may not deliver instructions directly to the European Depositaries.
Distributions on the Book-Entry Notes or Book-Entry Certificates, as
applicable, will be made on each Distribution Date by the Trustee to DTC. DTC
will be responsible for crediting the amount of each distribution to the
accounts of the applicable Participants of DTC in accordance with DTC's normal
procedures. Each Participant of DTC will be responsible for disbursing the
distribution to the Beneficial Owners of the Book-Entry Notes or Book-Entry
Certificates, as applicable, 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
Notes or Book-Entry Certificates, as applicable, that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes or
Book-Entry Certificates, as applicable, may experience some delay in their
receipt of payments, because the distributions will be forwarded by the
Trustee to Cede & Co. Any distributions on Notes or Certificates, as
applicable, held through Clearstream Luxembourg or Euroclear will be credited
to the cash accounts of Participants of Clearstream Luxembourg or Euroclear in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. These distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Material Federal Income Tax Considerations -- REMICs --
Taxation of Certain Foreign Investors" in this prospectus. Because DTC can
only act on behalf of Financial Intermediaries, the ability of a Beneficial
Owner to pledge Book-Entry Notes or Book-Entry Certificates, as applicable, to
persons or entities that do not participate in the depository system, or
otherwise take actions in respect of Book-Entry Notes or Book-Entry
Certificates, as applicable, may be limited due to the lack of physical
securities for the Book-Entry Notes or Book-Entry Certificates, as applicable.
In addition, issuance of the Book-Entry Notes or Book-Entry Certificates, as
applicable, in book-entry form may reduce the liquidity of the securities in
the secondary market since potential investors may be unwilling to purchase
Notes or Certificates, as applicable, for which they cannot obtain physical
securities.
Monthly and annual reports 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, regulations and procedures creating and
affecting the depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Notes or Book-Entry Certificates, as applicable, of
Beneficial Owners are credited.
Generally, DTC will advise the applicable trustee that unless and until
Definitive Notes or Definitive Certificates, as applicable, are issued, DTC
will take any action permitted to be taken by the holders of the Book-Entry
Notes or Book-Entry Certificates, as applicable, under the Agreement or
indenture, as applicable, only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Book-Entry Notes or Book-Entry
Certificates, as applicable, are credited, to the extent that actions are
taken on behalf of Financial Intermediaries whose holdings include the
Book-Entry Notes or Book-Entry Certificates, as applicable. If the Book-Entry
Notes or Book-Entry Certificates, as applicable, are globally offered,
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 or indenture, as applicable, on behalf of a Participant of
Clearstream Luxembourg or Euroclear only in accordance with its relevant rules
and procedures and subject to the ability of the Relevant Depositary to effect
those actions on its behalf through DTC. DTC may take actions, at the
direction of the related Participants, with respect to some Offered Notes or
Offered Certificates, as applicable, that conflict with actions taken with
respect to other Offered Notes or Offered Certificates, as applicable.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Book-Entry Notes or
Book-Entry Certificates, as applicable, among Participants of DTC, Clearstream
Luxembourg and Euroclear, they are under no obligation to perform or continue
to perform these procedures and the procedures may be discontinued at any
time.
None of the depositor, any master servicer, any servicer, the trustee,
any securities registrar or paying agent or any of their affiliates 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 Notes or
Book-Entry Certificates, as applicable, or for maintaining, supervising or
reviewing any records relating to those beneficial ownership interests.
Definitive Securities
Notes or Certificates, as applicable, initially issued in book-entry form
will be issued as Definitive Notes or Definitive Certificates, as applicable,
to Beneficial Owners or their nominees, rather than to DTC or its nominee only
(1) if the depositor advises the trustee in writing that DTC is no
longer willing or able to properly discharge its responsibilities as
depository for the Notes or Certificates, as applicable, and the
depositor is unable to locate a qualified successor,
(2) if the depositor, at its option, elects to end the book-entry system
through DTC or
(3) in accordance with any other provisions described in the prospectus
supplement.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Notes or Definitive Certificates, as
applicable, for the Beneficial Owners. Upon surrender by DTC of the security
or securities representing the Book-Entry Notes or Book-Entry Certificates, as
applicable, together with instructions for registration, the trustee will
issue (or cause to be issued) to the Beneficial Owners identified in those
instructions the Definitive Notes or Definitive Certificates, as applicable,
to which they are entitled, and thereafter the trustee will recognize the
holders of those Definitive Notes or Definitive Certificates, as applicable,
as securityholders under the Agreement.
Description of the Agreements
Agreements Applicable to a Series
REMIC Securities, FASIT Securities, Grantor Trust Securities
Notes or Certificates, as applicable, representing interests in a trust
fund, or a portion of a trust fund, that the trustee will elect to have
treated as a real estate mortgage investment conduit under Sections 860A
through 860G of the Code ("REMIC Securities"), FASIT Securities (as defined in
this prospectus), or Grantor Trust Securities (as defined in this prospectus)
will be issued, and the related trust fund will be created, pursuant to a
pooling and servicing agreement or trust agreement (in either case, generally
referred to in this prospectus as the "pooling and servicing agreement") among
the depositor, the trustee and the sole servicer or master servicer, as
applicable. The Assets of that trust fund will be transferred to the trust
fund and thereafter serviced in accordance with the terms of the pooling and
servicing agreement. In the event there are multiple servicers of the Assets
of that trust fund, or in the event the Securities consist of Notes, each
servicer will perform its servicing functions pursuant to a related underlying
servicing agreement.
Securities That Are Partnership Interests for Tax Purposes and Notes
Certificates, as applicable, that are intended to be treated as
partnership interests for tax purposes will be issued, and the related trust
fund will be created, pursuant to the pooling and servicing agreement or trust
agreement.
A series of Notes issued by a trust fund that is intended to be treated
as a partnership or disregarded entity for tax purposes will be issued
pursuant to an indenture between the related trust fund and an indenture
trustee named in the prospectus supplement. The trust fund will be established
either as a statutory business trust under the law of the State of Delaware or
as a common law trust under the law of the State of New York pursuant to a
trust agreement between the depositor and an owner trustee specified in the
prospectus supplement relating to that series of Notes. The Assets securing
payment on the Notes will be serviced in accordance with a sale and servicing
agreement or servicing agreement.
Material Terms of the Pooling and Servicing Agreements and Underlying
Servicing Agreements
General
The following summaries describe the material provisions that may appear
in each pooling and servicing agreement, sale and servicing agreement or
servicing agreement (each an "Agreement"). The prospectus supplement for a
series of Notes or Certificates, as applicable, will describe any provision of
the Agreement relating to that series that materially differs from the
description of those provisions contained in this prospectus. The summaries do
not purport to be complete and are subject to, and are qualified by reference
to, all of the provisions of the Agreement for each trust fund and the
description of those provisions in the prospectus supplement. The provisions
of each Agreement will vary depending on the nature of the Notes or
Certificates, as applicable, to be issued under the Agreement and the nature
of the related trust fund. As used in this prospectus for any series, the term
"Security" refers to all of the Notes or Certificates, as applicable, of that
series, whether or not offered by this prospectus and by the prospectus
supplement, unless the context otherwise requires. A form of a pooling and
servicing agreement has been filed as an exhibit to the Registration Statement
of which this prospectus is a part. The depositor will provide a copy of the
pooling and servicing agreement (without exhibits) relating to any series of
Notes or Certificates, as applicable, without charge upon written request of a
securityholder of that series addressed to ACE Securities Corp., 6525 Morrison
Boulevard, Suite 318, Charlotte, North Carolina 28211, Attention: Elizabeth S.
Eldridge.
The servicer or master servicer and the trustee for any series of Notes
or Certificates, as applicable, will be named in the prospectus supplement. In
the event there are multiple servicers for the Assets in a trust fund, a
master servicer will perform some of the administration, calculation and
reporting functions for that trust fund and will supervise the related
servicers pursuant to a pooling and servicing agreement. For a series
involving a master servicer, references in this prospectus to the servicer
will apply to the master servicer where non-servicing obligations are
described. If specified in the prospectus supplement, a manager or
administrator may be appointed pursuant to the pooling and servicing agreement
for any trust fund to administer that trust fund.
Assignment of Assets; Repurchases
At the time of issuance of any series of Notes or Certificates, as
applicable, the depositor will assign (or cause to be assigned) to the
designated trustee the Assets to be included in the related trust fund,
together with all principal and interest to be received on or with respect to
those Assets after the Cut-off Date, other than principal and interest due on
or before the Cut-off Date and other than any Retained Interest. The trustee
will, concurrently with that assignment, deliver the Notes or Certificates, as
applicable, to the depositor in exchange for the Assets and the other assets
comprising the trust fund for that series. Each Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. That schedule will
include detailed information to the extent available and relevant
(1) in respect of each mortgage loan included in the related trust
fund, including the city and state of the related Mortgaged Property and
type of that property, the mortgage rate and, if applicable, the
applicable index, margin, adjustment date and any rate cap information,
the original and remaining term to maturity, the original and outstanding
principal balance and balloon payment, if any, the Loan-to-Value Ratio as
of the date indicated and payment and prepayment provisions, if
applicable, and
(2) in respect of each Contract included in the related trust fund,
including the outstanding principal amount and the Contract Rate; and
(3) in respect of each Mortgage Security and Agency Security, the
original and outstanding principal amount, if any, and the interest rate
on the Mortgage Security or Agency Security.
For each mortgage loan, except as otherwise specified in the prospectus
supplement, the depositor will deliver or cause to be delivered to the trustee
(or to the custodian hereinafter referred to) particular loan documents, which
will generally include the original mortgage note endorsed, without recourse,
in blank or to the order of the trustee, the original Mortgage (or a certified
copy of the original Mortgage) with evidence of recording indicated on the
original Mortgage and an assignment of the Mortgage to the trustee in
recordable form. However, a trust fund may include mortgage loans where the
original mortgage note is not delivered to the trustee if the depositor
delivers to the trustee or the custodian a copy or a duplicate original of the
mortgage note, together with an affidavit certifying that the original of the
mortgage note has been lost or destroyed. For those mortgage loans, the
trustee (or its nominee) may not be able to enforce the mortgage note against
the related borrower. The Asset Seller or other entity specified in the
prospectus supplement will be required to agree to repurchase, or substitute
for, each of these mortgage loans that is subsequently in default if the
enforcement thereof or of the related Mortgage is materially adversely
affected by the absence of the original mortgage note. The related Agreement
will generally require the depositor or another party specified in the
prospectus supplement to promptly cause each of these assignments of Mortgage
to be recorded in the appropriate public office for real property records,
except in the State of California or in other states where, in the opinion of
counsel acceptable to the trustee, recording is not required to protect the
trustee's interest in the related mortgage loan against the claim of any
subsequent transferee or any successor to or creditor of the depositor, the
servicer, the relevant Asset Seller or any other prior holder of the mortgage
loan.
The trustee (or a custodian) will review the mortgage loan documents
within a specified period of days after receipt of the mortgage loan
documents, and the trustee (or a custodian) will hold those documents in trust
for the benefit of the securityholders. If any of these documents are found to
be missing or defective in any material respect, the trustee (or that
custodian) will immediately notify the servicer and the depositor, and the
servicer will immediately notify the relevant Asset Seller or other entity
specified in the prospectus supplement. If the Asset Seller cannot cure the
omission or defect within a specified number of days after receipt of that
notice, then the Asset Seller or other entity specified in the prospectus
supplement will be obligated, within a specified number of days of receipt of
that notice, to either (1) repurchase the related mortgage loan from the
trustee at a price equal to the sum of the unpaid principal balance of the
mortgage loan, plus unpaid accrued interest at the interest rate for that
Asset from the date as to which interest was last paid to the due date in the
Due Period in which the relevant purchase is to occur, plus servicing expenses
that are payable to the servicer, or another price as specified in the
prospectus supplement (the "Purchase Price") or (2) substitute a new mortgage
loan. There can be no assurance that an Asset Seller or other named entity
will fulfill this repurchase or substitution obligation, and neither the
servicer nor the depositor will be obligated to repurchase or substitute for
that mortgage loan if the Asset Seller or other named entity defaults on its
obligation.
This repurchase or substitution obligation constitutes the sole remedy
available to the securityholders or the trustee for omission of, or a material
defect in, a constituent document. To the extent specified in the prospectus
supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for that Asset, the Asset Seller or other named
entity may agree to cover any losses suffered by the trust fund as a result of
that breach or defect.
Notwithstanding the preceding three paragraphs, the documents for Home
Equity Loans, home improvement contracts and unsecured home improvements loans
will be delivered to the trustee (or a custodian) only to the extent specified
in the prospectus supplement. Generally these documents will be retained by
the servicer, which may also be the Asset Seller. In addition, assignments of
the related Mortgages to the trustee will be recorded only to the extent
specified in the prospectus supplement.
For each contract, the servicer, which may also be the asset seller,
generally will maintain custody of the original contract and copies of
documents and instruments related to each contract and the security interest
in the manufactured home securing each contract. To give notice of the right,
title and interest of the trustee in the contracts, the depositor will cause
UCC-1 financing statements to be executed by the related asset seller
identifying the depositor as secured party and by the depositor identifying
the trustee as the secured party and, in each case, identifying all contracts
as collateral. The contracts will be stamped or otherwise marked to reflect
their assignment from the depositor to the trust fund only to the extent
specified in the prospectus supplement. Therefore, if, through negligence,
fraud or otherwise, a subsequent purchaser were able to take physical
possession of the contracts without notice of that assignment, the interest of
the trustee in the contracts could be defeated.
While the contract documents will not be reviewed by the trustee or the
servicer, if the servicer finds that any document is missing or defective in
any material respect, the servicer will be required to immediately notify the
depositor and the relevant asset seller or other entity specified in the
prospectus supplement. If the asset seller or some other entity cannot cure
the omission or defect within a specified number of days after receipt of this
notice, then the asset seller or that other entity will be obligated, within a
specified number of days of receipt of this notice, to repurchase the related
contract from the trustee at the purchase price or substitute for that
contract. There can be no assurance that an asset seller or any other entity
will fulfill this repurchase or substitution obligation, and neither the
servicer nor the depositor will be obligated to repurchase or substitute for
that contract if the asset seller or any other entity defaults on its
obligation. This repurchase or substitution obligation constitutes the sole
remedy available to the securityholders or the trustee for omission of, or a
material defect in, a constituent document. To the extent specified in the
prospectus supplement, in lieu of curing any omission or defect in the asset
or repurchasing or substituting for that asset, the asset seller may agree to
cover any losses suffered by the trust fund as a result of that breach or
defect.
Mortgage Securities and Agency Securities will be registered in the name
of the trustee or its nominee on the books of the issuer or guarantor or its
agent or, in the case of Mortgage Securities and Agency Securities issued only
in book-entry form, through the depository with respect to the Mortgage
Securities and Agency Securities, in accordance with the procedures
established by the issuer or guarantor for registration of those certificates,
and distributions on those securities to which the trust fund is entitled will
be made directly to the trustee.
Representations and Warranties; Repurchases
To the extent provided in the prospectus supplement the depositor will,
for each Asset, assign representations and warranties, as of a specified date
(the person making those representations and warranties, the "Warranting
Party") covering, by way of example, the following types of matters:
o the accuracy of the information set forth for that Asset on the
schedule of Assets appearing as an exhibit to the related Agreement;
o in the case of a mortgage loan, the existence of title insurance
insuring the lien priority of the mortgage loan and, in the case of
a contract, that the contract creates a valid first security
interest in or lien on the related manufactured home;
o the authority of the Warranting Party to sell the Asset;
o the payment status of the Asset;
o in the case of a mortgage loan, the existence of customary
provisions in the related mortgage note and Mortgage to permit
realization against the Mortgaged Property of the benefit of the
security of the Mortgage; and
o the existence of hazard and extended perils insurance coverage on
the Mortgaged Property or manufactured home.
Any Warranting Party shall be an Asset Seller or an affiliate of the
Asset Seller or any other person acceptable to the depositor and will be
identified in the prospectus supplement.
Representations and warranties made in respect of an Asset may have been
made as of a date before the applicable Cut-off Date. A substantial period of
time may have elapsed between that date and the date of initial issuance of
the related series of Notes or Certificates, as applicable, evidencing an
interest in that Asset. In the event of a breach of any of these
representations or warranties, the Warranting Party will be obligated to
reimburse the trust fund for losses caused by that breach or either cure that
breach or repurchase or replace the affected Asset as described below. Since
the representations and warranties may not address events that may occur
following the date as of which they were made, the Warranting Party will have
a reimbursement, cure, repurchase or substitution obligation in connection
with a breach of that representation and warranty only if the relevant event
that causes that breach occurs before that date. That party would have no
obligations if the relevant event that causes that breach occurs after that
date.
Each Agreement will provide that the servicer and/or trustee or another
entity identified in the prospectus supplement will be required to notify
promptly the relevant Warranting Party of any breach of any representation or
warranty made by it in respect of an Asset that materially and adversely
affects the value of that Asset or the interests in the prospectus supplement
of the securityholders. If the Warranting Party cannot cure that breach within
a specified period following the date on which that party was notified of that
breach, then the Warranting Party will be obligated to repurchase that Asset
from the trustee within a specified period from the date on which the
Warranting Party was notified of that breach, at the Purchase Price therefor.
If so provided in the prospectus supplement for a series, a Warranting Party,
rather than repurchase an Asset as to which a breach has occurred, will have
the option, within a specified period after initial issuance of that series of
Notes or Certificates, as applicable, to cause the removal of that Asset from
the trust fund and substitute in its place one or more other Assets, as
applicable, in accordance with the standards described in the prospectus
supplement. If so provided in the prospectus supplement for a series, a
Warranting Party, rather than repurchase or substitute an Asset as to which a
breach has occurred, will have the option to reimburse the trust fund or the
securityholders for any losses caused by that breach. This reimbursement,
repurchase or substitution obligation will constitute the sole remedy
available to securityholders or the trustee for a breach of representation by
a Warranting Party.
Neither the depositor (except to the extent that it is the Warranting
Party) nor the servicer will be obligated to purchase or substitute for an
Asset if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that the Warranting Parties will carry out those
obligations with respect to the Assets.
A servicer will make representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
related Agreement. A breach of any representation of the servicer that
materially and adversely affects the interests of the securityholders and
which continues unremedied for the number of days specified in the Agreement
after the discovery of the breach by the servicer or the receipt of written
notice of that breach by the servicer from the trustee, the depositor or the
holders of Notes or Certificates, as applicable, evidencing not less than 25%
of the voting rights or other percentage specified in the related Agreement,
will constitute an Event of Default under that Agreement. See "Events of
Default" and "Rights Upon Event of Default."
Collection Account and Related Accounts
General. The servicer and/or the trustee will, as to each trust fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be an account or accounts
that either:
o are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC")
(to the limits established by the FDIC) and the uninsured deposits
in which are otherwise secured so that the securityholders have a
claim with respect to the funds in the Collection Account or a
perfected first priority security interest against any collateral
securing those funds that is superior to the claims of any other
depositors or general creditors of the institution with which the
Collection Account is maintained, or
o are maintained with a bank or trust company, and in a manner
satisfactory to the rating agency or agencies rating any class of
Notes or Certificates, as applicable, of that series.
Investment of amounts in the Collection Account is limited to United
States government securities and other investment grade obligations specified
in the Agreement ("Permitted Investments"). A Collection Account may be
maintained as an interest bearing or a non-interest bearing account and the
funds held in the Collection Account may be invested pending each succeeding
Distribution Date in short-term Permitted Investments. Any interest or other
income earned on funds in the Collection Account will, unless otherwise
specified in the prospectus supplement, be paid to the servicer or its
designee as additional servicing compensation. The Collection Account may be
maintained with an institution that is an affiliate of the servicer, if
applicable, provided that that institution meets the standards imposed by the
rating agency or agencies. If permitted by the rating agency or agencies, a
Collection Account may contain funds relating to more than one series of
mortgage pass-through certificates and may contain other funds respecting
payments on mortgage loans belonging to the servicer or serviced or master
serviced by it on behalf of others.
Deposits. A servicer or the trustee will deposit or cause to be deposited
in the Collection Account for one or more trust funds on a daily basis, or any
other period provided in the related Agreement, the following payments and
collections received, or advances made, by the servicer or the trustee or on
its behalf after the Cut-off Date (other than payments due on or before the
Cut-off Date, and exclusive of any amounts representing a Retained Interest),
except as otherwise provided in the Agreement:
(1) all payments on account of principal, including principal
prepayments, on the Assets;
(2) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion retained by a
servicer as its servicing compensation and net of any Retained Interest;
(3) Liquidation Proceeds and Insurance Proceeds, together with the
net proceeds on a monthly basis with respect to any Assets acquired for
the benefit of securityholders;
(4) any amounts paid under any instrument or drawn from any fund
that constitutes credit support for the related series of Notes or
Certificates, as applicable, as described under "Description of Credit
Support;"
(5) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies;"
(6) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds--Cash Flow Agreements;"
(7) all proceeds of any Asset or, with respect to a mortgage loan,
property acquired in respect of the mortgage loan purchased by the
depositor, any Asset Seller or any other specified person as described
above under "--Assignment of Assets; Repurchases" and "--Representations
and Warranties; Repurchases," all proceeds of any defaulted mortgage loan
purchased as described below under "--Realization Upon Defaulted Assets,"
and all proceeds of any Asset purchased as described under "Description
of the Securities--Termination;"
(8) any amounts paid by a servicer to cover interest shortfalls
arising out of the prepayment of Assets in the trust fund as described
below under "--Retained Interest; Servicing Compensation and Payment of
Expenses;"
(9) to the extent that any of these items do not constitute
additional servicing compensation to a servicer, any payments on account
of modification or assumption fees, late payment charges or Prepayment
Premiums on the Assets;
(10) all payments required to be deposited in the Collection Account
with respect to any deductible clause in any blanket insurance policy
described below under "--Hazard Insurance Policies;"
(11) any amount required to be deposited by a servicer or the
trustee in connection with losses realized on investments for the benefit
of the servicer or the trustee, as the case may be, of funds held in the
Collection Account; and
(12) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the
prospectus supplement.
Withdrawals. A servicer or the trustee may, from time to time as provided
in the related Agreement, make withdrawals from the Collection Account for
each trust fund for any of the following purposes, except as otherwise
provided in the Agreement:
(1) to make distributions to the securityholders on each
Distribution Date;
(2) to reimburse a servicer for unreimbursed amounts advanced as
described under "Description of the Securities--Advances in Respect of
Delinquencies," which reimbursement is to be made out of amounts received
that were identified and applied by the servicer as late collections of
interest (net of related servicing fees and Retained Interest) on and
principal of the particular Assets for which the advances were made or
out of amounts drawn under any form of credit support with respect to
those Assets;
(3) to reimburse a servicer for unpaid servicing fees earned and
unreimbursed servicing expenses incurred with respect to Assets and
properties acquired in respect of the Assets, which reimbursement is to
be made out of amounts that represent Liquidation Proceeds and Insurance
Proceeds collected on the particular Assets and properties, and net
income collected on the particular properties, which fees were earned or
expenses were incurred or out of amounts drawn under any form of credit
support for those Assets and properties;
(4) to reimburse a servicer for any advances described in clause (2)
above and any servicing expenses described in clause (3) above which, in
the servicer's good faith judgment, will not be recoverable from the
amounts described in those clauses, which reimbursement is to be made
from amounts collected on other Assets or, if and to the extent so
provided by the related Agreement and described in the prospectus
supplement, just from that portion of amounts collected on other Assets
that is otherwise distributable on one or more classes of Subordinate
Notes or Subordinate Certificates, as applicable, if any, remain
outstanding, and otherwise any outstanding class of Notes or
Certificates, as applicable, of the related series;
(5) if and to the extent described in the prospectus supplement, to
pay a servicer interest accrued on the advances described in clause (2)
above and the servicing expenses described in clause (3) above while
those advances and servicing expenses remain outstanding and
unreimbursed;
(6) to reimburse a servicer, the depositor, or any of their
respective directors, officers, employees and agents, as the case may be,
for expenses, costs and liabilities incurred by these parties, as and to
the extent described below under "--Certain Matters Regarding Servicers,
the Master Servicer and the Depositor;"
(7) if and to the extent described in the prospectus supplement, to
pay (or to transfer to a separate account for purposes of escrowing for
the payment of) the trustee's fees;
(8) to reimburse the trustee or any of its directors, officers,
employees and agents, as the case may be, for expenses, costs and
liabilities incurred by these parties, as and to the extent described
below under "--Certain Matters Regarding the Trustee;"
(9) to pay a servicer, as additional servicing compensation,
interest and investment income earned in respect of amounts held in the
Collection Account;
(10) to pay the person so entitled any amounts deposited in the
Collection Account that were identified and applied by the servicer as
recoveries of Retained Interest;
(11) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for
the benefit of securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise, which payments are to be made out of income
received on that property;
(12) if one or more elections have been made to treat the trust fund
or designated portions of the trust fund as a REMIC, to pay any federal,
state or local taxes imposed on the trust fund or its assets or
transactions, as and to the extent described under "Material Federal
Income Tax Considerations--REMICs--Taxes That May Be Imposed on the REMIC
Pool" or in the prospectus supplement, respectively;
(13) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a
defaulted mortgage loan or a property acquired in respect of a mortgage
loan in connection with the liquidation of that mortgage loan or
property;
(14) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of securityholders;
(15) to pay for the costs of recording the related Agreement if that
recordation materially and beneficially affects the interests of
securityholders, provided that the payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any
breach of representation or warranty under the Agreement;
(16) to pay the person so entitled any amounts deposited in the
Collection Account in error, including amounts received on any Asset
after its removal from the trust fund whether by reason of purchase or
substitution as contemplated above under "--Assignment of Assets;
Repurchase" and "--Representations and Warranties; Repurchases" or
otherwise;
(17) to make any other withdrawals permitted by the related
Agreement; and
(18) to clear and terminate the Collection Account at the
termination of the trust fund.
Other Collection Accounts. If specified in the prospectus supplement, the
Agreement for any series of Notes or Certificates, as applicable, may provide
for the establishment and maintenance of a separate collection account into
which the servicer will deposit on a daily basis, or any other period as
provided in the related Agreement, the amounts described under "--Deposits"
above for one or more series of Notes or Certificates, as applicable. Any
amounts on deposit in any of these collection accounts will be withdrawn from
these collection accounts and deposited into the appropriate Collection
Account by a time specified in the prospectus supplement. To the extent
specified in the prospectus supplement, any amounts that could be withdrawn
from the Collection Account as described under "--Withdrawals" above may also
be withdrawn from any of these collection accounts. The prospectus supplement
will set forth any restrictions for any of these collection accounts,
including investment restrictions and any restrictions for financial
institutions with which any of these collection accounts may be maintained.
The servicer will establish and maintain with the indenture trustee an
account, in the name of the indenture trustee on behalf of the holders of
Notes, into which amounts released from the Collection Account for
distribution to the holders of Notes will be deposited and from which all
distributions to the holders of Notes will be made.
Collection and Other Servicing Procedures. ___ The servicer is
required to make reasonable efforts to collect all scheduled payments under
the Assets and will follow or cause to be followed those collection procedures
that it would follow with respect to assets that are comparable to the Assets
and held for its own account, provided that those procedures are consistent
with
(1) the terms of the related Agreement and any related hazard insurance
policy or instrument of credit support, if any, included in the
related trust fund described in this prospectus or under
"Description of Credit Support,"
(2) applicable law and
(3) the general servicing standard specified in the prospectus
supplement or, if no standard is so specified, its normal servicing
practices (in either case, the "Servicing Standard").
In connection, the servicer will be permitted in its discretion to waive any
late payment charge or penalty interest in respect of a late payment on an
Asset.
Each servicer will also be required to perform other customary functions
of a servicer of comparable assets, including maintaining hazard insurance
policies as described in this prospectus and in any prospectus supplement, and
filing and settling claims under these policies; maintaining, to the extent
required by the Agreement, escrow or impoundment accounts of borrowers for
payment of taxes, insurance and other items required to be paid by any
borrower pursuant to the terms of the Assets; processing assumptions or
substitutions in those cases where the servicer has determined not to enforce
any applicable due-on-sale clause; attempting to cure delinquencies;
supervising foreclosures or repossessions; inspecting and managing mortgaged
properties or manufactured homes under some circumstances; and maintaining
accounting records relating to the Assets. The servicer or any other entity
specified in the prospectus supplement will be responsible for filing and
settling claims in respect of particular Assets under any applicable
instrument of credit support. See "Description of Credit Support."
The servicer may agree to modify, waive or amend any term of any Asset in
a manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (1) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (2) in its judgment,
materially impair the security for the Asset or reduce the likelihood of
timely payment of amounts due on the Asset. The servicer also may agree to any
modification, waiver or amendment that would so affect or impair the payments
on, or the security for, an Asset if (1) in its judgment, a material default
on the Asset has occurred or a payment default is reasonably foreseeable and
(2) in its judgment, that modification, waiver or amendment is reasonably
likely to produce a greater recovery with respect to the Asset on a present
value basis than would liquidation. In the event of any modification, waiver
or amendment of any Asset, the servicer will furnish a copy of that
modification, waiver or amendment to the trustee (or its custodian).
In the case of multifamily loans, a borrower's failure to make required
mortgage loan payments may mean that operating income is insufficient to
service the mortgage loan debt, or may reflect the diversion of that income
from the servicing of the mortgage loan debt. In addition, a borrower under a
multifamily loan that is unable to make mortgage loan payments may also be
unable to make timely payment of all required taxes and otherwise to maintain
and insure the related Mortgaged Property. In general, the servicer will be
required to monitor any multifamily loan that is in default, evaluate whether
the causes of the default can be corrected over a reasonable period without
significant impairment of the value of related Mortgaged Property, initiate
corrective action in cooperation with the borrower if cure is likely, inspect
the related Multifamily Property and take those other actions as are
consistent with the related Agreement. A significant period of time may elapse
before the servicer is able to assess the success of servicer can make the
initial determination of appropriate action, evaluate the success of
corrective action, develop additional initiatives, institute foreclosure
proceedings and actually foreclose may vary considerably depending on the
particular multifamily loan, the Multifamily Property, the borrower, the
presence of an acceptable party to assume the multifamily loan and the laws of
the jurisdiction in which the Multifamily Property is located.
Realization Upon Defaulted Assets
Generally, the servicer is required to monitor any Asset that is in
default, initiate corrective action in cooperation with the borrower if cure
is likely, inspect the Asset and take any other actions as are consistent with
the Servicing Standard. A significant period of time may elapse before the
servicer is able to assess the success of that corrective action or the need
for additional initiatives.
Any Agreement relating to a trust fund that includes mortgage loans or
contracts may grant to the servicer and/or the holder or holders of some
classes of Notes or Certificates, as applicable, a right of first refusal to
purchase from the trust fund at a predetermined purchase price any mortgage
loan or contract as to which a specified number of scheduled payments under
the Agreement are delinquent. Any right of first refusal granted to the holder
of an Offered Security will be described in the prospectus supplement. The
prospectus supplement will also describe any similar right granted to any
person if the predetermined purchase price is less than the Purchase Price
described above under "--Representations and Warranties; Repurchases."
If specified in the prospectus supplement, the servicer may offer to sell
any defaulted mortgage loan or contract described in the preceding paragraph
and not otherwise purchased by any person having a right of first refusal with
respect to that defaulted mortgage loan or contract, if and when the servicer
determines, consistent with the Servicing Standard, so that a sale would
produce a greater recovery on a present value basis than would liquidation
through foreclosure, repossession or similar proceedings. The related
Agreement will provide that any offering be made in a commercially reasonable
manner for a specified period and that the servicer accept the highest cash
bid received from any person (including itself, an affiliate of the servicer
or any securityholder) that constitutes a fair price for that defaulted
mortgage loan or contract. If there is no bid that is determined to be fair,
the servicer will proceed with respect to that defaulted mortgage loan or
contract as described below. Any bid in an amount at least equal to the
Purchase Price described above under "--Representations and Warranties;
Repurchases" will in all cases be deemed fair.
The servicer, on behalf of the trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a
Mortgaged Property securing a mortgage loan by operation of law or otherwise
and may at any time repossess and realize upon any manufactured home, if that
action is consistent with the Servicing Standard and a default on that
mortgage loan or contract has occurred or, in the servicer's judgment, is
imminent.
If title to any Mortgaged Property is acquired by a trust fund as to
which a REMIC election has been made, the servicer, on behalf of the trust
fund, will be required to sell the Mortgaged Property within three years from
the close of the calendar year of acquisition, unless (1) the Internal Revenue
Service grants an extension of time to sell that property or (2) the trustee
receives an opinion of independent counsel to the effect that the holding of
the property by the trust fund longer than three years after the close of the
calendar year of its acquisition will not result in the imposition of a tax on
the trust fund or cause the trust fund to fail to qualify as a REMIC under the
Code at any time that any Notes or Certificates, as applicable, are
outstanding. Subject to the foregoing, the servicer will be required to (A)
solicit bids for any Mortgaged Property so acquired in that manner as will be
reasonably likely to realize a fair price for that property and (B) accept the
first (and, if multiple bids are contemporaneously received, the highest) cash
bid received from any person that constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC provisions
of the Code (if a REMIC election has been made for the related trust fund) on
the ownership and management of any Mortgaged Property acquired on behalf of
the trust fund may result in the recovery of an amount less than the amount
that would otherwise be recovered. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure."
If recovery on a defaulted Asset under any related instrument of credit
support is not available, the servicer nevertheless will be obligated to
follow or cause to be followed those normal practices and procedures as it
deems necessary or advisable to realize upon the defaulted Asset. If the
proceeds of any liquidation of the property securing the defaulted Asset are
less than the outstanding principal balance of the defaulted Asset plus
interest accrued on the defaulted Asset at the applicable interest rate, plus
the total amount of expenses incurred by the servicer in connection with those
proceedings and which are reimbursable under the Agreement, the trust fund
will realize a loss in the amount of that difference. The servicer will be
entitled to withdraw or cause to be withdrawn from the Collection Account out
of the Liquidation Proceeds recovered on any defaulted Asset, before the
distribution of those Liquidation Proceeds to securityholders, amounts
representing its normal servicing compensation on the Security, unreimbursed
servicing expenses incurred with respect to the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset.
If any property securing a defaulted Asset is damaged the servicer is not
required to expend its own funds to restore the damaged property unless it
determines (1) that restoration will increase the proceeds to securityholders
on liquidation of the Asset after reimbursement of the servicer for its
expenses and (2) that its expenses will be recoverable by it from related
Insurance Proceeds or Liquidation Proceeds.
The pooling and servicing agreement will require the trustee, if it has
not received a distribution for any Mortgage Security or Agency Security by
the fifth business day after the date on which that distribution was due and
payable pursuant to the terms of that Agency Security, to request the issuer
or guarantor, if any, of that Mortgage Security or Agency Security to make
that payment as promptly as possible and legally permitted to take legal
action against that issuer or guarantor as the trustee deems appropriate under
the circumstances, including the prosecution of any claims in connection
therewith. The reasonable legal fees and expenses incurred by the trustee in
connection with the prosecution of this legal action will be reimbursable to
the trustee out of the proceeds of that action and will be retained by the
trustee before the deposit of any remaining proceeds in the Collection Account
pending distribution of the Collection Account to securityholders of the
related series. If the proceeds of any legal action are insufficient to
reimburse the trustee for its legal fees and expenses, the trustee will be
entitled to withdraw from the Collection Account an amount equal to its
expenses, and the trust fund may realize a loss in that amount.
As servicer of the Assets, a servicer, on behalf of itself, the trustee
and the securityholders, will present claims to the borrower under each
instrument of credit support, and will take those reasonable steps as are
necessary to receive payment or to permit recovery under these instruments for
defaulted Assets.
If a servicer or its designee recovers payments under any instrument of
credit support for any defaulted Assets, the servicer will be entitled to
withdraw or cause to be withdrawn from the Collection Account out of those
proceeds, before distribution of the Collection Account to securityholders,
amounts representing its normal servicing compensation on that Asset,
unreimbursed servicing expenses incurred for the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset. See "Hazard
Insurance Policies" and "Description of Credit Support."
Hazard Insurance Policies
Mortgage Loans. Generally, each Agreement for a trust fund composed of
mortgage loans will require the servicer to cause the borrower on each
mortgage loan to maintain a hazard insurance policy (including flood insurance
coverage, if obtainable, to the extent the property is located in a federally
designated flood area, in an amount as is required under applicable
guidelines) providing for the level of coverage that is required under the
related Mortgage or, if any Mortgage permits its holder to dictate to the
borrower the insurance coverage to be maintained on the related Mortgaged
Property, then the level of coverage that is consistent with the Servicing
Standard. That coverage will be in general in an amount equal to the lesser of
the principal balance owing on that mortgage loan (but not less than the
amount necessary to avoid the application of any co-insurance clause contained
in the hazard insurance policy) and the amount necessary to fully compensate
for any damage or loss to the improvements on the Mortgaged Property on a
replacement cost basis or any other amount specified in the prospectus
supplement. The ability of the servicer to assure that hazard insurance
proceeds are appropriately applied may be dependent upon its being named as an
additional insured under any hazard insurance policy and under any other
insurance policy referred to below, or upon the extent to which information in
this regard is furnished by borrowers. All amounts collected by the servicer
under any of these policies (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the borrower in
accordance with the servicer's normal servicing procedures, subject to the
terms and conditions of the related Mortgage and mortgage note) will be
deposited in the Collection Account in accordance with the related Agreement.
The Agreement may provide that the servicer may satisfy its obligation to
cause each borrower to maintain a hazard insurance policy by the servicer's
maintaining a blanket policy insuring against hazard losses on the mortgage
loans. If the blanket policy contains a deductible clause, the servicer will
be required to deposit in the Collection Account from its own funds all sums
that would have been deposited in the Collection Account but for that clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the mortgage loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms of the policies are dictated by respective state
laws, and most of these policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and other kinds of
uninsured risks.
The hazard insurance policies covering the Mortgaged Properties securing
the mortgage loans will typically contain a coinsurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on
the property to recover the full amount of any partial loss. If the insured's
coverage falls below this specified percentage, the coinsurance clause
generally provides that the insurer's liability in the event of partial loss
does not exceed the lesser of (1) the replacement cost of the improvements
less physical depreciation and (2) that proportion of the loss as the amount
of insurance carried bears to the specified percentage of the full replacement
cost of those improvements.
Each Agreement for a trust fund composed of mortgage loans will require
the servicer to cause the borrower on each mortgage loan to maintain all other
insurance coverage for the related Mortgaged Property as is consistent with
the terms of the related Mortgage and the Servicing Standard, which insurance
may typically include flood insurance (if the related Mortgaged Property was
located at the time of origination in a federally designated flood area).
Any cost incurred by the servicer in maintaining any insurance policy
will be added to the amount owing under the mortgage loan where the terms of
the mortgage loan so permit; provided, however, that the addition of that cost
will not be taken into account for purposes of calculating the distribution to
be made to securityholders. Those costs may be recovered by the servicer from
the Collection Account, with interest, as provided by the Agreement.
Under the terms of the mortgage loans, borrowers will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The servicer, on behalf of the
trustee and securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
Mortgaged Properties securing the mortgage loans. However, the ability of the
servicer to present or cause to be presented those claims is dependent upon
the extent to which information in this regard is furnished to the servicer by
borrowers.
Contracts. Generally, the terms of the agreement for a trust fund
composed of contracts will require the servicer to maintain for each contract
one or more hazard insurance policies that provide, at a minimum, the same
coverage as a standard form fire and extended coverage insurance policy that
is customary for manufactured housing, issued by a company authorized to issue
those policies in the state in which the manufactured home is located, and in
an amount that is not less than the maximum insurable value of that
manufactured home or the principal balance due from the borrower on the
related contract, whichever is less; provided, however, that the amount of
coverage provided by each hazard insurance policy must be sufficient to avoid
the application of any co-insurance clause contained therein. When a
manufactured home's location was, at the time of origination of the related
contract, within a federally designated special flood hazard area, the
servicer must cause flood insurance to be maintained, which coverage must be
at least equal to the minimum amount specified in the preceding sentence or
any lesser amount as may be available under the federal flood insurance
program. Each hazard insurance policy caused to be maintained by the servicer
must contain a standard loss payee clause in favor of the servicer and its
successors and assigns. If any borrower is in default in the payment of
premiums on its hazard insurance policy or policies, the servicer must pay
those premiums out of its own funds, and may add separately the premiums to
the borrower's obligation as provided by the contract, but may not add the
premiums to the remaining principal balance of the contract.
The servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained for each manufactured home, and must maintain, to
the extent that the related contract does not require the borrower to maintain
a hazard insurance policy for the related manufactured home, one or more
blanket insurance policies covering losses on the borrower's interest in the
contracts resulting from the absence or insufficiency of individual hazard
insurance policies. The servicer must pay the premium for that blanket policy
on the basis described therein and must pay any deductible amount for claims
under that policy relating to the contracts.
FHA Insurance and VA Guarantees
FHA loans will be insured by the FHA as authorized under the Housing Act.
Some FHA 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, the FHA 245 graduated payment mortgage program and the FHA
Title I Program. These programs generally limit the principal amount and
interest rates of the mortgage loans insured. The prospectus supplement for
Notes or Certificates, as applicable, of each series evidencing interests in a
trust fund including FHA loans will set forth additional information regarding
the regulations governing the applicable FHA insurance programs. Except as
otherwise specified in the prospectus supplement, the following describes FHA
insurance programs and regulations as generally in effect for FHA loans.
The insurance premiums for FHA loans are collected by lenders approved by
the Department of Housing and Urban Development ("HUD") or by the servicer and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the
mortgaged premises to the United States of America or upon assignment of the
defaulted loan to the United States of America. For a defaulted FHA loan, the
servicer is limited in its ability to initiate foreclosure proceedings. When
it is determined, either by the servicer or HUD, that default was caused by
circumstances beyond the borrower's control, the servicer is expected to make
an effort to avoid foreclosure by entering, if feasible, into one of a number
of available forms of forbearance plans with the borrower. Those plans may
involve the reduction or suspension of regular mortgage payments for a
specified period, with those payments to be made on or before the maturity
date of the mortgage, or the recasting of payments due under the mortgage up
to or, other than FHA loans originated under the FHA Title I Program, beyond
the maturity date. In addition, when a default caused by those circumstances
is accompanied by other criteria, HUD may provide relief by making payments to
the servicer in partial or full satisfaction of amounts due under the FHA loan
(which payments are to be repaid by the borrower to HUD) or by accepting
assignment of the loan from the servicer. With some exceptions, at least three
full monthly installments must be due and unpaid under the FHA loan, and HUD
must have rejected any request for relief from the borrower before the
servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. To the extent specified in the prospectus
supplement, the servicer of each single family FHA loan will be obligated to
purchase any debenture issued in satisfaction of that FHA loan upon default
for an amount equal to the principal amount of that debenture.
Other than in relation to the FHA Title I Program, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted FHA loan adjusted to reimburse the servicer
for some of its costs and expenses and to deduct amounts received or retained
by the servicer after default. When entitlement to insurance benefits results
from foreclosure (or other acquisition of possession) and conveyance to HUD,
the servicer is compensated for no more than two-thirds of its foreclosure
costs, and is compensated for interest accrued and unpaid before that date but
in general only to the extent it was allowed pursuant to a forbearance plan
approved by HUD. When entitlement to insurance benefits results from
assignment of the FHA loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA loan, bears interest from
a date 30 days after the borrower's first uncorrected failure to perform any
obligation to make any payment due under the mortgage and, upon assignment,
from the date of assignment to the date of payment of the claim, in each case
at the same interest rate as the applicable HUD debenture interest rate as
described above.
VA loans will be partially guaranteed by the VA under the Serviceman's
Readjustment Act (a "VA Guaranty Policy"). For a defaulted VA loan, the
servicer is, absent exceptional circumstances, authorized to announce its
intention to foreclose only when the default has continued for three months.
Generally, a claim for the guarantee is submitted after liquidation of the
Mortgaged Property.
The amount payable under the guarantee will be the percentage of the VA
loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guarantee will be equal to the unpaid principal amount of that VA loan,
interest accrued on the unpaid balance of that VA loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that those amounts have not been recovered through liquidation of
the Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
Fidelity Bonds and Errors and Omissions Insurance
Each Agreement will require that the servicer obtain and maintain in
effect a fidelity bond or similar form of insurance coverage (which may
provide blanket coverage) or any combination of these insuring against loss
occasioned by fraud, theft or other intentional misconduct of the officers,
employees and agents of the servicer. The related Agreement will allow the
servicer to self-insure against loss occasioned by the errors and omissions of
the officers, employees and agents of the servicer so long as the criteria set
forth in the Agreement are met.
Due-on-Sale Clauses
The mortgage loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
mortgage loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable
law; provided, however, that the servicer will not take any action in relation
to the enforcement of any due-on-sale clause that would:
o adversely affect or jeopardize coverage under any applicable
insurance policy or
o materially increase the risk of default or delinquency on, or
materially impair the security for, that mortgage loan.
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. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses."
The contracts may also contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related mortgaged property, or
due-on-sale clauses. The servicer will generally permit that transfer so long
as the transferee satisfies the servicer's then applicable underwriting
standards. The purpose of those transfers is often to avoid a default by the
transferring borrower.
Retained Interest; Servicing Compensation and Payment of Expenses
The prospectus supplement for a series of Notes or Certificates, as
applicable, will specify whether there will be any Retained Interest in the
Assets, and, if so, the initial owner of this Retained Interest. If so, the
Retained Interest will be established on a loan-by-loan basis and will be
specified on an exhibit to the related Agreement. A "Retained Interest" in an
Asset represents a specified portion of the interest payable on the Asset. The
Retained Interest will be deducted from borrower payments as received and will
not be part of the related trust fund.
The servicer's primary servicing compensation for a series of Notes or
Certificates, as applicable, will come from the periodic payment to it of a
portion of the interest payment on each Asset or any other amount specified in
the prospectus supplement. Since any Retained Interest and a servicer's
primary compensation are percentages of the principal balance of each Asset,
those amounts will decrease in accordance with the amortization of the Assets.
The prospectus supplement for a series of Notes or Certificates, as
applicable, evidencing interests in a trust fund that includes mortgage loans
or contracts may provide that, as additional compensation, the servicer may
retain all or a portion of assumption fees, modification fees, late payment
charges or Prepayment Premiums collected from borrowers and any interest or
other income that may be earned on funds held in the Collection Account or any
account established by a servicer pursuant to the Agreement.
The servicer may, to the extent provided in the prospectus supplement,
pay from its servicing compensation expenses incurred in connection with its
servicing and managing of the Assets, including payment of the fees and
disbursements of the trustee and independent accountants, payment of expenses
incurred in connection with distributions and reports to securityholders, and
payment of any other expenses described in the prospectus supplement. Some
other expenses, including expenses relating to defaults and liquidations on
the Assets and, to the extent so provided in the prospectus supplement,
interest on these expenses at the rate specified in the prospectus supplement
may be borne by the trust fund.
If and to the extent provided in the prospectus supplement, the servicer
may be required to apply a portion of the servicing compensation otherwise
payable to it in respect of any Due Period to interest shortfalls resulting
from the voluntary prepayment of any Assets in the related trust fund during
that period before their due dates.
Evidence as to Compliance
Each Agreement relating to Assets that include mortgage loans or
contracts, unless otherwise provided in the prospectus supplement, will
provide that on or before a specified date in each year, beginning with the
first of these dates at least six months after the related Cut-off Date, a
firm of independent public accountants will furnish a statement to the trustee
to the effect that, on the basis of the examination by that firm conducted
substantially in compliance with either the Uniform Single Attestation Program
for Mortgage Bankers, the Audit Program for Mortgages serviced for Freddie Mac
or any other program used by the servicer, the servicing by or on behalf of
the servicer of mortgage loans under agreements substantially similar to each
other (including the related Agreement) was conducted in compliance with the
terms of those agreements or that program except for any significant
exceptions or errors in records that, in the opinion of the firm, either the
Audit Program for Mortgages serviced for Freddie Mac, or paragraph 4 of the
Uniform Single Attestation Program for Mortgage Bankers, or any other program,
requires it to report.
Each Agreement will also provide for delivery to the trustee, on or
before a specified date in each year, of an officer's certificate of the
servicer to the effect that the servicer has fulfilled its obligations under
the Agreement throughout the preceding calendar year or other specified
twelve-month period.
Certain Matters Regarding Servicers, the Master Servicer and the
Depositor
The servicer or master servicer under each Agreement will be named in the
prospectus supplement. The entities serving as servicer or master servicer may
be affiliates of the depositor and may have other normal business
relationships with the depositor or the depositor's affiliates. If applicable,
reference in this prospectus to the servicer will also be deemed to be to the
master servicer. Each Agreement will provide, in general, that:
o The servicer may resign from its obligations and duties under the
Agreement only upon a determination that its duties under the
Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other
activities carried on by it, the other activities of the servicer so
causing that conflict being of a type and nature carried on by the
servicer at the date of 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.
o Neither any servicer, the depositor nor any director, officer,
employee, or agent of a 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; provided, however, that
neither a servicer, the depositor nor any other person will be
protected against any breach of a representation, warranty or
covenant made in the related Agreement, or against any liability
specifically imposed by the Agreement, or against any liability that
would otherwise be imposed by reason of willful misfeasance, bad
faith or gross negligence in the performance of obligations or
duties under the Agreement or by reason of reckless disregard of
obligations and duties under the Agreement.
o Any servicer, the depositor and any director, officer, employee or
agent of a 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 Notes or
Certificates, as applicable; provided, however, that that
indemnification will not extend to any loss, liability or expense
(1) specifically imposed by that Agreement or otherwise incidental
to the performance of obligations and duties under the
Agreement, including, in the case of a servicer, the
prosecution of an enforcement action in respect of any specific
mortgage loan or mortgage loans or contract or contracts
(except as any loss, liability or expense will be otherwise
reimbursable pursuant to that Agreement);
(2) incurred in connection with any breach of a representation,
warranty or covenant made in that Agreement;
(3) incurred by reason of misfeasance, bad faith or gross
negligence in the performance of obligations or duties under
the Agreement, or by reason of reckless disregard of those
obligations or duties;
(4) incurred in connection with any violation of any state or
federal securities law; or
(5) imposed by any taxing authority if that loss, liability or
expense is not specifically reimbursable pursuant to the terms
of the related Agreement.
o Neither any servicer nor the depositor will be under any obligation
to appear in, prosecute or defend any legal action that is not
incidental to its respective responsibilities under the Agreement
and which in its opinion may involve it in any expense or liability.
Any servicer or the depositor may, however, in its discretion
undertake any action which it may deem necessary or desirable with
respect to the Agreement and the rights and duties of the parties to
the Agreement and the interests of the securityholders under the
Agreement. In that event, the legal expenses and costs of that
action and any liability resulting will be expenses, costs and
liabilities of the securityholders, and the servicer or the
depositor, as the case may be, will be entitled to be reimbursed
therefor and to charge the Collection Account.
Any person into which the servicer or the depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to
which the servicer or the depositor is a party, or any person succeeding to
the business of the servicer or the depositor, may be the successor of the
servicer or the depositor, as the case may be, under the terms of the related
Agreement.
Special Servicers
If and to the extent specified in the prospectus supplement, a special
servicer (a "Special servicer") may be a party to the related Agreement or may
be appointed by the servicer or another specified party to perform specified
duties in respect of servicing the related mortgage loans that would otherwise
be performed by the servicer (for example, the workout and/or foreclosure of
defaulted mortgage loans). The rights and obligations of any Special servicer
will be specified in the prospectus supplement, and the servicer will be
liable for the performance of a Special servicer only if, and to the extent,
set forth in the prospectus supplement.
Events of Default under the Agreement
Events of default under the related Agreement will generally include:
o any failure by the servicer to distribute or cause to be distributed
to securityholders, or to remit to the trustee for distribution to
securityholders, any required payment that continues after a grace
period, if any;
o any failure by the servicer duly to observe or perform in any
material respect any of its other covenants or obligations under the
Agreement that continues unremedied for 30 days after written notice
of that failure has been given to the servicer by the trustee or the
depositor, or to the servicer, the depositor and the trustee by
securityholders evidencing not less than 25% of the voting rights
for that series;
o any breach of a representation or warranty made by the servicer
under the Agreement that materially and adversely affects the
interests of securityholders and which continues unremedied for 30
days after written notice of that breach has been given to the
servicer by the trustee or the depositor, or to the servicer, the
depositor and the trustee by the holders of Notes or Certificates,
as applicable, evidencing not less than 25% of the voting rights for
that series; and
o some events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings and actions by or on
behalf of the servicer indicating its insolvency or inability to pay
its obligations.
Material variations to the foregoing events of default (other than to
shorten cure periods or eliminate notice requirements) will be specified in
the prospectus supplement. The trustee will, not later than the later of 60
days or any other period specified in the prospectus supplement after the
occurrence of any event that constitutes or, with notice or lapse of time or
both, would constitute an event of default and five days after specific
officers of the trustee become aware of the occurrence of that event, transmit
by mail to the depositor and all securityholders of the applicable series
notice of that occurrence, unless that default has been cured or waived.
Rights Upon Event of Default under the Agreements
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 Notes or
Certificates, as applicable, evidencing not less than 51% (or any other
percentage specified in the Agreement) of the voting rights for that series,
the trustee will terminate all of the rights and obligations of the servicer
under the Agreement and in and to the mortgage loans (other than as a
securityholder or as the owner of any Retained Interest), whereupon the
trustee will succeed to all of the responsibilities, duties and liabilities of
the servicer under the Agreement (except that if the trustee is prohibited by
law from obligating itself to make advances regarding delinquent Assets, or if
the prospectus supplement so specifies, then the trustee will not be obligated
to make those advances) and will be entitled to similar compensation
arrangements. If the trustee is unwilling or unable so to act, it may or, at
the written request of the holders of Notes or Certificates, as applicable,
entitled to at least 51% (or any other percentage specified in the Agreement)
of the voting rights for that series, it must appoint, or petition a court of
competent jurisdiction for the appointment of, a loan servicing institution
acceptable to the rating agency with a net worth at the time of that
appointment of at least $15,000,000 (or any other amount specified in the
Agreement) to act as successor to the servicer under the Agreement. Pending
that appointment, the trustee is obligated to act in that capacity. The
trustee and any successor 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.
The holders of Notes or Certificates, as applicable, representing at
least 66 2/3% (or any other percentage specified in the Agreement) of the
voting rights allocated to the respective classes of Notes or Certificates, as
applicable, affected by any event of default will be entitled to waive that
event of default; provided, however, that an Event of Default involving a
failure to distribute a required payment to securityholders described in
clause (1) under "Events of Default under the Agreements" may be waived only
by all of the securityholders. Upon any waiver of an event of default, that
event of default will cease to exist and will be deemed to have been remedied
for every purpose under the Agreement.
No securityholders will have the right under any Agreement to institute
any proceeding with respect to the Agreement unless that holder previously has
given to the trustee written notice of default and unless the holders of Notes
or Certificates, as applicable, evidencing not less than 25% (or any other
percentage specified in the Agreement) of the voting rights have made written
request upon the trustee to institute that proceeding in its own name as
trustee under the Agreement and have offered to the trustee reasonable
indemnity, and the trustee for 60 days (or any other number of days specified
in the Agreement) has neglected or refused to institute any proceeding. The
trustee, however, is under no obligation to exercise any of the trusts or
powers vested in it by any Agreement or to make any investigation of matters
arising under the Agreement or to institute, conduct or defend any litigation
under the Agreement or in relation to the Agreement at the request, order or
direction of any of the securityholders covered by that Agreement, unless
those securityholders have offered to the trustee reasonable security or
indemnity against the costs, expenses and liabilities that may be incurred.
The manner of determining the voting rights of a Security or class or
classes of Notes or Certificates, as applicable, will be specified in the
Agreement.
Amendment
In general, each Agreement may be amended by the parties to it, without
the consent of any securityholders covered by the Agreement, to
(1) cure any ambiguity or mistake;
(2) correct, modify or supplement any provision in the Agreement
that may be inconsistent with any other provision in the Agreement or
with the prospectus supplement;
(3) make any other provisions with respect to matters or questions
arising under the Agreement that are not materially inconsistent with the
provisions of the Agreement; or
(4) comply with any requirements imposed by the Code; provided that,
in the case of clause (3), that amendment will not adversely affect in
any material respect the interests of any securityholders covered by the
Agreement as evidenced either by an opinion of counsel to that effect or
the delivery to the trustee of written notification from each rating
agency that provides, at the request of the depositor, a rating for the
Offered Notes or Offered Certificates, as applicable, of the related
series to the effect that that amendment or supplement will not cause
that rating agency to lower or withdraw the then current rating assigned
to those Notes or Certificates, as applicable.
In general, each Agreement may also be amended by the depositor, the
servicer, if any, and the trustee, with the consent of the securityholders
affected by the amendment evidencing not less than 51% (or any other
percentage specified in the Agreement) of the voting rights, for any purpose;
provided, however, no amendment may (1) reduce in any manner the amount of, or
delay the timing of, payments received or advanced on Assets that are required
to be distributed on any Security without the consent of the securityholder or
(2) reduce the consent percentages described in this paragraph without the
consent of all the securityholders covered by the Agreement then outstanding.
However, for any series of Notes or Certificates, as applicable, as to which a
REMIC election is to be made, the trustee will not consent to any amendment of
the Agreement unless it has first have received an opinion of counsel to the
effect that that amendment will not result in the imposition of a tax on the
related trust fund or, if applicable, cause the related trust fund to fail to
qualify as a REMIC, at any time that the related Notes or Certificates, as
applicable, are outstanding.
The Trustee
The trustee under each Agreement will be named in the prospectus
supplement. The commercial bank, national banking association, banking
corporation or trust company serving as trustee may have a banking
relationship with the depositor and its affiliates, with any servicer and its
affiliates and with any master servicer and its affiliates. To the extent
consistent with its fiduciary obligations as trustee, the trustee may delegate
its duties to one or more agents as provided in the Agreement.
Duties of the Trustee
The trustee will make no representations as to the validity or
sufficiency of any Agreement, the Notes or Certificates, as applicable, or any
Asset or related document and is not accountable for the use or application by
or on behalf of any servicer of any funds paid to the master servicer or its
designee in respect of the Notes or Certificates, as applicable, or the
Assets, or deposited into or withdrawn from the Collection Account or any
other account by or on behalf of the servicer. If no Event of Default has
occurred and is continuing, the trustee is required to perform only those
duties specifically required under the related Agreement, as applicable.
However, upon receipt of the various certificates, reports or other
instruments required to be furnished to it, the trustee is required to examine
those documents and to determine whether they conform to the requirements of
the Agreement.
Certain Matters Regarding the Trustee
The trustee and any director, officer, employee or agent of the trustee
will be entitled to indemnification out of the Collection Account for any
loss, liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in
settlement) incurred in connection with the trustee's
(1) enforcing its rights and remedies and protecting the interests of
the securityholders during the continuance of an Event of Default,
(2) defending or prosecuting any legal action in respect of the related
Agreement or series of Notes or Certificates, as applicable,
(3) being the mortgagee of record for the mortgage loans in a trust fund
and the owner of record for any Mortgaged Property acquired in
respect thereof for the benefit of securityholders, or
(4) acting or refraining from acting in good faith at the direction of
the holders of the related series of Notes or Certificates, as
applicable, entitled to not less than 25% (or any other percentage
as is specified in the related Agreement for any particular matter)
of the voting rights for that series;
provided, however, that this indemnification will not extend to any loss,
liability or expense that constitutes a specific liability of the trustee
pursuant to the related Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the trustee in the performance of its obligations and duties under the
Agreement, or by reason of its reckless disregard of those obligations or
duties, or as may arise from a breach of any representation, warranty or
covenant of the trustee made in the Agreement.
Resignation and Removal of the Trustee
The trustee may at any time resign from its obligations and duties under
an Agreement by giving written notice of its resignation to the depositor, the
servicer, if any, each rating agency, and all securityholders. Upon receiving
that notice of resignation, the depositor is required promptly to appoint a
successor trustee acceptable to the servicer, if any. If no successor trustee
has been so appointed and has accepted appointment within 30 days after the
giving of that notice of resignation, the resigning trustee may petition any
court of competent jurisdiction for the appointment of a successor trustee.
If at any time the trustee ceases to be eligible to continue as a trustee
under the related Agreement, or if at any time the trustee becomes incapable
of acting, or is adjudged bankrupt or insolvent, or a receiver of the trustee
or of its property is appointed, or any public officer takes charge or control
of the trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation, or if a change in the financial
condition of the trustee has adversely affected or will adversely affect the
rating on any class of the Notes or Certificates, as applicable, then the
depositor and/or a party specified in the related Agreement may remove the
trustee and appoint a successor trustee acceptable to the master servicer, if
any, according to the terms of the related Agreement. Securityholders of any
series entitled to at least 51% (or any other percentage specified in the
prospectus supplement) of the voting rights for that series may at any time
remove the trustee without cause and appoint a successor trustee.
Any resignation or removal of the trustee and appointment of a successor
trustee will not become effective until acceptance of appointment by the
successor trustee.
Material Terms of the Indenture
General
The following summary describes the material provisions that may appear
in each indenture. The prospectus supplement for a series of Notes will
describe any provision of the indenture relating to that series that
materially differs from the description of that provision contained in this
prospectus. The summaries do not purport to be complete and are subject to,
and are qualified by reference to, all of the provisions of the indenture for
a series of Notes. A form of an indenture has been filed as an exhibit to the
Registration Statement of which this prospectus is a part. The depositor will
provide a copy of the indenture (without exhibits) relating to any series of
Notes without charge upon written request of a securityholder of that series
addressed to ACE Securities Corp., 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211, Attention: Elizabeth S. Eldridge.
Events of Default
Events of default under the indenture for each series of Notes will
generally include:
o a default for thirty days (or any other number of days specified in
the prospectus supplement) or more in the payment of any principal
of or interest on a Note of that series, to the extent specified in
the prospectus supplement;
o failure to perform any other covenant of the depositor or the trust
fund in the indenture that continues for a period of sixty days (or
any other number of days specified in the prospectus supplement or
the indenture) after notice of the failure is given in accordance
with the procedures described in the prospectus supplement;
o any representation or warranty made by the depositor or the trust
fund in the indenture or in any certificate or other writing
delivered pursuant to the indenture or in connection with the
indenture with respect to or affecting that series having been
incorrect in a material respect as of the time made, and that breach
is not cured within sixty days (or any other number of days
specified in the prospectus supplement) after notice of the breach
is given in accordance with the procedures described in the
prospectus supplement;
o specified events of bankruptcy, insolvency, receivership or
liquidation of the trust fund; or
o any other event of default provided with respect to Notes of that
series.
If an event of default with respect to the Notes of any series at the
time outstanding occurs and is continuing, subject to and in accordance with
the terms of the indenture, either the indenture trustee or the holders of a
majority of the then total outstanding amount of the Notes of that series may
declare the principal amount (or, if the Notes of that series are Accrual
Securities, that portion of the principal amount as may be specified in the
terms of that series, as provided in the indenture) of all the Notes of that
series to be due and payable immediately. That declaration may, under some
circumstances, be rescinded and annulled by the securityholders of a majority
in total outstanding amount of the Notes of that series.
If, following an event of default with respect to any series of Notes,
the Notes of that series have been declared to be due and payable, the
indenture trustee may, in its discretion, notwithstanding that acceleration,
elect to maintain possession of the collateral securing the Notes of that
series and to continue to apply distributions on that collateral as if there
had been no declaration of acceleration if that 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 that
declaration. In addition, the indenture trustee may not sell or otherwise
liquidate the collateral securing the Notes of a series following an event of
default, other than a default in the payment of any principal or interest on
any Note of that series for thirty days or more, unless
(1) the holders of 100% (or any other percentage specified in the
indenture) of the then total outstanding amount of the Notes of that
series consent to that sale;
(2) the proceeds of that 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 that sale; or
(3) the indenture trustee determines that that collateral would not
be sufficient on an ongoing basis to make all payments on the Notes as
those payments would have become due if the Notes had not been declared
due and payable, and the indenture trustee obtains the consent of the
holders of 66 2/3% (or any other percentage specified in the indenture)
of the then total outstanding amount of the Notes of that series.
If so specified in the prospectus supplement, only holders of particular
classes of Notes will have the right to declare the Notes of that series to be
immediately due and payable in the event of a payment default, as described
above, and to exercise the remedies described above.
If the indenture trustee liquidates the collateral in connection with an
event of default involving a default for thirty days (or any other number of
days specified in the indenture) or more in the payment of principal of or
interest on the Notes of a series, the indenture provides that the indenture
trustee will have a prior lien on the proceeds of any liquidation for unpaid
fees and expenses. As a result, upon the occurrence of that event of default,
the amount available for distribution to the securityholders would be less
than would otherwise be the case. However, the indenture trustee may not
institute a proceeding for the enforcement of its lien except in connection
with a proceeding for the enforcement of the lien of the indenture for the
benefit of the securityholders after the occurrence of that event of default.
To the extent provided in the prospectus supplement, in the event the
principal of the Notes of a series is declared due and payable, as described
above, the holders of any Notes issued at a discount from par may be entitled
to receive no more than an amount equal to the unpaid principal amount of the
Notes less the amount of the discount that is unamortized.
Subject to the provisions of the indenture relating to the duties of the
indenture trustee, in case an event of default occurs and continues for a
series of Notes, the indenture trustee will be under no obligation to exercise
any of the rights or powers under the indenture at the request or direction of
any of the securityholders of that series, unless those holders offer to the
indenture trustee security or indemnity satisfactory to it against the costs,
expenses and liabilities that might be incurred by it in complying with that
request or direction. Subject to those provisions for indemnification and some
limitations contained in the indenture, the holders of a majority of the then
total outstanding amount of the Notes of that series will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the indenture trustee or exercising any trust or power conferred
on the indenture trustee with respect to the Notes of that series, and the
holders of a majority of the then total outstanding amount of the Notes of
that series may, in some cases, waive any default with respect to the Notes,
except a default in the payment of principal or interest or a default in
respect of a covenant or provision of the indenture that cannot be modified
without the waiver or consent of all the holders of the outstanding Notes of
that series affected.
Discharge of Indenture
The indenture will be discharged, subject to the provisions of the
indenture, for a series of Notes (except for continuing rights specified in
the indenture) upon the delivery to the indenture trustee for cancellation of
all the Notes of that series or, with some limitations, upon deposit with the
indenture trustee of funds sufficient for the payment in full of all of the
Notes of that series.
With some limitations, the indenture will provide that, if specified for
the Notes of any series, the related trust fund will be discharged from any
and all obligations in respect of the Notes of that series (except for
obligations specified in the indenture including obligations relating to
temporary Notes and exchange 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 indenture trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America which
through the payment of interest and principal in respect of the Notes 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 maturity 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 those direct obligations for payment of principal and interest, if any,
on their Notes until maturity.
Indenture Trustee's Annual Report
The indenture trustee for each series of Notes will be required to mail
each year to all related securityholders a brief report, as provided in the
indenture, relating to its eligibility and qualification to continue as
indenture trustee under the related indenture, any amounts advanced by it
under the indenture, the amount, interest rate and maturity date of
indebtedness owing by that Trust to the applicable indenture trustee in its
individual capacity, the property and funds physically held by the indenture
trustee in its capacity as indenture trustee and any action taken by it that
materially affects the Notes and that has not been previously reported.
The Indenture Trustee
The indenture trustee for a series of Notes will be specified in the
prospectus supplement. The indenture trustee for any series may resign at any
time in accordance with the terms of the indenture, in which event the
depositor or the appropriate party designated in the indenture will be
obligated to appoint a successor trustee for that series. The depositor or the
appropriate party designated in the indenture may also remove any indenture
trustee if that indenture trustee ceases to be eligible to continue as the
indenture trustee under the related indenture, if that indenture trustee
becomes insolvent or for any other grounds specified in the indenture. In
those circumstances the depositor or the appropriate party designated in the
indenture will be obligated to appoint a successor trustee for the applicable
series of Notes. Any resignation or removal of the indenture trustee and
appointment of a successor trustee for any series of Notes does not become
effective until acceptance of the appointment by the successor trustee for
that series.
The bank or trust company serving as indenture trustee may have a banking
relationship with the depositor or any of its affiliates, a servicer or any of
its affiliates or the master servicer or any of its affiliates. To the extent
consistent with its fiduciary obligations as indenture trustee, the indenture
trustee may delegate its duties to one or more agents as provided in the
indenture and the Agreement.
Description of Credit Support
General
For any series of Notes or Certificates, as applicable, credit support
may be provided for one or more classes of the series or the related Assets.
Credit support may be in the form of:
o the subordination of one or more classes of Notes or Certificates,
as applicable;
o letters of credit;
o insurance policies;
o guarantees;
o the establishment of one or more reserve funds; or
o any other method of credit support described in the prospectus
supplement, or any combination of the foregoing.
Any form of credit support may be structured so as to be drawn upon by
more than one series to the extent described in the prospectus supplement.
The coverage provided by any credit support will be described in the
prospectus supplement. Generally, that coverage will not provide protection
against all risks of loss and will not guarantee repayment of the entire
Security Balance of the Notes or Certificates, as applicable, and interest on
the Security Balance. If losses or shortfalls occur that exceed the amount
covered by credit support or that are not covered by credit support,
securityholders will bear their allocable share of deficiencies. Moreover, if
a form of credit support covers more than one series of Notes or Certificates,
as applicable, (each, a "Covered Trust"), securityholders evidencing interests
in any of those Covered Trusts will be subject to the risk that the credit
support will be exhausted by the claims of other Covered Trusts before that
Covered Trust receiving any of its intended share of that coverage.
If credit support is provided for one or more classes of Notes or
Certificates, as applicable, of a series, or the related Assets, the
prospectus supplement will include a description of
(a) the nature and amount of coverage under that credit support,
(b) any conditions to payment under the prospectus supplement not
otherwise described in this prospectus,
(c) the conditions (if any) under which the amount of coverage under
that credit support may be reduced and under which that credit
support may be terminated or replaced and
(d) the material provisions relating to that credit support.
Additionally, the prospectus supplement will set forth information with
respect to the obligor under any financial guaranty insurance policy, letter
of credit, guarantee or similar instrument of credit support, including
(1) a brief description of its principal business activities,
(2) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business,
(3) if applicable, the identity of regulatory agencies that exercise
primary jurisdiction over the conduct of its business and
(4) its total assets, and its stockholders' or policyholders' surplus,
if applicable, as of the date specified in the prospectus
supplement.
Subordinate Securities
One or more classes of Notes or Certificates, as applicable, of a series
may be Subordinate Notes or Subordinate Certificates, as applicable, if
specified in the prospectus supplement. The rights of the holders of
Subordinate Notes or Subordinate Certificates, as applicable, to receive
distributions of principal and interest from the Collection Account on any
Distribution Date will be subordinated to those rights of the holders of
Senior Notes or Senior Certificates, as applicable. The subordination of a
class may apply only in the event of (or may be limited to) particular types
of losses or shortfalls. The prospectus supplement will set forth information
concerning the amount of subordination of a class or classes of Subordinate
Notes or Subordinate Certificates, as applicable, in a series, the
circumstances in which that subordination will be applicable and the manner,
if any, in which the amount of subordination will be effected.
Cross-Support Provisions
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Notes or Certificates, as
applicable, of a series, credit support may be provided by cross-support
provisions requiring that distributions be made on Senior Notes or Senior
Certificates, as applicable, evidencing interests in one group of mortgage
loans before distributions on Subordinate Notes or Subordinate Certificates,
as applicable, evidencing interests in a different group of mortgage loans
within the trust fund. The prospectus supplement for a series that includes a
cross-support provision will describe the manner and conditions for applying
those provisions.
Limited Guarantee
If specified in the prospectus supplement for a series of Notes or
Certificates, as applicable, credit enhancement may be provided in the form of
a limited guarantee issued by a guarantor named in the prospectus supplement.
Financial Guaranty Insurance Policy or Surety Bond
Credit enhancement may be provided in the form of a financial guaranty
insurance policy or a surety bond issued by an insurer named in the policy or
surety bond, if specified in the prospectus supplement.
Letter of Credit
Alternative credit support for a series of Notes or Certificates, as
applicable, may be provided by the issuance of a letter of credit by the bank
or financial institution specified in the prospectus supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of
credit issued for a series of Notes or Certificates, as applicable, will be
set forth in the prospectus supplement relating to that series.
Pool Insurance Policies
If specified in the prospectus supplement relating to a series of Notes
or Certificates, as applicable, a pool insurance policy for the mortgage loans
in the related trust fund will be obtained. The pool insurance policy will
cover any loss (subject to the limitations described in the prospectus
supplement) by reason of default to the extent a related mortgage loan is not
covered by any primary mortgage insurance policy. The amount and principal
terms of any pool insurance coverage will be set forth in the prospectus
supplement.
Special Hazard Insurance Policies
A special hazard insurance policy may also be obtained for the related
trust fund, if specified in the prospectus supplement, in the amount set forth
in the prospectus supplement. The special hazard insurance policy will,
subject to the limitations described in the prospectus supplement, protect
against loss by reason of damage to Mortgaged Properties caused by hazards not
insured against under the standard form of hazard insurance policy for the
respective states, in which the Mortgaged Properties are located. The amount
and principal terms of any special hazard insurance coverage will be set forth
in the prospectus supplement.
Borrower Bankruptcy Bond
Losses resulting from a bankruptcy proceeding relating to a borrower
affecting the mortgage loans in a trust fund for a series of Notes or
Certificates, as applicable, will, if specified in the prospectus supplement,
be covered under a borrower bankruptcy bond (or any other instrument that will
not result in a downgrading of the rating of the Notes or Certificates, as
applicable, of a series by the rating agency or agencies that rate that
series). Any borrower bankruptcy bond or any other instrument will provide for
coverage in an amount meeting the criteria of the rating agency or agencies
rating the Notes or Certificates, as applicable, of the related series, which
amount will be set forth in the prospectus supplement. The amount and
principal terms of any borrower bankruptcy coverage will be set forth in the
prospectus supplement.
Reserve Funds
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, deficiencies in amounts otherwise payable on
those Notes or Certificates, as applicable, or specific classes of Notes or
Certificates, as applicable, will be covered by one or more reserve funds in
which cash, a letter of credit, Permitted Investments, a demand note or a
combination of these will be deposited, in the amounts so specified in the
prospectus supplement. The reserve funds for a series may also be funded over
time by depositing a specified amount of the distributions received on the
related Assets as specified in the prospectus supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income on these amounts, if any, will be applied for the
purposes, in the manner, and to the extent specified in the prospectus
supplement. A reserve fund may be provided to increase the likelihood of
timely distributions of principal of and interest on the Notes or
Certificates, as applicable. If specified in the prospectus supplement,
reserve funds may be established to provide limited protection against only
some types of losses and shortfalls. Following each Distribution Date amounts
in a reserve fund in excess of any amount required to be maintained in the
reserve fund may be released from the reserve fund under the conditions and to
the extent specified in the prospectus supplement and will not be available
for further application to the Notes or Certificates, as applicable.
Money deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the prospectus supplement. To the
extent specified in the prospectus supplement, any reinvestment income or
other gain from those investments will be credited to the related reserve fund
for that series, and any loss resulting from those investments will be charged
to the reserve fund. However, that income may be payable to any related
servicer or another service provider or other entity. To the extent specified
in the prospectus supplement, the reserve fund, if any, for a series will not
be a part of the trust fund.
Additional information concerning any reserve fund will be set forth in
the prospectus supplement, including the initial balance of the reserve fund,
the balance required to be maintained in the reserve fund, the manner in which
the required balance will decrease over time, the manner of funding the
reserve fund, the purposes for which funds in the reserve fund may be applied
to make distributions to securityholders and use of investment earnings from
the reserve fund, if any.
Overcollateralization
If specified in the prospectus supplement, subordination provisions of a
trust fund may be used to accelerate to a limited extent the amortization of
one or more classes of Notes or Certificates, as applicable, relative to the
amortization of the related Assets. The accelerated amortization is achieved
by the application of excess interest to the payment of principal of one or
more classes of Notes or Certificates, as applicable. This acceleration
feature creates, for the Assets or groups of Assets, overcollateralization,
which is the excess of the total principal balance of the related Assets, or a
group of related Assets, over the principal balance of the related class or
classes of Notes or Certificates, as applicable. This acceleration may
continue for the life of the related Security, or may be limited. In the case
of limited acceleration, once the required level of overcollateralization is
reached, and subject to the provisions specified in the prospectus supplement,
the limited acceleration feature may cease, unless necessary to maintain the
required level of overcollateralization.
Certain Legal Aspects of Mortgage Loans
The following discussion contains summaries, which are general in nature,
of legal aspects of loans secured by single-family or multi-family residential
properties. Because these legal aspects are governed primarily by applicable
state law (which laws may differ substantially), the summaries do not purport
to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the mortgage loans
is situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the mortgage loans. In this
regard, the following discussion does not fully reflect federal regulations
for FHA loans and VA loans. See "Description of The Trust Funds--FHA Loans and
VA Loans," "Description of the Agreements--Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements--FHA Insurance and VA
Guarantees" and "Description of the Trust Funds--Assets."
General
All of the mortgage loans are evidenced by a note or bond and secured by
instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
on the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are in
this prospectus collectively referred to as "mortgages." Any of the foregoing
types of mortgages will create a lien upon, or grant a title interest in, the
subject property, the priority of which will depend on the terms of the
particular security instrument, as well as separate, recorded, contractual
arrangements with others holding interests in the mortgaged property, the
knowledge of the parties to that instrument as well as the order of
recordation of the instrument in the appropriate public recording office.
However, recording does not generally establish priority over governmental
claims for real estate taxes and assessments and other charges imposed under
governmental police powers.
Types of Mortgage Instruments
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a borrower (usually the owner of the
subject property) and a mortgagee (the lender). In contrast, a deed of trust
is a three-party instrument, among a trustor (the equivalent of a borrower), a
trustee to whom the mortgaged property is conveyed, and a beneficiary (the
lender) for whose benefit the conveyance is made. As used in this prospectus,
unless the context otherwise requires, "borrower" includes the trustor under a
deed of trust and a grantor under a security deed or a deed to secure debt.
Under a deed of trust, the borrower grants the property, irrevocably
until the debt is paid, in trust, generally with a power of sale as security
for the indebtedness evidenced by the related note. A deed to secure debt
typically has two parties. By executing a 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, generally with a
power of sale as security for the indebtedness evidenced by the related
mortgage note.
In case the borrower under a mortgage is a land trust, there would be an
additional party because legal title to the property is held by a land trustee
under a land trust agreement for the benefit of the borrower. At origination
of a mortgage loan involving a land trust, the borrower executes a separate
undertaking to make payments on the mortgage note. The mortgagee's authority
under a mortgage, the trustee's authority under a deed of trust and the
grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, some federal laws (including the Soldiers' and Sailors' Civil Relief
Act of 1940) and, in some cases, in deed of trust transactions, the directions
of the beneficiary.
The mortgages that encumber multifamily properties may contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease
and the income derived therefrom, while retaining a revocable license to
collect the rents for so long as there is no default. If the borrower
defaults, the license terminates and the lender is entitled to collect the
rents. Local law may require that the lender take possession of the property
and/or obtain a court-appointed receiver before becoming entitled to collect
the rents.
Interest in Real Property
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, that instrument may encumber other interests in real property such as
a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by that lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating that interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
that interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. The depositor, the Asset Seller or other entity specified
in the prospectus supplement will make representations and warranties in the
Agreement or representations and warranties will be assigned to the trustee
for any mortgage loans secured by an interest in a leasehold estate. Those
representation and warranties, if applicable, will be set forth in the
prospectus supplement.
Cooperative Loans
If specified in the prospectus supplement, the mortgage loans may also
consist of cooperative apartment loans ("Cooperative Loans") secured by
security interests in shares issued by a cooperative housing corporation (a
"Cooperative") and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the
cooperatives' buildings. The security agreement will create a lien upon, or
grant a title interest in, the property that it covers, the priority of which
will depend on the terms of the particular security agreement as well as the
order of recordation of the agreement in the appropriate recording office.
That lien or title interest is not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers.
Each Cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling
units in the building. The Cooperative is directly responsible for property
management and, in most cases, payment of real estate taxes, other
governmental impositions and hazard and liability insurance. If there is a
blanket mortgage or mortgages on the cooperative apartment building or
underlying land, as is generally the case, or an underlying lease of the land,
as is the case in some instances, the Cooperative, as property borrower, or
lessee, as the case may be, is also responsible for meeting these mortgage or
rental obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with either the construction or purchase of the
Cooperative's apartment building or obtaining of capital by the Cooperative.
The interest of the occupant under proprietary leases or occupancy agreements
as to which that Cooperative is the landlord are generally subordinate to the
interest of the holder of a blanket mortgage and to the interest of the holder
of a land lease.
If the Cooperative is unable to meet the payment obligations (1) arising
under a blanket mortgage, the mortgagee holding a blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases
and occupancy agreements or (2) arising under its land lease, the holder of
the landlord's interest under the land lease could terminate it and all
subordinate proprietary leases and occupancy agreements. Also, a blanket
mortgage on a cooperative may provide financing in the form of a mortgage that
does not fully amortize, with a significant portion of principal being due in
one final payment at maturity. The inability of the Cooperative to refinance a
mortgage and its consequent inability to make that final payment could lead to
foreclosure by the mortgagee. Similarly, a land lease has an expiration date
and the inability of the Cooperative to extend its term or, in the
alternative, to purchase the land could lead to termination of the
Cooperative's interest in the property and termination of all proprietary
leases and occupancy agreement. In either event, a foreclosure by the holder
of a blanket mortgage or the termination of the underlying lease could
eliminate or significantly diminish the value of any collateral held by the
lender that financed the purchase by an individual tenant stockholder of
cooperative shares or, in the case of the mortgage loans, the collateral
securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing that tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights are financed
through a Cooperative Loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or
proprietary lease and a security interest in the related Cooperative shares.
The lender generally takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue
for judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares. See "--Foreclosure--Cooperative Loans" below.
Land Sale Contracts
Under an installment land sale contract for the sale of real estate (a
"land sale contract") the contract seller (hereinafter referred to as the
"contract lender") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the
"contract borrower") for the payment of the purchase price, plus interest,
over the term of the land sale contract. Only after full performance by the
borrower of the contract is the contract lender obligated to convey title to
the real estate to the purchaser. As with mortgage or deed of trust financing,
during the effective period of the land sale contract, the contract borrower
is responsible for maintaining the property in good condition and for paying
real estate taxes, assessments and hazard insurance premiums associated with
the property.
The method of enforcing the rights of the contract lender under an
installment contract varies on a state-by-state basis depending on the extent
to which state courts are willing, or able pursuant to state statute, to
enforce the contract strictly according to its terms. The terms of land sale
contracts generally provide that upon default by the contract borrower, the
borrower loses his or her right to occupy the property, the entire
indebtedness is accelerated, and the buyer's equitable interest in the
property is forfeited. The contract lender in that situation does not have to
foreclose to obtain title to the property, although in some cases a quiet
title action is in order if the contract borrower has filed the land sale
contract in local land records and an ejectment action may be necessary to
recover possession.
In a few states, particularly in cases of contract borrower default
during the early years of a land sale contract, the courts will permit
ejectment of the buyer and a forfeiture of his or her interest in the
property. However, most state legislatures have enacted provisions by analogy
to mortgage law protecting borrowers under land sale contracts from the harsh
consequences of forfeiture. Under those statues, a judicial contract may be
reinstated upon full payment of the default amount and the borrower may have a
post-foreclosure statutory redemption right. In other states, courts in equity
may permit a contract borrower with significant investment in the property
under a land sale contract for the sale of real estate to share the proceeds
of sale of the property after the indebtedness is repaid or may otherwise
refuse to enforce the forfeiture clause. Nevertheless, generally speaking, the
contract lender's procedures for obtaining possession and clear title under a
land sale contract for the sale of real estate in a particular state are
simpler and less time consuming and costly than are the procedures for
foreclosing and obtaining clear title to a mortgaged property.
Foreclosure
General
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its
obligations under the note or mortgage, the mortgagee has the right to
institute foreclosure proceedings to sell the mortgaged property at public
auction to satisfy the indebtedness.
Foreclosure procedures for the enforcement of a mortgage vary from state
to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted
in the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only
in some limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated
by the service of legal pleadings upon all parties having an interest of
record in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the
lender's right to foreclose is contested, the legal proceedings can be
time-consuming. Upon successful completion of a judicial foreclosure
proceeding, the court generally issues a judgment of foreclosure and appoints
a referee or other officer to conduct a public sale of the mortgaged property,
the proceeds of which are used to satisfy the judgment. Those sales are made
in accordance with procedures that vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of mortgage defaults, to the extent that the
effect is perceived as harsh or unfair. Relying on those principles, a court
may alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may
require the lender to undertake affirmative and expensive actions to determine
the cause 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
and have required that lenders reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose if
the default under the mortgage is not monetary, e.g., the borrower failed to
maintain the mortgaged property adequately or the borrower executed a junior
mortgage on the mortgaged property. The exercise by the court of its equity
powers will depend on the individual circumstances of each case presented to
it. Finally, some courts have been faced with the issue of whether federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that a borrower receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve
sufficient state action to afford constitutional protections to the borrower.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed
of trust. A power of sale is typically granted in a deed of trust. It may also
be contained in any other type of mortgage instrument. A power of sale allows
a non-judicial public sale to be conducted generally following a request from
the beneficiary/lender to the trustee to sell the property upon any default by
the borrower under the terms of the mortgage note or the mortgage instrument
and after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law.
In some states, before the sale, the trustee under a deed of trust must
record a notice of default and notice of sale and send a copy to the borrower
and to any other party who has recorded a request for a copy of a notice of
default and notice of sale. In addition, in some states the trustee must
provide notice to any other party having an interest of record in the real
property, including junior lienholders. A notice of sale must be posted in a
public place and, in most states, published for a specified period of time in
one or more newspapers. The borrower or junior lienholder may then have the
right, during a reinstatement period required in some states, to cure the
default by paying the entire actual amount in arrears (without acceleration)
plus the expenses incurred in enforcing the obligation. In other states, the
borrower or the junior lienholder is not provided a period to reinstate the
loan, but has only the right to pay off the entire debt to prevent the
foreclosure sale. Generally, the procedure for public sale, the parties
entitled to notice, the method of giving notice and the applicable time
periods are governed by state law and vary among the states. Foreclosure of a
deed to secure debt is also generally accomplished by a non-judicial sale
similar to that required by a deed of trust, except that the lender or its
agent, rather than a trustee, is typically empowered to perform the sale in
accordance with the terms of the deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of that
property at the time of sale, due to, among other things, redemption rights
that may exist and the possibility of physical deterioration of the property
during the foreclosure proceedings. For these reasons, it is common for the
lender to purchase the mortgaged property for an amount equal to or less than
the underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses that may be recovered by a lender. Thereafter, subject to the
borrower's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and
have both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make those repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending on market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Moreover, a lender commonly incurs substantial legal fees and
court costs in acquiring a mortgaged property through contested foreclosure
and/or bankruptcy proceedings. Generally, state law controls the amount of
foreclosure expenses and costs, including attorneys' fees, that may be
recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior
mortgages to avoid their foreclosure. In addition, if the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained
in a senior mortgage, the junior mortgagee may be required to pay the full
amount of the senior mortgage to avoid its foreclosure. Accordingly, for those
mortgage loans, if any, that are junior mortgage loans, if the lender
purchases the property the lender's title will be subject to all senior
mortgages, prior liens and specific governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the borrower. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by those holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the borrower, and all persons who have an
interest in the property that is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been
sold in accordance with a properly conducted foreclosure and foreclosure sale,
those having an interest that is subordinate to that of the foreclosing
mortgagee have an equity of redemption and may redeem the property by paying
the entire debt with interest. In addition, in some states, when a foreclosure
action has begun, the redeeming party must pay some of the costs of that
action. Those having an equity of redemption must generally be made parties
and joined in the foreclosure proceeding in order for their equity of
redemption to be cut off and terminated.
The equity of redemption is a common-law (non-statutory) right that
exists before completion of the foreclosure, is not waivable by the borrower,
must be exercised before foreclosure sale and should be distinguished from the
post-sale statutory 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 states, statutory redemption may occur only
upon payment of the foreclosure sale price. 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 a foreclosure sale or sale under
a deed of trust. Consequently, the practical effect of the redemption right is
to force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years from the
close of the calendar year of its acquisition. For a series of Notes or
Certificates, as applicable, for which an election is made to qualify the
trust fund or a part of the trust fund as a REMIC, the Agreement will permit
foreclosed property to be held for more than such three year period if the
Internal Revenue Service grants an extension of time within which to sell the
property or independent counsel renders an opinion to the effect that holding
the property for that additional period is permissible under the REMIC
Provisions.
Cooperative Loans
The Cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and bylaws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by that tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by that
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate the lease or agreement in the event a
borrower fails to make payments or defaults in the performance of covenants
required under the proprietary lease or occupancy agreement. Typically, the
lender and the Cooperative enter into a recognition agreement that establishes
the rights and obligations of both parties in the event of a default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender
and the tenant-stockholder.
The recognition agreement generally provides that, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate that lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under that
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the Cooperative Loan and accrued and
unpaid interest on the Cooperative Loan.
Recognition agreements also provide that in the event of a foreclosure on
a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender
is not limited in any rights it may have to dispossess the
tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by
a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires
that a sale be conducted in a "commercially reasonable" manner. Whether a
foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to
the usual practice of banks selling similar collateral will be considered
reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy
the indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the Cooperatives to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency.
In the case of foreclosure on a building that was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws that apply to tenants who
elected to remain in a building so converted.
Junior Mortgages
Some of the mortgage loans may be secured by junior mortgages or deeds of
trust, that are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the trust fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in
payment to those of the holder of the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or beneficiary to receive
and apply hazard insurance and condemnation proceeds and, upon default of the
borrower, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage or the sale
pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's
lien will be extinguished unless the junior lienholder satisfies the defaulted
senior loan or asserts its subordinate interest in a property in foreclosure
proceedings. See "--Foreclosure" above.
Furthermore, because the terms of the junior mortgage or deed of trust
are subordinate to the terms of the first mortgage or deed of trust, in the
event of a conflict between the terms of the first mortgage or deed of trust
and the junior mortgage or deed of trust, the terms of the first mortgage or
deed of trust will generally govern. Upon a failure of the borrower or trustor
to perform any of its obligations, the senior mortgagee or beneficiary,
subject to the terms of the senior mortgage or deed of trust, may have the
right to perform the obligation itself. Generally, all sums so expended by the
mortgagee or beneficiary become part of the indebtedness secured by the
mortgage or deed of trust. To the extent a first mortgagee expends these sums,
these sums will generally have priority over all sums due under the junior
mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders
Statutes in some states limit the right of a beneficiary under a deed of
trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the borrower following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former borrower equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender.
Some states require the lender to exhaust the security afforded under a
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 that security; however, in some of these states, the
lender, following judgment on the personal action, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the security. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting that election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a judicial sale to
the excess of the outstanding debt over the fair market value of the property
at the time of the public sale. The purpose of these statutes is generally to
prevent a lender from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the judicial sale.
In addition to 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 a secured mortgage lender to realize upon its security. For
example, numerous statutory provisions under the United States Bankruptcy
Code, 11 U.S.C. Sections 101 et seq. (the "Bankruptcy Code"), may interfere
with or affect the ability of the secured mortgage lender to obtain payment of
a mortgage loan, to realize upon collateral and/or enforce a deficiency
judgment. Under federal bankruptcy law, virtually all actions (including
foreclosure actions and deficiency judgment proceedings) are automatically
stayed upon the filing of a bankruptcy petition, and often no interest or
principal payments are made during the course of the bankruptcy proceeding. In
a case under the Bankruptcy Code, the secured party is precluded from
foreclosing without authorization from the bankruptcy court. In addition, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 plan to cure a monetary default in respect of a
mortgage loan by paying arrearages within a reasonable time period and
reinstating the original mortgage loan payment schedule even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been
entered in state court (provided no foreclosure sale had yet occurred) before
the filing of the debtor's petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the case,
that affected the curing of a mortgage loan default by paying arrearages over
a number of years.
If a mortgage loan is secured by property not consisting solely of the
debtor's principal residence, the Bankruptcy Code also permits that mortgage
loan to be modified. These modifications may include reducing the amount of
each monthly payment, changing the rate of interest, altering the repayment
schedule, and reducing the lender's security interest to the value of the
property, thus leaving the lender in the position of a general unsecured
creditor for the difference between the value of the property and the
outstanding balance of the mortgage loan. Some courts have permitted these
modifications when the mortgage loan is secured both by the debtor's principal
residence and by personal property.
In the case of income-producing multifamily properties, federal
bankruptcy law may also have the effect of interfering with or affecting the
ability of the secured lender to enforce the borrower's assignment of rents
and leases related to the mortgaged property. Under Section 362 of the
Bankruptcy Code, the lender will be stayed from enforcing the assignment, and
the legal proceedings necessary to resolve the issue could be time-consuming,
with resulting delays in the lender's receipt of the rents.
Some tax liens arising under the Code may in some circumstances provide
priority over the lien of a mortgage or deed of trust. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of mortgage loans by numerous federal and
some state consumer protection laws. These laws include the federal
Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal Credit
Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes. These federal laws impose specific statutory liabilities
upon lenders who originate mortgage loans and who fail to comply with the
provisions of the law. In some cases this liability may affect assignees of
the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Environmental Considerations
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to a security
interest may be subject to federal, state, and local laws and regulations
relating to environmental protection. These laws may regulate, among other
things: emissions of air pollutants; discharges of wastewater or storm water;
generation, transport, storage or disposal of hazardous waste or hazardous
substances; operation, closure and removal of underground storage tanks;
removal and disposal of asbestos-containing materials; and/or management of
electrical or other equipment containing polychlorinated biphenyls ("PCBs").
Failure to comply with these laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of some states,
environmental contamination on a property may give rise to a lien on the
property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on that property are subordinated to the
environmentally-related lien and, in some states, even prior recorded liens
are subordinated to these liens ("Superliens"). In the latter states, the
security interest of the trustee in a property that is subject to a Superlien
could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in some states, a
secured party that takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
particular types of activities that may constitute management of the mortgaged
property may become liable in some circumstances for the cleanup costs of
remedial action if hazardous wastes or hazardous substances have been released
or disposed of on the property. These cleanup costs may be substantial. CERCLA
imposes strict, as well as joint and several, liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property,
irrespective of whether those owners or operators caused or contributed to the
contamination on the property. In addition, owners and operators of properties
that generate hazardous substances that are disposed of at other "off-site"
locations may be held strictly, jointly and severally liable for environmental
remediation and/or damages at those off-site locations. Many states also have
laws that are similar to CERCLA. Liability under CERCLA or under similar state
law could exceed the value of the property itself as well as the total assets
of the property owner.
Although some provisions of the Asset Conservation Act (as defined in
this prospectus) apply to trusts and fiduciaries, the law is somewhat unclear
as to whether and under what precise circumstances cleanup costs, or the
obligation to take remedial actions, could be imposed on a secured lender,
such as the trust fund. Under the laws of some states and under CERCLA, a
lender may be liable as an "owner or operator" for costs of addressing
releases or threatened releases of hazardous substances on a mortgaged
property if that lender or its agents or employees have "participated in the
management" of the operations of the borrower, even though the environmental
damage or threat was caused by a prior owner or current owner or operator or
other third party. Excluded from CERCLA's definition of "owner or operator" is
a person "who without participating in the management of . . . [the] facility,
holds indicia of ownership primarily to protect his security interest" (the
"secured-creditor exemption"). This exemption for holders of a security
interest such as a secured lender applies only to the extent that a lender
seeks to protect its security interest in the contaminated facility or
property. Thus, if a lender's activities begin to encroach on the actual
management of that facility or property, the lender faces potential liability
as an "owner or operator" under CERCLA. Similarly, when a lender forecloses
and takes title to a contaminated facility or property, the lender may incur
potential CERCLA liability in various circumstances, including among others,
when it holds the facility or property as an investment (including leasing the
facility or property to a third party), fails to market the property in a
timely fashion or fails to properly address environmental conditions at the
property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"), contains
a similar secured-creditor exemption for those lenders who hold a security
interest in a petroleum underground storage tank ("UST") or in real estate
containing a UST, or that acquire title to a petroleum UST or facility or
property on which a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if that lender or its employees or agents participate in the
management of the UST. In addition, if the lender takes title to or possession
of the UST or the real estate containing the UST, under some circumstances the
secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly
construed CERCLA's secured-creditor exemption. The court's opinion suggested
that a lender need not have involved itself in the day-to-day operations of
the facility or participated in decisions relating to hazardous waste to be
liable under CERCLA; rather, liability could attach to a lender if its
involvement with the management of the facility were broad enough to support
the inference that the lender had the capacity to influence the borrower's
treatment of hazardous waste. The court added that a lender's capacity to
influence these decisions could be inferred from the extent of its involvement
in the facility's financial management. A subsequent decision by the United
States Court of Appeals for the Ninth Circuit in re Bergsoe Metal Corp.,
apparently disagreeing with, but not expressly contradicting, the Fleet
Factors court, held that a secured lender had no liability absent "some actual
management of the facility" on the part of the lender.
Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts
to provide guidance to lenders on the scope of activities that would trigger
CERCLA and/or RCRA liability. Until recently, these efforts have failed to
provide substantial guidance.
On September 28, 1996, however, Congress enacted, and on September 30,
1996, the President signed into law the Asset Conservation Lender Liability
and Deposit Insurance Protection Act of 1996 (the "Asset Conservation Act").
The Asset Conservation Act was intended to clarify the scope of the secured
creditor exemption under both CERCLA and RCRA. The Asset Conservation Act more
explicitly defined the kinds of "participation in management" that would
trigger liability under CERCLA and specified activities that would not
constitute "participation in management" or otherwise result in a forfeiture
of the secured-creditor exemption before foreclosure or during a workout
period. The Asset Conservation Act also clarified the extent of protection
against liability under CERCLA in the event of foreclosure and authorized
specific regulatory clarifications of the scope of the secured-creditor
exemption for purposes of RCRA, similar to the statutory protections under
CERCLA. However, since the courts have not yet had the opportunity to
interpret the new statutory provisions, the scope of the additional
protections offered by the Asset Conservation Act is not fully defined. It
also is important to note that the Asset Conservation Act does not offer
complete protection to lenders and that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that
person or entity may be bankrupt or otherwise judgment-proof. It is therefore
possible that cleanup or other environmental liability costs could become a
liability of the trust fund and occasion a loss to the trust fund and to
securityholders in some circumstances. The new secured creditor amendments to
CERCLA, also, would not necessarily affect the potential for liability in
actions by either a state or a private party under other federal or state laws
that may impose liability on "owners or operators" but do not incorporate the
secured-creditor exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property before the origination of the mortgage loan
or before foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
depositor nor any servicer makes any representations or warranties or assumes
any liability with respect to: environmental conditions of the Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from the Mortgaged Property; the impact on
securityholders of any environmental condition or presence of any substance on
or near the Mortgaged Property; or the compliance of any Mortgaged Property
with any environmental laws. In addition, no agent, person or entity otherwise
affiliated with the depositor is authorized or able to make any
representation, warranty or assumption of liability relative to any Mortgaged
Property.
Due-on-Sale Clauses
The mortgage loans may contain due-on-sale clauses. These clauses
generally provide that the lender may accelerate the maturity of the loan if
the borrower sells, transfers or conveys the related Mortgaged Property. The
enforceability of due-on-sale clauses has been the subject of legislation or
litigation in many states and, in some cases, the enforceability of these
clauses was limited or denied. However, for some loans the Garn-St. Germain
Depository Institutions Act of 1982 (the "Garn-St. Germain Act") preempts
state constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to limited exceptions. Due-on-sale clauses contained
in mortgage loans originated by federal savings and loan associations of
federal savings banks are fully enforceable pursuant to regulations of the
United States Federal Home Loan Bank Board, as succeeded by the Office of
Thrift Supervision, which preempt state law restrictions on the enforcement of
those clauses. Similarly, "due-on-sale" clauses in mortgage loans made by
national banks and federal credit unions are now fully enforceable pursuant to
preemptive regulations of the Comptroller of the Currency and the National
Credit Union Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in which
a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale"
clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, some transfers by operation of
law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a
loan pursuant to a due-on-sale clause. The inability to enforce a
"due-on-sale" clause may result in a mortgage that bears an interest rate
below the current market rate being assumed by a new home buyer rather than
being paid off, which may affect the average life of the mortgage loans and
the number of mortgage loans which may extend to maturity.
Prepayment Charges
Under some state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if those loans are
paid before maturity. For Mortgaged Properties that are owner-occupied, it is
anticipated that prepayment charges may not be imposed for many of the
mortgage loans. The absence of a restraint on prepayment, particularly for
fixed rate mortgage loans having higher mortgage rates, may increase the
likelihood of refinancing or other early retirement of those loans.
Subordinate Financing
Where a borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risks, such as:
o The borrower may have difficulty repaying multiple loans. In
addition, if the junior loan permits recourse to the borrower (as
junior loans often do) and the senior loan does not, a borrower may
be more likely to repay sums due on the junior loan than those on
the senior loan.
o Acts of the senior lender that prejudice the junior lender or impair
the junior lender's security may create a superior equity in favor
of the junior lender. For example, if the borrower and the senior
lender agree to an increase in the principal amount of or the
interest rate payable on the senior loan, the senior lender may lose
its priority to the extent any existing junior lender is harmed or
the borrower is additionally burdened.
o If the borrower defaults on the senior loan and/or any junior loan
or loans, the existence of junior loans and actions taken by junior
lenders can impair the security available to the senior lender and
can interfere with or delay the taking of action by the senior
lender. Moreover, the bankruptcy of a junior lender may operate to
stay foreclosure or similar proceedings by the senior lender.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations will not apply to some types of residential first mortgage loans
originated by lenders after March 31, 1980. A similar federal statute was in
effect for mortgage loans made during the first three months of 1980. The
Office of Thrift Supervision is authorized to issue rules and regulations and
to publish interpretations governing implementation of Title V. The statute
authorized any state to reimpose interest rate limits by adopting, before
April 1, 1983, a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Some
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1,
1980, are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges before origination of
those mortgage loans, any limitation under that state's usury law would not
apply to those mortgage loans.
In any state in which application of Title V has been expressly rejected
or a provision limiting discount points or other charges is adopted, no
mortgage loan originated after the date of that state action will be eligible
for inclusion in a trust fund unless (1) the mortgage loan provides for the
interest rate, discount points and charges as are permitted in that state or
(2) the mortgage loan provides that its terms will be construed in accordance
with the laws of another state under which the interest rate, discount points
and charges would not be usurious and the borrower's counsel has rendered an
opinion that the choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the borrower may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only
for the debt plus lawful interest. A second group of statutes is more severe.
A violation of this type of usury law results in the invalidation of the
transaction, thus permitting the borrower to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally
chartered lenders have historically been subject to a variety of restrictions.
Those restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by
a state-chartered lender was in compliance with applicable law. These
difficulties were alleviated substantially as a result of the enactment of
Title VIII of the Garn-St. Germain Act ("Title VIII"). Title VIII provides
that, notwithstanding any state law to the contrary, state-chartered banks may
originate alternative mortgage instruments in accordance with regulations
promulgated by the Comptroller of the Currency with respect to origination of
alternative mortgage instruments by national banks; state-chartered credit
unions may originate alternative mortgage instruments in accordance with
regulations promulgated by the National Credit Union Administration with
respect to origination of alternative mortgage instruments by federal credit
unions; and all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings banks
and mutual savings banks and mortgage banking companies, may originate
alternative mortgage instruments in accordance with the regulations
promulgated by the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision, with respect to origination of alternative mortgage
instruments by federal savings and loan associations. Title VIII provides that
any state may reject applicability of the provisions of Title VIII by
adopting, before October 15, 1985, a law or constitutional provision expressly
rejecting the applicability of those provisions. Some states have taken that
action.
Soldiers' and Sailors' Civil Relief Act of 1940
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 mortgage loan (including a borrower who was
in reserve status and is called to active duty after origination of the
mortgage loan) may not be charged interest (including fees and charges) above
an annual rate of 6% during the period of the borrower's active duty status,
unless a court orders otherwise upon application of the lender. The Relief Act
applies to borrowers who are members of the Army, Navy, Air Force, Marines,
National Guard, Reserves, Coast Guard and officers of the U.S. Public Health
Service assigned to duty with the military. Because the Relief Act applies to
borrowers who enter military service (including reservists who are called to
active duty) after origination of the related mortgage loan, no information
can be provided as to the number of loans that may be affected by the Relief
Act.
Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of the servicer to collect full
amounts of interest on some of the mortgage loans. Any shortfalls in interest
collections resulting from the application of the Relief Act would result in a
reduction of the amounts distributable to the holders of the related series of
Notes or Certificates, as applicable, and would not be covered by advances.
These shortfalls will be covered by the credit support provided in connection
with the Notes or Certificates, as applicable, only to the extent provided in
the prospectus supplement. In addition, the Relief Act imposes limitations
that would impair the ability of the servicer to foreclose on an affected
mortgage loan during the borrower's period of active duty status, and, under
some circumstances, during an additional three month period thereafter. Thus,
if an affected mortgage loan goes into default, there may be delays and losses
occasioned thereby.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the
"Crime Control Act"), the government may seize the property even before
conviction. The government must publish notice of the forfeiture proceeding
and may give notice to all parties "known to have an alleged interest in the
property," including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
Certain Legal Aspects of the Contracts
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the contracts. Because these legal
aspects are governed primarily by applicable state law, which laws may differ
substantially, the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the contracts is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
contracts may be originated.
General
As a result of the assignment of the contracts to the trustee, the
trustee will succeed collectively to all of the rights including the right to
receive payment on the contracts, of the obligee under the contracts. Each
contract evidences both
(a) the obligation of the borrower to repay the loan evidenced
thereby, and
(b) the grant of a security interest in the manufactured home to
secure repayment of the loan. Aspects of both features of the contracts
are described more fully below.
The contracts generally are "chattel paper" as defined in the UCC in
effect in the states in which the manufactured homes initially were
registered. Pursuant to the UCC, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. Under
the agreement, the servicer will transfer physical possession of the contracts
to the trustee. In addition, the servicer will make an appropriate filing of a
UCC-1 financing statement in the appropriate states to give notice of the
trustee's ownership of the contracts. The contracts will be stamped or marked
otherwise to reflect their assignment from the depositor to the trustee only
if provided in the prospectus supplement. Therefore, if, through negligence,
fraud or otherwise, a subsequent purchaser were able to take physical
possession of the contracts without notice of the assignment, the trustee's
interest in contracts could be defeated.
Security Interests in the Manufactured Homes
The manufactured homes securing the contracts may be located in all 50
states, Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by
delivery of the required documents and payment of a fee to the state motor
vehicle authority, depending on state law. In some nontitle states, perfection
pursuant to the provisions of the UCC is required. The asset seller may effect
that notation or delivery of the required documents and fees, and obtain
possession of the certificate of title, as appropriate under the laws of the
state in which any manufactured home securing a manufactured housing
conditional sales contract is registered. In the event the asset seller fails,
due to clerical error, to effect that notation or delivery, or files the
security interest under the wrong law, the asset seller may not have a first
priority security interest in the manufactured home securing a contract. As
manufactured homes have become larger and often have been attached to their
sites without any apparent intention to move them, courts in many states have
held that manufactured homes, under some circumstances, may become subject to
real estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate
law.
To perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a fixture filing
under the provisions of the UCC or a real estate mortgage under the real
estate laws of the state where the home is located. These filings must be made
in the real estate records office of the county where the home is located.
Substantially all of the contracts contain provisions prohibiting the borrower
from permanently attaching the manufactured home to its site. So long as the
borrower does not violate this agreement, a security interest in the
manufactured home will be governed by the certificate of title laws or the
UCC, and the notation of the security interest on the certificate of title or
the filing of a UCC financing statement will be effective to maintain the
priority of the security interest in the manufactured home. If, however, a
manufactured home is permanently attached to its site, other parties could
obtain an interest in the manufactured home that is prior to the security
interest originally retained by the asset seller and transferred to the
depositor. For a series of securities and if so described in the prospectus
supplement, the servicer may be required to perfect a security interest in the
manufactured home under applicable real estate laws. The warranting party will
represent that as of the date of the sale to the depositor it has obtained a
perfected first priority security interest by proper notation or delivery of
the required documents and fees for substantially all of the manufactured
homes securing the contracts.
The depositor will cause the security interests in the manufactured homes
to be assigned to the trustee on behalf of the securityholders. The depositor
or the trustee will amend the certificates of title, or file UCC-3 statements,
to identify the trustee as the new secured party, and will deliver the
certificates of title to the trustee or note thereon the interest of the
trustee only if specified in the prospectus supplement. Accordingly, the asset
seller, or other originator of the contracts, will continue to be named as the
secured party on the certificates of title relating to the manufactured homes.
In some states, that assignment is an effective conveyance of the security
interest without amendment of any lien noted on the related certificate of
title and the new secured party succeeds to servicer's rights as the secured
party. However, in some states, in the absence of an amendment to the
certificate of title and the new secured party succeeds to servicer's rights
as the secured party. However, in some states, in the absence of an amendment
to the certificate of title, or the filing of a UCC-3 statement, the
assignment of the security interest in the manufactured home may not be held
effective or the security interest in the manufactured home may not be held
effective or the security interests may not be perfected and in the absence of
that notation or delivery to the trustee, the assignment of the security
interest in the manufactured home may not be effective against creditors of
the asset seller, or any other originator of the contracts, or a trustee in
bankruptcy of the asset seller, or any other originator.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the manufactured home owner, or
administrative error by state recording officials, the notation of the lien of
the asset seller, or other originator of the Contracts, on the certificate of
title or delivery of the required documents and fees will be sufficient to
protect the securityholders against the rights or subsequent purchasers of a
manufactured home or subsequent lenders who take a security interest in the
manufactured home. If there are any manufactured homes as to which the
security interest assigned to the trustee is not perfected, that security
interest would be subordinate to, among others, subsequent purchasers for
value of manufactured homes and holders of perfected security interests. There
also exists a risk in not identifying the trustee as the new secured party on
the certificate of title that, through fraud or negligence, the security
interest of the trustee could be released.
If the owner of a manufactured home moves it to a state other than the
state in which the manufactured home initially is registered, under the laws
of most states the perfected security interest in the manufactured home would
continue for four months after the relocation and thereafter only if and after
the owner re-registers the manufactured home in that state. If the owner were
to relocate a manufactured home to another state and not re-register the
manufactured home in that state, and if steps are not taken to re-perfect the
trustee's security interest in that state, the security interest in the
manufactured home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a manufactured
home; accordingly, the servicer must surrender possession if it holds the
certificate of title to the manufactured home or, in the case of manufactured
homes registered n states that provide for notation of lien, the asset seller,
or other originator, would receive notice of surrender if the security
interest in the manufactured home is noted on the certificate of title.
Accordingly, the trustee would have the opportunity to re-perfect its security
interest in the manufactured home in the state of relocation. In states that
do not require a certificate of title for registration of a manufactured home,
re-registration could defeat perfection. In the ordinary course of servicing
the manufactured housing contracts, the servicer takes steps to effect
re-perfection upon receipt of notice of re-registration or information from
the borrower as to relocation.
Similarly, when a borrower under a manufactured housing contract sells a
manufactured home, the servicer must surrender possession of the certificate
of title or, if it is noted as lienholder on the certificate of title, will
receive notice as a result of its lien noted thereon and accordingly will have
an opportunity to require satisfaction of the related manufactured housing
conditional sales contract before release of the lien. Under the Agreement,
the servicer is obligated to take those steps, at the servicer's expense, as
are necessary to maintain perfection of security interests in the manufactured
homes.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority even
over a perfected security interest. The warranting party will represent in the
agreement that it has no knowledge of any of these liens for any manufactured
home securing payment on any contract. However, these liens could arise at any
time during the term of a contract. No notice will be given to the trustee or
securityholders if a lien arises.
Enforcement of Security Interests in the Manufactured Homes
The servicer on behalf of the trustee, to the extent required by the
related agreement, may take action to enforce the trustee's security interest
with respect to contracts in default by repossession and resale of the
manufactured homes securing those defaulted contracts. So long as the
manufactured home has not become subject to the real estate law, a creditor
can repossess a manufactured home securing a contract by voluntary surrender,
by "self-help" repossession that is "peaceful" or, in the absence of voluntary
surrender and the ability to repossess without breach of the peace, by
judicial process. The holder of a contract must give the debtor a number of
days' notice, which varies from 10 to 30 days depending on that state, before
beginning any repossession. The UCC and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting that sale. The
law in most states also requires that the debtor be given notice of any sale
before resale of the unit so that the debtor may redeem at or before that
resale. In the event of repossession and resale of a manufactured home, the
trustee would be entitled to be paid out of the sale proceeds before the
proceeds could be applied to the payment of the claims of unsecured creditors
or the holders of subsequently perfected security interests or, thereafter, to
the debtor.
Under the laws applicable in mot states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing the debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a
judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Soldiers' and Sailors' Civil Relief Act of 1940
The terms of the Relief Act apply to a borrower on a Contract as
described for a borrower on a mortgage loan under "Certain Legal Aspects of
Mortgage Loans-Soldiers' and Sailors' Civil Act of 1940."
Consumer Protection Laws
The so-called Holder-in-Due-Course rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract that is the seller of goods which gave rise to the transaction, and
some related lenders and assignees, to transfer the contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of the contract to all claims and defenses that the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a contract; however, the borrower also may be able to
assert the rule to set off remaining amounts due as a defense against a claim
brought by the trustee against the borrower. Numerous other federal and state
consumer protection laws impose requirements applicable to the origination and
lending pursuant to the contracts, including the Truth in Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of
these laws, the failure to comply with their provisions may affect the
enforceability of the related contract.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses
The contracts, in general, prohibit the sale or transfer of the related
manufactured homes without the consent of the servicer and permit the
acceleration of the maturity of the contracts by the servicer upon any sale or
transfer that is not consented to. Generally, it is expected that the servicer
will permit most transfers of manufactured homes and not accelerate the
maturity of the related contracts. In some cases, the transfer may be made by
a delinquent borrower to avoid a repossession proceeding for a manufactured
home.
In the case of a transfer of a manufactured home after which the servicer
desires to accelerate the maturity of the related contract, the servicer's
ability to do so will depend on the enforceability under state law of the
due-on-sale clauses applicable to the manufactured homes. Consequently, in
some states the servicer may be prohibited from enforcing a due-on-sale clause
in respect of some manufactured homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended (Title V), provides that, subject to the following
conditions, state usury limitations will not apply to any loan that is secured
by a first lien on certain kinds of manufactured housing. The contracts would
be covered if they satisfy certain conditions, among other things, governing
the terms of any prepayments, late charges and deferral fees and requiring a
30-day notice period before instituting any action leading to repossession of
or foreclosure on the related unit.
Title V authorized any state to re-impose limitations on interest rates
and finance charges by adopting before April 1, 1983, a law or constitutional
provision that expressly rejects application of the federal law. Fifteen
states adopted a similar law before the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered
by Title V. The related asset seller will represent that all of the contracts
comply with applicable usury law.
Material Federal Income Tax Considerations
General
The following discussion represents the opinion of Stroock & Stroock &
Lavan LLP as to the material federal income tax consequences of the purchase,
ownership and disposition of the Notes or Certificates, as applicable, offered
under this prospectus. This opinion assumes compliance with all provisions of
the Agreements pursuant to which the Notes or Certificates, as applicable, are
issued. This discussion is directed solely to securityholders that hold the
Notes or Certificates, as applicable, as capital assets within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"),
and does not purport to discuss all federal income tax consequences that may
be applicable to particular categories of investors, some of which (such as
banks, insurance companies and foreign investors) may be subject to special
rules. Further, the authorities on which this discussion, and the opinions
referred to below, are based are subject to change or differing
interpretations, which could apply retroactively.
In addition to the federal income tax consequences described in this
prospectus, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the Notes
or Certificates, as applicable. See "State and Other Tax Considerations." The
depositor recommends that securityholders consult their own tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the Notes or Certificates, as
applicable, offered under this prospectus.
The following discussion addresses securities of five general types:
o securities ("REMIC Securities) representing interests in a trust
fund, or a portion of a trust fund, that the trustee will elect to
have treated as a real estate mortgage investment conduit ("REMIC")
under Sections 860A through 860G (the "REMIC Provisions") of the
Code;
o securities ("FASIT Securities") representing interests in a trust
fund, or a portion of a trust fund, that the trustee will elect to
have treated as a financial asset securitization investment trust
("FASIT") under Sections 860H through 860L (the "FASIT Provisions")
of the Code;
o securities ("Grantor Trust Securities") representing interests in a
trust fund (a "Grantor Trust Fund") as to which no election will be
made;
o securities ("Partnership Certificates ") representing equity
interests in a trust fund (a "Partnership Trust Fund") which is
treated as a partnership for federal income tax purposes; and
o securities ("Debt Securities") representing indebtedness of a
Partnership Trust Fund or a trust fund which is disregarded as a
separate entity for federal income tax purposes.
The prospectus supplement for each series of Notes or Certificates, as
applicable, will indicate which of the foregoing treatments will apply to that
series and, if a REMIC election (or elections) will be made for the related
trust fund, will identify all "regular interests" and "residual interests" in
the REMIC or, if a FASIT election will be made for the related trust fund,
will identify all "regular interests" and "ownership interests" in the FASIT.
For purposes of this tax discussion,
(1) references to a "securityholder" or a "holder" are to the beneficial
owner of a Security,
(2) references to "REMIC Pool" are to an entity or portion thereof as to
which a REMIC election will be made and
(3) to the extent specified in the prospectus supplement, references to
"mortgage loans" include Contracts. Except to the extent specified
in the prospectus supplement, no REMIC election will be made for
Unsecured Home Improvement Loans.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271 through 1275 of
the Code and in the Treasury regulations promulgated thereunder (the "OID
Regulations"), in part upon the REMIC Provisions and the Treasury regulations
promulgated thereunder (the "REMIC Regulations"), and in part upon the FASIT
Provisions. Although the FASIT Provisions of the Code became effective on
September 1, 1997, the Treasury regulations issued with respect to those
provisions are still in proposed form only. Accordingly, the discussion herein
does not address the proposed FASIT regulations (which will be discussed in
the related prospectus supplement if and to the extent they are relevant) and
definitive guidance cannot be provided with respect to many aspects of the tax
treatment of the holders of FASIT Securities. In addition, the OID Regulations
do not adequately address some issues relevant to, and in some instances
provide that they are not applicable to, securities such as the Notes or
Certificates, as applicable.
Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of some entities
issuing non-REMIC and non-FASIT debt obligations secured by real estate
mortgages ("Taxable Mortgage Pools"). Any entity other than a REMIC or a FASIT
(as defined in this prospectus) will be considered a Taxable Mortgage Pool if
(1) substantially all of the assets of the entity consist of debt
obligations and more than 50% of those obligations consist of "real
estate mortgages,"
(2) that entity is the borrower under debt obligations with two or more
maturities, and
(3) under the terms of the debt obligations on which the entity is the
borrower, payments on those obligations bear a relationship to
payments on the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
The depositor generally will structure offerings of non-REMIC and non-FASIT
Securities to avoid the application of the Taxable Mortgage Pool rules.
REMICs
Classification of REMICs
For each series of REMIC Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Stroock & Stroock & Lavan LLP, the related trust fund (or each applicable
portion of the trust fund) will qualify as a REMIC and the REMIC Securities
offered with respect thereto will be considered to evidence ownership of
"regular interests" ("Regular Securities") or "residual interests" ("Residual
Securities") in the REMIC within the meaning of the REMIC Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in
the Code. The REMIC Pool must fulfill an asset test, which requires that no
more than a de minimis portion of the assets of the REMIC Pool, as of the
close of the third calendar month beginning after the "Startup Day" (which for
purposes of this discussion is the date of issuance of the REMIC Securities)
and at all times thereafter, may consist of assets other than "qualified
mortgages" and "permitted investments." The REMIC Regulations provide a safe
harbor pursuant to which the de minimis requirement will be met if at all
times the total adjusted basis of the nonqualified assets is less than 1% of
the total adjusted basis of all the REMIC Pool's assets. An entity that fails
to meet the safe harbor may nevertheless demonstrate that it holds no more
than a de minimis amount of nonqualified assets. A REMIC Pool also must
provide "reasonable arrangements" to prevent its residual interests from being
held by "disqualified organizations" or agents of "disqualified organizations"
and must furnish applicable tax information to transferors or agents that
violate this requirement. The pooling and servicing agreement for each series
of REMIC Securities will contain provisions meeting these requirements. See
"--Taxation of Owners of Residual Securities--Tax-Related Restrictions on
Transfer of Residual Securities--Disqualified Organizations" below.
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans and, generally, certificates
of beneficial interest in a grantor trust that holds mortgage loans and
regular interests in another REMIC, such as lower-tier regular interests in a
tiered REMIC. The REMIC Regulations specify that loans secured by timeshare
interests, shares held by a tenant stockholder in a cooperative housing
corporation, and manufactured housing that qualifies as a "single family
residence" under Code Section 25(e)(10) can be qualified mortgages. A
qualified mortgage includes a qualified replacement mortgage, which is any
property that would have been treated as a qualified mortgage if it were
transferred to the REMIC Pool on the Startup Day and that is received either:
(1) in exchange for any qualified mortgage within a three-month
period from the Startup Day; or
(2) in exchange for a "defective obligation" within a two-year
period from the Startup Day.
A "defective obligation" includes:
(1) a mortgage in default or as to which default is reasonably
foreseeable;
(2) a mortgage as to which a customary representation or warranty
made at the time of transfer to the REMIC Pool has been breached;
(3) a mortgage that was fraudulently procured by the borrower; and
(4) a mortgage that was not in fact principally secured by real
property (but only if the mortgage is disposed of within 90 days of
discovery).
A mortgage loan that is "defective" as described in clause (4) above that is
not sold or, if within two years of the Startup Day, exchanged, within 90 days
of discovery, ceases to be a qualified mortgage after that 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13
months, until the next scheduled distribution to holders of interests in the
REMIC Pool. A qualified reserve asset is any intangible property held for
investment that is part of any reasonably required reserve maintained by the
REMIC Pool to provide for payments of expenses of the REMIC Pool or amounts
due on the regular or residual interests in the event of defaults (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and other contingencies. The reserve
fund will be disqualified if more than 30% of the gross income from the assets
in that fund for the year is derived from the sale or other disposition of
property held for less than three months, unless required to prevent a default
on the regular interests caused by a default on one or more qualified
mortgages. A reserve fund must be reduced "promptly and appropriately" as
payments on the mortgage loans are received. Foreclosure property is real
property acquired by the REMIC Pool in connection with the default or imminent
default of a qualified mortgage and generally may not be held for more than
three taxable years after the taxable year of acquisition unless extensions
are granted by the Secretary of the Treasury.
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet specific requirements. All of the interests in a
REMIC Pool must be either of the following: (1) one or more classes of regular
interests or (2) a single class of residual interests on which distributions,
if any, are made pro rata.
o A regular interest is an interest in a REMIC Pool that is issued on
the Startup Day with fixed terms, is designated as a regular
interest, and unconditionally entitles the holder to receive a
specified principal amount (or other similar amount), and provides
that interest payments (or other similar amounts), if any, at or
before maturity either are payable based on a fixed rate or a
qualified variable rate, or consist of a specified, nonvarying
portion of the interest payments on qualified mortgages. That
specified portion may consist of a fixed number of basis points, a
fixed percentage of the total interest, or a qualified variable
rate, inverse variable rate or difference between two fixed or
qualified variable rates on some or all of the qualified mortgages.
The specified principal amount of a regular interest that provides
for interest payments consisting of a specified, nonvarying portion
of interest payments on qualified mortgages may be zero.
o A residual interest is an interest in a REMIC Pool other than a
regular interest that is issued on the Startup Day and that is
designated as a residual interest.
An interest in a REMIC Pool may be treated as a regular interest even if
payments of principal for that interest are subordinated to payments on other
regular interests or the residual interest in the REMIC Pool, and are
dependent on the absence of defaults or delinquencies on qualified mortgages
or permitted investments, lower than reasonably expected returns on permitted
investments, unanticipated expenses incurred by the REMIC Pool or prepayment
interest shortfalls. Accordingly, in the opinion of Stroock & Stroock & Lavan
LLP, the Regular Securities of a series will constitute one or more classes of
regular interests, and the Residual Securities for that series will constitute
a single class of residual interests for each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for that status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for that year and thereafter. In that event, that entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Securities may
not be accorded the status or given the tax treatment described below.
Although the Code authorizes the Treasury Department to issue regulations
providing relief in the event of an inadvertent termination of REMIC status,
none of these regulations have been issued. Any relief provided, moreover, may
be accompanied by sanctions, such as the imposition of a corporate tax on all
or a portion of the trust fund's income for the period in which the
requirements for that status are not satisfied. The pooling and servicing
agreement for each REMIC Pool will include provisions designed to maintain the
trust fund's status as a REMIC under the REMIC Provisions. It is not
anticipated that the status of any trust fund as a REMIC will be terminated.
Characterization of Investments in REMIC Securities
The REMIC Securities will be treated as "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
Pool underlying these Notes or Certificates, as applicable, would be so
treated. Moreover, if 95% or more of the assets of the REMIC Pool qualify for
either of the foregoing treatments at all times during a calendar year, the
REMIC Securities will qualify for the corresponding status in their entirety
for that calendar year.
If the assets of the REMIC Pool include Buydown Mortgage Loans, it is
possible that the percentage of those assets constituting "loans . . . secured
by an interest in real property which is . . . residential real property" for
purposes of Code Section 7701(a)(19)(C)(v) may be required to be reduced by
the amount of the related funds paid thereon (the "Buydown Funds"). No opinion
is expressed as to the treatment of those Buydown Funds because the law is
unclear as to whether the Buydown Funds represent an account held by the
lender that reduces the lender's investment in the mortgage loan. This
reduction of a holder's investment may reduce the assets qualifying for the
60% of assets test for meeting the definition of a "domestic building and loan
association." Interest (including original issue discount) on the Regular
Securities and income allocated to the class of Residual Securities will be
interest described in Section 856(c)(3)(B) of the Code to the extent that the
Notes or Certificates, as applicable, are treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code. In addition, the
Regular Securities generally will be "qualified mortgages" within the meaning
of Section 860G(a)(3) of the Code if transferred to another REMIC on its
Startup Day in exchange for regular or residual interests in the REMIC.
The assets of the REMIC Pool will include, in addition to mortgage loans,
payments on mortgage loans held pending distribution on the REMIC Securities
and property acquired by foreclosure held pending sale, and may include
amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the mortgage loans, or whether those assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the mortgage loans for purposes of all of
the foregoing sections. The REMIC Regulations do provide, however, that
payments on mortgage loans held pending distribution are considered part of
the mortgage loans for purposes of Section 856(c)(4)(A) of the Code.
Furthermore, foreclosure property generally will qualify as "real estate
assets" under Section 856(c)(4)(A) of the Code.
Tiered REMIC Structures
For some series of REMIC Securities, two or more separate elections may
be made to treat designated portions of the related trust fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any of
these series of REMIC Securities, Stroock & Stroock & Lavan LLP will deliver
its opinion that, assuming compliance with all provisions of the related
pooling and servicing agreement, the Tiered REMICs will each qualify as a
REMIC and the respective REMIC Securities issued by each Tiered REMIC will be
considered to evidence ownership of Regular Securities or Residual Securities
in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code
and "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code, and whether the income on those Notes or
Certificates, as applicable, is interest described in Section 856(c)(3)(B) of
the Code, the Tiered REMICs will be treated as one REMIC.
Taxation of Owners of Regular Securities
(1) General
Except as otherwise indicated herein, the Regular Securities will be
treated for federal income tax purposes as debt instruments that are issued by
the REMIC and not as beneficial interests in the REMIC or the REMIC's assets.
In general, interest, original issue discount, and market discount on a
Regular Security will be treated as ordinary income to a holder of the Regular
Security (the "Regular Securityholder"), and principal payments on a Regular
Security will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to
Regular Securities, regardless of the method of accounting otherwise used by
that Regular Securityholder.
Payments of interest on Regular Securities may be based on a fixed rate,
a variable rate as permitted by the REMIC Regulations, or may consist of a
specified portion of the interest payments on qualified mortgages where such
portion does not vary during the period the Regular Security is outstanding.
The definition of a variable rate for purposes of the REMIC Regulations is
based on the definition of a qualified floating rate for purposes of the rules
governing original issue discount set forth in the OID Regulations, with
certain modifications and permissible variations. See "--Variable Rate Regular
Securities" below for a discussion of the definition of a qualified floating
rate for purposes of the OID Regulations. In contrast to the OID Regulations,
for purposes of the REMIC Regulations, a qualified floating rate does not
include any multiple of a qualified floating rate (also excluding multiples of
qualified floating rates that themselves would constitute qualified floating
rates under the OID Regulations), and the characterization of a variable rate
that is subject to a cap, floor or similar restriction as a qualified floating
rate for purposes of the REMIC Regulations will not depend upon the OID
Regulations relating to caps, floors, and similar restrictions. See
"--Variable Rate Regular Securities" below for discussion of the OID
Regulations relating to caps, floors and similar restrictions. A qualified
floating rate, as defined above for purposes of the REMIC Regulations (a
"REMIC qualified floating rate"), qualifies as a variable rate for purposes of
the REMIC Regulations if such REMIC qualified floating rate is set at a
"current rate" as defined in the OID Regulations. In addition, a rate equal to
the highest, lowest or an average of two or more REMIC qualified floating
rates qualifies as a variable rate for REMIC purposes. A Regular Security may
also have a variable rate based on a weighted average of the interest rates on
some or all of the qualified mortgages held by the REMIC where each qualified
mortgage taken into account has a fixed rate or a variable rate that is
permissible under the REMIC Regulations. Further, a Regular Security may have
a rate that is the product of a REMIC qualified floating rate or a weighted
average rate and a fixed multiplier, is a constant number of basis points more
or less than a REMIC qualified floating rate or a weighted average rate, or is
the product, plus or minus a constant number of basis points, of a REMIC
qualified floating rate or a weighted average rate and a fixed multiplier. An
otherwise permissible variable rate for a Regular Security, described above,
will not lose its character as such because it is subject to a floor or a cap,
including a "funds available cap" as that term is defined in the REMIC
Regulations. Lastly, a Regular Security will be considered as having a
permissible variable rate if it has a fixed or otherwise permissible variable
rate during one or more payment or accrual periods and different fixed or
otherwise permissible variable rates during other payment or accrual periods.
(2) Original Issue Discount
Accrual Securities will be, and other classes of Regular Securities may
be, issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or Subclass of Regular Securities having
original issue discount generally must include original issue discount in
ordinary income for federal income tax purposes as it accrues, in accordance
with a constant yield method that takes into account the compounding of
interest, in advance of the receipt of the cash attributable to that income.
The following discussion is based in part on the "OID Regulations" and in part
on the provisions of the Tax Reform Act of 1986 (the "1986 Act"). Regular
Securityholders should be aware, however, that the OID Regulations do not
adequately address some of the issues relevant to prepayable securities, such
as the Regular Securities. To the extent that those issues are not addressed
in the regulations, the Seller intends to apply the methodology described in
the Conference Committee Report to the 1986 Act. No assurance can be provided
that the Internal Revenue Service will not take a different position as to
those matters not currently addressed by the OID Regulations. Moreover, the
OID Regulations include an anti-abuse rule allowing the Internal Revenue
Service to apply or depart from the OID Regulations where necessary or
appropriate to ensure a reasonable tax result because of the applicable
statutory provisions. A tax result will not be considered unreasonable under
the anti-abuse rule in the absence of a substantial effect on the present
value of a taxpayer's tax liability. Investors are advised to consult their
own tax advisors as to the discussion in the OID Regulations and the
appropriate method for reporting interest and original issue discount for the
Regular Securities.
Each Regular Security will be treated as a single installment obligation
for purposes of determining the original issue discount includible in a
Regular Securityholder's income. The total amount of original issue discount
on a Regular Security is the excess of the "stated redemption price at
maturity" of the Regular Security over its "issue price." The issue price of a
Class of Regular Securities offered pursuant to this prospectus generally is
the first price at which a substantial amount of that Class is sold to the
public (excluding bond houses, brokers and underwriters). Although unclear
under the OID Regulations, it is anticipated that the trustee will treat the
issue price of a Class as to which there is no substantial sale as of the
issue date or that is retained by the depositor as the fair market value of
the Class as of the issue date. The issue price of a Regular Security also
includes any amount paid by an initial Regular Securityholder for accrued
interest that relates to a period before the issue date of the Regular
Security, unless the Regular Securityholder elects on its federal income tax
return to exclude that amount from the issue price and to recover it on the
first Distribution Date.
The stated redemption price at maturity of a Regular Security always
includes the original principal amount of the Regular Security, but generally
will not include distributions of interest if those distributions constitute
"qualified stated interest." Under the OID Regulations, qualified stated
interest generally means interest payable at a single fixed rate or a
qualified variable rate (as described below), provided that the interest
payments are unconditionally payable at intervals of one year or less during
the entire term of the Regular Security. Because there is no penalty or
default remedy in the case of nonpayment of interest for a Regular Security,
it is possible that no interest on any Class of Regular Securities will be
treated as qualified stated interest. However, except as provided in the
following three sentences or in the prospectus supplement, because the
underlying mortgage loans provide for remedies in the event of default, it is
anticipated that the trustee will treat interest for the Regular Securities as
qualified stated interest. Distributions of interest on an Accrual Security,
or on other Regular Securities for which deferred interest will accrue, will
not constitute qualified stated interest, in which case the stated redemption
price at maturity of those Regular Securities includes all distributions of
interest as well as principal on the Regular Securities. Likewise, it is
anticipated that the trustee will treat an interest-only Class or a Class on
which interest is substantially disproportionate to its principal amount (a
so-called "super-premium" Class) as having no qualified stated interest. Where
the interval between the issue date and the first Distribution Date on a
Regular Security is shorter than the interval between subsequent Distribution
Dates, the interest attributable to the additional days will be included in
the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Security
will be considered to be zero if the original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Security
multiplied by the weighted average maturity of the Regular Security. For this
purpose, the weighted average maturity of the Regular 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
Regular Security and the denominator of which is the stated redemption price
at maturity of the Regular Security. The Conference Committee Report to the
1986 Act provides that the schedule of those distributions should be
determined in accordance with the assumed rate of prepayment of the mortgage
loans (the "Prepayment Assumption") and the anticipated reinvestment rate, if
any, relating to the Regular Securities. The Prepayment Assumption for a
series of Regular Securities will be set forth in the prospectus supplement.
Holders generally must report de minimis original issue discount pro rata as
principal payments are received, and that income will generally be capital
gain if the Regular Security is held as a capital asset. Under the OID
Regulations, however, Regular Securityholders may elect to accrue all de
minimis original issue discount as well as market discount and market premium,
under the constant yield method. See "-Election to Treat All Interest Under
the Constant Yield Method" below.
A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the
original issue discount on the Regular Security accrued during an accrual
period for each day on which it holds the Regular Security, including the date
of purchase but excluding the date of disposition. The trustee will treat the
monthly period ending on the day before each Distribution Date as the accrual
period. For each Regular Security, a calculation will be made of the original
issue discount that accrues during each successive full accrual period (or
shorter period from the date of original issue) that ends on the day before
the related Distribution Date on the Regular Security. The Conference
Committee Report to the 1986 Act states that the rate of accrual of original
issue discount is intended to be based on the Prepayment Assumption. The
original issue discount accruing in a full accrual period would be the excess,
if any, of:
(1) the sum of:
(a) the present value of all of the remaining distributions to
be made on the Regular Security as of the end of that accrual period
and
(b) the distributions made on the Regular Security during the
accrual period that are included in the Regular Security's stated
redemption price at maturity, over
(2) the adjusted issue price of the Regular Security at the
beginning of the accrual period.
The present value of the remaining distributions referred to in the preceding
sentence is calculated based on:
(1) the yield to maturity of the Regular Security at the issue
date; and
(2) the Prepayment Assumption.
For these purposes, the adjusted issue price of a Regular Security at the
beginning of any accrual period equals the issue price of the Regular
Security, increased by the total amount of original issue discount for the
Regular Security that accrued in all prior accrual periods and reduced by the
amount of distributions included in the Regular Security's stated redemption
price at maturity that were made on the Regular Security in those prior
periods. The original issue discount accruing during any accrual period (as
determined in this paragraph) will then be divided by the number of days in
the period to determine the daily portion of original issue discount for each
day in the period. For an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder
generally will increase to take into account prepayments on the Regular
Securities as a result of prepayments on the mortgage loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the mortgage loans for a series of Regular
Securities can result in both a change in the priority of principal payments
for some Classes of Regular Securities and either an increase or decrease in
the daily portions of original issue discount for those Regular Securities.
(3) Acquisition Premium
A purchaser of a Regular Security having original issue discount at a
price greater than its adjusted issue price but less than its stated
redemption price at maturity will be required to include in gross income the
daily portions of the original issue discount on the Regular Security reduced
pro rata by a fraction, the numerator of which is the excess of its purchase
price over the adjusted issue price and the denominator of which is the excess
of the remaining stated redemption price at maturity over the adjusted issue
price. Alternatively, a subsequent purchaser may elect to treat all that
acquisition premium under the constant yield method, as described below under
the heading "--Election to Treat All Interest Under the Constant Yield Method"
below.
(4) Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a qualified
variable rate if, generally, (1) the issue price does not exceed the original
principal balance by more than a specified amount, (2) it does not provide for
any principal payments that are contingent, within the meaning of the OID
Regulations, except as provided in (1), and (3) the interest compounds or is
payable at least annually at current values of
(a) one or more "qualified floating rates,"
(b) a single fixed rate and one or more qualified floating rates,
(c) a single "objective rate," or
(d) a single fixed rate and a single objective rate that is a "qualified
inverse floating rate."
A floating rate is a qualified floating rate if variations can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. A multiple of a qualified floating rate is considered a qualified
floating rate only if the rate is equal to either (a) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (b) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate. That rate may also be subject to a fixed cap or
floor, or a cap or floor that is not reasonably expected as of the issue date
to affect the yield of the instrument significantly. An objective rate is any
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, provided that the information is not (1) within the control of
the issuer or a related party or (2) unique to the circumstances of the issuer
or a related party. However, an objective rate does not include a rate if it
is reasonably expected that the average value of such rate during the first
half of the Regular Security's term will be either significantly less than or
significantly greater than the average value of the rate during the final half
of the Regular Security's term. A qualified inverse floating rate is a rate
equal to a fixed rate minus a qualified floating rate that inversely reflects
contemporaneous variations in the qualified floating rate; an inverse floating
rate that is not a qualified inverse floating rate may nevertheless be an
objective rate. A Class of Regular Securities may be issued under this
prospectus that does not have a qualified variable rate under the foregoing
rules, for example, a Class that bears different rates at different times
during the period it is outstanding that it is considered significantly
"front-loaded" or "back-loaded" within the meaning of the OID Regulations. It
is possible that a Class may be considered to bear "contingent interest"
within the meaning of the OID Regulations. The OID Regulations, as they relate
to the treatment of contingent interest, are by their terms not applicable to
Regular Securities. However, if final regulations dealing with contingent
interest for Regular Securities apply the same principles as the OID
Regulations, those regulations may lead to different timing of income
inclusion than would be the case under the OID Regulations. Furthermore,
application of those principles could lead to the characterization of gain on
the sale of contingent interest Regular Securities as ordinary income.
Investors should consult their tax advisors regarding the appropriate
treatment of any Regular Security that does not pay interest at a fixed rate
or qualified variable rate as described in this paragraph.
The amount of original issue discount for a Regular Security bearing a
qualified variable rate of interest will accrue in the manner described above
under "--Original Issue Discount," with the yield to maturity and future
payments on that Regular Security generally to be determined by assuming that
interest will be payable for the life of the Regular Security based on the
initial rate (or, if different, the value of the applicable variable rate as
of the pricing date) for the relevant Class, if the Class bears interest at a
qualified floating rate or qualified inverse floating rate, or based on a
fixed rate which reflects the reasonably expected yield for the relevant
Class, if the Class bears interest at an objective rate (other than a
qualified inverse floating rate). Unless required otherwise by applicable
final regulations, it is anticipated that the trustee will treat interest,
other than variable interest on an interest-only or super-premium Class, as
qualified stated interest at the qualified variable rate. However, the
qualified stated interest allocable to an accrual period will be increased (or
decreased) if the interest actually paid during the accrual period exceed (or
is less than) the interest assumed to be paid under the rate just described.
(5) Market Discount
A subsequent purchaser of a Regular Security also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Security (1) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified
stated interest payments due on a Regular Security, or (2) in the case of a
Regular Security having original issue discount, is exceeded by the adjusted
issue price of that Regular Security at the time of purchase. The purchaser
generally will be required to recognize ordinary income to the extent of
accrued market discount on that Regular Security as distributions includible
in the stated redemption price at maturity of the Regular Security are
received, in an amount not exceeding that distribution. The market discount
would accrue in a manner to be provided in Treasury regulations and should
take into account the Prepayment Assumption. The Conference Committee Report
to the 1986 Act provides that until these regulations are issued, the market
discount would accrue either (1) on the basis of a constant interest rate, or
(2) in the ratio of stated interest allocable to the relevant period to the
sum of the interest for that period plus the remaining interest as of the end
of that period, or in the case of a Regular Security issued with original
issue discount, in the ratio of original issue discount accrued for the
relevant period to the sum of the original issue discount accrued for that
period plus the remaining original issue discount as of the end of that
period. The purchaser also generally will be required to treat a portion of
any gain on a sale or exchange of the Regular Security as ordinary income to
the extent of the market discount accrued to the date of disposition under one
of the foregoing methods, less any accrued market discount previously reported
as ordinary income as partial distributions in reduction of the stated
redemption price at maturity were received. The purchaser will be required to
defer deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Security over the
interest distributable on the Regular Security. The deferred portion of the
interest expense in any taxable year generally will not exceed the accrued
market discount on the Regular Security for that year. Any deferred interest
expense is, in general, allowed as a deduction not later than the year in
which the related market discount income is recognized or the Regular Security
is disposed of.
As an alternative to the inclusion of market discount in income on the
foregoing basis, the Regular Securityholder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by the Regular Securityholder in that taxable year or thereafter, in
which case the interest deferral rule will not apply. See "--Election to Treat
All Interest Under the Constant Yield Method" below regarding an alternative
manner in which that election may be deemed to be made. A person who purchases
a Regular Security at a price lower than the remaining amounts includible in
the stated redemption price at maturity of the security, but higher than its
adjusted issue price, does not acquire the Regular Security with market
discount, but will be required to report original issue discount,
appropriately adjusted to reflect the excess of the price paid over the
adjusted issue price.
Market discount for a Regular Security will be considered to be zero if
the market discount is less than 0.25% of the remaining stated redemption
price at maturity of the Regular Security (or, in the case of a Regular
Security having original issue discount, the adjusted issue price of that
Regular Security) multiplied by the weighted average maturity of the Regular
Security (presumably determined as described above in the third paragraph
under "--Original Issue Discount" above) remaining after the date of purchase.
It appears that de minimis market discount would be reported in a manner
similar to de minimis original issue discount. See "--Original Issue Discount"
above.
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those
rules. Due to the substantial lack of regulatory guidance with respect to the
market discount rules, it is unclear how those rules will affect any secondary
market that develops for a particular Class of Regular Securities. Prospective
investors in Regular Securities should consult their own tax advisors
regarding the application of the market discount rules to the Regular
Securities and the elections to include market discount in income currently
and to accrue market discount on the basis of the constant yield method.
(6) Amortizable Premium
A Regular Security purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds that Regular Security as a
"capital asset" within the meaning of Code Section 1221, the Regular
Securityholder may elect under Code Section 171 to amortize the premium under
a constant yield method that reflects compounding based on the interval
between payments on the Regular Security. The election will apply to all
taxable debt obligations (including REMIC regular interests) acquired by the
Regular Securityholder at a premium held in that taxable year or thereafter,
unless revoked with the permission of the Internal Revenue Service. The
Conference Committee Report to the 1986 Act indicates a Congressional intent
that the same rules that apply to the accrual of market discount on
installment obligations will also apply to amortizing bond premium under Code
Section 171 on installment obligations as the Regular Securities, although it
is unclear whether the alternatives to the constant interest method described
above under "Market Discount" are available. Amortizable bond premium
generally will be treated as an offset to interest income on a Regular
Security, rather than as a separate deductible item. See "--Election to Treat
All Interest Under the Constant Yield Method" below regarding an alternative
manner in which the Code Section 171 election may be deemed to be made.
(7) Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument
subject to this election, (1) "interest" includes stated interest, original
issue discount, de minimis original issue discount, market discount and de
minimis market discount, as adjusted by any amortizable bond premium or
acquisition premium and (2) the debt instrument is treated as if the
instrument were issued on the holder's acquisition date in the amount of the
holder's adjusted basis immediately after acquisition. It is unclear whether,
for this purpose, the initial Prepayment Assumption would continue to apply or
if a new prepayment assumption as of the date of the holder's acquisition
would apply. A holder generally may make this election on an instrument by
instrument basis or for a class or group of debt instruments. However, if the
holder makes this election for a debt instrument with amortizable bond
premium, the holder is deemed to have made elections to amortize bond premium
currently as it accrues under the constant yield method for all premium bonds
held by the holder in the same taxable year or thereafter. Alternatively, if
the holder makes this election for a debt instrument with market discount, the
holder is deemed to have made elections to report market discount income
currently as it accrues under the constant yield method for all market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the Internal Revenue Service. Investors should consult their own
tax advisors regarding the advisability of making this election.
(8) Treatment of Losses
Regular Securityholders will be required to report income for Regular
Securities on the accrual method of accounting, without giving effect to
delays or reductions in distributions attributable to defaults or
delinquencies on the mortgage loans, except to the extent it can be
established that the losses are uncollectible. Accordingly, the holder of a
Regular Security, particularly a Subordinate Security, may have income, or may
incur a diminution in cash flow as a result of a default or delinquency, but
may not be able to take a deduction (subject to the discussion below) for the
corresponding loss until a subsequent taxable year. In this regard, investors
are cautioned that while they may generally cease to accrue interest income if
it reasonably appears that the interest will be uncollectible, the Internal
Revenue Service may take the position that original issue discount must
continue to be accrued in spite of its uncollectibility until the debt
instrument is disposed of in a taxable transaction or becomes worthless in
accordance with the rules of Code Section 166.
To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that Regular Securityholders that are corporations or
that otherwise hold the Regular Securities in connection with a trade or
business should in general be allowed to deduct as an ordinary loss that loss
with respect to principal sustained during the taxable year on account of any
Regular Securities becoming wholly or partially worthless, and that, in
general, Regular Securityholders that are not corporations and do not hold the
Regular Securities in connection with a trade or business should be allowed to
deduct as a short-term capital loss any loss sustained during the taxable year
on account of a portion of any Regular Securities becoming wholly worthless.
Although the matter is not free from doubt, non-corporate Regular
Securityholders should be allowed a bad debt deduction at the time the
principal balance of the Regular Securities is reduced to reflect losses
resulting from any liquidated mortgage loans. The Internal Revenue Service,
however, could take the position that non-corporate holders will be allowed a
bad debt deduction to reflect those losses only after all the mortgage loans
remaining in the trust fund have been liquidated or the applicable Class of
Regular Securities has been otherwise retired. The Internal Revenue Service
could also assert that losses on the Regular Securities are deductible based
on some other method that may defer those deductions for all holders, such as
reducing future cashflow for purposes of computing original issue discount.
This may have the effect of creating "negative" original issue discount that
may be deductible only against future positive original issue discount or
otherwise upon termination of the Class.
Regular Securityholders are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained
for their Regular Securities. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate
and non-corporate holders, the Internal Revenue Service may take the position
that losses attributable to accrued original issue discount may only be
deducted as capital losses in the case of non-corporate holders who do not
hold the Regular Securities in connection with a trade or business. Special
loss rules may be applicable to banks and thrift institutions. These taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
Regular Securities.
(9) Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular
Security. The adjusted basis of a Regular Security generally will equal the
original cost of the Regular Security to the seller, increased by any original
issue discount or market discount previously included in the seller's gross
income for the Regular Security and reduced by amounts included in the stated
redemption price at maturity of the Regular Security that were previously
received by the seller, by any amortized premium, and by any recognized
losses.
Except as described above regarding market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). That gain will be
treated as ordinary income
(1) if a Regular Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Securityholder's net
investment in the conversion transaction at 120% of the appropriate
applicable federal rate in effect at the time the taxpayer entered into
the transaction minus any amount previously treated as ordinary income
for any prior disposition of property that was held as part of that
transaction;
(2) in the case of a non-corporate taxpayer, to the extent that the
taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates; or
(3) to the extent that the gain does not exceed the excess, if any,
of (a) the amount that would have been includible in the gross income of
the holder if its yield on that Regular Security were 110% of the
applicable federal rate as of the date of purchase, over (b) the amount
of income actually includible in the gross income of the holder for that
Regular Security (the "110% yield rule").
In addition, gain or loss recognized from the sale of a Regular Security
by some banks or thrift institutions will be treated as ordinary income or
loss pursuant to Code Section 582(c). Long-term capital gains of noncorporate
taxpayers generally are subject to a lower maximum tax rate than ordinary
income of those taxpayers for property held for more than one year, with
further rate reductions for property held for more than five years. Currently,
the maximum tax rate for corporations is the same for both ordinary income and
capital gains.
Taxation of Owners of Residual Securities
(1) Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will
be includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Securities ("Residual Holders"), and will not be
taxed separately to the REMIC Pool. The daily portions of REMIC taxable income
or net loss of a Residual Holder are determined by allocating the REMIC Pool's
taxable income or net loss for each calendar quarter ratably to each day in
that quarter and by allocating that daily portion among the Residual Holders
in proportion to their respective holdings of Residual Securities in the REMIC
Pool on that day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using the accrual method of
accounting, except that
(1) the limitations on deductibility of investment interest expense
and expenses for the production of income do not apply;
(2) all bad loans will be deductible as business bad debts; and
(3) the limitation on the deductibility of interest and expenses
related to tax-exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount
income and market discount income, if any, on the mortgage loans, reduced by
amortization of any premium on the mortgage loans, plus income from
amortization of issue premium, if any, on the Regular Securities, plus income
on reinvestment of cash flows and reserve assets, plus any cancellation of
indebtedness income upon allocation of realized losses to the Regular
Securities. The REMIC Pool's deductions include interest and original issue
discount expense on the Regular Securities, servicing fees on the mortgage
loans, other administrative expenses of the REMIC Pool and realized losses on
the mortgage loans. The requirement that Residual Holders report their pro
rata share of taxable income or net loss of the REMIC Pool will continue until
there are no Notes or Certificates, as applicable, of any class of the related
series outstanding.
The taxable income recognized by a Residual Holder in any taxable year
will be affected by, among other factors, the relationship between the timing
of recognition of interest, original issue discount or market discount income
or amortization of premium for the mortgage loans, on the one hand, and the
timing of deductions for interest (including original issue discount) or
income from amortization of issue premium on the Regular Securities, on the
other hand. If an interest in the mortgage loans is acquired by the REMIC Pool
at a discount, and one or more of these mortgage loans is prepaid, the
prepayment may be used in whole or in part to make distributions in reduction
of principal on the Regular Securities, and the discount on the mortgage loans
that is includible in income may exceed the original issue discount deductions
allowed with respect to the Regular Securities. When there is more than one
Class of Regular Securities that distribute principal sequentially, this
mismatching of income and deductions is particularly likely to occur in the
early years following issuance of the Regular Securities when distributions in
reduction of principal are being made in respect of earlier Classes of Regular
Securities to the extent that those Classes are not issued with substantial
discount or are issued at a premium. If taxable income attributable to that
mismatching is realized, in general, losses would be allowed in later years as
distributions on the later maturing Classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later years
as a result of the fact that interest expense deductions, expressed as a
percentage of the outstanding principal amount of that series of Regular
Securities, may increase over time as distributions in reduction of principal
are made on the lower yielding Classes of Regular Securities, whereas, to the
extent the REMIC Pool consists of fixed rate mortgage loans, interest income
for any particular mortgage loan will remain constant over time as a
percentage of the outstanding principal amount of that loan. Consequently,
Residual Holders must have sufficient other sources of cash to pay any
federal, state, or local income taxes due as a result of that mismatching or
unrelated deductions against which to offset that income, subject to the
discussion of "excess inclusions" below under "--Limitations on Offset or
Exemption of REMIC Income." The timing of mismatching of income and deductions
described in this paragraph, if present for a series of Notes or Certificates,
as applicable, may have a significant adverse effect upon a Residual Holder's
after-tax rate of return.
A portion of the income of a Residual Holder may be treated unfavorably
in three contexts:
(1) it may not be offset by current or net operating loss
deductions;
(2) it will be considered unrelated business taxable income to
tax-exempt entities; and
(3) it is ineligible for any statutory or treaty reduction in the
30% withholding tax otherwise available to a foreign Residual Holder.
See "--Limitations on Offset or Exemption of REMIC Income" below. In addition,
a Residual Holder's taxable income during some periods may exceed the income
reflected by those Residual Holders for those periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in
Residual Securities.
(2) Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Holder is limited to the adjusted basis of the
Residual Security as of the close of the quarter (or time of disposition of
the Residual Security if earlier), determined without taking into account the
net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Security is the amount paid for that Residual Security. The adjusted
basis will be increased by the amount of taxable income of the REMIC Pool
reportable by the Residual Holder and will be decreased (but not below zero),
first, by a cash distribution from the REMIC Pool and, second, by the amount
of loss of the REMIC Pool reportable by the Residual Holder. Any loss that is
disallowed on account of this limitation may be carried over indefinitely with
respect to the Residual Holder as to whom the loss was disallowed and may be
used by the Residual Holder only to offset any income generated by the same
REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, if, in any year, cash distributions to a Residual
Holder exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its
Residual Security. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the Residual Holder (but
not below zero). If a Residual Security's basis is reduced to zero, any cash
distributions with respect to that Residual Security in any taxable year in
excess of its share of the REMIC's income would be taxable to the holder as
gain on the sale or exchange of its interest in the REMIC.
A Residual Security may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of the residual
interest as zero rather than the negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the Internal Revenue Service may provide future guidance on the
proper tax treatment of payments made by a transferor of the residual interest
to induce the transferee to acquire the interest, and Residual Holders should
consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Holder (other than an original holder) in the Residual Security is greater
than the corresponding portion of the REMIC Pool's basis in the mortgage
loans, the Residual Holder will not recover a portion of the basis until
termination of the REMIC Pool unless future Treasury regulations provide for
periodic adjustments to the REMIC income otherwise reportable by the holder.
The REMIC Regulations currently in effect do not so provide. See "--Treatment
of Certain Items of REMIC Income and Expense--Market Discount" below regarding
the basis of mortgage loans to the REMIC Pool and "--Sale or Exchange of a
Residual Security" below regarding possible treatment of a loss upon
termination of the REMIC Pool as a capital loss.
(3) Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the trustee will compute REMIC income and
expense in accordance with the Code and applicable regulations, the
authorities regarding the determination of specific items of income and
expense are subject to differing interpretations. The depositor makes no
representation as to the specific method that will be used for reporting
income with respect to the mortgage loans and expenses for the Regular
Securities, and different methods could result in different timing or
reporting of taxable income or net loss to Residual Holders or differences in
capital gain versus ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of premium
will be determined in the same manner as original issue discount income on
Regular Securities as described above under "--Taxation of Owners of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities,"
without regard to the de minimis rule described therein, and "--Amortizable
Premium."
Market Discount. The REMIC Pool will have market discount income in
respect of mortgage loans if, in general, the basis of the REMIC Pool in those
mortgage loans is exceeded by their unpaid principal balances. The REMIC
Pool's basis in those mortgage loans is generally the fair market value of the
mortgage loans immediately after the transfer of the mortgage loans to the
REMIC Pool. The REMIC Regulations provide that the basis is equal to the total
of the issue prices of all regular and residual interests in the REMIC Pool.
The market discount must be recognized currently as an item of ordinary income
as it accrues, rather than being included in income upon the sale of mortgage
loans or as principal on the mortgage loans is paid. Market discount income
generally should accrue in the manner described above under "--Taxation of
Owners of Regular Securities--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the mortgage loans
exceeds the unpaid principal balances of the mortgage loans, the REMIC Pool
will be considered to have acquired those mortgage loans at a premium equal to
the amount of that excess. As stated above, the REMIC Pool's basis in mortgage
loans is generally the fair market value of the mortgage loans and is based on
the total of the issue prices of the regular and residual interests in the
REMIC Pool immediately after the transfer of the mortgage loans to the REMIC
Pool. In a manner analogous to the discussion above under "--Taxation of
Owners of Regular Securities--Amortizable Premium," a person that holds a
mortgage loan as a capital asset under Code Section 1221 may elect under Code
Section 171 to amortize premium on mortgage loans originated after September
27, 1985, under the constant yield method. Amortizable bond premium will be
treated as an offset to interest income on the mortgage loans, rather than as
a separate deduction item. Because substantially all of the borrowers on the
mortgage loans are expected to be individuals, Code Section 171 will not be
available for premium on mortgage loans originated on or before September 27,
1985. Premium for those mortgage loans may be deductible in accordance with a
reasonable method regularly employed by the holder of those mortgage loans.
The allocation of that premium pro rata among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may
argue that the premium should be allocated in a different manner, such as
allocating the premium entirely to the final payment of principal.
(4) Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in determining
the federal income tax liability of a Residual Holder will be subject to
special treatment. That portion, referred to as the "excess inclusion," is
equal to the excess of REMIC taxable income for the calendar quarter allocable
to a Residual Security over the daily accruals for that quarterly period of
(1) 120% of the long-term applicable federal rate that would have applied to
the Residual Security (if it were a debt instrument) on the Startup Day under
Code Section 1274(d), multiplied by (2) the adjusted issue price of the
Residual Security at the beginning of the quarterly period. For this purpose,
the adjusted issue price of a Residual Security at the beginning of a quarter
is the issue price of the Residual Security, plus the amount of those daily
accruals of REMIC income described in this paragraph for all prior quarters,
decreased by any distributions made with respect to the Residual Security
before the beginning of that quarterly period.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including
net operating loss carryforwards, on the Residual Holder's return. However,
net operating loss carryovers are determined without regard to excess
inclusion income. Further, if the Residual Holder is an organization subject
to the tax on unrelated business income imposed by Code Section 511, the
Residual Holder's excess inclusions will be treated as unrelated business
taxable income of the Residual Holder for purposes of Code Section 511. In
addition, REMIC taxable income is subject to 30% withholding tax for persons
who are not U.S. Persons (as defined below under "--Tax-Related Restrictions
on Transfer of Residual Securities--Foreign Investors"), and the portion
thereof attributable to excess inclusions is not eligible for any reduction in
the rate of withholding tax (by treaty or otherwise). See "--Taxation of
Certain Foreign Investors--Residual Securities" below. Finally, if a real
estate investment trust or a regulated investment company owns a Residual
Security, a portion (allocated under Treasury regulations yet to be issued) of
dividends paid by the real estate investment trust or regulated investment
company could not be offset by net operating losses of its shareholders, would
constitute unrelated business taxable income for tax-exempt shareholders, and
would be ineligible for reduction of withholding to persons who are not U.S.
Persons.
Provisions governing the relationship between excess inclusions and the
alternative minimum tax provide that (i) alternative minimum taxable income
for a Residual Holder is determined without regard to the special rule,
discussed above, that taxable income cannot be less than excess inclusions,
(ii) a Residual Holder's alternative minimum taxable income for a taxable year
cannot be less than the excess inclusions for the year, and (iii) the amount
of any alternative minimum tax net operating loss deduction must be computed
without regard to any excess inclusions.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the Residual Securities is not
considered to be "significant," then the entire share of REMIC taxable income
of a Residual Holder may be treated as excess inclusions subject to the
foregoing limitations. This authority has not been exercised to date.
(5) Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (1) the
present value of the total anticipated excess inclusions for that Residual
Security for periods after the transfer and (2) the highest marginal federal
income tax rate applicable to corporations. The REMIC Regulations provide that
the anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under
Code Section 1274(d) as of the date of the transfer for a term ending with the
last calendar quarter in which excess inclusions are expected to accrue. That
rate is applied to the anticipated excess inclusions from the end of the
remaining calendar quarters in which they arise to the date of the transfer.
That tax generally would be imposed on the transferor of the Residual
Security, except that where the transfer is through an agent (including a
broker, nominee, or other middleman) for a Disqualified Organization, the tax
would instead be imposed on the agent. However, a transferor of a Residual
Security would in no event be liable for the tax for a transfer if the
transferee furnished to the transferor an affidavit stating that the
transferee is not a Disqualified Organization and, as of the time of the
transfer, the transferor does not have actual knowledge that the affidavit is
false. Under the REMIC Regulations, an affidavit will be sufficient if the
transferee furnishes (A) a social security number, and states under penalties
of perjury that the social security number is that of the transferee, or (B) a
statement under penalties of perjury that it is not a disqualified
organization.
"Disqualified Organization" means the United States, any state or
political subdivision of the United States, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that the term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors
in not selected by any governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 531) that is exempt from
taxation under the Code unless the organization is subject to the tax on
unrelated business income imposed by Code Section 511.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income for a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in that
entity, then a tax is imposed on the entity equal to the product of (1) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period that interest is held by the
Disqualified Organization, and (2) the highest marginal federal corporate
income tax rate. That tax would be deductible from the ordinary gross income
of the Pass-Through Entity for the taxable year. The Pass-Through Entity would
not be liable for the tax if (1) it has received an affidavit from the record
holder stating, under penalties of perjury, that it is not a Disqualified
Organization, or providing the holder's taxpayer identification number and
stating, under penalties of perjury, that the social security number is that
of the record owner, and (2) during the period that person is the record
holder of the Residual Security, the Pass-Through Entity does not have actual
knowledge that the affidavit is false.
"Pass-Through Entity" means any regulated investment company, real estate
investment trust, common trust fund, partnership, trust or estate and
corporations operating on a cooperative basis. Except as may be provided in
Treasury regulations, any person holding an interest in a Pass-Through Entity
as a nominee for another will, with respect to that interest, be treated as a
Pass-Through Entity.
If an "electing large partnership" holds a Residual Security, all
interests in the electing large partnership are treated as held by
Disqualified Organizations for purposes of the tax imposed upon a Pass-Through
Entity by Section 860E(c) of the Code. The exception to this tax, otherwise
available to a Pass-Through Entity that is furnished particular affidavits by
record holders of interests in the entity and that does not know those
affidavits are false, is not available to an electing large partnership.
The pooling and servicing agreement for a series will provide that no
legal or beneficial interest in a Residual Security may be transferred or
registered unless (1) the proposed transferee furnished to the transferor and
the trustee an affidavit providing its taxpayer identification number and
stating that the transferee is the beneficial owner of the Residual Security
and is not a Disqualified Organization and is not purchasing the Residual
Security on behalf of a Disqualified Organization (i.e., as a broker, nominee
or middleman) and (2) the transferor provides a statement in writing to the
trustee that it has no actual knowledge that the affidavit is false. Moreover,
the pooling and servicing agreement will provide that any attempted or
purported transfer in violation of these transfer restrictions will be null
and void and will vest no rights in any purported transferee. Each Residual
Security for a series will bear a legend referring to those restrictions on
transfer, and each Residual Holder will be deemed to have agreed, as a
condition of ownership of the Residual Security, to any amendments to the
related pooling and servicing agreement required under the Code or applicable
Treasury regulations to effectuate the foregoing restrictions. Information
necessary to compute an applicable excise tax must be furnished to the
Internal Revenue Service and to the requesting party within 60 days of the
request, and the Seller or the trustee may charge a fee for computing and
providing that information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
some transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of
the REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic
residual interest" (as defined below) to a Residual Holder (other than a
Residual Holder who is not a U.S. Person as defined below under "--Foreign
Investors") is disregarded to all federal income tax purposes if a significant
purpose of the transfer is to impede the assessment or collection of tax. A
residual interest in a REMIC (including a residual interest with a positive
value at issuance) is a "noneconomic residual interest" unless, at the time of
the transfer, (1) the present value of the expected future distributions on
the residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs, and (2) the transferor
reasonably expects that the transferee will receive distributions from the
REMIC at or after the time at which taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes on each excess
inclusion. The anticipated excess inclusions and the present value rate are
determined in the same manner as set forth above under "--Disqualified
Organizations." The REMIC Regulations explain that a significant purpose to
impede the assessment or collection of tax exists if the transferor, at the
time of the transfer, either knew or should have known that the transferee
would be unwilling or unable to pay taxes due on its share of the taxable
income of the REMIC. A safe harbor is provided if (1) the transferor
conducted, at the time of the transfer, a reasonable investigation of the
financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts
as they came due in the future, (2) the transferee represents to the
transferor that it understands that, as the holder of the non-economic
residual interest, the transferee may incur liabilities in excess of any cash
flows generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due, and (3)
either the formula test or the asset test (each as described below) is
satisfied.
The formula test is satisfied if the present value of the anticipated tax
liabilities associated with holding the Residual Security does not exceed the
sum of the present values of (1) any consideration given to the transferee to
the acquire the Residual Security, (2) the expected future distributions on
the Residual Security, and (3) the anticipated tax savings associated with
holding the Residual Security as the REMIC generates losses. For purposes of
this calculation, the present values generally are calculated using a discount
rate equal to the applicable federal rate, and the transferee is assumed to
pay tax at the highest corporate rate of tax.
The asset test is satisfied if
1. at the time of the transfer of the Residual Security, and at the
close of each of the transferee's two fiscal years preceding the
year of transfer, the transferee's gross assets for financial
reporting purposes exceed $100 million and its net assets for
financial reporting purposes exceed $10 million,
2. the transferee is a taxable domestic C corporation, other than a
RIC, REIT, REMIC or Subchapter T cooperative (an "Eligible
Corporation"), that makes a written agreement that any subsequent
transfer of the Residual Security will be to another Eligible
Corporation in a transaction that satisfies the safe harbor
described above, and the transferor does not know, or have reason to
know, that the transferee will not honor such agreement, and
3. the facts and circumstances known to the transferor on or before the
date of transfer do not reasonably indicate that the taxes
associated with the Residual Security will not be paid.
For purposes of requirement (1), the gross and net assets of a transferee do
not include any obligations of a person related to the transferee or any other
asset if a principal purpose for holding or acquiring the asset is to permit
the transferee to satisfy the asset test. Further, requirement (2) will not be
treated as satisfied in the case of any transfer or assignment of the Residual
Security to a foreign branch of an Eligible Corporation or any other
arrangement by which the Residual Security is at any time subject to net tax
by a foreign country or possession of the United States.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended
to apply to a transferee who is not a "U.S. Person" (as defined below), unless
the transferee's income is effectively connected with the conduct of a trade
or business within the United States. A Residual Security is deemed to have
tax avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that (1) the future distributions on the Residual Security
will equal at least 30% of the anticipated excess inclusions after the
transfer, and (2) such amounts will be distributed at or after the time at
which the excess inclusions accrue and before the end of the next succeeding
taxable year. ___ A safe harbor in the REMIC Regulations provides that the
reasonable expectation requirement will be satisfied if the above test would
be met at all assumed prepayment rates for the mortgage loans from 50 percent
to 200 percent of the Prepayment Assumption. If the non-U.S. Person transfers
the Residual Security back to a U.S. Person, the transfer will be disregarded
and the foreign transferor will continue to be treated as the owner unless
arrangements are made so that the transfer does not have the effect of
allowing the transferor to avoid tax on accrued excess inclusions.
The prospectus supplement relating to the Certificates of a series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which the transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation or
partnership (or other entity properly treated as a partnership or as a
corporation for federal income tax purposes) created or organized in or under
the laws of the United States or of any state (including, for this purpose,
the District of Columbia), an estate that is subject to U.S. federal income
tax regardless of the source of its income, or a trust if a court within the
United States is able to exercise primary supervision over the administration
of the trust and one or more U.S. Persons have the authority to control all
substantial decisions of the trust (or, to the extent provided in applicable
Treasury regulations, trusts in existence on August 20, 1996, which are
eligible to elect and do elect to be treated as U.S. Persons).
(6) Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount
realized over the adjusted basis (as described above under "--Taxation of
Owners of Residual Securities--Basis and Losses") of the Residual Holder in
the Residual Security at the time of the sale or exchange.
Further, as described above under "--Taxation of Owners of Residual
Securities--Basis and Losses", if a Residual Security's basis is reduced to
zero, any cash distributions with respect to that Residual Security in any
taxable year in excess of its share of the REMIC's income for that year would
be taxable to the holder as gain on the sale or exchange of its interest in
the REMIC. If a Residual Holder has an adjusted basis in its Residual Security
when its interest in the REMIC Pool terminates, then it will recognize a
capital loss (assuming the Residual Security was held as a capital asset) at
that time in an amount equal to the remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (1) if a Residual Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Holder's net investment in the
conversion transaction at 120% of the appropriate applicable federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income for any prior disposition of property
that was held as a part of that transaction or (2) in the case of a
non-corporate taxpayer, to the extent that the taxpayer has made an election
under Code Section 163(d)(4) to have net capital gains taxed as investment
income at ordinary income rates. In addition, gain or loss recognized from the
sale of a Residual Security by some banks or thrift institutions will be
treated as ordinary income or loss pursuant to Code Section 582(c).
Except as provided in Treasury regulations yet to be issued, the wash
sale rules of Code Section 1091 will apply to dispositions of Residual
Securities where the seller of the Residual Security, during the period
beginning six months before the sale or disposition of the Residual Security
and ending six months after the sale or disposition, acquires (or enters into
any other transaction that results in the application of Code Section 1091)
any residual interest in any REMIC or any interest in a "taxable mortgage
pool" (such as a non-REMIC owner trust) that is economically comparable to a
Residual Security.
(7) Mark to Market Regulations
Treasury regulations provide that a Residual Security acquired on or
after January 4, 1995 is not treated as a security and thus may not be marked
to market pursuant to Section 475 of the Code.
Taxes That May Be Imposed on the REMIC Pool
(1) Prohibited Transactions
Income from transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be
taxed directly to the REMIC Pool at a 100% rate. Prohibited transactions
generally include:
(1) the disposition of a qualified mortgages other than for
(a) substitution for a defective (including a defaulted)
obligation within two years of the Startup Day (or repurchase in
lieu of substitution of a defective (including a defaulted)
obligation at any time) or for any qualified mortgage within three
months of the Startup Day;
(b) foreclosure, default, or imminent default of a qualified
mortgage;
(c) bankruptcy or insolvency of the REMIC Pool; or
(d) a qualified (complete) liquidation;
(2) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold;
(3) the receipt of compensation for services; or
(4) the receipt of gain from disposition of cash flow investments
other than pursuant to a qualified liquidation.
Notwithstanding (1) and (4) above, it is not a prohibited transaction to
sell a qualified mortgage or cash flow investment held by a REMIC Pool to
prevent a default on Regular Securities as a result of a default on qualified
mortgages or to facilitate a clean-up call (generally, an optional termination
to save administrative costs when no more than a small percentage of the Notes
or Certificates, as applicable, is outstanding). The REMIC Regulations
indicate that the modification of a mortgage loan generally will not be
treated as a disposition if it is occasioned by a default or reasonably
foreseeable default, an assumption of the mortgage loan, the waiver of a
due-on-sale or due-on-encumbrance clause, or the conversion of an interest
rate by a borrower pursuant to the terms of a convertible adjustable rate
mortgage loan.
(2) Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool
(1) during the three months following the Startup Day,
(2) made to a qualified reserve fund by a Residual Holder,
(3) in the nature of a guarantee,
(4) made to facilitate a qualified liquidation or clean-up call, and
(5) as otherwise permitted in Treasury regulations yet to be issued.
It is not anticipated that there will be any contributions to the REMIC Pool
after the Startup Day.
(3) Net Income from Foreclosure Property
The REMIC Pool will be subject of 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. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" until the close of the third calendar year after the
year in which the REMIC Pool acquired that property, with possible extensions.
Net income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income
for a real estate investment trust. It is not anticipated that the REMIC Pool
will have any taxable net income from foreclosure property.
(4) Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which that adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on that date, the REMIC Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular Securities
and Residual Holders within the 90-day period.
(5) Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes
in a manner similar to a partnership. The form for the income tax return is
Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual Holder for
an entire taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among
other things, items of REMIC income, gain, loss, deduction, or credit in a
unified administrative proceeding. The master servicer will be obligated to
act as "tax matters person," as defined in applicable Treasury regulations,
for the REMIC Pool as agent of the Residual Holders holding the largest
percentage interest in the Residual Securities. If the Code or applicable
Treasury regulations do not permit the master servicer to act as tax matters
person in its capacity as agent of the Residual Holder, the Residual Holder or
any other person specified pursuant to Treasury regulations will be required
to act as tax matters person. The tax matters person generally has
responsibility for overseeing and providing notice to the other Residual
Holders of administrative and judicial proceedings regarding the REMIC Pool's
tax affairs, although other holders of the Residual Securities of the same
series would be able to participate in those proceedings in appropriate
circumstances.
(6) Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to some itemized deductions described in Code Section
67, to the extent that those itemized deductions, in total, do not exceed 2%
of the investor's adjusted gross income. 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. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser or (1) 3% of the excess, if
any, of adjusted gross income over $100,000 ($50,000 in the case of a married
individual filing a separate return) (subject to adjustment for inflation), or
(2) 80% of the amount of itemized deductions otherwise allowable for that
year. In the case of a REMIC Pool, those deductions may include deductions
under Code Section 212 for the Servicing Fee and all administrative and other
expenses relating to the REMIC Pool, or any similar expenses allocated to the
REMIC Pool for a regular interest it holds in another REMIC. Those investors
who hold REMIC Securities either directly or indirectly through pass-through
entities may have their pro rata share of those expenses allocated to them as
additional gross income, but may be subject to that limitation on deductions.
In addition, those expenses are not deductible at all for purposes of
computing the alternative minimum tax, and may cause those investors to be
subject to significant additional tax liability. Temporary Treasury
regulations provide that the additional gross income and corresponding amount
of expenses generally are to be allocated entirely to the holders of Residual
Securities in the case of a REMIC Pool that would not qualify as a fixed
investment trust in the absence of a REMIC election. For a REMIC Pool that
would be classified as an investment trust in the absence of a REMIC election
or that is substantially similar to an investment trust, any holder of a
Regular Security that is an individual, trust, estate, or pass-through entity
also will be allocated its pro rata share of those expenses and a
corresponding amount of income and will be subject to the limitations or
deductions imposed by Code Sections 67 and 68, as described above. The
prospectus supplement will indicate if all those expenses will not be
allocable to the Residual Securities.
Taxation of Certain Foreign Investors
(1) Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (1) the interest is not effectively connected
with the conduct of a trade or business in the United States of the
securityholder, (2) the Non-U.S. Person is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (3) that Non-U.S.
Person complies to the extent necessary with certain certification
requirements, which generally relate to the identity of the beneficial owner
and the status of the beneficial owner as a person that is a Non-U.S. person.
Each Regular Securityholder should consult its tax advisors regarding the tax
documentation and certifications that must be provided to secure the exemption
from United States withholding taxes.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Regular Security by a Non-U.S. Person generally will
be exempt from United States federal income and withholding tax, provided that
(i) such gain is not effectively connected with the conduct of a trade or
business in the United States by the Non-U.S. Person and (ii) in the case of
an individual Non-U.S. Person, the Non-U.S. Person is not present in the
United States for 183 days or more in the taxable year.
If the interest on the Regular Security is effectively connected with the
conduct of a trade or business within the United States by that Non-U.S.
Person, the Non-U.S. Person, although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement
establishing that such income is so effectively connected, will be subject to
United States federal income tax at regular rates. Investors who are Non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning a Regular Security. The term "Non-U.S. Person"
means any person who is not a U.S. Person.
(2) Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Holders who are Non-U.S. Persons generally should be treated
as interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the
conditions described in "Regular Securities" above, but only to the extent
that (1) the mortgage loans were issued after July 18, 1984, and (2) the trust
fund or segregated pool of assets in the trust fund (as to which a separate
REMIC election will be made), to which the Residual Security relates, consists
of obligations issued in "registered form" within the meaning of Code Section
163 (f) (1). Generally, mortgage loans will not be, but regular interests in
another REMIC Pool will be, considered obligations issued in registered form.
Furthermore, Residual Holders will not be entitled to any exemption from the
30% withholding tax (or lower treaty rate) to the extent of that portion of
REMIC taxable income that constitutes an "excess inclusion." See "--Taxation
of Owners of Residual Securities--Limitations on Offset or Exemption of REMIC
Income" above. If the amounts paid to Residual Holders who are Non-U.S.
Persons are effectively connected with the conduct of a trade or business
within the United States by those Non-U.S. Persons, although exempt from the
withholding tax previously discussed if the holder provides an appropriate
statement establishing that such income is so effectively connected, the
amounts paid to those Non-U.S. Persons will be subject to United States
federal income tax at regular rates. See "--Tax-Related Restrictions on
Transfer of Residual Securities--Foreign Investors" above concerning the
disregard of transfers having "tax avoidance potential." Investors who are
Non-U.S. Persons should consult their own tax advisors regarding the specific
tax consequences to them of owning Residual Securities.
(3) Backup Withholding
Distributions made on the REMIC Securities, and proceeds from the sale of
the REMIC Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under some circumstances, principal distributions) if the Holder fails to
comply with certain identification procedures, unless the Holder is otherwise
an exempt recipient under applicable provisions of the Code, and, if
necessary, demonstrates such status. Any amounts to be withheld from
distribution on the REMIC Securities would be refunded by the Internal Revenue
Service or allowed as a credit against the Regular Holder's federal income tax
liability.
FASITs
Classification of FASITs
For each series of FASIT Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Stroock & Stroock & Lavan LLP, the related trust fund (or each applicable
portion of the trust fund) will qualify as a FASIT. The trust fund will
qualify under the Code as a FASIT in which FASIT regular securities (the
"FASIT Regular Securities") and the ownership interest security (the "FASIT
Ownership Security") will constitute the "regular interests" and the
"ownership interest," respectively, if
(1) a FASIT election is in effect;
(2) tests concerning
(a) the composition of the FASIT's assets and
(b) the nature of the securityholders' interests in the FASIT
are met on a continuing basis; and
(3) the trust fund is not a regulated investment company as defined
in Section 851(a) of the Code.
A segregated pool of assets may also qualify as a FASIT.
(1) Asset Composition
In order for the trust fund to be eligible for FASIT status,
substantially all of the assets of the trust fund must consist of "permitted
assets" as of the close of the third month beginning after the closing date
and at all times thereafter. Permitted assets include:
(1) cash or cash equivalents;
(2) debt instruments with fixed terms that would qualify as
regular interests if issued by a REMIC as defined in Section 860D of the
Code (generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only type rate);
(3) foreclosure property;
(4) some hedging instruments (generally, interest and
currency rate swaps and credit enhancement contracts) that are reasonably
required to guarantee or hedge against the FASIT's risks associated with
being the obligor on FASIT interests;
(5) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments;
(6) FASIT regular interests; and
(7) REMIC regular interests.
Permitted assets do not include any debt instruments issued by the holder
of the FASIT's ownership interest or by any person related to that holder. A
debt instrument is a permitted asset only if the instrument is indebtedness
for federal income tax purposes, including regular interests in a REMIC or
regular interests issued by another FASIT, and it bears (1) fixed interest or
(2) variable interest of a type that relates to qualified variable rate debt
(as defined in Treasury regulations prescribed under section 860G(a)(1)(B)).
Permitted hedges include interest rate or foreign currency notional principal
contracts, letters of credit, insurance, guarantees against payment default
and similar instruments to be provided in regulations, and which are
reasonably required to guarantee or hedge against the FASIT's risks associated
with being the obligor on interests issued by the FASIT. Foreclosure property
is real property acquired by the FASIT in connection with the default or
imminent default of a debt instrument, provided the depositor had no knowledge
or reason to know as of the date the debt instrument was acquired by the FASIT
that a default had occurred or would occur.
(2) Interests in a FASIT
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet specific requirements. All of the
interests in a FASIT must belong to either of the following:
(1) one or more classes of regular interests or
(2) a single class of ownership interest that is held by an
Eligible Corporation (as defined in this prospectus).
FASIT regular interests generally will be treated as debt for federal
income tax purposes. FASIT ownership interests generally will not treated as
debt for federal income tax purposes, but rather as representing rights and
responsibilities with respect to the taxable income or loss of the related
FASIT. The prospectus supplement for each Series of Notes or Certificates, as
applicable, will indicate which securities of the Series will be designated as
regular interests, and which, if any, will be designated as ownership
interests.
A FASIT interest generally qualifies as a regular interest if:
(1) it is designated as a regular interest;
(2) it has a stated maturity no greater than thirty years;
(3) it entitles its holder to a specified principal amount;
(4) the issue price of the interest does not exceed 125% of its
stated principal amount;
(5) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%; and
(6) if it pays interest, this interest is payable at either:
(a) a fixed rate with respect to the principal amount of
the regular interest or
(b) a permissible variable rate with respect to the
principal amount.
Permissible variable rates for FASIT regular interests are the same as those
for REMIC regular interests. See "REMICs--Taxation of Owners of Regular
Securities--(1) General" for a discussion of permissible variable rates for
REMIC regular interests.
If an interest in a FASIT fails to meet one or more of the requirements
set out in clauses (3), (4), or (5) in the immediately preceding paragraph,
but otherwise meets all requirements to be treated as a FASIT, it may still
qualify as a type of regular interest known as a "high-yield interest." In
addition, if an interest in a FASIT fails to meet the requirement of clause
(6), but the interest payable on the interest consists of a specified portion
of the interest payments on permitted assets and that portion does not vary
over the life of the security, the interest will also qualify as a high-yield
interest.
See "--Taxation of Owners of FASIT Regular Securities," "--Taxation of
Owners of High-Yield Interests" and "--Taxation of FASIT Ownership Securities"
below.
(3) Consequences of Disqualification
If the trust fund fails to comply with one or more of the Code's ongoing
requirements for FASIT status during any taxable year, the Code provides that
it's FASIT status may be lost for that year and thereafter. If FASIT status is
lost, the treatment of the former FASIT and interests in the FASIT for U.S.
federal income tax purposes is uncertain. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good faith,
final regulations have not yet been issued. It is possible that
disqualification relief might be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the FASIT's income for
the period of time in which the requirements for FASIT status are not
satisfied.
Taxation of Owners of FASIT Regular Securities
(1) General
Payments received by holders of FASIT Regular Securities generally will
be accorded the same tax treatment under the Code as payments received on
other taxable debt instruments. Holders of FASIT Regular Securities must
report income from these Notes or Certificates, as applicable, under an
accrual method of accounting, even if they otherwise would have used the cash
receipts and disbursements method. Except in the case of FASIT Regular
Securities issued with original issue discount, interest paid or accrued on a
FASIT Regular Security generally will be treated as ordinary income to the
Holder and a principal payment on the security will be treated as a return of
capital to the extent that the securityholder's basis is allocable to that
payment.
(2) Original Issue Discount; Market Discount; Acquisition Premium
FASIT Regular Securities issued with original issue discount or acquired
with market discount or acquisition premium generally will treat interest and
principal payments on these Notes or Certificates, as applicable, in the same
manner described for REMIC Regular Securities. See "--REMICs - Taxation of
Owners of Regular Securities" above.
(3) Sale or Exchange
If the FASIT Regular Securities are sold, the holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "--REMICs--Taxation of Owners of Regular
Securities--Sale or Exchange of Regular Securities."
Taxation of Owners of High-Yield Interests
(1) General
The treatment of high-yield interests is intended to ensure that the
return on instruments issued by a FASIT yielding an equity-like return
continues to have a corporate level tax. High-yield interests are subject to
special rules regarding the eligibility of holders of this interest, and the
ability of these holders to offset income derived from their FASIT Security
with losses.
High-yield interests may only be held by Eligible Corporations, other
FASITs, and dealers in securities who acquire such interests as inventory
(together, "Eligible Holders").
o An "Eligible Corporation" is a taxable domestic C corporation that
does not qualify as a regulated investment company, a real estate
investment trust, a REMIC, or a cooperative.
If a securities dealer (other than an Eligible Corporation) initially
acquires a high-yield interest as inventory, but later begins to hold it for
investment, the dealer will be subject to an excise tax equal to the income
from the high-yield interest multiplied by the highest corporate income tax
rate. In addition, transfers of high-yield interests to a person that is not
an Eligible Holder will be disregarded for federal income tax purposes, and
the transferor will continue to be treated as the holder of the high-yield
interest.
In addition, the FASIT Provisions contain an anti-abuse rule that imposes
corporate income tax on income derived from a FASIT Regular Interest that is
held by a pass-through entity (other than another FASIT) that issues debt or
equity securities backed by the FASIT Regular Interest and that have an
original yield to maturity that is both five percentage points above the
applicable federal rate and more than the yield on the FASIT Regular Interest.
The excise tax is limited to those arrangements that have a principal purpose
of avoiding the ownership restriction relating to high-yield interests.
(2) Treatment of Losses
The holder of a high-yield interest may not use non-FASIT current losses
or net operating loss carryforwards or carrybacks to offset any income derived
from the high-yield interest, for either regular federal income tax purposes
or for alternative minimum tax purposes.
Taxation of FASIT Ownership Security
(1) General
A FASIT Ownership Security represents the residual equity interest in a
FASIT. As such, the holder of a FASIT Ownership Security determines its
taxable income by taking into account all assets, liabilities, and items of
income, gain, deduction, loss, and credit of a FASIT. The holder, however,
does not take into account any item of income, gain or deduction allocable to
a "prohibited transaction" as discussed below. In general, the character of
the income to the holder of a FASIT Ownership Security will be the same as the
character of the income to the FASIT, except that any tax-exempt interest
income taken into account by the holder of a FASIT Ownership Security is
treated as ordinary income. In determining that taxable income, the holder of
a FASIT Ownership Security must determine the amount of interest, original
issue discount, market discount, and premium recognized with respect to each
debt instrument held by the FASIT according to a constant yield methodology
and under an accrual method of accounting. In addition, a holder of a FASIT
Ownership Security is subject to the same limitations on their ability to use
losses to offset income from their FASIT Regular Securities as are holders of
high-yield interest. See "--Taxation of Owners of High-Yield Interests" above.
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Security. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where
within six months before or after the disposition, the seller of the Security
acquires any other FASIT Ownership Security that is economically comparable to
a FASIT Ownership Security. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT Ownership Security
was required to be marked-to-market under Section 475 of the Code by the
holder, then Section 475 of the Code will continue to apply to these
securities, except that the amount realized under the mark-to-market rules
cannot be less than the securities' value determined after applying special
valuation rules contained in the FASIT Provisions. Those special valuation
rules generally require that the value of debt instruments that are not traded
on an established securities market be determined by calculating the present
value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable federal rate, compounded
semi-annually.
(2) Prohibited Transaction
The holder of a FASIT Ownership Security is required to pay a penalty
excise tax equal to 100 percent of net income derived from:
(1) an asset that is not a permitted asset;
(2) any disposition of an asset other than a permitted disposition
(as described below);
(3) any income attributable to loans originated by the FASIT; and
(4) compensation for services (other than fees for a waiver,
amendment, or consent with respect to permitted assets other than
foreclosure property).
A permitted disposition is any disposition of any permitted asset:
(1) arising from complete liquidation of a class of regular
interest;
(2) incident to the foreclosure, default (or imminent default) on
the asset;
(3) incident to the bankruptcy or insolvency of the FASIT;
(4) necessary to avoid a default on any indebtedness of the a FASIT
attributable to a default (or imminent default) on an asset of the FASIT;
(5) to facilitate a clean-up call; or
(6) to substitute a permitted debt instrument for another permitted
debt instrument or in order to reduce over-collateralization by
distributing a debt instrument contributed by the holder of the FASIT
Ownership Security to such holder, but only if a principal purpose of
acquiring the debt instrument which is disposed of was not the
recognition of gain (or the reduction of a loss) arising from an increase
in its market value after its acquisition by the FASIT.
Notwithstanding this rule, the holder of an Ownership Security may currently
deduct its losses incurred in prohibited transactions in computing its taxable
income for the year of the loss. A Series of Notes or Certificates, as
applicable, for which a FASIT election is made generally will be structured in
order to avoid application of the prohibited transactions tax.
(3) Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to the
same extent as holders of REMIC Securities.
Grantor Trust Funds
Characterization. For each series of Grantor Trust Securities, Federal
Tax Counsel will deliver its opinion that the Grantor Trust Fund will not be
classified as an association taxable as a corporation and that the Grantor
Trust Fund will be classified as a grantor trust under subpart E, Part I of
subchapter J of the Code. In this case, beneficial owners of Grantor Trust
Securities (referred to in this Prospectus as "Grantor Trust Securityholders")
will be treated for federal income tax purposes as owners of a portion of the
Grantor Trust Fund's assets as described below.
Taxation of Grantor Trust Securityholders. Subject to the discussion
below under "Stripped Certificates" and "Subordinated Certificates," each
Grantor Trust Securityholder will be treated as the owner of a pro rata
undivided interest in the assets of the Grantor Trust Fund. Accordingly, and
subject to the discussion below of the recharacterization of the servicing
fee, each Grantor Trust Securityholder must include in income its pro rata
share of the interest and other income from the assets of the Grantor Trust
Fund, including any interest, original issue discount, market discount,
prepayment fees, assumption fees, and late payment charges with respect to the
assets, and, subject to limitations discussed below, may deduct its pro rata
share of the fees and other deductible expenses paid by the Grantor Trust
Fund, at the same time and to the same extent as these items would be included
or deducted by the Grantor Trust Securityholder if the Grantor Trust
Securityholder held directly a pro rata interest in the assets of the Grantor
Trust Fund and received and paid directly the amounts received and paid by the
Grantor Trust Fund. Any amounts received by a Grantor Trust Securityholder in
lieu of amounts due with respect to any asset of the Grantor Trust Fund
because of a default or delinquency in payment will be treated for federal
income tax purposes as having the same character as the payments they replace.
Each Grantor Trust Securityholder will be entitled to deduct its pro rata
share of servicing fees, prepayment fees, assumption fees, any loss recognized
upon an assumption and late payment charges retained by the servicer, provided
that these amounts are reasonable compensation for services rendered to the
Grantor Trust Fund. Grantor Trust Securityholders that are individuals,
estates or trusts will be entitled to deduct their share of expenses only to
the extent these expenses plus all other miscellaneous itemized deductions
exceed two percent of the Grantor Trust Securityholder's adjusted gross
income, and will be allowed no deduction for these expenses in determining
their liabilities for alternative minimum tax. In addition, Section 68 of the
Code provides that the amount of itemized deductions otherwise allowable for
the taxable year for an individual whose adjusted gross income exceeds a
prescribed threshold amount will be reduced by the lesser of (1) 3% of the
excess of adjusted gross income over the specified threshold amount or (2) 80%
of the amount of itemized deductions otherwise allowable for the applicable
taxable year. In the case of a partnership that has 100 or more partners and
elects to be treated as an "electing large partnership," 70% of the
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 servicing compensation to be received by the servicer may be
questioned by the IRS as exceeding a reasonable fee for the services being
performed in exchange for the servicing compensation, and a portion of the
servicing compensation could be recharacterized as an ownership interest
retained by the servicer or other party in a portion of the interest payments
to be made with respect to the Grantor Trust Fund's assets. In this event, a
certificate might be treated as a Stripped Certificate subject to the stripped
bond rules of Section 1286 of the Code, and either the original issue discount
or the market discount rules. See the discussion below under "--Stripped
Certificates". Except as discussed below under "Stripped Certificates" or
"--Subordinated Certificates," this discussion assumes that the servicing fees
paid to the servicer do not exceed reasonable servicing compensation.
A purchaser of a Grantor Trust Security will be treated as purchasing an
interest in each asset in the Grantor Trust Fund at a price determined by
allocating the purchase price paid for the certificate among all asset of the
Grantor Trust Fund in proportion to their fair market values at the time of
the purchase of the certificate. To the extent that the portion of the
purchase price of a Grantor Trust Security allocated to an asset of the
Grantor Trust Fund is less than or greater than the stated redemption price at
maturity of the asset, the interest in the asset will have been acquired at a
discount or premium. See "--Market Discount" and "--Premium," below.
The treatment of any discount on an asset of the Grantor Trust Fund will
depend on whether the discount represents original issue discount or market
discount. Except as indicated otherwise in the applicable Prospectus
Supplement, it is not expected that any asset of the Grantor Trust Fund (other
than a Stripped Agency Security or other instrument evidencing ownership of
specific interest and/or principal of a particular bond) will have original
issue discount (except as discussed below under "Stripped Certificates" or
"Subordinated Certificates"). For the rules governing original issue discount,
see "REMICs--Taxation of Owners of Regular Securities--Original Issue
Discount" above.
The information provided to Grantor Trust Securityholders will not
include information necessary to compute the amount of discount or premium, if
any, at which an interest in each asset of the Grantor Trust Fund is acquired.
Market Discount. A Grantor Trust Securityholder that acquires an
undivided interest in the Grantor Trust Fund's assets may be subject to the
market discount rules of Sections 1276 through 1278 to the extent an undivided
interest in an asset of the Grantor Trust Fund is considered to have been
purchased at a "market discount". For a discussion of the market discount
rules under the Code, see "REMICs--Taxation of Owners of Regular
Securities--Market Discount" above. As discussed above, to the extent an asset
of the Grantor Trust Fund is a Stripped Agency Security or other instrument
evidencing ownership of specific interest and/or principal of a particular
bond, it will be subject to the rules relating to original issue discount (in
lieu of the rules relating to market discount). See "REMICs--Taxation of
Owners of Regular Securities--Original Issue Discount" above.
Premium. To the extent a Grantor Trust Securityholder is considered to
have purchased an undivided interest in an asset of the Grantor Trust Fund for
an amount that is greater than the stated redemption price at maturity of the
interest, the Grantor Trust Securityholder will be considered to have
purchased the interest in the asset with "amortizable bond premium" equal in
amount to the excess. For a discussion of the rules applicable to amortizable
bond premium, see "REMICs--Taxation of Owners of Regular
Securities--Amortizable Premium" above.
Status of the Grantor Trust Securities. Except for that portion of a
trust fund consisting of unsecured home improvement loans and except as
qualified below, a Grantor Trust Security owned by a:
o "domestic building and loan association" within the meaning of Code
Section 7701(a)(19) will be considered to represent "loans . . .
secured by an interest in real property" within the meaning of Code
Section 7701(a)(19)(C)(v), provided that the real property securing
the mortgage loans represented by that Grantor Trust Security is of
the type described in that section of the Code.
o real estate investment trust will be considered to represent "real
estate assets" within the meaning of Code Section 856(c)(4)(A) to
the extent that the assets of the related Grantor Trust Fund consist
of qualified assets, and interest income on those assets will be
considered "interest on obligations secured by mortgages on real
property" to that extent within the meaning of Code Section
856(c)(3)(B).
o REMIC will be considered to represent an "obligation (including any
participation or certificate of beneficial ownership therein) which
is principally secured by an interest in real property" within the
meaning of Code Section 860G(a)(3)(A) to the extent that the assets
of the related Grantor Trust Fund consist of "qualified mortgages"
within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be characterized
in their entirety under the Code provisions cited in the first two bullet
points of the immediately preceding paragraph or whether the amount qualifying
for that treatment must be reduced by the amount of the Buydown Mortgage
Funds. Further, although it is not entirely clear, Grantor Trust Certificates
that are Stripped Certificates (as described below under "Stripped
Certificates") should be treated as qualifying under the Code provisions cited
in the bullet points above to the same extent as Grantor Trust Certificates
that are not Stripped Certificate. Grantor Trust Securityholders are urged to
consult their own tax advisors concerning the characterization of the
securityholder's investment for federal income tax purposes.
Stripped Certificates. Some classes of certificates may be subject to the
stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates." In general, a
Stripped Certificate will be subject to the stripped bond rules where there
has been a separation of ownership of the right to receive some or all of the
principal payments on a mortgage loan held by the Grantor Trust Fund from
ownership of the right to receive some or all of the related interest
payments. Generally, where a separation has occurred, under the stripped bond
rules of Section 1286 of the Code, the holder of a right to receive a
principal or interest payment on the bond is required to accrue into income,
on a constant yield basis under rules governing original issue discount (see
"REMICs--Taxation of Owners of Regular Securities--Original Issue Discount"),
the difference between the holder's initial purchase price for the right to
receive principal or interest, and the principal or interest payment to be
received with respect to that right. However, a holder of a Stripped
Certificate will account for any discount on the Stripped Certificate (other
than an interest treated as a "stripped coupon") as market discount rather
than original issue discount if either (i) the amount of original issue
discount with respect to the Stripped Certificate was treated as zero under
the original issue discount de minimis rule when the Stripped Certificate was
stripped or (ii) no more than 100 basis points (including any amount of
servicing in excess of reasonable servicing) is stripped off from the mortgage
assets.
Certificates will constitute Stripped Certificates and will be subject to
these rules under various circumstances, including the following:
o if any servicing compensation is deemed to exceed a reasonable
amount;
o if the company or any other party retains a retained yield with
respect to the assets held by the Grantor Trust Fund;
o if two or more classes of certificates are issued representing the
right to non-pro rata percentages of the interest or principal
payments on the Grantor Trust Fund's assets; or
o if certificates are issued which represent the right to
interest-only payments or principal-only payments.
The tax treatment of the Stripped Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the trustee intends to treat each Stripped Certificate as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect
to a Stripped Certificate must be included in ordinary gross income for
federal income tax purposes as it accrues in accordance with the constant
yield method that takes into account the compounding of interest and this
accrual of income may be in advance of the receipt of any cash attributable to
that income. See "REMICs--Taxation of Owners of Regular Securities--Original
Issue Discount" above. For purposes of applying the original issue discount
provisions of the Code, the issue price of a Stripped Certificate will be the
purchase price paid by each holder of the Stripped Certificate and the stated
redemption price at maturity may include the aggregate amount of all payments
to be made with respect to the Stripped Certificate whether or not denominated
as interest. The amount of original issue discount with respect to a Stripped
Certificate may be treated as zero under the original issue discount de
minimis rules described above.
Subordinated Certificates. In the event the Grantor Trust Fund issues two
classes of Grantor Trust Securities that are identical except that one class
is a subordinate class, with a relatively high certificate pass-through rate,
and the other is a senior class, with a relatively low certificate
pass-through rate (referred to in this Prospectus as the "Subordinate
Certificates" and "Senior Certificates", respectively), the Grantor Trust
Securityholders in the aggregate will be deemed to have acquired the following
assets: (1) the principal portion of each mortgage loan plus a portion of the
interest due on each mortgage loan (the "Grantor Trust Fund Stripped Bond"),
and (2) a portion of the interest due on each mortgage loan equal to the
difference between the Interest Rate on the Subordinate Certificates and the
Interest Rate on the Senior Certificates, if any, which difference is then
multiplied by the Subordinate Class Percentage (the "Grantor Trust Fund
Stripped Coupon"). The "Subordinate Class Percentage" equals the initial
aggregate principal amount of the Subordinate Certificates divided by the sum
of the initial aggregate principal amount of the Subordinate Certificates and
the Senior Certificates. The "Senior Class Percentage" equals the initial
aggregate principal amount of the Senior Certificates divided by the sum of
the initial aggregate principal amount of the Subordinate Certificates and the
Senior Certificates.
The Senior Certificateholders in the aggregate will own the Senior Class
Percentage of the Grantor Trust Fund Stripped Bond and accordingly each Senior
Certificateholder will be treated as owning its pro rata share of such asset.
The Senior Certificateholders will not own any portion of the Grantor Trust
Fund Stripped Coupon. The Subordinate Certificateholders in the aggregate own
both the Subordinate Class Percentage of the Grantor Trust Fund Stripped Bond
plus 100% of the Grantor Trust Fund Stripped Coupon, if any, and accordingly
each Subordinate Certificateholder will be treated as owning its pro rata
share in both assets. The Grantor Trust Fund Stripped Bond will be treated as
a "stripped bond" and the Grantor Trust Fund Stripped Coupon will be treated
as "stripped coupons" within the meaning of Section 1286 of the Code.
Although not entirely clear, the interest income on the Subordinate
Certificates and the portion of the servicing fee allocable to such
certificates that does not constitute excess servicing will be treated by the
Grantor Trust Fund as qualified stated interest, assuming the interest with
respect to the mortgage loans held by the Grantor Trust Fund would otherwise
qualify as qualified stated interest. Accordingly, except to the extent
modified below, the income of the Subordinate Certificates will be reported in
the same manner as described generally above for holders of Senior
Certificates.
If the Subordinate Certificateholders receive distribution of less than
their share of the Grantor Trust Fund's receipts of principal or interest (the
"Shortfall Amount") because of the subordination of the Subordinate
Certificates, holders of Subordinate Certificates would probably be treated
for federal income tax purposes as if they had
o received as distributions their full share of receipts;
o paid over to the Senior Certificateholders an amount equal to the
Shortfall Amount; and
o retained the right to reimbursement of the relevant amounts to the
extent these amounts are otherwise available as a result of
collections on the mortgage loans or amounts available from a
reserve account or other form of credit enhancement, if any.
Under this analysis,
o Subordinate Certificateholders would be required to accrue as
current income any interest income, original issue discount, or (to
the extent paid on assets of the Grantor Trust Fund) accrued market
discount of the Grantor Trust Fund that was a component of the
Shortfall Amount, even though that amount was in fact paid to the
Senior Certificateholders;
o a loss would only be allowed to the Subordinate Certificateholders
when their right to receive reimbursement of the Shortfall Amount
became worthless (i.e., when it becomes clear that amount will not
be available from any source to reimburse the loss); and
o reimbursement of the Shortfall Amount prior to a claim of
worthlessness would not be taxable income to Subordinate
Certificateholders because the amount was previously included in
income.
Those results should not significantly affect the inclusion of income for
Subordinate Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Subordinate Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount income.
Election to Treat All Interest as Original Issue Discount. The Treasury
Regulations relating to original issue discount permit a Grantor Trust
Securityholder to elect to accrue all interest, discount, including de minimis
market or original issue discount, reduced by any premium, in income as
interest, based on a constant yield method. If an election were to be made
with respect to an interest in a mortgage loan with market discount, the
Grantor Trust Securityholder would be deemed to have made an election to
include in income currently market discount with respect to all other debt
instruments having market discount that the Grantor Trust Securityholder
acquires during the year of the election or afterward. See "--Market Discount"
above. Similarly, a Grantor Trust Securityholder that makes this election for
an interest in a mortgage loan that is acquired at a premium will be deemed to
have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that the Grantor Trust
Securityholder owns at the beginning of the first taxable year to which the
election applies or acquires afterward. See "--Premium" above. The election to
accrue interest, discount and premium on a constant yield method with respect
to a Grantor Trust Security is irrevocable.
Prepayments. The Taxpayer Relief Act of 1997 (the "1997 Act") contains a
provision requiring original issue discount on any pool of debt instruments
the yield on which may be affected by reason of prepayments be calculated
taking into account the Prepayment Assumption and requiring the discount to be
taken into income on the basis of a constant yield to assumed maturity taking
account of actual prepayments. The legislative history to the 1986 Act states
that similar rules apply with respect to market discount and amortizable bond
premium on debt instruments.
Sale or Exchange of a Grantor Trust Security. Sale or exchange of a
Grantor Trust Security prior to its maturity will result in gain or loss equal
to the difference, if any, between the amount realized, exclusive of amounts
attributable to accrued and unpaid interest (which will be treated as ordinary
income allocable to the related asset of the Grantor Trust Fund), and the
owner's adjusted basis in the Grantor Trust Security. The adjusted basis
generally will equal the seller's cost for the Grantor Trust Security,
increased by the original issue discount and any market discount included in
the seller's gross income with respect to the Grantor Trust Security, and
reduced, but not below zero, by any premium amortized by the seller and by
principal payments on the Grantor Trust Security previously received by the
seller. The gain or loss will, except as discussed below, be capital gain or
loss to an owner for which the assets of the Grantor Trust Fund represented by
a Grantor Trust Security are "capital assets" within the meaning of Section
1221. A capital gain or loss will be long-term or short-term depending on
whether or not the Grantor Trust Security has been owned for the long-term
capital gain holding period, currently more than one year.
Notwithstanding the foregoing, any gain realized on the sale or exchange
of a Grantor Trust Security will be ordinary income to the extent of the
seller's interest in accrued market discount on Grantor Trust Fund assets not
previously taken into income. See "--Market Discount," above. Further, Grantor
Trust Securities will be "evidences of indebtedness" within the meaning of
Section 582(c)(1), so that gain or loss recognized from the sale of a Grantor
Trust Security by a bank or thrift institution to which such section applied
will be treated as ordinary gain or loss.
Foreign Investors in Grantor Trust Securities. A holder of a Grantor
Trust Security who is not a "U.S. person" (as defined above at "REMICs--Tax
Related Restrictions on Transfer of Residual Securities--Foreign Investors")
and is not subject to federal income tax as a result of any direct or indirect
connection to the United States other than its ownership of a Grantor Trust
Security generally will not be subject to United States income or withholding
tax in respect of payments of interest or original issue discount on its
Grantor Trust Security to the extent attributable to debt obligations held by
the Grantor Trust Fund that were originated after July 18, 1984, provided that
the Grantor Trust Securityholder complies to the extent necessary with certain
certification requirements which generally relate to the identity of the
beneficial owner and the status of the beneficial owner as a person that is
not a U.S. person. Interest or original issue discount on a Grantor Trust
Security attributable to debt obligations held by the Grantor Trust Fund that
were originated prior to July 19, 1984 will be subject to a 30% withholding
tax (unless such tax is reduced or eliminated by an applicable tax treaty).
All holders of Grantor Trust Securities should consult their tax advisors
regarding the tax documentation and certifications that must be provided to
secure any applicable exemptions from United States withholding taxes.
Any capital gain realized on the sale or other taxable disposition of a
Grantor Trust Security by a Non-U.S. Person (as defined above at
"REMICs--Taxation of Certain Foreign Investors--Regular Securities") generally
will be exempt from United States federal income and withholding tax, provided
that (i) such gain is not effectively connected with the conduct of a trade or
business in the United States by the Non-U.S. Person and (ii) in the case of
an individual Non-U.S. Person, the Non-U.S. Person is not present in the
United States for 183 days or more in the taxable year.
If the interest, gain or income with respect to a Grantor Trust Security
held by a Non-U.S. Person is effectively connected with the conduct of a trade
or business in the United States by the Non-U.S. Person (although exempt from
the withholding tax previously discussed if the holder provides an appropriate
statement establishing that such income is so effectively connected), the
holder generally will be subject to United States federal income tax on the
interest, gain or income at regular federal income tax rates. In addition, if
the Non-U.S. Person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits,"
within the meaning of the Code, for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
Backup Withholding. Distributions made on the Grantor Trust Securities
and proceeds from the sale of the Grantor Trust Securities will be subject to
a "backup" withholding tax of 31% if, in general, the Grantor Trust
Securityholder fails to comply with particular identification procedures,
unless the holder is an exempt recipient under applicable provisions of the
Code and, if necessary, demonstrates such status. Any amounts so withheld
would be refunded by the IRS or allowable as a credit against the Grantor
Trust Securityholder's federal income tax.
Partnership Trust Funds and Disregarded Trust Funds
Classification of Trust Funds
For each series of Partnership Certificates or Debt Securities, Stroock &
Stroock & Lavan LLP will deliver its opinion that the trust fund will not be a
taxable mortgage pool or an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. This opinion will be
based on the assumption that the terms of the related Agreement and related
documents will be complied with, and on counsel's opinion that the nature of
the income of the trust fund will exempt it from the rule that some publicly
traded partnerships are taxable as corporations.
Taxation of Debt Securityholders
The depositor will agree, and the securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
for each series of Debt Securities, Stroock & Stroock & Lavan LLP will deliver
its opinion that the Debt Securities will be classified as indebtedness for
federal income tax purposes. The discussion below assumes this
characterization of the Debt Securities is correct.
If, contrary to the opinion of counsel, the Internal Revenue Service
successfully asserted that the Debt Securities were not debt for federal
income tax purposes, the Debt Securities might be treated as equity interests
in the trust fund. If so treated, the trust fund might be treated as a
publicly traded partnership that would be taxable as a corporation unless it
met particular qualifying income tests, and the resulting taxable corporation
would not be able to reduce its taxable income by deductions for interest
expense on Debt Securities recharacterized as equity. Treatment of the Debt
Securities as equity interests in a partnership could have adverse tax
consequences to some holders, even if the trust fund were not treated as a
publicly traded partnership taxable as a corporation. For example, income
allocable to foreign holders might be subject to United States tax and United
States tax return filing and withholding requirements, income allocable to
tax-exempt holders might constitute "unrelated business taxable income" (if
some, but not all, of the Debt Securities were recharacterized as equity in a
partnership), individual holders might be subject to limitations on their
ability to deduct their share of trust fund expenses, and income from the
trust fund's assets would be taxable to owners of Debt Securities without
regard to whether cash distributions are made to such owners and without
regard to the owners' method of tax accounting.
Debt Securities generally will be subject to the same rules of taxation
as Regular Securities issued by a REMIC, as described above, except that (1)
income reportable on Debt Securities is not required to be reported under the
accrual method unless the holder otherwise uses the accrual method and (2) the
special 110% yield rule treating a portion of the gain on sale or exchange of
a Regular Security as ordinary income is inapplicable to Debt Securities. See
"--REMICs--Taxation of Owners of Regular Securities" and "--Sale or Exchange
of Regular Securities."
Further, for federal income tax purposes, (i) Debt Securities held by a
thrift institution taxed as a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code; (ii) interest on Debt
Securities held by a real estate investment trust will not be treated as
"interest on obligations secured by mortgages on real property or on interests
in real property "within the meaning of Code Section 856(c)(3)(B); (iii) Debt
Securities held by a real estate investment trust will not constitute "real
estate assets" or "Government securities" within the meaning of Section
856(c)(4)(A) of the Code; (iv) Debt Securities held by a regulated investment
company will not constitute "Government securities" within the meaning of
Section 851(b)(3)(A)(i) of the Code; and (v) Debt Securities will not
constitute "qualified mortgages" with in the meaning of Section 860G(a)(3) of
the Code for REMICs.
Taxation of Owners of Partnership Certificates
(1) Treatment of the Trust Fund as a Partnership
The Partnership Trust Fund will agree, and the related owners of
Partnership Certificates ("Partnership Certificate Owners") will agree by
their purchase of Partnership Certificates, if there is more than one
Partnership Certificate Owner, to treat the Partnership Trust Fund as a
partnership for purposes of federal and state income tax, franchise tax and
any other tax measured in whole or in part by income, with the assets of the
partnership being the assets held by the Partnership Trust Fund, the partners
of the partnership being the Partnership Certificate Owners, including, to the
extent relevant, the depositor in its capacity as recipient of distributions
from any reserve fund, and the Debt Securities, if any, being debt of the
partnership, and if there is one Partnership Certificate Owner, to treat the
Partnership Certificate Owner as the owner of the assets of the Partnership
Trust Fund and to treat the Partnership Trust Fund as a disregarded entity.
However, the proper characterization of the arrangement involving the
Partnership Trust Fund, the Partnership Certificates, the Debt Securities and
the depositor is not certain because there is no authority on transactions
closely comparable to that contemplated in this prospectus.
A variety of alternative characterizations are possible. For example,
because the Partnership Certificates have certain features characteristic of
debt, the Partnership Certificates might be considered debt of the Partnership
Trust Fund. Generally, provided such Partnership Certificates are issued at or
close to face value, any such characterization would not result in materially
adverse tax consequences to holders of Partnership Certificates as compared to
the consequences from treatment of the Partnership Certificates as equity in a
partnership, described below. The following discussion assumes that the
Partnership Certificates represent equity interests in a partnership. The
following discussion also assumes that all payments on the Partnership
Certificates are denominated in U.S. dollars, none of the Partnership
Certificates have Interest Rates which would qualify as contingent interest
under the Treasury regulations relating to original issue discount, and that a
series of securities includes a single class of Partnership Certificates. If
these conditions are not satisfied with respect to any given series of
Partnership Certificates, additional tax considerations with respect to such
Partnership Certificates will be disclosed in the applicable prospectus
supplement.
(2) Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to
federal income tax. Rather, each Partnership Certificate Owner will be
required to take into account separately the Partnership Certificate Owner's
allocable share of income, gains, losses, deductions and credits of the
Partnership Trust Fund, whether or not there is a corresponding cash
distribution. Thus, cash basis holders will in effect be required to report
income from the Partnership Certificates on the accrual basis and Partnership
Certificate Owners may become liable for taxes on Partnership Trust Fund
income even if they have not received cash from the Partnership Trust Fund to
pay the taxes. The Partnership Trust Fund's income will consist primarily of
interest and finance charges earned on the related mortgage loans, including
appropriate adjustments for market discount, original issue discount and bond
premium, and any gain upon collection or disposition of the mortgage loans.
The Partnership Trust Fund's deductions will consist primarily of
interest accruing with respect to the Debt Securities, servicing and other
fees, and losses or deductions upon collection or disposition of mortgage
loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(i.e., the Agreement and related documents). The Agreement will provide, in
general, that the Partnership Certificate Owners will be allocated taxable
income of the Partnership Trust Fund for each month equal to the sum of:
o the interest or other income that accrues on the Partnership
Certificates in accordance with their terms for the relevant month
including, as applicable, interest accruing at the related
Partnership Certificate Interest Rate for that month and interest on
amounts previously due on the Partnership Certificates but not yet
distributed;
o any income of the Partnership Trust Fund attributable to discount on
the related mortgage loans that corresponds to any excess of the
principal amount of the Partnership Certificates over their initial
issue price;
o any prepayment premium payable to the Partnership Certificate Owners
for the applicable month; and
o any other amounts of income payable to the Partnership Certificate
Owners for the applicable month.
The allocation will be reduced by any amortization by the Partnership Trust
Fund of premium on mortgage loans that corresponds to any excess of the issue
price of Partnership Certificates over their principal amount. All remaining
taxable income of the Partnership Trust Fund will be allocated to the
depositor. Losses will generally be allocated in the manner in which they are
borne.
Based on the economic arrangement of the parties, the foregoing approach
for allocating income of the Partnership Trust Fund should be permissible
under applicable Treasury regulations, although no assurance can be given that
the IRS would not require a greater amount of income to be allocated to
Partnership Certificate Owners. Moreover, even under the foregoing method of
allocation, Partnership Certificate Owners may be allocated income equal to
the entire Partnership Certificate Interest Rate plus the other items
described above, even though the Partnership Trust Fund might not have
sufficient cash to make current cash distributions of the amount. In addition,
because tax allocations and tax reporting will be done on a uniform basis for
all Partnership Certificate Owners, but Partnership Certificate Owners may be
purchasing Partnership Certificates at different times and at different
prices, Partnership Certificate Owners may be required to report on their tax
returns taxable income that is greater or less than the amount reported to
them by the Partnership Trust Fund.
Assuming Debt Securities are also issued, all or substantially all of the
taxable income allocated to a Partnership Certificate Owner 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 the holder under the Code.
An individual taxpayer's share of expenses of the Partnership Trust Fund,
including fees to the servicer, but not interest expense, would be
miscellaneous itemized deductions and thus deductible only to the extent such
expenses plus all other miscellaneous itemized deductions exceeds two percent
of the individual's adjusted gross income. An individual taxpayer will be
allowed no deduction for his share of expenses of the Partnership Trust Fund,
other than interest, in determining his liability for alternative minimum tax.
In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds a prescribed threshold amount will be reduced by
the lesser of (1) 3% of the excess of adjusted gross income over the specified
threshold amount or (2) 80% of the amount of itemized deductions otherwise
allowable for the applicable taxable year. Accordingly, deductions might be
disallowed to the individual in whole or in part and might result in the
Partnership Certificate Owner being taxed on an amount of income that exceeds
the amount of cash actually distributed to the holder over the life of the
Partnership Trust Fund. 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 Partnership Trust Fund intends to make all tax calculations relating
to income and allocations to Partnership Certificate Owners on an aggregate
basis to the extent relevant. If the IRS were to require that the calculations
be made separately for each mortgage loan, the calculations may result in some
timing and character differences under some circumstances.
(3) Discount and Premium
The purchase price paid by the Partnership Trust Fund for the related
mortgage loans may be greater or less than the remaining principal balance of
the mortgage loans at the time of purchase. If so, the mortgage loans will
have been acquired at a premium or market discount, as the case may be. See
"REMICs--Taxation of Owners of Regular Securities--Acquisition Premium" and
"-- Market Discount" above. As indicated above, the Partnership Trust Fund
will make this calculation on an aggregate basis, but it is possible that the
IRS might require that it be recomputed on a mortgage loan-by-mortgage loan
basis. Further, with respect to any asset of the Partnership Trust Fund that
is a Stripped Agency Security or other instrument evidencing ownership of
specific interest and/or principal of a particular bond, it will be subject to
the rules relating to original issue discount with respect to such security or
instrument (in lieu of the rules relating to market discount). See
"REMICs--Taxation of Owners of Regular Securities--Original Issue Discount"
above.
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include any
market discount in income currently as it accrues over the life of the
mortgage loans or to offset any premium against interest income on the
mortgage loans. As indicated above, a portion of the market discount income or
premium deduction may be allocated to Partnership Certificate Owners.
(4) Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be deemed
to terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If a termination occurs under Section 708 of the Code, the
Partnership Trust Fund will be considered to contribute its assets to a new
Partnership Trust Fund, which would be treated as a new partnership, in
exchange for Partnership Certificates in the new Partnership Trust Fund. The
original Partnership Trust Fund will then be deemed to distribute the
Partnership Certificates in the new Partnership Trust Fund to each of the
owners of Partnership Certificates in the original Partnership Trust Fund in
liquidation of the original Partnership Trust Fund. The Partnership Trust Fund
will not comply with particular technical requirements that might apply when a
constructive termination occurs. As a result, the Partnership Trust Fund may
be subject to some tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Partnership Trust
Fund might not be able to comply with these requirements due to lack of data.
(5) Disposition of Partnership Certificates
Generally, capital gain or loss will be recognized on a sale of
Partnership Certificates in an amount equal to the difference between the
amount realized and the seller's tax basis in the Partnership Certificates
sold. Any gain or loss would be long-term capital gain or loss if the
Partnership Certificate Owner's holding period exceeded one year. A
Partnership Certificate Owner's tax basis in a Partnership Certificate will
generally equal its cost, increased by its share of Partnership Trust Fund
income allocable to the Partnership Certificate Owner and decreased by any
distributions received or losses allocated with respect to the Partnership
Certificate. In addition, both the tax basis in the Partnership Certificates
and the amount realized on a sale of a Partnership Certificate would include
the Partnership Certificate Owner's share, determined under Treasury
Regulations, of the Debt Securities and other liabilities of the Partnership
Trust Fund. A Partnership Certificate Owner acquiring Partnership Certificates
at different prices will generally be required to maintain a single aggregate
adjusted tax basis in the Partnership Certificates and, upon a sale or other
disposition of some of the Partnership Certificates, allocate a portion of the
aggregate tax basis to the Partnership Certificates sold, rather than
maintaining a separate tax basis in each Partnership Certificate for purposes
of computing gain or loss on a sale of that Partnership Certificate.
If a Partnership Certificate Owner is required to recognize an aggregate
amount of income (not including income attributable to disallowed itemized
deductions described above) over the life of the Partnership Certificates that
exceeds the aggregate cash distributions with respect to the Partnership
Certificates, the excess will generally give rise to a capital loss upon the
retirement of the Partnership Certificates.
(6) Allocations Between Transferors and Transferees.
In general, the Partnership Trust Fund's taxable income and losses will
be determined each Due Period and the tax items for a particular Due Period
will be apportioned among the Partnership Certificate Owners in proportion to
the principal amount of Partnership Certificates owned by them as of the close
of the last day of that Due Period. As a result, a Partnership Certificate
Owner purchasing Partnership Certificates may be allocated tax items, which
will affect the purchaser's tax liability and tax basis, attributable to
periods before the actual transaction.
The use of a Due Period convention may not be permitted by existing
Treasury regulations. If a Due Period convention is not allowed, or only
applies to transfers of less than all of the partner's interest, taxable
income or losses of the Partnership Trust Fund might be reallocated among the
Partnership Certificate Owners. The Partnership Trust Fund's method of
allocation between transferors and transferees may be revised to conform to a
method permitted by future laws, regulations or other IRS guidance.
(7) Section 731 Distributions
In the case of any distribution to a Partnership Certificate Owner, no
gain will be recognized to that Partnership Certificate Owner to the extent
that the amount of any money distributed for that Partnership Certificate
exceeds the adjusted basis of that Partnership Certificate Owner's interest in
the Partnership Certificate. To the extent that the amount of money
distributed exceeds that Partnership Certificate Owner's adjusted basis, gain
will be currently recognized. In the case of any distribution to a Partnership
Certificate Owner, no loss will be recognized except upon a distribution in
liquidation of a Partnership Certificate Owner's interest. Any gain or loss
recognized by a Partnership Certificate Owner generally will be capital gain
or loss.
(8) Section 754 Election
In the event that a Partnership Certificate Owner sells its Partnership
Certificates at a profit (or loss), the purchasing Partnership Certificate
Owner will have a higher (or lower) basis in the Partnership Certificates than
the selling Partnership Certificate Owner had. The tax basis of the
Partnership Trust Fund's assets will not be adjusted to reflect that higher
(or lower) basis unless the Partnership Trust Fund were to file an election
under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the
Partnership Trust Fund current does not intend to make an election under
Section 754 of the Code. As a result, Partnership Certificate Owners might be
allocated a greater or lesser amount of Partnership Trust Fund income than
would be appropriate based on their own purchase price for Partnership
Certificates.
(9) Administrative Matters
The trustee is required to keep or cause to be kept complete and accurate
books of the Partnership Trust Fund. The trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Partnership Trust Fund and will report each Partnership Certificate Owner's
allocable share of items of Partnership Trust Fund income and expense to
Partnership Certificate Owners and the IRS on Schedule K-1. The Partnership
Trust Fund will provide the Schedule K-1 information to nominees that fail to
provide the Partnership Trust Fund with the information statement described
below and the nominees will be required to forward this information to the
beneficial owners of the Partnership Certificates. Generally, holders must
timely file tax returns that are consistent with the information return filed
by the Partnership Trust Fund or be subject to penalties unless the holder
notifies the IRS of all the inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Certificates as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing specific
information on the nominee, the beneficial owners and the Partnership
Certificates so held. The information includes (1) the name, address and
taxpayer identification number of the nominee and (2) as to each beneficial
owner
o the name, address and identification number of such person,
o whether such 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 particular information on Partnership Certificates that were held,
bought or sold on behalf of the person throughout the year.
In addition, brokers and financial institutions that hold Partnership
Certificates through a nominee are required to furnish directly to the
Partnership Trust Fund information as to themselves and their ownership of
Partnership Certificates. A clearing agency registered under Section 17A of
the Exchange Act is not required to furnish any information statement to the
Partnership Trust Fund. The information referred to above for any calendar
year must be furnished to the Partnership Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail
to provide the Partnership Trust Fund with the information described above may
be subject to penalties.
Unless another designation is made, the depositor will be designated as
the tax matters partner for each Partnership Trust Fund in the pooling and
servicing greement and, as the tax matters partner, will be responsible for
representing the Partnership Certificate Owners in some specific disputes 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 the later
of three years after the date on which the partnership information return is
filed or the last day for filing the return for the applicable year,
determined without regard to extensions. Any adverse determination following
an audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the Partnership
Certificate Owners, and, under some circumstances, a Partnership Certificate
Owner may be precluded from separately litigating a proposed adjustment to the
items of the Partnership Trust Fund. An adjustment could also result in an
audit of a Partnership Certificate Owner's returns and adjustments of items
not related to the income and losses of the Partnership Trust Fund.
A special audit system exists for qualifying large partnerships that have
elected to apply a simplified flow-through reporting system under Sections 771
through 777 of the Code. Unless otherwise specified in the applicable
prospectus supplement, a Partnership Trust Fund will not elect to apply the
simplified flow-through reporting system.
(10) Taxation of Certain Foreign Partnership Certificate Owners
As used below, the term "Non-United States Owner" means a Partnership
Certificate Owner that is not a U.S. Person, as defined under
"REMICs--Taxation of Owners of Residual Securities--Tax Related Restrictions
on Transfer of Residual Securities--Foreign Investors," above.
It is not clear whether the Partnership Trust Fund would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to Non-United States Owners because there is no
clear authority dealing with that issue under facts substantially similar to
those described in this Prospectus. Although it is not expected that the
Partnership Trust Fund would be engaged in a trade or business in the United
States for these purposes, the Partnership Trust Fund will withhold as if it
were so engaged in order to protect the Partnership Trust Fund from possible
adverse consequences of a failure to withhold. The Partnership Trust Fund
expects to withhold on the portion of its taxable income that is allocable to
Non-United States Owners pursuant to Section 1446 of the Code, as if the
income were effectively connected to a U.S. trade or business, at a rate of
35% for Non-United States Owners that are taxable as corporations and 39.6%
for all other Non-United States Owners.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Partnership Trust Fund to change
its withholding procedures.
Each Non-United States Owner might be required to file a U.S. individual
or corporate income tax return on its share of the income of the Partnership
Trust Fund including, in the case of a corporation, a return in respect of the
branch profits tax. Assuming the Partnership Trust Fund is not engaged in a
U.S. trade or business, a Non-United States Owner would be entitled to a
refund with respect to all or a portion of taxes withheld by the Partnership
Trust Fund if, in particular, the Owner's allocable share of interest from the
Partnership Trust Fund constituted "portfolio interest" under the Code.
The interest, however, may not constitute "portfolio interest" if, among
other reasons, the underlying obligation is not in registered form or if the
interest is determined without regard to the income of the Partnership Trust
Fund, in the later case, the interest being properly characterized as a
guaranteed payment under Section 707(c) of the Code. If this were the case,
Non-United States Owners would be subject to a United States federal income
and withholding tax at a rate of 30 percent on the Partnership Trust Fund's
gross income, without any deductions or other allowances for costs and
expenses incurred in producing the income, unless reduced or eliminated
pursuant to an applicable treaty. In this case, a Non-United States Owner
would only be entitled to a refund for that portion of the taxes, if any, in
excess of the taxes that should have been withheld with respect to the
interest.
(11) Backup Withholding
Distributions made on the Partnership Certificates and proceeds from the
sale of the Partnership Certificates will be subject to a "backup" withholding
tax of 31% if, in general, the Partnership Certificate Owner fails to comply
with particular identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code and, if necessary,
demonstrates such status. Any amounts so withheld would be refunded by the IRS
or allowable as a credit against the Non-United States Owner's federal income
tax.
Consequences for Particular Investors
The federal tax discussions above may not be applicable depending on a
securityholder's particular tax situation. The depositor recommends that
prospective purchasers consult their tax advisors for the tax consequences to
them of the purchase, ownership and disposition of REMIC Securities, FASIT
Securities, Grantor Trust Securities, Partnership Certificates and Debt
Securities, including the tax consequences under state, local, foreign and
other tax laws and the possible effects of changes in federal or other tax
laws.
State and Other Tax Considerations
In addition to the federal income tax consequences described in "Material
Federal Income Tax Considerations," potential investors should consider the
state and local tax consequences of the acquisition, ownership, and
disposition of the Notes or Certificates, as applicable, offered under this
prospectus. State tax law may differ substantially from the corresponding
federal tax law, and the discussion above does not purport to describe any
aspect of the tax laws of any state or other jurisdiction. Therefore,
prospective investors should consult their own tax advisors for the various
tax consequences of investments in the Notes or Certificates, as applicable,
offered under this prospectus.
ERISA Considerations
General
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA should consider the fiduciary
standards under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") in the context of the plan's particular circumstances before
authorizing an investment of a portion of such plan's assets in the
Securities. Accordingly, pursuant to Section 404 of ERISA, such fiduciary
should consider among other factors (i) whether the investment is for the
exclusive benefit of plan participants and their beneficiaries; (ii) whether
the investment satisfies the applicable diversification requirements; (iii)
whether the investment is in accordance with the documents and instruments
governing the plan; and (iv) whether the investment is prudent, considering
the nature of the investment. Fiduciaries of plans also should consider
ERISA's prohibition on improper delegation of control over, or responsibility
for, plan assets.
In addition, employee benefit plans or other retirement arrangements
subject to ERISA, as well as individual retirement accounts, certain types of
Keogh plans not subject to ERISA but subject to Section 4975 of the Code, or
any entity (including insurance company separate or general accounts) whose
underlying assets include plan assets by reason of such plans, arrangements or
accounts investing in the entity (each, a "Plan") are prohibited from engaging
in a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 of ERISA and excise taxes and/or other
penalties are imposed upon such persons under ERISA and/or Section 4975 of the
Code unless an exemption applies. The depositor, underwriter, each master
servicer or other servicer, any insurer, the trustee, the indenture trustee
and certain of their affiliates might be considered "parties in interest" or
"disqualified persons" with respect to a Plan. If so, the acquisition, holding
or disposition of Securities by or on behalf of such Plan could be considered
to give rise to a "prohibited transaction" within the meaning of ERISA and the
Code unless a statutory, regulatory or administrative exception or exemption
is available.
ERISA Considerations Relating to Certificates
Plan Assets
In 29 C.R.F ss.2510.3-101 (the "Plan Asset Regulations"), the U.S.
Department of Labor ("DOL") has defined what constitutes "plan assets" for
purposes of ERISA and Section 4975 of the Code. The Plan Asset Regulations
provide that if a Plan makes an investment in an "equity interest" in an
entity, an undivided portion of the assets of the entity will be considered
the assets of such Plan unless certain exceptions set forth in such
Regulations apply. The Certificates will be deemed an equity interest for
purposes of the Plan Asset Regulations, and the depositor can give no
assurance that the Certificates will qualify for any of the exceptions under
the Plan Asset Regulations. As a result, (i) a Plan may be deemed to have
acquired an interest in the Assets of the trust fund and not merely an
interest in the Certificates, (ii) the fiduciary investment standards of ERISA
could apply to such Assets and (iii) transactions occurring in the course of
managing, operating and servicing the trust fund and its Assets might
constitute prohibited transactions, unless a statutory, regulatory or
administrative exemption applies.
Prohibited Transaction Class Exemption 83-1
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which under certain conditions exempts
from the application of the prohibited transaction rules of ERISA and the
excise tax provisions of Section 4975 of the Code transactions involving a
Plan in connection with the operation of a "mortgage pool" and the purchase,
sale and holding of Certificates which are "mortgage pool pass-through
certificates." A "mortgage pool" is defined as a fixed investment pool
consisting solely of interest-bearing obligations secured by first or second
mortgages or deeds of trust on single-family residential property, property
acquired in foreclosure and undistributed cash. A "mortgage pool pass-through
certificate" is defined as a Certificate which represents a beneficial
undivided interest in a mortgage pool which entitles the holder to pass
through payments of principal and interest from the mortgage loans. PTCE 83-1
requires that: (i) the depositor and the trustee maintain a system of
insurance or other protection for the mortgage loans, the property securing
such mortgage loans and for indemnifying holders of Certificates against
reductions in pass-through payments due to defaults in loan payments or
property damage in an amount at least equal to the greater of (x) 1% of the
aggregate principal balance of the mortgage loans or (y) 1% of the principal
balance of the largest covered pooled mortgage loans; (ii) the trustee may not
be an affiliate of the depositor; and (iii) the payments made to, and retained
by, the depositor in connection with the trust fund, together with all funds
inuring to its benefit for administering the trust fund, represent no more
than "adequate consideration" for selling the mortgage loans, plus reasonable
compensation for services provided to the trust fund. In addition, PTCE 83-1
exempts the initial sale of Certificates to a Plan with respect to which the
depositor, the insurer, the master servicer or other servicer or the trustee
is a party in interest if the Plan does not pay more than fair market value
for such Certificates and the rights and interests evidenced by such
Certificates are not subordinated to the rights and interests evidenced by
other Certificates of the same pool.
PTCE 83-1 also exempts from the prohibited transaction rules any
transactions in connection with the servicing and operation of the mortgage
pool, provided that any payments made to the master servicer in connection
with the servicing of the trust fund are made in accordance with a binding
agreement, copies of which must be made available to prospective Plan
investors. In the case of any Plan with respect to which the depositor, the
master servicer, the insurer or the trustee is a fiduciary, PTCE 83-1 will
only apply if, in addition to the other requirements: (i) the initial sale,
exchange or transfer of Certificates is expressly approved by an independent
fiduciary who has authority to manage and control those Plan assets being
invested in Certificates; (ii) the Plan pays no more for the Certificates than
would be paid in an arm's-length transaction; (iii) no investment management,
advisory or underwriting fee, sales commission or similar compensation is paid
to the depositor with regard to the sale, exchange or transfer of Certificates
to the Plan; (iv) the total value of the Certificates purchased by such Plan
does not exceed 25% of the amount issued and (v) at least 50% of the aggregate
amount of Certificates is acquired by persons independent of the depositor,
the trustee, the master servicer and the insurer. Before purchasing
Certificates, a fiduciary of a Plan should confirm that the trust fund is a
"mortgage pool," that the Certificates constitute "mortgage pool pass-through
certificates" and that the conditions set forth in PTCE 83-1 would be
satisfied. In addition to making its own determination as to the availability
of the exemptive relief provided in PTCE 83-1, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions. The
Plan fiduciary should also consider its general fiduciary obligations under
ERISA in determining whether to purchase any Certificates on behalf of a Plan
pursuant to PTCE 83-1.
Underwriter Exemption
The DOL has granted to Deutsche Banc Alex. Brown Inc. an individual
exemption, Prohibited Transaction Exemption 94-84, and to Deutsche Morgan
Grenfell/C.J. Lawrence Inc., similar approval (FAN 97-03E), which were both
amended by Prohibited Transaction Exemption 97-34 ("PTE 97-34") and further
recently amended pursuant to Prohibited Transaction Exemption 2000-58 ("PTE
2000-58") (collectively, the "Exemption") which is applicable to Certificates
which meet its requirements whenever the underwriter or its affiliate is the
sole underwriter, manager or co-manager of an underwriting syndicate or is the
selling or placement agent. The Exemption generally exempts certain
transactions from the application of certain of the prohibited transaction
provisions of ERISA and the Code provided that the conditions set forth in the
Exemption are satisfied. These transactions include the servicing, managing
and operation of investment trusts holding fixed (generally non-revolving
pools) of enumerated categories of assets which include: single and
multi-family residential mortgage loans, home equity loans or receivables
(including cooperative housing loans), manufactured housing loans and
guaranteed government mortgage pool certificates and the purchase, sale and
holding of Certificates which represent beneficial ownership interests in the
assets of such trusts.
General Conditions of Exemption
The Exemption sets forth general conditions which must be satisfied for a
transaction involving the purchase, sale and holding of the Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of
Certificates by Plans must be on terms that are at least as favorable to the
Plan as they would be in an arm's-length transaction with an unrelated party.
Second, the Assets held by the trust fund must be fully secured (other than
one-to-four family residential mortgage loans and home equity loans or
receivables backing certain types of Certificates, as described below).
(Mortgage loans, loans, obligations and receivables will be collectively
referred to herein as "loans."). Third, unless the Certificates are issued in
"designated transactions" (as described below) and are backed by fully-secured
loans, they may not be subordinated. Fourth, the Certificates at the time of
acquisition by the Plan must generally be rated in one of the three (or in the
case of designated transactions, four) highest generic rating categories by
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc., Moody's Investors Services, Inc. or Fitch, Inc. (each, a "Rating
Agency"). Fifth, the trustee and the indenture trustee generally cannot be
affiliates of any member of the "Restricted Group" which consists of any (i)
underwriter as defined in the Exemption, (ii) the depositor, (iii) the master
servicer, (iv) each servicer, (v) the insurer, (vi) the counterparty of any
"interest rate swap" (as described below) held as an Asset of the trust fund
and (vii) any obligor with respect to loans constituting more than 5% of the
aggregate unamortized principal balance of the loans held in the trust fund as
of the date of initial issuance of the Certificates. Sixth, the sum of all
payments made to, and retained by, such underwriters must represent not more
than reasonable compensation for underwriting the Certificates; the sum of all
payments made to, and retained by, the depositor pursuant to the assignment of
the loans to the related trust fund must represent not more than the fair
market value of such loans; and the sum of all payments made to, and retained
by, the master servicer and any servicer must represent not more than
reasonable compensation for such person's services under the Agreement and
reimbursement of such person's reasonable expenses in connection therewith.
Seventh, (i) the investment pool must consist only of assets of the type
enumerated in the Exemption and which have been included in other investment
pools; (ii) Certificates evidencing interests in such other investment pools
must have been rated in one of the three (or in the case of designated
transactions, four) highest generic rating categories by one of the Rating
Agencies for at least one year prior to a Plan's acquisition of Certificates;
and (iii) Certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one year
prior to a Plan's acquisition of Certificates. Finally, the investing Plan
must be an accredited investor as defined in Rule 501(a)(1) of Regulation D of
the Commission under the Securities Act of 1933, as amended. If Securities are
being sold under the Exemptions, the depositor assumes that only Plans which
are accredited investors under the federal securities laws will be permitted
to purchase the Certificates.
Recent Amendments to Exemption
PTE 2000-58 (the "Amendment") recently amended the Exemption to make the
acquisition of Certificates by Plans in an initial offering or in a secondary
market transaction, the holding or transfer of Certificates and the servicing,
management and operation of the trust fund and its Assets on or after November
13, 2000 eligible for exemptive relief to a broader range of Certificates.
Prior to such amendment, the Exemption generally permitted Plans to purchase
only unsubordindated Certificates rated within the highest three generic
rating categories backed by secured collateral. Such Certificates had to be
issued by a trust fund which was a grantor trust, REMIC or a FASIT whose
corpus could not include certain types of Assets such as interest-rate swaps.
Types of Trust Funds
The Amendment has expanded the types of permitted trust funds to include
owner-trusts, as well as grantor trusts, REMICs and FASITs. Owner-trusts are
subject to certain restrictions in their governing documents to ensure that
their Assets may not be reached by the creditors of the depositor in the event
of bankruptcy or other insolvency and must provide certain legal opinions.
Designated Transactions
In the case where the Certificates are backed by trust fund Assets which
are residential, home equity, manufactured housing or multi-family loans which
are described and defined in the Exemption as designated transactions
("Designated Transactions"), the Amendment permits the Certificates issued by
the trust fund in such transactions to be rated in one of the highest four
generic rating categories by a Rating Agency and/or to be subordinated. The
Assets will qualify for Designated Transaction treatment under the Exemption
unless otherwise specified in the prospectus supplement. In addition, one
subset of Designated Transactions, residential (one- to-four family) and home
equity loans, may be less than fully secured, provided that the rights and
interests evidenced by Certificates issued in such Designated Transactions
are: (a) not subordinated to the rights and interests evidenced by Securities
of the same trust fund; (b) such Certificates acquired by the Plan have
received a rating from a Rating Agency at the time of such acquisition that is
in one of the two highest generic rating categories; and (c) any loan included
in the corpus or Assets of the trust fund is secured by collateral whose fair
market value on the closing date of the Designated Transactions is at least
equal to 80% of the sum of: (i) the outstanding principal balance due under
the loan which is held by the trust fund and (ii) the outstanding principal
balance(s) of any other loan(s) of higher priority (whether or not held by the
trust fund) which are secured by the same collateral.
Insurance Company General Accounts
In the event that Certificates do not meet the requirements of the
Exemption solely because they are Subordinate Certificates or fail to meet a
minimum rating requirement under the Exemption, certain Plans may be eligible
to purchase Certificates pursuant to Section III of Prohibited Transaction
Class Exemption 95-60 ("PTCE 95-60") which permits insurance company general
accounts as defined in PTCE 95-60 to purchase such Certificates if they
otherwise meet all of the other requirements of the Exemption.
Permitted Assets
The Amendment permits an interest-rate swap to be an Asset of a trust
fund which issues Certificates acquired by Plans in an initial offering or in
the secondary market on or after November 13, 2000 and clarifies the
requirements regarding yield supplement agreements. An interest-rate swap (or
if purchased by or on behalf of the trust fund) an interest-rate cap contract
(collectively, a "Swap" or "Swap Agreement") is a permitted trust fund Asset
if it: (a) is an "eligible Swap;" (b) is with an "eligible counterparty;" (c)
is purchased by a "qualified plan investor;" (d) meets certain additional
specific conditions which depend on whether the Swap is a "ratings dependent
Swap" or a "non-ratings dependent Swap" and (e) permits the trust fund to make
termination payments to the Swap counterparty (other than currently scheduled
payments) solely from excess spread or amounts otherwise payable to the
servicer or depositor.
An "eligible Swap" is one which: (a) is denominated in U.S. dollars; (b)
pursuant to which the trust fund pays or receives, on or immediately prior to
the respective payment or distribution date for the class of Certificates to
which the Swap relates, a fixed rate of interest or a floating rate of
interest based on a publicly available index (e.g., LIBOR or the U.S. Federal
Reserve's Cost of Funds Index (COFI)), with the trust fund receiving such
payments on at least a quarterly basis and obligated to make separate payments
no more frequently than the counterparty, with all simultaneous payments being
netted ("Allowable Interest Rate"); (c) has a notional amount that does not
exceed either: (i) the principal balance of the class of Certificates to which
the Swap relates, or (ii) the portion of the principal balance of such class
represented by obligations ("Allowable Notional Amount"); (d) is not leveraged
(i.e., payments are based on the applicable notional amount, the day count
fractions, the fixed or floating rates permitted above, and the difference
between the products thereof, calculated on a one-to-one ratio and not on a
multiplier of such difference) ("Leveraged"); (e) has a final termination date
that is either the earlier of the date on which the issuer terminates or the
related class of Certificates are fully repaid and (f) does not incorporate
any provision which could cause a unilateral alteration in the interest rate
requirements described above or the prohibition against leveraging.
An "eligible counterparty" means a bank or other financial institution
which has a rating at the date of issuance of the Certificates, which is in
one of the three highest long-term credit rating categories or one of the two
highest short-term credit rating categories, utilized by at least one of the
Rating Agencies rating the Certificates; provided that, if a counterparty is
relying on its short-term rating to establish eligibility hereunder, such
counterparty must either have a long-term rating in one of the three highest
long-term rating categories or not have a long-term rating from the applicable
Rating Agency.
A "qualified plan investor" is a Plan or Plans where the decision to buy
such class of Certificates is made on behalf of the Plan by an independent
fiduciary qualified to understand the Swap transaction and the effect the Swap
would have on the rating of the Certificates and such fiduciary is either (a)
a "qualified professional asset manager" ("QPAM") under Prohibited Transaction
Class Exemption 84-14 ("PTCE 84-14") (see below), (b) an "in-house asset
manager" under Prohibited Transaction Class Exemption 96-23 ("PTCE 96-23")
(see below) or (c) has total assets (both Plan and non-Plan) under management
of at least $100 million at the time the Certificates are acquired by the
Plan.
In "ratings dependent Swaps" (where the rating of a class of Certificates
is dependent on the terms and conditions of the Swap), the Swap Agreement must
provide that if the credit rating of the counterparty is withdrawn or reduced
by any Rating Agency below a level specified by the Rating Agency, the
servicer must, within the period specified under the Swap Agreement: (a)
obtain a replacement Swap Agreement with an eligible counterparty which is
acceptable to the Rating Agency and the terms of which are substantially the
same as the current Swap Agreement (at which time the earlier Swap Agreement
must terminate); or (b) cause the Swap counterparty to establish any
collateralization or other arrangement satisfactory to the Rating Agency such
that the then current rating by the Rating Agency of the particular class of
Certificates will not be withdrawn or reduced (and the terms of the Swap
Agreement must specifically obligate the counterparty to perform these duties
for any class of Certificates with a term of more than one year). In the event
that the servicer fails to meet these obligations, Plan certificateholders
must be notified in the immediately following periodic report which is
provided to certificateholders but in no event later than the end of the
second month beginning after the date of such failure. Sixty days after the
receipt of such report, the exemptive relief provided under the Exemption will
prospectively cease to be applicable to any class of Certificates held by a
Plan which involves such ratings dependent Swap.
"Non-ratings dependent Swaps" (those where the rating of the Certificates
does not depend on the terms and conditions of the Swap) are subject to the
following conditions. If the credit rating of the counterparty is withdrawn or
reduced below the lowest level permitted above, the servicer will, within a
specified period after such rating withdrawal or reduction: (a) obtain a
replacement Swap Agreement with an eligible counterparty, the terms of which
are substantially the same as the current Swap Agreement (at which time the
earlier Swap Agreement must terminate); (b) cause the counterparty to post
collateral with the trust fund in an amount equal to all payments owed by the
counterparty if the Swap transaction were terminated; or (c) terminate the
Swap Agreement in accordance with its terms.
An "eligible yield supplement agreement" is any yield supplement
agreement or similar arrangement (or if purchased by or on behalf of the trust
fund) an interest rate cap contract to supplement the interest rates otherwise
payable on obligations held by the trust fund ("EYS Agreement"). If the EYS
Agreement has a notional principal amount and/or is written on an
International Swaps and Derivatives Association, Inc. (ISDA) form, the EYS
Agreement may only be held as an Asset of the trust fund with respect to
Certificates purchased by Plans on or after April 7, 1998 if it meets the
following conditions: (a) it is denominated in U.S. dollars; (b) it pays an
Allowable Interest Rate; (c) it is not Leveraged; (d) it does not allow any of
these three preceding requirements to be unilaterally altered without the
consent of the trustee; (e) it is entered into between the trust fund and an
eligible counterparty and (f) it has an Allowable Notional Amount.
Pre-Funding Accounts
The Exemption was amended by PTE 97-34 to extend exemptive relief to
Certificates issued in transactions using pre-funding accounts whereby a
portion of the loans backing the Certificates are transferred to the trust
fund within a specified period following the closing date ("DOL Pre-Funding
Period") (see below) instead of requiring that all such loans be either
identified or transferred on or before the closing date. The relief is
effective for transactions occurring on or after May 23, 1997 provided that
the following conditions are met. First, the ratio of the amount allocated to
the Pre-Funding Account to the total principal amount of the Certificates
being offered ("Pre-Funding Limit") must not exceed twenty-five percent (25%).
Second, all loans transferred after the closing date (referred to here as
"additional loans") must meet the same terms and conditions for eligibility as
the original loans used to create the trust fund, which terms and conditions
have been approved by the Rating Agency. Third, the transfer of such
additional loans to the trust fund during the DOL Pre-Funding Period must not
result in the Certificates receiving a lower credit rating from the Rating
Agency upon termination of the DOL Pre-Funding Period than the rating that was
obtained at the time of the initial issuance of the Certificates by the trust
fund. Fourth, solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate (the "average interest rate") for all
of the loans in the trust fund at the end of the DOL Pre-Funding Period must
not be more than 100 basis points lower than the average interest rate for the
loans which were transferred to the trust fund on the closing date. Fifth,
either: (i) the characteristics of the additional loans must be monitored by
an insurer or other credit support provider which is independent of the
depositor; or (ii) an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided to the Rating
Agency, the underwriter and the trustee) stating whether or not the
characteristics of the additional loans conform to the characteristics
described in the Prospectus, Prospectus Supplement, Private Placement
Memorandum ("Offering Documents") and/or the Agreement. In preparing such
letter, the independent accountant must use the same type of procedures as
were applicable to the loans which were transferred as of the closing date.
Sixth, the DOL Pre-Funding Period must end no later than three months or 90
days after the closing date or earlier, in certain circumstances, if the
amount on deposit in the Pre-Funding Account is reduced below the minimum
level specified in the Agreement or an event of default occurs under the
Agreement. Seventh, amounts transferred to any Pre-Funding Account and/or
Capitalized Interest Account used in connection with the pre-funding may be
invested only in investments which are permitted by the Rating Agency and (i)
are direct obligations of, or obligations fully guaranteed as to timely
payment of principal and interest by, the United States or any agency or
instrumentality thereof (provided that such obligations are backed by the full
faith and credit of the United States); or (ii) have been rated (or the
obligor has been rated) in one of the three highest generic rating categories
by the Rating Agency ("Acceptable Investments"). Eighth, certain disclosure
requirements must be met.
Revolving Pool Features
The Exemption only covers Certificates backed by "fixed" pools of loans
which require that all the loans must be transferred to the trust fund or
identified at closing (or transferred within the DOL Pre-Funding Period, if
pre-funding meeting the conditions described above is used). Accordingly,
Certificates issued by trust funds which feature revolving pools of Assets
will not be eligible for a purchase by Plans. However, Securities which are
Notes backed by revolving pools of Assets may be eligible for purchase by
Plans pursuant to certain other prohibited transaction exemptions. See
discussion below in "ERISA Considerations Relating to Notes."
Limitations on Scope of the Exemption
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by ERISA and the Code
in connection with the initial acquisition, transfer or holding, and the
acquisition or disposition in the secondary market, of the Certificates by
Plans. However, no exemption is provided from the restrictions of ERISA for
the acquisition or holding of a Certificates on behalf of an "Excluded Plan"
by any person who is a fiduciary with respect to the assets of such Excluded
Plan. For those purposes, an Excluded Plan is a Plan sponsored by any member
of the Restricted Group. Exemptive relief may also be provided for the
acquisition, holding and disposition of Certificates by Plans if the fiduciary
or its affiliate is the obligor with respect to 5% or less of the fair market
value of the Loans in the trust fund provided that: (i) the Plan is not an
Excluded Plan, (ii) each Plan's investment in each class of Certificates does
not exceed 25% of the outstanding Certificates in the class, (iii) after the
Plan's acquisition of the Certificates, no more than 25% of the assets over
which the fiduciary has investment authority are invested in Certificates of a
trust containing assets which are sold or serviced by the same entity and (iv)
in the case of initial issuance (but not secondary market transactions), at
least 50% of each class of Certificates and at least 50% of the aggregate
interests in the trust fund are acquired by persons independent of the
Restricted Group.
ERISA Considerations Relating to Notes
Under the Plan Asset Regulations, the Assets of the trust fund would be
treated as "plan assets" of a Plan for the purposes of ERISA and the Code only
if the Plan acquires an "equity interest" in the trust fund and none of the
exceptions contained in the Plan Asset Regulations is applicable. An equity
interest is defined under the Plan Asset Regulations as an interest other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Assuming that the Notes are treated
as indebtedness without substantial equity features for purposes of the Plan
Asset Regulations, then such Notes will be eligible for purchase by Plans.
However, without regard to whether the Notes are treated as an "equity
interest" for such purposes, the acquisition or holding of Notes by or on
behalf of a Plan could be considered to give rise to a prohibited transaction
if the trust fund or any of its affiliates is or becomes a party in interest
or disqualified person with respect to such Plan, or in the event that a Note
is purchased in the secondary market and such purchase constitutes a sale or
exchange between a Plan and a party in interest or disqualified person with
respect to such Plan. There can be no assurance that the trust fund or any of
its affiliates will not be or become a party in interest or a disqualified
person with respect to a Plan that acquires Notes.
The Amendment to the Exemption permits trust funds which are grantor
trusts, owner-trusts, REMICs or FASITs to issue Notes, as well as
Certificates, provided a legal opinion is received to the effect that the
noteholders have a perfected security interest in the trust fund's Assets. The
exemptive relief provided under the Exemption for any prohibited transactions
which could be caused as a result of the operation, management or servicing of
the trust fund and its Assets would not be necessary with respect to Notes
with no substantial equity features which are issued as obligations of the
trust fund. However, effective for the acquisition, holding or transfer of
Notes between a Plan and a party in interest which occurs on or after November
13, 2000, the Exemption would provide prohibited transaction exemptive relief,
provided that the same conditions of the Exemption described above relating to
Certificates are met with respect to the Notes. The same limitations of such
exemptive relief relating to acquisitions of Certificates by fiduciaries with
respect to Excluded Plans would also be applicable to the Notes as described
herein in "Limitations on Scope of the Exemption."
In the event that the Exemption is not applicable to the Notes, one or
more other prohibited transactions exemptions may be available to Plans
purchasing or transferring the Notes depending in part upon the type of Plan
fiduciary making the decision to acquire the Notes and the circumstances under
which such decision is made. These exemptions include, but are not limited to,
Prohibited Transaction Class Exemption 90-1 (regarding investments by
insurance company pooled separate accounts), Prohibited Transaction Class
Exemption 91-38 (regarding investments by bank collective investments funds),
PTCE 84-14 (regarding transactions effected by "qualified professional asset
managers"), PTCE 95-60 (regarding investments by insurance company general
accounts) and PTCE 96-23 (regarding transactions effected by "in-house asset
managers") (collectively, the "Investor-Based Exemptions"). However, even if
the conditions specified in these Investor-Based Exemptions are met, the scope
of the relief provided under such Exemptions might or might not cover all acts
which might be construed as prohibited transactions.
EACH PROSPECTUS SUPPLEMENT WILL CONTAIN INFORMATION CONCERNING
CONSIDERATIONS RELATING TO ERISA AND THE CODE THAT ARE APPLICABLE TO THE
RELATED SECURITIES. BEFORE PURCHASING SECURITIES IN RELIANCE ON PTCE 83-1, THE
EXEMPTION, THE INVESTOR-BASED EMEMPTIONS OR ANY OTHER EXEMPTION, A FIDUCIARY
OF A PLAN SHOULD ITSELF CONFIRM THAT REQUIREMENTS SET FORTH IN SUCH EXEMPTION
WOULD BE SATISFIED.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO
PURCHASE SECURITIES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL
WITH RESPECT TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE
CODE OF THE ACQUISITION AND OWNERSHIP OF SUCH SECURITIES.
Governmental plans and church plans as defined in ERISA are not subject
to ERISA or Code Section 4975, although they may elect to be qualified under
Section 401(a) of the Code and exempt from taxation under Section 501(a) of
the Code and would then be subject to the prohibited transaction rules set
forth in Section 503 of the Code. In addition, governmental plans may be
subject to federal, state and local laws which are to a material extent
similar to the provisions of ERISA or a Code Section 4975 ("Similar Law"). A
fiduciary of a governmental plan should make its own determination as to the
propriety of an investment in Securities under applicable fiduciary or other
investment standards and the need for the availability of any exemptive relief
under any Similar Law.
Legal Investment
The prospectus supplement will specify which classes of the Notes or
Certificates, as applicable, if any, will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA"). Generally, only classes of Offered Notes or
Offered Certificates, as applicable, that (1) are rated in one of the two
highest rating categories by one or more rating agencies and (2) are part of a
series representing interests in, or secured by, a trust fund consisting of
loans secured by first liens on real property and originated by particular
types of originators specified in SMMEA, will be "mortgage related securities"
for purposes of SMMEA.
Those classes of Offered Notes or Offered Certificates, as applicable,
qualifying as "mortgage related securities" will constitute legal investments
for persons, trusts, corporations, partnerships, associations, business trusts
and business entities (including, but not limited to, state chartered savings
banks, commercial banks, savings and loan associations and insurance
companies, as well as trustees and state government employee retirement
systems) created pursuant to or existing under the laws of the United States
or of any state (including the District of Columbia and Puerto Rico) whose
authorized investments are subject to state regulation to the same extent
that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
of the United States constitute legal investments for those entities. Pursuant
to SMMEA, a number of states enacted legislation, on or before the October 3,
1991 cut-off for those enactments, limiting to varying extents the ability of
some entities (in particular, insurance companies) to invest in mortgage
related securities secured by liens on residential, or mixed residential and
commercial, properties, in most cases by requiring the affected investors to
rely solely upon existing state law, and not SMMEA.
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 "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in these securities, and
national banks may purchase these securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. ss.24 (Seventh), subject in each case to regulations that
the applicable federal regulatory authority may prescribe. In this connection,
the Office of the Comptroller of the Currency (the "OCC") has amended 12
C.F.R. Part 1 to authorize national banks to purchase and sell for their own
account, without limitation as to a percentage of the bank's capital and
surplus (but subject to compliance with general standards concerning "safety
and soundness" and retention of credit information in 12 C.F.R. ss.1.5), some
"Type IV securities," defined in 12 C.F.R. ss.1.2(l) to include some
"residential mortgage related securities." As so defined, "residential
mortgage-related security" means, in relevant part, "mortgage related
security" within the meaning of SMMEA. The National Credit Union
Administration ("NCUA") has adopted rules, codified at 12 C.F.R. Part 703,
which permit federal credit unions to invest in "mortgage related securities"
under some limited circumstances, other than stripped mortgage related
securities, residual interests in mortgage related securities, and commercial
mortgage related securities, unless the credit union has obtained written
approval from the NCUA to participate in the "investment pilot program"
described in 12 C.F.R. ss.703.140. Thrift institutions that are subject to the
jurisdiction of the Office of Thrift Supervision (the "OTS") should consider
the OTS' Thrift Bulletin 13a (December 1, 1998), "Management of Interest Rate
Risk, Investment Securities, and Derivatives Activities," before investing in
any of the Offered Notes or Offered Certificates, as applicable.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Investment Securities and
End-User Derivatives Activities" (the "1998 Policy Statement") of the Federal
Financial Institutions Examination Council ("FFIEC"), which has been adopted
by the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the OCC and the OTS, effective May 26, 1998, and by the
NCUA, effective October 1, 1998. The 1998 Policy Statement sets forth general
guidelines which depository institutions must follow in managing risks
(including market, credit, liquidity, operational (transaction), and legal
risks) applicable to all securities (including mortgage pass-through
securities and mortgage-derivative products) used for investment purposes.
If specified in the prospectus supplement, other classes of Offered Notes
or Offered Certificates, as applicable, offered pursuant to this prospectus
will not constitute "mortgage related securities" under SMMEA. The appropriate
characterization of those classes under various legal investment restrictions,
and thus the ability of investors subject to these restrictions to purchase
these Offered Notes or Offered Certificates, as applicable, may be subject to
significant interpretive uncertainties.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by those authorities before purchasing any Offered
Notes or Offered Certificates, as applicable, as some classes or subclasses
may be deemed unsuitable investments, or may otherwise be restricted, under
those rules, policies or guidelines (in some instances irrespective of SMMEA).
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
provisions that may restrict or prohibit investment in securities that are not
"interest bearing" or "income paying," and with regard to any Offered Notes or
Offered Certificates, as applicable, issued in book-entry form, provisions
that may restrict or prohibit investments in securities that are issued in
book-entry form.
Except as to the status of some classes of Offered Notes or Offered
Certificates, as applicable, as "mortgage related securities," no
representation is made as to the proper characterization of the Offered Notes
or Offered Certificates, as applicable, for legal investment, financial
institution regulatory, or other purposes, or as to the ability of particular
investors to purchase any Offered Notes or Offered Certificates, as
applicable, under applicable legal investment restrictions. The uncertainties
described above (and any unfavorable future determinations concerning legal
investment or financial institution regulatory characteristics of the Offered
Notes or Offered Certificates, as applicable,) may adversely affect the
liquidity of the Offered Notes or Offered Certificates, as applicable.
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their own legal advisors
in determining whether and to what extent the Offered Notes or Offered
Certificates, as applicable, of any class constitute legal investments for
them or are subject to investment, capital or other restrictions, and, if
applicable, whether SMMEA has been overridden in any jurisdiction relevant to
that investor.
Methods of Distribution
The Notes or Certificates, as applicable, offered by this prospectus and
by the supplements to this prospectus will be offered in series. The
distribution of the Notes or Certificates, as applicable, may be effected from
time to time in one or more transactions, including negotiated transactions,
at a fixed public offering price or at varying prices to be determined at the
time of sale or at the time of commitment therefor. If specified in the
prospectus supplement, the Notes or Certificates, as applicable, will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Deutsche Banc Alex. Brown Inc.
("DBAB") acting as underwriter with other underwriters, if any, named in the
underwriting agreement. In that event, the prospectus supplement may also
specify that the underwriters will not be obligated to pay for any Notes or
Certificates, as applicable, agreed to be purchased by purchasers pursuant to
purchase agreements acceptable to the depositor. In connection with the sale
of the Notes or Certificates, as applicable, underwriters may receive
compensation from the depositor or from purchasers of the Notes or
Certificates, as applicable, in the form of discounts, concessions or
commissions. The prospectus supplement will describe any compensation paid by
the depositor.
Alternatively, the prospectus supplement may specify that the Notes or
Certificates, as applicable, will be distributed by DBAB acting as agent or in
some cases as principal with respect to Notes or Certificates, as applicable,
that it has previously purchased or agreed to purchase. If DBAB acts as agent
in the sale of Notes or Certificates, as applicable, DBAB will receive a
selling commission for each series of Notes or Certificates, as applicable,
depending on market conditions, expressed as a percentage of the total
principal balance of the related mortgage loans as of the Cut-off Date. The
exact percentage for each series of Notes or Certificates, as applicable, will
be disclosed in the prospectus supplement. To the extent that DBAB elects to
purchase Notes or Certificates, as applicable, as principal, DBAB may realize
losses or profits based upon the difference between its purchase price and the
sales price. The prospectus supplement for any series offered other than
through underwriters will contain information regarding the nature of that
offering and any agreements to be entered into between the depositor and
purchasers of Notes or Certificates, as applicable, of that series.
The depositor will indemnify DBAB and any underwriters against particular
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments DBAB and any underwriters may be required to make
in respect of these civil liabilities.
In the ordinary course of business, DBAB and the depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the depositor's mortgage loans pending the
sale of those mortgage loans or interests in those mortgage loans, including
the Notes or Certificates, as applicable. DBAB performs management services
for the depositor.
The depositor anticipates that the Notes or Certificates, as applicable,
will be sold primarily to institutional investors. Purchasers of Notes or
Certificates, as applicable, including dealers, may, depending on the facts
and circumstances of those purchases, be deemed to be "underwriters" within
the meaning of the Securities Act of 1933 in connection with reoffers and
sales by them of Notes or Certificates, as applicable. securityholders should
consult with their legal advisors in this regard before any reoffer or sale of
Notes or Certificates, as applicable.
As to each series of Notes or Certificates, as applicable, only those
classes rated in one of the four highest rating categories by any rating
agency will be offered by this prospectus. Any lower rated or unrated class
may be initially retained by the depositor, and may be sold by the depositor
at any time to one or more institutional investors.
Additional Information
The Depositor has filed with the Commission a registration statement on
Form S-3 under the Securities Act of 1933, as amended, with respect to the
Notes or Certificates, as applicable, (the "Registration Statement"). This
prospectus, which forms a part of the Registration Statement, omits some of
the information contained in the Registration Statement pursuant to the rules
and regulations of the Commission. The Registration Statement and the exhibits
to the Registration Statement can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at Regional Offices in the following locations:
o Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and
o New York Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048.
Copies of these materials can also be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
The Commission also maintains a site on the world wide web at
"http://www.sec.gov" at which users can view and download copies of reports,
proxy and information statements and other information filed electronically
through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR")
system. The Depositor has filed the Registration Statement, including all
exhibits to the Registration Statement, through the EDGAR system and therefore
these materials should be available by logging onto the Commission's web site.
The Commission maintains computer terminals providing access to the EDGAR
system at each of the offices referred to above.
Copies of the most recent Fannie Mae prospectus for Fannie Mae
certificates and Fannie Mae's annual report and quarterly financial statements
as well as other financial information are available from the Director of
Investor Relations of Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington,
D.C. 20016 (202-752-7115). The Depositor did not participate in the
preparation of Fannie Mae's prospectus or its annual or quarterly reports or
other financial information and, accordingly, makes no representation as to
the accuracy or completeness of the information in those documents.
Copies of the most recent Offering Circular for Freddie Mac certificates
as well as Freddie Mac's most recent Information Statement and Information
Statement supplement and any quarterly report made available by Freddie Mac
may be obtained by writing or calling the Investor Inquiry Department of
Freddie Mac at 8200 Jones Branch Drive, McLean, Virginia 22102 (outside
Washington, D.C. metropolitan area, telephone 800-336-3672; within Washington,
D.C. metropolitan area, telephone 703-759-8160). The Depositor did not
participate in the preparation of Freddie Mac's Offering Circular, Information
Statement or any supplement to the Information Statement or any quarterly
report of the Information Statement and, accordingly, makes no representation
as to the accuracy or completeness of the information in those documents.
Incorporation of Certain Documents by Reference
All documents subsequently filed by or on behalf of the trust fund
referred to in the prospectus supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this
prospectus and prior to the termination of any offering of the Notes or
Certificates, as applicable, issued by that trust fund will 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 those documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
in this prospectus will be deemed to be modified or superseded for all
purposes of this prospectus to the extent that a statement contained in this
prospectus (or in the prospectus supplement) or in any other subsequently
filed document that also is or is deemed to be incorporated by reference
modifies or replaces that statement. Any statement so modified or superseded
will not be deemed, except as so modified or superseded, to constitute a part
of this prospectus.
The Trustee on behalf of any trust fund will provide without charge to
each person to whom this prospectus is delivered, upon request, 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). Requests for information should be directed to the
corporate trust office of the Trustee specified in the prospectus supplement.
Legal Matters
Certain legal matters, including the federal income tax consequences to
securityholders of an investment in the Notes or Certificates, as applicable,
of a series, will be passed upon for the depositor by Stroock & Stroock &
Lavan LLP, Washington, D.C., and Sidley Austin Brown & Wood LLP, New York, NY.
Financial Information
A new trust fund will be formed for each series of Notes or Certificates,
as applicable, and no trust fund will engage in any business activities or
have any assets or obligations before the issuance of the related series of
Notes or Certificates, as applicable. Accordingly, financial statements for a
trust fund will generally not be included in this prospectus or in the
prospectus supplement.
Rating
As a condition to the issuance of any class of Offered Notes or Offered
Certificates, as applicable, they must not be rated lower than investment
grade; that is, they must be rated in one of the four highest rating
categories, by a rating agency.
Ratings on mortgage pass-through certificates and mortgage-backed notes
address the likelihood of receipt by securityholders of all distributions on
the underlying mortgage loans. These ratings address the structural, legal and
issuer-related aspects associated with the Notes or Certificates, as
applicable, the nature of the underlying assets and the credit quality of the
guarantor, if any. Ratings on mortgage pass-through certificates,
mortgage-backed notes and other asset backed securities do not represent any
assessment of the likelihood of principal prepayments by borrowers or of the
degree by which prepayments might differ from those originally anticipated. As
a result, securityholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest certificates in extreme cases might
fail to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently of
any other security rating.
INDEX OF DEFINED TERMS
1986 Act......................................106
1997 Act......................................139
1998 Policy Statement.........................159
Accrual Period.................................20
Accrual Securities.............................28
Accrued Security Interest......................31
Adjustable Rate Assets..........................4
Agency Securities...............................3
Agreement......................................46
ARM Loans.......................................7
Asset Conservation Act.........................90
Asset Group....................................29
Asset Seller....................................3
Available Distribution Amount..................30
Balloon Payment Assets..........................4
Bankruptcy Code................................87
Beneficial Owner...............................39
Bi-weekly Assets................................4
Book-Entry Securities..........................29
borrower.......................................78
Buy Down Assets.................................4
Buydown Funds.................................104
Buydown Mortgage Loans.........................25
Buydown Period.................................25
Capitalized Interest Account...................19
Cash Flow Agreement............................20
Cedel..........................................39
CERCLA.........................................89
Certificates...................................28
Charter Act....................................13
Code...........................................99
Collection Account.............................51
Commission......................................7
contract borrower..............................81
contract lender................................81
Convertible Assets..............................4
Cooperative....................................79
Cooperative Corporation........................41
Cooperative Loans..............................79
Cooperatives....................................5
Covered Trust..................................74
CPR............................................23
credit support.................................19
Crime Control Act..............................94
Cut-off Date....................................6
Debt Securities...............................100
defective obligation..........................102
Definitive Securities..........................29
Determination Date.............................29
Disqualified Organization.....................119
Distribution Date..............................21
DTC............................................39
Due Period.....................................30
EDGAR.........................................162
Eligible Corporation..........................131
Euroclear......................................39
Euroclear Operator.............................41
European Depositaries..........................42
Exchange Act...................................40
Fannie Mae......................................3
FASIT..........................................99
FASIT Ownership Security......................127
FASIT Provisions...............................99
FASIT Regular Securities......................127
FASIT Securities...............................99
FDIC...........................................51
FFIEC.........................................159
FHA.............................................6
Financial Intermediary.........................42
Freddie Mac.....................................3
Freddie Mac Act................................14
Freddie Mac Certificate Group..................15
Garn-St. Germain Act...........................91
GEM Assets......................................4
Ginnie Mae......................................3
GPM Assets......................................4
Grantor Trust Fund.............................99
Grantor Trust Fund Stripped Bond..............137
Grantor Trust Fund Stripped Coupon............137
Grantor Trust Securities.......................99
Grantor Trust Securityholders.................133
Home Equity Loans...............................5
Housing Act....................................12
HUD............................................61
Increasing Payment Asset........................4
Indirect Participants..........................40
Insurance Proceeds.............................30
Interest Rate..................................31
Interest Reduction Assets.......................4
land sale contract.............................81
Land Sale Contracts.............................6
Level Payment Assets............................3
Liquidation Proceeds...........................30
Loan-to-Value Ratio.............................6
Lock-out Date...................................8
Lock-out Period.................................8
Mortgage Securities.............................3
Mortgaged Properties............................5
Mortgages.......................................6
NCUA..........................................159
Nonrecoverable Advance.........................35
Non-U.S. Person...............................126
Notes..........................................28
OCC...........................................159
Offered Securities.............................29
OID Regulations..........................100, 106
Participants...................................39
Partnership Certificates......................100
Partnership Trust Fund........................100
Pass-Through Entity...........................120
PCBs...........................................88
Permitted Investments..........................51
pooling and servicing agreement................46
Pre-Funded Amount..............................18
Pre-Funding Account............................18
Pre-Funding Period.............................18
prepayment.....................................23
Prepayment Assumption.........................107
Purchase Price.................................48
RCRA...........................................89
Record Date....................................29
Refinance Loans.................................6
Registration Statement........................162
Regular Securities............................101
Regular Securityholder........................105
Related Proceeds...............................34
Relevant Depositary............................42
Relief Act.....................................93
REMIC..........................................99
REMIC Pool....................................100
REMIC Regulations.............................100
REMIC Securities...............................46
REO Property...................................36
Residual Securities...........................101
Retained Interest..............................63
Revolving Credit Line Loans.....................8
RICO...........................................94
Rules..........................................42
secured-creditor exemption.....................89
Securities.....................................28
Security Balance...............................32
Senior Certificates...........................137
Senior Class Percentage.......................137
Senior Securities..............................28
Servicemen's Readjustment Act..................18
Servicing Standard.............................56
Shortfall Amount..............................138
Single Family Property..........................5
SMMEA.........................................158
SPA............................................23
Special servicer...............................66
Startup Day...................................101
Step-up Rate Assets.............................4
Strip Securities...............................28
Stripped Agency Securities.....................16
Stripped Certificates.........................136
Subordinate Certificates......................137
Subordinate Class Percentage..................137
Subordinate Securities.........................28
Subsequent Assets..............................18
Superliens.....................................88
super-premium.................................107
Taxable Mortgage Pools........................100
Terms and Conditions...........................42
Tiered REMICs.................................104
Title V........................................92
Title VIII.....................................93
U.S. Person...................................122
UCC............................................40
UST............................................89
VA .............................................6
VA Guaranty Policy.............................62
Value...........................................6
Warranting Party...............................50
Yield Considerations...........................32