As filed with the Securities and Exchange Commission on January 9, 2004
Registration Statement No. 333-111379 and No. 333-111379-01
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
ON FORM S-3
UNDER
THE SECURITIES ACT OF 1933
---------------
GREENWICH CAPITAL ACCEPTANCE, INC. FINANCIAL ASSET SECURITIES CORP.
(Exact name of co-registrant as specified in its charter) (Exact name of co-registrant as specified in its charter)
Delaware 06-1199884 Delaware 13-3172275
(State of incorporation) (I.R.S. Employer (State of incorporation) (I.R.S. Employer
Identification No.) Identification No.)
600 Steamboat Road
Greenwich, Connecticut 06830
(203) 625-2700
(Address, including ZIP code, and telephone number,
including area code, of principal executive offices)
---------------
John C. Anderson
600 Steamboat Road
Greenwich, Connecticut 06830
(203) 625-2700
(Name, address, including ZIP code, and telephone
number, including area code, of agent for service)
---------------
With copies to:
Stephen B. Esko, Esq. Richard M. Horowitz, Esq.
Sidley Austin Brown & Wood LLP Thacher Proffitt & Wood LLP
787 Seventh Avenue Two World Financial Center
New York, New York 10019 New York, New York 10281
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. [X]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
===========================================================================================================================
Proposed Proposed
Amount Maximum Maximum Amount of
Title of to be Aggregate Price Aggregate Registration
Securities to Be Registered Registered Per Unit Offering Price Fee
- ---------------------------------------------------------------------------------------------------------------------------
Asset-Backed/Mortgage-Backed Securities...... $25,608,047,536 100% $25,608,047,536(1) $2,071,691.05(2)
===========================================================================================================================
(1) This amount was estimated in order to calculate the amount of the fee.
(2) This amount has been paid as follows:
o $49,191.05 was previously paid in connection with $608,047,536 in
securities registered under Registation Statement No. 333-108195/01
and being carried forward;
o $80.90 was previously paid in conection with this Registration
Statement; and
o $2,022,419.10 is being paid with this Amendment No. 1.
Pursuant to Rule 429 under the Securities Act of 1933, as amended,
the prospectus included in this Registration Statement is a combined
prospectus and also relates to Registration Statement No. 333-108195/01 as
previously filed by the Registrants on Form S-3. That Registration Statement
was declared effective as of September 11, 2003.
The Registrants hereby amend this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
===============================================================================
The information in this prospectus supplement is not complete and may be
changed. We may not sell these certificates until the registration statement
filed with the SEC is effective. This prospectus supplement is not an offer
to sell these certificates and it is not soliciting an offer to buy these
certificates in any state where the offer or sale is not permitted.
Subject To Completion, Dated January 9, 2004
Prospectus Supplement
(To Prospectus dated __________, 200_)
Mortgage Loan Trust 200_-_
Mortgage Pass-Through Certificates, Series 200_-__
[Greenwich Capital Acceptance, Inc.]
Depositor
$________ (approximate) Class A, [ %] [Variable Pass-Through Rate]
$________ (approximate) Class M, [ %] [Variable Pass-Through Rate]
$________ (approximate) Class B, [ %] [Variable Pass-Through Rate]
The Trust
o The trust will issue [___] classes of certificates, of which the
three classes listed above are offered by this prospectus supplement
and the accompanying prospectus.
o The trust assets will consist primarily of single family mortgage
loans
The Certificates
o The certificates represent ownership interests in the trust assets.
o Each class of certificates will accrue interest at a rate equal to
[one-month LIBOR plus a fixed margin], subject to certain
limitations described in this prospectus supplement.
o Each class of offered certificates will have the benefit of credit
enhancement to the extent described in this prospectus supplement.
Consider carefully the risk factors beginning on page S-10 of this
prospectus supplement and on page 6 of the prospectus.
The certificates represent obligations of the truly only and do not
represent an interest in or obligation of [Greenwich Capital Acceptance,
Inc.] or any of its affilaites.
This prospectus supplement may be used to offer and sell the certificates
only if accompanied by the prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these securities or determined that this prospectus
supplement or the prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
_____________________ will offer the certificates listed above in negotiated
transactions. Proceeds to the depositor are expected to be approximately
$_____________, before deducting issuance expenses estimated to be
$___________. See "Method of Distribution" in this prospectus supplement.
___________________
[Logos of Underwriters]
____________ __, 200_
Table of Contents
Summary of Terms.................................................................................S-4
Risk Factors....................................................................................S-10
The Mortgage Pool...............................................................................S-18
General......................................................................................S-18
Mortgage Loan Statistics.....................................................................S-18
The Loan Index...............................................................................S-31
Underwriting Standards..........................................................................S-31
The Master Servicer.............................................................................S-32
The Pooling and Servicing Agreement.............................................................S-34
General......................................................................................S-34
Assignment of the Mortgage Loans.............................................................S-34
Payments on Mortgage Loans; Deposits to Collection Account and Distribution Account..........S-36
Advances.....................................................................................S-38
The Trustee..................................................................................S-39
Servicing and Other Compensation and Payment of Expenses.....................................S-40
Voting Rights................................................................................S-40
Amendment....................................................................................S-41
Termination..................................................................................S-41
[Optional Purchase of Defaulted Loans........................................................S-41
Events of Default............................................................................S-42
Rights upon Event of Default.................................................................S-42
Description of the Certificates.................................................................S-43
General......................................................................................S-43
Book-Entry Certificates......................................................................S-43
Priority of Distributions Among Certificates.................................................S-48
Allocation of Available Funds................................................................S-49
Pass-Through Rates...........................................................................S-50
Calculation of [One-Month LIBOR].............................................................S-51
Application of Allocable Loss Amounts........................................................S-52
[Excess Reserve Fund Account.................................................................S-52
Reports to Certificateholders................................................................S-52
Yield, Prepayment and Maturity Considerations...................................................S-54
Overcollateralization Provisions.............................................................S-56
[Additional Information......................................................................S-56
Weighted Average Lives.......................................................................S-56
Use of Proceeds.................................................................................S-58
Material Federal Income Tax Consequences........................................................S-58
Taxation of Regular Interests................................................................S-59
Status of the Offered Certificates...........................................................S-59
Non-U.S. Persons.............................................................................S-59
Prohibited Transactions Tax and Other Taxes..................................................S-61
Backup Withholding...........................................................................S-61
S-2
State Taxes.....................................................................................S-62
ERISA Considerations............................................................................S-62
Legal Investment Considerations.................................................................S-64
Method of Distribution..........................................................................S-65
Legal Matters...................................................................................S-65
Ratings.........................................................................................S-65
Glossary of Terms...............................................................................S-67
Annex I..........................................................................................A-1
Prospectus
Important Notice About Information in this Prospectus and Each
Accompanying Prospectus Supplement.........................................5
Risk Factors..................................................................6
The Trust Fund...............................................................16
Use of Proceeds..............................................................33
The Depositors...............................................................33
Loan Program.................................................................34
Description of the Securities................................................38
Credit Enhancement...........................................................47
Yield and Prepayment Considerations..........................................58
Operative Agreements.........................................................61
Material Legal Aspects of the Loans..........................................82
Material Federal Income Tax Considerations..................................106
State Tax Considerations....................................................152
ERISA Considerations........................................................152
Legal Investment Considerations.............................................158
Method of Distribution......................................................160
Legal Matters...............................................................161
Financial Information.......................................................161
Available Information.......................................................161
Ratings.....................................................................162
Glossary of Terms...........................................................163
S-3
Summary of Terms
o This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of an offering of
the certificates, read carefully this entire document and the accompanying
prospectus.
o This summary provides an overview of certain calculations, cash flow
priorities and other information to aid your understanding and is
qualified by the full description of these calculations, cash flow
priorities and other information in this prospectus supplement and the
accompanying prospectus. Some of the information consists of
forward-looking statements relating to future economic performance or
projections and other financial items. Forward-looking statements are
subject to a variety of risks and uncertainties that could cause actual
results to differ from the projected results. Those risks and
uncertainties include, among others, general economic and business
conditions, regulatory initiatives and compliance with governmental
regulations, and various other matters, all of which are beyond our
control. Accordingly, what actually happens may be very different from
what we predict in our forward-looking statements.
Offered Certificates
On the closing date, [_____________Trust] will issue [___] classes of
certificates, three of which are being offered pursuant to this prospectus
supplement and the accompanying prospectus.
Each class of certificates that is being offered will be book-entry securities
in minimum denominations of $50,000 clearing through DTC [in the United States
or Clearstream or Euroclear (in Europe)].
Trust Fund
The assets of the trust that will support the certificates will consist of a
pool of [fixed-rate] mortgage loans with a principal balance of approximately $
and [adjustable rate] mortgage loans with a principal balance of approximately
$ as of , 200 . [All of the adjustable rate mortgage loans are indexed to
[six-month LIBOR], of which [ ]% have initial fixed rate periods.] The mortgage
loans will have original terms to maturity ranging from [ ] years to 30 years
and will be secured by first liens on one- to four-family residential
properties.
Other Certificates
The trust will issue [two] additional classes of certificates. These
certificates will be designated the [Class OC and] Class R Certificates and are
not being offered to the public pursuant to this prospectus supplement and the
prospectus. [The Class OC Certificates will not have an original principal
balance.] The Class R Certificates will have an original principal balance of
[$100].
See "The Mortgage Pool" and "Description of the Certificates-- General" and
"--Book-Entry Certificates" in this prospectus supplement and "The Trust
Fund--The Mortgage Loans--General" in the prospectus.
Cut-off Date
__________ __, 200_
S-4
Closing Date
On or about __________ __, 200_
The Depositor
[Greenwich Capital Acceptance, Inc.]
600 Steamboat Road
Greenwich, Connecticut 06830
(203) 625-2700
Seller
[____________________]
Master Servicer
[____________________]
Trustee
[____________________]
Originator(s)
[____________________]
Designations
Each class of certificates will have different characteristics, some of which
are reflected in the following general designations.
o Offered Certificates
Class A, Class M and Class B Certificates
o Senior Certificates
Class A Certificates
o Mezzanine Certificates
Class M Certificates
o Subordinate Certificates
Class B Certificates
o Residual Certificates
Class R Certificates
o Book-Entry Certificates
Class A, Class M and Class B Certificates
o [Excess Reserve Fund Support Certificates
Class OC Certificates]
o Physical Certificates
[Class OC and] Class R Certificates
Distribution Dates
The trustee will make distributions on the certificates on the __[th] day of
each calendar month beginning on ________ __, 200_ to the holder of record of
the certificates as of the business day preceding such date of distribution. If
the __[th] day of a month is not a business day, then the distribution will be
made on the next business day.
Payments on the Certificates
Interest Payments
The pass-through rate for each class of offered certificates will be calculated
at the rates specified below, subject to the limitations described under
"Description of the Certificates -- Pass-Through Rates" in this prospectus
supplement:
Class A [Index] + __ basis points
Class M [Index] + __ basis points
Class B [Index] + __ basis points
Interest payable on the certificates on a distribution date will accrue during
the period commencing on the prior distribution date and ending on the day
before the current distribution date. The first accrual period will begin on
the closing date and end on _________ __, 200_. Interest will be calculated on
the basis of the actual number of days included in the interest accrual period,
based on a 360-day year.
S-5
See "Description of the Certificates" in this prospectus supplement.
Payment Priorities
On each distribution date, available funds in the trust will be paid in the
following order of priority and subject to the limitations described under
"Description of the Certificates--Allocation of Available Funds" in this
prospectus supplement:
(i) to the Class A Certificates, as current interest and any previously
unpaid interest;
(ii) as current interest, sequentially, to the Class M and Class B
Certificates;
(iii) as principal of the Class A, Class M and Class B Certificates, in that
order, to the extent these classes are entitled to receive
distributions of principal, up to the aggregate amount received on
account of principal of the mortgage loans;
(iv) as principal of the Class A, Class M and Class B Certificates, in that
order, to the extent these classes are entitled to receive
distributions of principal, up to the amount necessary to achieve the
required levels of overcollateralization;
(v) as unpaid interest and reimbursement of certain previously allocated
losses, if any, to the Class M and Class B Certificates;
[(vi) to the Class OC Certificates for deposit into a reserve account to
cover shortfalls or required reserves, before being released to the
Class OC Certificates;] and
(vi) any remaining amounts to the Class R Certificates.
See "Description of the Certificates" in this prospectus supplement.
Advances
The master servicer will make cash advances with respect to delinquent payments
of principal and interest to the extent it reasonably believes that the cash
advances are recoverable from future payments on the related mortgage loans.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the certificates and are not intended to guarantee or
insure against losses.
See "The Pooling and Servicing Agreement--Advances" in this prospectus
supplement.
Optional Termination
The holder of the majority interest in the residual certificates may purchase
all of the remaining assets of the trust after the principal balance of the
mortgage loans and any real estate owned by the trust declines below 10% of the
principal balance of the mortgage loans on [the cut-off date].
If the holder of the majority interest in the residual certificates does not
exercise this option, then the master servicer will have the right to exercise
this option. [If the option is not exercised, the offered certificates still
outstanding will accrue interest at a higher rate.]
See "The Pooling and Servicing Agreement --Termination" and "Description of the
Certificates -- Pass-Through Rates" in this prospectus supplement.
Credit Enhancement
The credit enhancements include overcollateralization, subordination and
S-6
allocation of losses. These credit enhancements are designed to increase the
likelihood that certificateholders with a higher payment priority will receive
regular payments of interest and principal.
Overcollateralization
The mortgage loans owned by the trust pay interest each month that in the
aggregate is expected to exceed the amount needed to pay monthly interest on
the offered certificates and certain fees and expenses of the trust. A portion
of this excess interest will be applied to pay principal on the offered
certificates, which reduces the principal balance of the certificates at a
faster rate than the principal balance of the mortgage loans is being reduced.
As a result, the aggregate principal balance of the mortgage loans is expected
to exceed the aggregate principal balance of the offered certificates. This
feature is referred to as "overcollateralization." The required level of
overcollateralization may increase or decrease over time. We cannot assure you
that sufficient interest will be generated by the mortgage loans to maintain
the required level of overcollateralization.
Subordination and Allocation of Losses
The Class A Certificates will have a payment priority over the mezzanine
certificates and the subordinate certificates. The Class M Certificates will
have a payment priority over the Class B Certificates.
Subordination is designed to provide the holders of certificates with a higher
payment priority protection against losses up to a certain level that are
realized when the unpaid principal balance on a mortgage loan exceeds the
proceeds recovered upon the liquidation of that mortgage loan. Losses will be
applied first to reduce the overcollateralization amount. Thereafter, loss
protection is accomplished by allocating the realized losses first to the
subordinate certificates, until the principal amount of the subordinate
certificates is reduced to zero. Realized losses would then be allocated to the
next most junior class of certificates, the Class M Certificates, until the
principal amount of the Class M Certificates is reduced to zero. Although the
outstanding principal balance of the Class A Certificates will not be reduced
as a result of realized losses, in some circumstances these losses may reduce
the amount of principal ultimately paid to the holders of the Class A
Certificates.
See "Description of the Certificates" in this prospectus supplement.
Ratings
It is a condition of the issuance of the offered certificates that they be
assigned the following ratings by _____________ and _____________.
Rating Rating
Agency Agency
Class Rating Rating
A
M
B
A rating is not a recommendation to buy, sell or hold securities. These ratings
may be lowered or withdrawn at any time by either of the rating agencies.
See "Ratings" in this prospectus supplement.
S-7
Material Federal Income Tax Consequences
In the opinion of [Sidley Austin Brown & Wood LLP] [Thacher Proffitt & Wood LL]
for federal income tax purposes the trust will include multiple segregated
asset pools each of which will qualify as a separate "real estate mortgage
investment conduit" (REMIC). Certain classes of certificates that are
designated as the regular certificates will constitute "regular interests" in
the master REMIC. The Class R Certificates will represent the sole class of
"residual interests" in the master REMIC. The class of certificates designated
as the residual certificates will represent the sole class of residual
interests in each subsidiary REMIC.
[The offered certificates will also represent the right to receive payments
from the excess reserve fund account. The excess reserve fund account will be
treated as an "outside reserve fund" and the trustee intends to treat the
right to receive payments from such account as an interest rate cap agreement
for federal income tax purposes. Beneficial owners of the offered certificates
will be treated for federal income tax purposes as having purchased an
undivided beneficial interest in a regular interest in the master REMIC and as
having acquired rights under an interest rate cap agreement, in each case to
the extent of the owner's proportionate interest in the offered certificates.
A certificateholder generally will recognize ordinary income equal to such
certificateholder's proportionate share of interest and original issue
discount, if any, accrued on the offered certificates and will take into
account a proportionate share of any payments received under the interest rate
cap agreement. A certificateholder's income derived from payments received
under the interest rate cap agreement generally must be accounted for under
the notional principal contract regulations.]
See "Material Federal Income Tax Consequences" in this prospectus supplement
and in the prospectus.
ERISA Considerations
It is expected that the Class A, [Class M and Class B] Certificates may be
purchased by a pension or other employee benefit plan subject to ERISA or
section 4975, of the Internal Revenue Code of 1986, as amended, so long as
certain conditions are met. A fiduciary of an employee benefit plan must
determine that the purchase of a certificate is consistent with its fiduciary
duties under applicable law and does not result in a non-exempt prohibited
transaction under applicable law.
See "ERISA Considerations" in this prospectus supplement and in the prospectus.
Legal Investment Considerations
The Class A Certificates and Class M Certificates will be "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 as long as they are rated in one of the two highest rating categories by
at least one nationally recognized statistical rating organization. The Class B
Certificates will not be rated in one of the two highest rating categories by a
nationally recognized statistical rating organization and, therefore, will not
be "mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984.
See "Legal Investment Considerations" in this prospectus supplement and in the
prospectus.
Listing
The certificates are not listed, and no party to the transaction intends to
list the certificates on any stock exchange or to
S-8
quote them in the automated quotation system of a registered securities
association.
Risk Factors
There are risks associated with an investment in the certificates. You should
consider carefully the material risks disclosed under the heading "Risk
Factors" beginning on page S-10 of this prospectus supplement and beginning on
page 5 of the accompanying prospectus.
S-9
Risk Factors
The following information, together with the information set forth under
"Risk Factors" in the prospectus, identifies the principal risk factors of an
investment in the certificates.
Loan prepayments
may adversely affect the
average life of, and rate of
return on, your certificates.......Borrowers may prepay their mortgage loans in
whole or in part at any time. We cannot
predict the rate at which borrowers will
repay their mortgage loans. A prepayment of
a mortgage loan generally will result in a
prepayment on the certificates.
o If you purchase your certificates at a
discount and principal is repaid slower
than you anticipate, then your yield may
be lower than you anticipate.
o If you purchase your certificates at a
premium and principal is repaid faster
than you anticipate, then your yield may
be lower than you anticipate.
o The rate of prepayments on the mortgage
loans will be sensitive to prevailing
interest rates. Generally, if prevailing
interest rates decline significantly below
the interest rates on the fixed-rate
mortgage loans, those mortgage loans are
more likely to prepay than if prevailing
rates remain above the interest rates on
such mortgage loans. In addition, if
interest rates decline, adjustable-rate
mortgage loan prepayments may increase due
to the availability of fixed-rate mortgage
loans at lower interest rates. Conversely,
if prevailing interest rates rise
significantly, the prepayments on
fixed-rate and adjustable-rate mortgage
loans are likely to decrease.
o [The mortgage loans held in the trust
include "balloon loans." Balloon loans
generally provide for scheduled monthly
payments with a final lump sum payment in
the ___th month. This lump sum payment is
substantially larger than the previous
scheduled payments. Having balloon loans
in the trust may cause the prepayment rate
to vary more than if there were no balloon
loans, because the borrower generally must
refinance the mortgage loan or sell the
mortgaged property prior to payment of the
lump sum on the maturity date.]
S-10
o [Some of the mortgage loans require the
mortgagor to pay a penalty if the
mortgagor prepays the mortgage loan during
periods ranging up to [five years] after
the mortgage loan was originated. A
prepayment penalty may discourage a
borrower from prepaying the mortgage loan
during the applicable period.]
o The seller may be required to purchase
mortgage loans from the trust due to
certain breaches of representations and
warranties that have not been cured. These
purchases will have the same effect on the
holders of the offered certificates as a
prepayment of the mortgage loans.
o So long as the overcollateralization level
remains greater than zero, liquidations of
defaulted mortgage loans will have the
same effect on holders of the offered
certificates as a prepayment of the
related mortgage loans.
o If the rate of default and the amount of
losses on the mortgage loans are higher
than you expect, then your yield may be
lower than you expect.
See "Yield, Prepayment and Maturity
Considerations" in this prospectus
supplement for a description of factors that
may influence the rate and timing of
prepayments on the mortgage loans.
Potential inadequacy
of credit enhancement
may result in losses on
your certificates................ The certificates are not insured by any
financial guaranty insurance policy. The
overcollateralization, subordination and
allocation of loss features described in the
summary are intended to enhance the
likelihood that holders of the Class A
Certificates will receive regular payments
of interest and principal.
If delinquencies or defaults occur on the
mortgage loans, neither the master servicer
nor any other entity will advance scheduled
monthly payments of interest and principal
on delinquent or defaulted mortgage loans if
such advances are not likely to be
recovered. We cannot assure you that the
applicable credit enhancement will
adequately cover any shortfalls in cash
available to pay your certificates as a
result of such delinquencies or defaults.
S-11
If substantial losses occur as a result
of defaults and delinquent payments on the
mortgage loans, investors, particularly
investors in the subordinate certificates,
may lose their initial investment.
Overcollateralization may
not always generate the
amount of excess interest
needed to compensate for
losses on the mortgage loans...... Because the weighted average of the interest
rates on the mortgage loans is expected to
be higher than the weighted average of the
interest rates on the certificates, the
mortgage loans are expected to generate more
interest than is needed to pay interest owed
on the certificates as well as trust
expenses. Any remaining interest will then
be used to compensate for losses on the
mortgage loans. After these financial
obligations of the trust are covered, the
available excess interest will be used to
create and maintain overcollateralization.
We cannot assure you, however, that enough
excess interest will be generated to
maintain the overcollateralization level
required by the rating agencies. The factors
described below will affect the amount of
excess interest that the mortgage loans will
generate.
o Every time a mortgage loan is prepaid,
excess interest may be reduced because
the mortgage loan will no longer be
outstanding and generating interest or,
in the case of a partial prepayment, will
be generating less interest.
o Every time a mortgage loan is liquidated
or written off, excess interest will be
reduced because such mortgage loans will
no longer be outstanding and generating
interest.
o If the rates of delinquencies, defaults
or losses on the mortgage loans turn out
to be higher than expected, excess
interest will be reduced as necessary to
compensate for any shortfalls in cash
available on such date to pay
certificateholders.
o The mortgage loans have rates that are
fixed or that adjust based on an index
that is different from the index used to
determine rates on the certificates. As a
result, interest rates on the
certificates may increase relative to
interest rates on the mortgage loans,
requiring that more of the interest
generated by the mortgage loans be
applied to cover interest on the
certificates.
S-12
Subordination of certain
classes of certificates may
reduce payments on those
certificates..................... When certain classes of certificates provide
credit enhancement for other classes of
certificates, this form of credit
enhancement is referred to as
"subordination." For any particular class,
"related junior class" means the class that
is subordinate to such class. The order of
seniority, beginning with the most senior
class, is Class A, Class M and Class B.
Credit enhancement is provided for the
certificates first by the right of the
holders of certain classes of certificates
to receive certain payments of interest
prior to the related junior classes and
certain payments of principal prior to the
related junior classes. This form of credit
enhancement is provided solely from
collections on the mortgage loans otherwise
payable to the holders of the related junior
classes. Credit enhancement also is provided
by the allocation of realized losses first
to the related junior classes. Thus, if the
aggregate principal balance of the related
junior classes were to be reduced to zero,
delinquencies and defaults on the mortgage
loans would reduce the amount of funds
available for monthly payments to holders of
the remaining certificates.
See "Description of the Certificates" in
this prospectus supplement and "Credit
Enhancement -- Subordination" in the
prospectus.
Certain features of adjustable
loan rates may adversely affect
the average life of, and rate of
return on, your certificates..... The offered certificates accrue interest at
pass-through rates based on the [one-month
LIBOR] index plus a specified margin, but
are subject to certain caps. The caps on
interest paid on the certificates are based
on the weighted average of the interest
rates on the mortgage loans net of certain
trust expenses. The trust includes [fixed
rate] and [adjustable rate mortgage loans
with rates that are based on the [six-month
LIBOR] index]. The adjustable rate mortgage
loans have periodic and maximum limitations
on adjustments to the mortgage loan rate. As
a result, the offered certificates may
accrue less interest than they would accrue
if their rates were based solely on the
one-month LIBOR index plus the specified
margin. If this circumstance occurred, the
value of the offered certificates may be
temporarily or permanently reduced.
S-13
A variety of factors could limit the
pass-through rates on the offered
certificates in a rising interest rate
environment. Some of these factors are
described below.
o The trust includes fixed rate mortgage
loans on which the rate of interest does
not adjust.
o The [one-month LIBOR] index is different
from the index used to calculate the loan
rates on the adjustable rate mortgage
loans in the trust.
o The pass-through rates adjust monthly
while the loan rates on the adjustable
rate mortgage loans adjust less
frequently, [and some adjustable rate
mortgage loans have initial fixed rate
periods following the date of
origination.]
o It is possible that interest rates on the
adjustable rate mortgage loans may
decline while pass-through rates on the
certificates are stable or rising. It is
also possible that interest rates on both
the adjustable rate mortgage loans and
the certificates may decline or increase
during the same period, but that the
pass-through rates on the certificates
may decline more slowly or increase more
rapidly.
These factors may adversely affect the
yields to maturity on the offered
certificates.]
Loan prepayments
may result in shortfalls
in interest collections and
reduce the yield on your
certificates..................... When a mortgage loan is prepaid in full, the
borrower is charged interest only up to the
date on which payment is made, rather than
for an entire month. This may result in a
shortfall in interest collections available
for payment on the next distribution date.
[The master servicer is required to cover a
portion of the shortfall in interest
collections that are attributable to
prepayments, but only up to the master
servicer's servicing fee for the related
period.]
Underwriting standards and
default risks may adversely
affect your investment in the
certificates..................... The mortgage loans were originated by
[various originators], none of which is
affiliated with the depositor. [Discussion
of originators' underwriting standards.]
S-14
Newly originated loans
are more likely to default....... Defaults on mortgage loans are generally
expected to occur more frequently in the
early years of the terms of mortgage loans.
[Many of] the mortgage loans in the trust
were originated [within the past year.]
Geographic concentration
of the trust's loans may
adversely affect your
certificates..................... The following chart reflects the [_____]
states with highest concentrations of
mortgage loans in the trust based on the
initial pool principal balance.
[Table]
In addition, the conditions below will
have a disproportionate impact on the
mortgage loans in general.
o Economic conditions in [___________] may
affect the ability of borrowers to repay
their loans on time.
o Declines in the [_______, ________, and
_________] residential real estate
markets may reduce the values of
properties located in those states, which
would result in an increase in the
loan-to-value ratios.
o Any increase in the market value of
properties located in [_______, ________,
and _________] would reduce the
loan-to-value ratios and could,
therefore, make alternative sources of
financing available to the borrowers at
lower interest rates. This in turn could
result in an increased rate of prepayment
of the mortgage loans.
The certificates are
sophisticated investments
and may not be suitable
to you........................... The offered certificates may not be an
appropriate investment for investors who do
not have sufficient resources or expertise
to evaluate the particular characteristics
of the applicable class of offered
certificates. This may be the case because,
among other things:
o The yield to maturity of offered
certificates purchased at a price other
than par will be sensitive to the
uncertain rate and timing of principal
prepayments on the mortgage loans.
S-15
o The rate of principal distributions on
and the weighted average lives of the
offered certificates will be sensitive to
the uncertain rate and timing of
principal prepayments on the mortgage
loans and the priority of principal
payments among the classes of
certificates. Therefore, the offered
certificates may be an inappropriate
investment if you require a payment of a
particular amount of principal on a
specific date or an otherwise predictable
stream of payments.
o You may be unable to reinvest amounts
received as principal on an offered
certificate at a rate comparable to the
applicable pass-through rate. In general,
principal prepayments are expected to be
greater during periods of relatively low
interest rates.
o A market for resale of the offered
certificates may not develop or provide
certificateholders with liquidity of
investment.
You should also carefully consider the
further matters discussed under the heading
"Yield, Prepayment and Maturity
Considerations" in this prospectus
supplement and under the heading "Risk
Factors" in the prospectus.
It may be difficult to
resell your certificates......... [Underwriter] intends to make a secondary
market in the classes of certificates
actually purchased by it, but it has no
obligation to do so. There is no assurance
that such a secondary market will develop
or, if it develops, that it will continue.
Furthermore, the certificates are not
listed, and the parties to the transaction
do not intend to list the certificates on
any stock exchange or to quote them in the
automated quotation system of a registered
securities association.
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 mortgage 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.
S-16
There is a Glossary of Terms beginning on page S-67 where you will find
definitions of the capitalized terms used in this prospectus supplement.
S-17
The Mortgage Pool
General
The [____________] Trust will consist of a pool of closed-end, [fixed rate
and adjustable rate] mortgage loans secured by first liens on one- to
four-family residential properties. Unless specifically indicated to the
contrary, all statistics with respect to the mortgage loans in the pool are
based on their principal balances, interest rates, terms to maturity and
similar statistics as of the __________ ___, 200_ cut-off date. All weighted
averages specified in this prospectus supplement are weighted based on the
principal balances of the mortgage loans as of the cut-off date. References to
percentages of the mortgage loans mean percentages based on the aggregate
principal balance of the mortgage loans in the pool as of the cut-off date,
unless otherwise specified.
The description in this prospectus supplement of the mortgage pool and the
related mortgaged properties is based upon the mortgage pool as constituted at
the close of business on the cut-off date, as adjusted for the principal
payments received on or before that date. Prior to the issuance of the
certificates by the trust, mortgage loans may be removed from the mortgage pool
as a result of incomplete documentation or otherwise, if the depositor deems
such removal necessary or desirable, 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 those mortgage loans would
materially alter the characteristics of the mortgage pool as described. 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
interest rates on the individual mortgage loans, the range of maturities and
certain other characteristics may vary.
Mortgage Loan Statistics
The mortgage pool will consist of approximately [________] conventional,
[fixed rate and adjustable rate] mortgage loans secured by first liens on
residential real property. The mortgage loans have original terms to maturity
ranging from [___] years to 30 years. The mortgage pool consists of [___] fixed
rate mortgage loans having an aggregate principal balance as of the cut-off
date of approximately $[__________] and approximately [_____] adjustable rate
mortgage loans having an aggregate principal balance as of the cut-off date of
approximately $[___________], in each case after application of payments of
principal due on or before the cut-off date whether or not received, and in
each case subject to a permitted variance of plus or minus [5]%. [Each
adjustable rate mortgage loan provides for a [semi-annual] adjustment to the
mortgage rate based on an Index [six-month London interbank offered rates
(LIBOR) for United States dollar deposits] and for corresponding adjustments to
the monthly payment amount, in each case subject to the limitations described
under "--Adjustable Rate Mortgage Loans" in this prospectus supplement.
However, [_____]% of the adjustable rate mortgage loans are "delayed first
adjustment mortgage loans" since the first interest rate adjustment will occur
after an initial period of [___] years.
S-18
The mortgage loans are secured by a "mortgage" by which we mean mortgages,
deeds of trust or other similar security instruments, creating first liens on
residential properties consisting of detached or semi-detached one- to
four-family dwelling units and individual condominium units. [Approximately
[______]% of the mortgage loans had a loan-to-value ratio at origination in
excess of 80%.] There can be no assurance that the loan-to-value ratio of any
mortgage loan determined at any time after origination is less than or equal to
its original loan-to-value ratio. The due date for the scheduled monthly
payment on each mortgage loan is [the first day of the month], [except for
approximately [____]% of the mortgage loans which have their due dates on other
dates during the month.] [Each mortgage loan will contain a customary
"due-on-sale" clause.]
[Approximately [_____]% of the mortgage loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such mortgage loan provides for payment of a
prepayment charge on certain partial prepayments and all prepayments in full
made within [______] from the date of origination of the loan. The amount of
the prepayment charge is set forth in the related mortgage note and is
generally equal to [______].]
[___] fixed rate mortgage loans comprising approximately [____]% of the
pool principal balance as of the cut-off date are "balloon" loans which
amortize over [360] months but have a balloon payment due and payable on the
due date of the [ ] month. The amount of the balloon payment on each balloon
loan is substantially in excess of the amount of the scheduled monthly payment
on the loan for the period prior to the due date of the balloon payment.
Each mortgage loan had a loan rate of not less than [___]% per annum and
not more than [_____]% per annum. As of the cut-off date, the average principal
balance of the mortgage loans was approximately $[_______], the weighted
average loan rate of the mortgage loans was [___]% per annum. The weighted
average remaining term to maturity of the mortgage loans will be approximately
[___] months as of the cut-off date. [None of the mortgage loans will have a
first due date prior to __________ __, 19__ or after ___________ __, 20__ or
will have a remaining term to maturity of less than [___] months or greater
than 30 years as of the cut-off date.] The month of the latest maturity date of
any mortgage loan is ___________ 20__].
No mortgage loan had a principal balance as of the cut-off date of greater
than approximately $[___] or less than approximately $[___].
The mortgage loans are expected to have the following characteristics as
of the cut-off date (the sum in any column may not equal the total indicated
due to rounding):
S-19
Principal Balances of the Mortgage Loans as of the Cut-off Date
Number of Principal Balance % of Aggregate Principal
Mortgage Outstanding as of Balance Outstanding as of
Principal Balance ($) Loans the Cut-off Date the Cut-off Date
------------------------------------------ -------------- --------------------- ---------------------------
$ %
-------------- --------------------- ---------------------------
Total................................ $ 100.00%
============== ===================== ===========================
The weighted average principal balance of the mortgage loans as of the cut-off date was $_____.
Original Terms to Maturity of the Mortgage Loans
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Original Term (months)( of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------ -----------------------
$ %
------------------- ------------------------ -----------------------
Total................... $ 100.00%
=================== ======================== =======================
The weighted average original term to maturity of the mortgage loans was [___] months.
Property Types of the Mortgage Loans
% 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
- ------------------------------- ------------------- ------------------------ -----------------------
%
2-4 Units.................... $
Condominium..................
Manufactured Housing.........
PUD..........................
Single Family Detached.......
Unknown......................
------------------- ------------------------ -----------------------
Total................... $ 100.00%
=================== ======================== =======================
S-20
Occupancy Status of the Mortgage Loans
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Occupancy Status of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------- -----------------------
Investor..................... $ %
Primary......................
Second Home..................
------------------- ------------------------- -----------------------
Total................... $ 100.00%
=================== ========================= =======================
Purpose of the Mortgage Loans
% of Aggregate
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Purpose Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------ -----------------------
Purchase..................... $ %
Rate/Term Refinance..........
------------------- ------------------------ -----------------------
Total................... $ 100.00%
=================== ======================== =======================
Loan Rates of the Mortgage Loans
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Loan Rate (%) of Mortgage Loans the Cut-off Date the Cut-off Date
------------- ------------------- ------------------------ -----------------------
$ %
------------------- ------------------------ -----------------------
Total....................... $ 100.00%
=================== ======================== =======================
The weighted average loan rate of the mortgage loans as of the cut-off date was [___]% per annum.
S-21
Loan Rates of the Fixed Rate Mortgage Loans
% of Aggregate
Principal Balance
of Fixed Rate
Number Principal Balance Mortgage Loans
of Mortgage Outstanding as of Outstanding as of
Loan Rate (%) Loans the Cut-off Date the Cut-off Date
--------------- ----------------- --------------------------- -------------------------
$ %
--------------- ----------------- --------------------------- -------------------------
Total............. $ 100.00%
=============== ================= =========================== =========================
The weighted average loan rate of the fixed rate mortgage loans as of the cut-off date was [___]% per annum.
Original Loan-to-Value Ratios of the Mortgage Loans
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Original Loan-to-Value Ratio(%) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------- ------------------ ---------------------- --------------------
$ %
------------------ ---------------------- --------------------
Total....................... $ 100.00%
================== ====================== ====================
The weighted average original loan-to-value ratio of the mortgage loans was [___]%.
S-22
Geographic Distribution of the Mortgaged Properties
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Location of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------- ------------------ ---------------------- --------------------
$ %
------------------ ---------------------- --------------------
Total................................... $ 100.00%
================== ====================== ====================
S-23
Prepayment Charges
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Months of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------- ------------------ ---------------------- --------------------
$ %
------------------ ---------------------- --------------------
Total............................... $ 100.00%
================== ====================== ====================
Adjustable Rate Mortgage Loans
Each adjustable rate mortgage loan provides for [semi-annual] adjustment
to its loan rate and for corresponding adjustments to the monthly payment
amount due on the loan. These adjustments to the loan rate and monthly payment
amount will occur on each related adjustment date specified in the related
mortgage note. However, in the case of the delayed first adjustment mortgage
loans which represent approximately [__]% of adjustable rate loss by aggregate
principal balance as of the cut-off date, the first rate adjustment will occur
after an initial period of [__________]. On each rate adjustment date for an
adjustable rate mortgage loan, the loan rate will be adjusted to equal the sum,
[rounded to the nearest multiple of 0.125%,] of the [six-month LIBOR] index and
a fixed percentage amount known as the gross margin. However, the loan rate on
an adjustable rate mortgage loan generally will not increase or decrease by
more than its periodic rate cap of 1.50% per annum on any rate adjustment date,
except that the loan rate may increase or decrease by a higher percentage per
annum on the initial rate adjustment date.] The loan rate on each adjustable
rate mortgage loan will never exceed a specified maximum loan rate over the
life of the loan or be less than a specified minimum loan rate over the life of
the loan. The delayed first adjustment mortgage loans have a weighted average
periodic rate cap of approximately [___]% per annum. Effective with the first
monthly payment due on an adjustable rate mortgage loan after the related rate
adjustment date, the monthly payment amount will be adjusted to an amount that
will amortize fully the outstanding principal balance of the loan over its
remaining term, and pay interest at the loan rate as so adjusted. Due to the
application of the periodic rate caps and the maximum loan rates, the loan rate
on each adjustable rate mortgage loan, as adjusted on any rate adjustment date,
may be less than the sum of the [six-month LIBOR] index and the related gross
margin, rounded as described above. See "--The Index" below. None of the
adjustable rate mortgage loans permits the related mortgagor to convert the
adjustable loan rate thereon to a fixed loan rate.
S-24
As of the cut-off date, the adjustable rate mortgage loans had loan rates
as of the cut-off date of not less than [______]% per annum and not more than
[_____]% per annum and the weighted average loan rate was approximately
[_____]% per annum. As of the cut-off date, the adjustable rate mortgage loans
had gross margins ranging from [_______]% to [______]%, minimum loan rates
ranging from [_____]% per annum to [_____]% per annum and maximum loan rates
ranging from [_____]% per annum to [_____]% per annum. As of the cut-off date,
the weighted average gross margin was approximately [_____]%, the weighted
average minimum loan rate was approximately [_____]% per annum [(exclusive of
the adjustable rate mortgage loans that do not have a minimum loan rate)] and
the weighted average maximum loan rate was approximately [_____]% per annum.
The latest next rate adjustment date following the cut-off date on any
adjustable rate mortgage loan occurs in [_______ 200_] and the weighted average
next rate adjustment date for all of the adjustable rate mortgage loans
following the cut-off date is [_______ 200_].
The percentages set forth in the tables that follow are percentages of the
adjustable rate mortgage loans as of the cut-off date. The information set
forth in the table showing the initial adjustment rate caps relates solely to
the initial rate adjustments. The information set forth in the table showing
the subsequent periodic rate caps relates to all rate adjustments subsequent to
initial rate adjustments.
The adjustable rate mortgage loans are expected to have the following
characteristics as of the cut-off date (the sum in any column may not equal the
total indicated due to rounding):
S-25
Loan Rates of the Adjustable Rate Mortgage Loans
% of Aggregate
Principal Balance
of Adjustable Rate
Principal Baalance Mortgage Loans
Number of Outstanding as of Outstanding as of
Loan Rate (%) Mortgage Loans the Cut-off Date the Cut-off Date
- ---------------------------------- ------------------- ------------------------ -------------------------
$ %
------------------- ------------------------ -------------------------
Total..................................... $ 100.00%
=================== ======================== =========================
Maximum Loan Rates of the Adjustable Rate Mortgage Loans
% of Aggregate
Principal Balance
of Adjustable Rate
Number of Principal Balance Mortgage Loans
Mortgage Outstanding as of Outstanding as of
Maximum Loan Rate (%) Loans the Cut-off Date the Cut-off Date
- ---------------------------------- ------------------- ------------------------ -------------------------
$ %
------------------ ------------------------- ----------------------
Total.......................... $ 100.00%
================== ========================= ======================
S-26
Minimum Loan Rates of the Adjustable Rate Mortgage Loans
% of Aggregate
Principal Balance
of Adjustable Rate
Principal Balance Mortgage Loans
Number of Outstanding as of Outstanding as of
Minimum Loan Rate (%) Mortgage Loans the Cut-off Date the Cut-off Date
------------------------------------ ----------------- ------------------------- ----------------------
$ %
----------------- ------------------------- ----------------------
Total.......................... $ 100.00%
================= ========================= ======================
S-27
Gross Margins of the Adjustable Rate Mortgage Loans
% of Aggregate
Principal Balance
of Adjustable Rate
Number Principal Balance Mortgage Loans
of Mortgage Outstanding as of Outstanding as of
Gross Margins (%) Loans the Cut-off Date the Cut-off Date
----------------------------- ----------------- ------------------------ ------------------------
$ %
----------------- ------------------------ ------------------------
Total.................. $ 100.00%
================= ======================== ========================
S-28
Next Rate Adjustment Date for the Adjustable Rate Mortgage Loans
% of Aggregate
Principal Balance
of Adjustable Rate
Principal Balance Mortgage Loans
Next Rate Number of Outstanding as of Outstanding as of
Adjustment Date Mortgage Loans the Cut-off Date the Cut-off Date
----------------------------- ----------------- ----------------------- ------------------------
$ %
----------------- ----------------------- ------------------------
Total.................. $ 100.00%
================= ======================= ========================
S-29
Initial Fixed Term/Subsequent Adjustable Rate Term of the Adjustable Rate Mortgage Loans
% of Aggregate
Principal Balance
of Adjustable Rate
Principal Balance Mortgage Loans
Initial Fixed Term/Subsequent Number of Outstanding as of Outstanding as of
Adjustable Rate Term Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------ ----------------- ----------------------- ------------------------
$ %
----------------- ----------------------- ------------------------
Total..................................... $ 100.00%
================= ======================= ========================
Initial Adjustment Rate Caps of the Adjustable Rate Mortgage Loans
% of Aggregate
Principal Balance
of Adjustable Rate
Principal Balance Mortgage Loans
Number of Outstanding as of Outstanding as of
Initial Periodic Rate Cap (%) Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------ ----------------- ----------------------- ------------------------
$ %
--------------- ------------------------- ------------------------
Total................................ $ 100.00%
=============== ========================= ========================
Subsequent Periodic Rate Caps of the Adjustable Rate Mortgage Loans
% of Aggregate
Principal Balance
of Adjustable Rate
Principal Balance Mortgage Loans
Number of Outstanding as of Outstanding as of
Perodic Rate Cap (%) Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------ --------------- ------------------------- ------------------------
$ %
--------------- ------------------------- ------------------------
Total............................. $ 100.00%
=============== ========================= ========================
S-30
The Loan Index
As of any adjustment date, the loan index used to calculate the loan rate
on each adjustable rate mortgage loan will be [________________].
In the event that the loan index becomes unavailable or otherwise
unpublished, the master servicer will select a comparable alternative loan
index over which it has no direct control and which is readily verifiable.
Underwriting Standards
All of the mortgage loans have been [originated by, or purchased in the
secondary market by], [__________] in the ordinary course of its business. The
mortgage loans were purchased from [___________], representing [___]% of the
pool principal balance as of the cut-off date. Each entity from which the
seller purchased mortgage loans has represented and warranted that each of the
mortgage loans that it sold was underwritten in accordance with standards
utilized during the period of origination by it or by the applicable originator
in originating mortgage loans generally comparable to the mortgage loans sold
to the depositor. As described under "The Pooling and Servicing
Agreement--Assignment of the Mortgage Loans" in this prospectus supplement, the
seller, in its capacity as seller, will make certain representations and
warranties to the trustee regarding the mortgage loans. In the event of a
breach that materially and adversely affects the certificateholders, the seller
will be obligated either to cure the breach or repurchase or replace each
affected mortgage loan.
[Underwriting standards are applied by or on behalf of a lender to
evaluate a borrower's credit standing and repayment ability, and the value and
adequacy of the related mortgaged property as collateral. In general, a
prospective borrower applying for a loan is required to fill out a detailed
application designed to provide the underwriting officer pertinent credit
information. As part of the description of the borrower's financial condition,
the borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expense, as well as an authorization
to apply for a credit report which summarizes the borrower's credit history
with local merchants and lenders and any record of bankruptcy.]
When the seller [originates or acquires] any mortgage loan, the borrower's
credit report is reviewed. [Generally, each credit report provides a credit
score for the borrower. The credit score is based upon the credit evaluation
methodology developed by _________, a consulting firm specializing in creating
evaluation predictive models through a high number of variables components.
Borrower scores generated by [the scoring company] generally range from [__] to
[__] and are available from three major credit bureaus: Experian (formerly
TRW), Equifax and Trans Union. These scores estimate, on a relative basis,
which loans are most likely to default in the future. Lower scores imply higher
default risk relative to a higher score. [Scoring company] scores are
empirically derived from historical credit bureau data and represent a
numerical weighing of a borrower's credit characteristics over a two-year
period. A [scoring company] score is generated through the statistical analysis
of a number of credit-related characteristics or variables. Common
characteristics include number of credit lines (trade lines), payment history,
past delinquencies, severity of delinquencies, current levels of indebtedness,
types of credit and length of credit history. Attributes are specific values of
each characteristic. A scorecard or
S-31
model is created with weights or points assigned to each attribute. An
individual loan applicant's credit score is derived by adding together the
attribute weights for the applicant. With respect to the mortgage loans to be
included in the trust, [_____]% have credit scores for the borrowers with a
weighted average [scoring company] score of [____].
The Master Servicer
The information set forth in the following paragraphs has been provided by
[_________________] without independent verification by the depositor, the
trustee, the underwriter or any of their respective affiliates.
The following table sets forth, for the servicing portfolio serviced by
the master servicer as of [December 31, 2000, as of December 31, 2001 and as of
December 31, 2002], certain information relating to the delinquency experience
at the end of the indicated periods. During the indicated periods, the master
servicer's servicing portfolio consisted of the following categories of assets:
[specify categories]. The delinquency information includes loans in foreclosure
in the master servicer's servicing portfolio but not loans that are subserviced
by others. The indicated periods of delinquency are based on the number of days
past due on a contractual basis. No mortgage loan is considered delinquent for
these purposes until it is one month past due on a contractual basis. The
information contained in the monthly remittance reports which will be sent to
investors will be compiled using the same methodology as that used to compile
the information contained in the table below. The mortgage loans included under
the heading "Loans in Foreclosure" in the table below are also included under
the heading "Total Delinquent Loans".
As of As of As of
December 31, 2000 December 31, 2001 December 31, 2002
------------------------------------ ------------------------------------ ------------------------------------
Percent Percent Percent Percent Percent Percent
By No. By No. By By No. By No. By By No. By No. By
of By Dollar of Dollar of By Dollar of Dollar of By Dollar of Dollar
Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount
------ --------- ------- ------- ------ --------- ------- ------- ------ --------- ------- -------
Total Portfolio.. 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Period of
Delinquency:
30-59 Days.......
60-89 Days.......
90 Days or more..
Total Delinquent
- -----------------
Loans............
Loans in
Foreclosure......
The following tables set forth, as of [December 31, 2000, as of
December 31, 2001 and as of December 31, 2002], certain information relating
to the foreclosure, REO and loan loss experience of mortgage loans included in
the master servicer's servicing portfolio [(which portfolio does not include
mortgage loans that are subserviced by others)] at the end of the indicated
periods. For purposes of these tables, the heading "Foreclosed Loans" refers
to the principal balance of mortgage loans secured by mortgaged properties,
the title to which the master servicer has acquired and the heading
"Foreclosure Ratio" refers to the aggregate principal balance or number of
foreclosed loans divided by the aggregate principal balance, or
S-32
number, as applicable, of mortgaged loans in the master servicer's portfolio at
the end of the indicated period. The tables do not include information relating
to mortgage loans in the master servicer's portfolio that are sub-serviced by
others.
Real Estate Owned
(Dollars in Thousands)
-----------------------------------------------------------------------------------------
As of As of As of
December 31, 2000 December 31, 2001 December 31, 2002
-----------------------------------------------------------------------------------------
By No. By By No. By By No. By
of Dollar of Dollar of Dollar
Loans Amount Loans Amount Loans Amount
-----------------------------------------------------------------------------------------
Total Portfolio.............
Foreclosed Loans............
Foreclosure Ratio...........
Loan Gain/(Loss) Experience
(Dollars in Thousands)
--------------------------------------------------------------------------
As of As of As of
December 31, 2000 December 31, 2001 December 31, 2002
----------------------- ----------------------- ------------------------
Total Portfolio ........................
Net Gains/(Losses) .....................
Net Gains/(Losses) as a Percentage of
Total Portfolio.........................
In the immediately preceding table, the heading "Total Portfolio" refers
to the principal balance of the mortgage loans outstanding on the last day of
the applicable period, and the heading "Net Gains/(Losses)" refers to actual
gains or losses incurred on liquidated properties and shortfall payoffs for
each respective period. Gains or losses on liquidated properties are calculated
at net sales proceeds less book value (exclusive of loan purchase premium or
discount). Shortfall payoffs are calculated as the difference between principal
payoff amount and unpaid principal at the time of payoff.
It is unlikely that the delinquency experience of the mortgage loans
comprising the mortgage pool will correspond to the delinquency experience of
the master servicer's mortgage portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for the master
servicer's mortgage servicing portfolio only for the periods presented, whereas
the aggregate delinquency experience on the mortgage loans comprising the
mortgage pool will depend on the results obtained over the life of the mortgage
pool. There can be no assurance that the mortgage loans comprising the mortgage
pool will perform consistent with the delinquency or foreclosure experience
described in this prospectus supplement. It should be noted that if the
residential real estate market should experience an overall decline in property
values, the actual rates of delinquencies and foreclosures could be higher than
those previously experienced by the master servicer. In addition, adverse
economic conditions may affect the timely payment by borrowers of scheduled
payments of principal and interest on the mortgage loans and, accordingly, the
actual rates of delinquencies and foreclosures with respect to the mortgage
pool.
S-33
The Pooling and Servicing Agreement
Set forth below is a description of the material provisions of the pooling
and servicing agreement, which will govern the terms of the certificates but
are not described in the prospectus. The description of the pooling and
servicing agreement is subject to, and qualified in its entirety by reference
to, the provisions of the pooling and servicing agreement. Where particular
provisions or terms used in the pooling and servicing agreement are referred
to, the provisions or terms are as specified in the pooling and servicing
agreement.
General
The certificates will be issued pursuant to a pooling and servicing
agreement, dated as of ____________ __, 200_, among the depositor, the seller,
the master servicer and the trustee. The trust fund created under the pooling
and servicing agreement will consist of
o all of the depositor's right, title and interest in the mortgage
loans, the related mortgage notes, mortgages and other related
documents;
o 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;
o any mortgaged properties acquired on behalf of certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues
received on the properties;
o the rights of the trustee under all insurance policies required to be
maintained pursuant to the pooling and servicing agreement; and
o the rights of the depositor under the mortgage loan purchase
agreement between the depositor and the seller.
The offered certificates will be transferable and exchangeable at the
corporate trust offices of the trustee.
Assignment of the Mortgage Loans
On the closing date the depositor will transfer to the trust fund all of
its right, title and interest in and to each mortgage loan included in the
pool, the related mortgage notes, mortgages and other related documents,
including all scheduled payments with respect to each mortgage loan due after
the cut-off date. The trustee, concurrently with this transfer, will deliver
the certificates to the depositor. Each mortgage loan transferred to the trust
fund will be identified on the mortgage loan schedule delivered to the trustee
pursuant to the pooling and servicing agreement. This mortgage loan schedule
will include information such as the principal balance of each mortgage loan
as of the cut-off date, its loan rate and other information.
The pooling and servicing agreement will establish a specified period of
time in which the seller must deliver 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
delivering an original mortgage, the seller may deliver a true and correct
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copy of any original that is not available, together with a lost note affidavit
executed by the seller.
Within [___] days of the closing date, the trustee will review the
mortgage loans and the related documents pursuant to the pooling and servicing
agreement. If any mortgage loan or related document is found to be defective in
any material respect and the defect is not cured within [___] days following
notification to the seller by the trustee, the seller will be obligated to
either
o substitute for the mortgage loan an eligible substitute mortgage
loan, if the substitution occurs within two years of the closing date
and the seller provides an opinion of counsel to the effect that the
substitution will not [disqualify the trust fund as a REMIC or]
result in a prohibited transaction tax under the Internal Revenue
Code; or
o purchase the mortgage loan at a purchase price equal to the
outstanding principal balance of the loan as of the date of purchase,
plus all accrued and unpaid interest thereon, computed at the loan
rate (net of the servicing fee rate and the trustee fee) through the
end of the calendar month in which the purchase is effected, plus the
amount of any unreimbursed advances and servicing advances made by
the master servicer.
The purchase price will be deposited in the collection account on or prior to
the next succeeding determination date after the purchase obligation arises.
The obligation of the seller to repurchase or substitute for a defective
mortgage loan is the sole remedy regarding any defects in the mortgage loans
and related documents available to the trustee or the certificateholders.
An eligible substitute mortgage loan is a mortgage loan substituted by the
seller for a defective mortgage loan which, on the date of substitution
o has an outstanding principal balance (or in the case of a
substitution of more than one mortgage loan for a defective mortgage
loan, an aggregate principal balance) not in excess of, and not more
than 5% less than, the principal balance of the defective mortgage
loan;
o has a loan rate not less than the loan rate of the defective mortgage
loan that has a fixed interest rate and not more than 1% in excess of
the loan rate of the defective mortgage loan, or has a maximum loan
rate and minimum loan rate not less than the respective rate for the
defective mortgage loan that has an adjustable rate and has a gross
margin equal to or greater than the gross margin of the defective
mortgage loan;
o has the same due date as the defective mortgage loan;
o has a remaining term to maturity not more than one year earlier and
not later than the remaining term to maturity of the defective
mortgage loan;
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o complies with each representation and warranty as to the mortgage
loans set forth in the pooling and servicing agreement (deemed to be
made as of the date of substitution); and
o satisfies certain other conditions specified in the pooling and
servicing agreement.
In connection with the substitution of an eligible substitute mortgage
loan, the seller will be required to deposit in the collection account on or
prior to the next succeeding determination date after such obligation arises a
substitution adjustment amount equal to the excess of the principal balance of
the related defective mortgage loan over the principal balance of the eligible
substitute mortgage loan.
The seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
trustee with respect to each mortgage loan (e.g., its principal balance and the
loan rate). In addition, the seller will represent and warrant on the closing
date that
o at the time of transfer to the depositor, the seller has transferred
or assigned all of its right, title and interest in each mortgage
loan and the related documents, free of any lien; and
o each mortgage loan complied, at the time of origination, in all
material respects with applicable state and federal laws.
Upon discovery of a breach of any representation and warranty which materially
and adversely affects the interests of the certificateholders in the mortgage
loan and the related documents, the seller will have a period of [___] days
after discovery or notice of the breach to effect a cure. If the breach cannot
be cured within the [___]-day period, the seller will be obligated to
o substitute an eligible substitute mortgage loan for the defective
mortgage loan, or
o purchase the defective mortgage loan from the trust fund.
The same procedure and limitations that are set forth above for the
substitution or purchase of defective mortgage loans as a result of deficient
documentation will apply to the substitution or purchase of a defective
mortgage loan as a result of a breach of a representation or warranty in the
pooling and servicing agreement that materially and adversely affects the
interests of the certificateholders.
Payments on Mortgage Loans; Deposits to Collection Account and Distribution \
Account
Collection Account. The master servicer shall establish and maintain a
collection account. Upon receipt by the master servicer of amounts in respect
of the mortgage loans (excluding amounts representing the servicing fee, the
trustee fee, reimbursement for advances and servicing advances and insurance
proceeds to be applied to the restoration or repair of a mortgaged property or
similar items), the master servicer will deposit those amounts in the
collection account. Amounts deposited may be invested in eligible investments
(as described in the pooling and servicing agreement) maturing no later than
one business day prior to the date on which the
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amount on deposit therein is required to be deposited in the distribution
account or on the distribution date if approved by the Rating Agencies.
Distribution Account. The trustee will establish a distribution account.
Amounts on deposit in the distribution account may be invested in eligible
investments maturing on or before the business day prior to the related
distribution date unless the eligible investments are one of its managed or
advised by the trustee or one of its affiliates, in which case the eligible
investments may mature on the related distribution date.
Eligible Accounts. The collection account and the distribution account
must be eligible accounts. An eligible account is one or more segregated
accounts which
o are maintained with a federal or state chartered depository
institution or trust company the short-term unsecured debt
obligations of which (or, in the case of a depository institution or
trust company that is the principal subsidiary of a holding company,
the short-term unsecured debt obligations of which holding company)
are rated P-1 by Moody's and A-1 by Standard & Poor's (or comparable
ratings if Moody's and Standard & Poor's are not the rating agencies
named under "Ratings" in this prospectus supplement) at the time any
amounts are held on deposit;
o the deposits in which are fully insured by the Federal Deposit
Insurance Corporation (to the limits established by the FDIC), or are
otherwise secured such that, as evidenced by an opinion of counsel
delivered to the trustee and to each Rating Agency, the
certificateholders will have a claim with respect to the funds in
such account or a perfected first priority security interest against
the eligible investments securing the funds that is superior to
claims of any other depositors or creditors of the depository
institution with which such account is maintained;
o which are maintained with the trust department of a federal or state
chartered depository institution, national banking association or
trust company acting in its fiduciary capacity; or
o which are otherwise acceptable to each rating agency named under
"Ratings" without reduction or withdrawal of their then current
ratings of the certificates as evidenced by a letter from that rating
agency to the trustee.
Eligible investments are specified in the pooling and servicing agreement and
are limited to investments which meet the criteria of the rating agencies named
under "Ratings" from time to time as being consistent with their then current
ratings of the certificates.
An eligible account is one or more segregated accounts which
o are maintained with a federal or state chartered depository
institution or trust company the short-term unsecured debt
obligations of which (or, in the case of a depository institution or
trust company that is the principal subsidiary of a holding company,
the short-term unsecured debt obligations of which holding company)
are rated P-1 by Moody's and A-1 by Standard & Poor's (or comparable
ratings if
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Moody's and Standard & Poor's are not the Rating Agencies)
at the time any amounts are held on deposit;
o the deposits in which are fully insured by the Federal Deposit
Insurance Corporation (to the limits established by the FDIC), or are
otherwise secured such that, as evidenced by an opinion of counsel
delivered to the trustee and to each Rating Agency, the
certificateholders will have a claim with respect to the funds in
such account or a perfected first priority security interest against
the eligible investments securing the funds that is superior to
claims of any other depositors or creditors of the depository
institution with which such account is maintained;
o which are maintained with the trust department of a federal or state
chartered depository institution, national banking association or
trust company acting in its fiduciary capacity; or
o which are otherwise acceptable to each Rating Agency without
reduction or withdrawal of their then current ratings of the
certificates as evidenced by a letter from each Rating Agency to the
trustee. Eligible investments are specified in the pooling and
servicing agreement and are limited to investments which meet the
criteria of the Rating Agencies from time to time as being consistent
with their then current ratings of the certificates.
Advances
On or before each distribution date, the master servicer generally will be
obligated to advance its own funds, or funds in the collection account not
included in the calculation of Available Funds for that distribution date, in
an amount equal to
o the aggregate of all payments of principal and interest on the
mortgage loans, other than balloon payments, that were due during the
related due period and delinquent on the related determination date
plus
o assumed payments not covered by a current income on mortgaged
properties that were acquired by foreclosure or deed in lieu of
foreclosure
plus
o with respect to each balloon loan for which the required balloon
payment was not made when due, an assumed monthly payment that would
have been due on the related due date based on its original
amortization schedule.
Advances are required to be made only to the extent they are deemed by the
master servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making advances is to maintain
a regular cash flow to the certificateholders, rather than to guarantee or
insure against losses. The master servicer will not be required to make any
advances with respect to reductions in the amount of the monthly
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payments on the mortgage loans due to bankruptcy proceedings or the application
of the Soldiers' and Sailors' Relief Act of 1940.
All advances will be reimbursable to the master servicer from late
collections, insurance proceeds and liquidation proceeds from the mortgage loan
as to which the unreimbursed advance was made. In addition, any advances
previously made in respect of any mortgage loan that are deemed by the master
servicer to be nonrecoverable from related late collections, insurance proceeds
or liquidation proceeds may be reimbursed to the master servicer out of any
funds in the collection account prior to the distributions on the certificates.
In the event the master servicer fails in its obligation to make any advance,
the trustee, in its capacity as successor master servicer, will be obligated to
make the advance, to the extent required in the pooling and servicing
agreement.
In the course of performing its servicing obligations, the master servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, the cost of
o the preservation, restoration and protection of the mortgaged
properties;
o any enforcement or judicial proceedings, including foreclosures; and
o the management and liquidation of mortgaged properties acquired in
satisfaction of the related mortgage.
These expenditures are referred to as servicing advances.
The master servicer's right to reimbursement for servicing advances is
limited to late collections on the related mortgage loan, including liquidation
proceeds, released mortgaged property proceeds, insurance proceeds and such
other amounts as may be collected by the master servicer from the related
mortgagor or otherwise relating to the mortgage loan in respect of which such
unreimbursed amounts are owed, unless these amounts are deemed to be
nonrecoverable by the master servicer. In that event, the master servicer will
be reimbursed from general funds in the collection account.
The Trustee
[__________], a [________], will be named trustee pursuant to the pooling
and servicing agreement. The trustee will initially serve as custodian of the
mortgage loans.
The principal compensation to be paid to the trustee in respect of its
obligations under the pooling and servicing agreement will be a trustee fee
equal to [____________]. 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 arising out of or in connection
with
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the acceptance or administration of its obligations and duties under the
pooling and servicing agreement. However, if the loss, liability or expense
o constitutes a specific liability of the trustee under the pooling and
servicing agreement; or
o is 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 fund will not provide indemnification.
Servicing and Other Compensation and Payment of Expenses
The master servicer will be paid a servicing fee at a rate of up to [___]%
per annum on the principal balance of each mortgage loan as its principal
compensation for servicing the mortgage loans. The excess servicing fee
represents the difference, if any, between the servicing fee rate for any
mortgage loan and [____]% per annum, and will be [retained by the seller]. As
additional servicing compensation, the master servicer is entitled to retain
all service-related fees (other than prepayment penalties), including
assumption fees, modification fees, extension fees and late payment charges, to
the extent collected from mortgagors, together with any interest or other
income earned on funds held in the collection account and any escrow accounts.
[The master servicer is obligated to offset any prepayment interest shortfall
on any distribution date by making compensating interest payments) by an amount
not in excess of its servicing fee for such distribution date.] The master
servicer is obligated to pay certain insurance premiums and certain ongoing
expenses associated with the mortgage pool and incurred by the master servicer
in connection with its responsibilities under the pooling and servicing
agreement and is entitled to reimbursement therefor as provided in the pooling
and servicing agreement.
The determination date with respect to any distribution date will be the
[__]th day of the calendar month in which the distribution date occurs or, if
the [___]th day is not a business day, the business day immediately following
the [___]th day. [With respect to any determination date and each mortgage loan
as to which a principal prepayment in full or in part was applied during
the related due period, the prepayment interest shortfall represents the amount
equal to interest at the applicable loan rate (net of the servicing fee) on
such principal prepayment for the period commencing on the date on which the
principal prepayment is applied and ending on the last day of the related due
period.]
Voting Rights
With respect to any date of determination, the percentage of all the
voting rights allocated among holders of the offered certificates shall be the
fraction, expressed as a percentage, the numerator of which is the aggregate
principal balance of all the certificates of that class then outstanding and
the denominator of which is the aggregate principal balance of all the
certificates then outstanding. The voting rights allocated to each class of
offered certificates shall be
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allocated among all holders of that class in proportion to the outstanding
principal balance of those certificates.
Amendment
The pooling and servicing agreement may be amended by the seller, the
depositor, the master servicer and the trustee, without the consent of the
holders of the certificates, for any of the purposes set forth under "Operative
Agreements--Amendment" in the accompanying prospectus. In addition, the pooling
and servicing agreement may be amended by the seller, the depositor, the master
servicer and the trustee and the holders of a majority in interest of any
affected class of offered certificates for the purpose of adding any provisions
to, or changing in any manner or eliminating any of the provisions of, the
pooling and servicing agreement or of modifying in any manner the rights of the
holders of offered certificates. However, no amendment may
o reduce in any manner the amount of, or delay the timing of,
distributions required to be made on any offered certificate without
the consent of the holder of the affected certificate;
o adversely affect in any material respect the interests of the holders
of any class of the offered certificates in a manner other than as
described in the prior bullet, without the consent of the holders of
offered certificates of that class evidencing percentage interests
aggregating at least 66%; or
o reduce the affected percentage of the aggregate outstanding principal
amounts of offered certificates, the holders of which are required to
consent to any amendment, without the consent of the holders of all
the affected certificates.
Termination
The holder of the majority interest in the Residual Certificate (or if the
holder does not exercise its option, the master servicer) will have the right
to repurchase all remaining mortgage loans and REO properties and thus effect
the early retirement of the certificates, on any distribution date when the
aggregate principal balance of the mortgage loans and any real estate owned by
the trust is less than or equal to 10% of the pool principal balance as of the
cut-off date. In the event that the option is exercised, the repurchase will be
made at a price equal to par plus accrued interest at the related loan rate for
each mortgage loan to but not including the first day of the month in which the
repurchase price is distributed, plus the amount of any unreimbursed advances
and servicing advances made by the master servicer. Proceeds from the
repurchase will be included in Available Funds and will be distributed to the
holders of the certificates in accordance with the pooling and servicing
agreement.
[Optional Purchase of Defaulted Loans]
[As to any Mortgage loan which is delinquent in payment by [__] days or
more, the master servicer may, at its option, purchase that loan from the trust
fund at its purchase price.]
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Events of Default
Among other things the following will be deemed "events of default" under
the pooling and servicing agreement:
o any failure by the master servicer to deposit in the collection
account or distribution account the required amounts or remit to the
trustee any payment which continues unremedied for one business day
following written notice to the master servicer;
o any failure of the master servicer to make any advance or to cover
any prepayment interest shortfalls, to the extent described in this
prospectus supplement, which failure continues unremedied for one
Business Day;
o any failure by the master servicer to observe or perform in any
material respect any other of its covenants or agreements in the
pooling and servicing agreement, which continues unremedied for 30
days after the first date on which the master servicer has knowledge
of such failure or written notice of such failure is given to the
master servicer;
o insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, and certain actions by or on
behalf of the master servicer indicating its insolvency or inability
to pay its obligations; or
o cumulative Realized Losses as of any distribution date exceed the
amount specified in the pooling and servicing agreement.
Rights upon Event of Default
So long as an event of default under the pooling and servicing agreement
remains unremedied, the trustee acting at the direction of the holders of
offered certificates evidencing not less than 51% of the voting rights, may
terminate all of the master servicer's rights and obligations in its capacity
as servicer with respect to the mortgage loans, as provided in the pooling and
servicing agreement. At that time the trustee will succeed to all of the
responsibilities and duties of the master servicer under the pooling and
servicing agreement, including the obligation to make advances. No assurance
can be given that termination of the rights and obligations of the master
servicer under the pooling and servicing agreement would not adversely affect
the servicing of the mortgage loans, including the delinquency experience of
the loans.
No holder of an offered certificate, solely by virtue of the holder's
status as a holder of an offered certificate, will have any right under the
pooling and servicing agreement to institute any proceeding, unless the holder
previously has given to the trustee written notice of default and unless the
holders of offered certificates having not less than 51% of the voting rights
evidenced by the offered certificates agree to instate the proceeding and have
offered reasonable indemnity to the trustee.
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Description of the Certificates
General
The offered certificates will be issued pursuant to the pooling and
servicing agreement. Set forth below is a description of the material terms and
provisions pursuant to which the offered certificates will be issued. The
following description is subject to, and are qualified in their entirety by
reference to, the actual provisions of the pooling and servicing agreement.
When particular provisions or terms used in the pooling and servicing agreement
are referred to, the provisions or terms are as specified in the pooling and
servicing agreement.
[___________ Trust] will issue
o senior certificates consisting of the Class A Certificates,
o mezzanine certificates consisting of the Class M Certificates,
o subordinate certificates consisting of the Class B Certificates, and
o residual certificates consisting of the Class R Certificate.
The residual certificates are not offered hereby. Only the senior certificates,
the mezzanine certificates and the subordinate certificates, which collectively
constitute the offered certificates, are offered by this prospectus supplement.
The Class A, the Class M and the Class B Certificates will have the
respective aggregate original principal balances specified on the cover of this
prospectus supplement. The aggregate of the original principal balances of the
offered certificates is approximately $[_____________].
The Class R Certificates will have an original principal balance of $[___]
and will [not] bear interest.
The offered certificates will be issued in book-entry form as described
below. The offered certificates will be issued in minimum dollar denominations
of $[______] and integral multiples of $[_______] above that amount (except
that one certificate of each class may be issued in a denomination which is not
an integral multiple). The assumed final maturity date for each Class of
offered certificates is the distribution date occurring in [___________ 20__].
On each distribution date, the trustee will make monthly distributions on
the offered certificates to the persons in whose names the certificates are
registered at the close of business on the related record date which is the
business day immediately preceding that distribution date.
Book-Entry Certificates
The offered certificates will be book-entry certificates. Persons and
entities that acquire beneficial ownership in the offered certificates will be
deemed "certificate owners" and will hold their offered certificates through
DTC [in the United States, or Clearstream Bank, societe anonyme, or Euroclear
(in Europe)] if they are participants in [that] [those] system[s], or
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indirectly through organizations which are participants in [that] [those]
system[s]. The book-entry certificates will be issued in the form of one or
more certificates which equal the aggregate principal balance of the offered
certificates and will initially be registered in the name of Cede & Co., as
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. Investors may hold such beneficial interests in the book-entry
certificates in minimum denominations of $50,000. Except as described below, no
beneficial owner of a book-entry certificate will be entitled to receive a
definitive (i.e., physical) certificate. Unless and until definitive
certificates are issued, it is anticipated that the only certificateholder of
the offered certificates will be Cede, as nominee of DTC. Beneficial owners of
certificates will not be "Certificateholders" as that term is used in the
pooling and servicing agreement. Beneficial owners of certificates are only
permitted to exercise their rights indirectly through DTC participants.
A beneficial owner's ownership of a book-entry certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary that maintains the beneficial owner's account for
such purpose. In turn, the financial intermediary's ownership of the book-entry
certificate will be recorded on the records of DTC (or of a participating firm
that acts as agent for the financial intermediary, whose interest will in turn
be recorded on the records of DTC if the beneficial owner's financial
intermediary is not a DTC participant [and on the records of Clearstream or
Euroclear, as appropriate]).
Beneficial owners will receive all distributions of principal of and
interest on the offered certificates from the trustee through DTC and DTC
participants. While the offered certificates are outstanding (except under the
circumstances described below), DTC rules (consisting of the rules, regulations
and procedures creating and affecting DTC and its operations) require that DTC
o make book-entry transfers among participants on whose behalf it acts
with respect to the offered certificates, and
o receive and transmit distributions of principal of, and interest on,
the offered certificates.
Participants and indirect participants with which beneficial owners have
accounts with respect to offered certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective certificate owners. Accordingly, although beneficial owners of
certificates will not possess physical certificates representing their
respective interests in the offered certificates, DTC rules provide a mechanism
by which certificate owners will receive distributions and will be able to
transfer their interests.
Certificateholders will not receive or be entitled to receive certificates
representing their respective interests in the offered certificates, except
under the limited circumstances described below. Unless and until definitive
certificates are issued, certificateholders which are not DTC
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participants may transfer ownership of offered certificates only through
participants and indirect participants by instructing participants and
indirect participants to transfer offered certificates, by book-entry
transfer, through DTC for the account of the purchasers of the offered
certificates, which account is maintained with their respective participants.
Under DTC rules and in accordance with DTC's normal procedures, transfers of
ownership of offered certificates will be executed through DTC and the
accounts of the respective participants at DTC will be debited and credited.
Similarly, the participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing certificateholders.
[Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a 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 or Clearstream participants on such business day.
Cash received in Clearstream or Euroclear as a result of sales of securities by
or through a Clearstream participant or Euroclear participant to a DTC
participant will be received with value on the DTC settlement date but will be
available in the relevant Clearstream or Euroclear cash account only as of the
business day following settlement in DTC. For information with respect to tax
documentation procedures relating to the certificates, see "Material Federal
Income Tax Consequences--REMIC Certificates --Regular Certificates--Non-U.S.
Persons" and "--Information Reporting and Backup Withholding" in the prospectus
and "Global Clearance, Settlement and Tax Documentation Procedures--Certain
U.S. Federal Income Tax Documentation Requirements" in Annex I to this
prospectus supplement.]
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, these 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. Clearstream participants and Euroclear participants may not deliver
instructions directly to the European depositaries.]
DTC is a New York-chartered limited purpose trust company, and performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the book-entry certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of book-entry certificates will be subject to DTC rules as
in effect from time to time.
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[Clearstream Banking, societe anonyme, is incorporated under Luxembourg
law as a professional depository and provides, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities. Clearstream is subject to regulation by the Luxembourg Monetary
Institute. Clearstream holds securities for its participating organizations,
thereby eliminating the need for physical movement of certificates. 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, whether directly or indirectly.]
[Euroclear was created in 1968 to hold securities for Euroclear
participants and to effect transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash.]
[Euroclear is operated by Euroclear Bank S.A./N.V., as sponsor of
Euroclear under contract with Euroclear System Societe Cooperative, a Belgian
cooperative corporation, which establishes policy for Euroclear on behalf of
the Euroclear participants. 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 with Euroclear Clearance
Systems. The Euroclear operator is regulated and examined by the Board of
Governors of the Federal Reserve System and the New York State Banking
Department, as well as by 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. The Euroclear 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 only on behalf of Euroclear participants, and has no record of or
relationship with persons holding through Euroclear participants.]
Distributions on the book-entry certificates will be made on each
distribution date by the trustee to DTC. DTC will be responsible for crediting
these payment amounts to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing the payments to the beneficial owners of the
book-entry certificates that it represents and to each financial intermediary
for which it acts as agent. In turn, each financial intermediary will be
responsible for disbursing funds to the beneficial owners of the book-entry
certificates that it represents.
Under a book-entry format, beneficial owners of the book-entry
certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the trustee to Cede. [Distributions with respect
to certificates held through Clearstream or Euroclear will be credited to the
cash accounts of Clearstream participants or Euroclear
S-46
participants in accordance with the relevant system's rules and procedures, to
the extent received by the relevant depositary. Distributions will be subject
to tax reporting in accordance with relevant United States tax laws and
regulations. See "Material Federal Income Tax Consequences--REMIC
Certificates--Regular Certificates--Non-U.S. Persons" and "--Information
Reporting and Backup Withholding" in the prospectus.] Because DTC can only act
on behalf of financial intermediaries, the ability of a beneficial owner to
pledge book-entry certificates to persons or entities that do not participate
in DTC, or otherwise take actions in respect of book-entry certificates, may
be limited due to the lack of physical certificates. In addition, issuance of
certificates in book-entry form may reduce the liquidity of the certificates
in the secondary market since certain potential investors may be unwilling to
purchase certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede, as
nominee of DTC, and may be made available by Cede 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 certificates of such beneficial owners are credited.
DTC has advised the trustee that, unless and until definitive certificates
are issued, DTC will take any action permitted to be taken by the holders of
the book-entry certificates under the pooling 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 book-entry
certificates. [Clearstream or the Euroclear operator, as the case may be, will
take any other action permitted to be taken by a certificateholder under the
pooling and servicing agreement on behalf of a Clearstream participant or
Euroclear participant only in accordance with its relevant rules and procedures
and subject to the ability of the relevant depositary to effect such actions on
its behalf through DTC.] DTC may take actions, at the direction of the related
participants, with respect to some offered certificates which conflict with
actions taken with respect to other offered certificates.
Definitive certificates will be issued to beneficial owners of the
book-entry certificates, or their nominees, rather than to DTC, only if
o DTC or [______________] advises the trustee in writing that DTC is no
longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the
book-entry certificates and [________________] or the trustee is
unable to locate a qualified successor;
o [_________________], at its sole option, with the consent of the
trustee, elects to terminate a book-entry system through DTC; or
o after the occurrence of an event of default, beneficial owners having
percentage interests aggregating not less than 51% of the book-entry
certificates advise the trustee and DTC through the financial
intermediaries and the DTC participants in writing that the
continuation of a book-entry system through DTC (or any successor) is
no longer in the best interests of beneficial owners.
S-47
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all beneficial
owners of the occurrence of the event and the availability through DTC of
definitive certificates. Upon surrender by DTC of the global certificate or
certificates representing the book-entry certificates and instructions for
re-registration, the trustee will issue definitive certificates, and thereafter
the trustee will recognize the holders of such definitive certificates as
"Certificateholders" under the pooling and servicing agreement.
Although DTC [, Clearstream and Euroclear] have agreed to the foregoing
procedures in order to facilitate transfers of offered certificates among
participants of DTC, [Clearstream and Euroclear,] they are under no obligation
to perform or continue to perform those procedures, which may be discontinued
at any time.
None of [_________], the master servicer or the trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry certificates held
by Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to beneficial ownership interests.
Priority of Distributions Among Certificates
As more fully described in this prospectus supplement, distributions on
the certificates will be made on each distribution date from Available Funds
and will be made to the classes of certificates (subject to the prior payment
of principal distributions to the Class R Certificates on the first
distribution date) in the following order of priority:
first, to interest on each Class of offered certificates in the priority
and subject to the limitations described under "--Allocations of
Available Funds" below;
second, to current principal of the classes of certificates then entitled
to receive distributions of principal, in the order and subject to
the priorities set forth herein under "--Allocation of Available
Funds";
third, to principal of the classes of certificates then entitled to
receive distributions of principal in order to maintain the
Overcollateralization Target Amount;
fourth, to unpaid interest and the Loss Reimbursement Entitlement in the
order and subject to the priorities described under "--Allocation of
Available Funds";
fifth, to the Class OC Certificates for deposit into the excess reserve
fund account first to cover any Basis Risk Shortfall Amount and then
to cover any Required Reserve Amount, and then to be released to the
Class OC Certificates, in each case subject to certain limitations
set forth herein under "--Allocation of Available Funds"; and
sixth, any remaining amounts to the holders of the Class R Certificates.
S-48
Allocation of Available Funds
Distributions to holders of each class of offered certificates will be
made on each distribution date from Available Funds.
On each distribution date, the trustee will withdraw from the distribution
account all Available Funds then on deposit and will distribute the Available
Funds in the following order of priority (provided that on the first
distribution date the trustee will first distribute all principal due to the
Class R Certificates):
(i) on account of interest to the holders of each class of offered
certificates in the following order of priority:
(a) to the Class A Certificates, the Interest Distributable Amount
for that class for that distribution date; and
(b) sequentially, to the Class M and Class B Certificates, in that
order, the related Monthly Interest Distributable Amount for
that distribution date;
(ii) from the Principal Distribution Amount (giving effect first to the
component of the Principal Distribution Amount equal to the Basic Principal
Distribution Amount and then to the component of the Principal Distribution
Amount equal to the Extra Principal Distribution Amount pursuant to clause
(iii)(a) below):
(a) on each distribution date (1) before the Stepdown Date or (2)
with respect to which a Trigger Event is in effect,
sequentially, to the holders of the Class A, Class M and Class B
Certificates, in that order, the respective Class Principal
Distribution Amount; or
(b) on each distribution date (1) on or after the Stepdown Date and
(2) as long as a Trigger Event is not in effect, to the holders
of the class or classes of offered certificates then entitled to
distribution of principal, in an amount equal to, in the
aggregate, the Principal Distribution Amount in the following
amounts and order of priority:
(1) the lesser of (x) the Principal Distribution Amount and (y)
the Class A Principal Distribution Amount, to the Class A
Certificateholders, until the aggregate principal balance
of the Class A Certificates is reduced to zero;
(2) the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the amount distributed to the
Class A Certificateholders in clause (ii)(b)(1) above and
(y) the Class M Principal Distribution Amount, to the Class
M Certificateholders, until the aggregate principal balance
of the Class M Certificates is reduced to zero; and
(3) the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the sum of the amounts
distributed to the Class A
S-49
Certificateholders in clause (ii)(b)(1) above and the
amount distributed to the Class M Certificateholders in
clause (ii)(b)(2) above and (y) the Class B Principal
Distribution Amount, to the Class B Certificateholders,
until the aggregate principal balance of the Class B
Certificates is reduced to zero;
(iii) any amounts remaining after the distributions in clauses (i) through
(ii) above shall be distributed in the following order of priority:
(a) to fund the Extra Principal Distribution Amount for that
distribution date to be paid as a component of the Principal
Distribution Amount in the same order of priority described in
clause (ii) above;
(b) to the Class M Certificateholders, the related Unpaid Interest
Shortfall Amount for that distribution date and then the related
Loss Reimbursement Entitlement, if any, for that distribution
date;
(c) to the Class B Certificateholders, the related Unpaid Interest
Shortfall Amount for that distribution date and then the related
Loss Reimbursement Entitlement, if any, for that distribution
date; and
(d) to the holders of the Class OC Certificates for deposit into the
Excess Reserve Fund Account first to cover any Basis Risk
Shortfall Amount and then to cover any Required Reserve Amount,
and then to be released to the holders of the Class OC
Certificates, the amounts, if any, as described in the pooling
and servicing agreement; and
(iv) to the holders of the Class R Certificates, the remaining amount.
On each distribution date, all amounts representing prepayment penalties
received during the related due period will be distributed to the holders of
the Class OC Certificates.
Percentage of
the Pool Principal
Balance as of the
Distribution Date Cut-off Date
----------------- ------------------
Pass-Through Rates
The pass-through rate for the Class A, the Class M and the Class B
Certificates for a particular distribution date is a per annum rate equal to
[the lesser of (a) the sum of (i) One-Month LIBOR on the related LIBOR
determination date and (ii) the related pass-through margin and (b) the
Available Funds Cap]. The pass-through margins for the Class A, the Class M-1
and Class B Certificates will be equal to [___]% ([__] basis points), [___]%
([__] basis points) and [___]% ([___] basis points), respectively, until the
first distribution date following the Call Option Date, and [____]% ([___]
basis points), [___]% ([___] basis points) and [___]% ([___] basis points),
respectively, on and after that distribution date.
S-50
[Any Basis Risk Shortfall Amount on any class of offered certificates will
be paid on future distribution dates from and to the extent of funds available
for that purpose in the excess reserve fund account. The ratings on the offered
certificates do not address the likelihood of the payment of any Basis Risk
Shortfall Amount.]
Calculation of [One-Month LIBOR]
[On each LIBOR determination date, which is the second LIBOR business day
preceding the commencement of each Accrual Period following the initial Accrual
Period, the trustee (except for the first Accrual Period) will determine
one-month LIBOR (i.e., the London interbank offered rate for one-month United
States dollar deposits), for that Accrual Period for the offered certificates
on the basis of the offered rates of the reference banks for one-month United
States dollar deposits, as those rates appear on the display page, currently
designated on the Dow Jones Telerate Service as Telerate Page 3750, as of 11:00
a.m. (London time) on that LIBOR determination date. The reference banks to be
used are leading banks selected by the trustee and engaged in transactions in
Eurodollar deposits in the international Eurocurrency market (i) with an
established place of business in London, (ii) whose quotations appear on
Telerate Page 3750 on the LIBOR determination date in question, (iii) which
have been designated as such by the trustee and (iv) not controlling,
controlled by or under common control with, the depositor, the master servicer
or any successor master servicer. If Telerate Page 3750 is no longer available,
the page that replaces it on the Dow Jones Telerate Service for displaying
comparable rates will be used.
On each LIBOR determination date, one-month LIBOR for the related Accrual
Period for the offered certificates will be established by the trustee as
follows:
(a) If on that LIBOR determination date two or more reference banks
provide offered quotations, one-month LIBOR for the related Accrual Period
will be the arithmetic mean of those offered quotations (rounded upwards if
necessary to the nearest whole multiple of 0.0625%).
(b) If on that LIBOR determination date fewer than two reference banks
provide offered quotations, one-month LIBOR for the related Accrual Period
will be the higher of (x) one-month LIBOR as determined on the previous
LIBOR determination date and (y) a reserve interest rate equal to the rate
per annum that the trustee determines to be either (i) the arithmetic mean
(rounded upwards if necessary to the nearest whole multiple of 0.0625%) of
the one-month United States dollar lending rates which New York City banks
selected by the trustee are quoting on the relevant LIBOR determination date
to the principal London offices of leading banks in the London interbank
market or (ii) in the event that the trustee can determine no such
arithmetic mean, the lowest one-month United States dollar lending rate
which New York City banks selected by the trustee are quoting on such LIBOR
determination date to leading European banks.
The establishment of one-month LIBOR on each LIBOR determination date by
the trustee and the trustee's calculation of the rate of interest applicable to
the offered certificates for the related Accrual Period will (in the absence of
manifest error) be final and binding.]
S-51
Application of Allocable Loss Amounts
Following any reduction of the Overcollateralized Amount to zero, any
Allocable Loss Amounts will be applied, sequentially, in reduction of the
aggregate principal balances of the Class B Certificates and the Class M
Certificates, in that order, until their respective aggregate principal
balances have been reduced to zero. The aggregate principal balance of the
Class A Certificates will not be reduced by any application of Allocable Loss
Amounts. However, if the subordinate and mezzanine certificates are reduced to
zero, such losses may ultimately reduce the amount of principal ultimately paid
to the holders of the Class A Certificates. The reduction of the aggregate
principal balance of any applicable class of offered certificates by the
application of Allocable Loss Amounts entitles that class to reimbursement in
an amount equal to the Loss Reimbursement Entitlement. Each affected class of
offered certificates will be entitled to receive its Loss Reimbursement
Entitlement, or any portion thereof, in accordance with the payment priorities
specified in this prospectus supplement. Payment in respect of Loss
Reimbursement Entitlements will not reduce the aggregate principal balance of
the related class or classes.
[Excess Reserve Fund Account]
[The pooling and servicing agreement establishes the excess reserve fund
account, which is held in trust, as part of the trust fund, by the trustee on
behalf of the offered certificateholders. The excess reserve fund account will
not be an asset of any REMIC. Certificateholders of each class of offered
certificates in the order of their priority of payment will be entitled to
receive payments from the excess reserve fund account to the extent of amounts
on deposit in an amount equal to any Basis Risk Shortfall Amount for that class
of certificates. On the closing date, $[_____] will be deposited into the
excess reserve fund account. Thereafter, if the Available Funds Cap does not
exceed one-month LIBOR by at least [___]%, the required amount to be held in
the excess reserve fund account on any subsequent distribution date will equal
the greater of (i) [___]% of the outstanding aggregate principal balance of the
offered certificates as of such distribution date and (ii) $[_____] and will be
funded from amounts otherwise to be paid to the Class OC Certificates. If the
Available Funds Cap does exceed one-month LIBOR by [___]% or more, the required
amount will be $[_____]. Any distribution by the trustee from amounts in the
excess reserve fund account shall be made on the applicable distribution date.
Amounts on deposit in the excess reserve fund account in excess of
$[_____] will be released and distributed to the holders of the Class OC
Certificates on any distribution date on which the Available Funds Cap exceeds
one-month LIBOR by [____]% or more.]
Reports to Certificateholders
On each distribution date, the trustee will forward to each holder of a
certificate and each rating agency named under "Ratings" in this prospectus
supplement a statement generally setting forth:
(i) the amount of the distributions, separately identified, with
respect to each class of the offered certificates;
S-52
(ii) the amount of the distributions set forth in clause (i)
allocable to principal, separately identifying the aggregate amount of any
principal prepayments or other unscheduled recoveries of principal
included therein;
(iii) the amount of the distributions set forth in clause (i)
allocable to interest and now it was calculated;
(iv) the amount of any Unpaid Interest Shortfall Amount with respect
to each class of certificates, separately identified;
(v) the Overcollateralization Target Amount and Overcollateralized
Amount as of that distribution date;
(vi) the aggregate principal balance of each class of offered
certificates after giving effect to the distribution of principal on that
distribution date;
(vii) the pool principal balance at the end of the related due
period;
(viii) the amount of the servicing fee paid to or retained by the
master servicer;
(ix) the amount of the trustee fee paid to the trustee;
(x) the amount of advances for the related due period;
(xi) the number and aggregate principal balance of mortgage loans
that were (A) delinquent (exclusive of mortgage loans in foreclosure) (1)
30 to 59 days, (2) 60 to 89 days and (3) 90 or more days, (B) in
foreclosure and delinquent (1) 30 to 59 days, (2) 60 to 89 days and (3) 90
or more days and (C) in bankruptcy as of the close of business on the last
day of the calendar month preceding that distribution date;
(xii) with respect to any mortgage loan that became an REO property
during the preceding calendar month, the loan number, the principal
balance of that loan as of the close of business on the last day of the
related due period and the date the loan became an REO property;
(xiii) the total number and principal balance of any REO properties
as of the close of business on the last day of the preceding due period;
(xiv) the aggregate amount of Realized Losses incurred during the
preceding calendar month;
(xv) the cumulative amount of Realized Losses;
(xvi) any Overcollateralization Deficiency Amount after giving effect
to the distribution of principal on such distribution date;
(xvii) the Allocable Loss Amounts, if any, allocated to the mezzanine
and subordinate certificates and the Loss Reimbursement Entitlement owing
to the mezzanine
S-53
and subordinate certificates outstanding after giving effect to
distributions on such distribution date;
(xviii) whether a Trigger Event or Overcollateralization Stepdown
Trigger Event has occurred and is continuing;
(xix) the amount of the Extra Principal Distribution Amount;
(xx) the pass-through rate for the Class A, the Class M and Class B
Certificates for that distribution date; and
(xxi) the amount on deposit in the excess reserve fund account on
that distribution date and the Basis Risk Shortfall Amount owing to each
class of offered certificates after giving effect to distributions thereof
on that distribution date.
In addition, within a reasonable period of time after the end of each
calendar year, the trustee will prepare and deliver to each holder of a
certificate of record during the previous calendar year a statement containing
information necessary to enable holders of the Certificates to prepare their
tax returns. Such statements will not have been examined and reported upon by
an independent public accountant.
Yield, Prepayment and Maturity Considerations
The yield to maturity of the offered certificates, and in particular the
subordinate certificates, will be sensitive to defaults on the mortgage loans.
If a purchaser of an offered certificate calculates its anticipated yield based
on an assumed rate of default and amount of losses that is lower than the
default rate and amount of losses actually incurred, its actual yield to
maturity will be lower than that so calculated. Certificateholders of the
offered certificates may not receive reimbursement for Realized Losses in the
month following the occurrence of those losses. In general, the earlier a loss
occurs, the greater is the effect on an investor's yield to maturity. There can
be no assurance as to the delinquency, foreclosure or loss experience with
respect to the mortgage loans. Because the mortgage loans were underwritten
in accordance with standards less stringent than those generally acceptable
to Fannie Mae and Freddie Mac with regard to a borrower's credit standing and
repayment ability, the risk of delinquencies with respect to, and losses on,
the mortgage loans will be greater than that of mortgage loans underwritten in
accordance with Fannie Mae and Freddie Mac standards.
The rate of principal payments on the offered certificates, the aggregate
amount of distributions on the offered certificates and the yields 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 and by the rate of principal prepayments (including for this
purpose prepayments resulting from refinancing, liquidations of the mortgage
loans due to defaults, casualties or condemnations and repurchases by the
seller or master servicer). [Because certain of the mortgage loans contain
prepayment penalties, the rate of principal payments may be less than the rate
of principal payments for mortgage loans which did not have prepayment
penalties.]
S-54
The mortgage loans are subject to the "due-on-sale" provisions included
therein. See "The Mortgage Pool" in this prospectus supplement.
Prepayments, liquidations and purchases of the mortgage loans (including
any optional purchase) will result in distributions on the offered certificates
of principal amounts which would otherwise be distributed over the remaining
terms of the mortgage loans. Since the rate of payment of principal on the
mortgage loans will depend on future events and a variety of other factors, no
assurance can be given as to such rate or the rate of principal prepayments.
The extent to which the yield to maturity of a class of offered certificates
may vary from the anticipated yield will depend upon the degree to which the
offered certificate is purchased at a discount or premium, and the degree to
which the timing of payments thereon is sensitive to prepayments, liquidations
and purchases of the mortgage loans. Further, an investor should consider the
risk that, in the case of any offered certificate purchased at a discount, a
slower than anticipated rate of principal payments (including prepayments) on
the mortgage loans could result in an actual yield to such investor that is
lower than the anticipated yield and, in the case of any offered certificate
purchased at a premium, a faster than anticipated rate of principal payments on
the mortgage loans could result in an actual yield to such investor that is
lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
borrowers' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the loan rates on the fixed
rate mortgage loans, the mortgage loans could be subject to higher prepayment
rates than if prevailing interest rates were to remain at or above the loan
rates on those mortgage loans. Conversely, if prevailing interest rates were to
rise significantly, the rate of prepayments on such mortgage loans would
generally be expected to decrease. As is the case with the fixed rate mortgage
loans, the adjustable rate mortgage loans may be subject to a greater rate of
principal prepayments in a low interest rate environment. For example, if
prevailing interest rates were to fall, borrowers with adjustable rate
mortgage loans may be inclined to refinance their loans with a fixed rate
loan to "lock in" a lower interest rate. The existence of the applicable
periodic rate cap and maximum rate also may affect the likelihood of
prepayments resulting from refinancings of adjustable rate mortgage loans. No
assurances can be given as to the rate of prepayments on the mortgage loans in
stable or changing interest rate environments. In addition, the delinquency and
loss experience of the adjustable rate mortgage loans may differ from that on
the fixed rate mortgage loans because the amount of the monthly payments on the
adjustable rate mortgage loans are subject to adjustment on each payment
adjustment date. [In addition, many of the adjustable rate mortgage loans will
not have their initial rate adjustment date for [__________] after origination.
The prepayment experience of the delayed first adjustment mortgage loans may
differ from that of the other adjustable rate mortgage loans. The delayed first
adjustment mortgage loans may be subject to greater rates of prepayments as
they approach their initial rate adjustment dates even if market interest rates
are only slightly higher or lower than the loan rates on the delayed first
adjustment mortgage loans as borrowers seek to avoid changes in their monthly
payments.]
S-55
Overcollateralization Provisions
The operation of the overcollateralization provisions of the pooling and
servicing agreement will affect the weighted average lives of the offered
certificates and consequently the yields to maturity of the certificates.
Unless and until the Overcollateralized Amount equals the Overcollateralization
Target Amount, the general excess available spread will be applied as
distributions of principal of the class or classes of certificates then
entitled to distributions of principal, thereby reducing their weighted average
lives. The actual Overcollateralized Amount may change from distribution date
to distribution date producing uneven distributions of the general excess
available spread. There can be no assurance as to when or whether the
Overcollateralized Amount will equal the Overcollateralization Target Amount.
The general excess available spread generally is equal to the excess of
interest collected or advanced on the mortgage loans over the sum of required
interest on the offered certificates plus the trustee fee, the servicing fee
rate and, if applicable, the excess servicing fee. Mortgage loans with higher
loan rates will contribute more interest to the general excess available
spread. Mortgage loans with higher loan rates may prepay faster than mortgage
loans with relatively lower loan rates in response to a given change in market
interest rates. Any such disproportionate prepayments of mortgage loans with
higher loan rates may adversely affect the amount of the general excess
available spread available to make accelerated payments of principal of the
offered certificates.
As a result of the interaction of the foregoing factors, the effect of the
overcollateralization provisions on the weighted average lives of the offered
certificates may vary significantly over time and from class to class.
[Additional Information]
[The depositor has filed certain yield tables and other computational
materials with respect to certain classes of the offered certificates with the
SEC in a report on Form 8-K and may file certain additional yield tables and
other computational materials with respect to one or more classes of offered
certificates. Those tables and materials were prepared by the underwriter at
the request of certain prospective investors, based on assumptions provided by,
and satisfying the special requirements of, those prospective investors. Those
tables and assumptions may be based on assumptions that differ from the
structuring assumptions described below under "--Weighted Average Lives" and
accordingly may not be relevant to or appropriate for investors other than
those specifically requesting them.]
Weighted Average Lives
The timing of changes in the rate of principal prepayments on the mortgage
loans may significantly affect an investor's actual yield to maturity, even if
the average rate of principal prepayments is consistent with such investor's
expectation. In general, the earlier a principal prepayment on the mortgage
loans occurs, the greater the effect of the principal prepayment on an
investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period
S-56
immediately following the issuance of the offered certificates may not be
offset by a subsequent like decrease (or increase) in the rate of principal
prepayments.
The projected weighted average life of any class of offered certificates
is the average amount of time that will elapse from the that closing date until
each dollar of principal is scheduled to be repaid to the investors in that
class of offered certificates. Because it is expected that there will be
prepayments and defaults on the mortgage loans, the actual weighted average
lives of the classes of offered certificates are expected to vary substantially
from the weighted average remaining terms to stated maturity of the mortgage
pool as set forth under "The Mortgage Pool--Mortgage Loan Statistics" in this
prospectus supplement.
The Assumed Final Maturity Date for each class of offered certificates is
set forth under "Description of the Certificates--General" in this prospectus
supplement. The weighted average life of each class of offered certificates is
likely to be shorter than would be the case if payments actually made on the
mortgage loans conformed to the foregoing assumptions, and the final
distribution date with respect to the offered certificates could occur
significantly earlier than the related Assumed Final Maturity Date because
o prepayments are likely to occur;
o excess cashflow, if any, will be applied as principal of the offered
certificates as described in this prospectus supplement;
o the Overcollateralization Target Amount is as defined in this
prospectus supplement; and
o the majority residual interestholder or the master servicer may cause
a termination of the trust fund.
The prepayment assumption model used in this prospectus supplement
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. The prepayment assumption model does not purport to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
mortgage loans included in the trust.
Each of the prepayment scenarios in the table on page S-[ ] assumes the
respective percentages of the applicable prepayment assumption model described.
The tables on pages S-[ ] through S-[ ] were prepared on the basis of the
assumptions in the following paragraph and the tables set forth below. There
are certain differences between the loan characteristics included in those
assumptions and the characteristics of the actual mortgage loans in the trust
fund. Any such discrepancy may have an effect upon the percentages of original
principal balances outstanding and weighted average lives of the offered
certificates set forth in the tables on pages S-[ ] through S-[ ]. In addition,
since the actual mortgage loans in the trust fund will have characteristics
that differ from those assumed in
S-57
preparing the tables set forth below, the distributions of principal of the
offered certificates may be made earlier or later than indicated in the
tables.
The percentages and weighted average lives in the tables on pages S-[ ]
through S-[ ] were determined on the basis of the following structuring
assumptions:
[list of structuring assumptions]
Nothing contained in the foregoing assumptions should be construed as a
representation that the mortgage loans in the trust fund will not experience
delinquencies or losses.
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each class of offered certificates, and set
forth the percentages of the original principal balance of each class that
would be outstanding after each of the dates shown, at various prepayment
scenarios.
[TABULAR INFORMATION]
Use of Proceeds
The depositor will apply the net proceeds of the sale of the offered
certificates against the purchase price of the mortgage loans transferred to
the trust fund.
Material Federal Income Tax Consequences
The pooling and servicing agreement provides that the trust fund[,
exclusive of the assets held in the excess reserve fund account, ]will comprise
several subsidiary REMICs and a Master REMIC organized in a tiered "real estate
mortgage investment conduit" (REMIC) structure. Each subsidiary REMIC will
issue uncertificated regular interests and those interests will be held
entirely by the REMIC immediately above it in the tiered structure. Each of the
subsidiary REMICs and the master REMIC will designate a single class of
interests as the residual interest in that REMIC. Elections will be made to
treat each subsidiary REMIC and the master REMIC as a REMIC for federal income
tax purposes.
Assuming compliance with the pooling and servicing agreement, in the
opinion of [Sidley Austin Brown & Wood LLP] [Thacher Proffitt & Wood LLP]
o each subsidiary REMIC and the master REMIC created pursuant to the
pooling and servicing agreement will be characterized as a REMIC
within the meaning of section 860D of the Internal Revenue Code of
1986, as amended;
o the Class R Certificates will represent beneficial ownership of the
residual interests in each of the REMICs;
o each class of offered certificates will represent beneficial
ownership of regular interests issued by the master REMIC; and
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o the excess reserve fund account is an "outside reserve fund" that is
beneficially owned by the certificateholders of the Class [__]
Certificates].
[In addition, each of the offered certificates will represent a beneficial
interest in the right to receive payments from the excess reserve fund
account.]
Taxation of Regular Interests
A certificateholder of a class of offered certificates will be treated for
federal income tax purposes as owning a regular interest in the master REMIC.
Upon the sale, exchange, or other disposition of an offered certificate,
assuming that an offered certificate is held as a "capital asset" within the
meaning of section 1221 of the Code, gain or loss on the disposition of an
offered certificate should, subject to the limitation described below, be
capital gain or loss. However, gain attributable to an offered certificate will
be treated as ordinary income to the extent such gain does not exceed the
excess, if any, of (i) the amount that would have been includible in the
certificateholder's gross income with respect to the regular interest component
had income thereon accrued at a rate equal to 110% of the applicable federal
rate as defined in section 1274(d) of the Code determined as of the date of
purchase of the offered certificate over (ii) the amount actually includible in
the certificateholder's gross income with respect to the offered certificate.
Interest on a REMIC regular interest must be included in income by a
certificateholder under the accrual method of accounting, regardless of the
certificateholder's regular method of accounting. In addition, a regular
interest could be considered to have been issued with original issue discount
(OID). See "Material Federal Income Tax Considerations --REMIC
Certificates--Regular Certificates--Original Issue Discount and Premium" in the
prospectus. The prepayment assumption that will be used to in determining the
accrual of any OID, market discount, or bond premium, if any, will equal the
rate described above under "Yield, Prepayment and Maturity
Considerations--Weighted Average Lives" for Scenario [___]. No representation
is made that the mortgage loans will prepay at that rate or at any other rate.
OID must be included in income as it accrues on a constant yield method,
regardless of whether the certificateholder receives currently the cash
attributable to OID.
Status of the Offered Certificates
The regular interest component of the offered certificates will be treated
as assets described in section 7701(a)(19)(C) of the Code, and as "real estate
assets" under section 856(c)(5)(B) of the Code, generally, in the same
proportion that the assets of the trust fund[, exclusive of the excess reserve
fund account,] would be treated. In addition, to the extent a regular interest
represents real estate assets under section 856(c)(5)(B) of the Code, the
interest derived from that component would be interest on obligations secured
by interests in real property for purposes of section 856(c)(3) of the Code.
Non-U.S. Persons
For purposes of this discussion, a Non-U.S. Person is any person other
than
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o a citizen or resident of the United States;
o a corporation (or entity treated as a corporation for tax purposes)
created or organized in the United States or under the laws of the
United States or of any state thereof, including, for this purpose,
the District of Columbia;
o a partnership (or entity treated as a partnership for tax purposes)
organized in the United States or under the laws of the United States
or of any state thereof, including, for this purpose, the District of
Columbia (unless provided otherwise by future Treasury regulations);
o an estate whose income is includible in gross income for United
States income tax purposes regardless of its source; or
o 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 authority to control all substantial decisions
of the trust. Notwithstanding the last clause of the preceding
sentence, to the extent provided in Treasury regulations, certain
trusts in existence on August 20, 1996, and treated as U.S. Persons
prior to such date, may elect to continue to be U.S. Persons.
Interest paid to or accrued by a certificateholder of an offered
certificate who is a Non-U.S. Person will be considered "portfolio interest",
and will not be subject to U.S. federal income tax and withholding tax, if the
interest is not effectively connected with the conduct of a trade or business
within the United States by the Non-U.S. Person and the Non-U.S. Person
o is not actually or constructively a "10 percent shareholder" of the
trust fund or a "controlled foreign corporation" with respect to
which the trust fund is a "related person" within the meaning of the
Code; and
o provides the trust fund or other person who is otherwise required to
withhold U.S. tax with respect to the offered certificates with an
appropriate statement (on Form W-8BEN or a substantially similar
form), signed under penalties of perjury, certifying that the
beneficial owner of the offered certificate is a Non-U.S. Person and
providing the Non-U.S. Person's name and address.
If an offered certificate is held through a securities clearing organization or
certain other financial institutions, the organization or institution may
provide the relevant signed statement to the withholding agent; in that case,
however, the signed statement must be accompanied by a Form W-8BEN or
substitute form provided by the Non-U.S. Person that owns the certificate.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of an offered certificate by a Non-U.S. Person will be
exempt from United States federal income and withholding tax, provided that (i)
such gain is not effectively connected with the conduct of a trade or business
in the United States by the Non-U.S. Person and (ii) in the case of an
individual, the individual is not present in the United States for 183 days or
more in the taxable year.
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Prohibited Transactions Tax and Other Taxes
The Code imposes a prohibited transactions tax on REMICs equal to 100% of
the net income derived from "prohibited transactions". In general, subject to
certain specified exceptions, a prohibited transaction means the disposition of
a mortgage loan, the receipt of income from a source other than a mortgage loan
or certain other permitted investments, the receipt of compensation for
services, or gain from the disposition of an asset purchased with the payments
on the mortgage loans for temporary investment pending distribution on the
certificates. It is not anticipated that the trust fund will engage in any
prohibited transactions in which it would recognize a material amount of net
income.
In addition, certain contributions to a trust fund that elects to be
treated as a REMIC made after the day on which such trust fund issues all of
its interests could result in the imposition of contributions tax equal to 100%
of the value of the contributed property. It is anticipated that the trust fund
will not accept contributions that would subject it to contributions tax.
In addition, a trust fund that elects to be treated as a REMIC may also be
subject to federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. "Net income from foreclosure property" generally
means gain from the sale of a foreclosure property other than qualifying rents
and other qualifying income for a real estate investment trust. It is not
anticipated that the trust fund will recognize net income from foreclosure
property subject to federal income tax.
Backup Withholding
Certain beneficial owners of certificates may be subject to backup
withholding with respect to interest paid on the offered certificates if the
owners, upon issuance, fail to supply the trustee or their broker with their
taxpayer identification number, furnish an incorrect taxpayer identification
number, fail to report interest, dividends, or other "reportable payments" (as
defined in the Code) properly, or, under certain circumstances, fail to provide
the trustee or their broker with a certified statement, under penalty of
perjury, that they are not subject to backup withholding.
The trustee will be required to report annually to the IRS, and to each
certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the offered certificates (and the amount of interest withheld for
federal income taxes, if any) for each calendar year, except as to exempt
holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their
status as nonresidents). As long as the only holder of record of a class of
offered certificates is Cede & Co., as nominee of DTC, the IRS and the
beneficial owners of that class will receive tax and other information,
including the amount of interest paid on their certificates, from clearing
system participants and financial intermediaries rather than from the trustee.
(The trustee, however, will respond to requests for necessary information to
enable participants, financial intermediaries and certain other persons to
complete their reports.) Each non-exempt beneficial owner will be required to
provide, under penalty of perjury, a certificate on IRS form W-9 containing his
or her name, address, correct
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federal taxpayer identification number and a statement that he or she is not
subject to backup withholding. Should a nonexempt beneficial owner fail to
provide the required certification, the participants or financial
intermediaries (or the paying agent) will be required to impose backup
withholding on the interest (and principal) otherwise payable to the holder,
and remit the withheld amount to the IRS as a credit against the holder's
federal income tax liability.
These amounts will be deemed distributed to the affected beneficial owner
for all purposes of the related Certificates and the pooling and servicing
agreement.
State Taxes
The depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the offered certificates under the tax
laws of any state. Investors considering an investment in the offered
certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the offered certificates.
ERISA Considerations
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and section 4975 of the Internal Revenue Code impose requirements on certain
employee benefit plans and on certain other benefit plans and arrangements,
including individual retirement accounts and annuities and Keogh plans, as
well as on collective investment funds and separate accounts in which these
plans, accounts or arrangements are invested, and on persons who are
fiduciaries with respect to these types of plans and arrangements. In this
prospectus supplement we refer to these types of plans and arrangements as
"Plans."
ERISA prohibits Parties in Interest with respect to a Plan from engaging
in certain transactions involving the Plan and its assets unless a statutory,
regulatory or administrative exemption applies to the transaction. Section 4975
of the Code imposes excise taxes on prohibited transactions involving plans
described under that section; ERISA authorizes the imposition of civil
penalties for prohibited transactions involving plans not covered under section
4975 of the Code. Any Plan fiduciary that proposes to cause a Plan to acquire
any of the offered certificates should consult with its counsel with respect to
the potential consequences under ERISA and the Code of the Plan's acquisition
and ownership of such certificates. See "ERISA Considerations" in the
prospectus.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
those plans may be invested in the offered certificates without regard to the
ERISA considerations described in this prospectus supplement and in the
prospectus, subject to the provisions of other applicable federal, state and
local law. Moreover, any such plan which is qualified and exempt from taxation
under sections
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401(a) and 501(a) of the Code may be subject to the prohibited transaction
rules set forth in section 503 of the Code.
ERISA also imposes certain duties on persons who are fiduciaries of Plans
subject to, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary that decides to
invest the assets of a Plan in the offered certificates should consider, among
other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the mortgage loans.
The U.S. Department of Labor has granted to Greenwich Capital Markets,
Inc. Prohibited Transaction Exemption (PTE) 90-59, as amended by PTE 97-34,
PTE 2000-58 and PTE 2002-41 (the "Exemption"), which exempts from the
application of the prohibited transaction rules transactions relating to
o the acquisition, holding and sale by Plans of certain securities
representing an undivided interest in certain asset-backed
pass-through entities with respect to which Greenwich Capital
Markets, Inc. or any of its affiliates is the sole underwriter or the
manager or co-manager of the underwriting syndicate; and
o the servicing, operation and management of such asset-backed
pass-through entities,
provided, however, that the general conditions and certain other requirements
set forth in the exemption, including the requirement that an investing plan
be an "accredited investor" as defined in Rule 501(a)(1) of Regulation D under
the Securities Act of 1933, as amended, are satisfied.
It is expected that the exemption will apply to the acquisition and
holding by Plans of the offered certificates [other than the Class ___
Certificates] and that all conditions of the exemption other than those within
the control of the investors will be met.
The rating of a security may change. If the rating of a security declines
below BBB- or Baa3, the security will no longer be eligible for relief under
the Exemption (although a Plan that had purchased the security when it had a
permissible rating would not be required by the exemption to dispose of it).
[However, an insurance company investing assets of a Plan held in its general
account could purchase such a security if it satisfied the requirements of
PTCE 95-60.]
Each beneficial owner of a [Class _______________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 or investing with Plan assets, (ii) it has acquired and
is holding such certificate in reliance on the Exemption, and that it
understands that there are certain conditions to the availability of the
Exemption, including that the certificate must be rated, at the time of
purchase, not lower than "BBB-" (or its equivalent) by Standard & Poor's,
Fitch Ratings or Moody's Investors Service, Inc., and the certificate is so
rated or (iii) (1) it is an insurance company, (2) the source of funds used to
acquire or hold the certificate or interest
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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.
[BECAUSE THE CHARACTERISTICS OF THE CLASS [M AND THE CLASS B]
CERTIFICATES MAY NOT MEET THE REQUIREMENTS OF THE EXEMPTION DISCUSSED ABOVE OR
ANY OTHER ISSUED EXEMPTION UNDER ERISA, INCLUDING PROHIBITED TRANSACTION CLASS
EXEMPTION (PTCE) 83-1 DISCUSSED UNDER "ERISA CONSIDERATIONS" IN THE
PROSPECTUS, THE PURCHASE AND HOLDING OF CLASS [M AND CLASS B] CERTIFICATES BY
A PLAN OR BY INDIVIDUAL RETIREMENT ACCOUNTS OR OTHER PLANS SUBJECT TO SECTION
4975 OF THE CODE MAY RESULT IN PROHIBITED TRANSACTIONS OR THE IMPOSITION OF
EXCISE TAXES OR CIVIL PENALTIES. CONSEQUENTLY, ACQUISITIONS AND TRANSFERS OF
THE CLASS [M AND CLASS B] CERTIFICATES (AND OF CERTIFICATES OF ANY CLASS THAT,
BECAUSE OF A CHANGE OF RATING, NO LONGER SATISFIES THE RATING REQUIREMENT OF
THE EXEMPTION) WILL NOT BE REGISTERED BY THE TRUSTEE UNLESS THE TRUSTEE
RECEIVES: (i) A REPRESENTATION FROM THE ACQUIROR OR TRANSFEREE OF THAT
CERTIFICATE, TO THE EFFECT THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE BENEFIT
PLAN SUBJECT TO SECTION 406 OF ERISA OR A PLAN OR ARRANGEMENT SUBJECT TO
SECTION 4975 OF THE CODE, OR A PERSON ACTING ON BEHALF OF ANY SUCH PLAN OR
ARRANGEMENT OR USING THE ASSETS OF ANY SUCH PLAN OR ARRANGEMENT TO EFFECT THE
TRANSFER, OR (ii) A REPRESENTATION THAT THE PURCHASER IS AN INSURANCE COMPANY
WHICH IS PURCHASING THAT CERTIFICATE WITH FUNDS CONTAINED IN AN "INSURANCE
COMPANY GENERAL ACCOUNT" (AS SUCH TERM IS DEFINED IN SECTION V(E) OF PTCE
95-60 AND THAT THE PURCHASE AND HOLDING OF THE CERTIFICATE ARE COVERED UNDER
SECTIONS I AND III OF PTCE 95-60, OR (iii) AN OPINION OF COUNSEL SATISFACTORY
TO THE TRUSTEE THAT THE PURCHASE AND HOLDING OF THE CERTIFICATE BY A PLAN, OR
ANY PERSON ACTING ON BEHALF OF A PLAN OR USING A PLAN'S ASSETS, WILL NOT
RESULT IN A NON-EXEMPT PROHIBITED TRANSACTION UNDER ERISA OR THE CODE AND WILL
NOT SUBJECT THE TRUSTEE TO ANY OBLIGATION IN ADDITION TO THOSE UNDERTAKEN IN
THE POOLING AND SERVICING AGREEMENT.
THE REPRESENTATION IN (i) OR (ii) OF THE PRECEDING PARAGRAPH SHALL BE
DEEMED TO HAVE BEEN MADE TO THE TRUSTEE BY THE ACQUIROR OR TRANSFEREE'S
ACCEPTANCE OF A CERTIFICATE THAT IS SUBJECT TO THAT PARAGRAPH AND THAT IS IN
BOOK-ENTRY FORM. IF THE REPRESENTATION IS NOT TRUE, OR ANY ATTEMPT TO TRANSFER
TO A PLAN OR PERSON ACTING ON BEHALF OF A PLAN OR USING A PLAN'S ASSETS IS
INITIATED WITHOUT THE REQUIRED OPINION OF COUNSEL, THE ATTEMPTED TRANSFER OR
ACQUISITION SHALL BE VOID AND OF NO EFFECT.]
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the exemption
described above, and the potential consequences in their specific circumstances
prior to making an investment in the offered certificates. Moreover, each Plan
fiduciary should determine whether under the general fiduciary standards of
investment prudence and diversification, an investment in the offered
certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
Legal Investment Considerations
The Class A Certificates and the Class M Certificates will constitute
"mortgage related securities" for the purposes of the Secondary Mortgage Market
Enhancement Act of 1984 (SMMEA) so long as they are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization and, as such, are legal investments for certain
S-64
entities to the extent provided for in SMMEA. The Class B Certificates will
not constitute "mortgage related securities" under SMMEA. Accordingly, many
institutions with legal authority to invest in "mortgage related securities"
may not be legally authorized to invest in the Class B Certificates.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the certificates or to purchase
certificates representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining
whether and to what extent the certificates constitute legal investments for
them. See "Legal Investment Considerations" in the prospectus.
Method of Distribution
Subject to the terms and conditions set forth in the underwriting
agreement between the depositor and the underwriter (an affiliate of 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 by the underwriter
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. The underwriter may effect transactions by
selling offered certificates to or through dealers and the dealers may receive
from the underwriter, for which they act as agent, compensation in the form of
underwriting discounts, concessions or commissions. The underwriter and any
dealers that participate with the underwriter in the distribution of the
offered certificates may be deemed to be statutory underwriters, and any
discounts, commissions or concessions received by them, and any profits on
resale of the certificates purchased by them, may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended.
The depositor has been advised by the underwriter that it intends to make
a market in the offered certificates but has no obligation to do so. There can
be no assurance that a secondary market for the offered certificates will
develop or, if it does develop, that it will continue.
The depositor has agreed to indemnify the underwriter against, or make
contributions to the underwriter with respect to, certain liabilities,
including liabilities under the Securities Act.
Legal Matters
Certain legal matters in connection with the issuance of the offered
certificates will be passed upon for the depositor and for the underwriter by
[Sidley Austin Brown & Wood LLP] [Thacher Proffitt & Wood LLP], New York, New
York.
Ratings
It is a condition to the issuance of the offered certificates that (i) the
Class A Certificates be rated "___" by __________ and ______, (ii) the M
Certificates be rated "__" by ___ and "___" by _______, and the Class B
Certificates be rated "___" by ___ .
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The ratings assigned by the rating agencies named above to mortgage
pass-through certificates address the likelihood of the receipt of all
distributions on the mortgage loans by the related certificateholders under
the agreements pursuant to which such certificates are issued. The rating
agencies' ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on the mortgage pool is adequate to make the payments required by such
certificates. The rating agencies' ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments of the
mortgage loans.
The ratings on the offered certificates address the likelihood of the
receipt by the holders of the offered certificates of all distributions on the
mortgage loans to which they are entitled. The ratings on the offered
certificates also address the structural, legal and issuer-related aspects of
the offered certificates, including the nature of the mortgage loans. In
general, the ratings on the offered certificates address credit risk and not
prepayment risk. The ratings on the offered certificates do not represent any
assessment of the likelihood that principal prepayments of the mortgage loans
will be made by borrowers or the degree to which the rate of such prepayments
might differ from that originally anticipated. [The ratings on the offered
certificates do not address the likelihood of the payment of any Basis Risk
Shortfall Amount.] As a result, the initial ratings assigned to the offered
certificates do not address the possibility that holders of the offered
certificates might suffer a lower than anticipated yield in the event of
principal payments on the offered certificates resulting from rapid
prepayments of the mortgage loans or the application of the General Excess
Available Amount as described herein, or in the event that the trust fund is
terminated prior to the Assumed Final Maturity Date of the classes of offered
certificates.
The depositor has not engaged any rating agency other than the rating
agencies named above to provide ratings on the offered certificates. However,
there can be no assurance as to whether any other rating agency will rate the
offered certificates, or, if it does, what rating would be assigned by any such
other rating agency. Any rating on the certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the offered
certificates by the rating agencies named above.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently of
any other security rating. In the event that the ratings initially assigned to
any of the offered certificates by the rating agencies are subsequently lowered
for any reason, no person or entity is obligated to provide any additional
support or credit enhancement with respect to the offered certificates.
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Glossary of Terms
"Accrual Period" relates to the offered certificates for a given
distribution date and is the actual number of days (based on a 360-day year)
included in the period commencing on the immediately preceding distribution
date and ending on the day immediately preceding the current distribution date;
provided, however, that the initial Accrual Period for the offered certificates
will be the actual number of days included in the period commencing on the
closing date and ending on ________ __, 200_.
"Allocable Loss Amount" means, with respect to each distribution date,
the excess, if any, of (a) the aggregate of the Certificate Principal Balances
of all classes of offered certificates (after giving effect to all
distributions on such distribution date) over (b) the pool principal balance
as of the end of the preceding Due Period.
"Assumed Final Maturity Date" for each class of offered certificates is
the __[th] distribution date following the Due Period in which the principal
balances of all the Mortgage Loans have been reduced to zero, assuming that the
mortgage loans pay in accordance with their terms.
"Available Funds" for any distribution date is equal to the sum, net of
amounts reimbursable therefrom to the master servicer, of
o the aggregate amount of monthly payments on the related mortgage
loans due on the related due date and received by the trustee on or
prior to the related determination date, after deduction of the
servicing fee, the excess servicing fee and the trustee fee;
o certain unscheduled payments in respect of the mortgage loans,
including prepayments, insurance proceeds, Net Liquidation Proceeds
and proceeds from repurchases of and substitutions for mortgage loans
occurring during the related Prepayment Period [,excluding prepayment
penalties]; and
o all advances with respect to the related mortgage loans received by
the trustee for such distribution date.
"Available Funds Cap" means, as to any distribution date, the rate per
year equal to the weighted average of the loan rates on the mortgage loans
outstanding as of the first day of the related Due Period, net of [___]% in
fees.
"Basic Principal Distribution Amount" means, with respect to any
distribution date, the excess of (i) the Principal Remittance Amount for that
distribution date over (ii) the Overcollateralization Release Amount, if any,
for that distribution date.
["Basis Risk Shortfall Amount" means, for any class of offered
certificates, if, on any distribution date, the pass-through rate for that
class of offered certificates is based upon the Available Funds Cap, the excess
of (i) the amount of interest that class of certificates would have been
entitled to receive on such distribution date had its pass-through rate not
been subject to the Available Funds Cap, up to the Maximum Cap, over (ii) the
amount of interest that class of
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offered certificates received on such distribution date based on the Available
Funds Cap, together with the unpaid portion of any such excess from prior
distribution dates (and interest accrued thereon at the then applicable
pass-through rate on that class of offered certificates, without giving effect
to the Available Funds Cap).]
"Call Option Date" means the first distribution date on which the pool
principal balance is less than or equal to 10% of the pool principal balance as
of the cut-off date.
"Certificate Principal Balance" for any class of offered certificates,
as of any distribution date, will be equal to the original principal balance
of that class reduced by the sum of (i) all amounts actually distributed in
respect of principal of that class on all prior distribution dates and (ii)
with respect to any mezzanine certificates and the Class B Certificates, all
related Allocable Loss Amounts applied in reduction of principal of those
certificates on all prior distribution dates.
"Class A Principal Distribution Amount" means as of any distribution date
(a) prior to the Stepdown Date or with respect to which a Trigger Event is in
effect, the lesser of (i) 100% of the Principal Distribution Amount and (ii)
the Certificate Principal Balance of the Class A Certificates and (b) on or
after the Stepdown Date and as long as a Trigger Event is not in effect, the
positive difference, if any, of the excess of (x) the Certificate Principal
Balance of the Class A Certificates immediately prior to that distribution date
over (y) the lesser of (A) the product of (i) approximately [____]% 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
$[________].
"Class B Principal Distribution Amount" means as of any distribution date
(a) prior to the Stepdown Date or with respect to which a Trigger Event is in
effect, the lesser of (i) 100% of the Principal Distribution Amount and (ii)
the aggregate Certificate Principal Balance of the Class B Certificates and (b)
on or after the Stepdown Date and as long as a Trigger Event is not in effect,
the positive difference, if any, of the excess of (x) the sum of (i) the
Certificate Principal Balance of the Class A Certificates (after taking into
account the payment of the Class A Principal Distribution Amount on that
distribution date), (ii) the Certificate Principal Balance of the Class M
Certificates (after taking into account the payment of the Class M Principal
Distribution Amount on that distribution date) and (iii) the Certificate
Principal Balance of the Class B Certificates immediately prior to that
distribution date over (y) the lesser of (A) the product of (i) approximately
[_____]% 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 $[________].
"Class M Principal Distribution Amount" means as of any distribution date
(a) prior to the Stepdown Date or with respect to which a Trigger Event is in
effect, the lesser of (i) 100% of the Principal Distribution Amount and (ii)
the Certificate Principal Balance of the Class M Certificates and (b) on or
after the Stepdown Date and as long as a Trigger Event is not in effect, the
positive difference, if any, of the excess of (x) the sum of (i) the
Certificate Principal Balance of the Class A Certificates (after taking into
account the payment of the Class A Principal Distribution Amount on that
distribution date) and (ii) the Certificate Principal Balance of the Class M
Certificates immediately prior to that distribution date over (y) the lesser of
(A) the
S-68
product of (i) approximately [____]% 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 $[__________].
"Compensating Interest" means payments the master servicer makes in
satisfaction of the master servicer's obligation to offset any Prepayment
Interest Shortfall on any distribution date.
"Cumulative Loss Trigger" occurs on a distribution date if cumulative
Realized Losses as of that distribution date exceed the percentages of the pool
principal balance as of the cut-off date set forth below with respect to that
distribution date.
"Delinquency Percentage," with respect to any distribution date and the
related Due Period, is the fraction, expressed as a percentage, the numerator
of which is the aggregate principal balances of all mortgage loans that are 60
or more days delinquent, in foreclosure or relating to REO Properties as of
the close of business on the last day of the related Due Period and the
denominator of which is the pool principal balance as of the close of business
on the last day of such Due Period. A mortgage loan is delinquent for purposes
of this definition if any monthly payment due on the loan is not made by the
close of business on the day the monthly payment is scheduled to be due. A
mortgage loan is "30 days delinquent" if the monthly payment has not been
received by the close of business on the corresponding day of the month
immediately succeeding the month in which such monthly payment was due or, if
there was no such corresponding day (e.g., as when a 30-day month follows a
31-day month in which a payment was due on the 31st day of such month), then
on the last day of such immediately succeeding month; and similarly for "60
days delinquent", etc.
"Due Period" means, with respect to the any distribution date, the period
commencing on the [second] day of the month preceding the month in which that
distribution date occurs and ending on the [first] day of the month in which
that distribution date occurs.
["Excess Reserve Fund Account" means an account created under the terms of
the pooling and servicing agreement, which the trustee holds in trust as part
of the trust fund, on behalf of the Offered Certificateholders. The Excess
Reserve Fund Account will not be an asset of any REMIC. For a more detailed
description, see the explanation as set forth under "Description of the
Certificates - Excess Reserve Fund Account".]
"Excess Servicing Fee" means the amount resulting from the difference, if
any, between the servicing fee rate for any Mortgage Loan and [____]% per year.
The excess servicing fee will be [retained by the seller].
"Extra Principal Distribution Amount" means, for any distribution date,
the lesser of (x) the General Excess Available Amount for such distribution
date and (y) Overcollateralization Deficiency Amount for that distribution
date.
"General Excess Available Amount" means, with respect to each distribution
date, the amount, if any, by which the Available Funds for such distribution
date exceeds the aggregate amount distributed on such distribution date
pursuant to clauses (i) and (ii) under "--Allocation of Available Funds" above
(other than the Extra Principal Distribution Amount).
S-69
"Interest Distributable Amount" means, for any distribution date, and for
and each class of offered certificates, the sum of (i) the Monthly Interest
Distributable Amount for the class for that distribution date and (ii) the
Unpaid Interest Shortfall Amount for the class for that distribution date.
"Loss Reimbursement Entitlement" means, with respect to any distribution
date and the Class M Certificates or Class B Certificates, the amount of
Allocable Loss Amounts applied to the reduction of the Certificate Principal
Balance of the related class and not reimbursed pursuant to "--Allocation of
Available Funds" above as of that distribution date.
"Monthly Interest Distributable Amount" means, for any distribution date,
and for each class of offered certificates, the amount of interest accrued
during the related Accrual Period at the related pass-through rate on the
Certificate Principal Balance of the class immediately prior to that
distribution date (or, in the case of the first distribution date, from the
closing date).
"Net Liquidation Proceeds" means the amount of loss realized equal to the
portion of the principal balance remaining unpaid after application of all
liquidation proceeds net of amounts reimbursable to the master servicer for
related advances, servicing advances and servicing fees.
"Overcollateralization Deficiency Amount" means, with respect to any
distribution date, the amount, if any, by which the Overcollateralization
Target Amount exceeds the related Overcollateralized Amount on that
distribution date (after giving effect to distributions in respect of the
Basic Principal Distribution Amount but without giving effect to any Allocable
Loss Amounts on that distribution date).
"Overcollateralization Release Amount" means, with respect to any
distribution date on or after the Stepdown Date on which an
Overcollateralization Stepdown Trigger Event is not in effect, the lesser of
(x) the Principal Remittance Amount for that distribution date and (y) the
excess, if any, of (i) the Overcollateralized Amount for such distribution
date, assuming that 100% of the Principal Remittance Amount is applied to as a
principal payment on the offered certificates on that distribution date over
(ii) the Overcollateralization Target Amount for that distribution date.
"Overcollateralization Stepdown Trigger Event" means the occurrence on any
distribution date of either of the following: (i) the Cumulative Loss Trigger
has occurred or (ii) the Trigger Event has occurred.
"Overcollateralization Target Amount" means with respect to (a) any
distribution date occurring prior to the Stepdown Date, an amount equal to
[____]% of the pool principal balance as of the cut-off date; and (b) with
respect to any distribution date on or after the Stepdown Date and (A) as long
as an Overcollateralization Stepdown Trigger Event is not in effect, an amount
equal to the greater of (x) [____]% of the pool principal balance as of the end
of the related Due Period and (y) approximately $[_________] or (B) for so long
as an Overcollateralization Stepdown Trigger Event is in effect, the
Overcollateralization Target Amount for the preceding distribution date.
S-70
"Overcollateralized Amount" means for any distribution date, the amount,
if any, by which (i) the pool principal balance on the last day of the
immediately preceding Due Period exceeds (ii) the aggregate Certificate
Principal Balance of the offered certificates as of that distribution date
after giving effect to distributions to be made on the certificates on that
distribution date.
"Pass-Through Rate" means, for each of the Class A Certificates, the
Class M Certificates and the Class B Certificates, for a particular
distribution date, a per annum rate equal to [the lesser of (a) the sum of (i)
One-Month LIBOR on the related LIBOR Determination Date and (ii) the related
Pass-Through margin and (b) the Available Funds Cap].
"Prepayment Period" means, with respect to any distribution date, the
period commencing on the determination date in the month preceding the month
in which that distribution date occurs (or, in the case of the first
distribution date, the day following the cut-off date) and ending on the
determination date relating to that distribution date.
"Principal Distribution Amount" means, for any distribution date, the sum
of (i) the Basic Principal Distribution Amount and (ii) the Extra Principal
Distribution Amount for such distribution date.
"Principal Prepayment" means, with respect to any distribution date, any
mortgagor payment or other recovery of principal on a mortgage loan that is
received in advance of its scheduled due date and is not accompanied by an
amount representing scheduled interest due on any date or dates in any month or
months subsequent to the month of prepayment.
"Principal Remittance Amount" means, with respect to any distribution
date, the sum of
o each scheduled payment of principal collected on the mortgage loans
by the master servicer in the related Due Period,
o the principal portion of all partial and full principal prepayments
of the mortgage loans applied by the master servicer during that Due
Period,
o the principal portion of all Net Liquidation Proceeds and Insurance
Proceeds received during that Due Period,
o that portion of the Purchase Price, representing principal of any
repurchased mortgage loan, required to be deposited to the collection
account during that Due Period,
o the principal portion of any substitution adjustments required to be
deposited in the collection account during that Due Period, and
o on the distribution date on which the trust fund is to be terminated
in accordance with the pooling and servicing agreement, that portion
of the Termination Price which is in respect of principal.
S-71
"Realized Loss" means, with respect to any defaulted mortgage loan that is
finally liquidated, (i) Net Liquidation Proceeds in respect of the mortgage
loan and (ii) with respect to certain mortgage loans the principal balances or
the scheduled payments of principal and interest of which have been reduced in
connection with bankruptcy proceedings, (a) in the case of a reduction of the
principal balance of a mortgage loan, the amount of such principal reduction,
and (b) in the case of a reduction in the scheduled payments of principal and
interest of a mortgage loan, the net present value (using as the discount rate
the higher of the loan rate on the mortgage loan or the rate of interest, if
any, specified by the court in such order) of the scheduled payments as so
modified or restructured.
"Rolling Delinquency Percentage" means, with respect to any distribution
date, the average of the Delinquency Percentages with respect to the last day
of each of the three immediately preceding Due Periods.
"Senior Credit Enhancement Percentage" means, with respect to any
distribution date, the percentage obtained by dividing (i) the sum of (a) the
aggregate of the Certificate Principal Balances of the Mezzanine Certificates
and the Class B Certificates and (b) the Overcollateralized Amount, in each
case after giving effect to the distributions of principal on that distribution
date, by (ii) the pool principal balance as of the end of the related Due
Period.
"Senior Specified Enhancement Percentage" means, on any date of
determination thereof, [_____]%.
"Stepdown Date" means the earlier of (A) the distribution date on which
the aggregate Certificate Principal Balance of the senior certificates equals
zero and (B) the later to occur of (x) the distribution date in ______________
200_ and (y) the first distribution date on which the Senior Credit
Enhancement Percentage (calculated for this purpose only using the pool
principal balance as of the end of the related Due Period but prior to any
application of Principal Distribution Amount to the certificates) is greater
than or equal to the Senior Specified Enhancement Percentage.
"Trigger Event" means an event that has occurred on any distribution date,
if the Rolling Delinquency Percentage exceeds [__]% of the Senior Credit
Enhancement Percentage for such distribution date.
S-72
Annex I
Annex I forms an integral part of this prospectus supplement.
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
[____________________] Certificates will be available only in book-entry form.
Investors in these 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.]
A-1
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 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 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
A-2
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
A-3
(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).
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 (Exemption from Withholding of
Tax 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 (Ownership, Exemption or Reduced Rate Certificate). If the treaty
provides only for a reduced rate, withholding tax will be imposed at that rate
unless the filer alternatively files Form W-8BEN. Form W-8BEN may be filed by
the Certificate Owners or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form W-8BEN or a Form W-8ECI filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-BEN and Form W-8ECI are effective for
three calendar years.
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
A-4
thereof or the District of Columbia 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. 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.
A-5
==================================================================================================
Until 90 days after the date of this prospectus $[ ]
supplement, all dealers effecting transactions in the (Approximate)
Certificates offered by this prospectus supplement,
whether or not participating in this distribution, may Mortgage Loan Trust 200_-_
be required to deliver this prospectus supplement and
the prospectus. This is in addition to the obligation Mortgage Pass-Through Certificates
of dealers to deliver this prospectus supplement and Series 200 -
the prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
$ Class A
_________________________ [Variable Pass-Through Rate]
You should rely on the information contained or $ Class M
incorporated by reference in this prospectus supplement [Variable Pass-Through Rate]
and the accompanying prospectus. We have not authorized
anyone to provide you with different information.
We are not offering the certificates in any state where $ Class B
the offer is not permitted. [Variable Pass-Through Rate]
We do not claim that the information in this prospectus
supplement and the accompanying prospectus is accurate
as of any date other than the dates stated on their [Greenwich Capital Acceptance, Inc.]
respective covers. Depositor
[ ]
Seller and Master Servicer
Prospectus Supplement
[ , 200_]
[Logo of Underwriter]
==========================================================================================================
The information in this prospectus supplement is not complete and may be
changed. We may not sell these certificates until the registration statement
filed with the SEC is effective. This prospectus supplement is not an offer to
sell these certificates and it is not soliciting an offer to buy these
certificates in any state where the offer or sale is not permitted.
Subject to Completion, Dated January 9, 2004
Prospectus Supplement
(To Prospectus dated ___________, 200_)
$[_____________] (Approximate)
Resecuritization Mortgage Trust 200_-_
Resecuritization Mortgage Trust Certificates, Series 200_
[Greenwich Capital Acceptance, Inc.]
Depositor
$ [___________] Class [_], [___]% Certificates
_______________
The Trust
o The Trust will issue [_______] classes of certificates of which the
[_______] classes listed above are being offered by this prospectus
supplement and the accompanying prospectus.
o The trust assets consist primarily of [_______] previously issued
mortgage pass-through securities representing senior ownership
interests in [_______] the related underlying trust funds.
The Certificates
o The certificates represent ownership interests in the trust assets.
o The certificates will have the benefit of credit enhancement to the
extent described in this prospectus supplement.
- ------------------------------------------------------------------------------
Consider carefully the risk factors beginning on page S-8 in this prospectus
supplement and on page 5 in the accompanying prospectus.
The certificates represent obligations of the trust only and do not represent
an interest in or obligation of [Greenwich Capital Acceptance, Inc.] or any of
its affiliates.
This prospectus supplement may be used to offer and sell the certificates only
if accompanied by the prospectus.
- ------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved these securities or determined that this prospectus
supplement or the prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
[___________________] will offer the certificates listed above in negotiated
transactions. Proceeds to the depositor are expected to be approximately
$[_______], before deducting issuance expenses, estimated to be approximately
$[_______]. See "Method of Distribution" in this prospectus supplement.
____________________
[Logo(s) of Underwriter(s)]
_______________, 200_
Table of Contents
Prospectus Supplement
Page
----
Summary of Terms................................................................................................S-4
Risk Factors....................................................................................................S-8
Description of the Certificates................................................................................S-16
General.....................................................................................................S-16
Assignment of the Underlying Securities.....................................................................S-16
Distributions - General.....................................................................................S-17
Deposits to the Certificate Account.........................................................................S-17
Withdrawals from the Certificate Account....................................................................S-18
Allocation of Available Funds...............................................................................S-18
Allocation of Losses........................................................................................S-20
Statements to Certificateholders............................................................................S-20
Representations and Warranties..............................................................................S-21
Termination of the Trust....................................................................................S-21
The Trustee.................................................................................................S-22
Amendment of the Trust Agreement............................................................................S-22
Voting Under the Underlying Agreements......................................................................S-23
Book-Entry Registration and Definitive Certificates.........................................................S-23
Description of the Underlying Securities.......................................................................S-28
General.....................................................................................................S-28
Distributions on the Underlying Securities..................................................................S-29
Subordinated Interests......................................................................................S-30
Allocation of Losses to the Underlying Securities...........................................................S-30
Adjustment to the Servicing Fee in Each Underlying Trust Fund in Connection with
Prepaid Underlying Mortgage Loans.........................................................................S-31
Advances....................................................................................................S-31
Optional Termination of the Underlying Trust Funds..........................................................S-31
Description of the Underlying Mortgage Loans...................................................................S-32
The Depositor..................................................................................................S-37
Yield, Prepayment And Maturity Considerations..................................................................S-37
Yield Considerations........................................................................................S-37
Factors Affecting Prepayments on the Underlying Mortgage Loans..............................................S-38
Early Termination of the Underlying Trust Funds.............................................................S-39
Weighted Average Lives of the Certificates..................................................................S-39
Assumed Final Distribution Dates............................................................................S-39
Modeling Assumptions........................................................................................S-40
Use of Proceeds................................................................................................S-44
Material Federal Income Tax Consequences.......................................................................S-44
Special Tax Attributes of the Offered Certificates..........................................................S-44
Original Issue Discount.....................................................................................S-44
Prohibited Transactions Tax and Other Taxes.................................................................S-45
S-2
The Residual Certificate....................................................................................S-45
ERISA Considerations...........................................................................................S-47
Legal Investment Considerations................................................................................S-50
Method of Distribution.........................................................................................S-51
Legal Matters..................................................................................................S-51
Ratings........................................................................................................S-51
Glossary of Terms..............................................................................................S-53
Appendix I......................................................................................................I-1
Appendix II....................................................................................................II-1
Exhibit A - Excerpts from the Underlying Supplement.............................................................A-1
Exhibit B - Remittance Date Statements .........................................................................B-1
Exhibit C - Global Clearance, Settlement and Tax Documentation Procedures.......................................C-1
Prospectus
Page
----
Important Notice About Information in This Prospectus and Each Accompanying Prospectus Supplement..................5
Risk Factors.......................................................................................................6
The Trust Fund....................................................................................................16
Use of Proceeds...................................................................................................33
The Depositors....................................................................................................33
Loan Program......................................................................................................34
Description of the Securities.....................................................................................38
Credit Enhancement................................................................................................47
Yield and Prepayment Considerations...............................................................................58
Operative Agreements..............................................................................................61
Material Legal Aspects of the Loans...............................................................................82
Material Federal Income Tax Consequences.........................................................................106
State Tax Considerations.........................................................................................153
ERISA Considerations.............................................................................................153
Legal Investment Considerations..................................................................................159
Method of Distribution...........................................................................................162
Legal Matters....................................................................................................163
Financial Information............................................................................................163
Available Information............................................................................................163
Ratings..........................................................................................................163
Glossary of Terms................................................................................................165
S-3
Summary of Terms
O THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES
NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING
YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF AN OFFERING
OF THE OFFERED CERTIFICATES, READ CAREFULLY THIS ENTIRE DOCUMENT AND THE
ACCOMPANYING PROSPECTUS.
O THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS
QUALIFIED BY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS. SOME OF THE INFORMATION CONSISTS OF FORWARD-
LOOKING STATEMENTS RELATING TO FUTURE ECONOMIC PERFORMANCE OR PROJECTIONS
AND OTHER FINANCIAL ITEMS. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A
VARIETY OF RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER FROM THE PROJECTED RESULTS. THOSE RISKS AND UNCERTAINTIES INCLUDE,
AMONG OTHERS, GENERAL ECONOMIC AND BUSINESS CONDITIONS, REGULATORY
INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, AND VARIOUS
OTHER MATTERS, ALL OF WHICH ARE BEYOND OUR CONTROL. ACCORDINGLY, WHAT
ACTUALLY HAPPENS MAY BE VERY DIFFERENT FROM WHAT WE PROJECT IN OUR
FORWARD-LOOKING STATEMENTS.
Offered Certificates previously issued mortgage pass-through
securities. The underlying mortgage pass-
On the closing date, [__________ Trust] through securities represent senior
will issue [________] classes of certificates, ownership interests in [___] respective
[___] of which are being offered pursuant to underlying trust funds. The assets of the
this prospectus supplement and the underlying trust funds consist primarily of
accompanying prospectus. [fixed-rate, fully amortizing] mortgage loans
secured by first liens on one- to four-family
Each class of certificates that is being residential properties.
offered will be book-entry securities
in minimum denominations of $50,000 The following table identifies the mortgage
clearing through DTC [in the United States pass-through securities held in the trust and
or Clearstream or Euroclear in Europe]. shows the approximate aggregate principal
balances of the mortgage loans in the related
Trust Fund underlying trust funds as of __________,
200_. Each of the underlying trust funds
The assets of the trust that will support the consist of multiple mortgage loan groups.
certificates will consist primarily of [___]
S-4
Class Principal Principal calendar month beginning in _________
Designations Balances of Balances 200_ to the holders of record of the
of Underlying Underlying of certificates as of the last business day of the
Underlying Mortgage Mortgage Underlying preceding month. If the [___] day is not a
Trust Pass-Through Pass-Through Mortgage business day, then the distribution will be
Funds Securities Securities Loans made on the next business day.
- --------------- --------------- ------------- ------------
[___] Distributions on the Certificates
Trust Series
[___] Class [___] $[___] $[___] Interest Distributions
[___]
Trust Series On each distribution date, interest payable on each
[___] Class [___] $[___] $[___] class of offered certificates will be calculated based
[___] on the pass-through rate specified on the cover,
Trust Series subject to the limitations described under "Description
[___] Class [___] $[___] $[___] of the Certificates - Allocation of Available Funds" in
this prospectus supplement.
The Depositor Interest payable on the offered certificates on a
distribution date will accrue during the calendar month
[Greenwich Capital Acceptance, Inc.] preceding the month in which that distribution date
600 Steamboat Road occurs. Interest will be calculated on the basis of an
Greenwich, Connecticut 06830 assumed 360-day year consisting of twelve 30-day
(203) 625-2700 months.
The Servicer Principal Distributions
[________________] On each distribution date, principal of the classes of
offered certificates will be paid from available funds
in the trust in the order of priority described under
The Trustee "Description of the Certificates--Allocation of
Available Funds" in this prospectus supplement.
[________________]
See "Description of the Certificates" in this
The Originator(s) prospectus supplement.
[________________] Advances
Cut-off Date The servicer of the mortgage loans held in the
underlying trust funds will make cash advances to cover
______________, 200_ delinquent payments of principal and interest to the
extent it reasonably believes that the cash advances
Closing Date are recoverable from future payments on the related
mortgage loans.
On or about ______________, 200_
Distribution Dates
The trustee will make distributions on the
certificates on the [___] day of each
S-5
See "Description of the Underlying See "Ratings" in this prospectus supplement.
Securities--Advances" in this prospectus supplement.
Material Federal Income Tax Consequences
Optional Termination of the Trust
In the opinion of [Sidley Austin Brown & Wood LLP]
The depositor may purchase the remaining assets of the [Thacher Proffitt & Wood LLP], for federal income tax
trust when the aggregate principal balance of the purposes, the trust will include [multiple segregated
underlying mortgage pass-through securities is less asset pools] each of which will qualify as a [separate]
than [__]% of their aggregate principal balance as of "real estate mortgage investment conduit" (REMIC).
the cut-off date. Certain classes of certificates that are designated as
the regular certificates will constitute "regular
See "Description of the Certificates --Termination of interests" in the REMIC. The Class [___] Certificate
the Trust" in this prospectus supplement. will represent the sole class of "residual interests"
in the REMIC. The holder of the Class [__] Certificate
Optional Termination of the Underlying Trust Funds will be subject to special federal income tax rules
that may significantly reduce the after-tax yield of
The depositor of the mortgage loans held in any of the that certificate.
underlying trust funds may terminate that trust fund on
and after the distribution date for the related See "Material Federal Income Tax Consequences" in this
underlying mortgage pass-through security on which the prospectus supplement and in the prospectus.
aggregate outstanding principal amount of all mortgage
loans in that trust fund is less than [___]% of the ERISA Considerations
aggregate principal amount of those mortgage loans as
of their cut-off date. Assuming the accuracy of certain statements included in
the disclosure documentation prepared in connection
See "Description of the Underlying Securities with the public offering of the underlying mortgage
- --Optional Termination of the Underlying Trust Funds" pass-through securities, it is expected that the Class
in this prospectus supplement. [__ and Class __] Certificates may be purchased by a
pension or other employee benefit plan subject to
Ratings ERISA or section 4975 of the Internal Revenue Code
so long as certain conditions are met. A fiduciary
It is a condition of the issuance of the offered of an employee benefit plan must determine that the purchase
certificates that they be assigned a rating of "[___]" of a certificate is consistent with its fiduciary duties
by [_____________]. under applicable law and does not result in a non-exempt
prohibited transaction under applicable law.
A rating is not a recommendation to buy, sell or hold
securities. These ratings may be lowered or withdrawn
at any time by either of the rating agencies.
S-6
See "ERISA Considerations" in this prospectus See Legal Investment Considerations" in this prospectus
supplement and in the prospectus. supplement" and in the prospectus.
Legal Investment Considerations Listing
Assuming the accuracy of certain representations The certificates are not listed, and no party to the
contained in the agreements under which the underlying transaction intends to list the certificates, on any
trust funds were created (which information is not stock exchange or to quote them in the automated
subject to independent verification) and on the basis quotation system of a registered securities
of certain assumptions derived from statements included association.
in the disclosure documentation prepared in connection
with the public offering of the underlying mortgage Risk Factors
pass-through securities, the Class [__ and Class __]
Certificates will be "mortgage related securities" for There are risks associated with an investment in the
purposes of the Secondary Mortgage Market Enhancement certificates. You should consider carefully the
Act of 1984 as long as they are rated in one of the two material risks disclosed under the heading "Risk
highest rating categories by at least one nationally Factors" beginning on page S-8 of this prospectus
recognized statistical rating organization. supplement and beginning on page 5 of the accompanying
prospectus.
S-7
Risk Factors
The following information, together with the information set forth
under "Risk Factors" in the prospectus, identify the principal risk factors of
an investment in the certificates.
Only limited information is available
about the underlying mortgage
pass-through securities and underlying
mortgage loans.............................. The information about the underlying mortgage pass-
through securities and the related mortgage loans
disclosed in this prospectus supplement has been
obtained from the disclosure documentation prepared
in connection with the initial offerings of those
securities as well as from reports and other
information supplied by the trustees of the related
underlying trust funds. That information has not
been independently verified or represented to the
trust as being accurate and complete. Additionally,
the agreements under which the underlying mortgage
pass-through securities were issued and the
disclosure documentation prepared in connection
with those public offerings contain information
only as of the dates of those documents. You should
be aware, however, that material changes may have
occurred since the preparation of those documents.
The composition of the related mortgage pools may
have changed significantly. As a result, there may
be considerable differences between the current
mortgage loan characteristics and the
characteristics described in connection with the
issuance of the underlying mortgage pass-through
securities, and those securities may not have
performed as originally anticipated. The depositor
did not prepare the underlying agreements or
disclosure documentation. Prospective investors are
advised to consider the limited nature of the
available information when evaluating the
suitability of any investment in the offered
certificates.
S-8
Loan prepayments may adversely affect
the average life of, and rate of return
on, your certificates....................... Borrowers may prepay their mortgage loans in whole or
in part at any time. However, the mortgage loans
are subject to certain penalties for prepayments
generally during the first five years after
origination. For a description of the prepayment
penalties, see "The Mortgage Pool--General" on
Exhibit A.
We cannot predict the rate at which borrowers will
repay their mortgage loans. A prepayment of a
mortgage loan may result in a prepayment on the
related underlying mortgage pass-through security,
which in turn would result in a prepayment on the
offered certificates.
o If you purchase your certificates at a discount
and principal is repaid slower than you anticipate,
then your yield may be lower than you anticipate.
o If you purchase your certificates at a premium
and principal is repaid faster than you anticipate,
then your yield may be lower than you anticipate.
o The rate of prepayments on the mortgage loans will be
sensitive to prevailing interest rates. Generally, if
interest rates decline significantly below the interest rates
on the mortgage loans, those mortgage loans are more likely to
prepay than if prevailing rates remain above the interest
rates on those mortgage loans. Conversely, if interest rates
rise significantly, the prepayments on the mortgage loans are
likely to decrease.
o The seller of a mortgage loan to an underlying
trust fund may be required to purchase that
mortgage loan from the trust fund due to certain
breaches of representations and warranties made by
the seller that have not been cured. These
purchases will have the same effect on the related
offered certificates as a prepayment of a mortgage
loan.
o So long as the subordinate interests in an
underlying trust fund are outstanding, liquidations
of defaulted mortgage loans in that trust fund
generally will have
S-9
the same effect on the offered certificates as a
prepayment of a mortgage loan.
o If the rate of default and the amount of losses
on the mortgage loans in an underlying trust fund
are higher than you expect, then your yield may be
lower than you expect.
Although principal
distributions on the Class
[___] Certificates generally
are expected to follow a
schedule, the rate of loan
prepayments may still affect
the rate of principal
distributions on those
certificates.......................... The Class [___] Certificates, which is a planned
amortization class, generally will be less affected
by the rate of principal prepayments than certain
other classes of certificates because, on each
distribution date, the Class [___] Certificates
receive principal distributions according to the
schedule set forth in Appendix II. The schedule
assumes that the rate of prepayment on the mortgage
loans remains at a constant rate of between [___]%
and [___]% of a standard prepayment assumption, as
described in "Yield, Prepayment and Maturity
Considerations" in this prospectus supplement.
However, there is no guarantee that the rate of
prepayment on the mortgage loans will stay at a
constant rate between these levels.
o If the mortgage loans prepay at a rate faster
or slower than those levels, or do not prepay
at a constant rate, distributions of
principal on the Class [___] Certificates may
no longer be made according to schedule.
o Moreover, once the Class [___] Certificates have
been paid in full, the Class [___] Certificates
will become very sensitive to the rate of
prepayments and will no longer be paid according to
the schedule.
S-10
See "Yield, Prepayment and Maturity Considerations"
in this prospectus supplement for tables showing
the expected rate of return of principal at
different prepayment rates.
The Class [___] Certificates will be
very sensitive to the rate of loan
prepayments................................. The Class [___] Certificates will be especially sensitive to the
rate of prepayment on the mortgage loans. The Class [___]
Certificates act as a prepayment cushion for the Class [___]
Certificates as described above, absorbing excess principal
prepayments. On each distribution date, the Class [___]
Certificates receive principal only if the Class [___] Certificates
have been paid according to their schedule. If the rate of
prepayments on the mortgage loans on any distribution date is slow
enough so that the Class [___] Certificates are not paid to
schedule, then the Class [___] Certificates will receive no
distributions of principal from the mortgage loans on that
distribution date. However, if the rate of prepayments is high
enough so that the Class [___] Certificates are paid according to
schedule, then the Class [___] Certificates will receive all of the
remaining principal available for distribution. This may cause
wide variations in the amount of principal the Class [___]
Certificates will receive from distribution date to distribution
date. See "Yield, Prepayment and Maturity Considerations" for
tables showing the expected rate of return of principal at
different rates of prepayment.
Loan prepayments may result in
shortfalls in interest collections and
may reduce the yield on your
certificates................................ When a mortgage loan is prepaid in full, the borrower is charged
interest only up to the date on which payment is made, rather than
for an entire month. This may result in a shortfall in interest
collections available for payment on the related underlying
mortgage pass-through security. The servicer is required to cover
the shortfall in interest collections that are attributable to
prepayments in full, but only up to the amount of the servicer's
fee for the related period. If the aggregate amount of this
shortfall is in excess of the servicing fee, it may adversely
affect the yield on your investment.
S-11
Potential inadequacy of credit
enhancement may result in losses on
your certificates........................... Credit enhancement is provided for the offered
certificates, first, by the right of the holders of
the underlying mortgage pass-through securities to
receive certain payments prior to the related
subordinate interests. This form of credit
enhancement is provided solely from collections on
the mortgage loans otherwise payable to the holders
of the related subordinate interests.
Credit enhancement also is provided by the
allocation of realized losses on mortgage loans,
first, to the related subordinate interests.
Accordingly, if the aggregate principal balance of
the subordinate interests with respect to any
underlying trust fund were to be reduced to zero,
delinquencies and defaults on the related mortgage
loans would reduce the funds available for payments
to holders of the senior interests in the related
underlying trust fund, including the related
underlying mortgage pass-through security. This
reduction in funds available for payment to the
underlying mortgage pass-through security would
reduce the funds available for distributions on the
offered certificates.
Geographic concentration of the trust's
loans may adversely affect your
certificates................................ The following chart reflects the [___] states with highest
concentrations of mortgage loans in the trust based
on the initial pool principal balance.
[Table]
In addition, the conditions below will have a disproportionate
impact on the mortgage loans.
o Economic conditions in [______] may affect the ability of
borrowers to repay their loans on time.
S-12
o Declines in the residential real estate markets in [______]
may reduce the values of properties located in
[______], which would result in an increase in
the loan-to-value ratios.
o Any increase in the market values of properties
located in [______] would reduce the loan-to-value
ratios and could, therefore, make alternative sources
of financing available to the borrowers at lower
interest rates. This in turn could result in an increased
rate of prepayment of the mortgage loans.
Losses on mortgage loans in
the underlying trust funds,
other than those directly
backing the underlying
mortgage pass-through
securities, may increase the
risk of losses on the offered
certificates........................ Realized losses, other than any excess losses,
experienced by mortgage loans included in a
particular mortgage loan group will be allocated,
first, to the subordinate interests in the related
underlying trust fund before being allocated to the
senior interests directly backed by that mortgage
loan group. However, the underlying subordinate
interests provide protection against losses on
mortgage loans in more than one mortgage loan
group. As a result, the subordinate interests could
be reduced or eliminated as a result of
disproportionate realized losses on the mortgage
loans included in a mortgage loan group other than
the group directly backing an underlying mortgage
pass-through security. Although realized losses,
other than excess losses, on the mortgage loans in
a mortgage loan group may be allocated only to the
underlying senior interest directly backed by that
mortgage loan group, the allocation to the
subordinate interests of realized losses on the
underlying mortgage loans in another mortgage loan
group will increase the likelihood that losses
ultimately may be allocated to an underlying
mortgage pass-through security and, in turn, to the
offered certificates. Generally, the
characteristics of the mortgage loans included in
the mortgage loan group directly backing each
underlying mortgage pass-through security are
substantially similar to those of the other
S-13
mortgage loan group whose losses are covered by the
same subordinate interests.
Excess losses on mortgage
loans in the underlying trust
funds will reduce yields on
the offered certificates.......... Realized losses on mortgage loans in the underlying trust
funds that exceed the applicable coverage amounts
for special hazard losses, fraud losses and
bankruptcy losses are referred to as "excess
losses." Excess losses on underlying mortgage loans
included in the mortgage loan group directly
backing an underlying mortgage pass-through
security or in the other mortgage loan group held
in the same underlying trust fund whose losses are
covered by the same subordinate interests will be
allocated on a pro rata basis to all senior
interests relating to those mortgage loans groups,
including the applicable underlying mortgage
pass-through security. As a result, any excess
losses on those mortgage loans will have a direct
effect on the offered certificates and will reduce
their yields.
Optional termination of the
trust may shorten the
weighted average lives of
the offered certificates........... The depositor may purchase the assets in the trust, in
whole but not in part, on and after the
distribution date on which the aggregate principal
balance of the underlying mortgage pass-through
securities is less than [___]% of their aggregate
principal balance as of the cut-off date. The
purchase of those assets will result in the receipt
by you of principal payments that could affect the
yield to maturity on your certificates and have the
effect of shortening the weighted average life of
your certificates.
Optional termination of the
underlying trust funds may
shorten the weighted
average lives of the offered
certificates................................ The depositor of the mortgage loans held in any of the
underlying trust funds may terminate the related
trust fund on and after the distribution date for
that trust fund on which the aggregate outstanding
principal amount of all mortgage loans in that
trust fund is less than [___]% of their aggregate
principal amount on their cut-off date.
S-14
As a result, it is possible for an underlying trust
fund to be terminated in this manner although the
aggregate outstanding principal amount of the
mortgage loans in the mortgage loan group directly
backing the related underlying mortgage
pass-through security is greater than [___]% of the
aggregate principal amount of those mortgage loans
as of their cut-off date. For the holder of an
offered certificate, any such termination of an
underlying trust fund may result in the receipt by
the holder of principal payments that could affect
the yield to maturity on its certificates by
shortening the weighted average life of its
certificates.
It may be difficult to
resell your certificates.................... [Underwriter] intends to make a secondary market in the
classes of certificates actually purchased by it, but
it has no obligation to do so. There is no assurance
that such a secondary market will develop or, if it
develops, that it will continue. Furthermore, the
certificates are not listed, and the parties to the
transaction do not intend to list the certificates on
any stock exchange or to quote them in the automated
quotation system of a registered securities
association. 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 mortgage 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.
There is a Glossary of Terms beginning on page S-54 where you will find
definitions of the capitalized terms used in this prospectus supplement.
S-15
Description of the Certificates
General
The certificates will be issued pursuant to the trust agreement dated
as of ________, 200_ between the depositor and the trustee and will represent
the entire beneficial ownership interest in the trust. Set forth below is a
description of the material terms and provisions pursuant to which the
certificates will be issued. The following description is subject to, and
qualified in its entirety by reference to, the provisions of the trust
agreement. When particular provisions or terms used in the trust agreement are
referred to, the provisions or terms are as specified in the trust agreement.
The assets of the trust will consist primarily of [___] previously
issued mortgage pass-through certificates representing [___] ownership
interests in [___]respective underlying trust funds. The certificates will
consist of the Class [___] Certificates, the Class [___] Certificates, the
Class [___] Certificates, and the Class [___] Certificate or residual
certificate. The offered certificates are the Class [___] Certificates, the
Class [___] Certificates, the Class [___] Certificates and the Class [___]
Certificates. The offered certificates and the Class [___] Certificate are
collectively referred to in this prospectus supplement as the certificates.
Only the offered certificates are offered by this prospectus supplement and
the accompanying prospectus.
The Class [___] Certificate represents the trustee's fee and has an
initial principal balance of $[___].
The offered certificates (other than the Class [__] Certificate) will
be issuable in denominations of not less than $[___] principal amount and in
integral multiples of $[___] in excess thereof, with the exception of one
certificate of each Class which may be issued in a lesser amount. The Class
[___] Certificate will be issued in fully registered certificated form as a
single certificate in a denomination of approximately $[___].
The offered certificates (other than the Class [___] Certificate)
initially will be book-entry certificates. Persons acquiring beneficial
ownership interests in the book-entry certificates will hold them through The
Depository Trust Company (DTC) in the United States, or Clearstream or
Euroclear in Europe, if they are participants of those systems, or indirectly
through organizations that are participants in those systems. The book-entry
certificates initially will be registered in the name of Cede & Co., as
nominee of DTC.
Assignment of the Underlying Securities
On the closing date, the depositor will deliver the underlying
securities to the trustee. The underlying securities will be registered in the
name of the trustee or its nominee, and all monthly distributions on each
underlying remittance date for each underlying security will be made to the
trustee. The underlying remittance date is the [ ] day of each month or, if
the [ ] day is not a business day, the next business day.
S-16
Distributions - General
Distributions on the offered certificates will be made by the trustee
on each distribution date. Distributions will be made to the persons in whose
names the certificates are registered at the close of business on the record
date, which is the last business day of the month preceding the month in which
the distribution date occurs.
Deposits to the Certificate Account
The trustee will establish and maintain a separate trust account
called the certificate account for the benefit of the holders of the
certificates. The certificate account will meet the criteria for an eligible
account listed in the following paragraph. Upon receipt by the trustee of
amounts in respect of the underlying securities, the trustee will deposit
those amounts in the certificate account. Amounts so deposited may be invested
in permitted investments (as described and defined in the trust agreement)
maturing no later than one business day prior to the distribution date unless
the permitted investments are invested in investments managed or advised by
the trustee or one of its affiliates, in which case the permitted investments
may mature on the related distribution date.
An eligible account is one or more segregated accounts that are
o maintained with a federal or state chartered depository
institution or trust company the short-term unsecured debt
obligations of which (or, in the case of a depository
institution or trust company that is the principal subsidiary of
a holding company, the short-term unsecured debt obligations of
which holding company) are rated [__] by [___________] and [__]
by [_____________] at the time any amounts are held on deposit;
o the deposits in which are fully insured by the Federal Deposit
Insurance Corporation (to the limits established by the FDIC),
or are otherwise secured such that, as evidenced by an opinion
of counsel delivered to the trustee and to each rating agency,
the certificateholders will have a claim with respect to the
funds in the account or a perfected first priority security
interest against the permitted investments securing the funds
that is superior to claims of any other depositors or creditors
of the depository institution with which the account is
maintained;
o are maintained with the trust department of a federal or state
chartered depository institution, national banking association
or trust company acting in its fiduciary capacity; or
o which are otherwise acceptable to each rating agency without
reduction or withdrawal of their then current ratings of the
certificates as evidenced by a letter from each rating agency to
the trustee.
S-17
Permitted investments are specified in the trust agreement and are limited to
investments which meet the criteria of the rating agencies named under
"Ratings" from time to time as being consistent with their then current
ratings of the certificates.
Withdrawals from the Certificate Account
The trustee is permitted from time to time to withdraw funds from the
certificate account for the following purposes:
o to make payments to certificateholders in the amounts and in the
manner as described under "--Allocation of Available Funds" below;
o to reimburse the depositor for any expenses incurred by and
reimbursable to the depositor pursuant to the trust agreement;
o to pay any taxes imposed on the trust; and
o to clear and terminate the certificate account upon termination
of the trust agreement.
Allocation of Available Funds
On each distribution date, the trustee will withdraw the Available
Funds from the certificate account and will distribute the Available Funds in
the following order of priority:
(i) to the holders of the classes of offered certificates and
the Class [____] Certificate, pro rata, interest accrued on the their
respective Certificate Principal Balances during the preceding Interest
Accrual Period at their respective pass-through rates (less any Net Prepayment
Interest Shortfalls allocated to those classes as provided below), together
with any accrued and unpaid interest thereon from prior distribution dates;
provided, however, that prior to the Class [____] Accretion Termination Date,
the amount of interest accrued on the Certificate Principal Balances of the
Class [____] Certificates during the preceding Interest Accrual Period will
not be distributed as interest thereon but instead will be distributed in
reduction of the Certificate Principal Balances of the Class [____]
Certificates as set forth in clause (iv) below; and provided, further, that
prior to the Class [____] Accretion Termination Date, the amount of interest
accrued on the Certificate Principal Balances of the Class [____] Certificates
during the preceding Interest Accrual Period will not be distributed as
interest thereon but instead will be distributed in reduction of the
Certificate Principal Balances of the Class [____] and Class [____]
Certificates, in that order, as set forth in clause (v) below;
(ii) as principal, to the holders of the Class [____] Certificate,
the Class [____] Pro Rata Distribution Amount;
(iii) as principal, to the holders of the Class [____]
Certificates, the Class [____] Priority Distribution Amount, until the
Certificate Principal Balances thereof are reduced to zero;
S-18
(iv) as principal, to the holders of the Class [____]
Certificates, the Class [____] Accrual Distribution Amount, until the
Certificate Principal Balances of the Class [____] Certificates have been
reduced to zero, and then to the holders of the Class [____] Certificates;
(v) as principal, sequentially, to the holders of the Class
[____] and Class [____] Certificates, in that order, the Class [____] Accrual
Distribution Amount, until the respective Certificate Principal Balances
thereof have been reduced to zero, and then to the holders of the Class [____]
Certificates;
(vi) as principal, to the holder of the Class [____] Certificate,
until the Certificate Principal Balance thereof has been reduced to zero;
(vii) as principal, to (A) the holders of the Class [____], Class
[____] and Class [____] Certificates according to the priorities set forth in
clause (x) below and (B) the holders of the Class [____] and Class [____]
Certificates according to the priorities set forth in clause (y) below, as
follows:
(x) [____]% of the remaining amount (after giving effect to
the distributions specified in clauses (i) through (vi) above):
first, to the holders of the Class [____]
Certificates until the Certificate Principal Balances
thereof are reduced to the Class [____] Planned Balance for
that distribution date;
second, sequentially, to the holders of the Class
[____] and Class [____] Certificates, in that order, until
the respective Certificate Principal Balances thereof are
reduced to zero; and
third, to the holders of the Class [____]
Certificates, without regard to the Class [____] Planned
Balance for that distribution date and until the Certificate
Principal Balances thereof are reduced to zero; and
(y) [____]% of the remaining amount (after giving effect to
the distributions specified in clauses (i) through (vi)
above), sequentially, to the holders of the Class [____] and
Class [____] Certificates, in that order, until their
respective Certificate Principal Balances have been reduced
to zero; and
(viii) as principal, sequentially, to the holders of the Class
[____], Class [____], Class [____] and Class [____] Certificates, in that
order, until their respective Certificate Principal Balances have been reduced
to zero.
On each distribution date, any Net Prepayment Interest Shortfalls
will be allocated, pro rata, to the certificates on the basis of their
Certificate Principal Balances.
On each distribution date preceding the Class [____] Accretion
Termination Date, the Class [____] Accrual Distribution Amount will be added
to the Certificate Principal Balances of
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the Class [____] Certificates on a pro rata basis. On each distribution date
preceding the Class [____] Accretion Termination Date, the Class [____]
Accrual Distribution Amount will be added to the Certificate Principal
Balances of the Class [____] Certificates on a pro rata basis.
In the event that on any underlying remittance date, the trustee
shall not have received the cash distribution, if any, required to be made in
respect of an underlying security, the trustee shall effect the distribution
set forth above on the business day immediately following the date on which
the cash distribution so required shall have been received by the trustee.
Allocation of Losses
Losses allocated to any of the underlying securities will in turn be
allocated to the classes of offered certificates, pro rata, based upon their
respective Certificate Principal Balances.
Statements to Certificateholders
Concurrently with each distribution on a distribution date, the
trustee will forward to the holder of each certificate a statement generally
setting forth the following information:
(i) the Available Funds, the Class [____] Accrual
Distribution Amount, the Class [____] Accrual Distribution Amount and
the Class [____] Priority Distribution Amount for that distribution
date;
(ii) with respect to that distribution date, the aggregate
amount of principal and interest, stated separately, distributed to
holders of each class of certificates;
(iii) with respect to that distribution date, the amount of
any interest shortfall (including any Net Prepayment Interest
Shortfalls) for each class of certificates, together with the amount
of any unpaid interest shortfall for that class immediately following
that distribution date;
(iv) with respect to that distribution date and each class
of certificates, the losses allocated to that class;
(v) the aggregate Certificate Principal Balance of each
class of certificates, after giving effect to (a) distributions of
principal of those certificates on that distribution date, (b) any
losses allocated to those certificates and (c) in the case of the
Class [____] Certificates, any addition to the aggregate Certificate
Principal Balance of that class; and
(vi) any additional amount distributed to the holder of the
residual certificate on that distribution date.
In addition, the trustee upon written request will furnish to
certificateholders copies of the statements received by the trustee for each
underlying remittance date as the holder of the underlying securities on
behalf of the trust.
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Within a reasonable period of time after the end of each calendar
year, the trustee will prepare and deliver to each person who at any time
during the previous calendar year was a certificateholder of record a
statement containing the information required to satisfy any requirements of
the Internal Revenue Code and related regulations as from time to time are in
force.
Representations and Warranties
The depositor will represent and warrant to the trustee as of the
closing date that
o the depositor was the sole owner of the underlying securities
free and clear of any lien, pledge, charge or encumbrance of any
kind;
o the depositor had not assigned any interest in the underlying
securities or any related distributions, except as contemplated
in the trust agreement; and
o the endorsements and other documents furnished to the trustee in
connection with the underlying securities are sufficient to
effect the transfer of the underlying securities to the trustee.
Upon discovery of a breach of any of the foregoing representations and
warranties which materially and adversely affects the interests of the
certificateholders in any of the underlying securities, the depositor or the
trustee shall give prompt written notice to the other and to the
certificateholders. On or prior to the distribution date in __________ 200_,
the depositor will be obligated to cure the breach in all material respects
or, if the breach cannot be cured, repurchase each affected underlying
security if so directed in writing by holders of the majority in interest of
each class of offered certificates.
Termination of the Trust
At its option, the depositor may purchase the underlying securities,
in whole but not in part, on and after the distribution date on which the
aggregate principal balance of the underlying securities is less than [____]%
of their aggregate principal balance as of the cut-off date. The purchase
price for each underlying security will be equal to the balance of the
underlying security (after giving effect to all distributions on that
distribution date). The obligations created by the trust agreement will
terminate upon the payment to certificateholders of all amounts held by the
trustee and required to be paid to them pursuant to the trust agreement after
the final payment or other liquidation of the underlying securities, including
any exercise of the optional purchase described above. In no event, however,
will the trust continue beyond the date specified in the trust agreement.
Written notice of termination of the trust agreement will be given to each
certificateholder, and the final distribution will be made only upon surrender
and cancellation of the certificates at an office or agency as specified in
the notice of termination.
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The Trustee
________________________ will act as trustee for the certificates
pursuant to the trust agreement. The trustee's principal corporate trust
offices are located at [_________________________________]. The trustee's fee
is represented by the Class [____] Certificate.
Amendment of the Trust Agreement
Without the consent of any of the certificateholders, the trust
agreement may be amended by the depositor and the trustee
o to cure any error or ambiguity;
o to correct or supplement any provision therein which may be
defective or inconsistent with any other provision
therein;
o to permit any other provisions with respect to matters or
questions arising under the trust agreement which are not
inconsistent with the provisions of the trust agreement;
o to comply with the Securities Act of 1933, as amended, or the
Investment Company Act of 1940, as amended;
o to amend any of the exhibits to the trust agreement pursuant to
the terms of the trust agreement; or
o if the amendment is reasonably necessary, as evidenced by an
opinion of counsel, to comply with any requirements imposed by
the Internal Revenue Code or any successor or amendatory statute
or any temporary or final regulation, revenue ruling, revenue
procedure or other written official announcement or
interpretation relating to federal income tax laws or any
proposed action which, if made effective, would apply
retroactively to the trust at least from the effective date of
that amendment;
provided, however, that the amendment (except any amendment described in (the
last bullet above) shall not, as evidenced by an opinion of counsel that shall
not be an expense of the trustee, delivered to the trustee, adversely affect
in any material respect the interests of any certificateholder; and provided,
further, that the amendment shall be deemed not to adversely affect in any
material respect the interests of any certificateholder of the offered
certificates if the person requesting the amendment obtains letters from the
rating agencies named under "Ratings" to the effect that the amendment would
not result in a downgrade or withdrawal of the ratings then assigned to the
offered certificates.
The trust agreement may also be amended by the depositor and the
trustee with the consent of the holders representing at least 51% of the
ownership interest of each class of certificates affected by the amendment for
the purpose of adding any provisions to or changing
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in any manner or eliminating any of the provisions of the trust agreement or
of modifying in any manner the rights of the holders of certificates; provided,
however, that no such amendment may
o reduce in any manner the amount of, or delay the timing of,
distributions required to be made on any certificate without the
consent of the holder of that certificate;
o adversely affect in any material respect the interest of the
holders of the certificates of any class in a manner other than
as described in the immediately preceding bullet point above
without the consent of the holders of certificates of that class
representing not less than 66% of the ownership interest of that
class; or
o reduce the aforesaid percentages of certificates the holders of
which are required to consent to any such amendment without the
consent of the holders of all certificates then outstanding.
In no event will the trustee consent to any amendment unless the trustee shall
have obtained an opinion of counsel to the effect that the amendment will not
cause the trust to fail to qualify as a REMIC at any time that certificates
deemed to be "regular interests" are outstanding.
Voting Under the Underlying Agreements
In the event that there are any matters arising under any of the
underlying agreements governing the underlying trust funds which require the
vote or direction of the holder of the related underlying security, the
trustee, as holder of the underlying security on behalf of the trust, will
vote the underlying security in accordance with instructions received from the
holders of a Majority in Interest of each class of certificates. In the
absence of any instructions, the trustee will not vote the underlying
securities. However, notwithstanding the absence of instructions, in the event
a required distribution pursuant to the applicable underlying agreement shall
not have been made, the trustee shall, subject to the provisions of the trust
agreement, pursue the remedies that may be available to it as holder of the
underlying security in accordance with the terms of the applicable underlying
agreement.
Book-Entry Registration and Definitive Certificates
The offered certificates (other than the Class [____] Certificate)
initially will be book-entry certificates. Persons and entities that acquire
beneficial ownership in the offered certificates will be deemed "certificate
owners" and will hold their offered certificates through DTC [in the United
States, or Clearstream Bank, societe anonyme, or Euroclear (in Europe)] if
they are participants in [that] [those] system[s], or indirectly through
organizations which are participants in [that] [those] system[s]. The
book-entry certificates will be issued in the form of one or more certificates
which equal the aggregate principal balance of the offered certificates and
will initially be registered in the name of Cede & Co., as 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
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The Chase Manhattan Bank will act as depositary for Euroclear. Investors may
hold such beneficial interests in the book-entry certificates in minimum
denominations of $50,000. Except as described below, no beneficial owner of a
book-entry certificate will be entitled to receive a definitive (i.e.,
physical) certificate. Unless and until definitive certificates are issued, it
is anticipated that the only certificateholder of the offered certificates
will be Cede, as nominee of DTC. Beneficial owners of certificates will not be
"Certificateholders" as that term is used in the trust agreement. Beneficial
owners of certificates are only permitted to exercise their rights indirectly
through DTC participants.
A beneficial owner's ownership of a book-entry certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary that maintains the beneficial owner's account for
such purpose. In turn, the financial intermediary's ownership of the
book-entry certificate will be recorded on the records of DTC (or of a
participating firm that acts as agent for the financial intermediary, whose
interest will in turn be recorded on the records of DTC if the beneficial
owner's financial intermediary is not a DTC participant [and on the records of
Clearstream or Euroclear, as appropriate]).
Beneficial owners will receive all distributions of principal of and
interest on the offered certificates from the trustee through DTC and DTC
participants. While the offered certificates are outstanding (except under the
circumstances described below), DTC rules (consisting of the rules,
regulations and procedures creating and affecting DTC and its operations)
require that DTC
o make book-entry transfers among participants on whose behalf it
acts with respect to the offered certificates and
o receive and transmit distributions of principal of, and interest
on, the offered certificates.
Participants and indirect participants with which beneficial owners have
accounts with respect to offered certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective certificate owners. Accordingly, although beneficial owners
of certificates will not possess physical certificates representing their
respective interests in the offered certificates, DTC rules provide a
mechanism by which certificate owners will receive distributions and will be
able to transfer their interests.
Certificateholders will not receive or be entitled to receive
certificates representing their respective interests in the offered
certificates, except under the limited circumstances described below. Unless
and until definitive certificates are issued, certificateholders which are not
DTC participants may transfer ownership of offered certificates only through
participants and indirect participants by instructing participants and
indirect participants to transfer offered certificates, by book-entry
transfer, through DTC for the account of the purchasers of the offered
certificates, which account is maintained with their respective participants.
Under DTC rules and in accordance with DTC's normal procedures, transfers of
ownership of offered certificates will be executed through DTC and the
accounts of the respective participants at DTC will be debited and
S-24
credited. Similarly, the participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the
selling and purchasing certificateholders.
[Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a 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 or Clearstream participants on such
business day. Cash received in Clearstream or Euroclear as a result of sales
of securities by or through a Clearstream participant or Euroclear participant
to a DTC participant will be received with value on the DTC settlement date
but will be available in the relevant Clearstream or Euroclear cash account
only as of the business day following settlement in DTC. For information with
respect to tax documentation procedures relating to the certificates, see
"Material Federal Income Tax Consequences--REMIC Certificates --Regular
Certificates--Non-U.S. Persons" and "--Information Reporting and Backup
Withholding" in the prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I to this prospectus supplement.]
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,
these 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. Clearstream participants and Euroclear
participants may not deliver instructions directly to the European
depositaries.]
DTC is a New York-chartered limited purpose trust company, and
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the
book-entry certificates, whether held for its own account or as a nominee for
another person. In general, beneficial ownership of book-entry certificates
will be subject to DTC rules as in effect from time to time.
[Clearstream Banking, societe anonyme, is incorporated under
Luxembourg law as a professional depository and provides, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities. Clearstream is
S-25
subject to regulation by the Luxembourg Monetary Institute. Clearstream holds
securities for its participating organizations, thereby eliminating the need
for physical movement of certificates. 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, whether
directly or indirectly.]
[Euroclear was created in 1968 to hold securities for Euroclear
participants and to effect transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash.]
[Euroclear is operated by Euroclear Bank S.A./N.V., as sponsor of
Euroclear under contract with Euroclear System Societe Cooperative, a Belgian
cooperative corporation, which establishes policy for Euroclear on behalf of
the Euroclear participants. 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 with Euroclear
Clearance Systems. The Euroclear operator is regulated and examined by the
Board of Governors of the Federal Reserve System and the New York State
Banking Department, as well as by 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 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 only on behalf of
Euroclear participants, and has no record of or relationship with persons
holding through Euroclear participants.]
Distributions on the book-entry certificates will be made on each
distribution date by the trustee to DTC. DTC will be responsible for crediting
these payment amounts to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing the payments to the beneficial owners of the
book-entry certificates that it represents and to each financial intermediary
for which it acts as agent. In turn, each financial intermediary will be
responsible for disbursing funds to the beneficial owners of the book-entry
certificates that it represents.
Under a book-entry format, beneficial owners of the book-entry
certificates may experience some delay in their receipt of payments, since
such payments will be forwarded by the trustee to Cede. [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. Distributions will be subject to tax
reporting in accordance with
S-26
relevant United States tax laws and regulations. See "Material Federal Income
Tax Consequences--REMIC Certificates--Regular Certificates--Non-U.S. Persons"
and "--Information Reporting and Backup Withholding" in the prospectus.]
Because DTC can only act on behalf of financial intermediaries, the ability of
a beneficial owner to pledge book-entry certificates to persons or entities
that do not participate in DTC, or otherwise take actions in respect of
book-entry certificates, may be limited due to the lack of physical
certificates. In addition, issuance of certificates in book-entry form may
reduce the liquidity of the certificates in the secondary market since certain
potential investors may be unwilling to purchase certificates for which they
cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede, as
nominee of DTC, and may be made available by Cede 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 certificates of such beneficial owners are credited.
DTC has advised the trustee that, unless and until definitive
certificates are issued, DTC will take any action permitted to be taken by the
holders of the book-entry certificates under the pooling 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 book-entry certificates. [Clearstream or the Euroclear
operator, as the case may be, will take any other action permitted to be taken
by a certificateholder under the pooling and servicing agreement on behalf of
a Clearstream participant or Euroclear participant only in accordance with its
relevant rules and procedures and subject to the ability of the relevant
depositary to effect such actions on its behalf through DTC.] DTC may take
actions, at the direction of the related participants, with respect to some
offered certificates which conflict with actions taken with respect to other
offered certificates.
Definitive certificates will be issued to beneficial owners of the
book-entry certificates, or their nominees, rather than to DTC, only if
o DTC or [______________] advises the trustee in writing that DTC
is no longer willing, qualified or able to discharge properly
its responsibilities as nominee and depository with respect to
the book-entry certificates and [________________] or the
trustee is unable to locate a qualified successor;
o [_________________], at its sole option, with the consent of the
trustee, elects to terminate a book-entry system through DTC; or
o after the occurrence of an event of default, beneficial owners
having percentage interests aggregating not less than 51% of the
book-entry certificates advise the trustee and DTC through the
financial intermediaries and the DTC participants in writing
that the continuation of a book-entry system through DTC (or any
successor) is no longer in the best interests of beneficial
owners.
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Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all beneficial
owners of the occurrence of the event and the availability through DTC of
definitive certificates. Upon surrender by DTC of the global certificate or
certificates representing the book-entry certificates and instructions for
re-registration, the trustee will issue definitive certificates, and
thereafter the trustee will recognize the holders of such definitive
certificates as "Certificateholders" under the trust agreement.
Although DTC [, Clearstream and Euroclear] have agreed to the
foregoing procedures in order to facilitate transfers of offered certificates
among participants of DTC, [Clearstream and Euroclear,] they are under no
obligation to perform or continue to perform those procedures, which may be
discontinued at any time.
Neither the depositor nor the trustee will have any responsibility
for any aspect of the records relating to or payments made on account of
beneficial ownership interests of the book-entry certificates held by Cede, as
nominee for DTC, or for maintaining, supervising or reviewing any records
relating to beneficial ownership interests.
Description of the Underlying Securities
All of the information contained herein with respect to the
underlying securities is based solely on (i) information contained in the
underlying agreements and (ii) information obtained from the monthly
statements provided by the underlying trustees in connection with the
__________ 200_ underlying remittance dates for the underlying securities.
None of the depositor, the underwriter or the trustee has the ability
independently to verify the accuracy of this information. Prospective
investors are advised to consider the limited nature of the available
information in evaluating the suitability of any investment in the offered
certificates.
General
The trust assets will consist primarily of the following:
o approximately [____]% of the Series [____] underlying security,
issued pursuant to a pooling and servicing agreement dated as of
__________, 200_ among [_______________], as depositor,
[_______________], as seller and master servicer, and
[_______________], as trustee;
o approximately [____]% of the Series [____] underlying security,
issued pursuant to a pooling and servicing agreement dated as of
__________, 200_ among [_______________], as depositor,
[_______________], as seller and master servicer, and
[_______________], as trustee; and
o [____]% of the Series [____] underlying security, issued
pursuant to a pooling and servicing agreement dated as of
__________, 200_ among [_______________], as
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depositor, [_______________], as seller and master servicer, and
[_______________], as trustee.
Each of the [____] underlying securities evidences a senior interest
in one of [____] underlying trust funds established pursuant to the related
underlying agreement and was issued together with other [___] underlying
senior interests, certain related underlying subordinate interests and certain
residual interests. Each of the underlying trust funds consists primarily of
the related underlying mortgage loans secured by first liens on one- to
four-family residential properties. The mortgage pool principal balance of the
underlying mortgage loans included in the three mortgage loan groups directly
backing the underlying securities as of the underlying remittance date in
__________ 200_ were approximately $[__________], $[__________] and
$[__________], respectively.
The servicer is required to deposit, or cause to be deposited, in
each underlying security Account on a daily basis the payments and collections
on the underlying mortgage loans, except that the servicer will deduct its
servicing fee and any expenses of liquidating defaulted underlying mortgage
loans or the related REO property.
The underlying subordinate interests are subordinate to the related
underlying senior interests with respect to the right to receive distributions
from the related underlying trust fund and, accordingly, no distributions will
be made on the underlying subordinate interests with respect to any underlying
trust fund on an underlying remittance date until all required distributions
have been made on the related underlying senior interests for that date. In
addition, all losses (other than Excess Losses) on the underlying mortgage
loans included in any underlying trust fund will be borne first by the related
underlying subordinate interests before being borne by the related underlying
senior interests.
Based solely on the monthly statements provided by the underlying
trustees in connection with the __________ 200_ underlying remittance dates,
which statements have not been independently verified for accuracy, the Series
[____] underlying security, the Series [____] underlying security and the
Series [____] underlying security had principal balances of approximately
$[__________], $[__________] and $[__________], respectively, after giving
effect to the distributions on that date, representing approximately [____]%,
[____]% and [____]% of the related mortgage pool principal balances for the
respective underlying trust funds.
Distributions on the Underlying Securities
Distributions of principal and interest on the underlying securities
will be made on each underlying remittance date.
Scheduled principal received on the underlying mortgage loans held in
each underlying trust fund will be passed through monthly on the underlying
remittance date occurring in the month in which the related due date occurs.
The due date is the [____] day of each calendar month, being the day of the
month on which a payment of interest and principal is due for each underlying
mortgage loan, exclusive of any days of grace. With respect to the underlying
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securities, principal prepayments received during the period from the [___]
day of any month to the [___] day of that month will be passed through on the
underlying remittance date occurring in the month following receipt.
Interest received on each underlying mortgage loan will be passed
through monthly on the underlying remittance date occurring in the month in
which the due date occurs, at the pass-through rate for that underlying
mortgage loan.
On each underlying remittance date, there will be distributed from,
and to the extent of, available funds for each of the applicable mortgage loan
groups in the underlying trust funds, an amount up to the amount required to
be paid in respect of the related underlying security.
For a further description of the distribution of principal on the
underlying securities, see "Description of the Certificates" in the excerpts
from the underlying supplements attached hereto as Exhibit A.
Subordinated Interests
The underlying securities, which represent senior interests in the
underlying trust funds, evidence the right of the holders thereof to receive
distributions on the related underlying mortgage loans before any
distributions have been made to holders of the related underlying subordinate
interests. This subordination is intended to enhance the likelihood of regular
receipt by holders of the underlying senior interests of the full amount of
monthly distributions due them and to protect holders of the underlying senior
interests against losses and other cash flow shortfalls. If, on any underlying
remittance date, holders of the underlying senior interests are paid less than
the amount due to them on that date, the interest of the holders of the
underlying senior interests in the related underlying trust funds will vary so
as to preserve the entitlement of the underlying senior interests to unpaid
principal of the underlying mortgage loans and interest thereon.
If at any time the underlying subordinate interests with respect to
any of the underlying trust funds have been extinguished, all future losses or
shortfalls due to delinquent payments on the related underlying mortgage loans
for which no advance is made by the servicer will be borne by the related
underlying senior interests. Amounts actually paid at any time to the holder
of the related underlying security will not be subsequently recoverable from
that holder.
Allocation of Losses to the Underlying Securities
Realized Losses on the underlying mortgage loans in the underlying
trust funds (other than Excess Losses) will be allocated to the related
underlying subordinate interests before they are allocated to the related
underlying senior interests (including the underlying securities). If the
aggregate principal balance of the underlying subordinate interests with
respect to any underlying trust fund is reduced to zero, the amount of all
such future losses on the underlying mortgage loans held in that underlying
trust fund will be allocated to the related underlying senior interests
(including the applicable underlying security), pro rata, based on their
respective outstanding principal balances.
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Excess Losses on underlying mortgage loans and on mortgage loans in
the other mortgage loan group held in the same underlying trust fund whose
losses are covered by the same underlying subordinate interests will be
allocated to all underlying senior interests relating to those mortgage loan
groups, including the applicable underlying security.
Adjustment to the Servicing Fee in Each Underlying Trust Fund in Connection
with Prepaid Underlying Mortgage Loans
When a mortgagor makes a full or partial principal prepayment of an
underlying mortgage loan between due dates, the mortgagor may be required to
pay interest on the principal balance thereof only to the date of prepayment.
In order to minimize any resulting shortfall in interest, the related portion
of the servicing fee owed to the servicer will be reduced to the extent
necessary to include an amount in payments in respect of the related
underlying security equal to a full month's interest payment at the underlying
pass-through rate with respect to that prepaid underlying mortgage loan. In
the event the aggregate amount of interest shortfalls exceeds the related
portions of the servicing fee, then the amount of the excess will be allocated
to the related underlying security, thereby reducing the interest
distributable thereon on the related underlying remittance date.
Advances
The servicer is obligated to make advances of cash each month for
distribution on each of the underlying securities equal to the difference
between the amount due on that underlying security and the amount in the
related underlying security account to be distributed to them pursuant to the
underlying agreement, but only to the extent the difference is attributable to
delinquent monthly payments due during the immediately preceding due period.
The servicer is not under any obligation to make an advance with respect to
any underlying mortgage loan if the servicer determines, in its sole
discretion, that the advance will not be recoverable from future payments and
collections on that underlying mortgage loan. Advances are intended to
maintain a regular flow of scheduled interest and principal payments on each
of the underlying securities, not to guarantee or insure against losses.
Accordingly, any funds so advanced are recoverable by the servicer out of
amounts received on the underlying mortgage loans.
Optional Termination of the Underlying Trust Funds
The underlying depositor may, on any underlying remittance date,
purchase from any of the underlying trust funds all mortgage loans (including
the related underlying mortgage loans) in that underlying trust fund remaining
outstanding if the aggregate unpaid principal balance of those mortgage loans
is less than [____]% of the aggregate unpaid principal balance thereof as of
the related cut-off date. The purchase price will be distributed on the
related underlying security in the month following the month of that purchase.
FOR ADDITIONAL INFORMATION ON THE UNDERLYING SECURITIES, INVESTORS
SHOULD CAREFULLY REVIEW (I) THE EXCERPTS FROM THE UNDERLYING SUPPLEMENTS
ATTACHED HERETO AS EXHIBIT A AND (II) THE UNDERLYING REMITTANCE DATE
STATEMENTS, EXCERPTS OF WHICH ARE ATTACHED HERETO AS EXHIBIT B. INFORMATION
REGARDING THE UNDERLYING SECURITIES, INCLUDING INFORMATION
S-31
REGARDING RELATED PAYMENT PRIORITIES AND ALLOCATION OF LOSSES, IS SET FORTH IN
THE ATTACHED EXHIBITS. ANY INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT
(INCLUDING APPENDIX I AND THE EXHIBITS HERETO) WITH RESPECT TO THE UNDERLYING
SECURITIES OR THE UNDERLYING MORTGAGE LOANS HAS BEEN OBTAINED BY THE DEPOSITOR
FROM THE UNDERLYING SUPPLEMENTS OR UNDERLYING REMITTANCE DATE STATEMENTS
PROVIDED BY THE UNDERLYING TRUSTEES OR THE SERVICER, AND HAS NOT BEEN
INDEPENDENTLY VERIFIED BY THE DEPOSITOR, THE UNDERWRITER OR THE TRUSTEE. THE
UNDERLYING SUPPLEMENTS AND ALL OTHER OFFERING MATERIALS DESCRIBED ABOVE FOR
THE UNDERLYING SECURITIES WERE PREPARED BY THE UNDERLYING DEPOSITOR. NONE OF
THE DEPOSITOR, THE UNDERWRITER OR THE TRUSTEE HAS THE ABILITY INDEPENDENTLY TO
VERIFY THE ACCURACY OF THE INFORMATION IN THE UNDERLYING SUPPLEMENTS, THE
UNDERLYING REMITTANCE DATE STATEMENTS OR OTHER RELATED MATERIALS.
DESCRIPTION OF THE UNDERLYING MORTGAGE LOANS
ALL OF THE INFORMATION CONTAINED HEREIN WITH RESPECT TO THE
UNDERLYING MORTGAGE LOANS IS BASED SOLELY ON (I) INFORMATION CONTAINED IN THE
RELATED UNDERLYING SUPPLEMENTS AND (II) INFORMATION OBTAINED FROM THE
UNDERLYING TRUSTEES IN CONNECTION WITH THE UNDERLYING REMITTANCE DATE
STATEMENTS. NONE OF THE DEPOSITOR, THE UNDERWRITER OR THE TRUSTEE HAS THE
ABILITY INDEPENDENTLY TO VERIFY THE ACCURACY OF THIS INFORMATION. PROSPECTIVE
INVESTORS ARE ADVISED TO CONSIDER THE LIMITED NATURE OF THE AVAILABLE
INFORMATION WHEN EVALUATING THE SUITABILITY OF ANY INVESTMENT IN THE OFFERED
CERTIFICATES.
Origination and Underwriting. Each underlying mortgage loan was
originated with credit, appraisal and underwriting guidelines applied by
[__________] to evaluate the prospective borrower's credit standing and
repayment ability and the value and adequacy of the mortgaged property as
collateral in accordance with applicable federal and state laws and
regulations. Certain of the underlying mortgage loans have been originated
under "reduced documentation" or "no documentation" programs which require
less documentation and verification than do traditional "full documentation"
programs. Generally, under a "reduced documentation" program, no verification
of a mortgagor's stated income is undertaken by the originator. Under a "no
documentation" program, no verification of a mortgagor's income or assets is
undertaken by the originator. The underwriting for the underlying mortgage
loans may have been based primarily on an appraisal of the underlying
mortgaged property and the loan-to-value ratio at origination. For a complete
description of the underwriting policies applied to the underlying mortgage
loans, see "The Mortgage Pool -- Underwriting Standards" in the excerpts from
the underlying supplements attached hereto as Exhibit A.
Selected Underlying Mortgage Loan Data. The tables on pages I-[__]
through I-[__] summarize certain characteristics of the underlying mortgage
loans included in each underlying trust fund as the underlying mortgage loans
were constituted as of __________, 200_. It is expected that the information
set forth herein will be representative of the characteristics of the
underlying mortgage loans as of the date hereof, although prior to issuance of
the offered certificates, certain of the underlying mortgage loans may be (or
may have been) prepaid in full or in part or may be repurchased as described
herein.
S-32
Servicing of the Underlying Mortgage Loans. The servicer acts as
servicer and provides customary servicing functions with respect to the
underlying mortgage loans. The servicer is entitled to a servicing fee for its
servicing activities.
The following tables set forth certain delinquency information with
respect to the underlying mortgage loans with respect to each of the
underlying trust funds, substantially all of which has been obtained from the
monthly statements provided by the underlying trustees in connection with the
__________, 200_ underlying remittance date for the underlying securities.
The delinquency, foreclosure and REO percentages given in the
following tables are percentages of the related aggregate mortgage pool
principal balance as of _____, 200__, and the cumulative losses percentage is
the percentage of the related aggregate mortgage pool principal balance as of
the related original issue date of the underlying security.
The information contained in the following tables may not be
indicative of future delinquent payment rates of the underlying mortgage loans
or reductions in the principal balances of the underlying securities.
S-33
Underlying Mortgage Loan Delinquency Information as of __________, 200_
Relating to the Series [____] Underlying Security
Mortgage Pool Mortgage Pool
Principal Principal 30 - 59 60 - 89
Balance as of Balance as of Days Days 90 + Days In
Original Issue __________, Delinquent Delinquent Delinquent Foreclosure
Date 200 # Balance % # Balance(1) % # Balance % # Balance(1)
---- --- --- ----------- --- --- ------------ --- --- ----------- --- --- -------------
$[__________] $[__________] [_] $[____] [__]% [_] $[____] [__]% [_] $[____] [__]% [_] $[___]
Mortgage Pool
Principal
Balance as of
Original Issue Cumulative Cumulative
Date % # R.E.O. Balance % Losses Losses %
---- --- - -------------- --- ------------ --------------
$[__________] [_]% [__]% $[____] [__]% $[____] [__]%
S-34
Underlying Mortgage Loan Delinquency Information as of __________, 200_
Relating to the Series [____] Underlying Security
Mortgage Pool Mortgage Pool
Principal Principal 31 - 60 61- 90
Balance as of Balance Days Days 91 + Days In
Original Issue as of ________, Delinquent Delinquent Delinquent Foreclosure
Date 200 # Balance % # Balance % # Balance % # Balance
---- ---- --- ------------ --- --- ----------- ---- --- ------------ ---- ---- -------------
$[_________] $[____________] [_] $[___] [__]% [_] $[________] [__]% [_] $[___] [__]% [_] $[________]
Mortgage Pool
Principal
Balance as of
Original Issue R.E.O. Cumulative Cumulative
Date % # Balance % Losses Losses %
---- -- --- -------- --- ----------- -----------
$[_________] [__]% [_] $[___] [__]% $[___] [__]%
S-35
Underlying Mortgage Loan Delinquency Information as of ___________, 200_
Relating to the Series [____] Underlying Security
Mortgage Pool Mortgage Pool
Principal Principal 31 - 60 61 - 90
Balance as of Balance as of Days Days 91 + Days In
__________, __________, Delinquent Delinquent Delinquent Foreclosure
200 200 # Balance % # Balance % # Balance % # Balance
--- --- -- ---------- --- --- ----------- ---- --- ----------- -- --- ------------
$[__________] $[__________] [_] $[___] [ _]% [_] $[___] [__]% [_] $[___] [__]% [_] $[___]
Mortgage Pool
Principal
Balance as of
Original Issue Cumulative Cumulative
Date % # R.E.O. Balance % Losses Losses %
---- --- ---- --------------- ------ ----------- ------------
[__]% [_] $[___] [__]% $[___] [__]%
$[_________]
S-36
The Depositor
The depositor, [Greenwich Capital Acceptance, Inc.], is a Delaware
corporation organized on [April 23, 1987] for the limited purpose of
acquiring, owning and transferring certain mortgage-related assets and selling
interests therein or bonds secured thereby. It is an indirect, limited purpose
finance subsidiary of Royal Bank of Scotland Plc and an affiliate of Greenwich
Capital Markets, Inc. Greenwich Capital Markets, Inc. is a registered
broker-dealer engaged in the U.S. government securities and related capital
markets business. The depositor maintains its principal office at 600
Steamboat Road, Greenwich, Connecticut 06830. Its telephone number is (203)
625-2700.
Neither the depositor nor any of its affiliates will insure or
guarantee distributions on the certificates.
Yield, Prepayment and Maturity Considerations
Yield Considerations
If the purchaser of an offered certificate offered at a discount
calculates the anticipated yield to maturity of that offered certificate based
on an assumed rate of payment of principal that is faster than that actually
received on the underlying mortgage loans and, in turn, on the underlying
securities, the actual yield to maturity will be lower than that so
calculated. If the purchaser of an offered certificate offered at a premium
calculates the anticipated yield to maturity of that offered certificate based
on an assumed rate of payment of principal that is slower than that actually
received on the underlying mortgage loans and, in turn, on the underlying
securities, the actual yield to maturity will be lower than that so
calculated.
The yield to maturity of the offered certificates and the aggregate
amount of distributions on the offered certificates will be related to the
timing and amount of principal distributions on the underlying securities,
which will be related to the rate of payment of principal (including
prepayments) on the underlying mortgage loans and the allocation of principal
payments in accordance with the priorities discussed in the excerpts from the
underlying supplements contained in Exhibit A hereto. The rate of principal
payments on the underlying mortgage loans will be affected by the amortization
schedules of the underlying mortgage loans and by the timing and amount of
principal prepayments thereon (for this purpose, the term "prepayment" also
includes payments resulting from refinancings and liquidations of the
underlying mortgage loans due to defaults, casualties, condemnations and
purchases of the underlying mortgage loans).
The model used in this prospectus supplement is the "PSA," which
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans for the life of
those mortgage loans. The PSA does not purport to be a historical description
of prepayment experience or a prediction of the anticipated rate of prepayment
of any pool of mortgage loans, including the underlying mortgage loans. A
[____]% PSA assumes constant prepayment rates of [____]% per annum of the then
outstanding principal balance of the
S-37
underlying mortgage loans in the first month of the life of the mortgage loans
and an additional [____]% per annum in each month thereafter until the
thirtieth month. Beginning in the thirtieth month and in each month thereafter
during the life of the underlying mortgage loans, [____]% PSA assumes a
constant prepayment rate of [____]% per annum each month. As used in the table
below, [____]% PSA assumes prepayment rates equal to [____]% of the [____]%
PSA i.e., no prepayments. Correspondingly, [____]% PSA assumes prepayment
rates equal to [____]% of the [____]% PSA, and so forth.
The decrement tables included in this prospectus supplement indicate
the weighted average lives of the offered certificates and set forth the
percentage of the original principal amount of the offered certificates that
would be outstanding after each of the distribution dates shown at various
percentages of PSA assuming that there is no optional termination of any of
the underlying trust funds. See "Yield and Prepayment Considerations" in the
prospectus.
Variations in actual prepayment experience (including prepayments
resulting from defaults) for the underlying mortgage loans will increase or
decrease the percentages of principal amounts (and weighted average lives)
shown in the decrement tables. There is no assurance that payments of the
underlying mortgage loans will conform to any of the percentages of PSA
described in the decrement tables. Among other things, the decrement tables
assume that the underlying mortgage loans prepay at the indicated constant
rates, notwithstanding the fact that the underlying mortgage loans may vary
substantially as to geography, interest rate and remaining terms.
Factors Affecting Prepayments on the Underlying Mortgage Loans
[____] of the underlying mortgage loans in the underlying trust funds
are fixed rate mortgage loans. The rate of payments (including prepayments) on
pools of mortgage loans are influenced by a variety of economic, geographic,
social, tax, legal and other factors. If prevailing mortgage rates fall
significantly below the then current fixed rate on the underlying mortgage
loans, the rate of prepayment resulting from refinancing would be expected to
increase, particularly because the availability of fixed or adjustable rate
mortgage loans at competitive interest rates may encourage borrowers to prepay
their underlying mortgage loans. Conversely, if prevailing mortgage rates rise
significantly above the then current fixed rates on the underlying mortgage
loans, the rate of prepayments on the underlying mortgage loans would be
expected to decrease. Other factors affecting prepayment of mortgage loans
include changes in borrowers' housing needs, job transfers, unemployment,
borrowers' net equity in the mortgaged premises and servicing decisions. The
underlying mortgage loans may be prepaid at any time by borrowers. Investors
are cautioned that past prepayment rates are unlikely to be indicative of
future prepayment rates. No assurance can be given as to the rate of principal
payments or prepayments on the underlying mortgage loans and, consequently, on
the offered certificates.
Substantially all of the underlying mortgage loans contain
"due-on-sale" clauses. However, the servicer may choose not to accelerate an
underlying mortgage loan upon conveyance of the related mortgaged premises if
the servicer would make a similar decision with
S-38
respect to a comparable mortgage loan held for its own account. The weighted
average lives of the offered certificates will be decreased to the extent that
the sale of mortgaged premises securing the underlying mortgage loans will
result in the prepayment of those loans.
Early Termination of the Underlying Trust Funds
As noted in "Description of the Underlying Securities--Optional
Termination of the Underlying Trust Funds" in this prospectus supplement, the
underlying depositor with respect to each underlying trust fund may redeem the
related underlying security on or after any underlying remittance date on
which, after taking into account payments of principal and allocations of
Realized Losses, if any, to be made on that date, the aggregate outstanding
principal amount of all mortgage loans held in the related underlying trust
fund (including the related underlying mortgage loans) is less than [____]% of
their aggregate principal amount as of the cut-off date for that underlying
trust fund. In that event, the related underlying trust fund may be
terminated. The termination of any underlying trust fund will result in the
receipt by holders of the applicable class or classes of offered certificates
of principal payments that could affect the yields to maturity on those
certificates and will have the effect of shortening the weighted average life
or lives of those certificates.
Weighted Average Lives of the Certificates
Weighted average life refers to the average amount of time that will
elapse from the date of delivery 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
o the rate at which principal of the underlying mortgage loans is
paid, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes
payments resulting from refinancings, liquidations of the
underlying mortgage loans due to defaults, casualties,
indemnifications and purchases by or on behalf of the servicer),
o optional termination with respect to any of the underlying trust
funds, and
o any required repurchase by an underlying depositor of any of the
underlying securities as a result of a breach of certain
representations and warranties made by the underlying depositor.
Assumed Final Distribution Dates
The assumed final distribution date for each class of certificates
(other than the Class [____] Certificates and Class [____] Certificates) is
__________, 20__, which is the distribution date immediately following the
latest scheduled maturity date for any underlying mortgage loan. The assumed
final distribution dates for the Class [____] Certificates and Class [____]
Certificates are __________, 20__ and __________, 20__, respectively. The
assumed final distribution dates for the Class [____] Certificates and Class
[____] Certificates were calculated based on the structuring assumptions
contained in "--Modeling Assumptions" below and
S-39
assuming a prepayment speed on the underlying mortgage loans of [____]% PSA.
No event of default, change in the priorities for distribution among the
various Classes or other provisions under the trust agreement will arise or
become applicable solely by reason of the failure to retire the entire
Certificate Principal Balance of any class of certificates on or before its
assumed final distribution date.
Modeling Assumptions
The decrement tables in this prospectus supplement have been prepared
on the basis of, among other things, the following modeling assumptions:
(i) all scheduled payments on the underlying mortgage
loans are timely received on the first day of each month, commencing
in __________, 200_;
(ii) the underlying mortgage loans will prepay monthly at
the specified percentages of PSA;
(iii) all principal prepayments constitute prepayments in
full of the underlying mortgage loans, are received on the last day
of each month, commencing in __________, 200_, and include 30 days'
interest thereon;
(iv) there are no defaults, losses or interest shortfalls on
the underlying mortgage loans prior to or after the closing date;
(v) the closing date is __________, 200_, and cash
distributions are received by the certificateholders on the [____]
day of each month, commencing in __________, 200_ (distributions will
not include any distributions received on the underlying securities
on or before the __________, 200_ underlying remittance date);
(vi) the underlying mortgage loans have been amortized using
the respective scheduled payments, outstanding principal balances
(prior to giving effect to prepayments received during the related
prepayment period) and interest rates;
(vii) no optional termination of the trust or the underlying
trust funds occurs;
(viii) the classes of offered certificates have the initial
principal amounts specified on the cover page of this prospectus
supplement;
(ix) the outstanding principal amount of the underlying
senior interests and the underlying subordinate interests are as set
forth in the __________, 200_ underlying remittance date monthly
statements;
(x) for each underlying trust fund and related underlying
security, the related underlying senior interests were aggregated as
one security, and the related underlying subordinate interests were
aggregated as one security calculated as the difference
S-40
between (a) the related mortgage pool principal balance as of the
underlying remittance date in __________, 200_ and (b) the aggregate
of the related underlying senior interests;
(xi) the aggregate underlying senior interests and aggregate
underlying subordinate interests described in clause (x) above are as
follows:
(a) [__________] Trust Series [____]: $[____] and
$[____];
(b) [__________] Trust Series [____]: $[____] and
$[____]; and
(c) [__________] Trust Series [____]: $[____] and
$[____];
(xii) each underlying trust fund included only the mortgage
loan groups relating to the applicable underlying mortgage loans, and
any additional mortgage loan groups held in that underlying trust
fund were disregarded;
(xiii) for purposes of determining the amount of cash from
the underlying securities that will be allocated to the certificates,
the following percentages were used:
(a) Series [____] underlying security: [____]%;
(b) Series [____] underlying security: [____]%; and
(c) Series [____] underlying security: [____]%;
(xiv) except with respect to the modeling assumptions set
forth in clauses (x) - (xii) above, payments of principal with
respect to the underlying trust funds are made in accordance with the
methodologies and priorities set forth in the underlying supplements;
and
(xv) the underlying mortgage loans held in the specified
underlying trust funds have the following characteristics:
- --------------------- ----------------------- --------------- ----------------- ------------------- --------------------
Principal Balance of
Underlying Trust Underlying Mortgage Remaining Term
Funds Loans ($) Gross Rate (%) Net Rate (%) (months) Loan Age (months)
- --------------------- ----------------------- --------------- ----------------- ------------------- --------------------
[____] Trust
Series [____] [__________] [_____] [_____] [_____] [_____]
- --------------------- ----------------------- --------------- ----------------- ------------------- --------------------
[____] Trust
Series[____] [__________] [_____] [_____] [_____] [_____]
- --------------------- ----------------------- --------------- ----------------- ------------------- --------------------
[____] Trust
Series [____] [__________] [_____] [_____] [_____] [_____]
- --------------------- ----------------------- --------------- ----------------- ------------------- --------------------
S-41
In the table that appears below, all percentages have been rounded to
the nearest whole percentage. The weighted average lives have been determined
by
o multiplying the assumed net reduction, if any, in the principal
amount on each distribution date by the number of years from the
closing date to the related distribution date,
o summing the results, and
o dividing the sum by the aggregate amount of the assumed net
reductions in principal amount.
Percent of Initial Certificate Principal Balance Outstanding of the
Class [____] Certificates at the Following Percentages of PSA
Distribution Date 0% 100% 175% 200% 225% 300% 400%
- ----------------- --- ---- ---- ---- ---- ---- ----
Initial Percent 100 100 100 100 100 100 100
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
S-42
Distribution Date 0% 100% 175% 200% 225% 300% 400%
- ----------------- --- ---- ---- ---- ---- ---- ----
Initial Percent 100 100 100 100 100 100 100
__________ 20__ [___] [___] [___] [___] [___] [___] [___]
Weighted Average Life in Years [___] [___] [___] [___] [___] [___] [___]
S-43
Use of Proceeds
The depositor will apply the proceeds of the sale of the offered
certificates towards the purchase price of the underlying securities, the
payment of expenses related to that purchase and other corporate purposes.
Material Federal Income Tax Consequences
Assuming compliance with all provisions of the trust agreement, in
the opinion of [Sidley Austin Brown & Wood LLP] [Thacher Proffitt & Wood LLP],
counsel to the depositor, the trust will be characterized as a REMIC within
the meaning of section 860D of the Code of 1986, as amended.
The Class [____], Class [____] and Class [____] Certificates will
represent "regular interests" in the REMIC and the Class [____] Certificate
will constitute the sole class of "residual interests" in the REMIC. As REMIC
regular interests, those certificates will generally be treated as debt for
federal income tax purposes. Certificateholders will be required to include in
income, all interest and original issue discount on those certificates in
accordance with the accrual method of accounting regardless of the
certificateholders' usual methods of accounting.
Special Tax Attributes of the Offered Certificates
As is described more fully under "Material Federal Income Tax
Consequences" in the prospectus, the offered certificates (other than the
Class [____] Certificate) will represent qualifying assets under Section
856(c)(4)(A) and 7701(a)(19)(C)(v) of the Code, and net interest income
attributable to those Certificates will be "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code, to the extent the assets of the trust are assets described in those
sections. The offered certificates (other than the Class [____] Certificate)
will represent qualifying assets under section 860G(a)(3) of the Code if
acquired by a REMIC within the prescribed time periods of the Code.
Original Issue Discount
The offered certificates may be issued with original issue discount
for federal income tax purposes. For purposes of determining the amount and
rate of accrual of original issue discount and market discount, the depositor
intends to assume that there will be prepayments on the underlying mortgage
loans at a rate equal to [____]% PSA. See "Yield, Prepayment and Maturity
Considerations" in this prospectus supplement and "Material Federal Income Tax
Consequences" in the prospectus.
The offered certificates may be treated as being issued at a premium.
In that case, the certificateholders may elect under section 171 of the Code
to amortize the premium under the constant interest method and to treat the
amortizable premium as an offset to interest income on the certificates.
S-44
If the method for computing original issue discount described in the
prospectus results in a negative amount for any period with respect to a
certificateholder, the certificateholder will be permitted to offset those
amounts only against the future income, if any, from that certificate.
Although the tax treatment is uncertain, a certificateholder may be permitted
to deduct a loss to the extent that the certificateholder's remaining basis in
that certificate exceeds the maximum amount of future payments to which the
holder is entitled, assuming no further principal prepayments of the
underlying mortgage loans are received. Although the matter is not free from
doubt, any such loss might be treated as a capital loss.
Prohibited Transactions Tax and Other Taxes
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions." In general, subject to certain
specified exceptions, a prohibited transaction means the disposition of an
underlying mortgage loan, the receipt of income from a source other than an
underlying mortgage loan or certain other permitted investments, the receipt
of compensation for services, or gain from the disposition of an asset
purchased with the payments on the underlying mortgage loans for temporary
investment pending distribution on the certificates. It is not anticipated
that the trust will engage in any prohibited transactions in which it would
recognize a material amount of net income.
In addition, certain contributions to a trust fund that elects to be
treated as a REMIC made after the day on which the trust fund issues all of
its interests could result in the imposition of a contributions tax on the
trust fund equal to 100% of the value of the contributed property. The trust
will not accept contributions that would subject it to that tax.
In addition, a trust fund that elects to be treated as a REMIC may
also be subject to federal income tax at the highest corporate rate on "net
income from foreclosure property," determined by reference to the rules
applicable to real estate investment trusts. The term "net income from
foreclosure property" generally means gain from the sale of a foreclosure
property other than qualifying rents and other qualifying income for a real
estate investment trust. It is not anticipated that the trust will recognize
net income from foreclosure property subject to federal income tax.
In the event that any prohibited transactions tax, contributions tax,
tax on net income from foreclosure property or state or local income or
franchise tax is imposed on the trust, the tax will be paid with amounts
otherwise distributable to the certificateholderss. Pursuant to the trust
agreement, the holder of the Class [____] Certificate, as "tax matters"
person, is obligated to indemnify the trust for the amount of any taxes. There
can be no assurance that the holder of the Class [____] Certificate will have
sufficient resources to pay that indemnity to the trust. It is not anticipated
that any material state or local income or franchise tax will be imposed on
the trust.
The Residual Certificate
The holder of the Class [____] Certificate must include the taxable
income of the REMIC in its federal taxable income. The resulting tax liability
of that holder may exceed cash distributions to that holder during certain
periods. All or a portion of the taxable income from
S-45
the Class [____] Certificate recognized by a holder may be treated as "excess
inclusion" income, which, with limited exceptions, is subject to U.S. federal
income tax.
Also, purchasers of the Class [____] Certificate should consider
carefully the tax consequences of an investment in Residual Certificates
discussed in the Prospectus and should consult their own tax advisors with
respect to those consequences. See "Material Federal Income Tax
Consequences--REMIC Certificates--b. Residual Certificates" in the prospectus.
Specifically, prospective holders of the Class [____] Certificate should
consult their tax advisors regarding whether, at the time of acquisition, the
Class [____] Certificate will be treated as a "non-economic" residual
interest, a "non-significant value" residual interest and a "tax avoidance
potential" residential interest. Final Treasury Regulations issued on July 18,
2002 modify the safe harbor which, if satisfied, provides that transfers of
non-economic residual interest are not disregarded for federal income tax
purposes. See "Material Federal Income Tax Considerations--REMIC
Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates--Noneconomic Residual Certificates" in the prospectus.
Additionally, for information regarding prohibited transactions and treatment
of Realized Losses, see "Material Federal Income Tax Considerations--REMIC
Certificates--Prohibited Transactions and Other taxes" and "--REMIC
Certificates-- Regular Certificates--Treatment of Realized Losses" in the
prospectus.
FOR FURTHER INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES
OF INVESTING IN THE OFFERED CERTIFICATES, SEE MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS--REMIC CERTIFICATES" IN THE PROSPECTUS.
ERISA Considerations
The Employee Retirement Income Security Act of 1974, as amended,
("ERISA") imposes requirements on certain employee benefit plans subject to
ERISA (and the Code imposes requirements on certain other benefit plans and
arrangements, including individual retirement accounts and annuities and Keogh
plans, as well as on collective investment funds and separate accounts in
which these plans, accounts or arrangements are invested) and on persons who
bear specified relationships to these types of plans or arrangements ("Parties
in Interest") or are fiduciaries with respect to these types of plans or
arrangements. In this prospectus supplement we refer to these types of plans
and arrangements as "Plans."
ERISA prohibits Parties in Interest with respect to a Plan from
engaging in certain transactions involving the Plan and its assets unless a
statutory, regulatory or administrative exemption applies to the transaction.
Section 4975 of the Code imposes excise taxes on prohibited transactions
involving Plans described under that section; ERISA authorizes the imposition
of civil penalties for prohibited transactions involving plans not covered
under Section 4975 of the Code. Any Plan fiduciary that proposes to cause a
Plan to acquire any of the offered certificates should consult with its
counsel with respect to the potential consequences under ERISA and the Code of
the Plan's acquisition and ownership of such certificates. See "ERISA
Considerations" in the prospectus.
S-46
Certain employee benefit plans, including governmental plans and
certain church plans, are not subject to ERISA's requirements. Accordingly,
assets of those plans may be invested in the offered certificates without
regard to the ERISA considerations described in this prospectus supplement and
in the prospectus, subject to the provisions of other applicable federal, and
local state law. Moreover, any such plan which is qualified and exempt from
taxation under sections 401(a) and 501(a) of the Code may be subject to the
prohibited transaction rules set forth in section 503 of the Code.
Section 404 of ERISA imposes general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. A fiduciary that decides to invest the assets of a Plan
in the offered certificates should consider, among other factors, the extreme
sensitivity of the investments to the rate of principal payments (including
prepayments) on the underlying mortgage loans.
The U.S. Department of Labor has granted to Greenwich Capital
Markets, Inc. Prohibited Transaction Exemption (PTE) 90-59, as amended by PTE
97-34, PTE 2000-58 and PTE 2000-41 (the "Exemption"), which exempts from the
application of the prohibited transaction rules transactions relating to
o the acquisition, holding and sale by Plans of certain securities
representing an undivided interest in certain asset-backed
pass-through entities with respect to which Greenwich Capital
Markets, Inc. or any of its affiliates is the sole underwriter
or the manager or co-manager of the underwriting syndicate, and
o the servicing, operation and management of such asset-backed
pass-through entities,
provided that the general conditions and certain other requirements set forth
in the exemption are satisfied.
Among the conditions that must be satisfied for the exemption to
apply are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable to
the Plan as they would be in an arm's length transaction with an unrelated
party;
(2) the rights and interests evidenced by the certificates acquired
by the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust fund, except when the trust holds certain
types of assets;
(3) the certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three (four, if the trust
holds certain types of assets) highest generic rating categories from a rating
agency, such as Standard & Poor's, Fitch Ratings or Moody's Investor Serives,
Inc.;
S-47
(4) the trustee must not be an affiliate of any other member of the
"Restricted Group" (as defined below);
(5) the sum of all payments made to and retained by the underwriter
in connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of all
payments made to and retained by the seller pursuant to the assignment of the
trust assets to the trust fund represents not more than the fair market value
of such loans; the sum of all payments made to and retained by any servicer
represents not more than reasonable compensation for the servicer's services
under the agreement pursuant to which the loans are pooled and reimbursements
of such person's reasonable expenses in connection therewith;
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the SEC under the
Securities Act of 1933, as amended; and
(7) for certain types of issuers, the documents establishing the
issuer and governing the transaction must contain certain provisions to ensure
that the issuer's assets may not be received by creditors of the sponsor in
the event of the bankruptcy or insolvency of the sponsor.
The trust fund must also meet the following requirements:
o the investment pool must consist solely of assets of the type
that have been included in other investment pools;
o certificates evidencing interests in those other investment
pools must have been rated in one of the three highest generic
rating categories (four, if the investment pool contains certain
types of assets) by a rating agency for at least one year prior
to the Plan's acquisition of certificates; and
o certificates evidencing interests in those other investment
pools must have been purchased by investors other than Plans for
at least one year prior to any Plan's acquisition of
certificates.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust holding
receivables as to which the fiduciary (or its affiliate) is an obligor
provided that, among other requirements, (i) in the case of an acquisition in
connection with the initial issuance of certificates, at least fifty percent
(50%) of each class of certificates in which Plans have invested and at least
50% of the aggregate interests in the trust is acquired by persons independent
of the Restricted Group; (ii) such fiduciary (or its affiliate) is an obligor
with respect to five percent (5%) or less of the fair market value of the
obligations contained in the trust; (iii) the Plan's investment in
certificates of any class does not exceed twenty-five percent (25%) of all of
the certificates of that class outstanding at the time of the acquisition; and
(iv) immediately after the acquisition, no more than twenty-five percent (25%)
of the assets of any Plan with respect to which such person is a fiduciary are
invested in certificates representing an interest in one or more issuers
containing assets sold or serviced by the same entity. This relief is not
S-48
available to Plans sponsored by the "Restricted Group" consisting of the
underwriter, the trustee, the master servicer, any obligor with respect to
Mortgage Loans included in the trust fund constituting more than five percent
of the aggregate unamortized principal balance of the assets in the trust
fund, [any insurers of the trust fund or counterparties to an eligible swap
included in the trust fund,] or any affiliate of these parties and in general
the Exemption provides only limited relief to such Plans.
Assuming the accuracy of certain statements in the underlying
supplements, it is expected that the exemption will apply to the acquisition
and holding by Plans of the offered certificates [other than the Class ___
Certificates] and that all conditions of the exemption other than those within
the control of the investors will be met.
The rating of a security may change. If the rating of a security
declines below BBB- or Baa3, the security will no longer be eligible for
relief under the exemption, (although a Plan that had purchased the security
when it had a permissible rating would not be required by the exemption to
dispose of it).
Each beneficial owner of a [Class _______________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 or investing with Plan assets, (ii) it has acquired and
is holding such certificate in reliance on the Exemption, and that it
understands that there are certain conditions to the availability of the
Exemption, including that the certificate must be rated, at the time of
purchase, not lower than "BBB-" (or its equivalent) by Standard &Poor's, Fitch
Ratings or Moody's Investors Service, Inc., and the certificate is so rated 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.
BECAUSE THE CHARACTERISTICS OF THE CLASS [___________] CERTIFICATES
MAY NOT MEET THE REQUIREMENTS OF THE EXEMPTION DISCUSSED ABOVE OR ANY OTHER
ISSUED EXEMPTION UNDER ERISA, INCLUDING PROHIBITED TRANSACTION CLASS EXEMPTION
(PTCE) 83-1 DISCUSSED UNDER "ERISA CONSIDERATIONS" IN THE PROSPECTUS, THE
PURCHASE AND HOLDING OF CLASS [____________] CERTIFICATES BY A PLAN OR BY
INDIVIDUAL RETIREMENT ACCOUNTS OR OTHER PLANS SUBJECT TO SECTION 4975 OF THE
CODE MAY RESULT IN PROHIBITED TRANSACTIONS OR THE IMPOSITION OF EXCISE TAXES
OR CIVIL PENALTIES. CONSEQUENTLY, ACQUISITIONS AND TRANSFERS OF THE CLASS
[_____________] CERTIFICATES (AND OF CERTIFICATES OF ANY CLASS THAT, BECAUSE
OF A CHANGE OF RATING, NO LONGER SATISFIES THE RATIANG REQUIREMENT OF THE
EXEMPTION) WILL NOT BE REGISTERED BY THE TRUSTEE UNLESS THE TRUSTEE RECEIVES:
(I) A REPRESENTATION FROM THE ACQUIROR OR TRANSFEREE OF SUCH CERTIFICATE, TO
THE EFFECT THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE BENEFIT PLAN SUBJECT TO
SECTION 406 OF ERISA OR A PLAN OR ARRANGEMENT SUBJECT TO SECTION 4975 OF THE
CODE, NOR A PERSON ACTING ON BEHALF OF ANY SUCH PLAN OR ARRANGEMENT OR USING
THE ASSETS OF ANY SUCH PLAN OR ARRANGEMENT TO EFFECT THE TRANSFER, OR (II) IF
THE PURCHASER IS AN INSURANCE COMPANY, A REPRESENTATION THAT THE PURCHASER IS
AN INSURANCE COMPANY WHICH IS PURCHASING SUCH CERTIFICATES WITH FUNDS
S-49
CONTAINED IN AN "INSURANCE COMPANY GENERAL ACCOUNT" (AS THAT TERM IS DEFINED
IN SECTION V(E) OF PTCE 95-60) AND THAT THE PURCHASE AND HOLDING OF SUCH
CERTIFICATES ARE COVERED UNDER SECTIONS I AND III OF PTCE 95-60, OR (III) AN
OPINION OF COUNSEL SATISFACTORY TO THE TRUSTEE THAT THE PURCHASE AND HOLDING
OF THE CERTIFICATE BY A PLAN, OR ANY PERSON ACTING ON BEHALF OF A PLAN OR
USING A PLAN'S ASSETS, WILL NOT RESULT IN A NON-EXEMPT PROHIBITED TRANSACTION
UNDER ERISA OR SECTION 4975 OF THE CODE AND WILL NOT SUBJECT THE TRUSTEE TO
ANY OBLIGATION IN ADDITION TO THOSE UNDERTAKEN IN THE POOLING AND SERVICING
AGREEMENT.
THE FIRST REPRESENTATION SHALL BE DEEMED TO HAVE BEEN MADE TO THE
TRUSTEE BY THE ACQUIROR OR TRANSFEREE'S ACCEPTANCE OF A CLASS [__________]
CERTIFICATE THAT IS IN BOOK-ENTRY FORM. IF THE REPRESENTATION IS NOT TRUE, OR
ANY ATTEMPT TO TRANSFER TO A PLAN OR PERSON ACTING ON BEHALF OF A PLAN OR
USING A PLAN'S ASSETS IS INITIATED WITHOUT THE REQUIRED OPINION OF COUNSEL,
THE ATTEMPTED TRANSFER OR ACQUISITION SHALL BE VOID AND OF NO EFFECT.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the
Exemption described above, and the potential consequences in their specific
circumstances prior to making an investment in the offered certificates.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment prudence and diversification, an investment
in the offered certificates is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
Legal Investment Considerations
Assuming the accuracy of certain representations contained in the
underlying agreements (which information is not subject to independent
certification) and on the basis of certain assumptions derived from statements
included in the underlying supplements, the offered certificates will
constitute "mortgage related securities" for the purposes of the Secondary
Mortgage Market Enhancement Act of 1984 (SMMEA) so long as they are rated in
one of the two highest rating categories by at least one nationally recognized
statistical rating organization and, as such, are legal investments for
certain entities to the extent provided for in SMMEA.
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase the offered certificates
or to purchase offered certificates representing more than a specified
percentage of the investor's assets. Investors should consult their own legal
advisors in determining whether and to what extent the offered certificates
constitute legal investments for them. See "Legal Investment Considerations"
in the prospectus.
Method of Distribution
Subject to the terms and conditions set forth in the underwriting
agreement between the depositor and the underwriter, the depositor has agreed
to sell to the underwriter, and the underwriter has agreed to purchase from
the depositor, all of the offered certificates.
S-50
Distribution of the offered certificates will be made by the
underwriter from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. The underwriter may
effect those transactions by selling offered certificates to or through
dealers and those dealers may receive from the underwriter, for which they act
as agent, compensation in the form of underwriting discounts, concessions or
commissions. The underwriter and any dealers that participate with the
underwriter in the distribution of the offered certificates may be deemed to
be underwriters, and any discounts, commissions or concessions received by
them, and any profits on resale of the offered certificates purchased by them,
may be deemed to be underwriting discounts and commissions under the
Securities Act of 1933.
The depositor has been advised by the underwriter that it intends to
make a market in the offered certificates but has no obligation to do so.
There can be no assurance that a secondary market for the offered certificates
will develop or, if it does develop, that it will continue.
The depositor has agreed to indemnify the underwriter against, or
make contributions to the underwriter with respect to, certain liabilities,
including liabilities under the Securities Act.
Legal Matters
Certain legal matters in connection with the issuance of the offered
certificates will be passed upon for the depositor and the underwriter by
[Sidley Austin Brown & Wood LLP] [Thacher Proffitt & Wood LLP], New York, New
York.
Ratings
It is a condition to the issuance of the offered certificates that
they be rated "[____]" by [__________] and "[______]" by [_________].
The ratings assigned by the rating agencies named above to mortgage
pass-through certificates address the likelihood of the receipt of all
distributions by the related certificateholders under the agreements pursuant
to which the certificates are issued. The ratings by the rating agencies take
into consideration the credit quality of the related mortgage pool, including
any credit support providers, structural and legal aspects associated with the
certificates, and the extent to which the payment stream on the mortgage pool
is adequate to make the payments required by the certificates. The ratings by
the rating agencies on the certificates do not, however, constitute a
statement regarding frequency of prepayments of the mortgage loans.
The depositor has not engaged any rating agency other than the rating
agencies to provide ratings on the offered certificates. However, there can be
no assurance as to whether any other rating agency will rate the offered
certificates, or, if it does, what rating would be assigned by the other
rating agency. Any rating on the offered certificates by another rating
agency, if assigned at all, may be lower than the ratings assigned to the
certificates by the rating agencies. The rating on the Class [____]
Certificate only addresses the return of its Certificate Principal Balance and
interest thereon at the related pass-through rate.
S-51
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the offered certificates by the rating agencies
are subsequently lowered for any reason, no person or entity is obligated to
provide any additional support or credit enhancement with respect to the
offered certificates.
S-52
Glossary of Terms
"Available Funds" means, with respect to each distribution date, an
amount equal to (a) the amount received by the trustee on and prior to that
distribution date as a distribution on the underlying security, reduced by (b)
the sum of any expenses reimbursable to the depositor and any taxes imposed
upon the trust.
"Basic Principal Distribution Amount" means, for any distribution
date, the portion of Available Funds attributable to principal received with
respect to the underlying mortgage loans.
"Certificate Principal Balance" means, with respect to any
certificate and any date of determination, the initial principal balance of
that certificate less all distributions made in respect of principal of that
certificate on all distribution dates preceding that date of determination and
further reduced by all losses allocated to that certificate on any such
distribution date.
"Class [____] Accretion Termination Date" means the distribution date
following the distribution date on which the Certificate Principal Balances of
the Class [__] Certificates are reduced to zero.
"Class [____] Accrual Distribution Amount" equals, for any
distribution date, the current interest allocated but not distributed with
respect to the Class [____] Certificates on that distribution date in
accordance with clause (i) of "Description of the Certificates--Allocation of
Available Funds" in this prospectus supplement.
"Class [____] Pro Rata Distribution Amount" means, for any
distribution date, the product of (a) the Class [____] Pro Rata Percentage and
(b) the Scheduled Principal Distribution Amount.
"Class [____] Pro Rata Percentage" equals, for any distribution date,
a fraction, the numerator of which is the aggregate of the Certificate
Principal Balances of the Class [__] Certificates on that distribution date
and the denominator of which is the aggregate of the Certificate Principal
Balances of all Classes of certificates on that distribution date.
"Class [____] Prepayment Distribution Amount" means, for any
distribution date, the product of (a) the Principal Prepayment Distribution
Amount, (b) the Class [____] Pro Rata Percentage and (c) the Shift Percentage.
"Class [____] Priority Distribution Amount" means, for any
distribution date, the sum of (i) the Class [____] Pro Rata Distribution
Amount and (ii) the Class [____] Prepayment Distribution Amount.
"Class [____] Accretion Termination Date" means the distribution date
following the distribution date on which the Certificate Principal Balances of
the Class [__] Certificates are reduced to zero.
S-53
"Class [____] Accrual Distribution Amount" equals, for any
distribution date, the current interest allocated but not distributed with
respect to the Class [____] Certificates on that distribution date in
accordance with clause (i) of "Description of the Certificates--Allocation of
Available Funds" in this prospectus supplement.
"Class [____] Planned Balance" means, for any distribution date, the
balance set forth in Appendix II attached hereto.
"Class [____] Pro Rata Distribution Amount" means, for any
distribution date, the product of (a) the Class [____] Pro Rata Percentage and
(b) the Basic Principal Distribution Amount.
"Class [____] Pro Rata Percentage" equals, for any distribution date,
a fraction, the numerator of which is the Certificate Principal Balance of the
Class [____] Certificate on that distribution date and the denominator of
which is the aggregate of the Certificate Principal Balances of all Classes of
Certificates on that distribution date.
"Excess Losses" means Realized Losses on mortgage loans in the
underlying trust funds (including the underlying mortgage loans) that exceed
the applicable coverage amounts for special hazard losses, fraud losses and
bankruptcy losses."
"Net Prepayment Interest Shortfall" means the amount of any interest
reduction with respect to any underlying security on any underlying remittance
date as described in this prospectus supplement under "Description of the
underlying securities - Adjustment to the Servicing Fee in each underlying
trust fund in Connection with Prepaid underlying mortgage loans."
"Principal Prepayment Distribution Amount" means, with respect to any
distribution date, the portion of Available Funds attributable to unscheduled
principal received with respect to the underlying mortgage loans.
"Scheduled Principal Distribution Amount" means, with respect to any
distribution date, the portion of Available Funds attributable to scheduled
principal received with respect to the underlying mortgage loans.
"Shift Percentage" for any distribution date will be the percentage
indicated below:
S-54
Distribution Date occurring in Shift Percentage
------------------------------ ----------------
_____ 200_ through _____ 200_ [____]%
_____ 200_ through _____ 200_ [____]%
_____ 200_ through _____ 200_ [____]%
_____ 200_ through _____ 200_ [____]%
_____ 200_ through _____ 200_ [____]%
_____ 200_ and thereafter [____]%
S-55
Appendix I
Characteristics of the Underlying Mortgage Loans for
[__________] Trust Series [____]
Current Principal Balances
Percentage of
Number of Mortgage Aggregate Unpaid Aggregate Unpaid
Range of Principal Balances ($) Loans Principal Balance ($) Principal Balance (%)
------------------------------- -------------------- ---------------------- ----------------------
-------------------- ---------------------- ----------------------
TOTAL $ %
==================== ======================= ======================
Mortgage Interest Rates
Percentage of
Range of Mortgage Interest Rates Number of Mortgage Aggregate Unpaid Aggregate Unpaid
(%) Loans Principal Balance ($) Principal Balance (%)
-------------------------------- ------------------- ---------------------- ---------------------
-------------------- ---------------------- ----------------------
TOTAL $ %
==================== ======================= =======================
Due to rounding, certain percentages may not add up to 100.00%.
I-1
Geographic Distribution of Mortgaged Properties
Percentage of
Number of Mortgage Aggregate Unpaid Aggregate Unpaid
State Loans Principal Balance ($) Principal Balance (%)
------------------------------- -------------------- ---------------------- ---------------------
-------------------- ---------------------- ---------------------
TOTAL $ %
==================== ====================== =====================
No more than approximately [____]% of the related underlying mortgage
loans are secured by mortgaged properties located in any one postal ZIP
code.
Loan Purpose
Percentage of
Number of Mortgage Aggregate Unpaid Aggregate Unpaid
Loan Purpose Loans Principal Balance ($) Principal Balance (%)
-------------------------- ------------------- ---------------------- ---------------------
Rate/Term Refinance
Purchase
Cash Out Refinance -------------------- ---------------------- ---------------------
TOTAL $ %
===================== ====================== =====================
I-2
Types of Mortgaged Properties
Percentage of
Aggregate Unpaid
Number of Mortgage Aggregate Unpaid Principal Balance
Type Loans Principal Balance ($) (%)
----------------------------- ------------------- ---------------------- -------------------
[____] Units
Condominium
PUD
Single Family Detached ------------------- ---------------------- -------------------
TOTAL $ %
=================== ====================== ====================
Occupancy Status
Percentage of
Number of Aggregate Unpaid Aggregate Unpaid
Occupancy Mortgage Loans Principal Balance ($) Principal Balance (%)
----------------------------- ------------------- ---------------------- ----------------------
Investor
Primary
Second Home ------------------- ---------------------- ----------------------
TOTAL $ %
=================== ====================== ======================
Remaining Terms to Maturity
Percentage of
Number of Mortgage Aggregate Unpaid Aggregate Unpaid
Remaining Term (Months) Loans Principal Balance ($) Principal Balance (%)
------------------------------ --------------------- ---------------------- -----------------------
------------------- ---------------------- ----------------------
TOTAL $ %
=================== ====================== ======================
I-3
Appendix II
Planned Principal Balance Tables
Distribution Date Principal Balance
- ----------------- -----------------
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
II-1
Distribution Date Principal Balance
- ----------------- -----------------
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
__________, 20__.............................................................. [__________]
II-2
Exhibit A
---------
The information about the underlying securities and the underlying
mortgage loans contained in this Exhibit A has been obtained from the
underlying supplements, which were prepared in connection with the public
offerings of the underlying securities. Such information has not been
independently represented to the trust as being accurate and complete.
Additionally the underlying supplements contain information only as of the
respective dates of such documents. You should be aware, however, that
material changes may have occurred since the preparation of the underlying
supplements and the composition of the related mortgage pools may have changed
significantly. There may be considerable differences between the current
mortgage loan characteristics and the characteristics described in connection
with the issuance of the underlying securities.
All capitalized terms contained in the following excerpts that are
not defined therein have the meanings solely as specified in the underlying
supplements.
Excerpts From The Underlying Supplement Relating To
[__________] Trust Series [____]
The Mortgage Pool
General
Underwriting Standards
Voting Rights
Description of the Certificates
General
A-1
Exhibit A - Excerpts from Underlying Supplement Relating to [ ] Trust
---------------------------------------------------------------------
Series [ ] (cont'd)
-------------------
Distributions
Priority of Distributions Among Certificates
Distributions of Interest
Distributions of Principal
Allocation of Losses
A-2
Exhibit B distribution date: [_________]
---------
REMITTANCE DATE STATEMENT FOR THE
[__________] TRUST SERIES [____]
__________, 200_ Distribution Date
[_______________] Trust
[_______________] Certificates, Series [____]
Certificateholder Monthly Distribution Summary
- -----------------------------------------------------------------------------------------------------------------------------------
Certificate Pass Current Cumulative
Class Rate Beginning Through Principal Interest Total Realized Ending Realized
Class Cusip Description Type Balance Rate (%) Distribution Distribution Distribution Losses Balance Losses
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Totals
- -----------------------------------------------------------------------------------------------------------------------------------
B-1
distribution date: [_______]
[_______________] Trust
[__________] Certificates, Series [____]
Principal Distribution Detail
- -----------------------------------------------------------------------------------------------------------------------------------
Original Beginning Scheduled Unscheduled Ending Ending
Certificate Certificate Principal Accretion Principal Net Principal Current Certificate Certificate
Class Cusip Balance Balance Distribution Principal Adjustments Distribution Realized Losses Balance Factor
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Totals
- -----------------------------------------------------------------------------------------------------------------------------------
B-2
distribution date: [_____]
[_______________] Trust
[__________] Certificates, Series [____]
Interest Distribution Detail
- -----------------------------------------------------------------------------------------------------------------------------------
Beginning Pass Accrued Cumulative Total Unscheduled
Certificate Through Optimal Unpaid Deferred Interest Net Prepayment Interest Interest
Class Balance Rate (%) Interest Interest Interest Due Int Shortfall Adjustment Paid
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Totals
- -----------------------------------------------------------------------------------------------------------------------------------
B-3
distribution date: [______]
[_______________] Trust
[__________] Certificates, Series [____]
Current Payment Information Factors per $1,000
- -----------------------------------------------------------------------------------------------------------------------------------
Original Pass
Certificate Beginning Cert. Principal Interest Ending Cert. Through
Class Cusip Balance Notional Balance Distribution Distribution Notional Balance Rate (%)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Totals
- -----------------------------------------------------------------------------------------------------------------------------------
B-4
- ------------------------------------------------------------------ ---------------------------------------------------
RECONCILIATION REPORT
- ------------------------------------------------------------------ ---------------------------------------------------
ISSUE DATE:
- ------------------------------------------------------------------ ---------------------------------------------------
[_______________] Trust Series [_____] DISTRIBUTION DATE:
- ------------------------------------------------------------------ ---------------------------------------------------
[_______________] Certificates, Series [_____] DETERMINATION DATE:
- ------------------------------------------------------------------ ---------------------------------------------------
RUN DATE:
- ------------------------------------------------------------------ ---------------------------------------------------
- ------------------------------------------------------------------ ---------------------------------------------------
Pool Level Data
Distribution Date
Cut-off Date
Determination Date
Accrual Period Begin
End
Number of Days in Accrual Period
Collateral Information
Group 1
-------
Cut-off Date Balance
Beginning Aggregate Pool Stated Principal Balance
Ending Aggregate Pool Stated Principal Balance
Beginning Aggregate Certificate Stated Principal Balance
Ending Aggregate Certificate Stated Principal Balance
Beginning Aggregate Loan Count
Loans Paid Off or Otherwise Removed Pursuant to Pooling and
Servicing Agreement
Ending Aggregate Loan Count
Beginning Weighted Average Loan Rate (WAC)
Ending Weighted Average Loan Rate (WAC)
Beginning Net Weighted Average Loan Rate
Ending Net Weighted Average Loan Rate
Weighted Average Maturity (WAM) (Months)
Servicer Advances
Aggregate Pool Prepayment
Pool Prepayment Rate
Group 2
--------
Cut-Off Date Balance
Beginning Aggregate Pool Stated Principal Balance
Ending Aggregate Pool Stated Principal Balance
B-5
Beginning Aggregate Certificate Stated Principal Balance
Ending Aggregate Certificated Stated Principal Balance
Beginning Aggregate Loan Count
Loans Paid Off or Otherwise Removed Pursuant to Pooling and
Servicing Agreement
Ending Aggregate Loan Count
Group 2
--------
Beginning Weighted Average Loan Rate (WAC)
Ending Weighted Average Loan Rate (WAC)
Beginning Net Weighted Average Loan Rate
Ending Net Weighted Average Loan Rate
Weighted Average Maturity (WAM) (Months)
Servicer Advances
Aggregate Pool Prepayment
Pool Prepayment Rate
Certificate Account
Beginning Balance
Deposit
Payments of Interest and Principal
Liquidation Proceeds
All Other Proceeds
Other Amounts
Total Deposits
Withdrawals
Reimbursement of Servicer Advances
Payment of Master Servicer Fees
Payment of Sub Servicer Fees
Payment of Other Fees
Payment of Insurances Premium(s)
Payment of Personal Mortgage Insurance
Other Permitted Withdrawal per the Pooling and Service
Agreement
Payment of Principal and Interest
Total Withdrawals
B-6
Ending Balance
Prepayment Compensation
Total Gross Prepayment Interest Shortfall
Compensation for Gross PPIS from Servicing Fees
Other Gross PPIS Compensation
Total Net PPIS (Non-Supported PPIS)
Master Servicing Fees Paid
Sub Servicing Fees Paid
Insurance Premium(s) Paid
Personal Mortgage Insurance Fees Paid
Other Fees Paid
Total Fees
Delinquency Information
Group 1
-------
Delinquency 30-59 60-89 Days 90+ Days
----------- ----- ---------- --------
Days
----
Scheduled Principal Balance
Percentage of Total Pool Balance
Number of Loans
Percentage of Total Loans
Foreclosure
Scheduled Principal Balance
Percentage of Total Pool Balance
Number of Loans
Percentage of Total Loans
Bankruptcy
Scheduled Principal Balance
Percentage of total Pool Balance
Number of Loans
Percentage of Total Loans
REO
Scheduled Principal Balance
Percentage of Total Pool Balance
B-7
Number of Loans
Percentage of Total Loans
Book Value of all REO Loans
Percentage of Total Pool Balance
Current Realized Losses
Additional Gains (Recoveries)/Losses
Total Realized Losses
Group 2
--------
Delinquency 30-59 60-89 Days 90+ Days
----------- ----- ---------- --------
Days
----
Scheduled Principal Balance
Percentage of Total Pool Balance
Number of Loans
Percentage of Total Loans
Foreclosure
-----------
Scheduled Principal Balance
Percentage of Total Pool Balance
Number of Loans
Percentage of Total Loans
Bankruptcy
----------
Scheduled Principal Balance
Percentage of Total Pool Balance
Number of Loans
Percentage of Total Loans
REO
----
Scheduled Principal Balance
Percentage of Total Pool Balance
Number of Loans
Percentage of Total Loans
Book Value of all REO Loans
Percentage of Total Pool Balance
B-8
Current Realized Losses
Additional Gains
(Recoveries)/Losses
Total Realized Losses
Subordinated/Credit Enhancement Information
Protection Original
---------- --------
Bankruptcy Loss
Bankruptcy Percentage
Credit/Fraud Loss
Credit/Fraud Loss Percentage
Special Hazard Loss
Special Hazard Loss Percentage
Credit Support Original
-------------- --------
Class [____]
Class [____] Percentage
Class [____]
Class [____] Percentage
Class [____]
Class [____] Percentage
Class [____]
Class [____] Percentage
Class [____]
Class [____] Percentage
Class [____]
Class [____] Percentage
Class [____]
Class [____] Percentage
B-9
Exhibit C
---------
Global Clearance, Settlement and
Tax Documentation Procedures
Except in certain limited circumstances, the globally offered
Resecuritization Mortgage Trust Certificates, Series 200_-_ (the "Global
Securities"), will be available only in book-entry form. Investors in the
Global Securities may hold such Global Securities through DTC, Clearstream or
Euroclear. The Global Securities will be traceable as home market instruments
in both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors 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 participants of Clearstream or
Euroclear and Participants holding certificates will be effected on a
delivery-against-payment basis through the Relevant Depositaries of
Clearstream and Euroclear (in such capacity) and as 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 Relevant Depositaries, which in turn will hold such positions in
accounts as Participants.
Investors selecting to hold their Global Securities through DTC will
follow DTC settlement practice. 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 securities custody accounts on the settlement date against
payment in same-day funds.
C-1
Secondary Market Trading
Because 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 Participants. Secondary market trading between
Participants will be settled using the procedures applicable to prior
asset-backed issues in same-day funds.
Trading between Clearstream and/or Euroclear participants. Secondary
market trading between Clearstream participants or Euroclear participants will
be settled using the Procedures applicable to conventional eurobonds in same
day funds.
Trading between DTC Seller and Clearstream or Euroclear participants.
When Global Securities are to be transferred from the account of a 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 to the 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 to
finance settlement. Under this procedure, Clearstream participants or
Euroclear participants purchasing Global Securities would incur overdraft
charges for one day, assuming they clear the overdraft when the Global
Securities are credited to their accounts. However, interest on the Global
Securities would accrue from the value date.
C-2
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.
Because the settlement is taking place during New York business
hours, 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 Participants
a cross-market transaction will settle no differently than a trade between two
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 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
Relevant Depositary, as appropriate, to deliver the Global Securities to the
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 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 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-3
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the 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:
Exemptions 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). If the information shown on
Form W-8BEN changes, a new Form W-8BEN must be filed within 30 days
of such change.
Exemptions for non-U.S. Persons with Effectively Connected
Income (Form W-8ECI). A non-U.S. Person, including a non U.S.
corporation or bank with a U.S. branch, for which the interest income
is effectively connected with its conduct of a trade or business in
the United States, can obtain an exemption from the withholding tax
by filing Form W-8ECI (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade of 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 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 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8BEN. Form W-8BEN may be filed by the
beneficial owners or their agents.
Exemptions 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 beneficial
owner of a Global Security or, in the case of a Form W-8BEN or a Form
W-8ECI filer, his agent, files by submitting the appropriate form to
the person through whom it holds (the clearing agency, in the case of
persons holding directly on the books of the clearing agency). Form
W-8BEN is effective for [____] calendar years, and Form W-8ECI is
effective for [____] calendar year.
C-4
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of
the United States, any state thereof or the District of Columbia, (iii) an
estate that is subject to United States federal income tax, regardless of the
source of its income or (iv) a trust if (a) a court in the United States is
able to exercise primary supervision over the administration of the trust, and
(b) one or more United States persons have the authority to control all
substantial decisions of the trust. The term "Non-U.S. Person means any person
who is not a U.S. Person. This summary does not deal with all aspects of U.S.
federal income tax withholding that may be relevant to foreign holders of
Global Securities or with the application of recently issued Treasury
Regulations relating to tax documentation requirements that are generally
effective with respect to payments made after December 31, 2000. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of Global Securities.
C-5
=======================================================================================================
Until the expiration of 90 days after the date of this $[__________]
prospectus supplement, all dealers selling the offered (Approximate)
certificates, whether or not participating in this
distribution, will deliver a prospectus supplement and
the prospectus to which it relates. This delivery Resecuritization Mortgage Trust Certificates,
requirement is in addition to the obligation of dealers Series 200_-_
to deliver a prospectus supplement and prospectus when
acting as underwriters and with respect to their unsold
allotment or subscriptions. $ __________ Class [___] [___]% Certificates
_________________________
You should rely on the information contained or [Greenwich Capital Acceptance, Inc.]
incorporated by reference in this prospectus supplement Depositor
and the accompanying prospectus. We have not authorized t
anyone to provide you with different information. d
We are not offering the offered certificates in any
state where the offer is not permitted.
Prospectus Supplement
We do not claim that the information in this prospectus [_____ __, 200_]
supplement and the accompanying prospectus is accurate
as of any date other than the dates dated on their
respective covers. [Logo of Underwriter]
-----------------------
==========================================================================================================
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus supplement and the accompanying prospectus are not an offer to sell
these securities and are not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
Subject to Completion, Dated January 9, 2004
Prospectus Supplement
- ---------------------
(To Prospectus dated ___________, 200_)
$______________
________________ Home Loan Owner Trust 200_-__
Home Loan Asset-Backed Notes, Series 200_-__
[Financial Asset Securities Corp.]
Depositor
[_____]
Seller
[_____]
Master Servicer
$________ (approximate) Depositor Class A-1 Adjustable Rate Notes
$________ (approximate) Class A-2 ___% Rate
$________ (approximate) Class A-3 ___% Rate
$________ (approximate) Class A-4 ___% Rate
The Trust
o The trust will issue five classes of notes and certificates, of which
the four classes of notes listed above are offered by this prospectus
supplement and the accompanying prospectus.
o The trust assets will consist primarily of
- a pool of fixed-rate, closed-end home equity loans
generally secured by second liens on one- to four-family
residential properties in which the borrowers have
little or no equity, and
- a note insurance policy issued by [____].
The Notes
o The notes are non-recourse obligations of the trust.
o The notes have the benefit of credit enhancement, including a note
insurance policy issued by _________, to the extent described in this
prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these securities or determined that this prospectus
supplement or the accompanying prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
The underwriter named below will offer the notes listed above in
negotiated transactions. Proceeds to the depositor are expected to be
approximately $_____________, before deducting issuance expenses estimated to
be $___________. See "Underwriting" in this prospectus supplement.
___________________________
Greenwich Capital Markets, Inc.
The date of this prospectus supplement is _______, 200_.
----------------------------------------------------------------------------
Consider carefully the risk factors beginning on page S-9 of this prospectus
supplement and on page 6 of the accompanying prospectus.
This prospectus supplement may be used to offer and sell the notes only if
accompanied by the accompanying prospectus.
Table of Contents
Page
----
Prospectus Supplement
Summary of Terms............................................................S-3
Risk Factors................................................................S-9
The Trust..................................................................S-15
Use of Proceeds............................................................S-16
The Depositor..............................................................S-16
The Seller.................................................................S-16
The Servicer...............................................................S-18
The Master Servicer, Custodian and Note Administrator......................S-19
The Home Loan Pool.........................................................S-19
Description of the Notes...................................................S-28
Servicing of the Home Loans................................................S-41
Note Insurance.............................................................S-49
Prepayment and Yield Considerations........................................S-54
Material Federal Income Tax Consequences...................................S-63
State Tax Consequences.....................................................S-68
ERISA Considerations.......................................................S-68
Experts....................................................................S-70
Underwriting...............................................................S-71
Legal Investment Considerations............................................S-72
Ratings....................................................................S-73
Legal Opinions.............................................................S-73
Glossary of Terms..........................................................S-74
Prospectus
Important Notice About Information in this Prospectus and Each
Accompanying Prospectus Supplement.........................................5
Risk Factors..................................................................6
The Trust Fund...............................................................16
Use of Proceeds..............................................................33
The Depositors...............................................................33
Loan Program.................................................................34
Description of the Securities................................................38
Credit Enhancement...........................................................47
Yield and Prepayment Considerations..........................................58
Operative Agreements.........................................................61
Material Legal Aspects of the Loans..........................................82
Material Federal Income Tax Considerations..................................106
State Tax Considerations....................................................152
ERISA Considerations........................................................152
Legal Investment Considerations.............................................158
Method of Distribution......................................................160
Legal Matters...............................................................161
Financial Information.......................................................161
Available Information.......................................................161
Ratings.....................................................................162
Glossary of Terms...........................................................163
S-2
Summary of Terms
o This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the offering
of the notes, read carefully this entire document and the accompanying
prospectus.
o This summary provides an overview of certain calculations, cash flow
priorities and other information to aid your understanding and is
qualified by the full description of these calculations, cash flow
priorities and other information in this prospectus supplement and the
accompanying prospectus. Some of the information consists of
forward-looking statements relating to future economic performance or
projections and other financial items. Forward-looking statements are
subject to a variety of risks and uncertainties that could cause actual
results to differ from the projected results. Those risks and
uncertainties include, among others, general economic and business
conditions, regulatory initiatives and compliance with governmental
regulations, and various other matters, all of which are beyond our
control. Accordingly, what actually happens may be very different from
what we predict in our forward-looking statements.
Trust: _____ Home Loan Owner Trust _______ - _____
Title of Series: Home Loan Asset-Backed Notes, Series 200_ - ____
Offered Notes: Class A-1, Class A-2, Class A-3 and Class A-4 Notes
Non-Offered Certificates: The Trust Certificates
Seller and Originator: __________________
Servicer: __________________
Master Servicer, Custodian
and Note Administrator: __________________
Depositor: [Financial Asset Securities Corp.]
Indenture Trustee __________________________
Owner Trustee: __________________________, acting not in its
individual capacity but solely as owner trustee
Note Insurer: __________________________
Cut-off Date: The close of business on __________ __, _____
Closing Date: On or about ___________ __, _______
Maturity Date: ____________________.
S-3
The Offered Notes o rights of the seller under certain
hazard insurance policies covering
On the closing date, the trust will issue the the mortgaged properties;
four classes of notes listed on the cover of
this prospectus supplement. Only the notes are o funds on deposit in certain accounts
being offered to you by this prospectus described in this prospectus supplement;
supplement and the accompanying prospectus. and
Each class of notes that is being offered will o the rights of the indenture trustee under the
be in book-entry form in minimum denominations note insurer's insurance policy.
of $__________ clearing through DTC [in the
United States or Clearstream or Euroclear in
Europe]. The Servicer
See "Description of the Securities--Book-Entry The servicer is a ____________. Under the terms
Registration" in this prospectus supplement. of the sale and servicing agreement, the
servicer will have the contractual
The Trust responsibility to service, manage and make
collections on the loans in the trust. Each
The trust will be a Delaware business trust calendar month the servicer will retain as a
formed under a trust agreement among the fee for its services a portion of the interest
depositor, the owner trustee and the co-owner payments on the loans equal to one-twelfth of
trustee. ___% of the principal balance of each loan.
The assets of the trust include: Depositor
o a pool of fixed rate, closed-end home The depositor is a Delaware corporation and an
equity loans, secured primarily by affiliate of Greenwich Capital Markets, Inc.
second liens on one- to four-family The depositor will acquire the loans from the
residential properties and the seller and will then sell them to the trust in
related loan files; exchange for the notes and the trust
certificates.
o payments of interest due on the loans
received on or after the cut-off date; Payment Date
o property that secured a home equity You will receive payments on the notes on the
loan and has been acquired after 25th day of each month, beginning in ________
the closing date by foreclosure or 200_. If the 25th day is not a business day,
deed in lieu of foreclosure; then the distribution date will be the next
business day.
o rights of the depositor under the
home equity loan purchase agreement
under which the depositor purchased the
home equity loans from the seller;
S-4
Loan Statistics (i.e., the related combined loan-to-value ratios
approach or exceed 100%).
The home loans will have the following
characteristics as of the close of business on Borrowers used their loan proceeds to finance
______________, 200_:
o property improvements,
o number of loans: __________
o debt consolidation, or
o aggregate principal balance:
$___________ o a combination of property improvements, debt
consolidation, cash-out, credit insurance premiums,
o average principal balance of loans: origination costs or other consumer purposes.
$__________ (approximate)
o principal balances of loans range: See "The Home Loan Pool" in this prospectus
$__________ to $_________ supplement for additional information.
o mortgaged property location: ____ Interest Payments on the Notes
states
Class A-1 Notes
o interest rates range: ______% to
______% The interest rate on the Class A-1 Notes will
equal the lesser of
o weighted average interest rate:
______% (approximate) o 1-Month LIBOR plus ___% and
o loan age range: ___ to ___ months o the weighted average of the interest rates on
the home loans net of certain trust expenses.
o weighted average loan age: ___
months (approximate) If for any payment date, the interest rate on the
Class A-1 Notes is calculated based on the second
o combined loan-to-value ratio range: bullet point above, the excess of the amount of
______% to ______% (approximate) interest calculated based on the first bullet
point over the amount of interest based on the
o weighted average combined loan-to- second bullet point will be payable on the next
value ratio: ______% (approximate) payment date, together with accrued interest on
the excess amount, to the extent that sufficient
See "The Home Loan Pool" in this prospectus funds are available. However, the note insurance
supplement for additional information. policy will not guaranty the payment of any such
excess amounts.
Loan Characteristics
Interest payable on the Class A-1 Notes on any
The home loans are fully amortizing. Interest on payment date will accrue from the preceding
the home loans will accrue at a fixed rate payment date (or the closing date
calculated on the "actuarial interest" method.
A majority of the home loans will be secured by
liens on mortgaged properties in which the
borrowers have little or no equity
S-5
in the case of the first payment date) through the Class A-4 ________________
day preceding the current payment date.
Calculations of interest on the Class A-1 Notes The actual final payment date for each class of
will be computed on the basis of an assumed notes is likely to occur earlier, and may occur
360-day year and the actual number of days significantly earlier, than its stated maturity
elapsed. date.
Class A-2, Class A-3 and Class A-4 Notes See "Prepayment and Yield Considerations" in this
prospectus supplement for additional information.
The interest rates on the Class A-2, Class A-3 and
Class A-4 Notes are specified on the cover of this Credit Enhancement
prospectus supplement.
The credit enhancement of the notes is achieved by
Interest payable on the Class A-2, Class A-3 and means of a note insurance policy and
Class A-4 Notes on any payment date will accrue overcollateralization designed to increase the
during the calendar month preceding the month in likelihood that noteholders will receive regular
which the current payment date occurs. payments of interest and principal.
Calculations of interest on the Class A-2, Class
A-3 and Class A-4 Notes will be computed on the Note Insurance Policy
basis of an assumed 360-day year consisting of
twelve 30-day months. The note insurer will issue the note insurance
policy which will guarantee principal and interest
Principal Payments on the Notes payments on the notes at the times and in the
amounts described in this prospectus supplement.
On each payment date available funds remaining
after the payment of certain trust expenses will In the absence of payments under the note
be applied to pay interest on the notes and then insurance policy, noteholders will directly bear
to pay principal on the notes. Payments of the credit risk and other risks associated with
principal will be made sequentially to the holders the loans.
of the Class A-1, Class A-2, Class A-3 and Class
A-4 Notes, in that order, until the balance of On each payment date, the indenture trustee will
each class of notes is reduced to zero. determine whether funds available to make the
payments of principal and interest are sufficient.
See "Description of the Notes--Payments" in this If an insufficiency exists and is covered by the
prospectus supplement for additional information. note insurance policy, then the trustee will make
a claim under the note insurance policy.
Stated Maturity Date
See "The Insurance Policy" in this prospectus
The stated maturity dates of the classes of notes supplement for additional information.
are as follows:
Class A-1 ________________
Class A-2 ________________
Class A-3 ________________
S-6
Overcollateralization taxable as acorporation or as a taxable mortgage pool.
It is anticipated that the home loans owned by the See "Material Federal Tax Consequences" in this
trust will pay interest each month in an aggregate prospectus and in the accompanying prospectus for
amount greater than the amount needed to pay trust additional information.
expenses and monthly interest on the notes. A
portion of this excess interest will be applied to
pay principal on the notes, which will reduce the ERISA Considerations
principal balance of the notes at a faster rate
than the principal balance of the loans is being The fiduciary responsibility provisions of the Employee
reduced. As a result, the principal balance of the Retirement Income Security Act of 1974, as amended, and
loans is expected to exceed the principal balance Section 4975 of the Internal Revenue Code of 1986, as
of the notes creating "overcollateralization." The amended, can limit investments by certain pension and
required level of overcollateralization may other employee benefit plans.
increase or decrease over time. We cannot assure
you that sufficient interest will be generated by Pension and other employee benefit plans should be able to
the loans to maintain overcollateralization. purchase the notes so long as they are treated as
indebtedness under applicable state law and have no
See "Description of the Notes" in this prospectus "substantial equity features." Prospective purchasers
supplement for additional information. using assets of a plan will be required to make the
representations or deemed representations set forth in
Optional Redemption "ERISA Considerations". Any plan fiduciary considering
whether to purchase the notes on behalf of a plan should
The holders of the trust certificates or the note consult with its counsel regarding the applicability of
insurer may effect an early redemption of the the relevant provisions of ERISA and the Internal Revenue
notes (and purchase of the trust certificates) on Code and the potential availability of any exemptions from
any payment date after the aggregate principal those provisions.
balance of the loans in the trust is reduced to 5%
of the aggregate principal balance of the loans as See "ERISA Considerations" in this prospectus supplement
of the cut-off date. and in the accompanying prospectus for additional
information.
See "Description of the Notes--Redemption" in this
prospectus supplement for additional information. Legal Investment Considerations
Federal Tax Considerations The notes will not be "mortgage related securities"
for purposes of the Secondary Mortgage Market
In the opinion of [Sidley Austin Brown & Wood LLP] Enhancement Act of 1974, as amended.
[Thacher Proffitt & Wood LLP], for federal income tax
purposes, the notes will be treated as debt
instruments to an investor other than the holder of
the trust certificates, and the trust will not be
characterized as an association (or publicly
traded partnership)
S-7
Note Ratings Listing
The trust will not issue the notes unless they The notes are not listed, and no party to the
receive the ratings "_____" and "_____" from transaction intends to list the notes on any stock
______ and ______, respectively. exchange or to quote them in the automated
quotation system of a registered securities
A rating is not a recommendation to buy, sell or association.
hold securities and may be subject to revision or
withdrawal by any rating agency. Risk Factors
See "Ratings" and "Risk Factors--Ratings of the There are risks associated with an investment in
Notes Should Be Viewed with Caution" in this the notes. You should consider carefully the
prospectus supplement for additional information material risks disclosed under the heading "Risk
Factors" beginning on page S-9 of this prospectus
supplement and beginning on page 5 of the
accompanying prospectus.
S-8
Risk Factors
THE FOLLOWING INFORMATION, TOGETHER WITH THE INFORMATION SET FORTH
UNDER "RISK FACTORS" IN THE ACCOMPANYING PROSPECTUS, IDENTIFIES THE PRINCIPAL
RISK FACTORS OF AN INVESTMENT IN THE CERTIFICATES.
Prepayments on the loans may
fluctuate and affect the average
life and yield of your notes...................... All of the home loans in the trust may be prepaid in
whole or in part at any time although [ ] % require
the payment of a prepayment fee for a limited period
ranging from ____ to ____ years after origination. A
prepayment fee may discourage borrowers from prepaying
their loans during the prepayment fee period. Home
loans like those in the trust have been originated in
significant volume only during the past few years, and
the depositor is not aware of any publicly available
studies or statistics on their rate of prepayment.
Generally, these loans are not viewed by borrowers as
permanent financing. As a result, the home loans in
the trust may have a higher rate of prepayment than
traditional loans. The prepayment experience of the
trust may be affected by a wide variety of factors,
including
o general economic conditions,
o prevailing interest rates,
o availability of alternative financing, and
o homeowner mobility.
In addition, all of the home loans have due-on-sale
provisions, which the servicer is required to enforce
unless enforcement is not allowed by applicable law.
The rate of prepayments of conventional housing loans
and other receivables has fluctuated significantly in
recent years. In general, however, if prevailing
interest rates fall significantly below the interest
rates on the home loans in the trust, the loans are
likely to prepay at a higher rate than if prevailing
interest rates remained at or above the interest rates
of these loans. Conversely, if prevailing interest
rates rise significantly, the rate of prepayments is
likely to decrease.
The rate of prepayments on the home loans can be
expected to affect the average life of your notes.
If you purchase your notes at a discount and principal
is repaid slower than you expect, then your yield may
S-9
be lower than you expect. Conversely, if you purchase
your notes at a premium and principal is repaid faster
than you expect, then your yield may be lower than you
expect.
Yield on the Class A-1 Notes will be
sensitive to 1-Month LIBOR and is
subject to a cap................................. The yield on the Class A-1 Notes will be sensitive to
fluctuations in one-month LIBOR and may be capped by
the weighted average of the home loan interest rates
(net of certain amounts described herein). The
prepayment of the higher interest rate loans may
result in a lower cap. The application of the cap may
result in an interest payment on the Class A-1 notes
lower than the interest that would have been paid
under the One-Month LIBOR formula.
Although holders of the Class A-1 Notes will be
entitled to receive certain excess funds to cover this
deficiency, there is no assurance that such funds will
be available. The note insurance policy does not
cover, and the ratings of the notes do not address,
the likelihood of the payment of any such deficiency.
Credit enhancement may be
inadequate........................................ The home loans are expected to generate more interest
than is needed to pay interest on the notes since the
weighted average interest rate on the loans is
expected to be higher than the weighted average
interest rate on the notes. If the home loans generate
more interest than is needed to pay interest owed on
the notes and certain trust expenses, the remaining
interest will be used to compensate for losses which
occur on the loans. After these financial obligations
have been satisfied, any available excess interest
will be used to create and maintain
overcollateralization. We cannot assure you, however,
that enough excess interest will be generated to
maintain the required level of overcollateralization.
The excess interest available on any payment date will
be affected by the actual amount of interest received,
collected or recovered in respect of the loans during
the preceding month. Such amount will be influenced by
changes in the weighted average of the loan interest
rates resulting from prepayments and liquidations of
the loans as well as from adjustments of the interest
rate on the Class A-1 Notes. Because the interest
rates on the loans are fixed rates and the interest
rate of the Class A-1 Notes adjusts based on the
1-Month LIBOR index, it is possible that the weighted
average of the interest rates on the notes may increase
relative to the
S-10
weighted average of the interest rates for the
loans. In that event, it may be necessary to apply all
or a portion of the available excess interest to make
required payments of interest on the notes. As a
result, excess interest may be unavailable for any
other purpose.
If the protection afforded by overcollateralization is
insufficient and if the note insurer is unable to meet
its obligations under the note insurance policy, then
the holders of the notes could experience a loss on
their investment.
Home loans pose particular risks
of defaults....................................... As purchasers of notes, you are protected to the extent
of the available of credit enhancement against the
risk of losses realized on the home loans. However, in
the event that the credit enhancement provides
inadequate protection, you will bear the losses on the
home loans in the trust. The risks associated with the
home loans include the following:
Early Default. Defaults on home loans are generally
expected to occur more frequently in the early years
of their terms. The weighted average number of months
since origination of the home loans as of the cut-off
date is approximately ___ months, which is not a
sufficiently long period of time to develop reliable
performance data. Delinquencies may increase as the
home loans become more seasoned.
High LTV Ratios. Most of the home loans are secured by
liens on the mortgaged properties in which the
borrowers have little or no equity. Approximately
_____% of the home loans have original combined
loan-to-value ratios in excess of 100%. Home loans
with high original combined loan-to-value ratios will
be more sensitive to declining property values than
those with lower original combined loan-to-value
ratios and therefore may experience a higher incidence
of default. In addition, in the case of home loans
with original combined loan-to-value ratios near or in
excess of 100%, if the related borrowers sell their
homes, they may be unable to repay the home loans in
full from the sale proceeds of the financed properties
and other funds available. Accordingly, those loans
likely may experience higher rates of delinquencies,
defaults and losses. In the case of loans the proceeds
of which were used in whole or in part for debt
consolidation, the related borrower may incur further
consumer debt. This reloading of debt could impair the
ability of the borrower ultimately to repay the home
loan.
S-11
Junior Liens. Substantially all of the home loans are
secured by liens junior to one or more senior liens on
the related mortgaged properties. In general, a junior
lienholder may not foreclose on the related mortgaged
property unless it forecloses subject to the senior
lien(s), in which case it must either pay the entire
amount due under the senior mortgage or agree to make
payments under the senior mortgage if the borrower is
in default. As a result, in general, the servicer does
not expect to foreclose on home loans secured by
junior liens.
Seller's Ability to Repurchase Defective Home Loans.
We cannot assure you that, at any particular time, the
seller will be capable, financially or otherwise, of
repurchasing home loans where repurchase is required
as a result of breaches of representations and
warranties or defects in the loan files that have not
been cured. If the seller does not make these
repurchases, the master servicer will use reasonable
efforts to enforce the obligations of the seller to
repurchase defective home loans. However, we cannot
assure you that any recoveries will be adequate to
fully cover amounts owing on the affected loans.
Underwriting standards may affect
loan performance................................. The seller's underwriting standards generally are less
stringent than those of Fannie Mae or Freddie Mac. For
example, a borrower's past credit history may not
preclude the seller from originating or purchasing a
loan to that borrower, but it will reduce the size
(and thus the combined loan-to-value ratio) of the
loan that the seller is willing to originate or
purchase. As a result of this approach to
underwriting, the home loans in the trust may have
higher rates of delinquencies, defaults and
foreclosures than loans underwritten in accordance
with Fannie Mae's or Freddie Mac's guidelines. If loan
losses occur, you may experience a loss on the notes.
Security interest will not be perfected
in all home loans................................. ____________ will deliver to ____________ the
assignments of the home loan mortgages in recordable
form within thirty days of the closing date. The
indenture trustee will deliver all the assignments for
recordation.
_____________will deliver to the custodian the
mortgage notes, the mortgages and any assumption or
modification agreements relating to the home loans on
or before the closing date and will deliver the
assignments of each mortgage in recordable form
S-12
within ninety days of the closing date. However,
assignments of the mortgages to the indenture trustee
will not be recorded in _________________ and
____________. Before delivery and recordation, the
indenture trustee's interest in the mortgages, the
mortgage notes and any proceeds from the home loans
may be subject to the claims of creditors or to sale
to a third party, as well as to a receiver or
conservator appointed in the event of the insolvency
of ____________.
In certain states where mortgaged properties are
located, failure to record the assignments of the
related mortgages to the indenture trustee will have
the result of making the sale of the home loans
potentially ineffective against:
o any creditors of __________ who may have been
fraudulently or inadvertently induced to rely on the
home loans as assets of __________; or
o any purchaser of a home loan who had no
notice of the prior conveyance to the
trust if the purchaser perfects his
interest in the loan by taking possession
of the related documents or other evidence
of indebtedness or otherwise.
In either case, the trust would be an unsecured
creditor of ____________.
Only limited historical delinquency, loss and
prepayment information ____________ has limited historical delinquency and default
is available...................................... experience for purposes of estimating the future delinquency and
loss experience of the home loans in the trust. In
addition, the servicer does not have any meaningful
historical performance data available for its
portfolio of home loans similar to the home loans in
the trust that are serviced for others because they
reflect a variety of underwriting guidelines.
Geographic concentration of the
loans may adversely affect loan
performance....................................... Approximately _____% of the home loans (by
principal balance as of the cut-off date) are secured
by properties located in ________. To the extent that
_______ has experienced or experiences in the future
weaker economic conditions or greater rates of decline
in real estate values than the United States
generally, this concentration of loans and contracts
in ______
S-13
may increase the related risks. The depositor cannot
quantify the impact of any recent property value
declines on the loans in the trust or predict whether,
to what extent or for how long these declines would
continue.
It may be difficult to resell the notes........... The underwriter intends to make a secondary market
for the notes but has no obligation to do so. There is
no assurance that such a secondary market will develop
or, if it develops, that it will continue.
Consequently, you may not be able to sell your notes
readily or at prices that will enable you to realize
your desired yield. The market values of the notes are
likely to fluctuate; these fluctuations may be
significant and could result in significant losses to
you.
The secondary market for mortgage-backed and
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.
Ratings of the notes should be
viewed with caution............................... The ratings of the notes will depend primarily upon an
assessment by the rating agencies of the home loans in
the trust and upon the adequacy of credit enhancement.
The rating agencies may reduce, suspend or withdraw
the ratings of the notes at any time. When the rating
agencies rate the notes, they are not recommending
that you purchase, hold or sell the notes, as their
ratings do not speak to the market price paid by, or
the general suitability for, a particular investor. We
cannot assure you that the ratings will stay the same
for any given period of time or that the rating
agencies will not lower or withdraw them.
S-14
The Trust
General
The ________________ Home Loan Owner Trust 200_-_ will be a business
trust formed under the laws of the state of Delaware pursuant to the trust
agreement for the transactions described in this prospectus supplement. After
its formation, the trust will not engage in any activity other than
o acquiring, holding and managing the home loans and the other
assets of the trust and proceeds of those assets,
o issuing the securities, including the notes and the trust
certificates,
o making payments on the securities, and
o engaging in related activities.
On the closing date, the trust will purchase from the depositor home
loans having an aggregate original pool principal balance of approximately
$______________ as of the cut-off date, under the sale and servicing agreement
to be dated as of _________ 1, 200_, among the trust, the depositor, the
seller, the servicer, the co-owner trustee, the custodian and the indenture
trustee. The depositor will purchase the home loans from the seller on the
closing date under the home loan purchase agreement dated as of _________ 1,
200_, between the seller and the depositor.
The assets of the trust will consist primarily of the home loans. The
assets of the trust will also include:
o payments of accrued interest and principal collected in respect
of the home loans in the trust received after the cut-off date;
o amounts on deposit in the collection account (excluding
investment income thereon), the note payment account and the
certificate distribution account;
o the related home loan files and credit files;
o certain other ancillary or incidental funds, rights and
properties related to the foregoing; and
o the rights of the indenture trustee under the note insurance
policy.
On the closing date, the trust will include the unpaid principal balance of
each home loan as of the cut-off date. The "principal balance" of a home loan
on any day is equal to its cut-off date principal balance, minus all principal
reductions credited against the principal balance of that loan since the
cut-off date. The principal balance of a Liquidated Home Loan is zero.
The servicer will be required to service the home loans pursuant to
the sale and servicing agreement and will be compensated for its services as
described under "Description of the Transfer and Servicing
Agreements--Servicing" in this prospectus supplement.
S-15
The trust's principal offices are located in Wilmington, Delaware, in
care of _____________________, as owner trustee, at the address set forth
under "--The Owner Trustee and Co-Owner Trustee" below.
The Owner Trustee
____________________ will act, not in its individual capacity but
solely as the owner trustee, under the trust agreement. ______________________
is a Delaware _____________________ and its principal offices are located at
____________________________________, Delaware ________.
Use of Proceeds
The proceeds from the sale of the notes, net of certain expenses,
will be used by the trust to purchase the home loans from the depositor. The
depositor will use the proceeds from the sale of the loans to the trust for
the purchase of the loans from the seller. The seller in turn will use all or
a substantial portion of the proceeds from the sale of the loans for general
corporate purposes.
The Depositor
The depositor, [Financial Asset Securities Corp.], is a Delaware
corporation. The depositor is an indirect limited purpose finance subsidiary
of Royal Bank of Scotland Plc and an affiliate of Greenwich Capital Markets,
Inc. See "The Depositor" in the prospectus and "Underwriting" in this
prospectus supplement. None of the depositor, Royal Bank of Scotland Plc or
any of their affiliates will insure or guarantee or otherwise be obligated
with respect to the notes.
The Seller
General
____________________________ is a ___________________________ with
its principal offices at ________________________________ (telephone:
_____________).
[Seller Information]
Purchase of Home Loans
_____________ purchased the home loans from originators which had
been contacted by ______________________________, a __________________ with
its principal offices located in _____________________. In connection with
____________'s purchase of the home loans, ____________, through its
subsidiary, ________________, a _____________________, re-underwrote the home
loans in accordance with the re-underwriting guidelines for
______________________ Loan program.
Underwriting Criteria
[Description of Underwriting Criteria]
Repurchase or Substitution of Defective Home Loans
The trust will have the option after the closing date to deposit
monies into the collection account and release from the lien of the indenture
any home loan upon foreclosure or default of
S-16
the loan. The seller will be obligated either to repurchase any defective home
loan or to remove the defective home loan and substitute a qualified
substitute home loan. The purchase or repurchase of any home loan in this way
(rather than its replacement through substitution) will result in accelerated
principal payments on the securities.
A home loan is deemed to be a defective home loan if the loan is in
material breach of any of the representations and warranties made by the
seller with respect to the loan in the home loan purchase agreement. From the
date when it discovers or is notified of any such breach, the seller has 60
days to
o cure the breach in all material respects, or
o repurchase the defective home loan on or before the first
determination date after the 60-day period.
Any repurchase will be effected at a purchase price equal to the
principal balance of the defective home loan as of the date of repurchase,
plus all accrued and unpaid interest on the loan to and including the due date
in the most recent Due Period computed at the applicable loan rate. In lieu of
repurchasing a defective home loan, the seller may replace the defective loan
with one or more qualified substitute home loan(s).
A "qualified substitute home loan" is a home loan substituted by the
seller for a defective home loan, which, on the date of substitution:
o has an interest rate that differs from the loan rate of the
defective home loan it replaces by no more than one percentage
point,
o matures not more than one year later than and not more than one
year earlier than the defective home loan,
o has a principal balance (after application of all payments
received on or prior to the date of the substitution) equal to
or less than the principal balance of the defective home loan as
of such date,
o has a lien priority no lower than the defective home loan,
o complies as of the date of substitution with each representation
and warranty set forth in the home loan purchase agreement with
respect to the home loans, and
o has a borrower with a comparable credit grade classification to
that of the borrower under the defective home loan.
If a defective home loan is replaced by one or more qualified substitute home
loans, the qualified substitute home loans may meet the criteria set forth in
the first, second, third and last bullets above on an aggregate or weighted
average basis.
If the aggregate outstanding principal balance of the qualified
substitute home loan(s) is less than the outstanding principal balance of the
defective home loan(s), the seller will also deposit in the collection account
a substitution adjustment amount equal to the shortfall. This will result in a
prepayment of principal on the securities then entitled to receive principal
in the amount of that shortfall.
S-17
No assurance can be given that, at any particular time, the seller
will be capable, financially or otherwise, of repurchasing defective home
loans or substituting qualified substitute home loans in the manner described
above. If the seller repurchases, or is obligated to repurchase, defective
home loans from any additional series of asset backed securities, the seller's
financial ability to repurchase defective home loans from the trust may be
adversely affected. In addition, other events relating to the seller and its
mortgage lending and consumer finance operations can occur that would
adversely affect the financial ability of the seller to repurchase defective
home loans from the trust, including without limitation the sale or other
disposition of all or any significant portion of its assets. If the servicer
or the indenture trustee is unable to collect all amounts due to the trust in
respect of a defective home loan, the resulting loss will be borne by
noteholders to the extent that the loss is not otherwise covered by amounts
available from the applicable credit enhancement. See "Risk Factors--Credit
enhancement may be inadequate" in this prospectus supplement.
Delinquency and Foreclosure Experience of the Seller
The seller has no historical delinquency and default experience that
may be referred to for purposes of estimating the future delinquency and loss
experience of the home loans underwritten pursuant to _______________ Loan
Program described in this prospectus supplement. The seller began acquiring
home loans comparable to the home loans in ________________. Accordingly,
there is insufficient historical delinquency, bankruptcy, foreclosure or
default experience that may be referred to for purposes of estimating the
future delinquency and loss experience of home loans similar to the home
loans. See "Risk Factors--Only limited historical delinquency, loss and
payment information is available" in this prospectus supplement.
Duties of Co-Administrator
___________, as co-administrator, will also perform certain
administrative functions on behalf of the trust pursuant to the administration
agreement.
The Servicer
General
The servicer will service the home loans in accordance with the terms
set forth in the sale and servicing agreement and will be entitled to the
servicing fee and to certain additional servicing compensation. The servicer
may perform any of its obligations under the sale and servicing agreement
through one or more subservicers. Notwithstanding any subservicing
arrangement, the servicer will remain liable for its servicing duties and
obligations under the sale and servicing agreement as if the servicer alone
were servicing the home loans. The information set forth in this section has
been provided by the servicer without independent verification by the
depositor or the seller.
The Servicer
_________________, the servicer, is a subsidiary of _______________,
a ______________________, with its principal executive offices located in
_______________________ with assets as of ________________, ______, in excess
of $__________.
[Servicer Information]
S-18
Delinquency and Loss Experience of the Servicer. _______________ has
been servicing home loans similar to the home loans in the trust since
_______________. ____________ does not have available for distribution loss
and delinquency information with respect to its aggregate portfolio of home
loans that are serviced for others because they were underwritten pursuant to
a variety of underwriting guidelines of many different originators and
aggregating their loss and delinquency experience would not provide meaningful
statistics for comparison to the home loans in the trust. However, the
servicer does maintain loss and delinquency information with respect to each
portfolio it services for others. See "Risk Factors--Only limited historical
delinquency, loss and prepayment information is available" in this prospectus
supplement.
The Master Servicer, Custodian and Note Administrator
________ is a _______, located at __________. If the servicer is
terminated as a result of a servicer event of default, the master servicer (or
the indenture trustee, in limited circumstances) shall be obligated to succeed
to the obligations of the servicer or to appoint a successor servicer. If the
master servicer is terminated pursuant to the servicing agreement as a result
of a failure to perform its obligations thereunder, the indenture trustee
shall be obligated to succeed to the obligations of the master servicer or to
appoint a successor master servicer with the prior consent of the note
insurer.
The Home Loan Pool
General
The home loan pool will consist of the home loans conveyed to the
trust the related net proceeds of which were used to finance
o property improvements,
o debt consolidation, or
o a combination of property improvements, debt consolidation,
cash-out, credit insurance premiums, origination costs or other
consumer purposes.
Substantially all of the mortgage, deeds of trust and other security
instruments securing the home loans will be junior in priority to one or more
senior liens on the related mortgaged properties, which will consist primarily
of owner-occupied one-to four-family residences. Substantially all of the home
loans will be secured by liens on mortgaged properties in which the borrowers
have little or no equity (i.e., the related combined loan-to-value ratios
approach or exceed 100%).
The "combined loan-to-value ratio" of a home loan means the fraction,
expressed as a percentage, the numerator of which is the principal balance of
that loan at origination plus, in the case of a junior lien home loan, the
aggregate outstanding principal balance of the related senior lien loans on
the date of origination of that home loan, and the denominator of which is the
appraised or stated value of the related mortgaged property at the time of
origination (determined as described under "The Seller--Underwriting Criteria"
in this prospectus supplement).
For a description of the underwriting criteria applicable to the home
loans, see "The Seller--Underwriting Criteria" in this prospectus supplement.
S-19
All of the home loans were acquired by the seller, were sold by the
seller to the depositor under the home loan purchase agreement, and sold by
the depositor to the trust under the sale and servicing agreement. Under the
indenture, the trust will pledge and assign the home loans to the indenture
trustee for the benefit of the noteholders. The trust will be entitled to all
payments of interest and principal and all proceeds received in respect of the
home loans on or after the cut-off date.
Payments on the Home Loans
Each home loan provides for a schedule of payments that, if timely
paid, will be sufficient to amortize fully the principal balance of the loan
on or before its maturity date. The scheduled monthly payment dates of the
home loans vary. Each home loan bears interest at a fixed rate. Interest on
the home loans will accrue on an "actuarial interest" method. No home loan
provides for deferred interest or negative amortization.
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day each month that is fixed at the time of
origination. Payments received after a grace period following the scheduled
day are subject to late charges. A scheduled payment on a home loan received
either earlier or later than its scheduled due date will not affect the
amortization schedule or the relative application of the payment to principal
and interest of the loan.
Certain borrowers are covered by credit life insurance policies and
involuntary unemployment insurance policies, which provide for payment in full
of the outstanding principal balance of the related home loans in the event of
the accidental death or disability of the borrower, or for payment of the
applicable monthly payment (up to $500 per month) in the case of employment
interruption. The credit life insurance policies and involuntary unemployment
insurance policies generally have terms of five years. If a borrower covered
by such a policy elects to cancel it, the amount of the premium refund payable
in connection with the cancellation will be applied as a principal payment on
the related home loan. Any proceeds received by the trust in respect of these
types of insurance policies will affect the rate of prepayments on the home
loans. See "Prepayment and Yield Considerations" in this prospectus
supplement.
Characteristics of the Home Loans
Set forth below is certain statistical information regarding
characteristics of the home loans expected to be included in the trust as of
the date of this prospectus supplement. Prior to the closing date, the seller
may remove any of the home loans intended for inclusion in the trust,
substitute comparable loans or add comparable loans to the pool; provided,
however, that the aggregate principal balance of home loans that are removed,
replaced or added will not exceed 5% of the aggregate principal balance of the
entire pool. As a result, the statistical information presented below
regarding the characteristics of the home loans expected to be included in the
trust may vary in certain respects from comparable information based on the
actual composition of the home loan pool at the closing date. A schedule of
the home loans included in the trust as of the closing date will be attached
to the sale and servicing agreement.
The home loans expected to be included in the trust will consist of
approximately ________ loans having an aggregate principal balance of
approximately $__________. Approximately _____% of the home loans (by
principal balance as of the cut-off date) were 30-59 days delinquent in
payment as of that date. Approximately _____% of the home loans (by principal
balance as of the cut-off date) were 60 days or more delinquent in payment as
of that date.
S-20
Except as provided in the second preceding paragraph, the home loans
are expected to have the approximate characteristics as of the cut-off date
set forth in the tables beginning on the following page. The sums of the
amounts and percentages in the following tables may not equal the totals shown
due to rounding.
Wherever reference is made in this prospectus supplement to a
percentage of the home loans, the percentage is determined (unless otherwise
specified) on the basis of the aggregate principal balance of the entire pool
as of the cut-off date.
Loan Rates
Percent of
Total
Aggregate by Aggregate
Range of Number of Principal Principal
Loan Rates (%) Home Loans Balance Balance
- -------------- -------------- ---------- -------------
10.51 to 11.00............................................. $ %
11.01 to 11.50.............................................
11.51 to 12.00.............................................
12.01 to 12.50.............................................
12.51 to 13.00.............................................
13.01 to 13.50.............................................
13.51 to 14.00.............................................
14.01 to 14.50.............................................
14.51 to 15.00.............................................
15.01 to 15.50.............................................
15.51 to 16.00.............................................
16.01 to 16.50.............................................
16.51 to 17.00.............................................
17.01 to 17.50.............................................
17.51 to 18.00............................................. -------------- ---------- -------------
Total................................................ 100.00%
============== ========== ==============
The weighted average loan rate of the home loans as of the cut-off
date was approximately _____% per year.
S-21
Current Principal Balances
Percent of
Aggregate Total
Range of Cut-off Date Number of Principal by Aggregate
Principal Balances ($) Home Loans Balance Principal Balance
- ---------------------- ----------- ---------- ------------------
Up to 10,000.00............................................
10,000.01 to 20,000.00.....................................
20,000.01 to 30,000.00.....................................
30,000.01 to 40,000.00.....................................
40,000.01 to 50,000.00.....................................
50,000.01 to 60,000.00.....................................
60,000.01 to 70,000.00.....................................
70,000.01 to 80,000.00.....................................
80,000.01 to 90,000.00..................................... ----------- ---------- ------------------
Total................................................ 100.00%
=========== =========== ==================
The average principal balance of the home loans as of the cut-off date was approximately
$_________.
Original Loan Principal Balances
Aggregate Percent of Total
Range of Original Number of Principal by Aggregate
Principal Balances ($) Home Loans Balance Principal Balance
- ---------------------- ----------- ---------- ------------------
Up to 10,000.00............................................
10,000.01 to 20,000.00.....................................
20,000.01 to 30,000.00.....................................
30,000.01 to 40,000.00.....................................
40,000.01 to 50,000.00.....................................
50,000.01 to 60,000.00.....................................
60,000.01 to 70,000.00.....................................
70,000.01 to 80,000.00.....................................
80,000.01 to 90,000.00..................................... ----------- ---------- ------------------
Total................................................ 100.00%
============ ========== ==================
The average principal balance of the home loans at origination was approximately
$_________.
S-22
Remaining Terms to Maturity
Aggregate Percent of Total
Range of Remaining Number of Principal by Aggregate
Term to Maturity (Months) Home Loans Balance Principal Balance
- ------------------------- ------------- ----------- -----------------
0 to 48................................................
49 to 60................................................
61 to 120................................................
121 to 180................................................
181 to 240................................................
241 to 300................................................ ------------- ----------- -----------------
Total................................................. 100.00%
============= =========== =================
The weighted average remaining term to maturity of the home loans as
of the cut-off date was approximately ___ months.
Original Term to Maturity
Percent of Total
Aggregate by Aggregate
Range of Months Number of Principal Principal
Since Origination Home Loans Balance Balance
- ----------------- ---------- ------------ ----------------
0 to 60................................................
61 to 120................................................
121 to 180................................................
181 to 240................................................
241 to 300................................................ ------------- ----------- -----------------
Total................................................ 100.00%
============= =========== =================
The weighted original term to maturity of the home loans as of the
cut-off date was approximately ___ months.
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Geographic Concentration
Percentage of
Aggregate Total
Number of Principal by Aggregate
State Home Loans Balance Principal Balance
----- ---------- ---------- ------------------
[ ].....................................................
[ ].....................................................
[ ].....................................................
Total................................................ 100.00%
========== ========== ==================
S-24
Credit Scores
Aggregate Percent of Total
Range of Number of Principal by Aggregate
Credit Scores Home Loans Balance Principal Balance
- -------------- ----------- ----------- ------------------
620 to 639.................................................
640 to 659.................................................
660 to 679.................................................
680 to 699.................................................
700 to 719.................................................
720 to 739.................................................
740 to 759.................................................
760 to 779.................................................
780 to 799.................................................
Greater than or equal to 800............................... ----------- ----------- ------------------
Total................................................ 100.00%
=========== =========== ==================
Credit scores were determined prior to the origination of the related
home loans. The weighted average credit score of the home loans as of the
cut-off date was approximately ___.
Debt-To-Income Ratios
Aggregate Percent of Total
Range of Number of Principal by Aggregate
Debt-to-Income Ratios(%) Home Loans Balance Principal Balance
- ------------------------ ----------- ----------- ------------------
5.01 to 10.00.............................................
10.01 to 15.00.............................................
15.01 to 20.00.............................................
20.01 to 25.00.............................................
25.01 to 30.00.............................................
30.01 to 35.00.............................................
35.01 to 40.00.............................................
40.01 to 45.00.............................................
45.01 to 50.00.............................................
50.01 to 55.00.............................................
55.01 to 60.00............................................. ----------- ----------- ------------------
Total................................................ 100.00%
=========== =========== =================
The weighted average debt-to-income ratio of the home loans as of the
cut-off date was approximately _____%.
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Combined Loan-To-Value Ratios
Aggregate Percent of Total
Range of Combined Number of Principal by Aggregate
Loan-to-Value Ratios(%) Home Loans Balance Principal Balance
- ----------------------- ----------- ---------- ------------------
15.01 to 20.00..........................................
25.01 to 30.00..........................................
30.01 to 35.00..........................................
35.01 to 40.00..........................................
40.01 to 45.00..........................................
45.01 to 50.00..........................................
50.01 to 55.00..........................................
55.01 to 60.00..........................................
60.01 to 65.00..........................................
65.01 to 70.00..........................................
70.01 to 75.00..........................................
75.01 to 80.00..........................................
80.01 to 85.00..........................................
85.01 to 90.00..........................................
90.01 to 95.00..........................................
95.01 to 100.00..........................................
100.01 to 105.00.........................................
105.01 to 110.00.........................................
110.01 to 115.00.........................................
115.01 to 120.00.........................................
120.01 to 125.00.........................................
125.01 to 130.00.........................................
Greater than 130.00...................................... ----------- ---------- ------------------
Total................................................ 100.00%
============ =========== ==================
Mortgaged Property Types
Aggregate Percent of Total
Number of Principal by Aggregate
Property Type Home Loans Balance Principal Balance
- ------------- ------------ ----------- ------------------
Single Family..............................................
Condominium................................................
Multifamily................................................
Manufactured Housing.......................................
Two Families............................................... ----------- ---------- ------------------
Total................................................ 100.00%
============ =========== ===================
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Lien Position
Aggregate Percent of Total
Number of Principal by Aggregate
Lien Position Home Loans Balance Principal Balance
- ------------- ----------- ---------- ------------------
First Lien.................................................
Second Lien................................................
Third Lien................................................. ----------- ---------- ------------------
Total................................................ 100.00%
=========== ========== ==================
Occupancy Type
Aggregate Percent of Total
Number of Principal by Aggregate
Occupancy Type Home Loans Balance Principal Balance
- -------------- ----------- ---------- ------------------
Owner Occupied.............................................
Non-Owner Occupied......................................... ----------- ---------- ------------------
Total................................................ 100.00%
=========== =========== ==================
S-27
Description of the Notes
General
The trust will issue the notes pursuant to the indenture. The notes
will be secured by the pledge of the assets of the trust pursuant to the
indenture. The notes will not represent an interest in, or obligation of, the
servicer, the master servicer, the indenture trustee, the co-owner trustee,
the note insurer, the underwriter or any of their respective affiliates and
will not represent an interest in, or recourse obligation of, the depositor or
the seller.
The trust will also issue the trust certificates pursuant to the
trust agreement dated as of __________ 1, _______ among the depositor, the
owner trustee and the co-owner trustee. The trust certificates will represent
the ownership interest in the trust. The trust certificates are not being
offered by this prospectus supplement.
The notes will consist of four sequential pay, asset-backed classes:
o the Class A-1 Notes,
o the Class A-2 Notes,
o the Class A-3 Notes and
o the Class A-4 Notes.
The Class A-1 Notes represent the right to receive payments of interest as
adjusted monthly based on 1-Month LIBOR, and the Class A-2 Notes, the Class
A-3 Notes and the Class A-4 Notes represent the right to receive payments of
interest at the applicable note interest rate specified on the cover of this
prospectus supplement, payable monthly, and, in each case, payments of
principal to the extent described under the heading "--Payments on the Notes"
below.
The notes will be issued in minimum denominations of $____________and
integral multiples of $1 in excess thereof.
On each payment date, the indenture trustee or its designee will pay
to the persons in whose names the notes are registered on the related record
date (which is the last business day of the month immediately preceding the
month in which the related payment date occurs) the portion of the aggregate
payment to be made to each noteholder as described below. A "noteholder" is a
holder of record of any class of notes as of the related record date. Except
under certain limited circumstances, payments on the notes will be made to
their beneficial owners only through DTC and its participants.
Book-Entry and Definitive Notes
The notes will be issued as book-entry notes in the form of
beneficial interests in one or more restricted global certificates, deposited
with a custodian for The Depository Trust Company
S-28
(DTC). The notes will not be issued in bearer form. Beneficial interests in
the notes may be held in denominations of $25,000 or any greater integral
multiples of $1. The registered holders of the notes are sometimes referred to
in this section as "noteholders" and the owners of beneficial interests in the
book-entry notes as "noteowners."
Book-Entry Notes. The notes will be represented initially by one or
more book-entry notes and will be deposited with DTC or its custodian and
registered in the name of Cede & Co., as nominee of 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 New York Uniform Commercial Code and a "clearing agency"
registered pursuant to Section 17A of the Securities Exchange Act of 1934, as
amended. DTC was created to hold securities for its participants and to
facilitate the clearance and settlement of securities transactions between
participants through electronic book-entries, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations. Indirect access to
the DTC system also is available to other indirect participants such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Owners of beneficial interests in book-entry notes that are not
participants or indirect participants of DTC but desire to purchase, sell or
otherwise transfer ownership of, or other interests in, the notes may do so
only through participants and indirect participants. In addition, note owners
will receive all distributions of principal of and interest on the notes
through participants, as described below. It is anticipated that the only
noteholder of record of the book-entry notes will be Cede & Co., as nominee of
DTC. Note owners will not be recognized by the indenture trustee as
"noteholders", as that term is used in the indenture, and note owners will be
permitted to exercise the rights of noteholders only indirectly through DTC
and its participants.
Under the rules, regulations and procedures creating and affecting
DTC and its operations, DTC is required to make book-entry transfers of the
book-entry notes among participants on whose behalf it acts with respect to
the book-entry notes. Participants and indirect participants with which note
owners have accounts with respect to the notes similarly are required to make
book-entry transfers and receive and transmit distributions on behalf of their
respective note owners. Accordingly, although note owners will not hold
physical certificates for the notes represented by the book-entry notes, DTC's
rules provide a mechanism by which note owners will receive payments and will
be able to transfer their interests in the notes.
Because DTC can act only on behalf of participants, who in turn act
on behalf of indirect participants and certain banks, the ability of an owner
to pledge book-entry notes to persons or entities that do not participate in
the DTC system, or to otherwise act with respect to the book-entry notes, may
be limited due to the lack of a physical certificate.
DTC has advised the trust that, unless and until physical notes are
issued in registered form, it will take any action permitted to be taken by a
noteholder under the indenture only at the direction of one or more
participants to whose accounts with DTC the book-entry notes are credited. DTC
may take conflicting actions with respect to other undivided interests to the
extent that the actions are taken on behalf of participants whose holdings
include such undivided interests.
S-29
Except as required by law, none of the depositor, the trust, the
owner trustee, the seller, the servicer, the co-owner trustee or the indenture
trustee will have any liability for any aspect of the records relating to or
distributions made on account of beneficial ownership interests in the
book-entry notes held by Cede, as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to the beneficial ownership
interests.
Physical Notes. Physical notes will be issued in registered form to
noteholders or their nominees, rather than to DTC, only if
o DTC advises the indenture trustee in writing that DTC is no
longer willing or able to discharge properly its
responsibilities as nominee and depository with respect to notes
and the indenture trustee is unable to locate a qualified
successor;
o the trust, at its sole option and with the consent of the
indenture trustee, elects to terminate the book-entry system
through DTC; or
o after the occurrence of any indenture event of default, DTC, at
the direction of noteowners having a majority in interest of the
notes, advises the indenture trustee in writing that the
continuation of a book-entry system through DTC (or its
successor) to the exclusion of any physical securities being
issued to noteowners is no longer in the best interest of the
noteowners.
Upon issuance of physical notes in registered form, the notes will be
transferable directly (and not exclusively on a book-entry basis), and
registered holders will deal directly with the indenture trustee with respect
to transfers, notices and distributions.
The holder of any physical note may exchange the same in whole or in
part (in an original principal amount equal to $25,000 or any greater integral
multiple of $1) for other physical notes or, if the holder is entitled to hold
an interest in book-entry notes (subject to the rules and procedures of DTC),
for a beneficial interest in book-entry notes by surrendering the physical
note to the indenture trustee (and completing the form of transfer on the
reverse of the note) together with any certificate or other required
documentation. No service charge will be imposed for any registration of
transfer or exchange, but the indenture trustee may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in this
connection.
Payments on the Notes
Payments on the Notes will be made by the indenture trustee on each
payment date, commencing with the payment date in ________, to each holder of
a class of notes as of the related record date in an amount equal to the
product of the noteholder's Percentage Interest in that class and the amount
to be paid in respect of that class.
On each payment date, the indenture trustee, as paying agent, will be
required to pay the following amounts, in the following order of priority, out
of Available Funds to the extent available:
first, to the note insurer, the aggregate amount necessary to
reimburse the note insurer for any unreimbursed amounts of Insured
Payments under the note insurance policy
S-30
(together with interest thereon at the late payment rate specified
in the insurance agreement) in respect of the notes on prior
payment dates and the amount of any unpaid note insurer premiums
for prior payment dates (together with interest thereon at the late
payment rate specified in the insurance agreement); provided,
however, that the note insurer shall be paid unreimbursed Insured
Payments and unpaid note insurer premiums (and any interest
thereon) only after noteholders have received interest on the notes
and any Overcollateralization Deficit with respect to that payment
date;
second, to the noteholders, the interest on the notes with respect to
that payment date;
third, sequentially, first to the Class A-1 Noteholders, then to the
Class A-2 Noteholders, then to the Class A-3 Noteholders, and then
to the Class A-4 Noteholders, the amount of Monthly Principal for
the notes with respect to that payment date, in reduction of the
related Class Note Balance until the Class Note Balance of each
class is reduced to zero;
fourth, sequentially, first to the Class A-1 Noteholders, then to the
Class A-2 Noteholders, then to the Class A-3 Noteholders, and then
to the Class A-4 Noteholders, in reduction of the related Class
Note Balance, the amount, if any, equal to the lesser of
o Excess Cash for that payment date and
o the lesser of
(x) the amount necessary for the Overcollateralization
Amount to equal the Required Overcollateralization
Amount on that payment date (after giving effect to
payments of Monthly Principal for that payment date)
and
(y) the amount necessary to reduce the related Class Note
Balance to zero;
fifth, to the note insurer, any amounts due and owing under the
insurance agreement that are not paid as described in clause first
above;
sixth, to the Class A-1 Noteholders, the Available Funds Cap Carry
Forward Amount; and
seventh, to the servicer, the amount of servicing advances not
otherwise reimbursed to the servicer from the collection account, [
]% of any collections in respect of any Liquidated Loan received
subsequent to the date on which the loan became a Liquidated Loan,
to the extent of any Realized Loss on that loan, and certain costs
incurred by the servicer pursuant to the servicing agreement.
Any Available Funds remaining after being applied in the manner specified
above will be released to the holders of the trust certificates on that
payment date pursuant to the trust agreement, free from the lien of the
indenture, and will not be available to make payments on the notes or payments
to the note insurer on any subsequent payment date.
In the event that, with respect to a particular payment date,
Available Funds on that date are not sufficient to pay any portion of interest
on the notes, the indenture trustee will file a claim on the note insurance
policy in an amount equal to the deficiency and apply the Insured Payment
S-31
in respect of such claim to the payment of the deficiency in interest. In
addition, the indenture trustee will file a claim on the note insurance policy
in an amount equal to any Overcollateralization Deficit on a payment date
(after taking into account payments in respect of Monthly Principal and Excess
Cash on that payment date) and apply the portion of the insured payment
related to the Overcollateralization Deficit to reduce the Aggregate Note
Balance on that payment date by the amount of the Overcollateralization
Deficit. Any Insured Payment paid in respect of the notes to make up any
Overcollateralization Deficit shall be paid to the holders of the notes then
entitled to payments of principal, in reduction of the related Class Note
Balance, until that Class Note Balance shall be reduced to zero.
In no event will the aggregate payments of principal to noteholders
exceed the original Aggregate Note Balance.
The note interest rate for the Class A-1 Notes will be an annual rate
equal to the lesser of
o note formula rate of 1-Month LIBOR plus ___% and
o the available funds cap which is equal to the weighted average
of the loan rates with respect to the related payment date less
the aggregate annual rate of the servicing fee, the indenture
trustee's fee and the note insurer premium.
The note interest rate for the Class A-2, Class A-3 and Class A-4 Notes will
be the applicable annual rate set forth on the cover of this prospectus
supplement. Interest payable for any class of notes on any payment date will
be an amount equal to interest accrued during the related interest accrual
period at the note interest rate on the related Class Note Balance as of the
preceding payment date (after giving effect to the payment, if any, in
reduction of principal made on the notes on the preceding payment date).
If on any payment date the available funds cap limits the note
interest rate payable with respect to the Class A-1 Notes (i.e., the rate set
by the available funds cap is less than the note formula rate), the amount of
any shortfall will be carried forward and be due and payable on the following
payment date and shall accrue interest at the applicable note interest rate
until paid. The note insurance policy does not cover this Available Funds Cap
Carry Forward Amount; the payment of such amount may be funded only from (i)
any excess interest resulting from the available funds cap being in excess of
the note formula rate on future payment dates and (ii) any Excess Cash which
would otherwise be paid to the holder(s) of the trust certificates. The
ratings assigned to the notes do not address the payment of the Available
Funds Cap Carry Forward Amount.
The establishment of 1-Month LIBOR on each LIBOR Determination Date
by the indenture trustee and the indenture trustee's calculation of the note
interest rate of the Class A-1 Notes for the related interest accrual period
shall be final and binding in the absence of manifest error.
Note Account
Pursuant to the indenture, the indenture trustee shall establish and
maintain a note account from which all payments with respect to the notes will
be made. As described below, not later than the 18th day of each month in
which a payment date occurs (or if such 18th day is not
S-32
a business day, the next succeeding business day), the servicer will be
required under the servicing agreement to remit to the indenture trustee for
deposit in the note account the sum (without duplication) of all amounts on
deposit in the collection account that constitute any portion of Available
Funds for the related payment date.
Investment of Note Account
All or a portion of the note account may be invested and reinvested
by the indenture trustee at the direction of the depositor in one or more
permitted investments bearing interest or sold at a discount. The indenture
trustee or any of its affiliates may be the obligor on any investment in the
note account which otherwise qualifies as a permitted investment. No
investment in the note account may mature later than the business day
preceding the payment date, although any permitted investment that is an
obligation of the indenture trustee may mature on the payment date.
All income or other gain from investments in the note account will
not be available to noteholders or otherwise subject to any claims or rights
of the noteholders and will be held in the note account for the benefit of the
depositor subject to withdrawal from time to time as permitted by the
indenture. Any loss resulting from such investments will be for the account of
the depositor. The depositor will be required to deposit the amount of any
such loss immediately upon the realization of such loss to the extent such
loss will not be offset by other income or gain from investments in the note
account and then available for such application.
Permitted Investments
Permitted investments include:
(a) direct obligations of, or obligations fully guaranteed
by, the United States of America, Freddie Mac, Fannie Mae, the
Federal Home Loan Banks or any agency or instrumentality of the
United States of America rated "___" or higher by ___________, the
obligations of which are backed by the full faith and credit of the
United States of America;
(b) (i) demand and time deposits in, certificates of deposit
of, banker's acceptances issued by or federal funds sold by any
depository institution or trust company (including the indenture
trustee or its agent acting in their respective commercial
capacities) incorporated under the laws of the United States of
America or any state thereof and subject to supervision and
examination by federal and/or state authorities, so long as, at the
time of such investment or contractual commitment providing for such
investment, such depository institution or trust company or its
ultimate parent has a short-term unsecured debt rating in one of the
two highest available rating categories of ____________ and the
highest available rating category of ____________ and provided that
each such investment has an original maturity of no more than 365
days, and (ii) any other demand or time deposit or deposit which is
fully insured by the FDIC;
(c) repurchase obligations with a term not to exceed 30 days
with respect to any security described in clause (a) above and
entered into with a depository institution or trust company (acting
as a principal) rated " " or higher by __________ and rated " " or
S-33
higher by ___________; provided, however, that collateral transferred
pursuant to such repurchase obligation must be of the type described
in clause (a) above and must (i) be valued daily at current market
price plus accrued interest, (ii) pursuant to such valuation, be
equal, at all times, to 105% of the cash transferred by the indenture
trustee in exchange for such collateral and (iii) be delivered to the
indenture trustee, or if the indenture trustee is supplying the
collateral, an agent for the indenture trustee, in such manner as to
accomplish perfection of a security interest in the collateral by
possession of certified securities;
(d) securities bearing interest or sold at a discount issued
by any corporation incorporated under the laws of the United States
of America or any state thereof which has a long-term unsecured debt
rating in the highest available rating category of each of the rating
agencies at the time of such investment;
(e) commercial paper having an original maturity of less
than 365 days and issued by an institution having a short-term
unsecured debt rating in the highest available rating category of
each of the rating agencies at the time of such investment;
(f) a guaranteed investment contract approved by each of the
rating agencies and the note insurer and issued by an insurance
company or other corporation having a long-term unsecured debt rating
in the highest available rating category of each of the Rating
Agencies at the time of such investment;
(g) money market funds having ratings in the highest
available rating category of ___________ and one of the two highest
available rating categories of ___________ at the time of such
investment which invest only in other permitted investments (any such
money market funds which provide for demand withdrawals being
conclusively deemed to satisfy any maturity requirements for
permitted investments set forth herein), including money market funds
of the indenture trustee and any such funds that are managed by the
indenture trustee or its affiliates or for which the indenture
trustee or any affiliate acts as advisor as long as such money market
funds satisfy the criteria of this subparagraph (g); and
(h) any investment otherwise acceptable to the note insurer
and each rating agency.
The indenture trustee may purchase from or sell to itself or an
affiliate, as principal or agent, the permitted investments listed above. All
permitted investments shall be held in a trust account under the indenture and
shall be made in the name of the indenture trustee for the benefit of the
noteholders and the note insurer.
Overcollateralization Feature
Credit enhancement with respect to the notes initially will be
provided in part by overcollateralization resulting from the principal balance
of the home loan pool as of the cut-off date exceeding the original Aggregate
Note Balance. On the closing date, the initial Overcollateralization Amount
for the Notes will be approximately ___% of the cut-off date pool principal
balance. The indenture requires that this Overcollateralization Amount be
increased to, and thereafter maintained at, the Required Overcollateralization
Amount. This increase and
S-34
subsequent maintenance is intended to be accomplished by the application of
monthly Excess Cash to accelerate the payment of the Aggregate Note Balance
until the Overcollateralization Amount reaches the Required
Overcollateralization Amount. The application of Excess Cash, which consists
of interest collections on the loans, but is paid as principal on the notes,
will increase the related Overcollateralization Amount. This
overcollateralization is intended to result in amounts received on the loans
in excess of the amount necessary to pay interest and the Monthly Principal
required to be paid on the notes on any payment date being applied to reduce
the Aggregate Note Balance to zero no later than the stated maturity date of
the Class A-4 Notes.
The application of Excess Cash to reduce the Aggregate Note Balance
on any payment date will have the effect of accelerating the amortization of
the notes relative to the amortization of the loans in the trust. In the event
that the Required Overcollateralization Amount is permitted to decrease or
"step down" on any payment date in the future, or in the event of an
Overcollateralization Surplus, the indenture will provide that all or a
portion of the Excess Cash that would otherwise be paid to the notes on any
such payment date in reduction of the Aggregate Note Balance will be released
to the holder(s) of the trust certificates, as provided in the trust
agreement.
The indenture will provide that, on any payment date, all amounts
collected on the loans in respect of principal to be applied on that payment
date will be paid to noteholders in reduction of the Aggregate Note Balance on
that payment date, except as provided above with respect to any payment date
for which there exists an Overcollateralization Surplus. If any loan became a
Liquidated Loan during the prior Collection Period, the related Net
Liquidation Proceeds allocated to principal may be less than the principal
balance of the related loan resulting in a "realized loss." In addition, the
indenture will provide that the principal balance of any loan that becomes a
Liquidated Loan shall equal zero. The indenture will not require that the
amount of any realized loss be paid to noteholders on the payment date
following the event of loss. However, the occurrence of a realized loss will
reduce the Overcollateralization Amount for the notes, and will result in more
Excess Cash, if any, being paid on the notes in reduction of the Aggregate
Note Balance on subsequent payment dates than would be the case in the absence
of the realized loss.
The indenture generally provides that the Required
Overcollateralization Amount may, over time, decrease or increase, subject to
certain floors, caps and triggers including triggers that allow the Required
Overcollateralization Amount to decrease or "step down" based on the
performance on the loans with respect to certain delinquency tests specified
in the indenture. In addition, Excess Cash will be applied to principal of the
notes during the period that the loans are unable to meet certain tests
specified in the indenture based on delinquency. Any increase in the
applicable Required Overcollateralization Amount may result in an accelerated
amortization of the notes until the Required Overcollateralization Amount is
reached. Conversely, any decrease in the Required Overcollateralization Amount
will result in a decelerated amortization of the notes until the Required
Overcollateralization Amount is reached.
Overcollateralization and the Note Insurance Policy
The indenture will require the indenture trustee to file a claim for
an Insured Payment under the note insurance policy not later than 12:00 noon
(New York City time) on the third business day prior to any payment date as to
which the indenture trustee has determined that an
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Overcollateralization Deficit with respect to the notes will occur for the
purpose of applying the proceeds of the Insured Payment as a payment of
principal to the noteholders on such payment date. Accordingly, the note
insurance policy is similar to the provisions described above with respect to
the overcollateralization provisions insofar as the note insurance policy
guarantees ultimate collection of the full amount of the Class Note Balances,
rather than current payments of the amounts of any realized losses to
noteholders. Investors in the notes should realize that, under certain loss or
delinquency scenarios, they may temporarily receive no payments in reduction
of their Class Note Balance even if their class of notes is entitled to
payments of principal.
Reports to Noteholders
Concurrently with each payment to noteholders, the note administrator
will prepare and the indenture trustee will mail a statement to each
noteholder and the note insurer in the form required by the indenture and
setting forth the following information (to the extent the servicer makes such
information available to the note administrator):
(a) the amount of the payment to the noteholders on the
related payment date allocable to (i) Monthly Principal (separately
setting forth principal prepayments) and (ii) any Excess Cash
payment;
(b) the amount of the payment to the noteholders on that
payment date allocable to interest;
(c) the Aggregate Note Balance and the Class Note Balance of
each class of notes, in each case after giving effect to the payment
of Monthly Principal and any Excess Cash on that payment date;
(d) the aggregate principal balance of the loans as of the
end of the related Collection Period;
(e) the amount of servicing advances made with respect to
that payment date and the aggregate amount of unreimbursed servicing
advances, if any;
(f) the number and the aggregate of the principal balances
of the loans delinquent (i) one month, (ii) two months and (iii)
three or more months, as of the end of the related Collection Period;
(g) the aggregate of the principal balances of the loans in
foreclosure or other similar proceedings or in which the borrower is
in bankruptcy and the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure during the
related Collection Period;
(h) the aggregate of the principal balances of the loans
repurchased by the Seller or the servicer, separately setting forth
the aggregate principal balance of loans delinquent for three
consecutive monthly installments purchased by the servicer at its
option under the servicing agreement;
(i) the Insured Payment, if any, for that payment date;
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(j) the amount of the servicing fee paid to or retained by
the servicer with respect to that payment date;
(k) the Overcollateralization Amount, the then applicable
Required Overcollateralization Amount, the Overcollateralization
Surplus, if any, and the Overcollateralization Deficit, if any, with
respect to that payment date;
(l) the aggregate outstanding principal balance of the three
largest outstanding loans in the pool;
(m) the aggregate amount of realized losses incurred during
the related Collection Period and the cumulative amount of realized
losses since the cut-off date;
(n) for the purpose of determining whether there has been a
Servicer Termination Event, the Rolling Delinquency Percentage, the
Rolling Loss Percentage, the Cumulative Loss Percentage, the
Delinquency Loss Factor and Total Expected Losses;
(o) for the purposes of calculating the Required
Overcollateralization Amount, the Rolling Three Month Average
Annualized Losses, the Delinquency Percentage, the Delinquency Loss
Factor and the Total Expected Losses; and
(p) the percentage of loans (as measured by the) aggregate
principal balance of such loans) that have been modified during the
related Collection Period and the percentage of loans (as measured by
the Aggregate Principal Balance of such loans) that have been
modified since the cut-off date.
In the case of information furnished pursuant to clauses (a) and (b)
above, the amounts shall be expressed as a dollar amount per note with a
$1,000 principal denomination.
Within 90 days after the end of each calendar year, the note
administrator will mail to each person who at any time during such calendar
year was a noteholder a statement containing the information set forth in
clauses (a) and (b) above, aggregated for such calendar year or applicable
portion thereof during which the person was a noteholder. This obligation of
the indenture trustee shall be deemed to have been satisfied to the extent
that substantially comparable information shall be prepared and furnished by
the indenture trustee to noteholders pursuant to any requirements of the
Internal Revenue Code as are in force from time to time.
Redemption of the Notes
The notes will be subject to redemption, in whole but not in part, at
the option of the holder(s) of the trust certificates or, if not so exercised,
at the option of the note insurer, on or after the payment date on which the
Aggregate Note Balance has declined to 5% or less of the Aggregate Note
Balance as of the cut-off date.
The notes will be redeemed at a redemption price of 100% of the then
outstanding Aggregate Note Balance, plus accrued but unpaid interest thereon
through the end of the interest accrual period immediately preceding the
related payment date. Notwithstanding the foregoing, however, no redemption
may take place unless, in connection with the redemption, any amounts due and
owing to the note insurer under the insurance agreement are paid in full to
the note
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insurer. There will be no prepayment premium in connection with a redemption.
Notice of an optional redemption of the notes must be mailed by the indenture
trustee to the noteholders and the note insurer at least ten days prior to the
payment date set for redemption.
In addition, the trust may redeem the notes at any time upon a
determination by the trust, based upon an opinion of counsel, that a
substantial risk exists that the notes will not be treated for federal income
tax purposes as evidences of indebtedness. See "Material Federal Income Tax
Consequences -- General" in this prospectus supplement. The note insurance
policy will not cover such a redemption.
The payment on the final payment date in connection with the
redemption of the notes shall be in lieu of any payment otherwise required to
be made on that payment date in respect of the notes.
Payments to the Holder(s) of the Trust Certificates
On each payment date, any portion of Available Funds remaining after
making payments of interest and principal due on the notes and other payments
required on that payment date will be released to the holder(s) of the trust
certificates as provided in the trust agreement, free of the lien of the
indenture. These amounts will not be available to make payments on the notes
or payments to the note insurer on any subsequent payment date.
The Indenture Trustee
_________, a _________, will be the indenture trustee under the
indenture. The indenture will provide that the indenture trustee is entitled
to the indenture trustee fee and reimbursement of certain expenses. In
addition, the indenture trustee will retain the benefit, if any, from
investment of funds in the note account.
The indenture also will provide that the indenture trustee may resign
at any time, upon notice to the trust, the master servicer, the note insurer
and any rating agency named in this prospectus supplement, in which event the
trust will be obligated to appoint a successor indenture trustee acceptable to
the note insurer. The trust, with the prior consent of the note insurer, may
remove the indenture trustee if the indenture trustee ceases to be eligible to
continue as such under the indenture or if the indenture trustee becomes
insolvent. In addition, the indenture trustee may be removed at any time by
the note insurer or, with the consent of the note insurer, by the holders of
more than 50% of the Aggregate Note Balance. Any resignation or removal of the
indenture trustee and appointment of a successor indenture trustee will not
become effective until acceptance of the appointment by the successor
indenture trustee. The indenture will provide that the indenture trustee is
under no obligation to exercise any of the rights or powers vested in it by
the indenture at the request or direction of any of the noteholders, unless
these noteholders shall have offered to the indenture trustee reasonable
security or indemnity against the costs, expenses and liabilities which might
be incurred by it in compliance with such request or direction. The indenture
trustee may execute any of the rights or powers granted by the indenture or
perform any duties thereunder either directly or by or through its agents or
attorneys, and the indenture trustee is not responsible for any misconduct or
negligence on the part of any agent or attorney appointed and supervised with
due care by it. Pursuant to the indenture, the indenture trustee is not liable
for any action it takes or omits to take in good faith
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which it reasonably believes to be authorized by an authorized officer of any
person or within its rights or powers under the indenture. The indenture
trustee may rely, and will be protected in acting or refraining from acting in
good faith in reliance, on any certificate, notice or other document of any
kind prima facie properly executed and submitted by the authorized officer of
any person respecting any matters arising under the indenture. The indenture
trustee will be indemnified by the Seller for certain losses and other events
to the extent described in the servicing agreement.
Note Events of Default
Events of default under the indenture will include, without
limitation, the following:
o on any payment date, after taking into account all payments made
in respect of the notes on that payment date, interest on the
notes for such payment date remains unpaid or an
Overcollateralization Deficit exists with respect to the notes,
or any class of notes is not paid in full before its stated
maturity date, and such default continues unremedied for a
period of five days;
o a default in the observance of certain negative covenants in the
indenture;
o a default in the observance of any other covenant of the
indenture, and the continuation of the default for a period of
thirty days after the earlier of (i) the date on which the trust
obtains knowledge of the default, and (ii) the date on which
notice is given to the trust by the indenture trustee at the
direction of the note insurer or to the trust and the indenture
trustee by the holders of at least 25% in principal amount of
the notes then outstanding, with the prior written consent of
the note insurer;
o any representation or warranty made by the trust in the
indenture or in any certificate delivered pursuant to the
indenture having been incorrect in a material respect as of the
time made, and the circumstance in respect of which such
representation or warranty is incorrect not having been cured
within thirty days after the earlier of (i) the date on which
the trust obtains knowledge of the incorrectness, and (ii) the
date on which notice is given to the trust by the indenture
trustee or by the holders of at least 25% in principal amount of
the notes then outstanding; or
o certain events of bankruptcy, insolvency, receivership or
reorganization of the trust.
Rights upon Note Event of Default
In case a note event of default should occur and be continuing, the
indenture trustee may, with the consent of the note insurer in the absence of
a note insurer default, and on request of holders of more than 50% in
principal amount of the notes then outstanding shall, with the consent of the
note insurer in the absence of a note insurer default, declare the principal
of the notes to be due and payable. This declaration may under certain
circumstances be rescinded by the holders of a majority in principal amount of
the notes then outstanding, with the prior consent of the note insurer.
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Subject to the provisions of the indenture relating to the duties of
the indenture trustee, in case a note event of default shall occur and be
continuing, the indenture trustee shall be under no obligation to exercise any
of the rights and powers under the indenture at the request or direction of
any of the holders of notes, unless the holders have offered to the indenture
trustee reasonable security or indemnity satisfactory to it against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction. Subject to the provisions for indemnification and
certain limitations contained in the indenture, the note insurer or the
holders of a majority in principal amount of the outstanding notes, with the
prior written consent of the note insurer, shall have the right to direct the
time, method, and place of conducting any proceeding or any remedy available
to the indenture trustee or exercising any trust or power conferred on the
indenture trustee with respect to the notes; and the holders of a majority in
principal amount of the notes then outstanding may, with the prior written
consent of the note insurer, in certain cases, waive any default with respect
to the notes, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the indenture than cannot be
modified without the waiver or consent of the holder of each outstanding note
affected thereby.
Supplemental indentures
Subject to the prior written consent of the note insurer, at any time
and from time to time, without the consent of the noteholders, the indenture
trustee and the trust may enter into one or more supplemental indentures to
cure any ambiguity, to correct or supplement any provision of the indenture
that may be defective or inconsistent with any other provision thereof, or to
amend any other provisions with respect to matters or questions arising under
the indenture, which shall not be inconsistent with the provisions of the
indenture; provided, however, that such action shall not adversely affect in
any material respect the interests of the noteholders; and provided further
that the amendment shall not be deemed to adversely affect in any material
respect the interests of the noteholders if the party requesting the amendment
obtains an opinion of counsel to that effect.
The indenture may also be amended by the indenture trustee and the
trust at any time and from time to time, with the prior written approval of
the rating agencies and the note insurer for the purpose of adding any
provisions or changing in any manner or eliminating any of the provisions of
the indenture or of modifying in any manner the rights of the noteholders
under the indenture; provided, however, that no amendment shall, without the
consent of all noteholders,
o change the date of any payment date or the stated maturity dates
of the notes or reduce the principal amount of the notes, the
note interest rates of the notes or the redemption price of the
notes, or
o reduce the percentage of Aggregate Note Balance which is required
to consent to any amendments.
Exercise of Noteholder Rights by the Note Insurer
The indenture provides that, unless a note insurer default exists,
the note insurer shall have the right to exercise all rights of the
noteholders under the indenture without any further
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consent of the noteholders, other than rights with respect to the approval of
certain amendments to the indenture and certain other specified rights.
Servicing of the Home Loans
General
The servicer will service and administer the home loans in the trust
in accordance with the policies, procedures and practices that it customarily
employs in servicing other comparable loans and pursuant to the provisions of
the servicing agreement. The servicer will not amend or modify in any material
respect its policies, procedures and practices with respect to the loans
(other than as required by applicable laws and regulations) without the prior
consent of the note insurer.
Generally, servicing includes, but is not limited to,
post-origination loan processing, customer service, remittance handling,
collections and liquidations. Consistent with the servicing standard described
in the preceding paragraph, the servicer, in its discretion, may
o waive any assumption fees, late payment charges, charges for
checks returned for insufficient funds or other fees that may be
collected in the ordinary course of servicing a loan,
o arrange a schedule for the payment of delinquent payments on the
related loan, subject to conditions set forth in the servicing
agreement, if a borrower is in default or about to be in default
because of the borrower's financial condition or
o modify monthly payments on loans in accordance with limitations
imposed by the servicing agreement and subject to the Soldiers'
and Sailors' Civil Relief Act of 1940.
However, the servicer may not, without the prior consent of the note
insurer, permit any waiver, modification or variance of a loan which would
o change the mortgage rate,
o forgive the payment of any principal or interest,
o lessen the lien priority,
o extend the final maturity date on a loan past three years prior
to the stated maturity date of the Class A-4 Notes, in any case
except to the extent required under the Relief Act, or
o modify any monthly payment to an amount less than the monthly
interest accrual for the loan. In addition, the servicer may not
modify, waive or amend any provisions of any loans if the
aggregate principal balance of modified loans would exceed ___%
of the cut-off date principal balance of the home loan pool
without the consent of the note insurer.
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The servicer, acting as agent for the indenture trustee, will not consent to
the subsequent placement of a deed of trust or mortgage, as applicable, on any
mortgaged property that is of equal or higher priority to that of the lien
securing the related pool loan unless the pool loan is prepaid in full and
thereby removed from the pool.
Customary Servicing Procedures
The procedures of the servicer with respect to day-to-day servicing
of the loans may vary considerably depending on the particular loan, the
mortgaged property, the borrower, the availability of an acceptable party to
assume a loan and the laws of the jurisdiction in which the mortgaged property
is located. Generally, it is the current practice of the servicer to send
borrowers coupon books periodically reflecting their monthly payments and the
related due dates. Although borrowers generally make loan payments within ten
to fifteen days after the due date, if a borrower fails to pay the monthly
payment within such time period, the servicer will commence collection efforts
by notifying the borrower of the delinquency through telephonic and written
communications methods. Under the terms of each loan, the borrower agrees to
pay a late charge (which the servicer is entitled to retain as additional
servicing compensation under the servicing agreement) if a monthly payment on
a loan is not received within the number of days specified in the mortgage
note after its due date. If the loan remains delinquent, the servicer will
attempt to contact the borrower to determine the cause of the delinquency and
to obtain a commitment to cure the delinquency at the earliest possible time.
As a general matter, if efforts to obtain payment have not been
successful shortly after the due date of the next subsequently scheduled
installment, an established collection procedure using telephonic and a series
of written communications is followed. The status of the delinquency
determines the level of collection effort and methodology followed. However,
if no substantial progress has been made in obtaining delinquent monies from
the borrower, legal procedures, including foreclosure and garnishment
proceedings, will be evaluated and commenced where appropriate.
Regulations and practices regarding foreclosure vary greatly from
state to state. Generally, the servicer will have commenced foreclosure,
collection or enforcement proceedings prior to the time when a loan is 150
days delinquent. If the servicer determines that purchasing a property
securing a mortgage loan will minimize the loss associated with such defaulted
loan, the servicer may bid at the foreclosure sale for that property or accept
a deed in lieu of foreclosure. After the servicer converts title to a
mortgaged property into the name of the indenture trustee on behalf of the
noteholders and the note insurer by foreclosure or deed in lieu of
foreclosure, a real estate broker is selected to market the property. Where
appropriate, the servicer also will seek garnishment of wages once the
servicer obtains judgment in enforcement proceedings.
The Servicing Agreement
General
The summaries of certain provisions of the servicing agreement set
forth below and under the caption "The Operative Agreements" in the
accompanying prospectus, while complete in material respects, do not purport
to be exhaustive. For more details regarding the terms of the servicing
agreement, prospective investors in the Notes are advised to review the
servicing
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agreement, a copy of which the depositor will provide (without exhibits)
without charge upon written request addressed to the depositor at 600
Steamboat Road, Greenwich, Connecticut 06830.
Generally, the servicer will be authorized and empowered pursuant to
the servicing agreement to:
o and deliver any and all instruments of satisfaction or
cancellation or of partial or full release or discharge and all
other comparable instruments with respect to the loans and with
respect to the mortgaged properties and
o institute foreclosure proceedings or obtain deeds in lieu of
foreclosure so as to convert title to any mortgaged property in
the name of the indenture trustee on behalf of the noteholders
and the note insurer.
Payments on Loans and Establishment of Collection Account
The servicer shall establish and maintain a collection account in the
form of one or more accounts at one or more institutions meeting the
requirements set forth in the servicing agreement. The collection account, and
all amounts deposited in it from time to time, shall be part of the trust. The
servicer will deposit into the collection account, not later than two business
days after receipt, all payments on or in respect of the loans received from
or on behalf of borrowers and all proceeds of the loans, net of servicing
fees, all other items of servicing compensation, and reimbursable outstanding
servicing advances, to the extent the servicer's automated system deducts such
amounts prior to deposit to the collection account. On or prior to each
Deposit Date, funds to be remitted to the note account will be remitted from
the collection account to the indenture trustee for deposit into the note
account. Notwithstanding the foregoing, payments and collections that do not
constitute Available Funds (e.g., amounts representing interest accrued on
loans in respect of any period prior to the cut-off date, fees, late payment
charges, prepayment fees, charges for checks returned for insufficient funds,
extension or other administrative charges or other amounts received for
application towards the payment of taxes, insurance premiums, assessments and
similar items) will not be required to be deposited into the collection
account. The servicer may make withdrawals from the collection account only
for the following purposes:
o to make deposits into the note account as described above;
o to pay itself any monthly servicing fees and other items of
servicing compensation and investment income on permitted
investments to the extent permitted by the servicing agreement;
o to make any servicing advance to the extent permitted by the
servicing agreement or to reimburse itself for any servicing
advance previously made to the extent permitted by the servicing
agreement;
o to withdraw amounts that have been deposited to the collection
account in error; and
o to clear and terminate the collection account.
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Investment of Collection Account
All or a portion of the collection account may be invested and
reinvested in one or more permitted investments bearing interest or sold at a
discount, at the servicer's direction. The indenture trustee or any of its
affiliates may be the obligor on any investment in any collection account
which otherwise qualifies as a permitted investment. No investment in the
collection account may mature later than the deposit date next succeeding the
date of investment.
The indenture trustee will not in any way be held liable by reason of
any insufficiency in the collection account resulting from any loss on any
permitted investment included in the collection account (except to the extent
the indenture trustee is the obligor thereon).
All income or other gain from investments in the collection account
will be held in the collection account for the benefit of the servicer and
will be subject to withdrawal from time to time as permitted by the servicing
agreement. Any loss resulting from the investments will be for the account of
the servicer. The servicer will be required to deposit the amount of any loss
immediately upon the realization of the loss to the extent the loss will not
be offset by other income or gain from investments in the collection account
and then available for application.
Realization upon Defaulted Loans
The servicing agreement will require the servicer, acting as the
agent of the indenture trustee, to foreclose upon or otherwise comparably
convert to ownership in the name of the indenture trustee, on behalf of the
noteholders and the note insurer, mortgaged properties securing such of the
loans as come into default, as to which no satisfactory arrangements can be
made for the collection of delinquent payments and which the servicer has not
reacquired pursuant to the option described below. However, if the servicer
has actual knowledge or reasonably believes that any mortgaged property is
contaminated by hazardous or toxic wastes or substances, the servicer will
cause an environmental inspection of the mortgaged property that complies with
Fannie Mae's selling and servicing guide applicable to single family homes and
its servicing procedures to be conducted. If the environmental inspection
reveals any potentially hazardous substances, the servicer will notify the
indenture trustee and the note insurer, and the servicer will not foreclose or
accept a deed in lieu of foreclosure on the mortgaged property without the
consent of the indenture trustee and the note insurer. In connection with
foreclosure or other conversion, the servicer will follow such practices as it
deems necessary or advisable and as are in keeping with its general mortgage
loan servicing activities; provided, however, that the servicer will not be
required to expend its own funds in connection with foreclosure or other
conversion, correction of a default on a senior deed of trust or restoration
of any mortgaged property unless the servicer determines that such
foreclosure, correction or restoration will increase Net Liquidation Proceeds.
In servicing the loans, the servicer will be required to determine,
with respect to each defaulted loan, when it has recovered, whether through
trustee's sale, foreclosure sale, collection and enforcement actions, or
otherwise, all amounts, if any, it expects to recover from or on account of
the defaulted loan, whereupon the loan will be charged off and will become a
Liquidated Loan.
Assumption of Loans
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In any case in which the servicer becomes aware that a mortgaged
property has been or is about to be voluntarily conveyed by the related
borrower, the servicer may enter into an assumption agreement with the person
to whom such property has been or is about to be conveyed, pursuant to which
such person becomes liable under the related promissory note and, to the
extent permitted by applicable law or the mortgage documents, the borrower
remains liable on the promissory note. The servicer may not enter into any
assumption agreement that modifies the mortgage interest rate or payment terms
of the mortgage note without the consent of the note insurer. The servicing
agreement will prohibit the servicer from entering into an assumption or
substitution of liability agreement unless permitted by applicable law and
unless the servicer determines that the assuming party would not fall within a
significantly lower credit risk category than the original borrower and such
assumption or substitution of liability agreement would not materially
increase the risk of default or delinquency on, or materially decrease the
security for, the loan. Notwithstanding any of the foregoing, the servicer
will not enter into any assumption agreement unless the assumption agreement
is pursuant to its standard servicing procedure and the servicer would enter
into the assumption agreement with respect to a mortgage loan in its own
portfolio. Any fees collected by the servicer for entering into an assumption
or substitution of liability agreement will be retained by the servicer as
additional servicing compensation.
Evidence as to Compliance
The servicing agreement provides that on or before a specified date
in each year, a firm of independent public accountants will furnish a report
to the indenture trustee, the rating agencies and the note insurer to the
effect that on the basis of certain procedures substantially in conformance
with the Uniform Single Attestation Program for Mortgage Bankers or USAP (to
the extent the procedures are applicable to the servicing obligations set
forth in the servicing agreement), the servicing by or on behalf of the
servicer of mortgage loans, and such procedures have disclosed no exceptions
or errors in records relating to the mortgage loans serviced by the servicer
for others which, in the opinion of the accounting firm, it is required to
report under USAP, except for such exceptions as will be referred to in the
report. The servicing agreement will provide that the servicer will be
required to deliver to the indenture trustee, the rating agencies and the note
insurer, on or before a specified date in each year, an annual statement
signed by an officer of the servicer to the effect that the servicer has
fulfilled its material obligations under the servicing agreement throughout
the preceding year.
Certain Matters Regarding Servicer's Servicing Obligations
The servicing agreement will provide that the servicer may not resign
from its obligations and duties as the servicer thereunder, except upon
o the consent of the master servicer, the note insurer and the
indenture trustee, or
o the delivery, at the servicer's expense, of an opinion of
counsel addressed to the indenture trustee and the note insurer
and in form and substance acceptable to the indenture trustee
and the note insurer to the effect that its duties thereunder
are no longer permissible under applicable law or regulation or
are in material conflict by reason of applicable law or
regulation with any other of its activities carried on as of the
date of the servicing agreement.
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No such resignation will become effective until the master servicer has
assumed the servicing obligations and duties of the servicer under the
servicing agreement.
The servicing agreement will also provide that neither the servicer,
nor any of its directors, officers, employees or agents, will be liable to the
indenture trustee, the trust or the noteholders for any action taken, or for
refraining from the taking of any action, by the servicer pursuant to the
servicing agreement, or for errors in judgment; provided, however, that
neither the servicer nor any such person will be protected against any
liability which would otherwise be imposed by reason of willful misfeasance,
bad faith or negligence in the performance of duties of the servicer, or by
reason of reckless disregard of obligations and duties of the servicer,
thereunder.
In addition, the servicing agreement will provide that the servicer
will not be under any obligation to appear in, prosecute or defend any legal
action which is not incidental to its duties to service the loans under the
servicing agreement and which in its opinion may involve it in any expense or
liability.
The servicing agreement will provide that any corporation or other
entity (a) into which the servicer may be merged or consolidated, (b) that may
result from any merger, conversion or consolidation to which the servicer
shall be a party or (c) that may succeed to all or substantially all of the
business of the servicer, will, in any case where an assumption is not
effected by operation of law, execute an agreement of assumption to perform
every obligation of the servicer under the servicing agreement, and will be
the successor to the servicer thereunder without the execution or filing of
any document or any further act by any of the parties to the servicing
agreement. However, if the servicer in any of the foregoing cases is not the
surviving entity, the surviving entity shall execute an agreement of
assumption to perform every obligation of the servicer thereunder and the
corporation or other entity satisfies the eligibility requirements for a
successor servicer.
Servicer Events of Default
Events of default under the servicing agreement will include
o any failure by the servicer to deposit in the collection account
or transfer to the indenture trustee for deposit in the note
account any amount required to be deposited under the servicing
agreement;
o any failure by the servicer to duly observe or perform in any
material respect any other of its covenants or agreements in the
servicing agreement or so long as the servicer and the
transferor under the home loan sale agreement are the same, the
failure of the seller, which materially and adversely affects
the rights of noteholders and continues unremedied for the
applicable cure period, if any, after the earlier of (i) the
date on which the seller obtains knowledge of such failure, and
(ii) the date on which written notice of such failure is given
to the servicer by the master servicer or the indenture trustee;
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o certain events of insolvency, readjustment of debt, marshaling
of assets and liabilities or similar proceedings regarding the
servicer and certain actions by the servicer indicating its
insolvency or inability to pay its obligations;
o any representation or warranty made by the seller in the
servicing agreement or the home loan sale agreement or
certificate delivered by the seller pursuant thereto having been
incorrect in any material respect as of the time made and the
circumstance in respect of which such representation and
warranty is incorrect, if capable of being cured, not having
been cured within 30 days after the earlier of (i) the date on
which the seller obtains knowledge of such incorrectness, and
(ii) the date on which notice is given to the seller by the
trust, the indenture trustee, the master servicer, or the note
insurer; and
o the occurrence of delinquencies and/or losses in respect of the
loans in excess of a level, and for a period of time, as
specified in the servicing agreement.
Rights upon Servicer Events of Default
Upon the occurrence of a servicer event of default, the master
servicer will be obligated to enforce the servicing agreement or to terminate
the servicer at the direction of the note insurer (so long as no note insurer
default exists and is continuing) and appoint a successor servicer, or if it
does not, succeed to all the responsibilities, duties and liabilities of the
servicer under the servicing agreement and, if it succeeds to such
responsibilities, will be entitled to such compensation as the servicer would
have been entitled to under the servicing agreement. in the event that the
master servicer fails to appoint a successor servicer and it is unwilling or
legally unable to act as servicer, it may petition a court of competent
jurisdiction for the appointment of a successor servicer. Any successor
servicer (other than the master servicer or the indenture trustee) must be an
established housing and home finance institution or any institution that
regularly services nonconforming residential mortgage loans, that is currently
servicing a nonconforming residential mortgage loan portfolio, that has all
licenses, permits and approvals required by applicable law and a net worth of
at least $10,000,000. The appointment of any successor servicer (other than
the master servicer or the indenture trustee) shall be acceptable to the note
insurer and shall not result in the qualification, reduction or withdrawal of
the implied rating assigned to the notes by the rating agencies (without
taking into account the note insurance policy). Pending appointment of a
successor servicer, unless the master servicer is prohibited by law from so
acting, the master servicer shall be obligated to act as servicer. The master
servicer and such successor servicer may agree upon the servicing compensation
to be paid, which in no event may be greater than the compensation described
above.
Master Servicer Events of Default
Master servicer events of default will be set forth in the servicing
agreement. Upon the occurrence of a master servicer event of default, the
indenture trustee shall, at the direction of the note insurer (so long as no
note insurer default exists and is continuing), terminate the master
servicer's rights and obligations under the servicing agreement. Upon a
termination of the master servicer, the indenture trustee shall be obligated
to succeed to the obligations of the master servicer or to appoint a successor
master servicer with the consent of the note insurer.
S-47
Amendments
Subject to the prior written consent of the note insurer, at any time
and from time to time, without the consent of the noteholders, the indenture
trustee, the trust, the master servicer and the servicer may amend the
servicing agreement for the purposes of
o curing any ambiguity or affecting or supplementing any provision
of such agreement that may be inconsistent with any other
provision of such agreement or
o complying with the requirements of the Internal Revenue Code;
provided, however, that the amendment shall not materially and adversely
affect the interests of any noteholder, as evidenced by an opinion of counsel
delivered to the indenture trustee to such effect (which opinion shall not be
at the expense of the indenture trustee) and written confirmation from each of
the rating agencies that the amendment will not result in a qualification,
reduction or withdrawal of the implied ratings on the notes (without taking
into account the note insurance policy).
The servicing agreement may also be amended by the indenture trustee,
the trust, the master servicer and the servicer, at any time and from time to
time, with the prior written approval of the rating agencies, the note insurer
and the holders of not less than 50% of the Aggregate Note Balance represented
by the notes then outstanding, for the purpose of adding any provisions or
changing in any manner or eliminating any of the provisions thereof or of
modifying in any manner the rights of the noteholders thereunder; provided,
however, that no amendment shall
o reduce in any manner the amount of, or delay the timing of,
payments which are required to be paid to the note account
without the consent of all noteholders or
o reduce the aforesaid percentages of the Aggregate Note Balance
which are required to consent to any amendments, without the
consent of all noteholders.
Servicing and Other Compensation; Payment of Expenses
The servicing fee will be the primary compensation to be paid to or
retained by the servicer in respect of its servicing activities under the
servicing agreement and will be paid to the servicer on each Deposit Date out
of collections of interest received on or in respect of the loans for the
related Collection Period. The servicing fee will equal one-twelfth (1/12) of
the product of (a) 1.00% and (b) the aggregate principal balance of the loans
as of the first day of the related Collection Period. The servicer shall be
entitled to retain the servicing fee from amounts to be deposited in the
collection account. In addition, the servicer will retain the benefit, if any,
from any deposit, maintenance or investment of funds in the collection
account. Assumption fees, late payment charges, prepayment fees, charges for
checks returned for insufficient funds, and extension and other administrative
charges, to the extent collected from borrowers, will be retained by the
servicer as additional servicing compensation. To the extent the servicer
obtains any collections on a Liquidated Loan subsequent to the date on which
it becomes a Liquidated Loan, the servicer will be entitled to receive [ ]% of
such recovery as servicing compensation, provided that the servicer's right to
receive such amounts shall be subordinated to the rights of the noteholders
and of the note insurer to receive the amounts due to them.
S-48
The servicer will be required to pay all reasonable and customary
"out-of-pocket" costs and expenses incurred in the performance of its
servicing obligations, including, but not limited to, the payment of fees for
any sub-servicer. The servicer will also be permitted (but not required) to
advance the cost of any enforcement or judicial proceedings relating to the
borrowers, including foreclosures, and the management and liquidation of
mortgaged properties acquired in satisfaction of the related loans. These
servicing advances may include costs of collection efforts, reappraisals,
forced placement of hazard insurance if a borrower allows his hazard policy to
lapse, legal fees in connection with foreclosure actions, advancing delinquent
property taxes and upkeep and maintenance of the mortgaged property if it is
acquired through foreclosure and similar types of expenses. The servicer will
not be required to make any servicing advance that it determines would not be
recoverable from subsequent collections, Trust Insurance Proceeds or
Liquidation Proceeds on the related loan or otherwise.
The servicing agreement provides that the servicer may pay all or a
portion of any servicing advance out of amounts on deposit in the collection
account which are being held for payment on a subsequent payment date relating
to the collection period; any such amounts so used are required to be replaced
by the servicer by deposit to the collection account on or before the Deposit
Date relating to the subsequent payment date.
The servicer may recover servicing advances, if not previously
recovered from the borrower on whose behalf the servicing advances were made,
from subsequent collections on the related loan, including Liquidation
Proceeds, Trust Insurance Proceeds and such other amounts as may be collected
by the servicer from the borrower or otherwise relating to the loan, or if
such collections are insufficient, from the note account, subject to certain
limitations.
Note Insurance
The Note Insurance Policy
The information set forth in this section has been provided by the
note insurer ________, a _________ without independent verification by the
trust, the depositor, the seller, the servicer, or any of their affiliates.
Center capitalized terms used in this section are defined in the note
insurance policy and set forth on page [___].
The note insurer, in consideration of the payment of the premium and
subject to the terms of the note insurance policy, unconditionally and
irrevocably guarantees to any noteholder that an amount equal to each full and
complete Insured Payment will be received by the indenture trustee or its
successor, as trustee for the noteholders, on behalf of the noteholders from
the note insurer, for distribution by the indenture trustee to each noteholder
of each noteholder's proportionate share of the Insured Payment. The note
insurer's obligations under the note insurance policy with respect to a
particular Insured Payment shall be discharged to the extent funds equal to
the applicable Insured Payment are received by the indenture trustee, whether
or not such funds are properly applied by the indenture trustee. Insured
Payments shall be made only at the time set forth in the note insurance policy
and no accelerated Insured Payments shall be made regardless of any
acceleration of the Notes, unless such acceleration is at the sole option of
the note insurer.
S-49
Notwithstanding the foregoing paragraph, the note insurance policy
does not cover shortfalls, if any, attributable to the liability of the trust
or the indenture trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability). The note insurance policy does
not cover any Available Funds Cap Carry Forward Amount.
The note insurer will pay any Insured Payment that is a preference
amount on the business day following receipt on a business day by the fiscal
agent (as described in the following paragraph) of
o a certified copy of the order requiring the return of the
preference payment,
o an opinion of counsel satisfactory to the note insurer that the
order is final and not subject to appeal,
o an assignment, in such form as is reasonably required by the
note insurer, irrevocably assigning to the note insurer all
rights and claims of the noteholder relating to or arising under
the notes against the debtor which made the preference payment
or otherwise with respect to the preference payment and
o appropriate instruments to effect the appointment of the note
insurer as agent for the noteholder in any legal proceeding
related to the preference payment, such instruments being in a
form satisfactory to the note insurer.
If, however, the documents are received after 12:00 noon New York City time on
such business day, they will be deemed to be received on the following
business day. Payment shall be disbursed to the receiver or trustee in
bankruptcy named in the final order of the court exercising jurisdiction on
behalf of the noteholder and not to any noteholder directly unless the
noteholder has returned principal or interest paid on the notes to the
receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to the noteholder.
The note insurer will pay any other amount payable under the note
insurance policy no later than 12:00 noon New York City time, on the later of
the payment date on which the related Deficiency Amount is due or the third
business day following receipt in New York, New York, on a business day by
_________, as fiscal agent for the note insurer or any successor fiscal agent
appointed by the note insurer of a Notice. If, however, the Notice is received
after 12:00 noon New York City time on a business day, it will be deemed to be
received on the following business day. If a Notice received by the fiscal
agent is not in proper form or is otherwise insufficient for the purpose of
making a claim under the note insurance policy, it shall be deemed not to have
been received by the fiscal agent for purposes of this paragraph, and the note
insurer or the fiscal agent, as the case may be, shall promptly so advise the
indenture trustee and the indenture trustee may submit an amended Notice.
Insured Payments due under the note insurance policy generally will
be disbursed by the fiscal agent to the indenture trustee on behalf of
noteholders by wire transfer of immediately available funds in the amount of
the Insured Payment less, in respect of Insured Payments related to Preference
Amounts, any amount held by the indenture trustee for the payment of the
Insured Payment and legally available.
S-50
The fiscal agent is the agent of the note insurer only and the fiscal
agent shall in no event be liable to noteholders for any acts of the fiscal
agent or any failure of the note insurer to deposit sufficient funds to make
payment due under the note insurance policy.
Subject to the terms of the indenture, the note insurer shall be
subrogated to the rights of each noteholder to receive payments under the
notes to the extent of any payment by the note insurer under the note
insurance policy.
As used in the note insurance policy, the following terms shall have
the following meanings:
"Deficiency Amount" means, with respect to any payment date
the sum of (i) the interest on the notes for that payment date minus
Available Funds and (ii) the then existing Overcollateralization
Deficit, if any, after application of Available Funds to reduce the
Aggregate Note Balance on that payment date.
"Insured Payment" means, (i) as of any payment date, the
Deficiency Amount and (ii) any Preference Amount due and then owing
under the note insurance policy.
"Notice" means the telephonic or telegraphic notice,
promptly confirmed in writing by telecopy substantially in the form
of Exhibit A attached to the note insurance policy, the original of
which is subsequently delivered by registered or certified mail, from
the indenture trustee specifying the Insured Payment which shall be
due and owing on the applicable payment date.
"Preference Amount" means any amount previously distributed
to a holder of a note that is recoverable and sought to be recovered
as avoidable preference by a trustee in bankruptcy pursuant to the
federal Bankruptcy Code (11 U.S.C.), as amended from time to time, in
accordance with a final nonappealable order of a court having
competent jurisdiction.
Capitalized terms used in the note insurance policy and not otherwise
defined therein will have the respective meanings set forth in the indenture
as of the date of execution of the note insurance policy, without giving
effect to any subsequent amendment to or modification of the indenture unless
such amendment or modification has been approved in writing by the note
insurer.
Any Notice under the note insurance policy or service of process on
the fiscal agent of the note insurer may be made at the address listed below
for the fiscal agent of the note insurer or such other address as the note
insurer shall specify in writing to the indenture trustee.
The notice address of the fiscal agent is ________, Attention:
_________, or such other address as the fiscal agent shall specify to the
indenture trustee in writing.
The note insurance policy is being issued under and pursuant to, and
shall be construed under, the laws of the State of New York, without giving
effect to conflict of laws principles.
S-51
THE INSURANCE PROVIDED BY THE INSURANCE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The note insurance policy is not cancelable for any reason. The
premium on the note insurance policy is not refundable for any reason
including payment, or provision being made for payment, prior to the maturity
of the notes.
The Note Insurer
[Note Insurer Information]. The note insurer is domiciled in the
State of ____ and is licensed to do business in and is subject to regulation
under the laws of [all 50 states, the District of Columbia, the Commonwealth
of Puerto Rico, the Commonwealth of the Northern Mariana Islands, the Virgin
Islands of the United States and the Territory of Guam]. [_______ has laws
prescribing minimum capital requirements, limiting classes and concentrations
of investments and requiring the approval of policy rates and forms.] State
laws also regulate the amount of both the aggregate and individual risks that
may be insured, the payment of dividends by the note insurer, changes in
control and transactions among affiliates. Additionally, the note insurer is
required to maintain contingency reserves on its liabilities in certain
amounts and for certain periods of time.
The principal executive offices of the note insurer are located at
________, and its telephone number is _______.
The tables below present selected financial information of the note
insurer determined in accordance with statutory accounting practices (SAP)
prescribed or permitted by insurance regulatory authorities and generally
accepted accounting principles (GAAP):
SAP
------------------------------------------
_______, 200_ _______, 200__
(Audited (Unaudited)
(In millions)
Admitted Assets $_____ $_____
Liabilities _____ _____
Capital and Surplus _____ _____
GAAP
------------------------------------------
________, 200_ _______, 200__
(Audited) (Unaudited)
(In millions)
Assets $_____ $_____
Liabilities _____ _____
Shareholder's Equity _____ _____
Copies of the financial statements of the note insurer incorporated
by reference in this prospectus supplement and copies of the note insurer's
200_ year-end audited financial
S-52
statements prepared in accordance with statutory accounting practices are
available, without charge, from the note insurer. The address of the note
insurer is _______ and its telephone number is ________.
The note insurer does not accept any responsibility for the accuracy
or completeness of this prospectus supplement or any information or disclosure
contained in, or omitted from this prospectus supplement, other than with
respect to the accuracy of the information regarding the note insurance policy
and note insurer set forth under the headings "Note Insurance--The Note
Insurance Policy" and "--The Note Insurer" in this prospectus supplement.
Additionally, the note insurer makes no representation regarding the notes or
the advisability of investing in the notes.
________ rates the claims paying ability of the note insurer "____."
________ rates the claims paying ability of the note insurer "____."
Each rating of the note insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the note insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
notes, and such ratings may be subject to revision or withdrawal at any time
by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the notes. The
note insurer does not guaranty the market price of the notes nor does it
guaranty that the ratings on the notes will not be revised or withdrawn.
Incorporation of Certain Documents of the Note Insurer by Reference
The consolidated financial statements of the note insurer [and
subsidiaries] included as an exhibit to the Annual Report on Form 10-K for the
period ended _______, 200__, and the unaudited financial statements of the
note insurer [and subsidiaries] for the quarter ended ______, 200__, included
as an exhibit to the Quarterly Report on Form 10-Q for the period ended
_______, 200__, each of which have been filed with the Securities and Exchange
Commission by _____, are hereby incorporated by reference in this prospectus
supplement.
All financial statements of the note insurer and subsidiaries
included in documents filed by ______ pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the
date of this prospectus supplement are to be a part hereof from the respective
dates of filing such documents.
The depositor will provide without charge to any person to whom this
prospectus supplement is delivered, upon oral or written request, a copy of
any or all of the foregoing financial statements incorporated by reference.
Requests for such copies should be directed to the depositor at 600 Steamboat
Road, Greenwich, Connecticut 06830.
S-53
Credit Enhancement Does Not Apply to Prepayment Risk
In general, the protection afforded by the note insurance policy is
protection for credit risk and not for prepayment risk. A claim may not be
made under the note insurance policy in an attempt to guarantee or insure that
any particular rate of prepayment is experienced by the trust.
Prepayment and Yield Considerations
No principal payments will be made on a class of notes on any payment
date until the Class Principal Balance of each class of notes having a lower
municipal designation (and thus a higher principal payment priority) has been
reduced to zero. Thus, the Class A-2 Notes will not be entitled to payments of
principal until the Class Note Balance of the Class A-1 Notes has been reduced
to zero, the Class A-3 Notes will not be entitled to payments of principal
until the Class Note Balance of the Class A-2 Notes has been reduced to zero
and the Class A-4 Notes will not be entitled to payments of principal until
the Class Note Balance of the Class A-3 Notes has been reduced to zero. See
"Description of the Notes -- Payments on the Notes" in this prospectus
supplement. As the rate of payment of principal of the notes depends primarily
on the rate and timing of payment (including prepayments) of the principal
balance of the home loans, final payment of any class of notes could occur
significantly earlier than its stated maturity date. Noteholders will bear the
risk of being able to reinvest principal payments on the notes at yields at
least equal to the yield on their respective notes. No prediction can be made
as to the rate or timing of prepayments on the home loans in either stable or
changing interest rate environments. Any reinvestment risk due to the rate of
prepayment of the home loans will be borne entirely by noteholders.
The rate of principal payments on the notes, the aggregate amount of
each interest payment on the notes and the yields to maturity of the notes
will be directly affected by the rate and timing of principal reductions on
the home loans. Principal reductions may be in the form of scheduled
amortization payments or unscheduled payments or reductions, which may include
prepayments, repurchases and liquidations or write-offs due to default,
casualty, insurance or other disposition. On any payment date on or after the
payment date on which the aggregate Note Class balance of the notes declines
to 5% or less of the original aggregate Note Class Balance of the notes, the
holder of the trust certificates or the note insurer may effect a redemption
of the notes. See "Description of the Notes--Redemption of the Notes" in this
prospectus supplement.
The "weighted average life" of a class of notes refers to the average
amount of time that will elapse from the closing date to the date each dollar
in respect of principal of that class is repaid. The weighted average life of
each class of notes will be influenced by, among other factors, the rate at
which principal reductions occur on the home loans, the rate at which Excess
Cash is paid to noteholders and the extent to which any excess funds are
distributable to holders of the trust certificates, in each case as described
in this prospectus supplement. If substantial principal prepayments on the
home loans are received as a result of unscheduled payments, liquidations or
repurchases, payments to noteholders may significantly shorten the weighted
average lives of the notes. If the home loans experience delinquencies and
defaults in the payment of principal, then noteholders will experience a delay
in the receipt of principal payments attributable to the delinquencies and
defaults, which in certain instances may result in longer actual average
weighted lives of the notes than would otherwise be the case. Interest
shortfalls on the home loans due to principal prepayments in full and
curtailments, and any
S-54
resulting shortfall in amounts payable on the notes, will be covered to the
extent of amounts available from the applicable credit enhancement. See "Risk
Factors--Credit enhancement may be inadequate" in this prospectus supplement.
The rate and timing of principal payments on the home loans will be
influenced by a variety of economic, geographic, social and other factors.
These factors may include changes in borrowers' housing needs, job transfers,
unemployment, borrowers' net equity, if any, in the mortgaged properties,
servicing decisions, homeowner mobility, seasoning of loans, market interest
rates for similar types of loans and the availability of funds for similar
types of loans.
In certain cases, the servicer may, in a manner consistent with its
servicing practices, permit a borrower who is selling his principal residence
and purchasing a new one to substitute the new mortgaged property as
collateral for the related loan, or may simply release the lien on the
existing collateral, leaving the related home loan unsecured. In that case,
the servicer generally will require the borrower to make a partial prepayment
in reduction of the principal balance of the home loan to the extent that the
borrower has received proceeds from the sale of the prior residence that will
not be applied to the purchase of the new residence. Certain of the home loans
are subject to prepayment fees during the first [_________] years after
origination. Prepayment fees may have the effect of reducing the amount or the
likelihood of prepayments on the related loans.
As with fixed rate obligations generally, the rate of prepayment on a
pool of loans is affected by prevailing market interest rates for similar
types of loans of a comparable term and risk level. If prevailing interest
rates were to fall significantly below the loan rates on the home loans in the
trust, the rate of prepayment would be expected to increase. Conversely, if
prevailing interest rates were to rise significantly above the loan rates on
the loans in the trust, the rate of prepayment on the loans would be expected
to decrease. In addition, any future limitations on the rights of borrowers to
deduct interest payments on mortgage loans for federal income tax purposes may
result in a higher rate of prepayment on the loans. The depositor and the
seller make no representations as to the particular factors that will affect
the prepayment of the home loans, as to the relative importance of such
factors, or as to the percentage of the principal balance of the loans that
will be paid as of any date.
Payments of principal at a faster rate than anticipated will decrease
the yield on notes purchased at a premium; payments of principal at a slower
rate than anticipated will decrease the yield on notes purchased at a
discount. The effect on an investor's yield due to payments of principal
occurring at a rate that is faster (or slower) than the rate anticipated by
the investor during any period following the issuance of the notes will not be
entirely offset by a subsequent like reduction (or increase) in the rate of
payments of principal during any subsequent period.
The rate of delinquencies and defaults on the home loans and of
recoveries, if any, on defaulted home loans and foreclosed properties will
affect the rate and timing of principal payments on the home loans, and,
accordingly, the weighted average lives of the notes, and could cause a delay
in the payment of principal to the holders of the notes. Certain factors may
influence delinquencies and defaults, including origination and underwriting
standards, loan-to-value ratios and delinquency history. In general, defaults
on home loans are expected to occur with greater frequency in their early
years, although few data are available with respect to the rate of default on
similar types of home loans. The rate of default on home loans with high
loan-
S-55
to-value ratios, or on home loans secured by junior liens, may be higher
than that of home loans with lower loan-to-value ratios or secured by first
liens on comparable properties. In addition, the rate and timing of
prepayments, defaults and liquidations on the home loans will be affected by
the general economic condition of the area in which the related mortgaged
properties are located or the related borrower is residing. The risk of
delinquencies and losses is greater and voluntary principal 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.
Although data have been published with respect to the historical
prepayment experience of certain residential mortgage loans those loans differ
in material respects from the home loans in the trust and the data may not be
reflect conditions applicable to the home loans in the trust. No significant
historical prepayment data are generally available with respect to the types
of home loans included in the home loan pool or similar types of loans, and
there can be no assurance that the home loans will achieve or fail to achieve
any particular rate of principal prepayment. A number of factors suggest that
the prepayment experience of the trust may be significantly different from
that of a pool of conventional first-lien, single family mortgage loans with
equivalent interest rates and maturities. One such factor is that the
principal balance of the average home loan is smaller than that of the average
conventional first-lien mortgage loan. A smaller principal balance may be
easier for a borrower to prepay than a larger balance and, therefore, a higher
prepayment rate may result for the home loan pool than for a pool of
first-lien mortgage loans, irrespective of the relative average interest rates
and the general interest rate environment. In addition, in order to refinance
a first-lien mortgage loan, the borrower must generally repay any junior
liens. However, a small principal balance may make refinancing a home loan at
a lower interest rate less attractive to the borrower as the perceived impact
to the borrower of lower interest rates on the size of the monthly payment may
not be significant. Other factors that might be expected to affect the
prepayment rate of the home loan pool include the relative creditworthiness of
the borrowers, the amounts of and interest rates on the underlying senior
mortgage loans, and the tendency of borrowers to use real property mortgage
loans as long-term financing for home purchase and junior liens as
shorter-term financing for a variety of purposes, which may include the direct
or indirect financing of home improvement, education expenses, debt
consolidation, purchases of consumer durables such as automobiles, appliances
and furnishings and other consumer purposes. Furthermore, because at
origination the majority of the home loans had combined loan-to-value ratios
that approached or exceeded 100%, the related borrowers may have less
opportunity to refinance the indebtedness secured by the related mortgaged
properties, including the home loans, and a lower prepayment rate may result
for the home loan pool than for a pool of mortgage (including first or junior
lien) loans that have combined loan-to-value ratios of less than 100%.
However, the availability of credit from an increased number of lenders making
loans similar to the home loans may result in faster rates of prepayment of
the home loans than would otherwise be the case. In addition, any increase in
the market values of mortgaged properties, and the resulting decrease in the
combined loan-to-value ratios of the related home loans, may make alternative
sources of financing available to the related borrowers at lower interest
rates.
Reinvestment Risk
During periods of falling interest rates, noteholders may receive an
increased amount of principal payments at a time when such holders may be
unable to reinvest such payments in investments having a yield and rating
comparable to the notes. Conversely, during periods of
S-56
rising interest rates, noteholders are likely to receive a decreased amount of
principal payments at a time when such holders may have an opportunity to
reinvest such payments in investments having a yield and rating comparable to
the notes.
Stated Maturity Dates
The stated maturity dates of the notes are as follows:
Class A-1 _____________
Class A-2 _____________
Class A-3 _____________
Class A-4 _____________
The stated maturity dates of the Class A-1 Notes, the Class A-2 Notes
and the Class A-3 Notes have been determined by calculating the final payment
date with respect to each class on the basis of the modeling assumptions (see
"--Weighted Average Lives --Modeling Assumptions" below) and an assumed
constant prepayment rate of 0% of the prepayment assumption model discussed
under "--Weighted Average Lives" below. The stated maturity date of the Class
A-4 Notes has been determined by adding three years to the last due date of
the loan in the trust with the latest stated maturity. It is anticipated that
the actual final payment date for each class of notes will occur significantly
earlier than its stated maturity date.
Weighted Average Lives
Generally, greater than anticipated prepayments of principal will
increase the yield on notes purchased at a price less than par. Generally,
greater than anticipated prepayments of principal will decrease the yield on
notes purchased at a price greater than par. The effect on an investor's yield
due to principal payments on the home loans occurring at a rate that is faster
(or slower) than the rate anticipated by the investor in the period
immediately following the issuance of the notes will not be entirely offset by
a subsequent like reduction (or increase) in the rate of principal payments.
The weighted average lives of the notes will also be affected by the amount
and timing of delinquencies and defaults on the home loans and the recoveries,
if any, on home loans and foreclosed properties.
The following information illustrates the effect of prepayments of
the home loans on the weighted average lives of the notes under certain stated
assumptions and is not a prediction of the prepayment rate that might actually
be experienced on the home loans. Weighted average life refers to the average
amount of time that will elapse from the date of delivery of a security until
each dollar of principal of that security will be repaid to the investor. The
weighted average lives of the notes will be influenced by the rate at which
principal of the home loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
unscheduled reductions of principal, including without limitation those
resulting from full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties or other dispositions, substitutions
and repurchases by or on behalf of the seller), the rate at which Excess Cash
is paid to noteholders as described in this prospectus supplement, and the
extent to which any excess funds are distributed to the holders of the trust
certificates as described in this prospectus supplement.
S-57
Prepayments on loans such as the loans in the trust are commonly
measured relative to a prepayment standard or model. The prepayment assumption
model used in this prospectus supplement represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of
the pool of loans for the life of such loans. A 100% prepayment assumption
assumes a constant prepayment rate or CPR of 0.0% per year of the outstanding
principal balance of such loans in the first month of the life of the loans
and an additional approximately _______% (expressed as a percentage per year)
in each month thereafter until the fifteenth month; beginning in the fifteenth
month and in each subsequent month during the life of the loans, a CPR of 15%
per year each month is assumed. As used in the table below, 0% Prepayment
Assumption assumes prepayment rates equal to 0% of the Prepayment Assumption
(i.e., no prepayments), 100% Prepayment Assumption assumes prepayment rates
equal to 100% of the prepayment assumption, and so forth. The prepayment
assumption model does not purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool
of loans, including the home loans in the trust. The seller does not make any
representations about the appropriateness of the prepayment assumption model
or the CPR model.
Modeling Assumptions. For purposes of preparing the tables below, the
actual characteristics of the home loans as of the cut-off date have been used
and the following modeling assumptions have been made:
o all scheduled payments on the home loans are timely received on
the first day of a Collection Period, commencing in ________
200_;
o each home loan has a first due date that occurs 30 days after the
origination of the loan;
o there are no defaults, losses or delinquencies on the home loans;
o all scheduled payments of interest and principal on the home
loans have been made through the cut-off date;
o the home loans prepay monthly at the respective specified
constant annual percentages of CPR specified in the table;
o the closing date is ___________, _____;
o all principal prepayments represent prepayments in full of the
home loans and include 30 days of interest thereon;
o each month consists of 30 days and each year consists of 360 days;
o there are no repurchases of or substitutions for the home loans;
o the initial Overcollateralization Amount equals $____________,
will gradually increase to the Required Overcollateralization
Amount of $______________ and will thereafter be reduced in
accordance with the terms of the indenture;
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o the note interest rate for each class of notes is specified on the
cover page or described in this prospectus supplement;
o the servicing fee is deducted from interest collections on the
home loans;
o no reinvestment income from any trust account is payable to the
noteholders;
o no early redemption of the notes is effected (except in the case
of "Weighted Average Life: With Optional Redemption");
o cash distributions are received by the noteholders on the 25th
day of each month, commencing in _________ 200_; and
o the home loan pool consists of ____ pools of loans having the
following characteristics:
Original Remaining
Interest Term Term
Outstanding Balance Rate (Months) (Months)
------------------- -------- --------- ----------
The tables on the following pages indicate the percentage of the
original Class Principal Balance of each class of notes that would be
outstanding at each of the dates shown at the specified percentages of the
prepayment assumption and the corresponding weighted average life of each
class of notes. Since these tables have been prepared based on the modeling
assumptions (including the assumptions regarding the characteristics and
performance of the home loans). There are discrepancies between the
characteristics of the actual home loans and the characteristics of the home
loans assumed in preparing the tables. Any such discrepancy may have an effect
upon the percentages of Class Note Balances outstanding and weighted average
lives of the notes set forth in the tables. In addition, since the actual home
loans have characteristics which differ from those assumed in preparing the
tables set forth below, the distributions of principal on the notes may be
made earlier or later than as indicated in the tables.
The weighted average life of a class of notes is determined by
(a) multiplying the amount of each payment of principal thereof by
the number of years from the date of issuance to the related
payment date,
(b) summing the results and
(c) dividing the sum by the aggregate payments of principal referred
to in clause (a) and rounding to one decimal place.
The percentages in the following tables have been rounded to the
nearest whole number and, except in the case of "Weighted Average Life: With
Optional Redemption," they are based
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on the assumption that the option to redeem the notes as described under
"Description of the Notes--Redemption of the Notes" in this prospectus
supplement is not exercised.
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Percentage of Original Class Note Balance Outstanding
at the Following Percentages of the Prepayment Assumption
------------------------------------------ -----------------------------------------
Class A-1 Class A-2
------------------------------------------ -----------------------------------------
Payment Balance 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
-------------------- --- --- --- ---- ---- ---- ---- ---- ---- ---- ----- ----
Initial Balance........... 100 100 100 100 100 100 100 100 100 100 100 100
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
Weighted Average Life:
Without Optional
Termination............
With Optional
Termination..............
____________________________
* Less than 0.5% but greater than 0%
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Percentage of Original Class Note Balance Outstanding
at the Following Percentages of the Prepayment Assumption
------------------------------------------ -----------------------------------------
Class A-3 Class A-4
------------------------------------------ -----------------------------------------
Payment Balance 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
-------------------- --- --- --- ---- ---- ---- ---- ---- ---- ---- ----- ----
Initial Balance........... 100 100 100 100 100 100 100 100 100 100 100 100
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
__________................
Weighted Average Life:
Without Optional
Termination............
With Optional
Termination..............
__________________________
* Less than 0.5% but greater than 0%
S-62
The paydown scenarios for the notes set forth in the foregoing tables
are subject to significant uncertainties and contingencies (including those
discussed above under "Prepayment and Yield Considerations"). As a result,
there can be no assurance that any of the foregoing paydown scenarios and the
modeling assumptions on which they were made will prove to resemble the actual
performance of the home loans and the notes, or that the actual weighted
average lives of the notes will not vary substantially from those set forth in
the foregoing tables, which variations may be shorter or longer, and which
variations may be greater with respect to later years. Furthermore, it is not
expected that the home loans will prepay at a constant rate or that all of the
home loans will prepay at the same rate. Moreover, the home loans actually
included in the trust, the payment experience of the loans and certain other
factors affecting the payments on the notes will not conform to the modeling
assumptions made in preparing the above tables. In fact, the characteristics
and payment experience of the home loans will differ in many respects from the
modeling assumptions. See "The Home Loan Pool" in this prospectus supplement.
To the extent that the home loans actually included in the trust have
characteristics and a payment experience that differ from those assumed in
preparing the foregoing tables, the notes are likely to have weighted average
lives that are shorter or longer than those set forth in the foregoing tables.
Material Federal Income Tax Consequences
General
The following summary of the material United States federal income
tax consequences of the purchase, ownership and disposition of the notes is
based upon laws, regulations, rulings and decisions now in effect, all of
which are subject to change (including changes in effective dates) or possible
differing interpretations. It deals only with notes held as capital assets and
does not purport to deal with persons in special tax situations, such as
financial institutions, insurance companies, regulated investment companies,
dealers in securities or currencies, persons holding notes as a hedge against
currency risks or as a position in a "straddle" for tax purposes, or persons
whose functional currency is not the United States dollar. It also does not
deal with holders other than original purchasers (except where otherwise
specifically noted). Persons considering the purchase of the notes should
consult their own tax advisors concerning the application of United States
federal income tax laws to their particular situations as well as any
consequences of the purchase, ownership and disposition of the notes arising
under the laws of any other taxing jurisdiction.
Characterization of the Notes as Indebtedness
In the opinion of [Sidley Austin Brown & Wood LLP] [Thacher, Proffitt
& Wood LLP], special tax counsel for the trust, for federal income tax purposes:
o the notes will be treated as debt instruments to an investor
other than the holder of the trust certificates, and
o the trust will not be treated as an association (or publicly
traded partnership) taxable as a corporation or as a taxable
mortgage pool within the meaning of Section 7701(i) of the
Internal Revenue Code of 1986, as amended (the "Code").
S-63
See "Material Federal Income Tax Consequences" in the accompanying prospectus
for additional information.
Depending on their issue prices, the notes may be treated as having
been issued with original issue discount or OID. As a result, holders of the
affected notes may be required to recognize income with respect to those notes
in advance of the receipt of cash attributable to that income. Each
noteholder, by the acceptance of a note, will agree to treat the notes as
indebtedness for federal income tax purposes.
In general, whether for U.S. federal income tax purposes a
transaction constitutes an equity investment or a loan, the repayment of which
is secured by property, is a question of fact, the resolution of which is
based upon the economic substance of the transaction rather than its form or
the manner in which it is labeled. While the Internal Revenue Service and the
courts have set forth several factors to be taken into account in determining
whether the substance of a transaction is a sale of property or a secured
loan, the primary factor in making this determination is whether transferee
has assumed the risk of loss or other economic burdens relating to the
property and has obtained the benefits of ownership thereof. [Sidley Austin
Brown & Wood LLP] [Thacher Proffitt & Wood LLP] has analyzed and relied on
several factors in reaching its opinion that the weight of the benefits and
burdens of ownership of the home loans has been retained by the trust or its
beneficial owners and has not been transferred to the noteholders.
U.S. Holders
Payments of Interest. Payments of interest on a note generally will
be taxable to a U.S. Holder as ordinary interest income at the time such
payments are accrued or are received (in accordance with the U.S. Holder's
regular method of tax accounting).
Original Issue Discount. Payments of qualified stated interest on a
note issued with OID are taxable to a U.S. Holder as ordinary interest income
at the time the payments are accrued or are received (in accordance with the
U.S. Holder's regular method of tax accounting). The U.S. Holder of a note
issued with OID must include OID in income as ordinary interest for United
States federal income tax purposes as it accrues under a constant yield method
in advance of receipt of the cash payments attributable to such income,
regardless of the U.S. Holder's regular method of tax accounting.
The OID Regulations do not contain provisions specifically
interpreting Section 1272(a)(6) of the Code which applies to prepayable
securities such as the notes. Until the Treasury issues guidance which applies
to prepayable securities such as the notes, the indenture trustee intends to
base its OID computation on Section 1272(a)(6) and the OID Regulations as
described in the accompanying prospectus. However, because no regulatory
guidance currently exists under Section 1272(a)(6), there can be no assurance
that this methodology represents the correct manner of calculating OID.
The yield used to calculate accruals of OID with respect to the notes
issued with OID will be the original yield to maturity of such notes,
determined by assuming that the home loans will prepay in accordance with 100%
of the prepayment assumption model. No representation is made as to the actual
rate at which the home loans will prepay. See "Material Federal Income
S-64
Tax Consequences" in the accompanying prospectus for a discussion of the
application of the OID rules and for purposes of calculating OID.
Disposition of a Note. Except as discussed in the accompanying
prospectus, upon the sale, exchange or retirement of a note, a U.S. Holder
generally will recognize taxable gain or loss equal to the difference between
the amount realized on the sale, exchange or retirement (other than amounts
representing accrued and unpaid interest) and the U.S. Holder's adjusted tax
basis in the note. A U.S. Holder's adjusted tax basis in a note generally will
equal the U.S. Holder's initial investment in the note increased by any OID
included in income (and accrued market discount, if any, if the U.S. Holder
has included such market discount in income) and decreased by the amount of
any payments, other than qualified stated interest payments, received and
amortizable bond premium taken with respect to such note. The gain or loss
generally will be long-term capital gain or loss if the note were held for
more than the applicable holding period, except to the extent of any accrued
market discount not previously included in income.
Possible Classification of the Trust as a Partnership or an Association
Taxable as a Corporation
The opinion of [Sidley Austin Brown & Wood LLP] [Thacher Proffitt &
Wood LLP] is not binding on the courts or the IRS. It is possible that the IRS
could assert that for purposes of the Code, the transaction contemplated by
the this prospectus supplement constitutes an equity investment in the home
loans (or an interest therein) to the noteholders, and that one or more
classes of the notes constitute equity interests. If it were determined that
this transaction created an entity classified as a corporation (including a
publicly traded partnership taxable as a corporation), the trust would be
subject to U.S. federal income tax at corporate income tax rates on the income
it derives from the home loans, which would reduce the amounts available for
payments to the noteholders. Cash payments to the noteholders whose interests
were characterized as equity interests generally would be treated as dividends
for tax purposes to the extent of the corporation's earnings and profits. If
the transaction were treated as creating a partnership, the partnership itself
would not be subject to U.S. federal income tax (unless it were to be
characterized as a publicly traded partnership taxable as a corporation) or a
taxable mortgage pool as described below. Rather, each certificateholders and
each noteholder holding an equity interest would be taxed individually on its
respective distributive share of the partnership's income, gain, loss,
deductions and credits. The amount and timing of items of income and
deductions of such noteholders could differ if the notes were to constitute
partnership interests rather than indebtedness.
Possible Classification as a Taxable Mortgage Pool
In relevant part, Section 7701(i) of the Code provides that any
entity (or a portion of an entity) that is a "taxable mortgage pool" will be
classified as a taxable corporation and will not be permitted to file a
consolidated U.S. federal income tax return with another corporation. Any
entity (or a portion of any entity) will be a taxable mortgage pool if
o substantially all of its assets consist of debt instruments,
more than 50% of which are principally secured by an interest
in real property,
o the entity is the obligor under debt obligations with two or more
maturities, and
S-65
o under the terms of the entity's debt obligations (or an
underlying arrangement), payments on such debt obligations bear
a relationship to the debt instruments held by the entity.
Assuming compliance with all of the provisions of relevant documents,
and based upon representations received from seller establishing that the home
loans transferred to the trust will not cause the trust to hold debt
instruments more than 50% of which are principally secured by an interest in
real property within the meaning of the taxable mortgage pool provisions of
the Code, [Sidley Austin Brown & Wood LLP] [Thacher Proffitt & Wood LLP] is of
the opinion that the trust will not be a taxable mortgage pool under Section
7701(i) of the Code.
The opinion of [Sidley Austin Brown & Wood LLP] [Thacher Proffitt &
Wood LLP] is not binding on the IRS or the courts. If the IRS were to contend
successfully (or future regulations were to provide) that the arrangement is a
taxable mortgage pool, such arrangement would be subject to U.S. federal
corporate income tax on its taxable income generated by ownership of the home
loans. Such a tax might reduce amounts available for payments to the
noteholders. The amount of such a tax would depend upon whether payments to
noteholders would be deductible as interest expense in computing the taxable
income of the arrangement as a taxable mortgage pool.
Non-U.S. Holders
In general, a non-U.S. Holder will not be subject to U.S. federal
income taxes on payments of principal, premium (if any) or interest (including
OID, if any) on a note, unless such non-U.S. Holder is a direct or indirect
10% or greater shareholder of the depositor or the trust, a controlled foreign
corporation related to the depositor or the trust or a bank receiving interest
described in Section 881(c)(3)(A) of the Code. To qualify for the exemption
from taxation, the withholding agent (i.e., last United States payor in the
chain of payment prior to payment to a non-U.S. Holder) must have received in
the year in which a payment of interest or principal occurs, or in either of
the two preceding calendar years, a statement that:
o is signed by the beneficial owner of the note under penalties of
perjury,
o certifies that such owner is not a U.S. Holder and
o provides the name and address of the beneficial owner.
The statement may be made on an IRS Form W-8BEN, and the beneficial owner must
inform the withholding agent of any change in the information on the statement
within 30 days after the change. If a note is held through a securities
clearing organization or certain other financial institutions, the
organization or institution may provide a signed statement to the withholding
agent. However, in such case, the signed statement must be accompanied by a
copy of the IRS Form W-8BEN provided by the beneficial owner to the
organization or institution.
Generally, a non-U.S. Holder will not be subject to federal income
taxes on any amount which constitutes capital gain upon retirement or
disposition of a note, provided that:
S-66
o the gain is not attributable to an office or other fixed place of
business maintained by the non-U.S. Holder in the United States,
and
o in the case of an individual non-U.S. Holder, the non-U.S. Holder
is not present in the U.S. for 183 days or more in the
taxable year.
Certain other exceptions may be applicable, and a non-U.S. Holder should
consult its tax advisor in this regard.
The notes will not be includible in the estate of a non-U.S. Holder
unless the individual is a direct or indirect 10% or greater shareholder of
the depositor or the trust or, at the time of such individual's death,
payments in respect of the notes would have been effectively connected with
the conduct by such individual of a trade or business in the United States.
Final regulations dealing with backup withholding and information
reporting on income paid to a foreign person and related matters unify current
certification procedures and forms and clarify reliance standards. These
regulations are effective for payments made after December 31, 2000, subject
to certain transition rules. Prospective non-U.S. Holders of the notes are
strongly urged to consult their own tax advisor with respect to these
regulations.
Backup Withholding
Backup withholding of United States federal income tax may apply to
payments made in respect of the notes to registered owners who are not "exempt
recipients" and who fail to provide certain identifying information (such as
the registered owner's taxpayer identification number) in the required manner.
Generally, individuals are not exempt recipients, whereas corporations and
certain other entities generally are exempt recipients. Payments made in
respect of the notes to a U.S. Holder must be reported to the IRS, unless the
U.S. Holder is an exempt recipient or establishes an exemption. Compliance
with the identification procedures described in the preceding section would
establish an exemption from backup withholding for those non-U.S. Holders who
are not exempt recipients.
In addition, upon the sale of a note to (or through) a broker, the
broker must impose backup withholding on the entire purchase price, unless
either:
o the broker determines that the seller is a corporation or other
exempt recipient or
o the seller provides, in the required manner, certain identifying
information and, in the case of a non-U.S. Holder, certifies
that the seller is a non-U.S. Holder (and certain other
conditions are met).
The sale must also be reported by the broker to the IRS, unless either the
broker determines that the seller is an exempt recipient or the seller
certifies its non-U.S. status (and certain other conditions are met).
Certification of the registered owner's non-U.S. status would be made normally
on an IRS Form W-8BEN under penalties of perjury, although in certain cases it
may be possible to submit other documentary evidence.
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Any amounts withheld under the backup withholding rules from a
payment to a beneficial owner would be allowed as a refund or a credit against
such beneficial owner's United States federal income tax provided the required
information is furnished to the IRS.
As previously mentioned, the final backup withholding regulations are
effective for payments made after December 31, 2000, subject to certain
transition rules. Prospective noteholders are strongly urged to consult their
own tax advisor with respect to these regulations.
State Tax Consequences
Investors should also consider the state income tax consequences of
the acquisition, ownership and disposition of the notes. State income tax law
may differ substantially from the corresponding federal tax law, and this
discussion does not purport to describe any aspect of the income tax laws of
any state. Therefore, potential investors should consult their own tax
advisors with respect to the various tax consequences of investments in the
notes.
ERISA Considerations
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Code impose requirements on employee
benefit plans and on certain other benefit plans and arrangements, including
individual retirement accounts and annuities and Keogh plans, as well as on
collective investment funds and separate accounts in which these plans,
accounts or arrangements are invested, and on persons who bear specified
relationships to these types of plans or arrangements ("Parties in Interest)
or are fiduciaries with respect to these types of plans and arrangements. In
this prospectus supplement we refer to these types of plans and arrangements
as "Plans."
ERISA prohibits Parties in Interest with respect to a Plan from
engaging in certain transactions involving the Plan and its assets unless a
statutory, regulatory or administrative exemption applies to the transaction.
Section 4975 of the Code imposes certain excise taxes on prohibited
transactions involving Plans described under that section; ERISA authorizes
the imposition of civil penalties for prohibited transactions involving plans
not covered under Section 4975 of the Code. Any Plan fiduciary that proposes
to cause a Plan to acquire any of the notes should consult with its counsel
with respect to the potential consequences under ERISA and the Code of the
Plan's acquisition and ownership of the notes. See "ERISA Considerations" in
the accompanying prospectus.
Certain employee benefit plans, including governmental plans (as
defined in Section 3(32) of ERISA) and certain church plans (as defined in
Section 3(33) of ERISA), are not subject to ERISA's requirements. Accordingly,
assets of those plans may be invested in the offered notes without regard to
the ERISA considerations described in this prospectus supplement and in the
prospectus. However, these plans may be subject to provisions of other federal,
state or local laws that are substantially similar to ERISA and Section 4975 of
the Code ("Similar Law"). Moreover, any such plan which is qualified and
exempt from taxation under Sections 401(a) and 501(a) of the Code may be
subject to the prohibited transaction rules set forth in Section 503 of the
Code.
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ERISA also imposes certain duties on persons who are fiduciaries of
Plans subject to ERISA, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary that decides to
invest the assets of a Plan in the notes should consider, among other factors,
the extreme sensitivity of the investments to the rate of principal payments
(including prepayments) on the mortgage loans.
Pursuant to Department of Labor Regulation Section 2510.3-101 (the
"Plan Assets Regulation"), in general when a Plan acquires an equity interest
in an entity such as the issuer and such interest does not represent a
"publicly offered security" or a security issued by an investment company
registered under the Investment Company Act of 1940, as amended, the Plan's
assets include both the equity interest and an undivided interest in each of
the underlying assets of the entity, unless it is established either that the
entity is an "operating company" or that equity participation by "benefit plan
investors" is not "significant." In general, an "equity interest" is defined
under the Plan Assets Regulation as any interest in an entity other than an
instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features.
Although there is no authority directly on point, the issuer believes
that, at the date of this prospectus supplement, the notes should be treated
as indebtedness without substantial equity features for purposes of the Plan
Assets Regulation. The issuer also believes that, so long as the notes retain
a rating of at least investment grade, the notes should continue to be treated
as indebtedness without substantial equity features for purposes of the
Plan Assets Regulation. There is, however, increased uncertainty regarding the
characterization of debt instruments that do not carry an investment grade
rating. Consequently, in the event of a withdrawal or downgrade to below
investment grade of the rating of the notes, the subsequent transfer of such
notes or any interest therein to a Plan trustee or other person acting on
behalf of a Plan, or using Plan assets to effect such transfer, is restricted.
The depositor, the master servicer or another service provider, the
note insurer, a trustee, or an underwriter with respect to the trust may be
the sponsor or the investment advisor with respect to one or more benefit
plans. Because they may receive certain benefits in connection with the sale
of the notes, the purchase of notes using plan assets over which any of them
has investment authority might be deemed to be a violation of the prohibited
transaction rules of ERISA and Section 4975 of the Code for which no exemption
may be available. Accordingly, any benefit plan for which the depositor, the
master servicer or another service provider, the note insurer, a trustee, or
an underwriter or any of their respective affiliates
o has investment or administrative discretion with respect to
plan assets;
o has authority or responsibility to give, or regularly gives,
investment advice with respect to plan assets for a fee and
pursuant to an agreement or understanding that the advice will
serve as a primary basis for investment decisions with respect
to plan assets, and will be based on the particular investment
needs for the plan; or
o is an employer maintaining or contributing to the plan
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should consult with its counsel about potential prohibited transactions under
ERISA and Section 4975 of the Code before investing in the notes
A prospective transferee of the notes or any interest therein who is
a Plan trustee or is acting on behalf of a Plan, or using Plan assets to
effect such transfer, is required to provide written confirmation (or in the
case of any note transferred in book-entry form, will be deemed to have
confirmed) that at the time of such transfer such notes are rated at least
investment grade, and that the transferee believes that such notes are
properly treated as indebtedness without substantial equity features for
purposes of the Plan Assets Regulation, and agrees to so treat the notes and
represents that the acquisition and holding of the notes will not give rise
to a non-exempt prohibited transaction under Section 406 of ERISA or Section
4975 of the Code (or, in the case of a governmental plan, the acquisition and
holding of the notes do not give rise to a nonexempt violation of any
applicable Similar Law).
Regardless of the rating of the notes, a prospective purchaser or
transferee may instead provide the trustee with an opinion of counsel, which
opinion of counsel will not be at the expense of the trustee, the issuer, the
servicer or the underwriter, which opines that the purchase, holding and
transfer of such note or interest therein is permissible under applicable law,
will not constitute or result in a non-exempt prohibited transaction under
ERISA or Section 4975 of the Code and will not subject the trustee, the
issuer, the servicer or the underwriter to any obligation in addition to those
undertaken in the indenture.
Each person that acquires a note in certificated form shall be
required to represent, and each person that acquires a note in book-entry form
will be deemed to represent by its acceptance of the note, that (x) it is not,
and is not acquiring the note on behalf of or with "plan assets" (as
determined under Department of Labor Regulation ss.2510.3-101 or otherwise) of
a Plan, or any governmental plan subject to Similar Law, or (y) its
acquisition and holding of the note do not give rise to a transaction
prohibited under Section 406 of ERISA or Section 4975 of the Code or under any
applicable Similar Law for which an exemption, all of the conditions of which
are satisfied, is not available.
The sale of notes to a Plan is in no respect a representation by the
issuer or any underwriter of the notes that this investment meets all relevant
legal requirements with respect to investments by Plans generally or any
particular Plan, or that this investment is appropriate for Plans generally or
any particular Plan.
Experts
The consolidated balance sheets of __________ [and its subsidiaries]
as of _______, 200__, and _______, 200__, and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended ________, 200__, incorporated by
reference in this prospectus supplement, have been incorporated herein in
reliance on the report of ___________, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
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Underwriting
Subject to the terms and conditions set forth in the underwriting
agreement, the depositor has agreed to sell to each of the underwriters named
below, and each of the underwriters has severally agreed to purchase, the
principal amount of notes set forth opposite its name in the table below:
Principal Amount of
--------------------------------------------------------------------------
Class A-1 Class A-2 Class A-3 Class A-4
Underwriter Notes Notes Notes Notes
- ------------- ----------------- ------------------ ---------------- --------------
Greenwich Capital $ $ $ $
Market, Inc. ...................
___________________............... ----------------- ------------------ ---------------- --------------
Total............................. $ $ $ $
================= ================== ================ ==============
The depositor has been advised that the underwriters propose
initially to offer the notes to the public at the respective offering prices
(plus accrued interest, if any) set forth below:
Class A-1 Class A-2 Class A-3 Class A-4
Notes Notes Notes Notes
---------------- ----------------- ---------------- ----------------
Price to Public................... $ $ $ $
Underwriting Discount............. % % % %
The depositor has been further advised that the underwriters propose to offer
the notes to certain dealers at the above offering prices less a selling
concession not to exceed the percentage of the note denomination set forth
below, and that the underwriters may allow and the dealers may reallow a
reallowance discount not to exceed the percentage of the note denomination set
forth below:
Class A-1 Class A-2 Class A-3 Class A-4
Notes Notes Notes Notes
---------------- ----------------- ---------------- ----------------
Concessions....................... % % % %
Reallowances...................... % % % %
Until the distribution of the notes is completed, rules of the SEC may
limit the ability of the underwriters and certain selling group members to bid
for and purchase those classes of notes. As an exception to these rules, the
underwriters are permitted to engage in certain transactions that stabilize
the price of the notes. These transactions consist of bids of purchase for the
purpose of pegging, fixing or maintaining the price of those classes of notes.
In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be
higher than it might be in the absence of the purchases.
Neither the depositor nor any of the underwriters makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the prices of the notes. In
addition, neither the depositor nor any of the underwriters makes any
S-71
representation that the underwriters will engage in these transactions or that
the transactions, once commenced, will not be discontinued without notice.
The depositor has been advised by Greenwich Capital Markets, Inc.
that it currently intends to make a market in the notes; however, it is not
obligated to do so, any market-making may be discontinued at any time, and
there can be no assurance that an active public market for the notes will
develop or, if it does develop, that it will continue.
The depositor is an affiliate of Greenwich Capital Markets, Inc.
The underwriting agreement provides that the depositor and the seller
will indemnify the underwriters against certain civil liabilities, including
liabilities under the Securities Act of 1933.
Legal Investment Considerations
The notes will not constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984. Accordingly, many
institutions with legal authority to invest in "mortgage related securities"
may not be legally authorized to invest in the notes.
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase the notes or to purchase
notes representing more than a specified percentage of the investor's assets.
You should consult their own legal advisors in determining whether and to what
extent the notes constitute legal investments for you.
S-72
Ratings
It is a condition to the issuance of the notes that they receive the
ratings "_____" and "_____" from _____ and _____, respectively.
The ratings on the notes address the likelihood of the receipt by
noteholders of all payments on the home loans to which they are entitled. The
ratings on the notes also address the structural, legal and issuer-related
aspects associated with the notes, including the nature of the home loans. In
general, the ratings on the notes address credit risk and not prepayment risk.
The ratings on the notes do not represent any assessment of the likelihood
that principal prepayments of the home loans will be made by borrowers or the
degree to which the rate of such prepayments might differ from that originally
anticipated. As a result, the initial ratings assigned to the notes do not
address the possibility that noteholders might suffer a lower than anticipated
yield in the event of principal payments on the notes resulting from rapid
prepayments of the home loans, or in the event that the trust is terminated
prior to the maturity date of the notes.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the notes by the rating agencies are subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to those notes.
Legal Opinions
In addition to the legal opinions described in the accompanying
prospectus, certain legal matters relating to the issuance of the notes will
be passed upon for the seller by _____________________ and for the depositor
and the underwriters by [Sidley Austin Brown & Wood LLP] [Thacher Proffitt &
Wood LLP], New York, New York. [Sidley Austin Brown & Wood LLP] [Thacher
Proffitt & Wood LLP] will also pass on certain federal income tax matters.
S-73
Glossary of Terms
1-Month LIBOR: The London interbank offered rate for one-month United
States dollar deposits. 1-Month LIBOR for each interest accrued period shall
be determined on each LIBOR Determination Date, on the basis of the offered
rates of the Reference Banks for one-month United States dollar deposits, as
such rate appears on the Telerate Page 3750, as of 11:00 a.m. (London, England
time) on that LIBOR Determination Date. If the rate does not appear on that
page or other replacement page on that service, or if the service is no longer
offered, another service for displaying 1-Month LIBOR or comparable rates as
may be reasonably selected by the indenture trustee, the rate will be the
Reference Bank Rate. If no such quotations can be obtained and no Reference
Bank Rate is available, 1-Month LIBOR will be 1-Month LIBOR applicable to the
preceding payment date.
Administrative Fee Amount: With respect to any payment date, the sum
of the servicing fee, the indenture trustee's fee and the note insurer premium
for that payment date.
Aggregate Note Balance: With respect to any payment date, the sum of
the Class Note Balances of all outstanding classes of notes on that payment
date.
Available Funds: With respect to the any payment date, the sum of the
following amounts:
o all scheduled payments of interest received with respect to the
loans and due during the related Collection Period and all other
interest payments on or in respect of the loans received by or
on behalf of the servicer during the related Collection Period
(including any amounts representing interest accrued on the
loans prior to the cut-off date), plus any net income received
during the related Collection Period from REO properties in the
trust;
o all scheduled payments of principal received with respect to the
loans and due during the related Collection Period and all other
principal payments (including Principal Prepayments, but
excluding amounts described elsewhere in this definition)
received during the related Collection Period in respect of the
loans;
o Trust Insurance Proceeds;
o Net Liquidation Proceeds;
o the aggregate of the amounts received in respect of any loans
that are required or permitted to be repurchased, released or
removed by the seller or servicer during the related Collection
Period as described in "--Assignment of Loans" and "Servicing of
the Loans" in this prospectus supplement, to the extent such
amounts are received by the indenture trustee on or before the
related [Deposit Date];
o the aggregate of amounts deposited in the note account by the
redeeming party during such Collection Period in connection with
redemption of the Notes as described under "--Redemption of the
Notes" below; and
S-74
o subsequent collections on any Liquidated Loan to the extent of
any Realized Loss incurred with respect to that loan, after
payment of any additional compensation permitted to the servicer
under the servicing agreement.
less the sum of the following amounts:
o the Administrative Fee Amount for that payment date;
o servicing advances previously made that are reimbursable to the
servicer (other than those included in liquidation expenses for
a Liquidated Loan and already reimbursed from the related
Liquidation Proceeds);
o amounts deposited into the collection account or the note
account that may not be withdrawn pursuant to a final and
nonappealable order of the United States bankruptcy court of
competent jurisdiction imposing a stay pursuant to Section 362
of the federal Bankruptcy Code and that would otherwise have
been included in the definition of Available Funds on that
payment date; and
o amounts received by the indenture trustee that are recoverable
and sought to be recovered from the trust as a voidable
preference by a trustee in bankruptcy pursuant to the federal
Bankruptcy Code in accordance with a final nonappealable order
of a court of competent jurisdiction.
Class Note Balance: With respect to any class of notes and any
payment date, the original Class Note Balance of that class less all Monthly
Principal and Excess Cash paid to the related noteholders on previous payment
dates in reduction of the Class Note Balance (exclusive, for the sole purpose
of effecting the note insurer's subrogation rights, of payments made by the
note insurer in respect of any Overcollateralization Deficit under the
insurance policy, except to the extent reimbursed to the note insurer pursuant
to the indenture).
Deposit Date: With respect to any payment date, the 18th day of the
month in which that payment date occurs or, if the 18th day is not a business
day, the next succeeding business day.
Excess Cash: With respect to any Payment Date, the Available Funds
for that payment date reduced by the sum of
o any amounts payable to note insurer for Insured Payments paid on
prior payment dates and not yet reimbursed and for any unpaid
note insurer premiums for prior payment dates (in each case with
interest thereon at the late payment rate set forth in the
insurance agreement),
o interest on the notes for the related payment date and
o the Monthly Principal for the related payment date.
LIBOR Determination Date: With respect to any interest accrual period
for the Class A-1 Notes, the second London Business Day preceding the
commencement of that interest accrual period.
S-75
Liquidated Loan: With respect to any payment date, any loan as to
which
o the servicer has determined during the related Collection
Period, in accordance with its customary servicing procedures,
that all Liquidation Proceeds which it expects to recover from
or on account of that loan have been recovered, or
o any portion of any monthly payment on that loan is 180 days or
more past due.
Liquidation Proceeds: With respect to any payment date, the aggregate
of any proceeds received by the servicer during the related Collection Period
in connection with the liquidation of any mortgaged property securing a loan,
whether through trustee's sale, foreclosure, condemnation, taken by amount
domain or otherwise (including any Trust Insurance Proceeds to the extent not
duplicative thereof).
London Business Day: Any day on which dealing in deposits of United
States dollars are transacted in the London interbank market.
Net Liquidation Proceeds: With respect to any payment date, the
Liquidation Proceeds received during the related Collection Period less
expenses incurred by the servicer in connection with the liquidation of the
related loans.
Monthly Principal: With respect to any payment date, the sum of the
following amounts
o all scheduled payments of principal received with respect to the
loans and due during the related Collection Period,
o all other amounts collected, received or otherwise recovered in
respect of principal of the loans (including Principal
Prepayments, but not including Payments Ahead that are not
allocable to principal for the related Collection Period) and
o all amounts allocable to principal deposited in the note account
on the related Deposit Date by the trust, the depositor, the
seller, the servicer or the note insurer in connection with a
repurchase, release or removal of any loans pursuant to the
indenture.
reduced by the amount of any Overcollateralization Surplus for that payment
date.
Overcollateralization Amount: With respect to any payment date, the
amount of the excess, if any, of
o the aggregate principal balance of the home loan pool as of the
end of the related Collection Period
over
o the aggregate Note Class Balance of the notes as of that payment
date after taking into account payments of Monthly Principal
made on that payment date (disregarding any permitted reduction
in Monthly Principal due to an Overcollateralization Surplus.
S-76
Overcollateralization Surplus: With respect to any payment date, the
excess, if any, of
o the Overcollateralization Amount for that payment date
o the applicable Required Overcollateralization Amount for that
payment date.
An Overcollateralization Surplus may result prior to the occurrence
of any decrease or "step down" in the Required Overcollateralization Amount
because, in the absence of an Overcollateralization Surplus, the notes will be
entitled to receive 100% of collected principal on the loans, even though the
aggregate Note Class Balance of the notes will, as a result of the initial
overcollateralization and the accelerated amortization caused by the
application of the Excess Cash, be less than the aggregate principal balance
of the home loan pool, in the absence of any realized losses on the loans.
Reference Bank Rate. With respect to any interest accrual period, as
follows: the arithmetic mean (rounded upwards, if necessary, to the nearest
one sixteenth of a percent) of the offered rates for United States dollar
deposits for one month which are offered by the Reference Banks as of 11:00
a.m., London, England time, on the LIBOR Determination Date to prime banks in
the London interbank market for a period of one month in amounts approximately
equal to the aggregate outstanding Class Note Balance of the Class A-1 Notes;
provided, however, that at least two such Reference Banks provide such rate.
If fewer than two offered rates appear, the Reference Bank Rate will be the
arithmetic mean of the rates quoted by one or more major banks in New York
City, selected by the Trustee, as of 11:00 a.m., New York time, on that date
for loans in U.S. Dollars to leading European banks for a period of one month
in amounts approximately equal to the aggregate outstanding Class Note Balance
of the Class A-1 Notes. If no such quotations can be obtained, the Reference
Bank Rate shall be the Reference Bank Rate applicable to the preceding payment
date.
Reference Banks. Leading banks selected by the indenture trustee and
engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (i) with an established place of business in London,
England; (ii) whose quotations appear in the Reuters Screen LIBOR Page on the
LIBOR Determination Date in question; (iii) which have been designated as such
by the indenture trustee; and (iv) which are not controlling, controlled by,
or under common control with the trust or the depositor.
Required Overcollateralization Amount. With respect to any payment
date, the required level of the Overcollateralization Amount specified in the
indenture.
Telerate Page 3750. The display page currently so designated on the
Bridge 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).
Trust Insurance Proceeds: With respect to any payment date, the
aggregate of any proceeds from or in respect of any policy of insurance
covering a mortgaged property that are received during the related Collection
Period and applied by the servicer to reduce the principal balance of the
related loan (which proceeds will not include any amounts applied to the
restoration or repair of the related mortgaged property or released to the
related borrower in
S-77
accordance with applicable law, the servicer's customary servicing procedures
or the terms of the related loan).
U.S. Holder. A beneficial owner of a note that is for United States
federal income tax purposes:
o a citizen or resident of the United States,
o a corporation or partnership (including an entity treated as a
corporation or partnership for U.S. income tax purposes) created
or organized in or under the laws of the United States or any
state thereof, including the District of Columbia (other than a
partnership that is not treated as a United States person under
any applicable Treasury regulations),
o an estate whose income is subject to United States federal income
tax regardless of its source,
o a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one
or more United States persons have the authority to control all
substantial decisions of the trust.
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 under the Internal Revenue Code of 1986, as
amended and applicable Treasury regulations thereunder prior to such date,
that elect to continue to be treated as United States persons under the Code
or applicable Treasury regulations thereunder also will be a U.S. Holder.
S-78
======================================================================================================
Until 90 days after the date of this prospectus ________________
supplement, all dealers effecting transactions in the
notes offered by this prospectus supplement, whether or
not participating in this distribution, may be required Home Loan Owner Trust 200_-__
to deliver this prospectus supplement and the Issuer of the Notes
prospectus. This is in addition to the obligation of
dealers to deliver this prospectus supplement and the
prospectus when acting as underwriters and with respect $__________ Home Loan Asset-Backed
to their unsold allotments or subscriptions. Notes, Series 200_-_
_________________
[LOGO]
You should rely 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. ---------------------
PROSPECTUS SUPPLEMENT
We are not offering the notes in any state where the ---------------------
offer is not permitted.
Greenwich Capital Markets, Inc.
We do not claim that the information in this prospectus
supplement and the accompanying prospectus is accurate ________, 200_
as of any date other than the dates stated on their
respective covers.
======================================================================================================
S-79
Subject to Completion, Dated January 9, 2004
Prospectus
Mortgage-Backed/Asset-Backed Securities
(Issuable in Series)
Greenwich Capital Acceptance, Inc. or Financial Asset Securities Corp.
Depositor
The Securities
Each issue of securities will have its own series designation and will evidence
either the ownership of assets in the related trust or debt obligations secured
by trust assets.
o Each series of securities will consist of one or more classes.
o Each class of securities will represent the entitlement to a specified
portion of interest payments and a specified portion of principal
payments on the trust assets.
o A series may include classes of securities that are senior in right of
payment to other classes. Classes of securities may be entitled to
receive principal, interest or both prior to other classes or before
or after specified events.
o No market will exist for the securities of any series before they are
issued. In addition, even after the securities of a series have been
issued and sold, there can be no assurance that a resale market for
them will develop.
The Trust and Its Assets
As specified in the related prospectus supplement, the assets of a trust will
include one or more of the following:
o mortgage loans secured generally by senior liens on one- to
four-family residential properties,
o closed-end and/or revolving home equity loans generally secured by
junior liens on one- to four-family residential properties,
o mortgage loans secured by senior liens on multifamily residential
properties,
o conditional sales contracts, installment sales agreements or loan
agreements secured by manufactured housing,
o home improvement installment sales contracts and loan agreements that
are either unsecured or secured generally by junior liens on one- to
four-family residential properties or by purchase money security
interests in the related home improvements,
o mortgage pass-through securities issued or guaranteed by Ginnie Mae,
Fannie Mae or Freddie Mac, or
o private label mortgage-backed or asset-backed securities.
Offers of the Securities
Offers of the securities may be made through one or more different methods. All
securities will be distributed by, or sold through underwriters managed by,
Greenwich Capital Markets, Inc.
- --------------------------------------------------------------------------------
Consider carefully the risk factors beginning on page 6 of this prospectus.
The securities represent obligations of the trust only and do not represent an
interest in or obligation of the applicable depositor, seller, master servicer
or any of their affiliates. This prospectus may be used to offer and sell the
securities only if accompanied by a prospectus supplement.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved these securities or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
________ __, 200_
Table of Contents
Page
Important Notice About Information in This Prospectus and Each Accompanying
Prospectus Supplement.........................................................................................5
Risk Factors......................................................................................................6
The Trust Fund...................................................................................................16
The Mortgage Loans--General........................................................................17
Single Family Loans................................................................................21
Home Equity Loans..................................................................................22
Multifamily Loans..................................................................................22
Manufactured Housing Contracts.....................................................................23
Home Improvement Contracts.........................................................................24
Agency Securities..................................................................................24
Private Label Securities...........................................................................30
Incorporation of Certain Information by Reference..................................................33
Use of Proceeds..................................................................................................33
The Depositors...................................................................................................34
Loan Program.....................................................................................................34
Underwriting Standards.............................................................................34
Qualifications of Sellers..........................................................................36
Representations by Sellers; Repurchases or Substitutions...........................................36
Description of the Securities....................................................................................38
General............................................................................................39
Distributions on Securities........................................................................41
Advances...........................................................................................45
Reports to Securityholders.........................................................................46
Credit Enhancement...............................................................................................47
General............................................................................................47
Subordination......................................................................................48
Pool Insurance Policies............................................................................50
FHA Insurance; VA Guarantees.......................................................................52
Special Hazard Insurance Policies..................................................................54
Bankruptcy Bonds...................................................................................55
FHA Insurance on Multifamily Loans.................................................................56
Reserve Accounts...................................................................................56
Cross Support......................................................................................57
Other Insurance, Surety Bonds, Guaranties, Letters of Credit and Similar
Instruments or Agreements..........................................................................57
2
Financial Instruments..............................................................................58
Yield and Prepayment Considerations..............................................................................58
Operative Agreements.............................................................................................62
Assignment of Trust Fund Assets....................................................................62
Payments on Loans; Deposits to Security Account....................................................65
Pre-Funding Account................................................................................67
Sub-Servicing of Loans.............................................................................67
Collection Procedures..............................................................................69
Hazard Insurance...................................................................................71
Realization upon Defaulted Mortgage Loans..........................................................72
Servicing and Other Compensation and Payment of Expenses...........................................75
Evidence as to Compliance..........................................................................75
Certain Matters Regarding the Master Servicer and the Depositors...................................76
Events of Default; Rights upon Event of Default....................................................77
Amendment..........................................................................................80
Termination; Optional Termination; Calls...........................................................81
The Trustee........................................................................................82
Material Legal Aspects of the Loans..............................................................................82
General............................................................................................83
Foreclosure........................................................................................86
Repossession of Manufactured Homes.................................................................88
Rights of Redemption...............................................................................90
Equitable Limitations on Remedies..................................................................90
Anti-Deficiency Legislation and Other Limitations on Lenders.......................................91
Homeownership Act and Similar State Laws...........................................................92
Due-on-Sale Clauses................................................................................94
Prepayment Charges; Late Fees......................................................................95
Applicability of Usury Laws........................................................................95
Soldiers' and Sailors' Civil Relief Act............................................................96
Environmental Risks................................................................................96
The Home Improvement Contracts.....................................................................98
Installment Contracts.............................................................................100
Junior Mortgages; Rights of Senior Mortgagees.....................................................100
The Title I Program...............................................................................102
Material Federal Income Tax Consequences........................................................................106
General...........................................................................................106
Taxation of Debt Securities.......................................................................107
Non-REMIC Certificates............................................................................115
REMIC Certificates................................................................................128
State Tax Considerations........................................................................................153
ERISA Considerations............................................................................................153
3
Insurance Company General Accounts................................................................155
Prohibited Transaction Class Exemption ("PTCE") 83-1..............................................156
Underwriter Exemption.............................................................................156
Legal Investment Considerations.................................................................................159
Method of Distribution..........................................................................................161
Legal Matters...................................................................................................162
Financial Information...........................................................................................163
Available Information...........................................................................................163
Ratings.........................................................................................................163
Glossary of Terms...............................................................................................164
4
Important Notice About Information in This Prospectus
and Each Accompanying Prospectus Supplement
Information about each series of securities is contained in two separate
documents:
o this prospectus, which provides general information, some of which may
not apply to a particular series; and
o the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series.
Although the accompanying prospectus supplement for a particular series of
securities cannot contradict the information contained in this prospectus,
insofar as the prospectus supplement contains specific information about the
series that differs from the more general information contained in this
prospectus, you should rely on the information in the prospectus supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement.
We include cross-references in this prospectus and each accompanying prospectus
supplement to captions in these materials where you can find further related
discussions. There is a Glossary of Terms beginning on page 164 where you will
find definitions of certain capitalized terms used in this prospectus. The
preceding Table of Contents and the Table of Contents included in each
accompanying prospectus supplement provide the pages on which these captions are
located.
---------------------
If you require additional information, the mailing address of the depositor's
principal executive offices is either Greenwich Capital Acceptance, Inc. or
Financial Acceptance Securities Corp., at 600 Steamboat Road, Greenwich,
Connecticut 06830 and the telephone number is (203) 625-2700. For other means of
acquiring additional information about us or a series of securities, see "The
Trust Fund -- Incorporation of Certain Information by Reference" on page 33 of
this prospectus.
--------------------
5
___________ Risk Factors
You should carefully consider the following information, together
with the information set forth under "Risk Factors" in the related prospectus
supplement, since it identifies the principal risk factors associated with an
investment in the securities.
Principal prepayments on the
loans may adversely affect the
average life of, and rate of return
on, your securities.......... You may be unable to reinvest the principal payments on
your securities at a rate of return at least equal to the rate on
your securities. The timing of principal payments on the
securities of a series will be affected by a number of factors,
including the following:
o the extent of prepayments on the loans in the trust or, if the
trust is comprised of underlying securities, on the loans
backing the underlying securities;
o how payments of principal are allocated among the classes of
securities of the series as specified in the related
prospectus supplement;
o if any party has an option to terminate the related trust
early or to call your securities, the effect of the exercise
of the option;
o the rate and timing of defaults and losses on the assets in
the related trust; and
o repurchases of assets in the related trust as a result of
material breaches of representations and warranties made by
the depositor or master servicer.
The rate of prepayment of the loans included in, or
underlying the assets held in, each trust may affect the
average life of the securities.
Only the assets of the related
trust are available to pay your
securities.......................... Unless the applicable prospectus supplement provides
otherwise, the securities of each series will be payable
solely from the assets of the related trust, including any
applicable credit enhancement, and will not have a claim
against the assets of any other trust. If the assets of
the related trust are not sufficient, you may suffer a
loss on your securities. Moreover, at the times specified
in the related prospectus
6
supplement, assets of the trust may be released to the
applicable depositor, master servicer, any servicer,
credit enhancement provider or other specified person, if
all payments then due on the securities have been made and
adequate provision for future payments on the remaining
securities has been made. Once released, these assets will
no longer be available to make payments on your securities
There will be no recourse against the depositor, the
master servicer, any servicer or any of their affiliates
if a required distribution on the securities is not made.
The securities will not represent an interest in, or an
obligation of, the depositor, the master servicer, any
servicer or any of their affiliates.
The depositor's obligations are limited to its
representations and warranties concerning the trust
assets. Because the depositor has no significant assets,
if it is required to repurchase trust assets due to the
breach of a representation or warranty, the depositor's
source of funds for the repurchase would be limited to:
o moneys obtained from enforcing any similar obligation of the
seller or originator of the asset, or
o funds from a reserve account or other credit
enhancement established to pay for asset repurchases.
Credit enhancement may not be
adequate to prevent losses on
your securities........... Credit enhancement is intended to reduce the effect of
delinquent payments or loan losses on those classes of
securities that have the benefit of the credit
enhancement. Nevertheless, the amount of any credit
enhancement is subject to the limits described in the
related prospectus supplement. Moreover, the amount of
credit enhancement may decline or be depleted under
certain circumstances before the securities are paid in
full. As a result, securityholders may suffer losses. In
addition, credit enhancement may not cover all potential
sources of risk of loss, such as fraud or negligence by a
loan originator or other parties.
The interest accrual period may
reduce the effective yield
on your securities................. Interest payable on the securities on any distribution date
will include all interest accrued during the related
interest accrual period. The interest accrual period for
the securities
7
of each series will be specified in the applicable
prospectus supplement. If the interest accrual period ends
two or more days before the related distribution date,
your effective yield will be less than it would be if the
interest accrual period ended the day before the
distribution date. As a result, your effective yield at
par would be less than the indicated coupon rate.
Economic, legal and other
factors could reduce the amount
and delay the timing of recoveries
on defaulted loans..... The following factors, among others, could adversely affect
property values in such a way that the outstanding balance
of the related loans would equal or exceed those values:
o an overall decline in the residential real estate markets
where the properties are located,
o failure of borrowers to maintain their properties adequately,
and
o natural disasters that are not necessarily covered
by hazard insurance, such as earthquakes and floods.
If property values decline, actual rates of delinquencies,
foreclosures and losses on the loans could be higher than
those currently experienced by the mortgage lending
industry in general.
Even if you assume that the mortgaged properties provide
adequate security for the loans, substantial delays could
occur before defaulted loans are liquidated and the
proceeds forwarded to investors. Property foreclosure
actions are regulated by state statutes and rules and are
subject to many of the delays and expenses that
characterize other types of lawsuits if defenses or
counterclaims are made. As a result, foreclosure actions
can sometimes take several years to complete. Moreover,
some states prohibit a mortgage lender from obtaining a
judgment against the borrower for amounts not covered by
property proceeds if the property is sold outside of a
judicial proceeding. As a result, if a borrower defaults,
these restrictions may impede the servicer's ability to
dispose of the borrower's property and obtain sufficient
proceeds to repay the loan in full. In addition, the
servicer is entitled to deduct from liquidation proceeds
all the expenses
8
it reasonably incurs in trying to recover on the defaulted
loan, including legal fees and costs, real estate taxes,
and property preservation and maintenance expenses.
State laws generally regulate interest rates and other
loan charges, require certain disclosures, and often
require licensing of loan originators and servicers. In
addition, most states have other laws and public policies
for the protection of consumers that prohibit unfair and
deceptive practices in the origination, servicing and
collection of loans. Depending on the provisions of the
particular law or policy and the specific facts and
circumstances involved, violations may limit the ability
of the servicer to collect interest or principal on the
loans. Also, the borrower may be entitled to a refund of
amounts previously paid and the servicer may be subject to
damage claims and administrative sanctions.
Loans secured by junior liens are
subject to additional risks........... If a loan is in a junior lien position, a decline in property
values could extinguish the value of the junior lien loan
before having any effect on the related senior lien loan
or loans. In general, the expenses of liquidating defaulted
loans do not vary directly with the unpaid amount. So, assuming
that a servicer would take the same steps to recover a
defaulted loan with a small unpaid balance as it would a
loan with a large unpaid balance, the net amount realized
after paying liquidation expenses would be a smaller
percentage of the balance of the small loan than of the
large loan. Since the mortgages securing home equity loans
typically will be in a junior lien position, the proceeds
from any liquidation will be applied first to the claims
of the related senior mortgageholders, including
foreclosure costs. In addition, a junior mortgage lender
may only foreclose subject to any related senior mortgage.
As a result, the junior mortgage lender generally must
either pay each related senior mortgage lender in full at
or before the foreclosure sale or agree to make the
regular payments on each senior mortgage. Since the trust
will not have any source of funds to satisfy any senior
mortgages or to continue making payments on them, the
trust's ability as a practical matter to foreclose on any
junior lien will be limited.
Loans to lower credit quality
9
borrowers are more likely
to experience late payments
and defaults and increase your
risk of loss........................... Trust assets may have been made to lower credit quality
borrowers who fall into one of two categories:
o customers with moderate income, limited assets and
other income characteristics that cause difficulty in
borrowing from banks and other traditional lenders; or
o customers with a history of irregular employment,
previous bankruptcy filings, repossession of
property, charged-off loans or garnishment of wages.
The average interest rate charged on loans made to these
types of borrowers is generally higher than that charged
by lenders that typically impose more stringent credit
requirements. There is a greater likelihood of late
payments on loans made to these types of borrowers than on
loans to borrowers with a higher credit quality. In
particular, payments from borrowers with a lower credit
quality are more likely to be sensitive to changes in the
economic climate in the areas in which they reside.
As much as 20% (by principal balance) of the trust assets
for any particular series of securities may be
contractually delinquent as of the related cut-off date.
Failure to perfect security
interests in manufactured
homes may result in losses on
your securities...................... Each manufactured housing conditional sales contract or
installment loan agreement that is included in a trust
fund will be secured by a security interest in the related
manufactured home. The steps necessary to perfect the
security interest in a manufactured home will vary from
state-to-state. If, as a result of clerical error or
otherwise, the master servicer fails to take the
appropriate steps to perfect the security interest in a
manufactured home that secures a conditional sales
contract or installment loan agreement included in the
trust, the trustee may not have a first priority security
interest in that manufactured home. Moreover, the master
servicer will not amend the certificate of title to a manufactured
home to name the trustee as lienholder, note the trustee's interest
on the certificate of title or deliver the certificate of title
to the trustee. As a result, in some states
10
the assignment of the security interest in the manufactured
home to the trustee may not be perfected or may not be effective
against creditors of the master servicer or a bankruptcy trustee
in the event of a bankruptcy of the master servicer.
In addition, courts in many states have held that
manufactured homes may, in certain circumstances, become
subject to real estate title and recording laws. As a
result, the security interest in each manufactured home
could be rendered subordinate to the interests of other
parties claiming an interest in that manufactured home
under applicable state real estate law.
The failure to properly perfect a valid, first priority
security interest in a manufactured home that secures a
conditional sales contract or installment loan agreement
included in the trust could lead to losses that, to the
extent not covered by any credit enhancement, could
adversely affect the yield to maturity of the related
securities.
Multifamily loans generally
are riskier than single family
loans............................... Loans that are secured by first liens on rental apartment
buildings or projects containing five or more residential
units, together with loans that are secured by first liens
on mixed-use properties, shall not in the aggregate
constitute 10% or more of any pool by principal balance.
Multifamily loans are generally considered riskier than
single-family loans for the following reasons:
o Multifamily loans typically are much larger in
amount, which increases the risk represented by
the default of a single borrower.
o Repayment of a multifamily loan usually depends upon
successful management of the related mortgaged property.
o Changing economic conditions in particular markets
can affect the supply and demand of rental
units and the rents that those markets
will bear.
o Government regulations, including rental control
laws, may adversely affect future income from
mortgaged properties that are subject to
those regulations.
11
In addition, because individual multifamily loans often
are relatively large in amount, principal prepayments
resulting from defaults, casualties, condemnations or
breaches of representations and warranties may adversely
affect your yield.
Loans with balloon payments
may increase your risk of loss........ Certain loans may not be fully amortizing and may require a
substantial principal payment (a "balloon" payment) at
their stated maturity. Loans of this type involve greater
risk than fully amortizing loans since the borrower must
generally be able to refinance the loan or sell the
related property prior to the loan's maturity date. The
borrower's ability to do so will depend on such factors as
the level of available mortgage rates at the time of sale
or refinancing, the relative strength of the local housing
market, the borrower's equity in the property, the
borrower's general financial condition and tax laws.
If amounts in any pre-funding
account are not used to
purchase trust assets, you will
receive a prepayment on the
related securities........ The related prospectus supplement may provide that
the depositor transfer a specified amount into a
pre-funding account on the date the securities are issued.
In this case, the transferred funds may be used only to
acquire additional assets for the trust during a set
period after the issuance. Any amounts remaining in the
account at the end of the period will be distributed as a
prepayment of principal to the holders of the related
securities. The resulting prepayment could adversely
affect the yield on those securities.
Violations of applicable federal
laws may reduce or delay
mortgage loan collections... The loans may also be subject to federal laws relating to the
origination and underwriting. These laws
o require certain disclosures to the borrowers regarding the
terms of the loans;
o prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right
under the consumer credit protection act, in the extension
of credit;
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o regulate the use and reporting of information related to the
borrower's credit experience; and
o require additional application disclosures, limit
changes that may be made to the loan documents without the
borrower's consent and restrict a lender's ability to
declare a default or to suspend or reduce a borrower's credit
limit to certain enumerated events.
Loans may also be subject to federal laws that impose
additional disclosure requirements on creditors for
non-purchase money loans with high interest rates or high
up-front fees and charges. These laws can impose specific
statutory liabilities upon creditors that fail to comply
and may affect the enforceability of the related loans. In
addition, any assignee of the creditor (including the
trust) would generally be subject to all claims and
defenses that the borrower could assert against the
creditor, including the right to rescind the loan.
Loans relating to home improvement contracts may be
subject to federal laws that protect the borrower from
defective or incomplete work by a contractor. These laws
permit the borrower to withhold payment if the work does
not meet the quality and durability standards agreed to
between the borrower and the contractor. These laws have
the effect of subjecting any assignee of the seller
(including the trust) to all claims and defenses which the
borrower in a sale transaction could assert against the
seller of defective goods.
If certain provisions of these federal laws are violated,
the master servicer may be unable to collect all or part
of the principal or interest on the loans. The trust also
could be subject to damages and administrative
enforcement.
Proceeds of liquidated loans
generally are paid first to
providers of trust services... There is no assurance that the value of the trust assets for
any series of securities at any time will equal or exceed
the principal amount of the outstanding securities of that
series. If trust assets have to be sold because of an event of
default or otherwise, providers of services to the trust
(including the trustee, the master servicer and the credit
enhancer, if any) generally will be entitled to receive
the proceeds of the sale to the extent of their unpaid
fees and other amounts due them before any proceeds are
paid to investors. As a result, the
13
proceeds of such a sale may be insufficient to pay the full
amount of interest and principal of the related securities.
Mortgaged properties may be
subject to environmental risks
that could result in losses......... Federal, state and local laws and regulations impose a wide
range of requirements on activities that may affect the
environment, health and safety. In certain circumstances,
these laws and regulations impose obligations on owners or
operators of residential properties such as those that
secure the loans included in a trust. Failure to comply
with these laws and regulations can result in fines and
penalties that could be assessed against the trust as
owner of the related property.
In some states, a lien on the property due to
contamination has priority over the lien of an existing
mortgage. Further, a mortgage lender may be held liable as
an "owner" or "operator" for costs associated with the
release of petroleum from an underground storage tank
under certain circumstances. If the trust is considered
the owner or operator of a property, it will suffer losses
as a result of any liability imposed for environmental
hazards on the property.
You may have difficulty
selling your securities or
obtaining your desired price......... No market will exist for the securities before they are issued.
In addition, there can be no assurance that a secondary
market will develop following the issuance and sale of the
securities. Even if a secondary market does develop, you
may not be able to sell your securities when you wish to
or at the price you want.
Ratings of the securities do not
address all investment risks and
must be viewed with caution.......... Any class of securities issued under this prospectus and the
accompanying prospectus supplement will be rated in one of
the four highest generic rating categories of a nationally
recognized rating agency. A rating is based on the
adequacy of the value of the trust assets and any credit
enhancement for that class and reflects the rating
agency's assessment of how likely it is that holders of the
class of securities will receive the payments to which they are
entitled. A rating does not constitute an assessment of how likely
it is that principal prepayments on the loans will be made,
the degree to which the rate of prepayments might differ
from that originally anticipated or the likelihood of
early, optional
14
termination of the securities. You must
not view a rating as a recommendation to purchase, hold or
sell securities because it does not address the market
price or suitability of the securities for any particular
investor.
There is no assurance that any rating will remain in
effect for any given period of time or that the rating
agency will not lower or withdraw it entirely in the
future. The rating agency could lower or withdraw its
rating due to:
o any decrease in the adequacy of the value of the trust assets
or any related credit enhancement,
o an adverse change in the financial or other condition of a
credit enhancement provider, or
o a change in the rating of the credit enhancement provider's
long-term debt.
Book-entry registration may limit
your ability to sell securities
and delay your receipt of
payments......................... Limit on Liquidity of Securities. Securities issued in book-
entry form may have only limited liquidity in the resale
market, since investors may be unwilling to purchase
securities for which they cannot obtain physical
instruments.
Limit on Ability to Transfer or Pledge. Transactions in
book-entry securities can be effected only through The
Depository Trust Company, its participating organizations,
its indirect participants and certain banks. As a result,
your ability to transfer or pledge securities issued in
book-entry form may be limited.
Delays in Distributions. You may experience some delay in
the receipt of distributions on book-entry securities
since the distributions will be forwarded by the trustee
to DTC for DTC to credit the accounts of its participants.
In turn, these participants will thereafter credit the
distributions to your account either directly or
indirectly through indirect participants.
There is a Glossary of Terms beginning on page 164 of this prospectus
where you will find definitions of the capitalized terms used in this
prospectus.
15
The Trust Fund
The trust fund for each series of certificates will be held by the trustee
named in the related prospectus supplement for the benefit of the related
securityholders. Each trust fund will consist of one or more pools of the
following asset types:
o Single Family Loans,
o Home Equity Loans,
o Multifamily Loans,
o Manufactured Housing Contracts,
o Home Improvement Contracts,
o Agency Securities or
o Private Label Securities,
in each case as specified in the related prospectus supplement, as well as
payments relating to the assets and other accounts, obligations or agreements,
as specified in the related prospectus supplement.
Whenever the terms "pool," "certificates" and "notes" are used in this
prospectus, these terms are intended to apply, unless the context indicates
otherwise, to a discrete asset pool and the certificates representing undivided
interests in, or the notes secured by the assets of, a particular trust fund
consisting primarily of the loans in that pool. Similarly, the term
"pass-through rate" refers to the pass-through rate borne by the certificates of
a particular series, the term "interest rate" refers to the coupon borne by
notes of a particular series and the term "trust fund" refers to the related
trust fund.
Unless the context indicates otherwise, the term "loan" includes Single
Family Loans, Home Equity Loans, Multifamily Loans, Manufactured Housing
Contracts and Home Improvement Contracts. Unless the context indicates
otherwise, the term "underlying loan" refers to the Single Family Loans, Home
Equity Loans, Multifamily Loans, Manufactured Housing Contracts or Home
Improvement Contracts backing or securing Agency Securities or Private Label
Securities.
The securities will be entitled to payment from the assets of the related
trust fund or other assets pledged for the benefit of the securityholders as
specified in the related prospectus supplement. The securities will not be
entitled to payments from the assets of any other trust fund established by the
depositor.
The loans, Agency Securities and Private Label Securities will be acquired
by the applicable depositor, either directly or through affiliates, from sellers
and conveyed by that depositor to the trustee named in the related prospectus
supplement for the benefit of the holders of the securities of the related
series. Sellers may have originated or purchased the assets. Loans
16
acquired by the applicable depositor will have been originated principally in
accordance with the general underwriting criteria specified in this prospectus
under the heading "Loan Program--Underwriting Standards" and as more
specifically provided in a related prospectus supplement.
Because the securities issued by a trust will be secured by assets
transferred to that trust by one of the depositors you should construe all
references in this prospectus to the "depositor" as referring to the applicable
depositor that transfers assets to your trust under the applicable operative
documents.
The master servicer named in the related prospectus supplement will service
the trust fund assets, either directly or through sub-servicers, under a
servicing agreement for the related series of securities. If the securities are
certificates, the servicing agreement will be in the form of a pooling and
servicing agreement among the depositor, the master servicer and the trustee. If
the securities are notes, the servicing agreement generally will be between the
trustee and the master servicer.
The following sections contain a brief description of the assets expected
to be included in the trust funds. If specific information respecting the assets
is not known at the time the related series of securities initially is offered,
more general information of the nature described below will be provided in the
related prospectus supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the SEC within 15 days after the initial
issuance of the securities. A copy of the operative agreements with respect to
the related series of securities will be attached to the Form 8-K and will be
available for inspection at the corporate trust office of the trustee specified
in the related prospectus supplement. A schedule of the assets relating to the
series will be attached to the related servicing agreement delivered to the
trustee upon issuance of the securities.
The Mortgage Loans--General
The loans in each trust fund are secured by the related mortgaged
properties. Except in the case of Multifamily Loans, the related mortgaged
properties generally consist of detached or semi-detached one- to four-family
dwellings, town houses, rowhouses, individual units in condominiums, individual
units in planned unit developments and certain other dwelling units. In
addition, if the related prospectus supplement so provides, the mortgaged
properties may include mixed-use properties. Mixed-use properties consist of
structures principally containing residential units but also including other
space used for retail, professional and other commercial uses. Loans that are
secured by multifamily and mixed-use properties shall not in the aggregate
constitute 10% or more of any pool by principal balance.
The mortgaged properties may include vacation and second homes, investment
properties and leasehold interests as specified in the related prospectus
supplement. The mortgaged properties may be located in any one of the fifty
states, the District of Columbia, Guam, Puerto Rico or any other territory of
the United States. If a loan has a loan-to-value ratio or principal balance in
excess of a particular benchmark, it may be covered in whole or in part by a
primary mortgage insurance policy. If the loans in a pool are covered by this
type of policy, the related prospectus supplement will describe the existence,
extent and duration of the coverage.
17
Unless otherwise specified in the related prospectus supplement, all of the
loans in a pool will have monthly payments due on the first day of each month.
The payment terms of the mortgage loans to be included in a trust fund will be
described in the related prospectus supplement and may include one or more of
the following features or other features described in the related prospectus
supplement:
o Interest may be payable at
- a fixed rate,
- a rate that adjusts from time to time in relation to an index
that will be specified in the related prospectus supplement,
- a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate,
- a rate that otherwise varies from time to time, or
- a rate that is convertible from an adjustable rate to a fixed
rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of these limitations. Accrued
interest may be deferred and added to the principal of a loan for the
periods and under the circumstances specified in the related prospectus
supplement. A mortgage loan may provide for the payment of interest at a
rate lower than the specified interest rate borne by the loan for a period
of time or for the life of the loan, and the amount of any difference may
be contributed from funds supplied by the seller of the related mortgaged
property or another source.
o Principal may be
- payable on a level debt service basis to fully amortize the loan
over its term,
- calculated on the basis of an assumed amortization schedule that
is significantly longer than the original term to maturity or on
an interest rate that is different from the loan rate, or
- nonamortizing during all or a portion of the original term.
Payment of all or a substantial portion of the principal may be due on
maturity in the form of a "balloon" payment. Principal may include interest
that has been deferred and added to the principal balance of the loan.
o Monthly payments of principal and interest may
- be fixed for the life of the loan,
- increase over a specified period of time, or
18
- change from period to period.
Loans may include limits on periodic increases or decreases in the amount
of monthly payments and may include maximum or minimum amounts of monthly
payments.
o Prepayments of principal may be subject to a prepayment fee, which may
be fixed for the life of the loan or may decline over time, and may be
prohibited for the life of the loan or during any lockout periods.
Some loans may permit prepayments after expiration of the applicable
lockout period and may require the payment of a prepayment fee in
connection with any subsequent prepayment. Other loans may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The loans may include "due-on-sale"
clauses which permit the lender to demand payment of the entire loan
in connection with the sale or certain transfers of the related
mortgaged property. Other loans may be assumable by persons meeting
the then applicable underwriting standards of the related seller.
Each prospectus supplement will contain information, as of the date of the
prospectus supplement and to the extent then specifically known to the
depositor, with respect to the loans contained in the related pool, including
o the aggregate outstanding principal balance and the average
outstanding principal balance of the loans as of the applicable
cut-off date,
o the type of mortgaged property securing each loan,
o the original terms to maturity of the loans,
o the largest principal balance and the smallest principal balance of
the loans,
o the earliest origination date and latest maturity date of the loans,
o the aggregate principal balance of loans having loan-to-value ratios
at origination exceeding 80%,
o the loan rates or fixed percentage rates (APRs) or range of loan rates
or APRs borne by the loans, and
o the geographical location of the related mortgaged properties on a
state-by-state basis.
If specific information respecting the loans is not known to the depositor at
the time the related securities are initially offered, more general information
of the nature described in the immediately preceding sentence will be provided
in the related prospectus supplement, and specific information will be set forth
in the Form 8-K to be filed with the SEC within 15 days after issuance.
The loan-to-value ratio of a loan at any given time is the ratio,
expressed as a percentage, of the then outstanding principal balance of the loan
to the collateral value of the related mortgaged property. Unless otherwise
specified in the related prospectus supplement, the
19
collateral value of a mortgaged property, other than with respect to loans used
to refinance an existing loan, is the lesser of (a) the appraised value
determined in an appraisal obtained by the originator at origination of the loan
and (b) the sales price for the property. In the case of refinance loans, the
collateral value of the related mortgaged property is the appraised value of the
property determined in an appraisal obtained at the time of refinancing. Unless
otherwise specified in the related prospectus supplement, for purposes of
calculating the loan-to-value ratio of a Manufactured Housing Contract relating
to a new manufactured home, the collateral value is no greater than the sum of
o a fixed percentage of the list price of the unit actually billed by
the manufacturer to the dealer, net of freight to the dealer site but
including any accessories identified in the invoice (i.e., the
"manufacturer invoice price"),
o the actual cost of any accessories depending on the size of the unit,
and
o the cost of state and local taxes, filing fees and up to three years'
prepaid hazard insurance premiums.
Unless otherwise specified in the related prospectus supplement, the collateral
value of a used manufactured home is the least of the sales price, appraised
value, and National Automobile Dealers' Association book value plus prepaid
taxes and hazard insurance premiums. The appraised value of a manufactured home
is based upon the age and condition of the manufactured housing unit and the
quality and condition of the mobile home park in which it is situated, if
applicable.
The loan-to-value ratio of a Home Improvement Contract will be computed in
the manner described in the related prospectus supplement.
No assurance can be given that values of the mortgaged properties have
remained or will remain at their levels on the dates of origination of the
related loans. If the residential real estate market should experience an
overall decline in property values such that the outstanding principal balances
of the loans in a particular pool, and any secondary financing on the mortgaged
properties, become equal to or greater than the value of the mortgaged
properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions and other factors which may or may not
affect real property values may affect the timely payment by borrowers of
scheduled payments of principal and interest on the loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to any pool.
In the case of Multifamily Loans, these other factors could include
o excessive building resulting in an oversupply of rental housing stock,
o a decrease in employment reducing the demand for rental units in an
area,
o federal, state or local regulations and controls affecting rents,
prices of goods and energy,
20
o environmental restrictions,
o increasing labor and material costs, and
o the relative attractiveness to tenants of the mortgaged properties.
To the extent that losses are not covered by subordination provisions or
alternative arrangements, losses will be borne, at least in part, by the
securityholders of the securities of the related series.
Unless otherwise specified in the related prospectus supplement, the only
obligations of the depositor with respect to a series of certificates will be to
obtain certain representations and warranties from the related seller and to
assign to the trustee for that series of certificates the depositor's rights
with respect to those representations and warranties. See "Operative
Agreements--Assignment of Trust Fund Assets" in this prospectus.
The obligations of the master servicer with respect to the mortgage loans
will consist principally of:
o its contractual servicing obligations under the related servicing
agreement, including its obligation to enforce the obligations of the
sub-servicers or sellers, or both, as more fully described in this
prospectus under the headings "Mortgage Loan Program--Representations
by Sellers; Repurchases" and "Operative Agreements--Sub-Servicing by
Sellers" and "--Assignment of Trust Fund Assets"; and
o its obligation to make certain cash advances in the event of
delinquencies in payments with respect to the mortgage loans in the
amounts described in this prospectus under the heading "Description of
the Certificates--Advances".
The obligations of the master servicer to make advances may be subject to
limitations, to the extent provided in this prospectus and in the related
prospectus supplement.
Single Family Loans
Unless otherwise specified in the related prospectus supplement, Single
Family Loans will consist of loans or participations or other beneficial
interests in loans secured by mortgages or deeds of trust that create first
liens on one- to four-family residential properties. If specified in the related
prospectus supplement, Single Family Loans may include cooperative loans secured
by security interests in shares issued by private, non-profit, cooperative
housing corporations and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in the
cooperatives' buildings. If specified in the related prospectus supplement, the
assets of the related trust fund may include mortgage participation certificates
evidencing interests in Single Family Loans. Single Family Loans may be
conventional loans (loans that are not insured or guaranteed by any governmental
agency), loans insured by the Federal Housing Administration (FHA) or partially
guaranteed by the Veterans Administration (VA), as specified in the related
prospectus supplement. Unless otherwise specified in the related prospectus
supplement, Single Family Loans will have individual principal balances at
origination of not less than $25,000 and not more than $1,000,000, and original
terms to stated maturity of from ten to 40 years.
21
If specified in the related prospectus supplement, the mortgaged properties
securing Single Family Loans may include five- to eight-family residential
properties and small mixed-use properties. In the case of leasehold interests,
the term of the leasehold will exceed the scheduled maturity of the related
mortgage loan by at least five years, unless otherwise specified in the related
prospectus supplement.
Home Equity Loans
Unless otherwise specified in the related prospectus supplement, Home
Equity Loans will consist of closed-end and/or revolving home equity loans
generally secured by junior liens on one- to four-family residential properties.
As more fully described in the related prospectus supplement, interest on
each revolving credit line loan, excluding introductory rates offered from time
to time during promotional periods, is computed and payable monthly on the
average daily outstanding principal balance of the loan. Principal amounts on a
revolving credit line loan may be drawn down (up to the maximum amount specified
in the related prospectus supplement) or repaid from time to time, but may be
subject to a minimum periodic payment. Except to the extent provided in the
related prospectus supplement, the trust fund will not include any amounts
borrowed under a revolving credit line loan after the cut-off date. The full
amount of a closed-end loan is advanced at the inception of the loan and
generally is repayable in equal (or substantially equal) installments in an
amount necessary to fully amortize such loan at its stated maturity. Except to
the extent provided in the related prospectus supplement, the original terms to
stated maturity of closed-end loans will not exceed 360 months. Under certain
circumstances, under either a revolving credit line loan or a closed-end loan, a
borrower may choose an interest only payment option, in which event the borrower
is obligated to pay only the amount of interest which accrued on the loan during
the billing cycle. An interest only payment option may be available for a
specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance of
the loan.
Multifamily Loans
Multifamily Loans will consist of loans or participations or other
beneficial interests in loans secured by mortgages that create first liens on
rental apartment buildings or projects containing five or more residential
units. If specified in the related prospectus supplement, the mortgage assets of
a trust fund may include mortgage participation certificates evidencing
interests in Multifamily Loans. Multifamily Loans may be conventional loans or
FHA-insured loans, as specified in the related prospectus supplement. Unless
otherwise specified in the related prospectus supplement, all Multifamily Loans
will have original terms to stated maturity of not more than 40 years.
Multifamily Loans shall not constitute 10% or more of any pool by principal
balance.
Mortgaged properties securing Multifamily Loans may include high-rise,
mid-rise and garden apartments. Multifamily Loans may be secured by apartment
buildings owned by cooperatives. A cooperative owns all the apartment units in
its building and all common areas and is owned by tenant-stockholders who,
through ownership of stock, shares or membership
22
certificates in the corporation, receive proprietary leases or occupancy
agreements which confer exclusive rights to occupy specific apartments or units.
Generally, a tenant-stockholder of a cooperative must make a monthly payment to
the cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for the cooperative's mortgage loan, real property taxes,
maintenance expenses and other capital or ordinary expenses. Those payments are
in addition to any payments of principal and interest the tenant-stockholder
must make on any loans to the tenant-stockholder secured by his shares in the
cooperative. The cooperative will be directly responsible for building
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. A cooperative's ability to meet debt service obligations on
a Multifamily Loan, as well as all other operating expenses, will be dependent
in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the cooperative might control. Unanticipated expenditures may in some cases have
to be paid by special assessments on the tenant-stockholders.
Manufactured Housing Contracts
Manufactured Housing Contracts will consist of manufactured housing
conditional sales contracts and installment sales or loan agreements, each
secured by a manufactured home. Manufactured Housing Contracts may be
conventional, insured by the FHA or partially guaranteed by the VA, as specified
in the related prospectus supplement. Unless otherwise specified in the related
prospectus supplement, each Manufactured Housing Contract will be fully
amortizing and will bear interest at a fixed percentage rate or APR. Unless
otherwise specified in the related prospectus supplement, Manufactured Housing
Contracts will all have individual principal balances at origination of not less
than $10,000 and not more than $1,000,000 and original terms to stated maturity
of from five to 30 years.
When we use the term "manufactured home" in this prospectus, we mean, as
stated in 42 U.S.C. ss. 5402(6), "a structure, transportable in one or more
sections which, in the traveling mode, is eight body feet or more in width or
forty body feet or more in length or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of this paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under this chapter."
Each prospectus supplement will specify for the Manufactured Housing
Contracts contained in the related trust fund, among other things, the dates of
origination of the Manufactured Housing Contracts, the APRs on the Manufactured
Housing Contracts, the loan-to-value ratios of the Manufactured Housing
Contracts, the minimum and maximum outstanding principal balances as of the
cut-off date and the average outstanding principal balance, the outstanding
principal balances of the Manufactured Housing Contracts included in the related
trust fund, and the original maturities of the Manufactured Housing Contracts
and the last maturity date of any Manufactured Housing Contract.
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Home Improvement Contracts
Home Improvement Contracts are originated by home improvement contractors,
thrifts or commercial mortgage bankers in the ordinary course of business. As
specified in the related prospectus supplement, the Home Improvement Contracts
will either be unsecured or secured by mortgages or deeds of trust generally
creating a junior lien on the related mortgaged properties, or secured by
purchase money security interests in the financed home improvements. Unless
otherwise specified in the related prospectus supplement, the Home Improvement
Contracts will be fully amortizing and may have fixed interest rates or
adjustable interest rates and may provide for other payment characteristics as
described in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the home
improvements securing the Home Improvement Contracts will include, but are not
limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels.
Agency Securities
Government National Mortgage Association or Ginnie Mae. The Government
National Mortgage Association (Ginnie Mae) is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. Section 306(g) of Title II of the National Housing Act of 1934, as
amended, authorizes Ginnie Mae to guarantee the timely payment of the principal
of and interest on certificates which represent an interest in a pool of FHA
loans, which are mortgage loans insured by the FHA under the National Housing
Act or under Title V of the Housing Act of 1949, or VA loans, which are mortgage
loans partially guaranteed by the VA under the Servicemen's Readjustment Act of
1944, as amended, or Chapter 37 of Title 38 of the United States Code.
Section 306(g) of the National Housing Act provides that "the full faith
and credit of the United States is pledged to the payment of all amounts which
may be required to be paid under any guaranty under this subsection." In order
to meet its obligations under any such guarantee, Ginnie Mae may, under Section
306(d) of the National Housing Act, borrow from the United States Treasury in an
unlimited amount which is at any time sufficient to enable Ginnie Mae to perform
its obligations under its guarantee.
Ginnie Mae Certificates. Each Ginnie Mae Certificate held in a trust fund
will be a "fully modified pass-through" mortgage-backed certificate issued and
serviced by a Ginnie Mae issuer that is a mortgage banking company or other
financial concern approved by Ginnie Mae or approved by Fannie Mae as a
seller-servicer of FHA loans and/or VA loans. The Ginnie Mae Certificates may be
either Ginnie Mae I Certificates issued under the Ginnie Mae I program or Ginnie
Mae II Certificates issued under the Ginnie Mae II program. The mortgage loans
underlying the Ginnie Mae Certificates will consist of FHA loans and/or VA
loans. Each such mortgage loan is secured by a one- to four-family or
multifamily residential property. Ginnie Mae will approve the issuance of each
Ginnie Mae Certificate in accordance with a guaranty agreement between Ginnie
Mae and the Ginnie Mae issuer. Pursuant to its guaranty agreement, a Ginnie Mae
issuer will be required to advance its own funds in order to make timely
payments of all amounts due on each Ginnie Mae Certificate, even if the payments
received by the Ginnie
24
Mae issuer on the underlying FHA loans or VA loans are less than the amounts due
on the related Ginnie Mae Certificate.
The full and timely payment of principal of and interest on each Ginnie Mae
Certificate will be guaranteed by Ginnie Mae, which obligation is backed by the
full faith and credit of the United States. Each Ginnie Mae Certificate will
have an original maturity of not more than 30 years, but may have original
maturities of substantially less than 30 years. Each Ginnie Mae Certificate will
be based on and backed by a pool of FHA loans or VA loans secured by one- to
four-family residential properties and will provide for the payment by or on
behalf of the Ginnie Mae issuer to the registered holder of the Ginnie Mae
Certificate scheduled monthly payments of principal and interest equal to the
registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
the Ginnie Mae Certificate, less the applicable servicing and guarantee fee
which together equal the difference between the interest on the FHA Loan or VA
Loan and the pass-through rate on the Ginnie Mae Certificate. In addition, each
payment will include proportionate pass-through payments of any prepayments of
principal on the FHA loans or VA loans underlying the Ginnie Mae Certificate and
liquidation proceeds in the event of a foreclosure or other disposition of any
such FHA loans or VA loans.
If a Ginnie Mae issuer is unable to make the payments on a Ginnie Mae
Certificate as they become due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make the payments. Upon notification and request, Ginnie Mae will
make payments directly to the registered holder of the Ginnie Mae Certificate.
In the event no payment is made by a Ginnie Mae issuer and the Ginnie Mae issuer
fails to notify and request Ginnie Mae to make the payment, the holder of the
Ginnie Mae Certificate will have recourse only against Ginnie Mae to obtain
payment. The trustee or its nominee, as registered holder of the Ginnie Mae
Certificates held in a trust fund, will have the right to proceed directly
against Ginnie Mae under the terms of the guaranty agreements relating to those
Ginnie Mae Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular Ginnie Mae I Certificate must
have the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on a Ginnie Mae
I Certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying the Ginnie Mae I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular Ginnie Mae II Certificate may have
per annum interest rates that vary from one another by up to one percentage
point. The interest rate on each Ginnie Mae II Certificate will be between
one-half percentage point and one and one-half percentage points lower than the
highest interest rate on the mortgage loans included in the pool of mortgage
loans underlying the Ginnie Mae II Certificate (except for pools of mortgage
loans secured by manufactured homes).
Regular monthly installment payments on each Ginnie Mae Certificate held in
a trust fund will be comprised of interest due as specified on the Ginnie Mae
Certificate plus the scheduled principal payments on the FHA loans or VA loans
underlying the Ginnie Mae Certificate due on the first day of the month in which
the scheduled monthly installments on the
25
Ginnie Mae Certificate are due. Regular monthly installments on each Ginnie
Mae Certificate are required to be paid to the trustee as registered holder by
the 15th day of each month in the case of a Ginnie Mae I Certificate, and are
required to be mailed to the trustee by the 20th day of each month in the case
of a Ginnie Mae II Certificate. Any principal prepayments on any FHA loans or
VA loans underlying a Ginnie Mae Certificate held in a trust fund or any other
early recovery of principal on such loan will be passed through to the trustee
as the registered holder of the Ginnie Mae Certificate.
Ginnie Mae Certificates may be backed by graduated payment mortgage loans
or by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loans.
Payments due the registered holders of Ginnie Mae Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other Ginnie Mae Certificates and will include amounts to
be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of such mortgage loans, will be less than the
amount of stated interest on such mortgage loans. The interest not so paid will
be added to the principal of the graduated payment mortgage loans and, together
with interest thereon, will be paid in subsequent years. The obligations of
Ginnie Mae and of a Ginnie Mae Issuer will be the same irrespective of whether
the Ginnie Mae Certificates are backed by graduated payment mortgage loans or
"buydown" mortgage loans. No statistics comparable to the FHA's prepayment
experience on level payment, non-"buydown" mortgage loans are available in
respect of graduated payment or "buydown" mortgages. Ginnie Mae Certificates
related to a series of certificates may be held in book-entry form.
If specified in a prospectus supplement, Ginnie Mae Certificates may be
backed by multifamily mortgage loans having the characteristics specified in the
prospectus supplement.
Federal Home Loan Mortgage Corporation or Freddie Mac. The Federal Home
Loan Mortgage Corporation (Freddie Mac) is a shareholder-owned, government
sponsored enterprise created pursuant to Title III of the Emergency Home Finance
Act of 1970, as amended. Freddie Mac was established primarily for the purpose
of increasing the availability of mortgage credit for the financing of urgently
needed housing. It seeks to provide an enhanced degree of liquidity for
residential mortgage investments primarily by assisting in the development of
secondary markets for conventional mortgages. The principal activity of Freddie
Mac currently consists of the purchase of first lien conventional mortgage
loans, or participation interests in the mortgage loans, and the sale of the
mortgage loans or participations so purchased in the form of mortgage
securities, primarily Freddie Mac Certificates. Freddie Mac is confined to
purchasing, so far as practicable, mortgage loans that it deems to be of such
quality, type and class as to meet generally the purchase standards imposed by
private institutional mortgage investors.
Freddie Mac Certificates. Each Freddie Mac Certificate represents an
undivided interest in a pool of mortgage loans that may consist of first lien
conventional loans, FHA loans or VA loans. Freddie Mac Certificates are sold
under the terms of a mortgage participation certificate agreement. A Freddie Mac
Certificate may be issued under either Freddie Mac's Cash Program or its
Guarantor Program.
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Mortgage loans underlying the Freddie Mac Certificates held by a trust fund
will consist of mortgage loans with original terms to maturity of from ten to 40
years. Each such mortgage loan must meet the applicable standards set forth in
the legislation that established Freddie Mac. The pool of loans backing a
Freddie Mac Certificate may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another Freddie Mac pool. Under the Guarantor Program, however, the
pool of loans backing a Freddie Mac Certificate may include only whole loans or
participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable certificate rate on the registered holder's pro
rata share of the unpaid principal balance outstanding on the underlying
mortgage loans represented by that Freddie Mac Certificate, whether or not
received. Freddie Mac also guarantees to each registered holder of a Freddie Mac
Certificate that the holder will collect all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the related prospectus supplement for a series of certificates, guarantee the
timely payment of scheduled principal. Under Freddie Mac's Gold PC Program,
Freddie Mac guarantees the timely payment of principal based on the difference
between the pool factor, published in the month preceding the month of
distribution, and the pool factor published in such month of distribution.
Pursuant to its guarantees, Freddie Mac indemnifies holders of Freddie Mac
Certificates against any diminution in principal by reason of charges for
property repairs, maintenance and foreclosure. Freddie Mac may remit the amount
due on account of its guaranty of collection of principal at any time after
default on an underlying mortgage loan, but not later than (i) 30 days following
foreclosure sale, (ii) 30 days following payment of the claim by any mortgage
insurer or (iii) 30 days following the expiration of any right of redemption,
whichever occurs later, but in any event no later than one year after demand has
been made upon the mortgagor for accelerated payment of principal. In taking
actions regarding the collection of principal after default on the mortgage
loans underlying Freddie Mac Certificates, including the timing of demand for
acceleration, Freddie Mac reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for Freddie Mac to
determine that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and Freddie Mac has not adopted standards which
require that the demand be made within any specified period.
Freddie Mac Certificates are not guaranteed by the United States or by
any Federal Home Loan Bank and do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The obligations of Freddie Mac
under its guarantee are obligations solely of Freddie Mac and are not backed by,
or entitled to, the full faith and credit of the United States. If Freddie Mac
were unable to satisfy such obligations, distributions to holders of Freddie Mac
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac Certificates would be affected by delinquent payments and defaults
on such mortgage loans.
Registered holders of Freddie Mac Certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial repayments of principal and
27
principal received by Freddie Mac by virtue of condemnation, insurance,
liquidation or foreclosure, and repurchases of the mortgage loans by Freddie Mac
or the seller thereof. Freddie Mac is required to remit each registered Freddie
Mac Certificateholder's pro rata share of principal payments on the underlying
mortgage loans, interest at the Freddie Mac pass-through rate and any other sums
such as prepayment fees, within 60 days of the date on which those payments are
deemed to have been received by Freddie Mac.
Under Freddie Mac's Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a Freddie Mac Certificate
may exceed the pass-through rate on the Freddie Mac Certificate. Under this
program, Freddie Mac purchases groups of whole mortgage loans from sellers at
specified percentages of their unpaid principal balances, adjusted for accrued
or prepaid interest, which, when applied to the interest rate of the mortgage
loans and participations purchased, results in the yield (expressed as a
percentage) required by Freddie Mac. The required yield, which includes a
minimum servicing fee retained by the servicer, is calculated using the
outstanding principal balance. The range of interest rates on the mortgage loans
and participations in a particular Freddie Mac pool under the Cash Program will
vary since mortgage loans and participations are purchased and assigned to a
Freddie Mac pool based upon their yield to Freddie Mac rather than on the
interest rate on the underlying mortgage loans. Under Freddie Mac's Guarantor
Program, the pass-through rate on a Freddie Mac Certificate is established based
upon the lowest interest rate on the underlying mortgage loans, minus a minimum
servicing fee and the amount of Freddie Mac's management and guaranty income as
agreed upon between the related seller and Freddie Mac.
Freddie Mac Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a Freddie Mac
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser becomes a registered
holder of the Freddie Mac Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to Freddie Mac Certificates sold by Freddie
Mac, and makes payments of principal and interest each month to the registered
Freddie Mac Certificateholders in accordance with the holders' instructions.
Federal National Mortgage Association or Fannie Mae. The Federal National
Mortgage Association (Fannie Mae) is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act, as amended. Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder-owned and
privately-managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. Fannie Mae acquires funds to purchase mortgage loans from many capital
market investors that may not ordinarily invest in mortgages, thereby expanding
the total amount of funds available for housing. Operating nationwide, Fannie
Mae helps to redistribute mortgage funds from capital-surplus to capital-short
areas.
28
Fannie Mae Certificates. Fannie Mae Certificates are Guaranteed Mortgage
Pass-Through Certificates representing fractional undivided interests in a pool
of mortgage loans formed by Fannie Mae. Each mortgage loan must meet the
applicable standards of the Fannie Mae purchase program. Mortgage loans
comprising a pool are either provided by Fannie Mae from its own portfolio or
purchased pursuant to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae Certificates held by a trust fund will
consist of conventional mortgage loans, FHA loans or VA loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a Fannie Mae Certificate are expected to be from eight to 15
years or from 20 to 40 years. The original maturities of substantially all of
the fixed rate level payment FHA loans or VA loans are expected to be 30 years.
Mortgage loans underlying a Fannie Mae Certificate may have annual interest
rates that vary by as much as two percentage points from one another. The rate
of interest payable on a Fannie Mae Certificate is equal to the lowest interest
rate of any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and Fannie Mae's guaranty fee.
Under a regular servicing option pursuant to which the mortgagee or each other
servicer assumes the entire risk of foreclosure losses, the annual interest
rates on the mortgage loans underlying a Fannie Mae Certificate will be between
25 basis points and 250 basis points greater than is its annual pass-through
rate. Under a special servicing option pursuant to which Fannie Mae assumes the
entire risk for foreclosure losses, the annual interest rates on the mortgage
loans underlying a Fannie Mae Certificate will generally be between 30 basis
points and 255 basis points greater than the annual Fannie Mae Certificate
pass-through rate. If specified in the related prospectus supplement, Fannie Mae
Certificates may be backed by adjustable rate mortgages.
Fannie Mae guarantees to each registered holder of a Fannie Mae Certificate
that it will distribute amounts representing the holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by the Fannie Mae Certificate on the underlying mortgage loans,
whether or not received, and the holder's proportionate share of the full
principal amount of any foreclosed or other finally liquidated mortgage loan,
whether or not such principal amount is actually recovered. The obligations of
Fannie Mae under its guarantees are obligations solely of Fannie Mae and are not
backed by, or entitled to, the full faith and credit of the United States.
Although the Secretary of the Treasury of the United States has discretionary
authority to lend Fannie Mae up to $2.25 billion outstanding at any time,
neither the United States nor any of its agencies or instrumentalities is
obligated to finance Fannie Mae's operations or to assist Fannie Mae in any
other manner. If Fannie Mae were unable to satisfy its obligations,
distributions to holders of Fannie Mae Certificates would consist solely of
payments and other recoveries on the underlying mortgage loans and, accordingly,
monthly distributions to holders of Fannie Mae Certificates would be affected by
delinquent payments and defaults on such mortgage loans.
Fannie Mae Certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae Certificates backed by
pools containing graduated payment mortgage loans or mortgage loans secured by
multifamily projects) are available in book-entry form only. Distributions of
principal and interest on each Fannie Mae Certificate will be made by Fannie Mae
on the 25th day of each month to the persons in whose name the Fannie
29
Mae Certificate is entered in the books of the Federal Reserve Banks (or
registered on the Fannie Mae Certificate register in the case of fully
registered Fannie Mae Certificates) as of the close of business on the last day
of the preceding month. With respect to Fannie Mae Certificates issued in
book-entry form, distributions will be made by wire and, with respect to fully
registered Fannie Mae Certificates, distributions will be made by check.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one
or more stripped mortgage-backed securities as described in this prospectus and
in the related prospectus supplement. Each Agency Security of this type will
represent an undivided interest in all or part of the principal distributions -
but not the interest distributions, or the interest distributions - but not the
principal distributions, or in some specified portion of the principal and
interest distributions on certain Freddie Mac, Fannie Mae or Ginnie Mae
Certificates. The underlying securities will be held under a trust agreement by
Freddie Mac, Fannie Mae or Ginnie Mae, each as trustee, or by another trustee
named in the related prospectus supplement. Freddie Mac, Fannie Mae or Ginnie
Mae will guaranty each stripped Agency Security to the same extent as such
entity guarantees the underlying securities backing the stripped Agency
Security, unless otherwise specified in the related prospectus supplement.
Other Agency Securities. If specified in the related prospectus supplement,
a trust fund may include other mortgage pass-through certificates issued or
guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae. The characteristics of any
such mortgage pass-through certificates will be described in the related
prospectus supplement. If specified in the related prospectus supplement, a
combination of different types of Agency Securities may be held in a trust fund.
Private Label Securities
General. Private Label Securities or PLS (i.e., private mortgage-backed or
asset-backed securities) may consist of
o pass-through certificates or participation certificates evidencing an
undivided interest in a pool of Single Family Loans, Home Equity
Loans, Multifamily Loans, Manufactured Housing Contracts or Home
Improvement Contracts,
o collateralized mortgage obligations secured by Single Family Loans,
Home Equity Loans, Multifamily Loans, Manufactured Housing Contracts
or Home Improvement Contracts, or
o other Private Label Securities.
Private Label Securities may include stripped mortgage-backed securities
representing an undivided interest in all or a part of the principal
distributions - but not the interest distributions, or the interest
distributions - but not the principal distributions, or in some specified
portion of the principal and interest distributions on certain mortgage loans.
The Private Label Securities will have been issued pursuant to a pooling and
servicing agreement, an indenture or similar agreement. Unless otherwise
specified in the related prospectus supplement, the seller/servicer of the
underlying loans will have entered into a PLS Agreement with a trustee under
that agreement. The PLS trustee or its agent, or a custodian, will possess the
mortgage loans underlying the Private Label Securities. The loans underlying the
Private Label Securities will
30
be serviced by a PLS servicer directly or by one or more subservicers which may
be subject to the supervision of the PLS servicer. Unless otherwise specified in
the related prospectus supplement, the PLS servicer will be a Fannie Mae- or
Freddie Mac-approved servicer and, if FHA loans underlie the Private Label
Securities, approved by HUD as an FHA mortgagee.
The PLS issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending, a public agency or
instrumentality of a state, local or federal government, or a limited purpose
corporation organized for the purpose of, among other things, establishing
trusts and acquiring and selling housing loans to trusts and selling beneficial
interests in trusts. If specified in the related prospectus supplement, the PLS
issuer may be an affiliate of the depositor. The obligations of the PLS issuer
will generally be limited to certain representations and warranties with respect
to the assets it conveys to the related trust. Unless otherwise specified in the
related prospectus supplement, the PLS issuer will not have guaranteed any of
the assets conveyed to the related trust or any of the Private Label Securities
issued under the PLS agreement. Additionally, although the loans underlying the
Private Label Securities may be guaranteed by an agency or instrumentality of
the United States, the Private Label Securities themselves will not be so
guaranteed, unless the related prospectus supplement specifies otherwise.
Distributions of principal and interest will be made on the Private Label
Securities on the dates specified in the related prospectus supplement. The
Private Label Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Label Securities by the PLS trustee or
the PLS servicer. The PLS issuer or the PLS servicer may have the right to
repurchase assets underlying the Private Label Securities after a particular
date or under other circumstances specified in the related prospectus
supplement.
Underlying Loans. The loans underlying the PMBS may consist of fixed rate,
level payment, fully amortizing loans or graduated payment mortgage loans,
buydown loans, adjustable rate mortgage loans, or loans having balloon or other
special payment features. The loans may be secured by one- to four-family
residential property, small mixed-use property, five- to eight-family
residential property, multifamily property, manufactured homes or by an
assignment of the proprietary lease or occupancy agreement relating to a
specific dwelling within a cooperative and the related shares issued by the
cooperative. Except as otherwise specified in the related prospectus supplement,
the loans will have the following characteristics:
o no loan will have had a loan-to-value ratio at origination in excess
of 95%;
o each Single Family Loan secured by a mortgaged property having a
loan-to-value ratio in excess of 80% at origination will be covered by
a primary mortgage insurance policy;
o each loan will have had an original term to stated maturity of not
less than five years and not more than 40 years;
31
o no loan that was more than 89 days delinquent as to the payment of
principal or interest will have been eligible for inclusion in the
assets under the related PLS agreement;
o each loan (other than a cooperative loan) will be required to be
covered by a standard hazard insurance policy (which may be a blanket
policy); and
o each loan (other than a cooperative loan or a Manufactured Housing
Contract) will be covered by a title insurance policy.
Credit Support Relating to Private Label Securities. Credit support in the
form of reserve funds, subordination of other private label securities issued
under the PLS agreement, letters of credit, surety bonds, insurance policies or
other types of credit support may be provided with respect to the loans
underlying the Private Label Securities or with respect to the Private Label
Securities themselves.
Additional Information. If the trust fund for a series of securities
includes Private Label Securities, the related prospectus supplement will
specify
o the aggregate approximate principal amount and type of Private Label
Securities to be included in the trust fund,
o the maximum original term-to-stated maturity of the PLS,
o the weighted average term-to-stated maturity of the PLS,
o the pass-through or certificate rate of the PLS,
o the weighted average pass-through or interest rate of the PLS,
o the PLS issuer, the PLS servicer (if other than the PLS issuer) and
the PLS trustee,
o certain characteristics of any credit support such as reserve funds,
insurance policies, surety bonds, letters of credit or guaranties
relating to the loans underlying the Private Label Securities
themselves,
o the terms on which the loans underlying the PLS may, or are required
to, be purchased prior to their stated maturity or the stated maturity
of the PLS and
o the terms on which mortgage loans may be substituted for those
originally underlying the PLS.
In addition, the related prospectus supplement will provide information
about the loans which comprise the underlying assets of the Private Label
Securities, including
o the payment features of the mortgage loans,
o the approximate aggregate principal balance, if known, of underlying
loans insured or guaranteed by a governmental entity,
32
o the servicing fee or range of servicing fees with respect to the
loans, and
o the minimum and maximum stated maturities of the underlying loans at
origination.
Incorporation of Certain Information by Reference
We incorporate in this prospectus by reference all documents and reports
filed by the applicable depositor, Greenwich Capital Acceptance, Inc. (GCA) or
Financial Acceptance Securities Corp. (FASCO), with respect to a trust fund
pursuant to Section 13(a), 14 or 15(d) of the Securities Exchange Act of 1934,
as amended, prior to the termination of the offering of certificates evidencing
interests in that trust fund. Upon request by any person to whom this prospectus
is delivered in connection with the offering of one or more classes of
certificates, the applicable depositor will provide without charge a copy of any
such documents and/or reports incorporated herein by reference, in each case to
the extent that the documents or reports relate to those classes of
certificates, other than the exhibits to the documents (unless the exhibits are
specifically incorporated by reference in such documents). Requests to the
depositors should be directed in writing to: Paul D. Stevelman, Greenwich
Capital Acceptance, Inc. or Financial Acceptance Securities Corp. as applicable,
600 Steamboat Road, Greenwich, Connecticut 06830, telephone number (203)
625-2700. Each depositor has determined that its financial statements are not
material to the offering of any of the securities.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, DC 20549. Investors may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains a website at http:\\www.sec.gov
containing reports, proxy and information statements and other information
regarding issuers, including each trust fund, that file electronically with the
SEC.
Use of Proceeds
The net proceeds to be received from the sale of the securities will be
applied by the applicable depositor to the purchase of trust fund assets or will
be used by the depositor for general corporate purposes. The depositors expect
to sell securities in series from time to time, but the timing and amount of
offerings of securities will depend on a number of factors, including the volume
of assets acquired by the depositors, prevailing interest rates, availability of
funds and general market conditions.
The Depositors
Greenwich Capital Acceptance, Inc. is a Delaware corporation organized on
April 23, 1987, and Financial Asset Securities Corp. is a Delaware corporation
organized on August 2, 1995, in each case for the limited purpose of acquiring,
owning and transferring mortgage assets and selling interests in those assets or
bonds secured by those assets. Each ofthe depositors is an indirect, limited
purpose finance subsidiary of Royal Bank of Scotland Plc and an affiliate of
Greenwich Capital Markets, Inc. Greenwich Capital Markets, Inc. is a registered
broker-dealer engaged in the U.S. government securities market and related
capital markets business. Each of
33
the depositors maintains its principal office at 600 Steamboat Road,
Greenwich, Connecticut 06830 and the telephone number is (203) 625-2700.
Neither the depositors nor any of their affiliates will ensure or guarantee
distributions on the securities of any series.
Loan Program
The depositor will have purchased the loans, either directly or through
affiliates, from sellers. Unless otherwise specified in the related prospectus
supplement, the loans acquired by the depositor will have been originated in
accordance with the underwriting criteria specified under the heading
"--Underwriting Standards" below.
Underwriting Standards
Unless otherwise specified in the related prospectus supplement, each
seller will represent and warrant that all the loans that it originated and/or
sold to the depositor or one of the depositor's affiliates will have been
underwritten in accordance with standards consistent with those utilized by
institutional lenders generally during the period of origination for similar
types of loans. As to any loan insured by the FHA or partially guaranteed by the
VA, the related seller will represent that it has complied with the underwriting
policies of the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
a prospective borrower's credit standing and repayment ability, and the value
and adequacy of the mortgaged property as collateral. In general, a prospective
borrower applying for a loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information,
including the principal balance and payment history of any senior lien loan on
the related mortgaged property. As part of the description of the borrower's
financial condition, the borrower generally is required to provide a current
list of assets and liabilities and a statement of income and expenses, as well
as an authorization to apply for a credit report which summarizes the borrower's
credit history with local merchants and lenders and any record of bankruptcy.
Generally, an employment verification is obtained from an independent source,
which is typically the borrower's employer. The verification reports the
borrower's length of employment with its employer, current salary, and
expectations of continued employment. If a prospective borrower is
self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has demand or savings accounts.
Underwriting standards which pertain to the creditworthiness of borrowers
seeking Multifamily Loans will be described in the related prospectus
supplement.
In determining the adequacy of the mortgaged property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good repair and that
construction, if new, has been completed. The appraisal generally is based on
the market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the subject home. In
connection with a Manufactured Housing Contract, the appraisal is based on
recent sales of comparable
34
manufactured homes and, when deemed applicable, a replacement cost analysis
based on the cost of a comparable manufactured home. In connection with a
Multifamily Loan, the appraisal must specify whether an income analysis, a
market analysis or a cost analysis was used. An appraisal employing the income
approach to value analyzes a multifamily project's cashflow, expenses,
capitalization and other operational information in determining the property's
value. The market approach to value focuses its analysis on the prices paid for
the purchase of similar properties in the multifamily project's area, with
adjustments made for variations between these other properties and the
multifamily project being appraised. The cost approach calls for the appraiser
to make an estimate of land value and then determine the current cost of
reproducing the building less any accrued depreciation. In any case, the value
of the property being financed, as indicated by the appraisal, must be such that
it currently supports, and is anticipated to support in the future, the
outstanding loan balance.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available
o to meet the borrower's monthly obligations on the proposed loan,
generally determined on the basis of the monthly payments due in the
year of origination, and other expenses related to the mortgaged
property such as property taxes and hazard insurance, and
o to meet monthly housing expenses and other financial obligations and
monthly living expenses.
The underwriting standards applied by sellers, particularly with respect to
the level of loan documentation and the borrower's income and credit history,
may be varied in appropriate cases where factors such as low loan-to-value
ratios or other favorable credit exist.
In the case of a loan secured by a leasehold interest in real property, the
title to which is held by a third-party lessor, the related seller will
represent and warrant, among other things, that the remaining term of the lease
and any sublease is at least five years longer than the remaining term of the
related mortgage note.
Some types of loans which may be included in the pools may involve
additional uncertainties not present in traditional types of loans. For example,
loans may provide for escalating or variable payments by the borrower. These
types of loans are generally underwritten on the basis of a judgment that
borrowers will have the ability to make the monthly payments required initially.
In some instances, however, their incomes may not be sufficient to permit
continued loan payments as payments increase. These types of loans may also be
underwritten primarily upon the basis of loan-to-value ratios or other favorable
credit factors.
Qualifications of Sellers
Unless otherwise specified in the related prospectus supplement, each
seller will be required to satisfy the qualifications set forth in the following
sentence. Each seller must
35
o be an institution experienced in originating and servicing loans of
the type contained in the related pool in accordance with accepted
practices and prudent guidelines,
o maintain satisfactory facilities to originate and service the loans,
o be a seller/servicer approved by either Fannie Mae or Freddie Mac, and
o be a mortgagee approved by the FHA or an institution the deposit
accounts in which are insured by the Federal Deposit Insurance
Corporation (FDIC).
Representations by Sellers; Repurchases or Substitutions
Each seller will have made representations and warranties in respect of the
loans sold by that seller and evidenced by a series of securities. These
representations and warranties, unless otherwise provided in the related
prospectus supplement, generally include the following:
o Except in the case of a cooperative loan, each Single Family Loan,
Home Equity Loan or Multifamily Loan has a title insurance policy,
required hazard insurance policy and any required primary mortgage
insurance policy, each of which was in effect at the origination of
the loan and remained in effect on the date that the loan was
purchased from the seller by or on behalf of the depositor. If the
related mortgaged property is located in an area where title insurance
policies are generally not available, an attorney's certificate of
title may be substituted.
o The seller had good title to each loan and no loan was subject to
offsets, defenses, counterclaims or rights of rescission except to the
extent that any specified buydown agreement may forgive certain
indebtedness of a borrower.
o Each loan constituted a valid lien on, or a perfected security
interest with respect to, the related mortgaged property, subject only
to permissible title insurance exceptions, if applicable, and certain
other exceptions described in the related servicing agreement.
o The mortgaged property was free from damage and was in acceptable
condition.
o There were no delinquent tax or assessment liens against the mortgaged
property.
o No required payment on a loan was delinquent more than 30 days.
o Each loan was made in compliance with, and is enforceable under, all
applicable local, state and federal laws and regulations, in all
material respects.
If specified in the related prospectus supplement, the representations and
warranties of a seller in respect of a loan will be made not as of the related
cut-off date but as of the date on which the seller sold the loan to the
depositor or one of its affiliates. Under these circumstances, a substantial
period of time may have elapsed between that date and the date of initial
issuance of the series of securities evidencing an interest in, or secured by,
the loan. Since the representations and warranties of a seller do not address
events that may occur following the sale
36
of the loan by that seller, the repurchase obligation described in the following
paragraph will not arise if the relevant event that would otherwise have given
rise to the obligation occurs after the date when the seller sold the loan to
the depositor or one of its affiliates. However, the depositor will not include
any loan in a trust fund if anything has come to the depositor's attention that
would cause it to believe that the representations and warranties of the related
seller regarding that loan will not be accurate and complete in all material
respects as of the date when the related series of securities is issued. If the
master servicer is also a seller of loans for a particular series, these
representations will be in addition to the representations and warranties made
by the master servicer in its capacity as master servicer.
Unless otherwise specified in the related prospectus supplement, the seller
will make certain representations and warranties in connection with Manufactured
Housing Contracts included in the trust with respect to the enforceability of
coverage under any related insurance policy or hazard insurance policy. The
seller, if required by the rating agencies rating the related issue of
securities, will obtain a surety bond, guaranty, letter of credit or other
acceptable instrument to support its repurchase or substitution obligation
specified in the immediately following paragraph.
The master servicer, or the trustee if the master servicer is the seller,
will promptly notify the relevant seller of any breach of any representation or
warranty made by that seller in respect of a loan which materially and adversely
affects the interests of the securityholders in the loan. Unless otherwise
specified in the related prospectus supplement, if the seller cannot cure the
breach within 90 days after notice from the master servicer or the trustee, as
the case may be, then the seller will be obligated either
o to repurchase that loan from the trust fund at a purchase price equal
to 100% of the loan's unpaid principal balance as of the date of the
repurchase plus accrued interest thereon to the first day of the month
following the month of repurchase at the related loan rate, less any
advances made by the seller or amount payable as related servicing
compensation if the seller is the master servicer, or
o substitute for that loan a replacement loan that satisfies the
requirements set forth in the related prospectus supplement.
This repurchase or substitution obligation will constitute the sole remedy
available to the securityholders or the trustee for a breach of representation
or warranty by the seller.
Except in those cases in which the master servicer is the seller, the
master servicer will be required under the applicable servicing agreement to
enforce this obligation for the benefit of the trustee and the related
securityholders, following the practices it would employ in its good faith
business judgment were it the owner of the loan.
If a REMIC election is to be made with respect to a trust fund, unless
otherwise provided in the related prospectus supplement, the master servicer or
a holder of the related residual certificate will be obligated to pay any
prohibited transaction tax which may arise in connection with a repurchase or
substitution. Unless otherwise specified in the related prospectus supplement,
the master servicer will be entitled to reimbursement for any such payment from
the
37
assets of the related trust fund or from any holder of the related residual
certificate. See "Description of the Securities--General" in this prospectus.
Neither the depositor nor the master servicer - unless the master servicer
is the seller - will be obligated to purchase a loan if the seller defaults on
its obligation to do so. No assurance can be given that sellers will carry out
their respective repurchase or substitution obligations with respect to the
loans. However, to the extent that a breach of a representation and warranty of
a seller may also constitute a breach of a representation made by the master
servicer, the master servicer may have a repurchase or substitution obligation
as described under the heading "Operative Agreements--Assignment of Trust Fund
Assets" in this prospectus.
Description of the Securities
Either Greenwich Capital Acceptance, Inc. or Financial Asset Securities
Corp., as depositor, will establish a trust fund for each series of securities.
A particular series of securities will consist of mortgage-backed or
asset-backed certificates or notes or both certificates and notes.
Each series of certificates will be issued pursuant to a pooling and
servicing agreement or a trust agreement, dated as of the related cut-off date,
among the depositor, the trustee and, if the trust includes loans, the related
master servicer. The provisions of each pooling and servicing agreement or trust
agreement will vary depending upon the nature of the related certificates and
the related trust fund. Forms of pooling and servicing and trust agreements are
exhibits to the Registration Statement of which this prospectus forms a part.
Each series of notes will be issued under an indenture between the related
trust fund and the trustee named in the prospectus supplement for that series.
If the trust fund includes loans, the trust fund and the servicer of the loans
will also enter into a servicing agreement. Forms of indenture and servicing
agreement have been filed as an exhibit to the registration statement of which
this prospectus forms a part.
The following summaries describe the material provisions which may appear
in each pooling and servicing agreement or trust agreement, in the case of a
series of certificates, and in each indenture and servicing agreement, in the
case of a series of notes. The prospectus supplement for each series of
securities will describe any provision of the operative agreements relating to
that series which materially differs from the description contained in this
prospectus. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
related agreements and prospectus supplement. The applicable depositor will
provide a copy of the operative agreements (without exhibits) relating to any
series without charge, upon written request of a holder of record of a
certificate or note of the series, addressed to Greenwich Capital Acceptance,
Inc. or Financial Asset Securities Corp., as applicable, 600 Steamboat Road,
Greenwich, Connecticut 06830, Attention: Asset Backed Finance Group.
38
General
Unless otherwise specified in the related prospectus supplement, the
securities of each series will
o be issued in fully registered form only, in the authorized
denominations specified in the prospectus supplement,
o evidence specified beneficial ownership interests in the trust fund
assets, in the case of a series of certificates, or be secured by the
pledge of the trust fund assets, in the case of a series of notes, and
o not be entitled to payments in respect of the assets included in any
other trust fund established by the depositor.
The securities will not represent obligations of the depositor or any of its
affiliates. The loans will not be insured or guaranteed by any governmental
entity or other person, unless otherwise specified in the related prospectus
supplement.
To the extent provided in the related operative agreements, each trust fund
will consist of the following:
o the assets as from time to time are subject to the related agreement,
exclusive of any amounts specified in the related prospectus
supplement as "retained interest";
o those assets as from time to time are required to be deposited in the
related security account as defined under the heading "Operative
Agreements--Payments on Loans; Deposits to Security Account" in this
prospectus;
o property which secured a loan and which is acquired on behalf of the
securityholders by foreclosure or deed in lieu of foreclosure; and
o primary mortgage insurance policies, FHA insurance and VA guarantees,
if any, and any other insurance policies or other forms of credit
enhancement required to be maintained pursuant to the related
agreement.
If specified in the related prospectus supplement, a trust fund may also include
one or more of the following:
o reinvestment income on payments received on the trust fund assets,
o a reserve fund,
o a pool insurance policy,
o a special hazard insurance policy,
o a bankruptcy bond,
39
o one or more letters of credit,
o a surety bond,
o guaranties, or
o similar instruments or other agreements.
Each series of securities will be issued in one or more classes. Each class
of securities of a series will evidence beneficial ownership of a specified
portion or percentage - which may be 0% - of future interest payments and a
specified portion or percentage - which may be 0% - of future principal payments
on the assets in the related trust fund. A series of securities may include one
or more classes that are senior in right to payment to one or more other classes
of securities of the series. A series or classes of securities may be covered by
insurance policies, surety bonds or other forms of credit enhancement, in each
case as described in this prospectus and in the related prospectus supplement.
Distributions on one or more classes of a series of securities may be made prior
to being made on one or more other classes, after the occurrence of specified
events, in accordance with a schedule or formula, on the basis of collections
from designated portions of the trust fund assets or on a different basis, in
each case as specified in the related prospectus supplement. The timing and
amounts of distributions may vary among classes or over time as specified in the
related prospectus supplement.
Unless otherwise specified in the related prospectus supplement,
distributions of principal and interest, or, where applicable, of principal only
or interest only, on the related securities will be made by the trustee on each
distribution date. Distributions will be made monthly, quarterly, semi-annually,
or at such other intervals and on the dates as are specified in the related
prospectus supplement, in proportion to the percentages specified in the
prospectus supplement. Distributions will be made to the persons in whose names
the securities are registered at the close of business on the applicable record
date specified in the related prospectus supplement. Distributions will be made
in the manner specified in the related prospectus supplement to the persons
entitled to them at the address appearing in the register maintained for the
securityholders. In the case of the final distribution in retirement of the
securities, payment will be made only upon presentation and surrender of the
securities at the office or agency of the trustee or other person specified in
the notice to securityholders of the final distribution.
The securities will be freely transferable and exchangeable at the
corporate trust office of the trustee named in the related prospectus
supplement. No service charge will be made for any registration of exchange or
transfer of securities of any series but the trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law, the purchase and holding of certain classes of
certificates by or on behalf of, or with the assets of, an employee benefit plan
or other retirement plan or arrangement subject to the provisions of ERISA or
the Internal Revenue Code may result in "prohibited transactions" within the
meaning of ERISA or Section 4975 of the Code. See "ERISA Considerations" in this
prospectus.
As to each series of securities, an election may be made to treat the
related trust fund, or designated portion of the trust fund, as a "real estate
mortgage investment conduit" (REMIC) as
40
defined in the Internal Revenue Code. The related prospectus supplement will
specify whether a REMIC election is to be made. Alternatively, the operative
agreement for a series may provide that a REMIC election may be made at the
discretion of the depositor or the master servicer and may only be made if
certain conditions are satisfied. As to any series of securities for which a
REMIC election will be made, the terms and provisions applicable to the making
of the REMIC election, as well as any material federal income tax consequences
to securityholders not otherwise described in this prospectus, will be set forth
in the related prospectus supplement. If a REMIC election is made with respect
to a series, one of the classes will be designated as evidencing the sole class
of "residual interests" in the related REMIC, as defined in the Code. All other
classes of securities in that series will constitute "regular interests" in the
related REMIC, as defined in the Code. As to each series with respect to which a
REMIC election is to be made, the master servicer or a holder of the related
residual certificate will be obligated to take all actions required in order to
comply with applicable laws and regulations and will be obligated to pay any
prohibited transaction taxes. Unless otherwise specified in the related
prospectus supplement, the master servicer will be entitled to reimbursement for
any such payment from the assets of the trust fund or from any holder of the
related residual certificate.
Distributions on Securities
General. In general, the method of determining the amount of distributions
on a particular series of securities will depend on the type of credit support,
if any, that is used with respect to that series. See "Credit Enhancement" in
this prospectus. Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the securities of a particular
series. The prospectus supplement for each series of securities will describe
the method to be used in determining the amount of distributions on the
securities of that series.
The trustee will make distributions allocable to principal and interest on
the securities out of, and only to the extent of, funds in the related security
account, including any funds transferred from any reserve account. As between
securities of different classes and as between distributions of principal (and,
if applicable, between distributions of principal prepayments and scheduled
payments of principal) and interest, distributions made on any distribution date
will be applied as specified in the related prospectus supplement. Unless
otherwise specified in the related prospectus supplement, distributions to any
class of securities will be made pro rata to all securityholders of that class.
Available Funds. All distributions on the securities of each series on each
distribution date will be made from Available Funds in accordance with the terms
described in the related prospectus supplement and specified in the related
operative agreement. Unless otherwise provided in the related prospectus
supplement, the term "Available Funds" for each distribution date will equal the
sum of the following amounts:
(i) the aggregate of all previously undistributed payments on account of
principal, including principal prepayments, if any, and prepayment
penalties, if so provided in the related prospectus supplement, and
interest on the mortgage loans in the related trust fund (including
Liquidation Proceeds and Insurance Proceeds and amounts drawn under
letters of credit or other credit enhancement instruments as permitted
thereunder and as specified in the related operative agreement)
received by the master
41
servicer after the cut-off date and on or prior to the related
determination date specified in the prospectus supplement except:
o all payments which were due on or before the cut-off date;
o all Liquidation Proceeds and all Insurance Proceeds, all
principal prepayments and all other proceeds of any loan
purchased by the depositor, the master servicer, any sub-servicer
or any seller pursuant to the related operative agreement that
were received after the prepayment period specified in the
prospectus supplement and all related payments of interest
representing interest for any period after the related collection
period;
o all scheduled payments of principal and interest due on a date or
dates subsequent to the first day of the month of distribution;
o amounts received on particular loans as late payments of
principal or interest or other amounts required to be paid by
borrowers, but only to the extent of any unreimbursed advance in
respect of those loans made by the master servicer, the related
sub-servicers, support servicers or the trustee;
o amounts representing reimbursement, to the extent permitted by
the related operative agreement and as described under the
heading "--Advances" immediately below, for advances made by the
master servicer, sub-servicers, support servicers or the trustee
that were deposited into the security account, and amounts
representing reimbursement for certain other losses and expenses
incurred by the master servicer or the depositor and described
below; and
o that portion of each collection of interest on a particular loan
in the trust fund which represents servicing compensation payable
to the master servicer or retained interest which is to be
retained from such collection or is permitted to be retained from
related Insurance Proceeds, Liquidation Proceeds or proceeds of
loans purchased pursuant to the related operative agreement;
(ii) the amount of any advance made by the master servicer, sub-servicer,
support servicer or the trustee as described under "--Advances"
immediately below and deposited by it in the security account;
(iii) if applicable, amounts withdrawn from a reserve account;
(iv) any applicable, amounts provided under a letter of credit, insurance
policy, surety bond or other third-party credit enhancement; and
(v) if applicable, the amount of any prepayment interest shortfall.
Distributions of Interest. Unless otherwise specified in the related
prospectus supplement, interest will accrue on the aggregate principal balance
of each class of securities or the aggregate notional principal balance of each
class of securities entitled to distributions of interest only at the
pass-through rate (or interest rate) and for the periods specified in the
42
prospectus supplement. Except in the case of a class of accrual securities that
provides for interest that accrues but is not currently payable, the
pass-through rate may be a fixed rate or an adjustable rate that adjusts as
specified in the prospectus supplement. Interest accrued during each specified
period on each class of securities entitled to interest will be distributable on
the distribution dates specified in the related prospectus supplement, to the
extent that funds are available, until the aggregate principal balance of the
securities of that class has been distributed in full or, in the case of a class
of securities entitled only to distributions allocable to interest, until the
aggregate notional principal balance of that class is reduced to zero or for the
period of time designated in the related prospectus supplement. The original
principal balance of each security will equal the aggregate distributions
allocable to principal to which that security is entitled. Unless otherwise
specified in the related prospectus supplement, distributions allocable to
interest on each security that is not entitled to distributions allocable to
principal will be calculated based on the notional principal balance of that
security. The notional principal balance of a security will not evidence an
interest in or entitlement to distributions allocable to principal but will be
used solely for convenience in expressing the calculation of interest and for
certain other purposes.
With respect to any class of accrual securities, if specified in the
related prospectus supplement, any interest that has accrued but is not paid on
any distribution date will be added to the aggregate principal balance of that
class on that distribution date. Unless otherwise specified in the related
prospectus supplement, distributions of interest on each class of accrual
securities will commence only after the occurrence of the events specified in
the prospectus supplement. Unless otherwise specified in the related prospectus
supplement, the beneficial ownership interest of a class of accrual securities
in the trust fund will increase on each distribution date, as reflected in the
aggregate principal balance of that class, by the amount of interest that
accrued on that class during the preceding interest accrual period but was not
required to be distributed to the class on the distribution date. Each class of
accrual securities will thereafter accrue interest on the outstanding aggregate
principal balance of that class as so increased.
Distributions of Principal. Unless otherwise specified in the related
prospectus supplement, the aggregate principal balance of any class of
securities entitled to distributions of principal will equal
o the original aggregate principal balance of that class as specified in
the related prospectus supplement
reduced by
o all distributions reported to securityholders of that class as
allocable to principal
increased by
o in the case of a class of accrual securities, all interest accrued but
not then distributable on that class and
subject to
o in the case of adjustable rate certificates, the effect of any
negative amortization.
43
The related prospectus supplement will specify the method by which the
amount of principal to be distributed on the securities on each
distribution date will be calculated and the manner in which the
amount will be allocated among the classes of securities entitled to
distributions of principal.
If so provided in the related prospectus supplement, one or more
classes of senior securities will be entitled to receive all or a
disproportionate percentage of the payments of principal which are received from
borrowers in advance of their scheduled due dates and are not accompanied by
amounts representing scheduled interest due after the month of such payments in
the percentages and under the circumstances or for the periods specified in the
prospectus supplement. Any allocation of principal prepayments to a class or
classes of senior securities will have the effect of accelerating the
amortization of the senior securities while increasing the interests evidenced
by the subordinated securities in the related trust fund. Increasing the
interests of the subordinated securities relative to that of the senior
securities is intended to preserve the availability of the subordination
provided by the subordinated securities. See "Credit Enhancement--Subordination"
in this prospectus.
Unscheduled Distributions. If specified in the related prospectus
supplement, the securities will be subject to receipt of distributions before
the next scheduled distribution date under the circumstances and in the manner
described in this paragraph and the following paragraph and in the prospectus
supplement. The trustee will be required to make such unscheduled distributions
on the day and in the amount specified in the related prospectus supplement if,
due to substantial payments of principal - including principal prepayments - on
the trust fund assets, the trustee or the master servicer determines that the
funds available or anticipated to be available from the security account and, if
applicable, from any reserve account may be insufficient to make required
distributions on the securities on that distribution date. Unless otherwise
specified in the related prospectus supplement, the amount of any unscheduled
distribution that is allocable to principal will not exceed the amount that
would otherwise have been required to be distributed as principal on the
securities on the next distribution date. Unless otherwise specified in the
related prospectus supplement, all unscheduled distributions will include
interest at the applicable pass-through rate, if any, on the amount of the
unscheduled distribution allocable to principal for the period and to the date
specified in the prospectus supplement.
Unless otherwise specified in the related prospectus supplement, all
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
securities would have been made on the next distribution date, and with respect
to securities of the same class, unscheduled distributions of principal will be
made on a pro rata basis. Notice of any unscheduled distribution will be given
by the trustee prior to the date of distribution.
Advances
Unless otherwise provided in the related prospectus supplement, the master
servicer will be required to make advances, from its own funds, from funds
advanced by sub-servicers or support servicers or from funds held in the
security account for future distributions to the securityholders. On each
distribution date, the amount of any advances will be equal to the
44
aggregate of payments of principal and interest that were delinquent on the
related determination date and were not advanced by any sub-servicer, subject to
the master servicer's determination that these advances will be recoverable from
late payments by borrowers, Liquidation Proceeds, Insurance Proceeds or
otherwise. In the case of cooperative loans, the master servicer also will be
required to advance any unpaid maintenance fees and other charges under the
related proprietary leases as specified in the related prospectus supplement.
In making advances, the master servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to the securityholders rather
than to guarantee or insure against losses. If advances are made by the master
servicer from cash being held for future distribution to securityholders, the
master servicer will replace those funds on or before any future distribution
date to the extent that funds in the applicable security account on a
distribution date would be less than the amount required to be available for
distributions to securityholders on that date. Any funds advanced by the master
servicer will be reimbursable to the master servicer out of recoveries on the
specific loans with respect to which the advances were made (e.g., late payments
made by the related borrower, any related Insurance Proceeds, Liquidation
Proceeds or proceeds of any loan purchased by a sub-servicer or a seller under
the circumstances described in this prospectus). Advances by the master servicer
and any advances by a sub-servicer or a support servicer also will be
reimbursable to the master servicer or sub-servicer or support servicer, as
applicable, from cash otherwise distributable to securityholders, including the
holders of senior securities, to the extent that the master servicer determines
that any advances previously made are not ultimately recoverable as described in
this paragraph. The master servicer also will be obligated to make advances, to
the extent recoverable out of Insurance Proceeds, Liquidation Proceeds or
otherwise, in respect of certain taxes and insurance premiums not paid by
borrowers on a timely basis. Funds so advanced are reimbursable to the master
servicer to the extent permitted by the related operative agreement. If
specified in the related prospectus supplement, the obligations of the master
servicer to make advances may be supported by a cash advance reserve fund, a
surety bond or other arrangement, in each case as described in the related
prospectus supplement.
The master servicer or sub-servicer may enter into a support agreement with
a support servicer pursuant to which the support servicer agrees to provide
funds on behalf of the master servicer or sub-servicer in connection with the
obligation of the master servicer or sub-servicer, as the case may be, to make
advances. The support agreement will be delivered to the trustee and the trustee
will be authorized to accept a substitute support agreement in exchange for an
original support agreement, provided that the substitution of the support
agreement will not adversely affect the rating or ratings assigned to the
securities by each rating agency named in the related prospectus supplement.
Unless otherwise provided in the prospectus supplement, in the event the
master servicer, a sub-servicer or a support servicer fails to make an advance,
the trustee will be obligated to make the advance in its capacity as successor
servicer. If the trustee makes an advance, it will be entitled to be reimbursed
for that advance to the same extent and degree as the master servicer, a
sub-servicer or a support servicer is entitled to be reimbursed for advances.
See "--Distributions on Securities" above.
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Reports to Securityholders
Prior to or concurrently with each distribution on a distribution date and
except as otherwise set forth in the related prospectus supplement, the master
servicer or the trustee will furnish to each securityholder of record of the
related series a statement setting forth, to the extent applicable to that
series of securities, among other things:
o the amount of the distribution that is allocable to principal,
separately identifying the aggregate amount of any principal
prepayments and, if specified in the prospectus supplement, any
prepayment penalties included in the distribution;
o the amount of the distribution allocable to interest;
o the amount of any advances;
o the aggregate amount (a) otherwise allocable to the subordinated
securityholders on that distribution date and (b) withdrawn from the
reserve fund, if any, that is included in the amounts distributed to
the senior securityholders;
o the outstanding aggregate principal balance or notional principal
balance of each class after giving effect to the distribution of
principal on that distribution date;
o the percentage of principal payments on the loans (excluding
prepayments), if any, which each class will be entitled to receive on
the following distribution date;
o the percentage of principal prepayments on the mortgage loans, if any,
which each class will be entitled to receive on the following
distribution date;
o the amount of the servicing compensation retained or withdrawn from
the security account by the master servicer and the amount of
additional servicing compensation received by the master servicer
attributable to penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
o the number and aggregate principal balance of mortgage loans
delinquent, but not in foreclosure, (i) from 30 to 59 days, (ii) from
60 to 89 days and (iii) 90 days or more, as of the close of business
on the last day of the calendar month preceding that distribution
date;
o the number and aggregate principal balance of mortgage loans
delinquent and in foreclosure (i) from 30 to 59 days, (ii) from 60 to
89 days and (iii) 90 days or more, as of the close of business on the
last day of the calendar month preceding that distribution date;
o the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure and, if the real estate secured
a Multifamily Loan, any additional information specified in the
prospectus supplement;
46
o if a class is entitled only to a specified portion of interest
payments on the loans in the related pool, the pass-through rate, if
adjusted from the date of the last statement, of the loans expected to
be applicable to the next distribution to that class;
o if applicable, the amount remaining in any reserve account at the
close of business on that distribution date;
o the pass-through rate as of the day prior to the immediately preceding
distribution date; and
o the amounts remaining under any letters of credit, pool policies or
other forms of credit enhancement applicable to the certificates.
Where applicable, any amount set forth in the above list may be expressed
as a dollar amount per single security of the relevant class having the
percentage interest specified in the prospectus supplement. The report to
securityholders for any series of securities may include additional or other
information of a similar nature to that specified in the above list.
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or the trustee will mail, to each
securityholder of record at any time during such calendar year, a report setting
forth:
o the aggregate of the amounts for that calendar year reported pursuant
to the first two bullet points in the immediately preceding list or,
in the event that the recipient was a securityholder of record only
during a portion of the calendar year, for the applicable portion of
the year; and
o other customary information as may be deemed necessary or desirable
for securityholders to have in order to prepare their tax returns.
Credit Enhancement
General
Credit enhancement may be provided with respect to one or more classes of a
series of securities or with respect to the assets in the related trust fund.
Credit enhancement may take the form of one or more of the following:
o a limited financial guaranty policy issued by an entity named in the
related prospectus supplement,
o the subordination of one or more classes of the securities of that
series,
o the establishment of one or more reserve accounts,
o the use of a cross-support feature,
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o a pool insurance policy, bankruptcy bond, special hazard insurance
policy, surety bond, letter of credit, guaranteed investment contract,
or
o any other method of credit enhancement described in the related
prospectus supplement.
Unless otherwise specified in the related prospectus supplement, any credit
enhancement will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance of the securities and
interest. If losses occur which exceed the amount covered by the credit
enhancement or which are not covered by the credit enhancement, securityholders
will bear their allocable share of deficiencies.
Subordination
If specified in the related prospectus supplement, protection afforded to
holders of one or more classes of the senior securities of a series by means of
the subordination feature will be accomplished by the holders of one or more
other classes of that series having a preferential right to distributions in
respect of scheduled principal, principal prepayments, interest or any
combination thereof that otherwise would have been payable to the holders of one
or more other subordinated classes of securities of that series under the
circumstances and to the extent specified in the prospectus supplement. If
specified in the related prospectus supplement, protection may also be afforded
to the holders of the senior securities of a series by:
o reducing the ownership interest of the holders of the related
subordinated securities,
o a combination of the subordination feature and reducing the ownership
interest of the subordinated securityholders, or
o as otherwise described in the related prospectus supplement.
If specified in the related prospectus supplement, delays in receipt of
scheduled payments on the loans and losses on defaulted loans will be borne
first by the various classes of subordinated securities and thereafter by the
various classes of senior securities, in each case under the circumstances and
subject to the limitations specified in that prospectus supplement.
The related prospectus supplement may also limit the following:
o the aggregate distributions in respect of delinquent payments on the
loans over the lives of the securities or at any time,
o the aggregate losses in respect of defaulted loans which must be borne
by the subordinated securities by virtue of their subordination, and
o the amount of the distributions otherwise distributable to the
subordinated securityholders that will be distributable to senior
securityholders on any distribution date.
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If aggregate distributions in respect of delinquent payments on the loans or
aggregate losses in respect of the loans were to exceed the amount specified in
the related prospectus supplement, holders of the senior securities would
experience losses on their securities.
In addition to or in lieu of the foregoing, if specified in the related
prospectus supplement, all or any portion of distributions otherwise payable to
holders of the subordinated securities on any distribution date may instead be
deposited into one or more reserve accounts established with the trustee. The
related prospectus supplement may specify that deposits in any reserve account
may be made
o on each distribution date,
o for specified periods, or
o until the balance in the reserve account has reached a specified
amount and, following payments from the reserve account to holders of
the senior securities or otherwise, thereafter to the extent necessary
to restore the balance in the reserve account to the specified level.
If specified in the related prospectus supplement, amounts on deposit in the
reserve account may be released to the holders of the class or classes of
securities specified in the prospectus supplement at the times and under the
circumstances specified in the prospectus supplement.
If specified in the related prospectus supplement, various classes of
senior securities and subordinated securities may themselves be subordinate in
their right to receive certain distributions to other classes of senior and
subordinated securities, respectively, through a cross-support mechanism or
otherwise.
As among classes of senior securities and as among classes of subordinated
securities, distributions may be allocated among these classes as follows:
o in the order of their scheduled final distribution dates,
o in accordance with a schedule or formula,
o in relation to the occurrence of events or otherwise,
in each case as specified in the related prospectus supplement. As among classes
of subordinated securities, the related prospectus supplement will specify the
allocation of payments to holders of the related senior securities on account of
delinquencies or losses and the allocation payments to any reserve account.
Pool Insurance Policies
The related prospectus supplement may specify that a separate pool
insurance policy will be obtained for the pool. This policy will be issued by
the pool insurer named in the prospectus supplement. Subject to the limits
described in this section, each pool insurance policy will cover loss by reason
of default in payment on loans in the related pool in an amount equal to a
49
percentage, which is specified in the related prospectus supplement, of the
aggregate principal balances of the loans on the cut-off date which are not
covered as to their entire outstanding principal balances by primary mortgage
insurance policies. As more fully described in the following paragraph, the
master servicer will present claims to the pool insurer on behalf of itself, the
trustee and the securityholders. However, the pool insurance policies are not
blanket policies against loss, since claims under the policies may only be made
respecting particular defaulted loans and only upon satisfaction of the
conditions precedent described in the following paragraph. Unless otherwise
specified in the related prospectus supplement, no pool insurance policy will
cover losses due to a failure to pay or denial of a claim under a primary
mortgage insurance policy.
Unless otherwise specified in the related prospectus supplement, the pool
insurance policy will provide that no claims may be validly presented unless the
following conditions are satisfied:
o any required primary mortgage insurance policy is in effect for the
defaulted loan and a claim under that policy has been submitted and
settled;
o hazard insurance on the related mortgaged property has been kept in
force and real estate taxes and other protection and preservation
expenses have been paid;
o if there has been physical loss or damage to the mortgaged property,
the property has been restored to its physical condition, reasonable
wear and tear excepted, at the time of issuance of the policy; and
o the insured has acquired good and merchantable title to the mortgaged
property free and clear of liens except certain permitted
encumbrances.
Upon satisfaction of these conditions, the pool insurer will have the option
either
o to purchase the property securing the defaulted loan at a price equal
to the loan's principal balance plus accrued and unpaid interest at
the loan rate to the date of purchase plus certain expenses incurred
by the master servicer on behalf of the trustee and securityholders,
or
o to pay the amount by which the sum of the principal balance of the
defaulted loan plus accrued and unpaid interest at the loan rate to
the date of payment of the claim and the aforementioned expenses
exceeds the proceeds received from an approved sale of the mortgaged
property,
in either case net of amounts paid or assumed to have been paid under the
related primary mortgage insurance policy.
If any property securing a defaulted loan is damaged and proceeds, if any,
from the related hazard insurance policy or any applicable special hazard
insurance policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the pool insurance policy, the master
servicer will not be required to expend its own funds to restore the damaged
property unless it determines that
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o the restoration will increase the proceeds to securityholders on
liquidation of the related loan after reimbursement to the master
servicer of its expenses, and
o the master servicer will be able to recover its expenses from proceeds
of the sale of the property or proceeds of the related pool insurance
policy or any related primary mortgage insurance policy.
Unless otherwise specified in the related prospectus supplement, no pool
insurance policy will insure against losses sustained by reason of a default
arising, among other things, from
o fraud or negligence in the origination or servicing of a loan,
including misrepresentation by the borrower, the originator or persons
involved in the origination of the loan, or
o failure to construct a mortgaged property in accordance with plans and
specifications.
Many primary mortgage insurance policies also do not insure against these types
of losses. Nevertheless, a failure of coverage attributable to one of the
foregoing events might result in a breach of the related seller's
representations and, in that event, might give rise to an obligation on the part
of the seller to purchase the defaulted loan if the breach cannot be cured. No
pool insurance policy will cover a claim in respect of a defaulted loan that
occurs when the loan's servicer, at the time of default or thereafter, was not
approved by the insurer. Many primary mortgage insurance policies also do not
cover claims in this case.
Unless otherwise specified in the related prospectus supplement, the
original amount of coverage under the pool insurance policy will be reduced over
the life of the related securities by the aggregate dollar amount of claims
paid, less the aggregate of the net amounts realized by the pool insurer upon
disposition of all foreclosed properties. The amount of claims paid will include
certain expenses incurred by the master servicer as well as accrued interest on
delinquent loans to the date of payment of the claim, unless otherwise specified
in the related prospectus supplement. Accordingly, if aggregate net claims paid
under any pool insurance policy reach the original policy limit, coverage under
that pool insurance policy will be exhausted and any further losses will be
borne by the securityholders.
The terms of any pool insurance policy relating to a pool of Manufactured
Housing Contracts or Home Improvement Contracts will be described in the related
prospectus supplement.
FHA Insurance; VA Guarantees
Single Family Loans designated in the related prospectus supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. These mortgage loans will be insured
under various FHA programs including the standard FHA 203(b) program to finance
the acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. Single Family Loans insured by
the FHA generally require a minimum down payment of approximately 5% of the
original principal amount of the loan. No FHA-insured Single Family Loan
relating to a series may have
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an interest rate or original principal amount exceeding the applicable FHA
limits at the time the loan was originated.
The insurance premiums for Single Family Loans insured by the FHA are
collected by lenders approved by the Department of Housing and Urban Development
(HUD), or by the master servicer or any sub-servicer, and are paid to the FHA.
The regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure (or other
acquisition of possession) and conveyance of the mortgaged property to HUD or
upon assignment of the defaulted mortgage loan to HUD. With respect to a
defaulted FHA-insured Single Family Loan, the master servicer or any
sub-servicer is limited in its ability to initiate foreclosure proceedings. When
it is determined by the master servicer or sub-servicer or HUD that the default
was caused by circumstances beyond the mortgagor's control, the master servicer
or such sub-servicer is expected to make an effort to avoid foreclosure by
entering, if feasible, into one of a number of available forms of forbearance
plans with the mortgagor. These plans may involve the reduction or suspension of
regular mortgage payments for a specified period, with such payments to be made
up on or before the maturity date of the mortgage, or the recasting of payments
due under the mortgage up to or beyond the maturity date. In addition, when this
type of default is accompanied by certain other criteria, HUD may provide relief
by making payments to the master servicer or sub-servicer in partial or full
satisfaction of amounts due under the mortgage loan or by accepting assignment
of the loan from the master servicer or sub-servicer. Any payments made by HUD
are to be repaid by the mortgagor to HUD. With certain exceptions, at least
three full monthly installments must be due and unpaid under the mortgage loan,
and HUD must have rejected any request for relief from the mortgagor, before the
master servicer or sub-servicer may initiate foreclosure proceedings.
In most cases, HUD has the option to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash. Claims have
not been paid in debentures since 1965. HUD debentures issued in satisfaction of
FHA insurance claims bear interest at the applicable HUD debentures' interest
rate. The master servicer or sub-servicer of each FHA-insured Single Family Loan
will be obligated to purchase any HUD debenture issued in satisfaction of a
mortgage loan upon default for an amount equal to the debenture's principal
amount.
The amount of insurance benefits paid by the FHA generally is equal to the
entire unpaid principal amount of the defaulted mortgage loan adjusted to
reimburse the master servicer or sub-servicer for certain costs and expenses and
to deduct certain amounts received or retained by the master servicer or
sub-servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
property to HUD, the master servicer or sub-servicer is compensated for no more
than two-thirds of its foreclosure costs, and is compensated for interest
accrued and unpaid prior to the conveyance date generally only to the extent
allowed pursuant to the related forbearance plan approved by HUD. When
entitlement to insurance benefits results from assignment of the mortgage loan
to HUD, the insurance payment includes full compensation for interest accrued
and unpaid to the assignment date. The insurance payment itself, upon
foreclosure of an FHA-insured Single Family Loan, bears interest from the date
which is 30 days after the mortgagor's first uncorrected failure to perform any
obligation to make any payment due under the mortgage loan and, upon
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assignment, from the date of assignment to the date of payment of the claim, in
each case at the same interest rate as the applicable HUD debenture interest
rate.
Single Family Loans designated in the related prospectus supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended, which permits a veteran, the
spouse of a veteran in certain cases, to obtain a mortgage loan guaranteed by
the VA covering financing of the purchase of a one- to four-family dwelling unit
at interest rates permitted by the VA. The program has no mortgage loan limits,
requires no down payment from the purchaser and permits the guarantee of
mortgage loans of up to 30 years' duration. However, no Single Family Loan
guaranteed by the VA will have an original principal amount greater than five
times the partial VA guarantee for that mortgage loan.
The maximum guarantee that may be issued by the VA under a VA-guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 U.S.C. Section 1803(a), as amended. As of November 1,
1998 the maximum guarantee that may be issued by the VA under a VA-guaranteed
mortgage loan of more than $144,000 is the lesser of 25% of the original
principal amount of the mortgage loan and $50,570. The liability on the
guarantee is reduced or increased, pro rata, with any reduction or increase in
the amount of indebtedness, but in no event will the amount payable under the
guaranty exceed the amount of the original guaranty. The VA may, at its option
and without regard to the guaranty, make full payment to a mortgage holder of
unsatisfied indebtedness on a mortgage loan upon the loan's assignment to the
VA.
With respect to a defaulted VA-guaranteed Single Family Loan, the master
servicer or sub-servicer is, absent exceptional circumstances, authorized to
announce its intention to foreclose only when the default has continued for
three months. Generally, a claim under the guaranty is submitted after
liquidation of the mortgaged property.
The amount payable under the guaranty will be the percentage of the
VA-guaranteed Single Family Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in VA
regulations. Payments under the guaranty will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that these amounts have not been recovered through
liquidation of the mortgaged property. The amount payable under the guaranty may
in no event exceed the amount of the original guaranty.
Special Hazard Insurance Policies
If specified in the related prospectus supplement, a separate special
hazard insurance policy will be obtained for the pool and will be issued by the
special hazard insurer named in the prospectus supplement. Subject to the
limitations described in the immediately following sentence, each special hazard
insurance policy will protect holders of the related securities from
o loss by reason of damage to mortgaged properties caused by certain
hazards -including earthquakes and, to a limited extent, tidal waves
and related water damage or as otherwise specified in the prospectus
supplement - not insured against under the
53
standard form of hazard insurance policy for the respective states in
which the mortgaged properties are located or under a flood insurance
policy if the mortgaged property is located in a federally designated
flood area, and
o loss caused by reason of the application of the coinsurance clause
contained in hazard insurance policies.
See "Operative Agreements--Hazard Insurance" in this prospectus. No special
hazard insurance policy will cover losses occasioned by fraud or conversion by
the trustee or master servicer, war, insurrection, civil war, certain
governmental action, errors in design, faulty workmanship or materials (except
under certain circumstances), nuclear or chemical reaction, flood (if the
mortgaged property is located in a federally designated flood area), nuclear or
chemical contamination and certain other risks. The amount of coverage under any
special hazard insurance policy will be specified in the related prospectus
supplement. Each special hazard insurance policy will provide that no claim may
be paid unless hazard insurance and, if applicable, flood insurance on the
related mortgaged property have been kept in force and other protection and
preservation expenses have been paid.
Subject to the limitations set forth in the immediately preceding
paragraph, and unless otherwise specified in the related prospectus supplement,
each special hazard insurance policy will provide coverage where there has been
damage to property securing a foreclosed mortgage loan, and title to the
mortgaged property has been acquired by the insured, to the extent that the
damage is not covered by the hazard insurance policy or flood insurance policy,
if any, maintained by the borrower or the master servicer. In this circumstance,
the special hazard insurer will pay the lesser of
o the cost to repair or replace the mortgaged property, and
o upon transfer of the property to the special hazard insurer, the
unpaid principal balance of the loan at the time the property is
acquired by foreclosure or deed in lieu of foreclosure, plus accrued
interest to the date of claim settlement, together with certain
expenses incurred by the master servicer with respect to the property.
If the unpaid principal balance of a loan plus accrued interest and certain
servicing expenses are paid by the special hazard insurer, the amount of further
coverage under the related special hazard insurance policy will be reduced by
that amount less any net proceeds from the sale of the property. Any amount paid
as the cost to repair the damaged property will also reduce coverage by such
amount. So long as a pool insurance policy remains in effect, the payment by the
special hazard insurer to cover the unpaid principal balance of a loan plus
accrued interest and certain servicing expenses or to cover the cost to repair a
mortgaged property will not affect the total insurance proceeds paid to
securityholders, but will affect the relative amounts of coverage remaining
under the special hazard insurance policy and the pool insurance policy.
Since each special hazard insurance policy will be designed to permit full
recovery under the mortgage pool insurance policy in circumstances in which
recoveries would otherwise be unavailable because mortgaged properties have been
damaged by a cause not insured against by a standard hazard policy and thus
would not be restored, each operative agreement will provide
54
that, unless otherwise specified in the related prospectus supplement, the
master servicer will be under no obligation to maintain the special hazard
insurance policy once the related pool insurance policy has been terminated or
been exhausted due to payment of claims.
To the extent specified in the related prospectus supplement, the master
servicer may deposit in a special trust account, cash, an irrevocable letter of
credit or any other instrument acceptable to each rating agency named in the
prospectus supplement, in order to provide protection in lieu of or in addition
to that provided by a special hazard insurance policy. The amount of any special
hazard insurance policy or of the deposit to the special trust account relating
to securities may be reduced so long as the reduction will not result in a
downgrading of the rating of the securities by any rating agency named in the
prospectus supplement.
The terms of any special hazard insurance policy relating to a pool of
Manufactured Housing Contracts or Home Improvement Contracts will be described
in the related prospectus supplement.
Bankruptcy Bonds
If specified in the related prospectus supplement, a bankruptcy bond for
proceedings under the federal Bankruptcy Code will be issued by an insurer named
in the prospectus supplement. Each bankruptcy bond will cover certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a loan or a reduction by the court of the principal
amount of a loan. The bankruptcy bond will also cover unpaid interest on the
amount of such a principal reduction from the date of the filing of a bankruptcy
petition. The required amount of coverage under any bankruptcy bond will be set
forth in the related prospectus supplement. Coverage under a bankruptcy bond may
be cancelled or reduced by the master servicer if the cancellation or reduction
would not adversely affect the then current rating of the securities by any
rating agency named in the prospectus supplement. See "Material Legal Aspects of
the Mortgage Loans--Anti-Deficiency Legislation and Other Limitations on
Lenders" in this prospectus.
To the extent specified in the related prospectus supplement, the master
servicer may deposit in a special trust account, cash, an irrevocable letter of
credit or any other instrument acceptable to each rating agency named in the
prospectus supplement, to provide protection in lieu of or in addition to that
provided by a bankruptcy bond. The amount of any bankruptcy bond or of the
deposit to the special trust account relating to the securities may be reduced
so long as the reduction would not result in a downgrading of the rating of the
securities by any rating agency named in the prospectus supplement.
The terms of any bankruptcy bond relating to a pool of Manufactured Housing
Contracts or Home Improvement Contracts will be described in the related
prospectus supplement.
FHA Insurance on Multifamily Loans
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the National Housing Act
allow HUD to insure mortgage loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of mortgage loans made under
55
Sections 221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer.
Generally the term of a mortgage loan may be up to 40 years and the ratio of
loan amount to property replacement cost can be up to 90%.
Section 223(f) of the National Housing Act allows HUD to insure mortgage
loans made for the purchase or refinancing of existing apartment projects which
are at least three years old. Section 244 also provides for co-insurance of
mortgage loans made under Section 223(f). Under Section 223(f), the loan
proceeds cannot be used for substantial rehabilitation work but repairs may be
made for, generally up to the greater of 15% of the value of the project or a
dollar amount per apartment unit established from time to time by HUD. In
general the loan term may not exceed 35 years and a loan-to-value ratio of no
more than 85% is required for the purchase of a project and a loan-to-value
ratio of no more than 70% for the refinancing of a project.
FHA insurance is generally payable in cash or, at the option of the
mortgagee, in debentures. The insurance does not cover 100% of the mortgage loan
but is subject to certain deductions and certain losses of interest from the
date of the default.
Reserve Accounts
If specified in the related prospectus supplement, credit support with
respect to a series of securities may be provided by the establishment and
maintenance of one or more reserve accounts for that series, in trust, with the
related trustee. The prospectus supplement will specify whether or not a reserve
accounts will be included in the related trust fund.
The reserve account for a series of securities will be funded in one of the
following ways:
o by a deposit of cash, U.S. Treasury securities, instruments evidencing
ownership of principal or interest payments on U.S. Treasury
securities, letters of credit, demand notes, securities of deposit or
a combination of these, in the aggregate amount specified in the
related prospectus supplement;
o by deposit from time to time of amounts specified in the related
prospectus supplement to which the subordinated securityholders, if
any, would otherwise be entitled; or
o in such other manner as the prospectus supplement may specify.
Any amounts on deposit in the reserve account and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in permitted
investments. Unless otherwise specified in the related prospectus supplement,
"permitted investments" will include obligations of the United States and
certain of its agencies, certificates of deposit, certain commercial paper, time
deposits and bankers acceptances sold by eligible commercial banks and certain
repurchase agreements of United States government securities with eligible
commercial banks. If a letter of credit is deposited with the trustee, the
letter of credit will be irrevocable. Unless otherwise specified in the related
prospectus supplement, any instrument deposited in a reserve account will name
the trustee, in its capacity as trustee for the securityholders, as beneficiary
and will be issued by an entity acceptable to each rating agency named in the
56
prospectus supplement. Additional information with respect to instruments
deposited in the reserve account will be set forth in the related prospectus
supplement.
Any amounts deposited, and payments on instruments deposited, in a reserve
account will be available for withdrawal from the reserve account for
distribution to securityholders, for the purposes, in the manner and at the
times specified in the related prospectus supplement.
Cross Support
If specified in the related prospectus supplement, the beneficial ownership
of separate groups of assets included in a trust fund may be evidenced by
separate classes of securities. In this case, credit support may be provided by
a cross support feature which requires that distributions be made with respect
to securities evidencing a beneficial ownership interest in, or secured by,
other asset groups within the same trust fund. The related prospectus supplement
for a series which includes a cross support feature will describe the manner and
conditions for applying the cross support feature.
If specified in the related prospectus supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
related trust funds. If applicable, the related prospectus supplement will
identify the trust funds to which the credit support relates and the manner of
determining the amount of the coverage provided and the application of the
coverage to the identified trust funds.
Other Insurance, Surety Bonds, Guaranties, Letters of Credit and Similar
Instruments or Agreements
If specified in the related prospectus supplement, a trust fund may also
include insurance, guaranties, surety bonds, letters of credit or similar
arrangements for the following purposes:
o to maintain timely payments or provide additional protection against
losses on the assets included in the trust fund,
o to pay administrative expenses, or
o to establish a minimum reinvestment rate on the payments made in
respect of the assets included in the trust fund or principal payment
rate on the assets.
These arrangements may include agreements under which securityholders are
entitled to receive amounts deposited in various accounts held by the trustee
upon the terms specified in the prospectus supplement.
Financial Instruments
If specified in the related prospectus supplement, the trust fund may
include one or more swap arrangements or other financial instruments that are
intended to meet the following goals:
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o to convert the payments on some or all of the assets from fixed to
floating payments, or from floating to fixed, or from floating based
on a particular index to floating based on another index;
o to provide payments in the event that any index rises above or falls
below specified levels; or
o to provide protection against interest rate changes, certain types of
losses, including reduced market value, or other payment shortfalls to
one or more classes of the related series.
If a trust fund includes financial instruments of this type, the
instruments may be structured to be exempt from the registration requirements of
the Securities Act of 1933, as amended.
The related prospectus supplement will include, or incorporate by
reference, material financial and other information about the provider of the
financial instruments.
Yield and Prepayment Considerations
The yields to maturity and weighted average lives of the certificates will
be affected primarily by the amount and timing of principal payments received on
or in respect of the assets included in the related trust fund. The original
terms to maturity of the loans in a given pool will vary depending upon the
types of loans included. Each prospectus supplement will contain information
with respect to the types and maturities of the loans in the related pool.
Unless otherwise specified in the related prospectus supplement, loans may be
prepaid, without penalty, in full or in part at any time. Multifamily Loans may
prohibit prepayment for a specified period after origination, may prohibit
partial prepayments entirely, and may require the payment of a prepayment
penalty upon prepayment in full or in part. The prepayment experience of the
loans in a pool will affect the life of the related series of securities.
The rate of prepayments on the loans cannot be predicted. A number of
factors, including homeowner mobility, economic conditions, the presence and
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds may affect the prepayment experience of loans.
Some of these factors, as well as other factors including limitations on
prepayment and the relative tax benefits associated with the ownership of
income-producing real property, may affect the prepayment experience of
Multifamily Loans.
Home Equity Loans and Home Improvement Contracts have been originated in
significant volume only during the past few years and neither depositor is aware
of any publicly available studies or statistics on the rate of prepayment of
these types of loans. Generally, Home Equity Loans and Home Improvement
Contracts are not viewed by borrowers as permanent financing. Accordingly, these
loans may experience a higher rate of prepayment than traditional first mortgage
loans. On the other hand, because Home Equity Loans that are revolving credit
line loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments to be lower than, or similar
to, those of traditional fully-amortizing first mortgages. The prepayment
experience of the related trust fund may also be
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affected by the frequency and amount of any future draws on any revolving credit
line loans. Other factors that might be expected to affect the prepayment rate
of a pool of Home Equity Loans or Home Improvement Contracts include the amounts
of, and interest rates on, the underlying senior mortgage loans, and the use of
first mortgage loans as long-term financing for home purchase and junior
mortgage loans as shorter-term financing for a variety of purposes, including
home improvement, education expenses and purchases of consumer durables such as
automobiles. Accordingly, these types of loans may experience a higher rate of
prepayment than traditional fixed-rate mortgage loans. In addition, any future
limitations on the right of borrowers to deduct interest payments on Home Equity
Loans for federal income tax purposes may further increase the rate of
prepayments of these loans.
Collections on Home Equity Loans that are revolving credit line loans may
vary because, among other things, borrowers may
o make payments during any month as low as the minimum monthly payment
for that month or, during the interest-only period for revolving
credit line loans and, in more limited circumstances, closed-end
loans, as to which an interest-only payment option has been selected,
the interest and the fees and charges for that month; or
o make payments as high as the entire outstanding principal balance plus
accrued interest and related fees and charges.
It is possible that borrowers may fail to make the required periodic payments.
In addition, collection on these loans may vary due to seasonal purchasing and
the payment habits of borrowers.
Unless otherwise provided in the related prospectus supplement, all
conventional loans other than Multifamily Loans will contain due-on-sale
provisions permitting the mortgagee or holder of the contract to accelerate the
maturity of the related loan upon the sale or certain other transfers of the
related mortgaged property by the borrower. As described in the related
prospectus supplement, conventional Multifamily Loans may contain due-on-sale
provisions, due-on-encumbrance provisions or both. Loans insured by the FHA, and
loans partially guaranteed by the VA, are assumable with the consent of the FHA
and the VA, respectively. Thus, the rate of prepayments of these loans may be
lower than that of conventional mortgage loans bearing comparable interest
rates. Unless otherwise provided in the related prospectus supplement, the
master servicer generally will enforce any due-on-sale or due-on-encumbrance
clause, to the extent it has knowledge of the conveyance or further encumbrance
or the proposed conveyance or proposed further encumbrance of the mortgaged
property and reasonably believes that it is entitled to do so under applicable
law. However, the master servicer will not take any enforcement action that
would impair or threaten to impair any recovery under any related insurance
policy. See "Operative Agreements--Collection Procedures" and "Material Legal
Aspects of the Mortgage Loans" in this prospectus for a description of certain
provisions of each operative agreement and certain legal matters that may affect
the prepayment experience of the loans.
The rate of prepayments of conventional mortgage loans has fluctuated
significantly in recent years. In general, prepayment rates may be influenced by
a variety of economic,
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geographic, social and other factors, including changes in housing needs, job
transfers, unemployment and servicing decisions. In general, however, if
prevailing rates fall significantly below the loan rate borne by a loan, that
loan is likely to be subject to a higher prepayment rate than would be the case
if prevailing interest rates remain at or above its rate. Conversely, if
prevailing interest rates rise appreciably above the loan rate borne by a loan,
that loan is likely to experience a lower prepayment rate than would be the case
if prevailing rates remain at or below its loan rate. However, there can be no
assurance that these generalities will hold true in particular cases. The rate
of prepayment of Multifamily Loans may also be affected by other factors
including loan terms including the existence of lockout periods, due-on-sale and
due-on-encumbrance clauses and prepayment changes, relative economic conditions
in the area where the mortgaged properties are located, the quality of
management of the mortgaged properties and possible changes in tax laws.
When a loan is prepaid in full, the borrower is charged interest on the
principal amount of the loan only for the number of days in the month actually
elapsed up to the date of the prepayment rather than for a full month. Unless
otherwise specified in the related prospectus supplement, the effect of a
prepayment in full will be to reduce the amount of interest passed through in
the following month to securityholders, because interest on the principal
balance of the prepaid loan will be paid only to the date of prepayment. Partial
prepayments in a given month may be applied to the outstanding principal
balances of the prepaid loans either on the first day of the month of receipt or
of the month following receipt. In the latter case, partial prepayments will not
reduce the amount of interest passed through in that month. Unless otherwise
specified in the related prospectus supplement, neither prepayments in full nor
partial prepayments will be passed through until the month following receipt.
Prepayment charges collected with respect to Multifamily Loans will be
distributed to securityholders, or to other persons entitled to them, as
described in the related prospectus supplement.
If so specified in the related prospectus supplement, the master servicer
will be required to remit to the trustee, with respect to each loan in the
related trust as to which a principal prepayment in full or a principal payment
which is in excess of the scheduled monthly payment and is not intended to cure
a delinquency was received during any due period, an amount, from and to the
extent of amounts otherwise payable to the master servicer as servicing
compensation, equal to the excess, if any, of
o 30 days' interest on the principal balance of the related loan at the
loan rate net of the annual rate at which the master servicer's
servicing fee accrues, over
o the amount of interest actually received on that loan during the due
period, net of the master servicer's servicing fee.
If the rate at which interest is passed through to the holders of
securities of a series is calculated on a loan by loan basis, disproportionate
principal prepayments with respect to loans bearing different loan rates will
affect the yield on the securities. In general, the effective yield to
securityholders will be slightly lower than the yield otherwise produced by the
applicable security pass-through rate and purchase price because, while interest
generally will accrue on each loan from the first day of the month, the
distribution of interest generally will not be made earlier than the month
following the month of accrual.
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Under certain circumstances, the master servicer, the holders of the
residual interests in a REMIC or any other person named in the related
prospectus supplement may have the option to purchase the assets of a trust fund
to effect early retirement of the related series of securities. See "Operative
Agreements--Termination; Optional Termination; Optional Calls" in this
prospectus.
Factors other than those identified in this prospectus and in the related
prospectus supplement could significantly affect principal prepayments at any
time and over the lives of the securities. The relative contribution of the
various factors affecting prepayment may also vary from time to time. There can
be no assurance as to the rate of payment of principal of trust fund assets at
any time or over the lives of the securities.
The prospectus supplement relating to a series of securities will discuss
in greater detail the effect of the rate and timing of principal payments
including prepayments, delinquencies and losses on the yield, weighted average
lives and maturities of the securities.
In the event that a receiver, bankruptcy trustee, debtor in possession or
similar entity (each, an "insolvency trustee") is appointed with respect to a
seller due to its insolvency or a seller becomes a debtor under the federal
Bankruptcy Code or any similar insolvency law, the insolvency trustee may
attempt to characterize the transfer of the related mortgage loans from the
seller to the depositor as a pledge to secure a financing rather than as a sale.
In the event that this attempt were successful, the insolvency trustee might
elect, among other remedies, to accelerate payment of the related securities and
liquidate the related loans, with each securityholder being entitled to receive
its allocable share of the principal balance of the loans, together with its
allocable share of interest on the loans at the applicable pass-through rate, or
weighted average "strip rate" as defined in the related prospectus supplement,
as the case may be, to the date of payment. In this event, the related
securityholders might incur reinvestment losses with respect to principal
received and investment losses attendant to the liquidation of the loans and the
resulting early retirement of the related security. In addition, certain delays
in distributions might be experienced by the securityholders in connection with
any such insolvency proceedings.
Operative Agreements
Set forth below is a summary of the material provisions of each operative
agreement that are not described elsewhere in this prospectus. This summary does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each operative agreement applicable to a
particular series of certificates. Where particular provisions or terms used in
the operative agreements are referred to, those provisions or terms are as
specified in the agreements. Except as otherwise specified, the operative
agreements described in this prospectus contemplate a trust fund that is
comprised of loans. Although an agreement governing a trust fund that consists
of Agency Securities or Private Label Securities may contain provisions that are
similar to those described below, they will be described more fully in the
related prospectus supplement.
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Assignment of Trust Fund Assets
Assignment of the Trust Fund Loans. When the securities of a series are
issued, the depositor named in the prospective supplement will cause the loans
comprising the related trust fund to be assigned to the trustee, together with
all principal and interest received by or on behalf of the depositor with
respect to those loans after the cut-off date, other than principal and interest
due on or before the cut-off date and other than any retained interest specified
in the related prospectus supplement. Concurrently with this assignment, the
trustee will deliver the securities to the depositor in exchange for the loans.
Each loan will be identified in a schedule appearing as an exhibit to the
related agreement. The schedule will include information as to the outstanding
principal balance of each loan after application of payments due on the cut-off
date, as well as information regarding the loan rate or APR, the current
scheduled monthly payment of principal and interest, the maturity of the loan,
its loan-to-value ratio or combined loan-to-value ratio at origination and
certain other information.
If so specified in the related prospectus supplement, and in accordance
with the rules of membership of Merscorp, Inc. and/or Mortgage Electronic
Registration Systems, Inc. (MERS) assignments of the mortgages for some or all
of the mortgage loans in the related trust will be registered electronically
through the MERS(R) System. With respect to mortgage loans registered through
the MERS(R) System, MERS shall serve as mortgagee of record solely as a nominee
in an administrative capacity on behalf of the trustee and shall not have any
interest in any of those mortgage loans.
In addition, the depositor will deliver to the trustee or a custodian the
following items in connection with each loan in the related trust fund:
o the original mortgage note or contract, endorsed without recourse in
blank or to the order of the trustee;
o in the case of Single Family Loans, Home Equity Loans or Multifamily
Loans, the mortgage, deed of trust or similar instrument (each, a
"mortgage") with evidence of recording indicated on the mortgage;
however, in the case of any mortgage not returned from the public
recording office, the depositor will deliver or cause to be delivered
a copy of the mortgage together with a certificate stating that the
original mortgage was delivered to the recording office;
o in the case of a contract, other than an unsecured contract, the
security interest in the mortgaged property securing the contract;
o an assignment of the mortgage or contract to the trustee, which
assignment will be in recordable form in the case of a mortgage
assignment or evidence that the mortgage is held for the trustee
through the MERS(R) System; and
o any other security documents as may be specified in the related
prospectus supplement, including those relating to any senior
lienholder interests in the related mortgaged property.
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Unless otherwise specified in the related prospectus supplement, the
depositor will promptly cause the assignments of any Single Family Loan, Home
Equity Loan and Multifamily Loan (except for mortgages held under the MERS(R)
System) to be recorded in the appropriate public office for real property
records, except in states in which, in the opinion of counsel acceptable to the
trustee, recording is not required to protect the trustee's interest in the
loans against the claim of any subsequent transferee or any successor to, or
creditor of, the depositor or the originator of the loans. Unless otherwise
specified in the related prospectus supplement, the depositor will promptly make
or cause to be made an appropriate filing of a UCC-1 financing statement in the
appropriate states to give notice of the trustee's ownership of the contracts.
With respect to any loans which are cooperative loans, the depositor will
deliver the following items to the trustee:
o the related original cooperative note endorsed, without recourse, in
blank or to the order of the trustee,
o the original security agreement,
o the proprietary lease or occupancy agreement,
o the recognition agreement,
o an executed financing agreement and the relevant stock certificate,
o related blank stock powers, and
o any other document specified in the related prospectus supplement.
The depositor will cause to be filed in the appropriate office an assignment and
a financing statement evidencing the trustee's security interest in each
cooperative loan.
The trustee or custodian will review the mortgage loan documents, upon
receipt, within the time period specified in the related prospectus supplement.
The trustee will hold the documents in trust for the benefit of the
securityholders. Unless otherwise specified in the related prospectus
supplement, if any of these documents are found to be missing or defective in
any material respect, the trustee or custodian will notify the master servicer
and the depositor, and the master servicer will notify the related seller. If
the seller cannot cure the omission or defect within a specified member of days
after receipt of notice, the seller will be obligated either to purchase the
loan from the trustee or to substitute a qualified substitute loan for the
defective loan. There can be no assurance that a seller will fulfill this
obligation. Although the master servicer may be obligated to enforce the
seller's obligation to the extent described in this prospectus under "Mortgage
Loan Program--Representations by Sellers; Repurchases", neither the master
servicer nor the depositor will be obligated to purchase the mortgage loan if
the seller defaults on its obligation, unless the breach also constitutes a
breach of the representations or warranties of the master servicer or the
depositor, as the case may be. Unless otherwise specified in the related
prospectus supplement, the seller's obligation to cure, purchase or substitute
constitutes the sole remedy available to the securityholders or the trustee for
the omission of, or a material defect in, a constituent loan document.
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The trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the loans as agent of the trustee.
The master servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the agreement. Upon a breach of any representation of the
master servicer which materially and adversely affects the interests of the
securityholders in a loan, the master servicer will be obligated either to cure
the breach in all material respects or to purchase the loan. Unless otherwise
specified in the related prospectus supplement, this obligation to cure,
purchase or substitute constitutes the sole remedy available to the
securityholders or the trustee for a breach of representation by the master
servicer.
Notwithstanding the provisions of the foregoing two paragraphs, with
respect to a trust fund for which a REMIC election is to be made, unless the
related prospectus supplement otherwise provides, no purchase or substitution of
a loan will be made if the purchase or substitution would result in a prohibited
transaction tax under the Internal Revenue Code.
Assignment of Agency Securities. The applicable depositor will cause any
Agency Securities included in a trust fund to be registered in the name of the
trustee or its nominee, and the trustee concurrently will execute, countersign
and deliver the securities. Each Agency Security will be identified in a
schedule appearing as an exhibit to the related pooling and servicing agreement,
which will specify as to each Agency Security its original principal amount,
outstanding principal balance as of the cut-off date, annual pass-through rate,
if any, and the maturity date.
Assignment of Private Label Securities. The applicable depositor will cause
any Private Label Securities included in a trust fund to be registered in the
name of the trustee. The trustee or custodian will have possession of any
Private Label Securities that are in certificated form. Unless otherwise
specified in the related prospectus supplement, the trustee will not be in
possession, or be assignee of record, of any assets underlying the Private Label
Securities. See "The Trust Fund--Private Label Securities." The Private Label
Securities will be identified in a schedule appearing as an exhibit to the
related agreement, which will specify the original principal amount, the
outstanding principal balance as of the cut-off date, the annual pass-through
rate or interest rate, the maturity date and other pertinent information for the
Private Label Securities conveyed to the trustee.
Payments on Loans; Deposits to Security Account
Each sub-servicer servicing a loan pursuant to a sub-servicing agreement
will establish and maintain a subservicing account which meets the requirements
and is otherwise acceptable to the master servicer. A sub-servicing account must
be established with a Federal Home Loan Bank or with a depository institution
(including the sub-servicer if it is a depository institution), the accounts in
which are insured by the Federal Deposit Insurance Corporation (FDIC). If a
sub-servicing account is maintained at an institution that is a Federal Home
Loan Bank or an FDIC-insured institution and, in either case, the amount on
deposit in the sub-servicing account exceeds the FDIC insurance coverage amount,
then such excess amount must be remitted to the
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master servicer within one business day after receipt. In addition, the
sub-servicer must maintain a separate account for escrow and impound funds
relating to the loans. Each sub-servicer is required to deposit into its
sub-servicing account on a daily basis all amounts that it receives in respect
of the loans described immediately below under "--Sub-Servicing by Sellers",
less its servicing or other compensation. On or before the date specified in the
sub-servicing agreement, the sub-servicer will remit to the master servicer or
the trustee all funds held in the sub-servicing account with respect to the
loans that are required to be remitted. The sub-servicer is also required to
advance, on the scheduled remittance date, an amount corresponding to any
monthly installment of principal and interest, less its servicing or other
compensation, on any loan the payment of which was not received from the
borrower. Unless otherwise specified in the related prospectus supplement, this
obligation of each sub-servicer to advance continues up to and including the
first of the month following the date on which the related mortgaged property is
sold at a foreclosure sale or is acquired on behalf of the securityholders by
deed in lieu of foreclosure, or until the related loan is liquidated.
The master servicer will establish and maintain with respect to the related
trust fund a security account which is a separate account or accounts for the
collection of payments on the assets in the trust fund. Unless otherwise
specified in the related prospectus supplement, each security account shall meet
one of the requirements listed below.
o It must be maintained with a depository institution the debt
obligations of which (or in the case of a depository institution that
is the principal subsidiary of a holding company, the obligations of
which) are rated in one of the two highest rating categories by each
rating agency rating(s) named in the prospectus supplement.
o It must be an account the deposits in which are fully insured by the
FDIC.
o It must be an account or accounts the deposits in which are insured by
the FDIC to its established limits and the uninsured deposits in which
are otherwise secured such that, as evidenced by an opinion of
counsel, the securityholders have a claim with respect to the funds in
the security account or a perfected first priority security interest
against any collateral securing those funds that is superior to the
claims of any other depositors or general creditors of the depository
institution with which the security account is maintained.
o It must be an account otherwise acceptable to each rating agency named
in the prospectus supplement.
The collateral eligible to secure amounts in the security account is limited to
United States government securities and other high-quality permitted investments
.. A security account may be maintained as an interest-bearing account or the
funds held in the account may be invested pending each succeeding distribution
date in permitted investments. Unless otherwise specified in the related
prospectus supplement, the master servicer or its designee will be entitled to
receive any interest or other income earned on funds in the security account as
additional compensation and will be obligated to deposit in the security account
the amount of any loss immediately as realized. The security account may be
maintained with the master servicer or
65
with a depository institution that is an affiliate of the master servicer,
provided that the master servicer or its affiliate, as applicable, meets the
standards set forth above.
On a daily basis, the master servicer will deposit in the certificate
account for each trust fund, to the extent applicable and unless otherwise
specified in the related prospectus supplement and provided in the pooling and
servicing agreement, the following payments and collections received, or
advances made, by the master servicer or on its behalf subsequent to the cut-off
date, other than payments due on or before the cut-off date and exclusive of any
amounts representing a retained interest:
o all payments on account of principal, including principal prepayments
and, if specified in the related prospectus supplement, prepayment
penalties, on the loans;
o all payments on account of interest on the loans, net of applicable
servicing compensation;
o Insurance Proceeds;
o Liquidation Proceeds;
o any net proceeds received on a monthly basis with respect to any
properties acquired on behalf of the securityholders by foreclosure or
deed in lieu of foreclosure;
o all proceeds of any loan or mortgaged property purchased by the master
servicer, the depositor, any sub-servicer or any seller as described
in this prospectus under "Loan Program--Representations by Sellers;
Repurchases or Substitutions" or "--Assignment of Trust Fund Assets"
above and all proceeds of any loan repurchased as described in this
prospectus under "--Termination; Optional Termination" below;
o all payments required to be deposited in the security account with
respect to any deductible clause in any blanket insurance policy
described in this prospectus under "--Hazard Insurance" below;
o any amount required to be deposited by the master servicer in
connection with losses realized on investments of funds held in the
security account made for the benefit of the master servicer; and
o all other amounts required to be deposited in the security account
pursuant to the related agreement.
Pre-Funding Account
If so provided in the related prospectus supplement, the master servicer
will establish and maintain a pre-funding account in the name of the trustee on
behalf of the related securityholders into which the applicable depositor will
deposit the pre-funded amount on the related closing date. The trustee will use
the pre-funded amount to purchase subsequent loans from the depositor from time
to time during the funding period which generally runs from the closing date to
the date specified in the related prospectus supplement. At the end of the
funding period, any
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amounts remaining in the pre-funding account will be distributed to the related
securityholders in the manner and priority specified in the related prospectus
supplement as a prepayment of principal of the related securities.
Sub-Servicing of Loans
Each seller of a loan or any other servicing entity may act as the
sub-servicer for that loan pursuant to a sub-servicing agreement which will not
contain any terms inconsistent with the related operative agreement. While each
sub-servicing agreement will be a contract solely between the master servicer
and the related sub-servicer, the operative agreement pursuant to which a series
of securities is issued will provide that, the trustee or any successor master
servicer must recognize the sub-servicer's rights and obligations under the
sub-servicing agreement, if for any reason the master servicer for that series
is no longer the master servicer of the related loans.
With the approval of the master servicer, a sub-servicer may delegate its
servicing obligations to third-party servicers, but the sub-servicer will remain
obligated under its sub-servicing agreement. Each sub-servicer will be required
to perform the customary functions of a servicer of mortgage loans. These
functions generally include
o collecting payments from borrowers and remitting collections to the
master servicer;
o maintaining hazard insurance policies as described in this prospectus
and in any related prospectus supplement, and filing and settling
claims under those policies, subject in certain cases to the master
servicer's right to approve settlements in advance;
o maintaining borrower escrow or impoundment accounts for payment of
taxes, insurance and other items required to be paid by the borrower
under the related loan;
o processing assumptions or substitutions, although, unless otherwise
specified in the related prospectus supplement, the master servicer is
generally required to enforce due-on-sale clauses to the extent their
enforcement is permitted by law and would not adversely affect
insurance coverage;
o attempting to cure delinquencies;
o supervising foreclosures;
o inspecting and managing mortgaged properties under certain
circumstances;
o maintaining accounting records relating to the loans; and
o to the extent specified in the related prospectus supplement,
maintaining additional insurance policies or credit support
instruments and filing and settling claims under them.
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A sub-servicer will also be obligated to make advances in respect of delinquent
installments of principal and interest on loans, as described more fully in this
prospectus under "--Payments on Loans; Deposits to Security Account" above, and
in respect of certain taxes and insurance premiums not paid on a timely basis by
borrowers.
As compensation for its servicing duties, each sub-servicer will be
entitled to a monthly servicing fee, to the extent the scheduled payment on the
related loan has been collected, in the amount set forth in the related
prospectus supplement. Each sub-servicer is also entitled to collect and retain,
as part of its servicing compensation, any prepayment or late charges provided
in the note or related instruments. Each sub-servicer will be reimbursed by the
master servicer for certain expenditures which it makes, generally to the same
extent the master servicer would be reimbursed under the agreement. The master
servicer may purchase the servicing of loans if the sub-servicer elects to
release the servicing of the loans to the master servicer. See "--Servicing and
Other Compensation and Payment of Expenses" below.
Each sub-servicer may be required to agree to indemnify the master servicer
for any liability or obligation sustained by the master servicer in connection
with any act or failure to act by the sub-servicer in its servicing capacity.
Each sub-servicer will be required to maintain a fidelity bond and an errors and
omissions policy with respect to its officers, employees and other persons
acting on its behalf or on behalf of the master servicer.
Each sub-servicer will be required to service each loan pursuant to the
terms of its sub-servicing agreement for the entire term of the loan, unless the
sub-servicing agreement is earlier terminated by the master servicer or unless
servicing is released to the master servicer. The master servicer may terminate
a sub-servicing agreement without cause, upon written notice to the sub-servicer
in the manner specified in that sub-servicing agreement.
The master servicer may agree with a sub-servicer to amend a sub-servicing
agreement or, upon termination of the sub-servicing agreement, the master
servicer may act as servicer of the related loans or enter into new
sub-servicing agreements with other sub-servicers. If the master servicer acts
as servicer, it will not assume liability for the representations and warranties
of the sub-servicer which it replaces. Each sub-servicer must be a seller or
meet the standards for becoming a seller or have such servicing experience as to
be otherwise satisfactory to the master servicer and the depositor. The master
servicer will make reasonable efforts to have the new sub-servicer assume
liability for the representations and warranties of the terminated sub-servicer,
but no assurance can be given that an assumption of liability will occur. In the
event of an assumption of liability, the master servicer may in the exercise of
its business judgment, release the terminated sub-servicer from liability in
respect of such representations and warranties. Any amendments to a
sub-servicing agreement or new sub-servicing agreements may contain provisions
different from those which are in effect in the original sub-servicing
agreement. However, each sub-servicing agreement will provide that any amendment
or new agreement may not be inconsistent with or violate the original
sub-servicing agreement.
Collection Procedures
The master servicer, directly or through one or more sub-servicers, will
make reasonable efforts to collect all payments called for under the loans and
will, consistent with each agreement
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and any mortgage pool insurance policy, primary mortgage insurance policy, FHA
insurance, VA guaranty and bankruptcy bond or alternative arrangements, follow
such collection procedures as are customary with respect to loans that are
comparable to the loans included in the related trust fund. Consistent with the
preceding sentence, the master servicer may, in its discretion,
o waive any assumption fee, late payment or other charge in connection
with a loan; and
o to the extent not inconsistent with the coverage of the loan by a pool
insurance policy, primary mortgage insurance policy, FHA insurance, VA
guaranty or bankruptcy bond or alternative arrangements, arrange with
the borrower a schedule for the liquidation of delinquencies running
for no more than 125 days after the applicable due date for each
payment.
Both the sub-servicer and the master servicer remain obligated to make advances
during any period when an arrangement of this type is in effect.
In certain instances in which a mortgage loan is in default (or if default
is reasonably foreseeable), the master servicer may, acting in accordance with
procedures specified in the applicable pooling and servicing agreement, permit
certain modifications of the mortgage loan rather than proceeding with
foreclosure. Modifications of this type may have the effect of reducing the
mortgage rate, forgiving the payment of principal or interest or extending the
final maturity date of the mortgage loan. Any such modified mortgage loan may
remain in the related trust fund, and the reduction in collections resulting
from the modification may result in reduced distributions of interest (or other
amounts) on, or may extend the final maturity of, one or more classes of the
related securities. If no satisfactory arrangement can be made for the
collection of such delinquent payments, the master servicer will continue to
follow procedures specified in the applicable pooling and servicing agreement.
These procedures could result, among other possible outcomes, in the sale of the
delinquent mortgage loan by the master servicer on behalf of the related trust
fund.
Unless otherwise specified in the related prospectus supplement, in any
case in which property securing a loan has been, or is about to be, conveyed by
the borrower, the master servicer will, to the extent it has knowledge of the
conveyance or proposed conveyance, exercise its rights to accelerate the
maturity of the loan under any applicable due-on-sale clause, but only if the
exercise of its rights is permitted by applicable law and will not impair or
threaten to impair any recovery under any primary mortgage insurance policy. If
these conditions are not met or if the master servicer reasonably believes it is
unable under applicable law to enforce the due-on-sale clause, or if the loan is
insured by the FHA or partially guaranteed by the VA, the master servicer will
enter into an assumption and modification agreement with the person to whom such
property has been or is about to be conveyed. Pursuant to the assumption
agreement, the transferee of the property becomes liable for repayment of the
loan and, to the extent permitted by applicable law, the original borrower also
remains liable on the loan. Any fee collected by or on behalf of the master
servicer for entering into an assumption agreement will be retained by or on
behalf of the master servicer as additional servicing compensation. In the case
of Multifamily Loans and unless otherwise specified in the related prospectus
supplement, the
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master servicer will agree to exercise any right it may have to accelerate the
maturity of a Multifamily Loan to the extent it has knowledge of any further
encumbrance of the related mortgaged property effected in violation of any
applicable due-on-encumbrance clause. See "Material Legal Aspects of the
Mortgage Loans--Due-on-Sale Clauses" in this prospectus. In connection with any
assumption, the terms of the original loan may not be changed.
With respect to cooperative loans, any prospective purchaser of a
cooperative unit will generally have to obtain the approval of the board of
directors of the relevant cooperative before purchasing the shares and acquiring
rights under the related proprietary lease or occupancy agreement. See "Material
Legal Aspects of the Loans" in this prospectus. This approval is usually based
on the purchaser's income and net worth and numerous other factors. Although the
cooperative's approval is unlikely to be unreasonably withheld or delayed, the
need to acquire approval could limit the number of potential purchasers for
those shares and otherwise limit the trust fund's ability to sell and realize
the value of those shares.
In general, a "tenant-stockholder," as defined in Section 216(b)(2) of the
Internal Revenue Code, of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of section 216(b)(1) of the Code is allowed a
deduction for amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of certain interest expenses and real
estate taxes allowable as a deduction under Section 216(a) of the Code to the
cooperative corporation under Sections 163 and 164 of the Code. In order for a
corporation to qualify under Section 216(b)(1) of the Code for the taxable year
in which these items are allowable as a deduction to the corporation, Section
216(b)(1) requires, among other things, that at least 80% of the gross income of
the cooperative corporation be derived from its tenant-stockholders. By virtue
of this requirement, the status of a corporation for purposes of Section
216(b)(1) of the Code must be determined on a year-to-year basis. Consequently,
there can be no assurance that cooperatives relating to particular cooperative
loans will qualify under this section for any given year. In the event that a
cooperative fail to qualify for one or more years, the value of the collateral
securing the related cooperative loan could be significantly impaired because no
deduction would be allowable to tenant-stockholders under Section 216(a) of the
Code with respect to those years. In view of the significance of the tax
benefits accorded tenant-stockholders of a corporation that qualifies under
Section 216(b)(1) of the Code, the likelihood that such a failure would be
permitted to continue over a period of years appears remote.
Hazard Insurance
The master servicer will require each borrower to maintain a hazard
insurance policy providing for no less than the coverage of the standard form of
fire insurance policy with extended coverage customary for the type of mortgaged
property in the state where the property is located. This coverage will be in an
amount not less than the replacement value of the improvements or manufactured
home securing the loan or the principal balance owing on the loan, whichever is
less. All amounts collected by the master servicer under any hazard policy will
be deposited in the related security account, except for amounts to be applied
to the restoration or repair of the mortgaged property or released to the
borrower in accordance with the master servicer's normal servicing procedures.
In the event that the master servicer maintains a blanket policy insuring
against hazard losses on all the loans comprising part of a trust fund, it will
conclusively be deemed to have satisfied its obligation to maintain hazard
insurance. A
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blanket policy may contain a deductible clause, in which case the master
servicer will be required to deposit into the related security account from its
own funds the amounts which would have been deposited in the security account
but for the deductible clause. Any additional insurance coverage for mortgaged
properties with respect to a pool of Multifamily Loans will be specified in the
related prospectus supplement.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements or manufactured home
securing a loan by fire, lightning, explosion, smoke, windstorm and hail, riot,
strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Although the policies relating to the loans may
have been underwritten by different insurers under different state laws in
accordance with different applicable forms and therefore may not contain
identical terms and conditions, the basic policy terms are dictated by
respective state laws. In addition, most policies typically do not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mud flows), nuclear reactions, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all-inclusive. If the mortgaged property
securing a loan is located in a federally designated special flood area at the
time of origination, the master servicer will require the borrower to obtain and
maintain flood insurance.
The hazard insurance policies covering mortgaged properties typically
contain a clause which have the effect of requiring the insured at all times to
carry insurance of a specified percentage -generally 80% to 90% - of the full
replacement value of the mortgaged property in order to recover the full amount
of any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of
o the actual cash value (generally defined as replacement cost at the
time and place of loss, less physical depreciation) of the
improvements damaged or destroyed, generally defined to equal
replacement cost at the time and place of the loss less physical
depreciation; and
o such proportion of the loss as the amount of insurance carried bears
to the specified percentage of the full replacement cost of the
improvements.
Since the amount of hazard insurance that the master servicer may cause to be
maintained on the improvements securing the loans will decline as the principal
balances owing on the loans decrease, and since improved real estate generally
has appreciated in value over time in the past, the effect of this requirement
may be that, in the event of a partial loss, hazard insurance proceeds will be
insufficient to restore the damaged property fully. If specified in the related
prospectus supplement, a special hazard insurance policy will be obtained to
insure against certain of the uninsured risks described. See "Credit
Enhancement--Special Hazard Insurance Policies" in this prospectus.
The master servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
cooperative loan. Generally, the
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cooperative itself is responsible for maintenance of hazard insurance for the
property owned by the cooperative and the tenant-stockholders of that
cooperative do not maintain individual hazard insurance policies. To the extent,
however, that a cooperative and the related borrower on a cooperative loan do
not maintain such insurance or do not maintain adequate coverage or any
insurance proceeds are not applied to the restoration of damaged property, any
damage to the borrower's cooperative dwelling or the cooperative's building
could significantly reduce the value of the collateral securing the cooperative
loan to the extent not covered by other credit support.
Realization upon Defaulted Mortgage Loans
Primary Mortgage Insurance Policies. To the extent specified in the related
prospectus supplement, the master servicer will maintain, or cause each
sub-servicer to maintain, in full force and effect, a primary mortgage insurance
policy with regard to each loan for which coverage is required. The master
servicer will not cancel or refuse to renew any primary mortgage insurance
policy in effect at the time of the initial issuance of a series of securities
that is required to be kept in force under the applicable agreement unless the
primary mortgage insurance policy that replaces the cancelled or nonrenewed
policy is maintained with an insurer whose claims-paying ability is sufficient
to maintain the current rating of the classes of securities of that series by
each rating agency named in the related prospectus supplement.
Although the terms and conditions of primary mortgage insurance vary, the
amount of a claim for benefits under a primary mortgage insurance policy
covering a loan will consist of the insured percentage of the unpaid principal
amount of the covered loan, accrued and unpaid interest thereon and
reimbursement of certain expenses, less the following amounts:
o all rents or other payments collected or received by the insured other
than the proceeds of hazard insurance that are derived from or in any
way related to the mortgaged property,
o hazard insurance proceeds in excess of the amount required to restore
the mortgaged property and which have not been applied to the payment
of the loan,
o amounts expended but not approved by the issuer of the related primary
mortgage insurance policy,
o claim payments previously made by the primary insurer, and
o unpaid premiums.
Primary mortgage insurance policies generally reimburse losses sustained by
reason of defaults in payments by borrowers. Primary mortgage insurance policies
do not insure against, and exclude from coverage, a loss sustained by reason of
a default arising from or involving the following matters, among others:
o fraud or negligence in origination or servicing of the loan, including
misrepresentation by the originator, borrower or other persons
involved in the origination of the loan,
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o failure to construct the related mortgaged property in accordance with
specified plans,
o physical damage to the mortgaged property and
o lack of approval by the primary mortgage insurance policy insurer of
the master servicer or sub-servicer to act as servicer of the loan.
Recoveries Under a Primary Mortgage Insurance Policy. As conditions
precedent to the filing or payment of a claim under a primary mortgage insurance
policy covering a loan, the insured will be required
o to advance or discharge all hazard insurance policy premiums;
o to advance
- real estate property taxes,
- all expenses required to maintain the related mortgaged property
in at least as good a condition as existed at the effective date
of the policy, ordinary wear and tear excepted,
- mortgaged property sales expenses,
- any outstanding liens on the mortgaged property (as defined in
the policy) and
- foreclosure costs, including court costs and reasonable
attorneys' fees,
in each case as necessary and approved in advance by the primary
mortgage insurance policy insurer;
o in the event of any physical loss or damage to the mortgaged property,
to have the mortgaged property restored and repaired to at least as
good a condition as existed at the effective date of the policy,
ordinary wear and tear excepted; and
o to tender to the primary mortgage insurance policy carrier good and
merchantable title to and possession of the mortgaged property.
In those cases in which a loan is serviced by a sub-servicer, the
sub-servicer, on behalf of itself, the trustee and securityholders, will present
claims to the primary mortgage insurance policy carrier, and all collections
under the policy will be deposited in the sub-servicing account. In all other
cases, the master servicer, on behalf of itself, the trustee and the
securityholders, will present claims to the carrier of each primary mortgage
insurance policy and will take such reasonable steps as are necessary to receive
payment or to permit recovery under the policy with respect to defaulted loans.
As set forth above, all collections by or on behalf of the master servicer under
any primary mortgage insurance policy and, when the mortgaged property has not
been restored, the hazard insurance policy are to be deposited in the security
account, subject to withdrawal as previously described.
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If the mortgaged property securing a defaulted loan is damaged and any
proceeds from the related hazard insurance policy are insufficient to restore
the damaged property to a condition sufficient to permit recovery under any
related primary mortgage insurance policy, the master servicer is not required
to expend its own funds to restore the damaged property unless it determines
that
o the restoration will increase the proceeds to securityholders upon
liquidation of the loan after reimbursement of the master servicer for
its expenses, and
o the master servicer will be able to recover its expenses from related
Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted loan is not available under the primary mortgage
insurance policy for the reasons set forth in the preceding paragraph, or if the
defaulted loan is not covered by a primary mortgage insurance policy, the master
servicer will be obligated to follow such normal practices and procedures as it
deems necessary or advisable to realize upon the defaulted loan. If the proceeds
of any liquidation of the related mortgaged property are less than the principal
balance of the loan plus accrued interest that is payable to securityholders,
the trust fund will realize a loss in the amount of that difference plus the
amount of expenses that it incurred in connection with the liquidation and that
are reimbursable under the agreement. In the unlikely event that proceedings
result in a total recovery which, after reimbursement to the master servicer of
its expenses, is in excess of the principal balance of the defaulted loan plus
accrued interest that is payable to securityholders, the master servicer will be
entitled to withdraw or retain from the security account amounts representing
its normal servicing compensation with respect to that loan and, unless
otherwise specified in the related prospectus supplement, amounts representing
the balance of the excess amount, exclusive of any amount required by law to be
forwarded to the related borrower, as additional servicing compensation.
If the master servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the master servicer, exceed the principal balance of
the related loan plus accrued interest that is payable to securityholders, the
master servicer will be entitled to withdraw or retain from the security account
amounts representing its normal servicing compensation with respect to that
loan. In the event that the master servicer has expended its own funds to
restore the damaged mortgaged property and those funds have not been reimbursed
under the related hazard insurance policy, the master servicer will be entitled
to withdraw from the security account, out of related Liquidation Proceeds or
Insurance Proceeds, an amount equal to the expenses that it incurred, in which
event the trust fund may realize a loss up to the amount of those expenses.
Since Insurance Proceeds cannot exceed deficiency claims and certain expenses
incurred by the master servicer, no payment or recovery will result in a
recovery to the trust fund that exceeds the principal balance of the defaulted
loan together with accrued interest. See "Credit Enhancement" in this
prospectus.
Servicing and Other Compensation and Payment of Expenses
The master servicer's primary servicing compensation with respect to a
series of securities will come from the payment to it each month, out of each
interest payment on a loan,
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of an amount equal to the annual percentage specified in the related prospectus
supplement of the outstanding principal balance of that loan. Since the master
servicer's primary compensation is a percentage of the outstanding principal
balance of each mortgage loan, this amount will decrease as the mortgage loans
amortize. In addition to this primary servicing compensation, the master
servicer or the sub-servicers will be entitled to retain all assumption fees and
late payment charges to the extent collected from borrowers and, if so provided
in the related prospectus supplement, any prepayment charges and any interest or
other income which may be earned on funds held in the security account or any
sub-servicing account. Unless otherwise specified in the related prospectus
supplement, any sub-servicer will receive a portion of the master servicer's
primary compensation as its sub-servicing compensation.
Unless otherwise specified in the related prospectus supplement, the master
servicer will pay from its servicing compensation, in addition to amounts
payable to any sub-servicer, certain expenses incurred in connection with its
servicing of the loans, including, without limitation
o payment of any premium for any insurance policy, guaranty, surety or
other form of credit enhancement as specified in the related
prospectus supplement;
o payment of the fees and disbursements of the trustee and independent
accountants;
o payment of expenses incurred in connection with distributions and
reports to securityholders; and
o payment of any other expenses described in the related prospectus
supplement.
Evidence as to Compliance
Each operative agreement will provide that a firm of independent public
accountants will furnish a statement to the trustee, on or before a specified
date in each year, to the effect that, on the basis of the examination by the
firm conducted substantially in compliance with the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages Serviced for Freddie
Mac, the servicing by or on behalf of the master servicer of loans, the Agency
Securities or the Private Label Securities, under agreements substantially
similar to one another (including the governing agreement), was conducted in
compliance with those agreements except for any significant exceptions or errors
in records that, in the opinion of the firm, the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages Serviced by Freddie Mac
requires it to report. In rendering this statement the accounting firm may rely,
as to matters relating to the direct servicing of mortgage loans, Agency
Securities or Private Label Securities by sub-servicers, upon comparable
statements of firms of independent public accountants rendered within one year
with respect to the sub-servicers for examinations conducted substantially in
compliance with the Uniform Single Audit Program for Mortgage Bankers or the
Audit Program for Mortgages Serviced for Freddie Mac.
Each operative agreement will also provide for delivery to the related
trustee, on or before a specified date in each year, of an annual statement
signed by two officers of the master servicer to the effect that the master
servicer has fulfilled its obligations under the agreement throughout the
preceding year.
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Copies of the annual accountants' statement and the statement of officers
of the master servicer may be obtained by securityholders of the related series
without charge upon written request to the master servicer at the address set
forth in the related prospectus supplement.
Certain Matters Regarding the Master Servicer and the Depositors
The master servicer under each operative agreement will be named in the
related prospectus supplement. The entity serving as master servicer may have
normal business relationships with the depositor or the depositor's affiliates.
Each operative agreement will provide that the master servicer may not
resign from its obligations and duties under the agreement except (i) upon a
determination that it is no longer permissible to perform them under applicable
law or (ii) if so provided in the related operative agreement, a determination
by the master servicer that it will no longer engage in the business of
servicing mortgage loans. In no event will the master servicer's resignation
become effective until the trustee or a successor servicer has assumed the
master servicer's obligations and duties under the agreement.
Each operative agreement will further provide that none of the master
servicer, the depositor or any director, officer, employee or agent of the
master servicer or of the depositor will be under any liability to the related
trust fund or the securityholders for any action taken, or for refraining from
the taking of any action, in good faith pursuant to the agreement, or for errors
in judgment. However, none of the master servicer, the depositor or any
director, officer, employee or agent of the master servicer or of the depositor
will be protected against any liability which would otherwise be imposed by
reason of willful misfeasance, bad faith or negligence in the performance of
duties under the agreement or by reason of reckless disregard of obligations and
duties under the agreement. Each operative agreement will further provide that
the master servicer, the depositor and any director, officer, employee or agent
of the master servicer or of the depositor will be entitled to indemnification
by the related trust fund and will be held harmless against any loss, liability
or expense incurred in connection with (i) any legal action relating to the
agreement or the securities or (ii) a breach of a representation or warranty
regarding the loan or loans, other than
o any loss, liability or expense related to any specific loan in the
trust fund or the loans in general except for any loss, liability or
expense otherwise reimbursable under the agreement, and
o any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence in the performance of duties
under the agreement or by reason of reckless disregard of obligations
and duties under the agreement.
In addition to the foregoing, if so provided in the agreement, the master
servicer, the depositor and any director, officer, employee or agent of the
master servicer or of the depositor may be entitled to indemnification by the
related trust fund and may be held harmless against any loss, liability or
expense in connection with any actions taken under the agreement.
In addition, each operative agreement will provide that neither the master
servicer nor the depositor will be under any obligation to appear in, prosecute
or defend any legal action which is
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not incidental to its responsibilities under the agreement and which, in its
opinion, may involve it in any expense or liability. However, the master
servicer or the depositor may, in its discretion, undertake any action which it
may deem necessary or desirable with respect to the agreement and the rights and
duties of the parties and the interests of the securityholders. In that event,
the legal expenses and costs of the action and any resulting liability will be
expenses, costs and liabilities of the trust fund, and the master servicer or
the depositor, as the case may be, will be entitled to reimbursement from funds
otherwise distributable to securityholders.
Any entity into which the master servicer may be merged or consolidated, or
any entity resulting from any merger or consolidation to which the master
servicer is a party, or any entity succeeding to the business of the master
servicer, will be the successor of the master servicer under each agreement,
provided that the successor entity is qualified to sell loans to, and service
loans on behalf of, Fannie Mae or Freddie Mac and that the merger, consolidation
or succession does not adversely affect the then current rating of the
securities rated by each rating agency named in the related prospectus
supplement.
Events of Default; Rights upon Event of Default
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related prospectus supplement, the following will be deemed
"events of default" under each agreement:
o any failure by the master servicer to distribute to security holders
of any class any required payment - other than an advance - which
failure continues unremedied for five business days after the giving
of written notice to the master servicer by the trustee or the
depositor, or to the master servicer, the depositor and the trustee by
the holders of securities of that class evidencing not less than 25%
of the aggregate percentage interests evidenced by that class;
o any failure by the master servicer to make an advance as required
under the agreement, unless cured as specified in the agreement;
o any failure by the master servicer duly to observe or perform in any
material respect any of its other covenants or agreements in the
agreement, which failure continues unremedied for a specified number
of days after the giving of written notice of the failure to the
master servicer by the trustee or the depositor, or to the master
servicer, the depositor and the trustee by the holders of securities
of any class evidencing not less than 25% of the aggregate percentage
interests constituting that class; and
o events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and certain actions by or on behalf
of the master servicer indicating its insolvency, reorganization or
inability to pay its obligations.
If specified in the related prospectus supplement, the agreement will
permit the trustee to sell the assets of the trust fund in the event that
payments are insufficient to make the payments required under the agreement. The
assets of the trust fund will be sold only under the circumstances and in the
manner specified in the related prospectus supplement.
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So long as an event of default under the related agreement remains
unremedied, the depositor or the trustee may, and, at the direction of holders
of securities of any class evidencing not less than 51% of the aggregate
percentage interests constituting that class and under such other circumstances
as may be specified in the agreement, the trustee shall, terminate all of the
rights and obligations of the master servicer relating to the trust fund and in
and to the related loans. Thereupon the trustee will succeed to all of the
responsibilities, duties and liabilities of the master servicer under the
agreement, including, if specified in the related prospectus supplement, the
obligation to make advances, and the trustee will be entitled to similar
compensation arrangements. In the event that the trustee is unwilling or unable
to act in this way, it may appoint, or petition a court of competent
jurisdiction to appoint, a loan servicing institution with a net worth of at
least $10,000,000 to act as successor to the master servicer under the
agreement. Pending the appointment, the trustee is obligated to act in this
capacity. The trustee and any successor master servicer may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the master servicer under the agreement.
No securityholder, solely by virtue of its status as a securityholder, will
have any right under any agreement to institute any proceeding with respect to
that agreement, unless
o the holder has previously given to the trustee written notice of
default;
o the holders of securities of any class evidencing not less than 25% of
the aggregate percentage interests constituting that class have made
written request upon the trustee to institute the proceeding in its
own name as trustee and have offered a reasonable indemnity to the
trustee; and
o the trustee for 60 days has neglected or refused to institute any such
proceeding.
Indenture. Unless otherwise specified in the related prospectus supplement,
the following will be deemed "events of default" under the indenture for each
series of notes:
o failure to pay for five days or more any principal or interest on any
note of that series;
o failure by the depositor or the trust to perform any other covenant in
the indenture, which failure continues unremedied for 30 days after
notice is given in accordance with the procedures described in the
related prospectus supplement;
o the material breach of any representation or warranty made by the
depositor or the trust in the indenture or in any document delivered
under the indenture, which breach continues uncured for 30 days after
notice is given in accordance with the procedures described in the
related prospectus supplement;
o events of bankruptcy insolvency, receivership or liquidation of the
depositor in the trust; or
o any other event of default specified in the indenture.
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If an event of default with respect to the notes of a series (other than
principal only notes) occurs and is continuing, either the trustee or the
holders of a majority of the then aggregate outstanding amount of the notes of
that series may declare the principal amount of all the notes of that series to
be due and payable immediately. In the case of principal only notes, the portion
of the principal amount necessary to make such a declaration will be specified
in the related prospective supplement. This declaration may, under certain
circumstances, be rescinded and annulled by the holders of more than 50% of the
percentage ownership interest of the notes of that series.
If, following an event of default with respect to any series of notes, the
notes of that series have been declared to be due and payable, the trustee may,
in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of that series and to continue
to apply distributions on the collateral as if there had been no declaration of
acceleration so long as the collateral continues to provide sufficient funds for
the payment of principal and interest on the notes as they would have become due
if there had not been a declaration. In addition, the trustee may not sell or
otherwise liquidate the collateral securing the notes of a series following an
event of default, unless one of the following conditions precedent has occurred:
o the holders of 100% of the percentage ownership interest in the
related notes consent to the sale or liquidation;
o the proceeds of the sale or liquidation are sufficient to pay the full
amount of principal and accrued interest, due and unpaid, on the
related notes at the date of the sale or liquidation; or
o the trustee determines that the collateral would not be sufficient on
an ongoing basis to make all payments on the related notes as they
would have become due if the notes had not been declared due and
payable, and the trustee obtains the consent of the holders of 662/3>%
of the percentage ownership interest of each class of the related
notes.
Unless otherwise specified in the related prospectus supplement, in the
event the principal of the notes of a series is declared due and payable as
described above, the holders of any of those notes issued at a discount from par
may be entitled to receive no more than an amount equal to the unpaid principal
amount of those notes less the amount of the unamortized discount.
Subject to the provisions of the indenture relating to the duties of the
trustee, in case an event of default shall occur and be continuing with respect
to a series of notes, the trustee shall be under no obligation to exercise any
of the rights or powers under the indenture at the request or direction of any
of the holder of the related notes, unless the holders offer to the trustee
satisfactory security or indemnity against the trustee's costs, expenses and
liabilities which might be incurred in complying with their request or
direction. Subject to the indemnification provisions and certain limitations
contained in the indenture, the holders of a majority of the then aggregate
outstanding amount of the related notes of the series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee or exercising any trust or power conferred on the
trustee with respect to the related notes, and
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holders of a majority of the then aggregate outstanding amount of the related
notes may, in certain cases, waive any default other than 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 affected notes.
Amendment
Unless otherwise specified in the related prospectus supplement, each
operative agreement may be amended by the depositor, the master servicer and the
trustee, without the consent of any of the securityholders, for the following
purposes:
o to cure any ambiguity,
o to correct or supplement any provision in the agreement which may be
defective or inconsistent with any other provision, or
o to make any other revisions with respect to matters or questions
arising under the agreement which are not inconsistent with its other
provisions.
In no event, however, shall any amendment adversely affect in any material
respect the interests of any securityholder as evidenced by either (i) an
opinion of counsel or (ii) confirmation by the rating agencies that such
amendment will not result in the downgrading of the securities. No amendment
shall be deemed to adversely affect in any material respect the interests of any
securityholder who shall have consented thereto, and no opinion of counsel or
written notice from the rating agencies shall be required to address the effect
of any such amendment on any such consenting securityholder. In addition, an
agreement may be amended without the consent of any of the securityholders to
change the manner in which the security account is maintained, so long as the
amendment does not adversely affect the then current ratings of the securities
rated by each rating agency named in the prospectus supplement. In addition, if
a REMIC election is made with respect to a trust fund, the related agreement may
be amended to modify, eliminate or add to any of its provisions to such extent
as may be necessary to maintain the qualification of the trust fund as a REMIC,
but the trustee shall have first received an opinion of counsel to the effect
that the action is necessary or helpful to maintain the REMIC qualification.
Unless otherwise specified in the related prospectus supplement, each
operative agreement may also be amended by the depositor, the master servicer
and the trustee with consent of holders of securities evidencing not less than
66% of the aggregate percentage ownership interests of each affected class for
the purpose of adding any provisions to, or changing in any manner or
eliminating any of the provisions of, the agreement or of modifying in any
manner the rights of the holders of the related securities. In no event,
however, shall any amendment
o reduce in any manner the amount of, or delay the timing of, payments
received on loans which are required to be distributed on any security
without the consent of the holder of that security, or
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o reduce the percentage of the securities of any class the holders of
which are required to consent to any amendment without the consent of
the holders of all securities of that class then outstanding.
If a REMIC election is made with respect to a trust fund, the trustee will not
be entitled to consent to an amendment to the agreement without having first
received an opinion of counsel to the effect that the amendment will not cause
the trust fund to fail to qualify as a REMIC.
Termination; Optional Termination; Calls
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise
specified in the related prospectus supplement, the obligations created by the
pooling and servicing agreement and trust agreement for the related series of
securities will terminate upon the payment to the securityholders of all amounts
held in the security account or held by the master servicer, and required to be
paid to the securityholders under the agreement, following the later to occur of
the following:
o the final payment or other liquidation of the last of the assets of
the trust fund subject to the agreement or the disposition of all
property acquired upon foreclosure of any assets remaining in the
trust fund, and
o the purchase from the trust fund by the master servicer, or such other
party as may be specified in the related prospectus supplement, of all
of the remaining trust fund assets and all property acquired in
respect of those assets.
See "Material Federal Income Tax Consequences" in this prospectus.
Unless otherwise specified in the related prospectus supplement, any
purchase of trust fund assets and property acquired in respect of trust fund
assets will be made at the option of the related master servicer or, if
applicable, another designated party, at a price, and in accordance with the
procedures, specified in the related prospectus supplement. The exercise of this
right will effect early retirement of the securities of that series. However,
this right can be exercised only at the times and upon the conditions specified
in the related prospectus supplement. If a REMIC election has been made with
respect to the trust fund, any repurchase pursuant to the second bullet point in
the immediately preceding paragraph will be made only in connection with a
"qualified liquidation" of the REMIC within the meaning of Section 860F(a)(4) of
the Internal Revenue Code.
Indenture. The indenture will be discharged with respect to a series of
notes (except with respect to certain continuing rights specified in the
indenture) upon the delivery to the trustee for cancellation of all the notes of
that series or, with certain limitations, upon deposit with the trustee of funds
sufficient for the payment in full of all of the notes of that series.
If specified for the notes of any series, the indenture will provide that
the related trust fund will be discharged from any and all obligations in
respect of the notes of that series (except for certain obligations relating to
temporary notes and exchange of notes, registering the transfer or exchange
notes, replacing stolen, lost or mutilated notes, maintaining paying agencies
and holding monies for payment in trust) upon the deposit with the trustee, in
trust, of money and/or
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direct obligations of or obligations guaranteed by the United States which,
through the payment of interest and principal in accordance with their terms,
will provide money in an amount sufficient to pay the principal and each
installment of interest on the related notes on the last scheduled distribution
date for the notes and any installment of interest on the notes in accordance
with the terms of the indenture and the notes of that series. In the event of
any such defeasance and discharge of a series of notes, holders of the related
notes would be able to look only to such money and/or direct obligations for
payment of principal and interest, if any, on their notes until maturity.
Calls. One or more classes of securities may be subject to a mandatory or
optional call at the times and subject to the conditions specified in the
related prospectus supplement. In the case of a mandatory call or in the event
an optional call is exercised with respect to one or more classes of securities,
holders of each affected class of securities will receive the outstanding
principal balance of their securities together with accrued and unpaid interest
at the applicable pass-through rate, subject to the terms specified in the
related prospectus supplement.
The Trustee
The trustee under each agreement will be named in the related prospectus
supplement. The commercial bank or trust company serving as trustee may have
normal banking relationships with the depositor, the master servicer and any of
their respective affiliates.
Material Legal Aspects of the Loans
The following discussion contains general summaries of material legal
matters relating to the loans. Because the legal matters are determined
primarily by applicable state law and because state laws may differ
substantially, the summaries do not purport to be complete, to reflect the laws
of any particular state or to encompass the laws of all states in which security
for the loans may be situated. The summaries are qualified in their entirety by
reference to the applicable laws of the states in which loans may be originated.
General
Single Family Loans, Multifamily Loans and Home Equity Loans. The loans may
be secured by deeds of trust, mortgages, security deeds or deeds to secure debt,
depending upon the prevailing practice in the state in which the property
subject to the loan is located. A mortgage creates a lien upon the real property
encumbered by the mortgage. The mortgage lien generally is not prior to the lien
for real estate taxes and assessments. Priority between mortgages depends on
their terms and generally on the order of recording with a state or county
office. There are two parties to a mortgage: the mortgagor, who is the borrower
and owner of the mortgaged property, and the mortgagee, who is the lender. Under
the mortgage instrument, the mortgagor delivers to the mortgagee a note or bond
and the mortgage. Although a deed of trust is similar to a mortgage, a deed of
trust formally has three parties: the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
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which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys to the
grantee title to, as opposed to merely creating a lien upon, the subject
property until such time as the underlying debt is repaid. The trustee's
authority under a deed of trust, the mortgagee's authority under a mortgage and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
Cooperative Loans. Certain of the loans may be cooperative loans. The
cooperative owns all the real property that comprises the related project,
including the land, separate dwelling units and all common areas. The
cooperative is directly responsible for project management and, in most cases,
payment of real estate taxes and hazard and liability insurance. If, as is
generally the case, there is a blanket mortgage on the cooperative and/or
underlying land, the cooperative, as project mortgagor, is also responsible for
meeting these mortgage obligations. A blanket mortgage is ordinarily incurred by
the cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under proprietary
leases or occupancy agreements to which the cooperative is a party are generally
subordinate to the interest of the holder of the blanket mortgage in that
building. If the cooperative is unable to meet the payment obligations arising
under its blanket mortgage, the mortgagee holding the blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements. In addition, the blanket mortgage on a cooperative may
provide financing in the form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at final maturity.
The inability of the cooperative to refinance this mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of cooperative shares or, in the case of a trust fund
including cooperative loans, the collateral securing the cooperative loans.
A cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a cooperative must make a monthly
payment to the cooperative representing such tenant-stockholder's pro rata share
of the cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and the accompanying rights are financed through a
cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or against the
tenant-stockholder as an individual as provided in the security agreement
covering the assignment of the proprietary lease or occupancy agreement and the
pledge of cooperative shares.
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Manufactured Housing Contracts. Each Manufactured Housing Contract
evidences both
o the obligation of the borrower to repay the loan it represents, and
o the grant of a security interest in a manufactured home to secure
repayment of the loan.
The Manufactured Housing Contracts generally are "chattel paper" as defined
in the Uniform Commercial Code in effect in the states in which the manufactured
homes initially were registered. Pursuant to the UCC, the rules governing the
sale of chattel paper are similar to those governing the perfection of a
security interest in chattel paper. Under the related pooling and servicing
agreement, the depositor will transfer physical possession of the Manufactured
Housing Contracts to the trustee or its custodian. In addition the depositor
will file UCC-1 financing statements in the appropriate states to give notice of
the trustee's ownership of the Manufactured Housing Contracts. Under the laws of
most states, manufactured housing constitutes personal property and is subject
to the motor vehicle registration laws of the state or other jurisdiction in
which the unit is located. In a few states, where certificates of title are not
required for manufactured homes, security interests are perfected by the filing
of a financing statement under Article 9 of the UCC which has been adopted by
all states. The certificate of title laws adopted by the majority of states
provide that ownership of motor vehicles and manufactured housing shall be
evidenced by a certificate of title generally issued by the motor vehicles
department of the state. In states which have enacted certificate of title laws,
a security interest in a unit of manufactured housing, so long as it is not
attached to land in so permanent a fashion as to become a fixture, is generally
perfected by the recording of the interest on the certificate of title to the
unit in the appropriate motor vehicle registration office or by delivery of the
required documents and payment of a fee to that office, depending on state law.
Unless otherwise specified in the related prospectus supplement, the master
servicer will be required to effect such notation or delivery of the required
documents and fees and to obtain possession of the certificate of title, as
appropriate under the laws of the state in which any manufactured home is
registered. If the master servicer fails to effect such notation or delivery,
due to clerical errors or otherwise, or files the security interest under the
wrong law (for example, under a motor vehicle title statute rather than under
the UCC, in a few states), the trustee may not have a first priority security
interest in the manufactured home securing the affected Manufactured Housing
Contract. As manufactured homes have become larger and have often been attached
to their sites without any apparent intention to move them, courts in many
states have held that manufactured homes may, under certain circumstances,
become subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the home under applicable state real
estate law. In order to perfect a security interest in a manufactured home under
real estate laws, the holder of the security interest must file either a
"fixture filing" under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the manufactured home is located. These
filings must be made in the real estate records office of the county where the
manufactured home is located. Generally, Manufactured Housing Contracts will
contain provisions prohibiting the borrower from permanently attaching the
manufactured home to its site. So long as the borrower does not violate this
agreement, a security interest in the manufactured home will be governed by the
certificate of title laws or the
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UCC, and the notation of the security interest on the certificate of title or
the filing of a UCC financing statement will be effective to maintain the
priority of the security interest in the manufactured home. If, however, a
manufactured home is permanently attached to its site, other parties could
obtain an interest in the manufactured home which is prior to the security
interest originally retained by the seller and transferred to the depositor.
The depositor will assign to the trustee, on behalf of the securityholders,
a security interest in the manufactured homes. Unless otherwise specified in the
related prospectus supplement, none of the depositor, the master servicer or the
trustee will amend the certificates of title to identify the trustee, on behalf
of the securityholders, as the new secured party and, accordingly, the depositor
or the seller will continue to be named as the secured party on the certificates
of title relating to the manufactured homes. In most states, the assignment is
an effective conveyance of the security interest without amendment of any lien
noted on the related certificate of title and the new secured party succeeds to
the depositor's rights as the secured party. However, in some states there
exists a risk that, in the absence of an amendment to the certificate of title,
assignment of the security interest might not be held effective against
creditors of the depositor or seller.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the home owner, or administrative error by
state recording officials, the notation of the lien of the trustee on the
certificate of title or delivery of the required documents and fees will be
sufficient to protect the trustee against the rights of subsequent purchasers of
the manufactured home or subsequent lenders who take a security interest in the
manufactured home. In the case of any manufactured home as to which the security
interest assigned to the depositor and the trustee is not perfected, the
security interest would be subordinate to, among others, subsequent purchasers
for value of the manufactured home and holders of perfected security interests
in the home. There also exists a risk that, in not identifying the trustee, on
behalf of the securityholders, as the new secured party on the certificate of
title, the security interest of the trustee could be released through fraud or
negligence.
If the owner of a manufactured home moves it to a state other than the
state in which it initially is registered, the perfected security interest in
the manufactured home under the laws of most states would continue for four
months after relocation and thereafter until the owner re-registers the
manufactured home in the new state. If the owner were to relocate a manufactured
home to another state and re-register the manufactured home in the new state,
and if steps are not taken to re-perfect the trustee's security interest in the
new state, the security interest in the manufactured home would cease to be
perfected. A majority of states generally require surrender of a certificate of
title to re-register a manufactured home. Accordingly, the trustee must
surrender possession if it holds the certificate of title to the manufactured
home or, in the case of manufactured homes registered in states which provide
for notation of lien, the master servicer would receive notice of surrender if
the security interest in the manufactured home is noted on the certificate of
title. Accordingly, the trustee would have the opportunity to re-perfect its
security interest in the manufactured home in the new state. In states which do
not require a certificate of title for registration of a manufactured home,
re-registration could defeat perfection. Similarly, when a borrower under a
Manufactured Housing Contract sells a manufactured home, the lender must
surrender possession of the certificate of title or it will receive notice as a
result of its lien noted thereon and accordingly will have an opportunity to
require satisfaction of the
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related Manufactured Housing Contract before the lien is released. The master
servicer will be obligated, at its own expense, to take all steps necessary to
maintain perfection of security interests in the manufactured homes.
Under the laws of most states, liens for repairs performed on a
manufactured home take priority even over a perfected security interest. The
depositor will obtain the representation of the seller that it has no knowledge
of any repair liens with respect to any manufactured home securing a
Manufactured Housing Contract. However, repair liens could arise at any time
during the term of a Manufactured Housing Contract. No notice will be given to
the trustee or securityholders in the event a repair lien arises.
Foreclosure
Single Family Loans, Multifamily Loans and Home Equity Loans. Foreclosure
of a deed of trust is generally accomplished by a non-judicial sale under a
specific provision in the deed of trust which authorizes the trustee to sell the
mortgaged property at public auction upon any default by the borrower under the
terms of the note or deed of trust. In some states, such as California, the
trustee must record a notice of default and send a copy to the borrower-trustor,
to any person who has recorded a request for a copy of any notice of default and
notice of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. Before
such non-judicial sale takes place, typically a notice of sale must be posted in
a public place and published during a specific period of time in one or more
newspapers, posted on the property and sent to parties having an interest of
record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the mortgaged property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. Judicial
foreclosure proceedings are often not contested by any of the parties. When the
mortgagee's right to foreclosure is contested, the legal proceedings necessary
to resolve the issue can be time consuming. After the completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure and
appoints a referee or other court officer to conduct the sale of the property.
In general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorneys'
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the deed of trust is not reinstated,
a notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.
Although foreclosure sales are typically public sales, frequently no
third-party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and
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a requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan plus accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burden of ownership, including obtaining
hazard insurance and making such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property.
When the beneficiary under a junior mortgage or deed of trust cures the
default on the related senior mortgage or reinstates or redeems the senior
mortgage by paying it in full, the amount paid by the beneficiary to cure,
reinstate or redeem the senior mortgage becomes part of the indebtedness secured
by the junior mortgage or deed of trust. See "--Junior Mortgages, Rights of
Senior Mortgages" below.
Cooperative Loans. Cooperative shares owned by a tenant-stockholder and
pledged to a lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's articles of incorporation and
by-laws, as well as in the proprietary lease or occupancy agreement, and may be
cancelled by the cooperative if the tenant-stockholder fails to pay rent or
other obligations or charges owed, including mechanics' liens against the
cooperative apartment building incurred by such tenant-stockholder. The
proprietary lease or occupancy agreement generally permits the cooperative to
terminate such lease or agreement in the event an obligor fails to make payments
or defaults in the performance of covenants required thereunder. Typically, the
lender and the cooperative enter into a recognition agreement which establishes
the rights and obligations of both parties in the event of a default by the
tenant-stockholder on its obligations under the proprietary lease or occupancy
agreement. A default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides, that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from the sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under the proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest.
Recognition agreements also provide that, in the event of a foreclosure on
a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, lenders are
not limited in any rights they may have to dispossess tenant-stockholders.
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In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account for the surplus to subordinate lenders or the
tenant-stockholder as provided in the UCC. Conversely, if a portion of the
indebtedness remains unpaid, the tenant-stockholder is generally responsible for
the deficiency. See "--Anti-Deficiency Legislation and Other Limitations on
Lenders" below.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building but who did not purchase shares in
the cooperative when the building was so converted.
Repossession of Manufactured Homes
Repossession of manufactured housing is governed by state law. A number of
states have enacted legislation that requires that the debtor be given an
opportunity to cure a monetary default (typically 30 days to bring the account
current) before repossession can commence. So long as a manufactured home has
not become attached to real estate in such way that it may be treated as a part
of the real estate under applicable state law, repossession in the event of a
default by the obligor will generally be governed by the UCC. Article 9 of the
UCC provides the statutory framework for the repossession of manufactured
housing. While the UCC as adopted by the various states may vary in certain
particulars, the general repossession procedure is discussed below.
Because manufactured homes generally depreciate in value, it is unlikely
that repossession and resale of a manufactured home will result in the full
recovery of the outstanding principal and unpaid interest on the related
defaulted Manufactured Housing Contract.
Except in those states where the debtor must receive notice of the right to
cure a default, repossession can commence immediately upon default without prior
notice. Repossession may be effected either through self-help (peaceable
retaking without court order), voluntary repossession or through judicial
process (repossession pursuant to court-issued writ of replevin). The self-help
and/or voluntary repossession methods, which are more commonly employed, are
accomplished simply by retaking possession of the manufactured home. In cases in
which the debtor objects or raises a defense to repossession, a court order must
be obtained from the
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appropriate state court, and the manufactured home must then be repossessed in
accordance with that order. Whether the method employed is self-help, voluntary
repossession or judicial repossession, the repossession can be accomplished
either by an actual physical removal of the manufactured home to a secure
location for refurbishment and resale or by removing the occupants and their
belongings from the manufactured home and maintaining possession of the
manufactured home on the location where the occupants were residing. Various
factors may affect whether the manufactured home is physically removed or left
on location, such as the nature and term of the lease of the site on which it is
located and the condition of the unit. In many cases, leaving the manufactured
home on location is preferable, in the event that the home is already set up,
because the expenses of retaking and redelivery will be saved. However, in those
cases where the home is left on location, expenses for site rentals will usually
be incurred.
Once repossession has been achieved, preparation for the subsequent
disposition of the manufactured home can commence. The disposition may be by
public or private sale provided the method, manner, time, place and other terms
of the sale are commercially reasonable.
Sale proceeds are to be applied first to reasonable repossession expenses
(expenses incurred in retaking, storage, preparing for sale to include
refurbishing costs and selling) and then to satisfaction of the indebtedness.
While some states impose prohibitions or limitations on deficiency judgments if
the net proceeds from resale do not cover the full amount of the indebtedness,
the remainder may be sought from the debtor in the form of a deficiency judgment
in those states that do not prohibit or limit such judgments. The deficiency
judgment is a personal judgment against the debtor for the shortfall.
Occasionally, after resale of a manufactured home and payment of all expenses
and indebtedness, there is a surplus of funds. In that case, the UCC requires
the party suing for the deficiency judgment to remit the surplus to the
subordinate creditors or the debtor, as provided in the UCC. Because the
defaulting owner of a manufactured home generally has very little capital or
income available following repossession, a deficiency judgment may not be sought
in many cases or, if obtained, will be settled at a significant discount in
light of the defaulting owner's strained financial condition.
Any contract secured by a manufactured home located in Louisiana will be
governed by Louisiana Revised Statutes in addition to Article 9 of the UCC.
Louisiana law provides similar mechanisms for perfection and enforcement of a
security interest in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently affixed
to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession
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can be accomplished only after the obligor's abandonment or with the obligor's
consent given after or in contemplation of default, or pursuant to judicial
process and seizure by the sheriff.
Rights of Redemption
Single Family Loans, Multifamily Loans and Home Equity Loans. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the
borrower and foreclosed junior lienors are given a statutory period in which to
redeem the mortgaged property from the foreclosure sale. In some states,
redemption may occur only upon payment of the entire principal balance of the
loan plus accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption would defeat the title
of any purchaser from the lender subsequent to foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to force
the lender to retain the property and pay the expenses of ownership until the
redemption period has run.
Manufactured Housing Contracts. While state laws do not usually require
notice to be given debtors prior to repossession, many states do require
delivery of a notice of default and of the debtor's right to cure defaults
before repossession. The law in most states also requires that the debtor be
given notice of sale prior to the resale of a manufactured home so that the
owner may redeem at or before resale. In addition, the sale generally must
comply with the requirements of the UCC.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon its
security if the default under the security agreement is not monetary, such as
the borrower's failure to maintain the property adequately or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in some cases
involving the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
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Anti-Deficiency Legislation and Other Limitations on Lenders
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement. Certain states,
including California, have adopted statutory prohibitions restricting the right
of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment is
a personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property sold at the foreclosure sale. As a result of these prohibitions, it is
anticipated that in many instances the master servicer will not seek deficiency
judgments against defaulting borrowers. Under the laws applicable in most
states, a creditor is entitled to obtain a deficiency judgment for any
deficiency following possession and resale of a manufactured home. However, some
states impose prohibitions or limitations on deficiency judgments in these
cases.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the Bankruptcy Code, the
federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws affording
relief to debtors, may interfere with or affect the ability of the secured
mortgage lender to realize upon its security. For example, in a proceeding under
the Bankruptcy Code, a lender may not foreclose on the mortgaged property
without the permission of the bankruptcy court. If the mortgaged property is not
the debtor's principal residence and the bankruptcy court determines that the
value of the mortgaged property is less than the principal balance of the
mortgage loan, the rehabilitation plan proposed by the debtor may
o reduce the secured indebtedness to the value of the mortgaged property
as of the date of the commencement of the bankruptcy thereby rendering
the lender a general unsecured creditor for the difference,
o reduce the monthly payments due under the mortgage loan,
o change the rate of interest of the mortgage loan, and
o alter the mortgage loan repayment schedule.
The effect of proceedings under the Bankruptcy Code, including but not limited
to any automatic stay, could result in delays in receiving payments on the
mortgage loans underlying a series of certificates and possible reductions in
the aggregate amount of payments.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, or TILA, as implemented by
Regulation Z, Real Estate Settlement Procedures Act, as implemented by
Regulation Z, Real Estate Settlement Procedures Act, as implemented by
Regulation X, Equal Credit Opportunity Act, as implemented by Regulation B, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In
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some cases, this liability may affect assignees of the mortgage loans. In
particular, an originator's failure to comply with certain requirements of the
federal TILA, as implemented by Regulation Z, could subject both originators and
assignees of such obligations to monetary penalties and could result in
borrowers' rescinding the mortgage loans either against the originators or
assignees.
Homeownership Act and Similar State Laws
Some of the mortgage loans, known as High Cost Loans, may be subject to the
Home Ownership and Equity Protection Act of 1994, or Homeownership Act, which
amended TILA to provide new requirements applicable to loans not made to finance
the purchase of a mortgaged property that exceed certain interest rate and/or
points and fees thresholds. The Homeownership Act requires certain additional
disclosures, specifies when those disclosures are to be made and limits or
prohibits inclusion of certain features in High Cost Loans. Purchasers or
assignees of any High Cost Loan, including any trust, could be liable under
federal law for all claims and be subject to all defenses that the borrower
could assert against the originator of the High Cost Loan under TILA or any
other law, unless the purchaser or assignee did not know, and could not with
reasonable diligence have determined, that the loan was subject to the
Homeownership Act. Remedies available to the borrower include monetary penalties
as well as rescission rights, if the appropriate disclosures were not given as
required or if the particular loan includes features prohibited by the
Homeownership Act. The maximum damages that may be recovered from an assignee,
including the related trust, is the remaining amount of indebtedness plus the
total amount paid by the borrower in connection with the mortgage loan.
In addition to the Homeownership Act, a number of legislative proposals
have been introduced at both the federal and state levels that are designed to
discourage predatory lending practices. Some states have enacted, and other
state or local governments may enact, laws that impose requirements and
restrictions greater than those in the Homeownership Act. These laws prohibit
inclusion of certain features in mortgage loans that have interests rate or
origination costs in excess of prescribed levels, and require that borrowers be
given certain disclosures prior to the consummation of the mortgage loans.
Purchasers or assignees of a mortgage loan, including the related trust, could
be exposed to all claims and defenses that the borrower could assert against the
originator of the mortgage loan for a violation of state law. Claims and
defenses available to the borrower could include actual, statutory and punitive
damages, costs and attorneys' fees, rescission rights, defenses to foreclosure
action or an action to collect, and other equitable remedies.
Unless otherwise specified in the accompanying prospectus supplement, the
depositor will represent and warrant that all of the mortgage loans in the
related pool complied in all material respects with all applicable local, state
and federal laws at the time of origination. Although the depositor will be
obligated to repurchase any mortgage loan as to which a breach of its
representation and warranty has occurred (so long as the breach is materially
adverse to the interests of the securityholders), the repurchase price of those
mortgage loans could be less than the monetary damages and/or any equitable
remedies imposed pursuant to various state laws.
Lawsuits have been brought in various states making claims against
assignees of High Cost Loans for violations of federal and state law allegedly
committed by the originator. Named
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defendants in these cases include numerous participants within the secondary
mortgage market, including some securitization trusts.
The so-called Holder-in-Due-Course Rule of the Federal Trade Commission has
the effect of subjecting a seller and certain related creditors and their
assignees in a consumer credit transaction, and any assignee of the creditor, to
all claims and defenses which the debtor in the transaction could assert against
the seller of the goods. Liability under this FTC Rule is limited to the amounts
paid by a debtor on a Manufactured Housing Contract, and the holder of the
Manufactured Housing Contract may also be unable to collect amounts still due
under the Manufactured Housing Contract.
Most of the Manufactured Housing Contracts in a pool will be subject to the
requirements of this FTC Rule. Accordingly, the trustee, as holder of the
Manufactured Housing Contracts, will be subject to any claims or defenses that
the purchaser of the related manufactured home may assert against the seller of
the manufactured home, or that the purchaser of the home improvements may assert
against the contractor, subject to a maximum liability equal to the amounts paid
by the obligor on the Manufactured Housing Contract. If an obligor is successful
in asserting any such claim or defense, and if the seller had or should have had
knowledge of such claim or defense, the master servicer will have the right to
require the seller to repurchase the Manufactured Housing Contract because of a
breach of its representation and warranty that no claims or defenses exist which
would affect the borrower's obligation to make the required payments under the
Manufactured Housing Contract.
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials including such manufactured housing components as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts and others
in the distribution process. Plaintiffs have won judgments in some of these
lawsuits.
Under the FTC Rule discussed above, the holder of a Manufactured Housing
Contract secured by a manufactured home with respect to which a formaldehyde
claim has been asserted successfully may be liable to the borrower for the
amount paid by the borrower on that Manufactured Housing Contract and may be
unable to collect amounts still due under that Manufactured Housing Contract.
Because the successful assertion of this type of claim would constitute the
breach of a representation or warranty of the seller, the related
securityholders would suffer a loss only to the extent that
o the seller fails to perform its obligation to repurchase that
Manufactured Housing Contract, and
o the seller, the applicable depositor or the trustee is
unsuccessful in asserting a claim of contribution or subrogation
on behalf of the securityholders against the manufacturer or
other who are directly liable to the plaintiff for damages.
Typical product liability insurance policies held by manufacturers and component
suppliers of manufactured homes may not cover liabilities from the presence of
formaldehyde in
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manufactured housing. As a result, recoveries from manufacturers and component
suppliers may be limited to their corporate assets without the benefit of
insurance.
Due-on-Sale Clauses
Unless otherwise provided in the related prospectus supplement, each
conventional loan will contain a due-on-sale clause which will generally provide
that, if the mortgagor or obligor sells, transfers or conveys the mortgaged
property, the loan may be accelerated by the mortgagee or secured party. Unless
otherwise provided in the related prospectus supplement, the master servicer
will, to the extent it has knowledge of the sale, transfer or conveyance,
exercise its rights to accelerate the maturity of the related loans through
enforcement of the due-on-sale clauses, subject to applicable state law. Section
341(b) of the Garn-St. Germain Depository Institutions Act of 1982 (Garn-St.
Germain) permits a lender, subject to certain conditions, to "enter into or
enforce a contract containing a due-on-sale clause with respect to a real
property loan," notwithstanding any contrary state law. Garn-St. Germain gave
states that previously had enacted "due-on-sale" restrictions a three-year
window to reenact the previous restrictions or enact new restrictions. Only six
states acted within this window period: Arizona, Florida, Michigan, Minnesota,
New Mexico and Utah. Consequently, due-on-sale provisions in documents governed
by the laws of those state are not preempted by federal law. With respect to
loans secured by an owner-occupied residence including a manufactured home, the
Garn-St Germain Act sets forth nine specific instances in which a mortgagee
covered by the act may not exercise its rights under a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred. The
inability to enforce a due-on-sale clause may result in transfer of the
mortgaged property to an uncreditworthy person, which could increase the
likelihood of default, or may result in a mortgage bearing an interest rate
below the current market rate being assumed by a new home buyer, which may
affect the average life of the loans and the number of loans which may extend to
maturity.
In addition, under the federal Bankruptcy Code, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and under certain circumstances may be
eliminated in a resulting loan modification.
Prepayment Charges; Late Fees
Under certain state laws, prepayment charges with respect to prepayments on
loans secured by liens encumbering owner-occupied residential properties may not
be imposed after a certain period of time following the origination of a loan.
Since many of the mortgaged properties will be owner-occupied, it is anticipated
that prepayment charges may not be imposed with respect to many of the loans.
The absence of this type of a restraint on prepayment, particularly with respect
to fixed rate loans having higher loan rates or APRs, may increase the
likelihood of refinancing or other early retirement of the loans. Legal
restrictions, if any, on prepayment of Multifamily Loans will be described in
the related prospectus supplement.
Loans may also contain provisions obligating the borrower to pay a late fee
if payments are not timely made. In some states there may be specific
limitations on the late charges that a lender may collect from the borrower for
delinquent payments. Unless otherwise specified in the
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related prospectus supplement, late fees will be retained by the applicable
servicer as additional servicing compensation.
Some state laws restrict the imposition of prepayment charges and late fees
even when the loans expressly provide for the collection of those charges.
Although the Alternative Mortgage Transaction Parity Act 1982, or the Parity
Act, permits the collection of prepayment charges and late fees in connection
with some types of eligible loans preempting any contrary state law
prohibitions, some states may not recognize the preemptive authority of the
Parity Act or have formally opted out of the Parity Act. As a result, it is
possible that prepayment charges may not be collected even on loans that provide
for the payment of those charges unless otherwise specified in the accompanying
prospectus supplement. The master servicer or any entity identified in the
accompanying prospectus supplement will be entitled to all prepayment charges
and late payment charges received on the loans and these amounts will not be
available for payment on the securities. The Office of Thrift Supervision or
OTS, the agency that administers the Parity Act for unregulated housing
creditors, has withdrawn its favorable Parity Act regulations and chief counsel
opinions that authorized lenders to charge prepayment charges and late fees in
certain circumstances notwithstanding contrary state law, effective July 1,
2003. However, the OTS's ruling does not have retroactive effect on loans
originated before July 1, 2003.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 provides that state usury limitations shall not apply to certain
types of residential first mortgage loans originated by certain lenders after
March 31, 1980. The Office of Thrift Supervision, as successor to the Federal
Home Loan Bank Board, is authorized to issue rules and regulations and to
publish interpretations governing implementation of Title V. The statute
authorized any state to reimpose limitations on interest rates and finance
charges by adopting before April 1, 1983 a law or constitutional provision which
expressly rejects application of the federal law. Fifteen states adopted such a
law prior to the April 1, 1983 deadline. In addition, even where Title V was not
rejected, any state is authorized to adopt a provision limiting discount points
or other charges on loans covered by Title V. No Manufactured Housing Contract
secured by a manufactured home located in any state in which application of
Title V was expressly rejected or a provision limiting discount points or other
charges has been adopted will be included in any trust fund if the Manufactured
Housing Contract imposes finance charges or provides for discount points or
charges in excess of permitted levels.
Title V also provides that state usury limitations will not apply to any
loan which is secured by a first lien on certain kinds of manufactured housing
provided that certain conditions are satisfied. These conditions relate to the
terms of any prepayment, balloon payment, late charges and deferral fees and the
requirement of a 30-day notice period prior to instituting any action leading to
repossession of or foreclosure with respect to the related unit.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended, borrowers who enter military service after the
origination of their mortgage loan may
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not be charged interest above an annual rate of 6% during the period of active
duty status, unless a court orders otherwise upon application of the lender. The
Relief Act also applies to borrowers who are members of the National Guard or
are on reserve status at the time their mortgage is originated and are later
called to active duty. It is possible that the interest rate limitation could
have an effect, for an indeterminate period of time, on the ability of the
master servicer to collect full amounts of interest on affected mortgage loans.
Unless otherwise provided in the related prospectus supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to the related securityholders. In addition, the Relief Act
imposes limitations which would impair the ability of the master servicer to
foreclose on an affected mortgage loan during the borrower's period of active
duty status. Thus, in the event that a mortgage loan goes into default, the
application of the Relief Act could cause delays and losses occasioned by the
lender's inability to realize upon the mortgaged property in a timely fashion.
Environmental Risks
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states such a lien has priority over the lien of
an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA), the United States Environmental Protection Agency (EPA) may impose a
lien on property where the EPA has incurred clean-up costs. However, a CERCLA
lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states and under CERCLA, there is a possibility that
a lender may be held liable as an "owner" or "operator" for costs of addressing
releases or threatened releases of hazardous substances at a property,
regardless of whether or not the environmental damage or threat was caused by a
current or prior owner or operator. CERCLA imposes liability for such costs on
any and all "responsible parties," including owners or operators of the property
who did not cause or contribute to the contamination. Furthermore, liability
under CERCLA is not limited to the original or outstanding balance of a loan or
to the value of the related mortgaged property. Lenders may be held liable under
CERCLA as owners or operators unless they qualify for the secured creditor
exemption to CERCLA. This exemption exempts from the definition of "owner" or
"operator" those who, without participating in the management of a facility,
hold indicia of ownership primarily to protect a security interest in the
facility. Thus, if a lender's activities begin to encroach on the actual
management of a contaminated facility or property, the lender may incur
liability as an "owner" or "operator" under CERCLA. Similarly, if a lender
forecloses and takes title to a contaminated facility or property, the lender
may incur CERCLA liability in various circumstances, including, but not limited
to, when it holds the facility or property as an investment, including leasing
the facility or property to a third party, or fails to market the property in a
timely fashion.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996,
or Conservation Act, amended, among other things, the provisions of CERCLA with
respect to lender liability and the secured creditor exemption. The Conservation
Act offers substantial protection to lenders by defining the activities which a
lender can engage in without losing the benefit of the secured creditor
exemption. For a lender to be deemed to have participated in the
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management of a mortgaged property, the lender must actually participate in
the management or operational affairs of the mortgaged property. The
Conservation Act provides that "merely having the capacity to influence, or
the unexercised right to control" operations does not constitute participation
in management. A lender will lose the protection of the secured creditor
exemption only if it (1) exercises decision-making control over the borrower's
environmental compliance and hazardous substance handling or disposal
practices for the mortgaged property, or (2) assumes responsibility for the
overall management of the mortgaged property, including day-to-day
decision-making for environmental compliance, or (3) assumes management of
substantially all operational functions of the mortgaged property. The
Conservation Act also provides that a lender will continue to have the benefit
of the secured creditor exemption even in the event that it forecloses on a
mortgaged property, purchases it at a foreclosure sale or accepts a
deed-in-lieu of foreclosure so long as the lender seeks to sell the mortgaged
property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act, which regulates underground petroleum storage tanks other than
heating oil tanks. The EPA has adopted a lender liability rule for underground
storage tanks under Subtitle I of the Resource Conservation Act. Under this
rule, a holder of a security interest in an underground storage tank or real
property containing an underground storage tank is not considered an operator of
the underground storage tank as long as petroleum is not added to, stored in or
dispensed from the tank. Moreover, under the Conservation Act, the protections
accorded to lenders under CERCLA are also accorded to holders of security
interests in underground petroleum storage tanks. It should be noted, however,
that liability for cleanup of petroleum contamination may be governed by state
law, which may not provide for any specific protection for secured creditors.
The Conservation Act specifically addresses the potential liability under
CERCLA of lenders that hold mortgages or similar conventional security interests
in real property, as the trust fund generally does in connection with the loans.
However, the Conservation Act does not clearly address the potential liability
of lenders who retain legal title to a property and enter into an agreement with
the purchaser for the payment of the purchase price and interest over the term
of the contract as is the case with the installment contracts.
If a lender (including a lender under an installment contract) is or
becomes liable under CERCLA, it may be authorized to bring a statutory action
for contribution against any other "responsible parties", including a previous
owner or operator. However, these persons or entities may be bankrupt or
otherwise judgment proof, and the costs associated with environmental cleanup
and related actions may be substantial. Moreover, some state laws imposing
liability for addressing hazardous substances do not contain exemptions from
liability for lenders. Whether the costs of addressing contamination at a
property pledged as collateral for one of the loans (or at a property subject
to an installment contract), would be imposed on the trust fund, and thus
occasion a loss to the securityholders, depends on the specific factual and
legal circumstances at issue.
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Except as otherwise specified in the applicable prospectus supplement, at
the time the mortgage loans were originated, no environmental assessment or a
very limited environment assessment of the mortgage properties was conducted.
Traditionally, many residential mortgage lenders have not taken steps to
determine whether contaminants are present on a mortgaged property prior to the
origination of a single family mortgage loan or prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Except as otherwise specified in the
applicable prospectus supplement, neither the depositor nor any master servicer
will be required by any agreement to undertake any of these evaluations prior to
foreclosure or accepting a deed-in-lieu of foreclosure. The depositor does not
make any representations or warranties or assume any liability with respect to
the absence or effect of contaminants on any mortgaged property or any casualty
resulting from the presence or effect of contaminants. However, the master
servicer will not be obligated to foreclose on any mortgaged property or accept
a deed-in-lieu of foreclosure if it knows or reasonably believes that there are
material contaminated conditions on the property. A failure so to foreclose may
reduce the amounts otherwise available to securityholders of the related series.
The pooling and servicing agreement will provide that the master servicer,
acting on behalf of the trust fund, may not acquire title to a multifamily
residential property or mixed-use property underlying a loan or take over its
operation unless the master servicer has previously determined, based upon a
report prepared by a person who regularly conducts environmental audits, that
the mortgaged property is in compliance with applicable environmental laws and
regulations or that the acquisition would not be more detrimental than
beneficial to the value of the mortgaged property and the interests of the
related securityholders.
The Home Improvement Contracts
General. The Home Improvement Contracts, other than those that are
unsecured or secured by mortgages on real estate, generally are "chattel paper"
or constitute "purchase money security interests" each as defined in the UCC.
Under the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the related agreement,
the depositor will transfer physical possession of these contracts to the
trustee or a designated custodian or may retain possession of them as custodian
for the trustee. In addition, the depositor will file a UCC-1 financing
statement in the appropriate states to give notice of the trustee's ownership of
the contracts. Unless otherwise specified in the related prospectus supplement,
the contracts will not be stamped or otherwise marked to reflect their
assignment from the depositor to the trustee. Therefore, if through negligence,
fraud or otherwise, a subsequent purchaser were able to take physical possession
of the contracts without notice of such assignment, the trustee's interest in
the contracts could be defeated.
Security Interests in Home Improvements. The Home Improvement Contracts
that are secured by the related home improvements grant to the originator a
purchase money security interest in the home improvements to secure all or part
of the purchase price of the home improvements and related services. A financing
statement generally is not required to be filed to perfect a purchase money
security interest in consumer goods and the purchase money security interests
are assignable. In general, a purchase money security interest grants to the
holder a security interest that has priority over a conflicting security
interest in the same collateral and the
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proceeds of the collateral. However, to the extent that the collateral subject
to a purchase money security interest becomes a fixture, in order for the
related purchase money security interest to take priority over a conflicting
interest in the fixture, the holder's interest in the home improvement must
generally be perfected by a timely fixture filing. In general, a security
interest does not exist under the UCC in ordinary building material
incorporated into an improvement on land. Home Improvement Contracts that
finance lumber, bricks, other types of ordinary building material or other
goods that are deemed to lose such characterization upon incorporation of such
materials into the related property, will not be secured by a purchase money
security interest in the home improvement being financed.
Enforcement of Security Interest in Home Improvements. So long as the home
improvement has not become subject to the real estate law, a creditor can
repossess a home improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
at or before the resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments, and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Installment Contracts
Under an installment contract the seller retains legal title to the
property and enters into an agreement with the purchaser/borrower for the
payment of the purchase price, plus interest, over the term of the contract.
Only after full performance by the borrower of the contract is the lender
obligated to convey title to the property to the purchaser. As with mortgage or
deed of trust financing, during the effective period of the installment
contract, the borrower is generally responsible for maintaining the property in
good condition and for paying real estate taxes, assessments and hazard
insurance premiums associated with the property.
The method of enforcing the rights of the lender under an installment
contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of installment contracts
generally provide that upon a default by the borrower, the borrower loses his
or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable
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interest in the property is forfeited. The lender in such a situation does not
have to foreclose in order to obtain title to the property, although in some
cases a quiet title action is in order if the borrower has filed the
installment contract in local land records and an ejectment action may be
necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an installment contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under installment contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during
which the installment contract may be reinstated upon full payment of the
default amount and the borrower may have a post-foreclosure statutory
redemption right. In other states, courts in equity may permit a borrower with
significant investment in the property under an installment contract for the
sale of real estate to share in the proceeds of sale of the property after the
indebtedness is repaid or may otherwise refuse to enforce the forfeiture
clause. Nevertheless, generally speaking, the lender's procedures for
obtaining possession and clear title under an installment contract in a given
state are simpler and less time-consuming and costly than are the procedures
for foreclosing and obtaining clear title to a property subject to one or more
liens.
Junior Mortgages; Rights of Senior Mortgagees
To the extent that the loans comprising the trust fund for a series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the trust fund (and therefore the
securityholders), as mortgagee under any such junior mortgage, are subordinate
to those of any mortgagee under any senior mortgage. The senior mortgagee has
the right to receive hazard insurance and condemnation proceeds and to cause the
property securing the loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
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Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste, and to appear in and defend any action or proceeding purporting to affect
the property or the rights of the mortgagee under the mortgage. Upon a failure
of the mortgagor to perform any of these obligations, the mortgagee is given the
right under certain mortgages to perform the obligation itself, at its election,
with the mortgagor agreeing to reimburse the mortgagee for any sums expended by
the mortgagee on behalf of the mortgagor. All sums so expended by the mortgagee
become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make revolving credit line loans typically contains
a "future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. Any amounts so advanced after the
cut-off date with respect to any mortgage will not be included in the trust
fund. The priority of the lien securing any advance made under the clause may
depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens which intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of such intervening junior trust
deeds or mortgages and other liens at the time of the advance. In most states,
the trust deed or mortgage lien securing mortgage loans of the type which
includes home equity credit lines applies retroactively to the date of the
original recording of the trust deed or mortgage, provided that the total amount
of advances under the home equity credit line does not exceed the maximum
specified principal amount of the recorded trust deed or mortgage, except as to
advances made after receipt by the lender of a written notice of lien from a
judgment lien creditor of the trustor.
The Title I Program
General. Certain of the loans contained in a trust fund may be loans
insured under the FHA Title I Insurance program created pursuant to Sections 1
and 2(a) of the National Housing Act of 1934. Under the Title I Program, the FHA
is authorized and empowered to insure qualified lending institutions against
losses on eligible loans. The Title I Program operates as a coinsurance program
in which the FHA insures up to 90% of certain losses incurred on an individual
insured loan, including the unpaid principal balance of the loan, but only to
the extent of the insurance coverage available in the lender's FHA insurance
coverage reserve account. The owner of the loan bears the uninsured loss on each
loan.
Title I loan means a loan made to finance actions or items that
substantially protect or improve the basic livability or utility of a one- to
four-family residential property.
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There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the dealer, who has a direct or indirect
financial interest in the loan transaction, assists the borrower in preparing
the loan application or otherwise assists the borrower in obtaining the loan
from the lender. The lender may disburse proceeds solely to the dealer or the
borrower or jointly to the borrower and the dealer or other parties to the
transaction. With respect to a dealer Title I loan, a dealer may include a
seller, a contractor or supplier of goods or services.
Loans insured under the Title I Program are required to have fixed interest
rates and generally provide for equal installment payments due weekly, biweekly,
semi-monthly or monthly, except that a loan may be payable quarterly or
semi-annually where a borrower has an irregular flow of income. The first or
last payments (or both) may vary in amount but may not exceed 150% of the
regular installment payment, and the first payment may be due no later than two
months from the date of the loan. The note must contain a provision permitting
full or partial prepayment of the loan. The interest rate must be negotiated and
agreed to by the borrower and the lender and must be fixed for the term of the
loan and recited in the note. Interest on an insured loan must accrue from the
date of the loan and be calculated according to the actuarial method. The lender
must assure that the note and all other documents evidencing the loan are in
compliance with applicable federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of HUD unless the lender determines and documents in
the loan file the existence of compensating factors concerning the borrower's
creditworthiness which support approval of the loan.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution (as is typically the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatements of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
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Requirements for Title I Loans. The maximum principal amount for Title I
loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I loan may not be less
than six months nor greater than 20 years and 32 days. A borrower may obtain
multiple Title I loans with respect to multiple properties, and a borrower may
obtain more than one Title I loan with respect to a single property, in each
case as long as the total outstanding balance of all Title I loans in the same
property does not exceed the maximum loan amount for the type of Title I loan
thereon having the highest permissible loan amount.
Borrower eligibility for a Title I loan requires that the borrower have at
least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I loan or a recorded land installment contract for the purchase of
the real property. In the case of a Title I loan with a total principal balance
in excess of $15,000, if the property is not occupied by the owner, the borrower
must have equity in the property being improved at least equal to the principal
amount of the loan, as demonstrated by a current appraisal. Any Title I loan in
excess of $7,500 must be secured by a recorded lien on the improved property
which is evidenced by a mortgage or deed of trust executed by the borrower and
all other owners in fee simple.
The proceeds from a Title I loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I loan, the lender is
required to obtain, promptly upon completion of the improvements but not later
than 6 months after disbursement of the loan proceeds with one 6 month extension
if necessary, a completion certificate, signed by the borrower. The lender is
required to conduct an on-site inspection on any Title I loan where the
principal obligation is $7,500 or more, and on any direct Title I loan where the
borrower fails to submit a completion certificate.
FHA Insurance Coverage. Under the Title I Program, the FHA establishes an
insurance coverage reserve account for each lender which has been granted a
Title I contract of insurance. The amount of insurance coverage in this account
is a maximum of 10% of the amount disbursed, advanced or expended by the lender
in originating or purchasing eligible loans registered with the FHA for Title I
insurance, with certain adjustments. The balance in the insurance coverage
reserve account is the maximum amount of insurance claims the FHA is required to
pay to the Title I lender. Loans to be insured under the Title I Program will be
registered for insurance by the FHA and the insurance coverage attributable to
such loans will be included in the insurance coverage reserve account for the
originating or purchasing lender following the receipt and acknowledgment by the
FHA of a loan report on the prescribed form pursuant to the Title I regulations.
For each eligible loan reported and acknowledged for insurance, the FHA charges
a premium. For loans having a maturity of 25 months or less, the FHA bills the
lender for the entire premium in an amount equal to the product of 0.50% of the
original loan amount and the loan term. For home improvement loans with a
maturity greater
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than 25 months, each year that a loan is outstanding the FHA bills the lender
for a premium in an amount equal to 0.50% of the original loan amount. If a
loan is prepaid during the year, the FHA will not refund or abate the premium
paid for that year.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to such insured loans and
(ii) the amount of insurance coverage attributable to insured loans sold by the
lender, and such insurance coverage may be reduced for any FHA insurance claims
rejected by the FHA. The balance of the lender's FHA insurance coverage reserve
account will be further adjusted as required under Title I or by the FHA, and
the insurance coverage therein may be earmarked with respect to each or any
eligible loans insured thereunder, if a determination is made by the Secretary
of HUD that it is in its interest to do so. Originations and acquisitions of new
eligible loans will continue to increase a lender's insurance coverage reserve
account balance by 10% of the amount disbursed, advanced or expended in
originating or acquiring such eligible loans registered with the FHA for
insurance under the Title I Program. The Secretary of HUD may transfer insurance
coverage between insurance coverage reserve accounts with earmarking with
respect to a particular insured loan or group of insured loans when a
determination is made that it is in the Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide transaction)
insured loans and loans reported for insurance only to another qualified lender
under a valid Title I contract of insurance. Unless an insured loan is
transferred with recourse or with a guaranty or repurchase agreement, the FHA,
upon receipt of written notification of the transfer of such loan in accordance
with the Title I regulations, will transfer from the transferor's insurance
coverage reserve account to the transferee's insurance coverage reserve account
an amount, if available, equal to 10% of the actual purchase price or the net
unpaid principal balance of such loan (whichever is less). However, under the
Title I Program not more than $5,000 in insurance coverage shall be transferred
to or from a lender's insurance coverage reserve account during any October 1 to
September 30 period without the prior approval of the Secretary of HUD. Amounts
which may be recovered by the Secretary of HUD after payment of an insurance
claim are not added to the amount of insurance coverage in the related lender's
insurance coverage reserve account.
Claims Procedures Under Title I. Under the Title I Program the lender may
accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I loan, the lender
may either (a) proceed against the property under any security instrument, or
(b) make a claim under the
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lender's contract of insurance. If the lender chooses to proceed against the
property under a security instrument (or if it accepts a voluntary conveyance
or surrender of the property), the lender may file an insurance claim only
with the prior approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I loan must be filed
with the FHA no later than 9 months after the date of default of the loan.
Concurrently with filing the insurance claim, the lender shall assign to the
United States of America the lender's entire interest in the loan note (or a
judgment in lien of the note), in any security held and in any claim filed in
any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either such defect is discovered after the FHA has paid a
claim, the FHA may require the lender to repurchase the paid claim and to accept
a reassignment of the loan note. If the lender subsequently obtains a valid and
enforceable judgment against the borrower, the lender may resubmit a new
insurance claim with an assignment of the judgment. Although the FHA may contest
any insurance claim and make a demand for repurchase of the loan at any time up
to two years from the date the claim was certified for payment and may do so
thereafter in the event of fraud or misrepresentation on the part of the lender,
the FHA has expressed an intention to limit the period of time within which it
will take such action to one year from the date the claim was certified for
payment.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the claimable amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. The "claimable
amount" means an amount equal to 90% of the sum of:
o the unpaid loan obligation (net unpaid principal and the uncollected
interest earned to the date of default) with adjustments thereto if
the lender has proceeded against property securing the loan;
o the interest on the unpaid amount of the loan obligation from the date
of default to the date of the claim's initial submission for payment
plus 15 calendar days (but not to exceed 9 months from the date of
default), calculated at the rate of 7% per year;
o the uncollected court costs;
o the attorney's fees not to exceed $500; and
o the expenses for recording the assignment of the security to the
United States.
The Secretary of HUD may deny a claim for insurance in whole or in part for
any violations of the regulations governing the Title I Program; however, the
Secretary of HUD may waive such violations if it determines that enforcement of
the regulations would impose an injustice upon a lender which has substantially
complied with the regulations in good faith.
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Material Federal Income Tax Consequences
The following summary of the material federal income tax consequences of
the purchase, ownership and disposition of certificates is based on the opinion
of tax counsel to the depositor, either Sidley Austin Brown & Wood LLP or
Thacher Proffitt & Wood LLP, as specified in the related prospectus supplement.
This summary is based on the provisions of the Internal Revenue Code of 1986, as
amended, and the regulations, including the REMIC Regulations, rulings and
decisions promulgated thereunder and, where applicable, proposed regulations,
all of which are subject to change either prospectively or retroactively. This
summary does not address the material federal income tax consequences of an
investment in securities applicable to certain financial institutions, banks,
insurance companies, tax exempt organizations, dealers in options, currency or
securities, traders in securities that elect to mark to market, or persons who
hold positions other than securities such that the securities are treated as
part of a hedging transaction, straddle, conversion or other integrated
transaction which are subject to special rules. Because of the complexity of the
tax issues involved, we strongly suggest that prospective investors consult
their tax advisors regarding the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of securities.
General
The federal income tax consequences to securityholders will vary depending
on whether an election is made to treat the trust fund relating to a particular
series of securities as a REMIC under the Code. The prospectus supplement for
each series of securities will specify whether a REMIC election will be made. In
the discussion that follows, all references to a "section" or "sections" shall
be understood to refer, unless otherwise specifically indicated, to a section or
sections of the Code.
If a REMIC election is not made, in the opinion of tax counsel, the trust
fund will not be classified as a publicly traded partnership, a taxable mortgage
pool, or an association taxable as a corporation. A trust fund that qualifies as
a "grantor trust" for federal income tax purposes also will receive an opinion
of tax counsel to the effect that:
o the trust fund will be classified as a grantor trust under subpart E,
part I of subchapter J of the Code; and
o owners of certificates will be treated for federal income tax purposes
as owners of a portion of the trust fund's assets as described below.
A trust fund that issues notes may also receive an opinion of tax counsel
regarding the characterization of the notes as debt instruments for federal
income tax purposes.
With respect to each trust fund that elects REMIC status, in the opinion of
tax counsel, assuming compliance with all provisions of the related agreement,
the trust fund will qualify as a REMIC and the related certificates will be
considered to be regular interests or residual interests in the REMIC. The
related prospectus supplement for each series of securities will indicate
whether the trust fund will make a REMIC election and whether a class of
securities will be treated as a regular or residual interest in the REMIC.
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Each opinion is an expression of an opinion only, is not a guarantee of
results and is not binding on the Internal Revenue Service or any third party.
If, contrary to the opinion of tax counsel, the IRS successfully were to
assert that a class of notes did not represent debt instruments for federal
income tax purposes, that class of notes would be treated as equity interests
in the related trust fund. The trust fund would then be treated as a
partnership and could be a publicly traded partnership. If the trust fund were
classified as a publicly traded partnership, it would not be subject to
taxation as a corporation because its income would constitute "qualifying
income" not derived in the conduct of a financial business. Nevertheless, if
the trust fund were classified as a partnership, treatment of a class of notes
as equity interests in such a partnership could have adverse tax consequences
to certain holders. For example, income to foreign holders of such a class
generally would be subject to U.S. tax and withholding requirements, and
individual holders of such a class would be allocated their proportionate
share of the trust's income but might be subject to certain limitations on
their ability to deduct their share of the trust's expenses.
Taxation of Debt Securities
Status as Real Property Loans. Except to the extent otherwise provided in
the related prospectus supplement, if the securities are regular interests in a
REMIC or represent interests in a grantor trust, in the opinion of tax counsel:
o securities held by a domestic building and loan association will
constitute "loans... secured by an interest in real property" within
the meaning of section 7701(a)(19)(C)(v) of the Code; and
o securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of section 856(c)(4)(A) of the
Code and interest on securities will be considered "interest on
obligations secured by mortgages on real property or on interests in
real property" within the meaning of section 856(c)(3)(B) of the Code.
Interest and Acquisition Discount. In the opinion of tax counsel,
securities that are REMIC regular interests are generally taxable to holders in
the same manner as evidences of indebtedness issued by the REMIC. Stated
interest on the securities that are REMIC regular interests will be taxable as
ordinary income and taken into account using the accrual method of accounting,
regardless of the holder's normal accounting method. Interest (other than
original issue discount) on securities (other than securities that are REMIC
regular interests) which are characterized as indebtedness for federal income
tax purposes will be includible in income by their holders in accordance with
their usual methods of accounting. When we refer to "debt securities" in this
section, we mean securities characterized as debt for federal income tax
purposes and securities that are REMIC regular interests.
In the opinion of tax counsel, "compound interest securities" (i.e., debt
securities that permit all interest to accrue for more than one year before
payments of interest are scheduled to begin) will, and certain of the other
debt securities issued at a discount may, be issued with "original issue
discount" or OID. The following discussion is based in part on the OID
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Regulations. A holder should be aware, however, that the OID Regulations do
not adequately address certain issues relevant to prepayable securities, such
as the debt securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a debt security and its issue price. In the
opinion of tax counsel, a holder of a debt security must include OID in gross
income as ordinary interest income as it accrues under a method taking into
account an economic accrual of the discount. In general, OID must be included in
income in advance of the receipt of the cash representing that income. The
amount of OID on a debt security will be considered to be zero if it is less
than a de minimis amount determined under the Code.
The issue price of a debt security is the first price at which a
substantial amount of debt securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of debt securities is sold for cash on
or prior to the closing date, the issue price for that class will be treated as
the fair market value of that class on the closing date. The issue price of a
debt security also includes the amount paid by an initial debt security holder
for accrued interest that relates to a period prior to the issue date of the
debt security. The stated redemption price at maturity of a debt security
includes the original principal amount of the debt security, but generally will
not include distributions of interest if the distributions constitute "qualified
stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below), provided that the interest payments are unconditionally payable at
intervals of one year or less during the entire term of the debt security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Debt securities may provide for default remedies in the
event of late payment or nonpayment of interest. Although the matter is not free
from doubt, the trustee intends to treat interest on such debt securities as
unconditionally payable and as constituting qualified stated interest, not OID.
However, absent clarification of the OID Regulations, where debt securities do
not provide for default remedies, the interest payments will be included in the
debt security's stated redemption price at maturity and taxed as OID. Interest
is payable at a single fixed rate only if the rate appropriately takes into
account the length of the interval between payments. Distributions of interest
on debt securities with respect to which deferred interest will accrue, will not
constitute qualified stated interest payments, in which case the stated
redemption price at maturity of such debt securities includes all distributions
of interest as well as principal thereon. Where the interval between the issue
date and the first distribution date on a debt security is longer than the
interval between subsequent distribution dates, the greater of (i) the interest
foregone and (ii) the excess of the stated principal amount over the issue price
will be included in the stated redemption price at maturity and tested under the
de minimis rule described below. Where the interval between the issue date and
the first distribution date on a debt security is shorter than the interval
between subsequent distribution dates, all of the additional interest will be
included in the stated redemption price at maturity and tested under the de
minimis rule described below. In the case of a debt security with a long first
period that has non-de minimis OID, all stated interest in excess of interest
payable at the effective interest rate for the long first period will be
included in the stated redemption price at maturity and the debt security will
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generally have OID. Holders of debt securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity
of a debt security.
Under the de minimis rule, OID on a debt security will be considered to be
zero if the OID is less than 0.25% of the stated redemption price at maturity of
the debt security multiplied by the weighted average maturity of the debt
security. For this purpose, the weighted average maturity of the debt security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the debt security and the
denominator of which is the stated redemption price at maturity of the debt
security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the debt security
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
Debt securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is generally treated as payable at a
qualified variable rate and not as contingent interest if
o the interest is unconditionally payable at least annually,
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments, and
o interest is based on a "qualified floating rate," an "objective rate,"
or a combination of "qualified floating rates" that do not operate in
a manner that significantly accelerates or defers interest payments on
the debt security.
In the case of compound interest securities, certain interest weighted
securities, and certain of the other debt securities, none of the payments under
the instrument will be considered qualified stated interest, and thus the
aggregate amount of all payments will be included in the stated redemption price
at maturity.
The Internal Revenue Service issued contingent payment regulations
governing the calculation of OID on instruments having contingent interest
payments. These contingent payment regulations represent the only guidance
regarding the views of the IRS with respect to contingent interest instruments
and specifically do not apply for purposes of calculating OID on debt
instruments subject to section 1272(a)(6) of the Code, such as the debt
securities. Additionally, the OID Regulations do not contain provisions
specifically interpreting section 1272(a)(6) of the Code. Until the Treasury
issues guidance to the contrary, the trustee intends to base its computation on
section 1272(a)(6) and the OID Regulations as described in this prospectus.
However, because no regulatory guidance currently exists under section
1272(a)(6) of the Code, there can be no assurance that such methodology
represents the correct manner of calculating OID.
The holder of a debt security issued with OID must include in gross income,
for all days during its taxable year on which it holds the debt security, the
sum of the "daily portions" of
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OID. The amount of OID includible in income by a holder will be computed by
allocating to each day during a taxable year a pro rata portion of the
original issue discount that accrued during the relevant accrual period. In
the case of a debt security that is not a Regular Interest Security and the
principal payments on which are not subject to acceleration resulting from
prepayments on the loans, the amount of OID includible in income of a holder
for an accrual period (generally the period over which interest accrues on the
debt instrument) will equal the product of the yield to maturity of the debt
security and the adjusted issue price of the debt security, reduced by any
payments of qualified stated interest. The adjusted issue price is the sum of
its issue price plus prior accruals of OID, reduced by the total payments made
with respect to the debt security in all prior periods, other than qualified
stated interest payments.
Certain classes of the debt securities may be "pay-through securities,"
which are debt instruments that are subject to acceleration due to prepayments
on other debt obligations securing those instruments. The amount of OID to be
included in the income of a pay-through security is computed by taking into
account the prepayment rate assumed in pricing the debt instrument. The amount
of OID that will accrue during an accrual period on a pay-through security is
the excess, if any, of the
o sum of
- the present value of all payments remaining to be made on the
pay-through security as of the close of the accrual period and
- the payments during the accrual period of amounts included in the
stated redemption price of the pay-through security,
over
o the adjusted issue price of the pay-through security at the beginning
of the accrual period.
The present value of the remaining payments is to be determined on the
basis of three factors:
o the original yield to maturity of the pay-through security (determined
on the basis of compounding at the end of each accrual period and
properly adjusted for the length of the accrual period),
o events that have occurred before the end of the accrual period, and
o the assumption that the remaining payments will be made in accordance
with the original prepayment assumption.
The effect of this method is to increase the portions of OID required to be
included in income by a holder to take into account prepayments with respect to
the loans at a rate that exceeds the prepayment assumption, and to decrease (but
not below zero for any period) the portions of OID required to be included in
income by a holder of a pay-through security to take into account prepayments
with respect to the loans at a rate that is slower than the prepayment
assumption.
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Although OID will be reported to holders of pay-through securities based on
the prepayment assumption, no representation is made to holders that loans
will be prepaid at that rate or at any other rate.
The depositor may adjust the accrual of OID on a class of securities that
are regular REMIC interests (or other regular interests in a REMIC) in a manner
that it believes to be appropriate, to take account of realized losses on the
loans, although the OID Regulations do not provide for such adjustments. If the
IRS were to require that OID be accrued without such adjustments, the rate of
accrual of OID for a class of securities that are regular REMIC interests could
increase.
Certain classes of securities that are regular REMIC interests may
represent more than one class of REMIC regular interests. Unless otherwise
provided in the related prospectus supplement, the applicable trustee intends,
based on the OID Regulations, to calculate OID on such securities as if, solely
for the purposes of computing OID, the separate regular interests were a single
debt instrument.
A subsequent holder of a debt security will also be required to include OID
in gross income, but the holder who purchases the debt security for an amount
that exceeds its adjusted issue price will be entitled (as will an initial
holder who pays more than a debt security's issue price) to offset such OID by
comparable economic accruals of portions of the excess.
Effects of Defaults and Delinquencies. In the opinion of tax counsel,
holders will be required to report income with respect to the related securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the loans, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
holder of a security in any period could significantly exceed the amount of cash
distributed to the holder in that period. The holder will eventually be allowed
a loss (or will be allowed to report a lesser amount of income) to the extent
that the aggregate amount of distributions on the securities is reduced as a
result of a loan default. However, the timing and character of losses or
reductions in income are uncertain and, accordingly, holders of securities
should consult their own tax advisors on this point.
Interest Weighted Securities. An "interest weighted security" is a security
that is a REMIC regular interest or a "stripped" security (as discussed under
"--Tax Status as a Grantor Trust; General" below) the payments on which consist
solely or primarily of a specified portion of the interest payments on qualified
mortgages held by the REMIC or on loans underlying pass-through securities. It
is not clear how income should be accrued with respect to interest weighted
securities. The trustee intends to take the position that all of the income
derived from an interest weighted security should be treated as OID and that the
amount and rate of accrual of such OID should be calculated by treating the
interest weighted security as a compound interest security. However, in the case
of interest weighted securities that are entitled to some payments of principal
and are REMIC regular interests, the IRS could assert that income derived from
the interest weighted security should be calculated as if the security were a
security purchased at a premium equal to the excess of the price paid by the
holder for the Security over its stated principal amount, if any. Under this
approach, a holder would be entitled to amortize such
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premium only if it has in effect an election under section 171 of the Code
with respect to all taxable debt instruments held by such holder, as described
below. Alternatively, the IRS could assert that an interest weighted security
should be taxable under the rules governing bonds issued with contingent
payments. This treatment may be more likely in the case of interest weighted
securities that are stripped securities as described below. See "--Non-REMIC
Certificates--B. Multiple Classes of Senior Certificates--Stripped Bonds and
Stripped Coupons" below.
Variable Rate Debt Securities. In the opinion of tax counsel, in the case
of debt securities bearing interest at a rate that varies directly, according to
a fixed formula, with an objective index, it appears that the yield to maturity
of the debt securities and in the case of pay-through securities, the present
value of all payments remaining to be made on the debt securities, should be
calculated as if the interest index remained at its value as of the issue date
of the securities. Because the proper method of adjusting accruals of OID on a
variable rate debt security is uncertain, holders of variable rate debt
securities should consult their own tax advisers regarding the appropriate
treatment of such securities for federal income tax purposes.
Market Discount. In the opinion of tax counsel, a purchaser of a security
may be subject to the market discount rules of sections 1276 through 1278 of the
Code. A holder that acquires a debt security with more than a prescribed de
minimis amount of "market discount" (generally, the excess of the principal
amount of the debt security over the purchaser's purchase price) will be
required to include accrued market discount in income as ordinary income in each
month, but limited to an amount not exceeding the principal payments on the debt
security received in that month and, if the securities are sold, the gain
realized. This market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, market discount
would in general accrue either
o on the basis of a constant yield (in the case of a pay-through
security, taking into account a prepayment assumption) or
o in the ratio of (a) in the case of securities (or in the case of a
pass-through security, as set forth below, the loans underlying the
security) not originally issued with OID, stated interest payable in
the relevant period to total stated interest remaining to be paid at
the beginning of the period or (b) in the case of securities (or, in
the case of a pass-through security, as described below, the loans
underlying the security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the debt security (or, in the case of a pass-through security, the loans),
the excess of interest paid or accrued to purchase or carry the security (or, in
the case of a pass-through security, as described below, the underlying loans)
with market discount over interest received on the security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the security (or in the case of a pass-
through security, an underlying loan). A holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such
112
holder during the taxable year such election is made and thereafter, in which
case the interest deferral rule will not apply.
Premium. In the opinion of tax counsel, a holder who purchases a debt
security (other than an interest weighted security to the extent described
above) at a cost greater than its stated redemption price at maturity, generally
will be considered to have purchased the security at a premium, which it may
elect to amortize as an offset to interest income on the security (and not as a
separate deduction item) on a constant yield method. Although no regulations
addressing the computation of premium accrual on comparable securities have been
issued, the legislative history of the 1986 Act indicates that premium is to be
accrued in the same manner as market discount. Accordingly, it appears that the
accrual of premium on a class of pay-through securities will be calculated using
the prepayment assumption used in pricing the class. If a holder makes an
election to amortize premium on a debt security, the election will apply to all
taxable debt instruments (including all REMIC regular interests and all
pass-through certificates representing ownership interests in a trust holding
debt obligations) held by the holder at the beginning of the taxable year in
which the election is made, and to all taxable debt instruments acquired
thereafter by the holder, and will be irrevocable without the consent of the
IRS. Purchasers who pay a premium for the securities should consult their tax
advisers regarding the election to amortize premium and the method to be
employed.
On December 30, 1997, the IRS issued final amortizable bond premium
regulations dealing with amortizable bond premium. The regulations specifically
do not apply to prepayable debt instruments subject to section 1272(a)(6)
of the Code. Absent further guidance from the IRS, the trustee intends to
account for amortizable bond premium in the manner described above. Prospective
purchasers of the debt securities should consult their tax advisors regarding
the possible application of the amortizable bond premium regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit the holder of a debt security to elect to accrue all
interest, discount (including de minimis market discount or OID) and premium
income as interest, based on a constant yield method for Debt securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a debt security with market discount, the holder of the debt security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such holder of the debt security acquires during the year of the election or
thereafter. Similarly, the holder of a debt security that makes this election
for a debt security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a debt security is irrevocable.
Sale or Exchange of a Debt Security. Sale or exchange of a debt security
prior to its maturity will result in gain or loss equal to the difference, if
any, between the amount received and the seller's adjusted basis in the debt
security. Such adjusted basis generally will equal the seller's purchase price
for the debt security, increased by the OID and market discount included in
the seller's gross income with respect to the debt security, and reduced by
principal payments on the debt security previously received by the seller and
any premium amortized by the seller. Such gain or loss will be capital gain or
loss to a seller for which a debt security is a "capital
113
asset" within the meaning of section 1221 of the Code except to the extent of
any accrued but unrecognized market discount, and will be long-term or
short-term depending on whether the debt security has been owned for the
long-term capital gain holding period (currently more than one year).
Non-corporate taxpayers are subject to reduced maximum rates on long-term
capital gains and are generally subject to tax at ordinary income rates on
short-term capital gains. The deductibility of capital losses is subject to
certain limitations. Prospective investors should consult their own tax advisors
concerning these tax law provisions.
It is possible that capital gain realized by holders of debt securities
could be considered gain realized upon the disposition of property that was part
of a "conversion transaction." A sale of a debt security will be part of a
conversion transaction if substantially all of the holder's expected return is
attributable to the time value of the holder's net investment, and at least one
of the following conditions is met:
o the holder entered the contract to sell the debt security
substantially contemporaneously with acquiring the debt security;
o the debt security is part of a straddle;
o the debt security is marketed or sold as producing capital gain; or
o other transactions to be specified in Treasury regulations that have
not yet been issued occur.
If the sale or other disposition of a debt security is part of a conversion
transaction, all or any portion of the gain realized upon the sale or other
disposition would be treated as ordinary income instead of capital gain.
Non-U.S. Persons. Generally, to the extent that a debt security evidences
ownership in mortgage loans that are issued on or before July 18, 1984, interest
or OID paid by the person required to withhold tax under section 1441 or 1442 of
the Code to (i) an owner that is not a U.S. Person or (ii) a debt securityholder
holding on behalf of an owner that is not a U.S. Person, will be subject to
federal income tax, collected by withholding, at a rate of 30% (or such lower
rate as may be provided for interest by an applicable tax treaty). Accrued OID
recognized by the owner on the sale or exchange of such a debt security also
will be subject to federal income tax at the same rate. Generally, such payments
would not be subject to withholding to the extent that a debt security evidences
ownership in mortgage loans issued after July 18, 1984, if
o the debt securityholder does not actually or constructively own 10% or
more of the combined voting power of all classes of equity in the
issuer (which for purposes of this discussion may be defined as the
trust fund);
o the debt securityholder is not a controlled foreign corporation within
the meaning of section 957 of the Code related to the issuer; and
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o the debt securityholder complies with certain identification
requirements, including delivery of a statement, signed by the debt
securityholder under penalties of perjury, certifying that it is not a
U.S. Person and providing its name and address.
Information Reporting and Backup Withholding. The master servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each holder of a debt security at any time during the year,
such information as may be deemed necessary or desirable to assist
securityholders in preparing their federal income tax returns, or to enable
holders to make the information available to owners or other financial
intermediaries of holders that hold the debt securities as nominees. If a
holder, owner or other recipient of a payment on behalf of an owner fails to
supply a certified taxpayer identification number or if the Secretary of the
Treasury determines that such person has not reported all interest and dividend
income required to be shown on its federal income tax return, backup withholding
may be required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against the
recipient's federal income tax liability.
Non-REMIC Certificates
A. Single Class of Senior Certificates
Characterization. The trust fund may be created with one class of senior
certificates and one class of subordinated certificates. In this case, each
senior certificateholder will be treated as the owner of a pro rata undivided
interest in the interest and principal portions of the trust fund represented by
that senior certificate and will be considered the equitable owner of a pro rata
undivided interest in each of the mortgage loans in the related mortgage pool.
Any amounts received by a senior certificateholder in lieu of amounts due with
respect to any mortgage loan because of a default or delinquency in payment will
be treated for federal income tax purposes as having the same character as the
payments they replace.
Each holder of a senior certificate will be required to report on its
federal income tax return its pro rata share of the entire income from the
mortgage loans in the trust fund represented by that senior certificate,
including interest, original issue discount, if any, prepayment fees, assumption
fees, any gain recognized upon an assumption and late payment charges received
by the master servicer in accordance with the senior certificateholder's method
of accounting. Under section 162 or 212 of the Code, each senior
certificateholder will be entitled to deduct its pro rata share of servicing
fees, prepayment fees, assumption fees, any loss recognized upon an assumption
and late payment charges retained by the master servicer, provided that these
amounts are reasonable compensation for services rendered to the trust fund. A
senior certificateholder that is an individual, estate or trust will be entitled
to deduct its share of expenses only to the extent such expenses, plus all other
section 212 expenses, exceed 2% of that senior certificateholder's adjusted
gross income. A senior certificateholder using the cash method of accounting
must take into account its pro rata share of income and deductions as and when
collected by or paid to the master servicer. A senior certificateholder using an
accrual method of accounting must take into account its pro rata share of income
and deductions as they become due or are paid to the master servicer, whichever
is earlier. If the servicing fees paid to the master servicer were deemed to
exceed reasonable servicing compensation, the amount of such excess could be
considered as a retained ownership interest by the master servicer, or any
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person to whom the master servicer assigned for value all or a portion of the
servicing fees, in a portion of the interest payments on the mortgage loans. The
mortgage loans might then be subject to the "coupon stripping" rules of the Code
discussed below.
Unless otherwise specified in the related prospectus supplement, tax
counsel will deliver its opinion to the depositor with respect to each series of
certificates that:
o a senior certificate owned by a "domestic building and loan
association" within the meaning of section 7701(a)(19) of the Code
representing principal and interest payments on mortgage loans will be
considered to represent "loans . . . secured by an interest in real
property which is . . . residential property" within the meaning of
section 7701(a)(19)(C)(v) of the Code to the extent that the mortgage
loans represented by that senior certificate are of a type described
in the section;
o a senior certificate owned by a real estate investment trust
representing an interest in mortgage loans will be considered to
represent "real estate assets" within the meaning of section
856(c)(4)(A) of the Code and interest income on the mortgage loans
will be considered "interest on obligations secured by mortgages on
real property" within the meaning of section 856(c)(3)(B) of the Code
to the extent that the mortgage loans represented by that senior
certificate are of a type described in the section; and
o a senior certificate owned by a REMIC will be an "obligation . . .
which is principally secured by an interest in real property" within
the meaning of section 860G(a)(3)(A) of the Code.
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
section 593(d) of the Code to any taxable year beginning after December 31,
1995.
The assets constituting certain trust funds may include "buydown" mortgage
loans. The characterization of any investment in "buydown" mortgage loans will
depend upon the precise terms of the related buydown agreement, but to the
extent that such "buydown" mortgage loans are secured in part by a bank account
or other personal property, they may not be treated in their entirety as assets
described in the foregoing sections of the Code. There are no directly
applicable precedents with respect to the federal income tax treatment or the
characterization of investments in "buydown" mortgage loans. Accordingly,
holders of senior certificates should consult their own tax advisors with
respect to characterization of investments in senior certificates representing
an interest in a trust fund that includes "buydown" mortgage loans.
Premium. The price paid for a senior certificate by a holder will be
allocated to the holder's undivided interest in each mortgage loan based on each
mortgage loan's relative fair market value, so that the holder's undivided
interest in each mortgage loan will have its own tax basis. A senior
certificateholder that acquires an interest in mortgage loans at a premium may
elect to amortize the premium under a constant interest method, provided that
the mortgage loan was originated after September 27, 1985. Premium allocable to
a mortgage loan originated on or before September 27, 1985 should be allocated
among the principal payments on the mortgage loan and allowed as an ordinary
deduction as principal payments are made. Amortizable bond
116
premium will be treated as an offset to interest income on a senior certificate.
The basis for a senior certificate will be reduced to the extent that
amortizable premium is applied to offset interest payments.
It is not clear whether a reasonable prepayment assumption should be used
in computing amortization of premium allowable under section 171 of the Code. A
certificateholder that makes this election for a certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that the
certificateholder acquires during the year of the election or thereafter.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a senior certificate acquired at a premium should
recognize a loss, if a mortgage loan prepays in full, equal to the difference
between the portion of the prepaid principal amount of the mortgage loan that is
allocable to the senior certificate and the portion of the adjusted basis of the
senior certificate that is allocable to the mortgage loan. If a reasonable
prepayment assumption is used to amortize the premium, it appears that a loss
would be available, if at all, only if prepayments have occurred at a rate
faster than the reasonable assumed prepayment rate. It is not clear whether any
other adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments.
On December 30, 1997, the Internal Revenue Service issued final amortizable
bond premium regulations. These regulations, which generally are effective for
bonds issued or acquired on or after March 2, 1998 (or, for holders making an
election for the taxable year that included March 2, 1998 or any subsequent
taxable year, shall apply to bonds held on or after the first day of the taxable
year of the election). The amortizable bond premium regulations specifically do
not apply to prepayable debt instruments or any pool of debt instruments, such
as the trust fund, the yield on which may be affected by prepayments which are
subject to section 1272(a)(6) of the Code. Absent further guidance from the IRS
and unless otherwise specified in the related prospectus supplement, the trustee
will account for amortizable bond premium in the manner described above.
Prospective purchasers should consult their tax advisors regarding amortizable
bond premium and the amortizable bond premium regulations.
Original Issue Discount. The IRS has stated in published rulings that, in
circumstances similar to those described herein, the special rules of the Code
(currently sections 1271 through 1273 and section 1275) relating to original
issue discount (OID) will be applicable to a senior certificateholder's interest
in those mortgage loans meeting the conditions necessary for these sections to
apply. Accordingly, the following discussion is based in part on the Treasury's
OID Regulations issued on February 2, 1994 under sections 1271 through 1273 and
section 1275 of the Code. Certificateholders should be aware, however, that the
OID Regulations do not adequately address certain issues relevant to prepayable
securities, such as the certificates. Rules regarding periodic inclusion of OID
income are applicable to mortgages of corporations originated after May 27,
1969, mortgages of noncorporate mortgagors (other than individuals) originated
after July 1, 1982, and mortgages of individuals originated after March 2, 1984.
OID could arise by the financing of points or other charges by the originator of
the mortgages in an amount greater than a statutory de minimis exception to the
extent that the points are not currently deductible under applicable provisions
of the Code or are not for services provided by the lender. OID generally must
be reported as ordinary gross income as it accrues under a
117
constant interest method. See "--B. Multiple Classes of Senior
Certificates--Senior Certificates Representing Interests in Loans Other than ARM
Loans--Accrual of Original Issue Discount" below.
Market Discount. A senior certificateholder that acquires an undivided
interest in mortgage loans may be subject to the market discount rules of
sections 1276 through 1278 to the extent an undivided interest in a mortgage
loan is considered to have been purchased at a "market discount". Generally, the
excess of the portion of the principal amount of a mortgage loan allocable to
the holder's undivided interest over the holder's tax basis in such interest.
Market discount with respect to a senior certificate will be considered to be
zero if the amount allocable to the senior certificate is less than 0.25% of the
senior certificate's stated redemption price at maturity multiplied by the
weighted average maturity remaining after the date of purchase. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under sections 1276 through 1278 of the Code.
The Code provides that any principal payment, whether a scheduled payment
or a prepayment, or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986 shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants to the Department of the Treasury authority to
issue regulations providing for the computation of accrued market discount on
debt instruments, the principal of which is payable in more than one
installment. Although the Treasury has not yet issued regulations, rules
described in the relevant legislative history will apply. Under those rules, the
holder of a market discount bond may elect to accrue market discount either on
the basis of a constant interest rate or according to one of the following
methods. If a senior certificate is issued with OID, the amount of market
discount that accrues during any accrual period is equal to the product of
o the total remaining market discount
times
o a fraction, the numerator of which is the original issue discount
accruing during the period and the denominator of which is the total
remaining original issue discount at the beginning of the accrual
period.
For senior certificates issued without OID, the amount of market discount that
accrues during a period is equal to the product of
o the total remaining market discount
times
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o a fraction, the numerator of which is the amount of stated interest
paid during the accrual period and the denominator of which is the
total amount of stated interest remaining to be paid at the beginning
of the accrual period.
For purposes of calculating market discount under any of the above methods in
the case of instruments (such as the senior certificates) which provide for
payments which may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of original issue discount will apply. Because the
regulations described above have not been issued, it is impossible to predict
what effect those regulations might have on the tax treatment of a senior
certificate purchased at a discount or premium in the secondary market.
A holder who acquires a senior certificate at a market discount also may be
required to defer, until the maturity date of the senior certificate or its
earlier disposition in a taxable transaction, the deduction of a portion of the
amount of interest that the holder paid or accrued during the taxable year on
indebtedness incurred or maintained to purchase or carry the senior certificate
in excess of the aggregate amount of interest (including OID) includible in such
holder's gross income for the taxable year with respect to the senior
certificate. The amount of such net interest expense deferred in a taxable year
may not exceed the amount of market discount accrued on the senior certificate
for the days during the taxable year on which the holder held the senior
certificate and, in general, would be deductible when such market discount is
includible in income. The amount of any remaining deferred deduction is to be
taken into account in the taxable year in which the senior certificate matures
or is disposed of in a taxable transaction. In the case of a disposition in
which gain or loss is not recognized in whole or in part, any remaining deferred
deduction will be allowed to the extent of gain recognized on the disposition.
This deferral rule does not apply if the senior certificateholder elects to
include such market discount in income currently as it accrues on all market
discount obligations acquired by the senior certificateholder in that taxable
year or thereafter.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method for certificates acquired on or
after April 4, 1994. If such an election is made with respect to a mortgage loan
with market discount, the certificateholder will be deemed to have made an
election to include in income currently market discount with respect to all
other debt instruments having market discount that such certificateholder
acquires during the year of the election or thereafter. Similarly, a
certificateholder that makes this election for a certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
certificateholder owns or acquires. See "--Regular Certificates--Original Issue
Discount and Premium" below. The election to accrue interest, discount and
premium on a constant yield method with respect to a certificate is irrevocable.
Anti-abuse Rule. The IRS is permitted to apply or depart from the rules
contained in the OID Regulations as necessary or appropriate to achieve a
reasonable result where a principal purpose in structuring a mortgage asset,
mortgage loan or senior certificate, or the effect of applying the otherwise
applicable rules, is to achieve a result that is unreasonable in light of
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the purposes of the applicable statutes (which generally are intended to achieve
the clear reflection of income for both issuers and holders of debt
instruments).
B. Multiple Classes of Senior Certificates
Stripped Bonds and Stripped Coupons
-----------------------------------
General. Pursuant to section 1286 of the Code, the separation of ownership
of the right to receive some or all of the interest payments on an obligation
from ownership of the right to receive some or all of the principal payments
results in the creation of "stripped bonds" with respect to principal payments
and "stripped coupons" with respect to interest payments. For purposes of
sections 1271 through 1288 of the Code, section 1286 treats a stripped bond or a
stripped coupon as an obligation issued on the date that such stripped interest
is created. If a trust fund is created with two classes of senior certificates,
one class of senior certificates will represent the right to principal and
interest, or principal only, on all or a portion of the mortgage loans
("stripped bond certificates"), while the second class of senior certificates
will represent the right to some or all of the interest on such portion
("stripped coupon certificates").
Servicing fees in excess of reasonable servicing fees will be treated under
the stripped bond rules. If such excess servicing fee is less than 100 basis
points (i.e., 1% interest on the mortgage loan principal balance) or the
certificates are initially sold with a de minimis discount (assuming no
prepayment assumption is required), any non-de minimis discount arising from a
subsequent transfer of the certificates should be treated as market discount.
The IRS appears to require that reasonable servicing fees be calculated on a
mortgage loan by mortgage loan basis, which could result in some mortgage loans
being treated as having more than 100 basis points of interest stripped off.
Although not entirely clear, a stripped bond certificate generally should
be treated as a single debt instrument issued on the day it is purchased for
purposes of calculating any original issue discount. Generally, if the discount
on a stripped bond certificate is larger than a de minimis amount (as calculated
for purposes of the original issue discount rules), a purchaser of such a
certificate will be required to accrue the discount under the original issue
discount rules of the Code. See "--Single Class of Senior Certificates--Original
Issue Discount" above. However, a purchaser of a stripped bond certificate will
be required to account for any discount on the certificate as market discount
rather than original issue discount if either
o the amount of OID with respect to the certificate was treated as zero
under the OID de minimis rule when the certificate was stripped, or
o no more than 100 basis points (including any amount of servicing in
excess of reasonable servicing) are stripped off the trust fund's
mortgage loans.
Pursuant to Revenue Procedure 91-49 issued on August 8, 1991, purchasers of
stripped bond certificates using an inconsistent method of accounting must
change their method of accounting and request the consent of the IRS to the
change in their accounting method on a statement attached to their first timely
tax return filed after August 8, 1991.
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The precise tax treatment of stripped coupon certificates is substantially
uncertain. The Code could be read literally to require that original issue
discount computations be made on a mortgage loan by mortgagee loan basis.
However, based on recent IRS guidance, it appears that a stripped coupon
certificate should be treated as a single installment obligation subject to the
original issue discount rules of the Code. As a result, all payments on a
stripped coupon certificate would be included in the certificate's stated
redemption price at maturity for purposes of calculating income on such
certificate under the original issue discount rules of the Code.
It is unclear under what circumstances, if any, the prepayment of mortgage
loans will give rise to a loss to the holder of a stripped bond certificate
purchased at a premium or a stripped coupon certificate. If a senior certificate
is treated as a single instrument (rather than an interest in discrete mortgage
loans) and the effect of prepayments is taken into account in computing yield
with respect to the senior certificate, it appears that no loss may be available
as a result of any particular prepayment unless prepayments occur at a rate
faster than the assumed prepayment rate. However, if the senior certificate is
treated as an interest in discrete mortgage loans or if no prepayment assumption
is used, then, when a mortgage loan is prepaid, the holder of the certificate
should be able to recognize a loss equal to the portion of the adjusted issue
price of the certificate that is allocable to the mortgage loan.
Because of the complexity of these issues, we strongly suggest that holders
of stripped bond certificates and stripped coupon certificates consult with
their own tax advisors regarding the proper treatment of these certificates for
federal income tax purposes.
Treatment of Certain Owners. Several sections of the Code provide
beneficial treatment to certain taxpayers that invest in mortgage loans of the
type that make up the trust fund. With respect to these sections, no specific
legal authority exists regarding whether the character of the senior
certificates, for federal income tax purposes, will be the same as that of the
underlying mortgage loans. While section 1286 treats a stripped obligation as a
separate obligation for purposes of the provisions of the Code addressing
original issue discount, it is not clear whether such characterization would
apply with regard to these other sections. Although the issue is not free from
doubt, in the opinion of tax counsel, based on policy considerations, each class
of senior certificates should be considered to represent "real estate assets"
within the meaning of section 856(c)(4)(A) of the Code and "loans . . . secured
by, an interest in real property which is . . . residential real property"
within the meaning of section 7701(a)(19)(C)(v) of the Code, and interest income
attributable to senior certificates should be considered to represent "interest
on obligations secured by mortgages on real property" within the meaning of
section 856(c)(3)(B) of the Code, provided that in each case the underlying
mortgage loans and interest on such mortgage loans qualify for such treatment.
Prospective purchasers to which such characterization of an investment in senior
certificates is material should consult their own tax advisors regarding the
characterization of the senior certificates and related income. Senior
certificates will be "obligations (including any participation or certificate of
beneficial ownership therein) which are principally secured by an interest in
real property" within the meaning of section 860G(a)(3)(A) of the Code.
Senior Certificates Representing Interests in Loans Other Than ARM Loans
------------------------------------------------------------------------
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General. The OID rules of sections 1271 through 1275 of the Code will be
applicable to a senior certificateholder's interest in those mortgage loans as
to which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount in income are applicable
to mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, OID could arise by the charging of points by the originator of the
mortgage in an amount greater than the statutory de minimis exception, including
a payment of points that is currently deductible by the borrower under
applicable provisions of the Code, or, under certain circumstances, by the
presence of "teaser" rates on the mortgage loans. OID on each senior certificate
must be included in the owner's ordinary income for federal income tax purposes
as it accrues, in accordance with a constant interest method that takes into
account the compounding of interest, in advance of receipt of the cash
attributable to such income. The amount of OID required to be included in an
owner's income in any taxable year with respect to a senior certificate
representing an interest in mortgage loans other than mortgage loans with
interest rates that adjust periodically (ARM loans) likely will be computed as
described under "--Accrual of Original Issue Discount" below. The following
discussion is based in part on the OID Regulations and in part on the provisions
of the Tax Reform Act of 1986, as amended. The OID Regulations generally are
effective for debt instruments issued on or after April 4, 1994, but may be
relied upon as authority with respect to debt instruments such as the senior
certificates issued after December 21, 1992. Alternatively, proposed Treasury
regulations issued December 21, 1992 may be treated as authority for debt
instruments issued after December 21, 1992 and prior to April 4, 1994, and
proposed Treasury regulations issued in 1986 and 1991 may be treated as
authority for instruments issued before December 21, 1992. In applying these
dates, the issue date of the mortgage loans should be used or, in the case of
stripped bond certificates or stripped coupon certificates, the date when these
certificates are acquired. The holder of a senior certificate should be aware,
however, that neither the proposed OID Regulations nor the OID Regulations
adequately address certain issues relevant to prepayable securities.
Under the Code, the mortgage loans underlying each senior certificate will
be treated as having been issued on the date they were originated with an amount
of OID equal to the excess of such mortgage loan's stated redemption price at
maturity over its issue price. The issue price of a mortgage loan is generally
the amount lent to the mortgagee, which may be adjusted to take into account
certain loan origination fees. The stated redemption price at maturity of a
mortgage loan is the sum of all payments to be made on such mortgage loan other
than payments that are treated as qualified stated interest payments. The
accrual of this OID, as described under "--Accrual of Original Issue Discount"
below, will, unless otherwise specified in the related prospectus supplement,
utilize the original yield to maturity of the senior certificate calculated
based on a reasonable assumed prepayment rate for the mortgage loans underlying
the senior certificates and will take into account events that occur during the
calculation period. This prepayment assumption will be determined in the manner
prescribed by regulations that have not yet been issued. The legislative history
of the Tax Reform Act provides, however, that the regulations will require that
this prepayment assumption be the prepayment assumption that is used in
determining the offering price of the certificate. No representation is made
that any certificate will prepay at the prepayment assumption or at any other
rate. The prepayment assumption contained in the Code literally only applies to
debt instruments collateralized by other debt instruments that are subject to
prepayment rather than direct ownership interests in
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such debt instruments, such as the certificates represent. However, no other
legal authority provides guidance with regard to the proper method for accruing
OID on obligations that are subject to prepayment, and, until further guidance
is issued, the master servicer intends to calculate and report OID under the
method described below.
Accrual of Original Issue Discount. Generally, the owner of a senior
certificate must include in gross income the sum of the "daily portions", as
defined below, of the OID on that senior certificate for each day on which it
owns the senior certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily portions of
original issue discount with respect to each component generally will be
determined as follows under the Amendments. A calculation will be made by the
master servicer or such other entity specified in the related prospectus
supplement of the portion of original issue discount that accrues during each
successive monthly accrual period (or shorter period from the date of original
issue) that ends on the day in the calendar year corresponding to each of the
distribution dates on the senior certificate (or the day prior to each such
date). This will be done, in the case of each full month accrual period, by
adding
o the present value at the end of the accrual period (determined by
using as a discount factor the original yield to maturity of the
respective component, under the Prepayment Assumption) of all
remaining payments to be received under the Prepayment Assumption on
the respective component, and
o any payments received during such accrual period (other than a payment
of qualified stated interest), and subtracting from that total the
"adjusted issue price" of the respective component at the beginning of
such accrual period.
The "adjusted issue price" of a senior certificate at the beginning of the first
accrual period is its issue price; the "adjusted issue price" of a senior
certificate at the beginning of a subsequent accrual period is the "adjusted
issue price" at the beginning of the immediately preceding accrual period plus
the amount of OID allocable to that accrual period reduced by the amount of any
payment (other than a payment of qualified stated interest) made at the end of
or during that accrual period. The OID during the accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the period. With respect to an initial accrual period
shorter than a full monthly accrual period, the daily portions of original issue
discount must be determined according to an appropriate allocation under any
reasonable method.
OID generally must be reported as ordinary gross income as it accrues under
a constant interest method that takes into account the compounding of interest
as it accrues rather than when received. However, the amount of OID includible
in the income of a holder of an obligation is reduced when the obligation is
acquired after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued OID, less prior payments of
principal. Accordingly, if mortgage loans acquired by a certificateholder are
purchased at a price equal to the then unpaid principal amount of such mortgage
loan, no original issue discount attributable to the difference between the
issue price and the original principal amount of such mortgage loan (i.e.,
points) will be includible by such holder. Other OID on the mortgage loans
(e.g., that arising from a "teaser" rate) would still need to be accrued.
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Senior Certificates Representing Interests in ARM Loans
-------------------------------------------------------
The OID Regulations do not address the treatment of instruments, such as
the senior certificates (if the related trust fund includes ARM loans), which
represent interests in ARM loans. Additionally, the IRS has not issued guidance
under the coupon stripping rules of the Code with respect to these instruments.
In the absence of any authority, the master servicer will report OID on senior
certificates attributable to ARM loans ("stripped ARM obligations") to holders
in a manner it believes to be consistent with the rules described under the
heading "--Senior Certificates Representing Interests in Loans Other Than ARM
Loans" above and with the OID Regulations. In general, application of these
rules may require inclusion of income on a stripped ARM obligation in advance of
the receipt of cash attributable to such income. Further, the addition of
deferred interest resulting from negative amortization to the principal balance
of an ARM loan may require the inclusion of such amount in the income of the
senior certificateholder when the amount accrues. Furthermore, the addition of
deferred interest to the senior certificate's principal balance will result in
additional income (including possibly OID income) to the senior
certificateholder over the remaining life of the senior certificates.
Because the treatment of stripped ARM obligations is uncertain, investors
are urged to consult their tax advisors regarding how income will be includible
with respect to these certificates.
C. Possible Application of Contingent Payment Regulations to Certain Non-REMIC
Certificates
Final regulations issued on June 11, 1996 with respect to OID under section
1275 include "contingent payment regulations" covering obligations that provide
for one or more contingent payments. Rights to interest payments on a mortgage
loan might be considered to be contingent within the meaning of the contingent
payment regulations if the interest would not be paid if the borrower exercised
its right to prepay the mortgage loan. However, in the case of an investor
having a right to shares of the interest and principal payments on a mortgage
loan when the share of interest is not substantially greater than the share of
principal, the possibility of prepayment should not be considered to
characterize otherwise noncontingent interest payments as contingent payments.
The absence of interest payments following a prepayment would be the normal
consequence of the return of the investor's capital in the form of a principal
payment. On the other hand, a right to interest on such a mortgage loan is more
likely to be regarded as contingent if held by an investor that does not also
hold a right to the related principal. Such an investor would not recover its
capital through receipt of a principal payment at the time of the prepayment of
the mortgage loan.
Applying these principles to the senior certificates, because the mortgage
loans are subject to prepayment at any time, payments on a class of senior
certificates representing a right to interest on the mortgage loans could be
considered to be contingent within the meaning of the contingent payment
regulations, at least if the senior certificate was issued at a premium. The
likelihood that such payments will be considered contingent increases the
greater the amount of such premium.
In the event that payments on a senior certificate in respect of interest
on the mortgage loans are considered contingent, then the holder would generally
report income or loss as
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described under the heading "--Stripped Bonds and Stripped Coupons" above;
provided, however, that the yield that would be used in calculating interest
income would not be the actual yield but would instead equal the "applicable
Federal rate" (AFR), in effect at the time of purchase of the senior certificate
by the holder. The AFR generally is an average of current yields on Treasury
securities computed and published monthly by the IRS. In addition, once the
holder's adjusted basis in the senior certificate has been reduced (by prior
distributions or losses) to an amount equal to the aggregate amount of the
remaining noncontingent payments of the mortgage loans that are allocable to the
senior certificate (or to zero if the senior certificate does not share in
principal payments), then the holder would recognize income in each subsequent
month equal to the full amount of interest on the mortgage loans that accrues in
that month and is allocable to the senior certificate. It is uncertain whether,
under the contingent payment regulations, any other adjustments would be made to
take account of prepayments of the mortgage loans.
D. Sale or Exchange of a Senior Certificate
Sale or exchange of a senior certificate prior to its maturity will
result in gain or loss equal to the difference, if any, between the amount
received and the seller's adjusted basis in the senior certificate. Such
adjusted basis generally will equal the seller's purchase price for the senior
certificate, increased by the OID and market discount included in the seller's
gross income with respect to the senior certificate, and reduced by principal
payments on the senior certificate previously received by the seller and any
premium amortized by the seller. Such gain or loss will be capital gain or
loss to a seller for which a senior certificate is a "capital asset" within
the meaning of section 1221 of the Code except to the extent of any accrued
but unrecognized market discount, and will be long-term or short-term
depending on whether the senior certificate has been owned for the long-term
capital gain holding period (currently more than one year).
Non-corporate taxpayers are subject to reduced maximum rates on long-term
capital gains and are generally subject to tax at ordinary income rates on
short-term capital gains. The deductibility of capital losses is subject to
certain limitations. Prospective investors should consult their own tax advisors
concerning these tax law provisions.
It is possible that capital gain realized by holders of the senior
certificates could be considered gain realized upon the disposition of property
that was part of a "conversion transaction". A sale of a senior certificate will
be part of a conversion transaction if substantially all of the holder's
expected return is attributable to the time value of the holder's net
investment, and at least one of the following conditions is met:
o the holder entered the contract to sell the senior certificate
substantially contemporaneously with acquiring the senior certificate;
o the senior certificate is part of a straddle;
o the senior certificate is marketed or sold as producing capital gain;
or
o other transactions to be specified in Treasury regulations that have
not yet been issued occur.
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If the sale or other disposition of a senior certificate is part of a
conversion transaction, all or any portion of the gain realized upon the sale or
other disposition would be treated as ordinary income instead of capital gain.
Senior certificates will be "evidences of indebtedness" within the meaning
of section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a senior certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
E. Non-U.S. Persons
Generally, to the extent that a senior certificate evidences ownership in
mortgage loans that are issued on or before July 18, 1984, interest or OID paid
by the person required to withhold tax under section 1441 or 1442 to (i) an
owner that is not a U.S. Person or (ii) a senior certificateholder holding on
behalf of an owner that is not a U.S. Person, will be subject to federal income
tax, collected by withholding, at a rate of 30% or such lower rate as may be
provided for interest by an applicable tax treaty. Accrued OID recognized by the
owner on the sale or exchange of such a senior certificate also will be subject
to federal income tax at the same rate. Generally, such payments would not be
subject to withholding to the extent that a senior certificate evidences
ownership in mortgage loans issued after July 18, 1984, if
o the senior certificateholder does not actually or constructively own
10% or more of the combined voting power of all classes of equity in
the issuer (which for purposes of this discussion may be defined as
the trust fund);
o the senior certificateholder is not a controlled foreign corporation
within the meaning of section 957 of the Code related to the issuer;
and
o the senior certificateholder complies with certain identification
requirements, including delivery of a statement, signed by the senior
certificateholder under penalties of perjury, certifying that it is
not a U.S. Person and providing its name and address.
F. Information Reporting and Backup Withholding
The master servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each certificateholder at any time
during the year, such information as may be deemed necessary or desirable to
assist securityholders in preparing their federal income tax returns, or to
enable holders to make the information available to owners or other financial
intermediaries of holders that hold the certificates as nominees. If a holder,
owner or other recipient of a payment on behalf of an owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, backup withholding may be
required with respect to any payments. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against the recipient's
federal income tax liability.
G. New Withholding Regulations
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On October 6, 1997, the Treasury Department issued new regulations which
attempt to unify certification requirements and modify reliance standards
effective for payments made after December 31, 2000.
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REMIC Certificates
A. General
The trust fund relating to a series of certificates may elect to be treated
as a REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to federal income tax
(see, however, "--Prohibited Transactions and Other Taxes") below, if a trust
fund with respect to which a REMIC election is made fails to comply with one or
more of the ongoing requirements of the Code for REMIC status during any taxable
year (including the implementation of restrictions on the purchase and transfer
of the residual interest in a REMIC as described under "--Residual Certificates"
below), the Code provides that a trust fund will not be treated as a REMIC for
such year and thereafter. In that event, such entity may be taxable as a
separate corporation, and the related REMIC certificates may not be accorded the
status or given the tax treatment described below. While the Code authorizes the
Treasury to issue regulations providing relief in the event of an inadvertent
termination of status as a REMIC, no such regulations have been issued.
Moreover, any relief may be accompanied by sanctions such as the imposition of a
corporate tax on all or a portion of the REMIC's income for the period in which
the requirements for such status are not satisfied. With respect to each trust
fund that elects REMIC status, in the opinion of tax counsel, assuming
compliance with all provisions of the related Agreement, the trust fund will
qualify as a REMIC and the related certificates will be considered to be regular
interests ("regular certificates") or residual interests ("residual
certificates") in the REMIC. The related prospectus supplement for each series
of certificates will indicate whether the trust fund will make a REMIC election
and whether a class of certificates will be treated as a regular or residual
interest in the REMIC.
In general, with respect to each series of certificates for which a REMIC
election is made,
o certificates held by a thrift institution taxed as a "domestic
building and loan association" will constitute assets described in
section 7701(a)(19)(C) of the Code;
o certificates held by a real estate investment trust will constitute
"real estate assets" within the meaning of section 856(c)(4)(A) of the
Code; and
o interest on certificates held by a real estate investment trust will
be considered "interest on obligations secured by mortgages on real
property" within the meaning of section 856(c)(3)(B) of the Code.
If less than 95% of the REMIC's assets are assets qualifying under any of the
foregoing sections, the certificates will be qualifying assets only to the
extent that the REMIC's assets are qualifying assets. In addition, payments on
mortgage loans held pending distribution on the REMIC certificates will be
considered to be qualifying assets under the foregoing sections.
In some instances, the mortgage loans may not be treated entirely as assets
described in the foregoing sections. See, in this regard, the discussion of
"buydown" mortgage loans contained in "--Non-REMIC Certificates--Single Class of
Senior Certificates" above. REMIC certificates held by a real estate investment
trust will not constitute "Government Securities" within the meaning of section
856(c)(4)(A) of the Code and REMIC certificates held by a regulated investment
company will not constitute "Government Securities" within the meaning
128
of section 851(b)(4)(A)(ii) of the Code. REMIC certificates held by certain
financial institutions will constitute "evidences of indebtedness" within the
meaning of section 582(c)(1) of the Code.
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes
(not including recreational vehicles, campers or similar vehicles) which are
"single family residences" under section 25(e)(10) of the Code will qualify as
real property without regard to state law classifications. Under section
25(e)(10), a single family residence includes any manufactured home which has a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches and which is of a kind customarily used at a fixed location.
B. Tiered REMIC Structures
For certain series of certificates, two separate elections may be made to
treat designated portions of the related trust fund as REMICs (respectively, the
"subsidiary REMIC" and the "master REMIC") for federal income tax purposes. Upon
the issuance of any such series of certificates, tax counsel will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related pooling and servicing agreement, the master REMIC as well as any
subsidiary REMIC will each qualify as a REMIC and the REMIC certificates issued
by the master REMIC and the subsidiary REMIC, respectively, will be considered
to evidence ownership of regular certificates or residual certificates in the
related REMIC within the meaning of the REMIC provisions.
Only REMIC certificates issued by the master REMIC will be offered under
this prospectus. The subsidiary REMIC and the master REMIC will be treated as
one REMIC solely for purposes of determining
o whether the REMIC certificates will be (i) "real estate assets" within
the meaning of section 856(c)(4)(A) of the Code or (ii) "loans secured
by an interest in real property" under section 7701(a)(19)(C) of the
Code; and
o whether the income on the certificates is interest described in
section 856(c)(3)(B) of the Code.
C. Regular Certificates
General. Except as otherwise stated in this discussion, regular
certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of regular certificates that otherwise report income under a
cash method of accounting will be required to report income with respect to
regular certificates under an accrual method.
Original Issue Discount and Premium. The regular certificates may be issued
with OID within the meaning of section 1273(a) of the Code. Generally, the
amount of OID, if any, will equal the difference between the "stated redemption
price at maturity" of a regular certificate and
129
its "issue price". Holders of any class of certificates issued with OID will be
required to include such OID in gross income for federal income tax purposes as
it accrues, in accordance with a constant interest method based on the
compounding of interest, in advance of receipt of the cash attributable to such
income. The following discussion is based in part on the OID Regulations and in
part on the provisions of the Tax Reform Act. Holders of regular certificates
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities such as the regular
certificates.
Rules governing OID are set forth in sections 1271 through 1273 and section
1275 of the Code. These rules require that the amount and rate of accrual of OID
be calculated based on a Prepayment Assumption and prescribe a method for
adjusting the amount and rate of accrual of such discount where the actual
prepayment rate differs from the Prepayment Assumption. Under the Code, the
Prepayment Assumption must be determined in the manner prescribed by regulations
which have not yet been issued. The Legislative History provides, however, that
Congress intended the regulations to require that the Prepayment Assumption be
the prepayment assumption that is used in determining the initial offering price
of the regular certificates. The prospectus supplement for each series of
regular certificates will specify the prepayment assumption to be used for the
purpose of determining the amount and rate of accrual of OID. No representation
is made that the regular certificates will prepay at the prepayment assumption
or at any other rate.
In general, each regular certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its "issue price". The issue price of
a regular certificate is the first price at which a substantial amount of
regular certificates of that class are sold to the public (excluding bond
houses, brokers, underwriters or wholesalers). If less than a substantial amount
of a particular class of regular certificates is sold for cash on or prior to
the date of their initial issuance, the issue price for that class will be
treated as the fair market value of that class on the initial issue date. The
issue price of a regular certificate also includes the amount paid by an initial
regular certificateholder for accrued interest that relates to a period prior to
the initial issue date of the regular certificate. The stated redemption price
at maturity of a regular certificate includes the original principal amount of
the regular certificate, but generally will not include distributions of
interest if such distributions constitute "qualified stated interest". Qualified
stated interest generally means interest payable at a single fixed rate or
qualified variable rate (as described below) provided that the interest payments
are unconditionally payable at intervals of one year or less during the entire
term of the regular certificate. Interest is payable at a single fixed rate only
if the rate appropriately takes into account the length of the interval between
payments. Distributions of interest on regular certificates with respect to
which deferred interest will accrue will not constitute qualified stated
interest payments, in which case the stated redemption price at maturity of the
regular certificates includes all distributions of interest as well as principal
thereon.
Where the interval between the initial issue date and the first
distribution date on a regular certificate is longer than the interval between
subsequent distribution dates, the greater of any OID (disregarding the rate in
the first period) and any interest foregone during the first period is treated
as the amount by which the stated redemption price at maturity of the
certificate exceeds its issue price for purposes of the de minimis rule
described below. The OID
130
Regulations suggest that all interest on a long-first-period regular certificate
that is issued with non-de minimis OID, as determined under the foregoing rule,
will be treated as OID. Where the interval between the issue date and the first
distribution date on a regular certificate is shorter than the interval between
subsequent distribution dates, interest due on the first Distribution Date in
excess of the amount that accrued during the first period would be added to the
certificates stated redemption price at maturity. Regular securityholders should
consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a regular certificate.
Under the de minimis rule, OID on a regular certificate will be considered
to be zero if the amount of OID is less than 0.25% of the stated redemption
price at maturity of the regular certificate multiplied by the weighted average
maturity of the regular certificate. For this purpose, the weighted average
maturity of the regular certificate is computed as the sum of the amounts
determined by multiplying
o the number of full years (i.e., rounding down partial years) from the
issue date until each distribution in reduction of stated redemption
price at maturity is scheduled to be made
times
o a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the regular
certificate and the denominator of which is the stated redemption
price at maturity of the regular certificate.
Although currently unclear, it appears that the schedule of such distributions
should be determined in accordance with the assumed rate of prepayment of the
mortgage loans and the anticipated reinvestment rate, if any, relating to the
regular certificates. This prepayment assumption with respect to a series of
regular certificates will be set forth in the related prospectus supplement.
Holders generally must report de minimis OID pro rata as principal payments are
received and such income will be capital gain if the regular certificate is held
as a capital asset. However, accrual method holders may elect to accrue all de
minimis OID as well as market discount under a constant interest method.
The prospectus supplement with respect to a trust fund may provide for
certain regular certificates to be issued as "super-premium" certificates at
prices significantly exceeding their principal amounts or based on notional
principal balances. The income tax treatment of these super-premium certificates
is not entirely certain. For information reporting purposes, the trust fund
intends to take the position that the stated redemption price at maturity of the
super-premium certificates is the sum of all payments to be made on these
certificates determined under the prepayment assumption set forth in the related
prospectus supplement, with the result that the super-premium certificates would
be treated as being issued with OID. The calculation of income in this manner
could result in negative OID (which delays future accruals of OID rather than
being immediately deductible) when prepayments on the mortgage loans exceed
those estimated under the prepayment assumption. The IRS might contend, however,
that the contingent payment regulations should apply to the super-premium
certificates.
131
Although the contingent payment regulations are not applicable to
instruments governed by section 1272(a)(6) of the Code, they represent the only
guidance regarding the current view of the IRS with respect to contingent
payment instruments. In the alternative, the IRS could assert that the stated
redemption price at maturity of such regular certificates should be limited to
their principal amount (subject to the discussion under "--Accrued Interest
Certificates" below), so that such regular certificates would be considered for
U.S. federal income tax purposes to be issued at a premium. If such position
were to prevail, the rules described under "--Premium" below would apply. It is
unclear when a loss may be claimed for any unrecovered basis for a super-premium
certificate. It is possible that a holder of a super-premium certificate may
only claim a loss when its remaining basis exceeds the maximum amount of future
payments, assuming no further prepayments, or when the final payment is received
with respect to the super-premium certificate.
Under the REMIC Regulations, if the issue price of a regular certificate
(other than regular certificate based on a notional amount) does not exceed 125%
of its actual principal amount, the interest rate is not considered
disproportionately high. Accordingly, a regular certificate generally should not
be treated as a super-premium certificate and the rules described below under
"--Premium" below should apply. However, it is possible that holders of regular
certificates issued at a premium, even if the premium is less than 25% of the
certificate's actual principal balance, will be required to amortize the premium
under an OID method or contingent interest method even though no election under
section 171 of the Code is made to amortize such premium.
Generally, a regular certificateholder must include in gross income the
"daily portions," as determined below, of the OID that accrues on a regular
certificate for each day the regular certificateholder holds the regular
certificate, including the purchase date but excluding the disposition date. In
the case of an original holder of a regular certificate, a calculation will be
made of the portion of the OID that accrues during each successive accrual
period that ends on the day in the calendar year corresponding to a distribution
date (or if distribution dates are on the first day or first business day of the
immediately preceding month, interest may be treated as payable on the last day
of the immediately preceding month) and begins on the day after the end of the
immediately preceding accrual period (or on the issue date in the case of the
first accrual period). This will be done, in the case of each full accrual
period, by adding
o the present value at the end of the accrual period (determined by
using as a discount factor the original yield to maturity of the
regular certificates as calculated under the Prepayment Assumption) of
all remaining payments to be received on the regular certificate under
the Prepayment Assumption, and
o any payments included in the stated redemption price at maturity
received during the accrual period,
and subtracting from that total the "adjusted issue price" of the regular
certificates at the beginning of the accrual period.
The "adjusted issue price" of a regular certificate at the beginning of the
first accrual period is its issue price; the "adjusted issue price" of a regular
certificate at the beginning of a
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subsequent accrual period is the "adjusted issue price" at the beginning of the
immediately preceding accrual period plus the amount of OID allocable to that
accrual period and reduced by the accrual period. The OID accrued during an
accrual period will then be divided by the number of days in the period to
determine the daily portion of OID for each day in the accrual period. The
calculation of OID under the method described above will cause the accrual of
OID to either increase or decrease (but never below zero) in a given accrual
period to reflect the fact that prepayments are occurring faster or slower than
under the Prepayment Assumption. With respect to an initial accrual period
shorter than a full accrual period, the daily portions of OID may be determined
according to an appropriate allocation under any reasonable method.
A subsequent purchaser of a regular certificate issued with OID who
purchases the regular certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of OID on that regular certificate. In computing
the daily portions of OID for such a purchaser (as well as an initial purchaser
that purchases at a price higher than the adjusted issue price but less than the
stated redemption price at maturity), however, the daily portion is reduced by
the amount that would be the daily portion for such day (computed in accordance
with the rules set forth above) multiplied by a fraction, the numerator of which
is the amount, if any, by which the price paid by such holder for that regular
certificate exceeds the following amount:
o the sum of the issue price plus the aggregate amount of OID that would
have been includible in the gross income of an original regular
certificateholder (who purchased the regular certificate at its issue
price),
less
o any prior payments included in the stated redemption price at
maturity,
and the denominator of which is the sum of the daily portions for that regular
certificate for all days beginning on the date after the purchase date and
ending on the maturity date computed under the Prepayment Assumption. A holder
who pays an acquisition premium instead may elect to accrue OID by treating the
purchase as original issue.
Variable Rate Regular Certificates. Regular certificates may provide for
interest based on a variable rate. Interest based on a variable rate will
constitute qualified stated interest and not contingent interest if, generally,
o the interest is unconditionally payable at least annually;
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments; and
o interest is based on a "qualified floating rate", an "objective rate",
a combination of a single fixed rate and one or more "qualified
floating rates", one "qualified inverse floating rate", or a
combination of "qualified floating rates" that do not operate in a
manner that significantly accelerates or defers interest payments on
the regular certificate.
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The amount of OID with respect to a regular certificate bearing a variable
rate of interest will accrue in the manner described under "--Original Issue
Discount and Premium" above by assuming generally that the index used for the
variable rate will remain fixed throughout the term of the certificate.
Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the depositor intends to treat interest on a
regular certificate that is a weighted average of the net interest rates on
mortgage loans as qualified stated interest. In such case, the weighted average
rate used to compute the initial pass-through rate on the regular certificates
will be deemed to be the index in effect through the life of the regular
certificates. It is possible, however, that the IRS may treat some or all of the
interest on regular certificates with a weighted average rate as taxable under
the rules relating to obligations providing for contingent payments. Such
treatment may effect the timing of income accruals on regular certificates.
Market Discount. A purchaser of a regular certificate may be subject to the
market discount provisions of sections 1276 through 1278 of the Code. Under
these provisions and the OID Regulations, "market discount" equals the excess,
if any, of
o the regular certificate's stated principal amount or, in the case of a
regular certificate with OID, the adjusted issue price (determined for
this purpose as if the purchaser had purchased the regular certificate
from an original holder)
over
o the price for the regular certificate paid by the purchaser.
A holder who purchases a regular certificate at a market discount will recognize
income upon receipt of each distribution representing stated redemption price.
In particular, under section 1276 of the Code such a holder generally will be
required to allocate each principal distribution first to accrued market
discount not previously included in income and to recognize ordinary income to
that extent. A certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by the certificateholder on or after the first day of
the first taxable year to which the election applies. In addition, the OID
Regulations permit a certificateholder using the accrual method of accounting to
elect to accrue all interest, discount (including de minimis market or original
issue discount) and premium in income as interest, based on a constant yield
method. If such an election is made with respect to a regular certificate with
market discount, the certificateholder will be deemed to have made an election
to include in income currently market discount with respect to all other debt
instruments having market discount that the certificateholder acquires during
the year of the election or thereafter. Similarly, a certificateholder that
makes this election for a certificate that is acquired at a premium will be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that the certificateholder owns
or acquires. See "--Original Issues Discount and Premium" above. The election to
accrue interest, discount and premium on a constant yield method with respect to
a certificate is irrevocable.
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Market discount with respect to a regular certificate will be considered to
be zero if the amount allocable to the regular certificate is less than 0.25% of
the regular certificate's stated redemption price at maturity multiplied by the
regular certificate's weighted average maturity remaining after the date of
purchase. If market discount on a regular certificate is considered to be zero
under this rule, the actual amount of market discount must be allocated to the
remaining principal payments on the regular certificate and gain equal to such
allocated amount will be recognized when the corresponding principal payment is
made. Treasury regulations implementing the market discount rules have not yet
been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code sections 1276 through 1278 of the Code.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986, shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants authority to the Treasury to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. Until such time
as regulations are issued by the Treasury, rules described in the legislative
history of the Tax Reform Act will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. For
regular certificates issued with OID, the amount of market discount that accrues
during a period is equal to the product of
o the total remaining market discount
multiplied by
o a fraction, the numerator of which is the OID accruing during the
period and the denominator of which is the total remaining OID at the
beginning of the period.
For regular certificates issued without OID, the amount of market discount that
accrues during a period is equal to the product of
o the total remaining market discount
multiplied by
o a fraction, the numerator of which is the amount of stated interest
paid during the accrual period and the denominator of which is the
total amount of stated interest remaining to be paid at the beginning
of the period.
For purposes of calculating market discount under any of the above methods
in the case of instruments (such as the regular certificates) which provide for
payments which may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of OID will apply.
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A holder of a regular certificate that acquires it at a market discount
also may be required to defer, until the maturity date of the regular
certificate or its earlier disposition in a taxable transaction, the deduction
of a portion of the amount of interest that the holder paid or accrued during
the taxable year on indebtedness incurred or maintained to purchase or carry the
regular certificate in excess of the aggregate amount of interest (including
OID) includible in the holder's gross income for the taxable year with respect
to the regular certificate. The amount of such net interest expense deferred in
a taxable year may not exceed the amount of market discount accrued on the
regular certificate for the days during the taxable year on which the holder
held the regular certificate and, in general, would be deductible when such
market discount is includible in income. The amount of any remaining deferred
deduction is to be taken into account in the taxable year in which the regular
certificate matures or is disposed of in a taxable transaction. In the case of a
disposition in which gain or loss is not recognized in whole or in part, any
remaining deferred deduction will be allowed to the extent of gain recognized on
the disposition. This deferral rule does not apply if the regular
certificateholder elects to include such market discount in income currently as
it accrues on all market discount obligations acquired by the regular
certificateholder in that taxable year or thereafter.
Premium. A purchaser of a regular certificate who purchases the regular
certificate at a cost (not including accrued qualified stated interest) greater
than its remaining stated redemption price at maturity will be considered to
have purchased the regular certificate at a premium and may elect to amortize
such premium under a constant yield method. A certificateholder that makes this
election for a certificate that is acquired at a premium will be deemed to have
made an election to amortize bond premium with respect to all debt instruments
having amortizable bond premium that such certificateholder acquires during the
year of the election or thereafter. It is not clear whether the prepayment
assumption would be taken into account in determining the life of the regular
certificate for this purpose. However, the legislative history of the Tax Reform
Act states that the same rules that apply to accrual of market discount (which
rules require use of a prepayment assumption in accruing market discount with
respect to regular certificates without regard to whether the certificates have
OID) will also apply in amortizing bond premium under section 171 of the Code.
The Code provides that amortizable bond premium will be allocated among the
interest payments on the regular certificates and will be applied as an offset
against the interest payment.
On June 27, 1996, the IRS published in the Federal Register proposed
regulations on the amortization of bond premium. The foregoing discussion is
based in part on such proposed regulations. On December 30, 1997, the IRS issued
the amortizable bond premium regulations which generally are effective for bonds
acquired on or after March 2, 1998 or, for holders making an election to
amortize bond premium as described above, the taxable year that includes March
2, 1998 or any subsequent taxable year, will apply to bonds held on or after the
first day of taxable year in which such election is made. Neither the proposed
regulations nor the final regulations, by their express terms, apply to
prepayable securities described in section 1272(a)(6) of the Code such as the
regular certificates. Holders of regular certificates should consult their tax
advisors regarding the possibility of making an election to amortize any such
bond premium.
Deferred Interest. Certain classes of regular certificates will provide for
the accrual of interest when one or more ARM Loans are adding deferred interest
to their principal balance by reason of negative amortization. Any deferred
interest that accrues with respect to a class of
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regular certificates will constitute income to the holders of such certificates
prior to the time distributions of cash with respect to deferred interest are
made. It is unclear, under the OID Regulations, whether any of the interest on
such certificates will constitute qualified stated interest or whether all or a
portion of the interest payable on the certificates must be included in the
stated redemption price at maturity of the certificates and accounted for as OID
(which could accelerate such inclusion). Interest on regular certificates must
in any event be accounted for under an accrual method by the holders of these
certificates. Applying the latter analysis therefore may result only in a slight
difference in the timing of the inclusion in income of interest on the regular
certificates.
Effects of Defaults and Delinquencies. Certain series of certificates may
contain one or more classes of subordinated certificates and, in the event there
are defaults or delinquencies on the mortgage loans, amounts that would
otherwise be distributed on the subordinated certificates may instead be
distributed on the senior certificates. Holders of subordinated certificates
nevertheless will be required to report income with respect to these
certificates under an accrual method without giving effect to delays and
reductions in distributions on such subordinated certificates attributable to
defaults and delinquencies on the mortgage loans, except to the extent that it
can be established that such amounts are uncollectible. As a result, the amount
of income reported by a holder of a subordinated certificate in any period could
significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the subordinated certificate is reduced as a result of defaults
and delinquencies on the mortgage loans. However, the timing and character of
such losses or reductions in income are uncertain. Accordingly, holders of
subordinated certificates should consult their own tax advisors on this point.
Sale, Exchange or Redemption. If a regular certificate is sold, exchanged,
redeemed or retired, the seller will recognize gain or loss equal to the
difference between the amount realized on the sale, exchange, redemption, or
retirement and the seller's adjusted basis in the regular certificate. The
adjusted basis generally will equal the cost of the regular certificate to the
seller, increased by any OID and market discount included in the seller's gross
income with respect to the regular certificate, and reduced (but not below zero)
by payments included in the stated redemption price at maturity previously
received by the seller and by any amortized premium. Similarly, a holder who
receives a payment which is part of the stated redemption price at maturity of a
regular certificate will recognize gain equal to the excess, if any, of the
amount of the payment over the holder's adjusted basis in the regular
certificate. The holder of a regular certificate that receives a final payment
which is less than the holder's adjusted basis in the regular certificate will
generally recognize a loss. Except as provided in the following paragraph and as
provided under "--Market Discount" above, any such gain or loss will be capital
gain or loss, provided that the regular certificate is held as a "capital asset"
(generally, property held for investment) within the meaning of section 1221 of
the Code.
Non-corporate taxpayers are subject to reduced maximum rates on long-term
capital gains and are generally subject to tax at ordinary income rates on
short-term capital gains. The deductibility of capital losses is subject to
certain limitations. Prospective investors should consult their own tax advisors
concerning these tax law provisions.
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Gain from the sale or other disposition of a regular certificate that might
otherwise be capital gain will be treated as ordinary income to the extent that
such gain does not exceed the excess, if any, of:
o the amount that would have been includible in such holder's income
with respect to the regular certificate had income accrued thereon at
a rate equal to 110% of the AFR as defined in section 1274(d) of the
Code determined as of the date of purchase of such regular
certificate,
over
o the amount actually includible in the holder's income.
Gain from the sale or other disposition of a regular certificate that might
otherwise be capital gain will be treated as ordinary income, (i) if the regular
certificate is held as part of a "conversion transaction" as defined in section
1258(c) of the Code, up to the amount of interest that would have accrued at the
applicable federal rate under section 1274(d) of the Code in effect at the time
the taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as part of such transaction, or (ii) if the regular certificate is held as part
of a straddle. Potential investors should consult their tax advisors with
respect to the tax consequences of ownership and disposition of an investment in
regular certificates in their particular circumstances.
Regular certificates will be "evidences of indebtedness" within the meaning
of section 582(c)(1) of the Code so that gain or loss recognized from the sale
of a regular certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
The regular certificate information reports will include a statement of the
adjusted issue price of the regular certificate at the beginning of each accrual
period. In addition, the reports will include information necessary to compute
the accrual of any market discount that may arise upon secondary trading of
regular certificates. Because exact computation of the accrual of market
discount on a constant yield method would require information relating to the
holder's purchase price which the REMIC may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
Accrued Interest Certificates. Regular certificates that are "payment lag"
certificates may provide for payments of interest based on a period that
corresponds to the interval between distribution dates but that ends prior to
each distribution date. The period between the initial issue date of the payment
lag certificates and their first distribution date may or may not exceed such
interval. Purchasers of payment lag certificates for which the period between
the initial issue date and the first distribution date does not exceed such
interval could pay upon purchase of the regular certificates accrued interest in
excess of the accrued interest that would be paid if the interest paid on the
distribution date were interest accrued from distribution date to distribution
date. If a portion of the initial purchase price of a regular certificate is
allocable to interest that has accrued prior to the issue date ("pre-issuance
accrued interest"), and the regular certificate provides for a payment of stated
interest on the first payment date (and the first
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payment date, is within one year of the issue date) that equals or exceeds the
amount of the pre-issuance accrued interest, then the regular certificate's
issue price may be computed by subtracting from the issue price the amount of
pre-issuance accrued interest, rather than as an amount payable on the regular
certificate. However, it is unclear under this method how the proposed OID
Regulations treat interest on payment lag certificates as described above.
Therefore, in the case of a payment lag certificate, the REMIC intends to
include accrued interest in the issue price and report interest payments made on
the first distribution date as interest only to the extent such payments
represent interest for the number of days that the certificateholder has held
the payment lag certificate during the first accrual period.
Investors should consult their own tax advisors concerning the treatment
for federal income tax purposes of payment lag certificates.
Non-Interest Expenses of the REMIC. Under temporary Treasury regulations,
if the REMIC is considered to be a "single-class REMIC", a portion of the
REMIC's servicing, administrative and other noninterest expenses will be
allocated as a separate item to those regular securityholders that are
"pass-through interest holders". Generally, a single-class REMIC is defined as
(i) a REMIC that would be treated as a fixed investment trust under Treasury
regulations but for its qualification as a REMIC or (ii) a REMIC that is
substantially similar to an investment trust but is structured with the
principal purpose of avoiding this allocation requirement imposed by the
temporary regulations. Such a pass-through interest holder would be required to
add its allocable share, if any, of such expenses to its gross income and to
treat the same amount as an item of investment expense. An individual generally
would be allowed a deduction for such expenses only as a miscellaneous itemized
deduction subject to the limitations under section 67 of the Code. That section
allows such deductions only to the extent that in the aggregate such expenses
exceed 2% of the holder's adjusted gross income. In addition, section 68 of the
Code provides that the amount of itemized deductions otherwise allowable for an
individual whose adjusted gross income exceeds a certain amount (the "applicable
amount") will be reduced by the lesser of (i) 3% of the excess of the
individual's adjusted gross income over the applicable amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. As a
result of the Economic Growth and Tax Relief Reconciliaiton Act of 2001 (the
"2001 Act"), limitations imposed by section 68 of the Code on claiming itemized
deductions will be phased-out commencing in 2006. Unless amended, this provision
of the 2001 Act will no longer apply for taxable years beginning on or after
December 31, 2010. The amount of additional taxable income recognized by
residual securityholders who are subject to the limitations of either section 67
or section 68 may be substantial. The REMIC is required to report to each
pass-through interest holder and to the IRS such holder's allocable share, if
any, of the REMIC's non-interest expenses. The term "pass-through interest
holder" generally refers to individuals, entities taxed as individuals and
certain pass-through entities including regulated investment companies, but does
not include real estate investment trusts. Certificateholders that are
"pass-through interest holders" should consult their own tax advisors about the
impact of these rules on an investment in the regular certificates.
Treatment of Realized Losses. Although not entirely clear, it appears that
holders of regular certificates that are corporations should in general be
allowed to deduct as an ordinary loss any loss sustained during the taxable year
on account of any regular certificates becoming wholly or partially worthless
and that, in general, holders of certificates that are not corporations
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should be allowed to deduct as a short-term capital loss any loss sustained
during the taxable year on account of any regular certificates becoming wholly
worthless. Although the matter is not entirely clear, non-corporate holders of
certificates may be allowed a bad debt deduction at such time that the principal
balance of any regular certificate is reduced to reflect realized losses
resulting from any liquidated mortgage loans. The IRS, however, could take the
position that non-corporate holders will be allowed a bad debt deduction to
reflect realized losses only after all mortgage loans remaining in the related
trust fund have been liquidated or the certificates of the related series have
been otherwise retired. Prospective investors in and holders of the certificates
are urged to consult their own tax advisors regarding the appropriate timing,
amount and character of any loss sustained with respect to such certificates,
including any loss resulting from the failure to recover previously accrued
interest or discount income. Special loss rules are applicable to banks and
thrift institutions, including rules regarding reserves for bad debts. Such
taxpayers are advised to consult their tax advisors regarding the treatment of
losses on certificates.
Non-U.S. Persons. Generally, payments of interest (including any payment
with respect to accrued OID) on the regular certificates to a regular
certificateholder who is a non-U.S. Person not engaged in a trade or business
within the United States will not be subject to federal withholding tax if
o the regular certificateholder does not actually or constructively own
10% or more of the combined voting power of all classes of equity in
the issuer (which for purposes of this discussion may be defined as
the trust fund or the beneficial owners of the related residual
certificates);
o the regular certificateholder is not a controlled foreign corporation
(within the meaning of section 957 of the Code) related to the issuer;
and
o the regular certificateholder complies with certain identification
requirements, including delivery of a statement, signed by the regular
certificateholder under penalties of perjury, certifying that it is a
foreign person and providing its name and address.
If a regular certificateholder is not exempt from withholding, distributions of
interest, including distributions in respect of accrued OID, the holder may be
subject to a 30% withholding tax, subject to reduction under any applicable tax
treaty.
Further, it appears that a regular certificate would not be included in the
estate of a nonresident alien individual and would not be subject to United
States estate taxes. However, securityholders who are non-resident alien
individuals should consult their tax advisors concerning this question.
Regular securityholders who are non-U.S. Persons and persons related to
such holders should not acquire any residual certificates, and residual
securityholders and persons related to residual securityholders should not
acquire any regular certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
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Information Reporting and Backup Withholding. The master servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each regular certificateholder at any time during such year,
such information as may be deemed necessary or desirable to assist regular
securityholders in preparing their federal income tax returns or to enable
holders to make such information available to owners or other financial
intermediaries of holders that hold regular certificates. If a holder, owner or
other recipient of a payment on behalf of an owner fails to supply a certified
taxpayer identification number or if the Secretary of the Treasury determines
that such person has not reported all interest and dividend income required to
be shown on its federal income tax return, backup withholding may be required
with respect to any payments. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
New Withholding Regulations. On October 6, 1997, the Treasury Department
issued the new regulations which attempt to unify certification requirements and
modify reliance standards effective for payments made after December 31, 2000.
D. Residual Certificates
Allocation of the Income of the REMIC to the Residual Certificates. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. See "--Prohibited
Transactions and Other Taxes" below. Instead, each original holder of a residual
certificate will report on its federal income tax return, as ordinary income,
its share of the taxable income of the REMIC for each day during the taxable
year on which such holder owns any residual certificates. The taxable income of
the REMIC for each day will be determined by allocating the taxable income of
the REMIC for each calendar quarter ratably to each day in the quarter. The
holder's share of the taxable income of the REMIC for each day will be based on
the portion of the outstanding residual certificates that the holder owns on
that day. The taxable income of the REMIC will be determined under an accrual
method and will be taxable to the residual securityholders without regard to the
timing or amounts of cash distributions by the REMIC. Ordinary income derived
from residual certificates will be "portfolio income" for purposes of the
taxation of taxpayers subject to the limitations on the deductibility of
"passive losses". As residual interests, the residual certificates will be
subject to tax rules, described below, that differ from those that would apply
if the residual certificates were treated for federal income tax purposes as
direct ownership interests in the certificates or as debt instruments issued by
the REMIC.
A residual certificateholder may be required to include taxable income from
the residual certificate in excess of the cash distributed. For example, a
structure where principal distributions are made serially on regular interests
(i.e., a fast-pay, slow-pay structure) may generate such a mismatching of income
and cash distributions (i.e., "phantom income"). This mismatching may be caused
by the use of certain required tax accounting methods by the REMIC, variations
in the prepayment rate of the underlying mortgage loans and certain other
factors. Depending upon the structure of a particular transaction, the
aforementioned factors may significantly reduce the after-tax yield of a
residual certificate to a residual certificateholder. Investors should consult
their own tax advisors concerning the federal income tax treatment of a residual
certificate and the impact of such tax treatment on the after-tax yield of a
residual certificate.
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A subsequent residual certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that the residual certificateholder owns the residual
certificate. Those daily amounts generally would equal the amounts that would
have been reported for the same days by an original residual certificateholder,
as described above. The legislative history of the Tax Reform Act indicates that
certain adjustments may be appropriate to reduce (or increase) the income of a
subsequent holder of a residual certificate that purchased the residual
certificate at a price greater than (or less than) the adjusted basis the
residual certificate would have in the hands of an original residual
certificateholder. See "--Sale or Exchange of Residual Certificates" below. It
is not clear, however, whether such adjustments will in fact be permitted or
required and, if so, how they would be made. The REMIC Regulations do not
provide for any such adjustments.
Taxable Income of the REMIC Attributable to Residual Certificates. The
taxable income of the REMIC will reflect a netting of the income from the
mortgage loans and the REMIC's other assets and the deductions allowed to the
REMIC for interest and OID on the regular certificates and, except as described
under "--Non-Interest Expenses of the REMIC" below, other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the regular and residual certificates (or, if a class of certificates is not
sold initially, their fair market values). Such aggregate basis will be
allocated among the mortgage loans and other assets of the REMIC in proportion
to their respective fair market values. A mortgage loan will be deemed to have
been acquired with discount or premium to the extent that the REMIC's basis
therein is less or greater, respectively than its principal balance. Any such
discount (whether market discount or OID) will be includible in the income of
the REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing OID on
the regular certificates. The REMIC expects to elect under section 171 of the
Code to amortize any premium on the mortgage loans. Premium on any mortgage loan
to which the election applies would be amortized under a constant yield method.
It is likely that the yield of a mortgage loan would be calculated for this
purpose taking account of the prepayment assumption. However, the election would
not apply to any mortgage loan originated on or before September 27, 1985.
Instead, premium on such a mortgage loan would be allocated among the principal
payments thereon and would be deductible by the REMIC as those payments become
due.
The REMIC will be allowed a deduction for interest and OID on the regular
certificates. The amount and method of accrual of OID will be calculated for
this purpose in the same manner as described above with respect to regular
certificates except that the 0.25% per annum de minimis rule and adjustments for
subsequent holders described therein will not apply.
A residual certificateholder will not be permitted to amortize the cost of
the residual certificate as an offset to its share of the REMIC's taxable
income. However, such taxable income will not include cash received by the REMIC
that represents a recovery of the REMIC's basis in its assets, and, as described
above, the issue price of the residual certificates will be added to the issue
price of the regular certificates in determining the REMIC's initial basis in
its assets. See "--Sale or Exchange of Residual Certificates" below. For a
discussion of possible
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adjustments to income of a subsequent holder of a residual certificate to
reflect any difference between the actual cost of the residual certificate to
such holder and the adjusted basis the residual certificate would have in the
hands of an original residual certificateholder, see "--Allocation of the Income
of the REMIC to the Residual Certificates" above.
Additional Taxable Income of Residual Interests. Any payment received by a
holder of a residual certificate in connection with the acquisition of the
residual certificate will be taken into account in determining the income of
such holder for federal income tax purposes. Although it appears likely that any
such payment would be includible in income immediately upon its receipt or
accrual as ordinary income, the IRS might assert that such payment should be
included in income over time according to an amortization schedule or according
to some other method. Because of the uncertainty concerning the treatment of
such payments, holders of residual certificates should consult their tax
advisors concerning the treatment of such payments for income tax purposes.
Net Losses of the REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. The net loss would be
allocated among the residual securityholders in the same manner as the REMIC's
taxable income. The net loss allocable to any residual certificate will not be
deductible by the holder to the extent that such net loss exceeds such holder's
adjusted basis in the residual certificate. Any net loss that is not currently
deductible by reason of this limitation may only be used by the residual
certificateholder to offset its share of the REMIC's taxable income in future
periods (but not otherwise). The ability of residual securityholders that are
individuals or closely held corporations to deduct net losses may be subject to
additional limitations under the Code.
Mark-to-Market Regulations. Prospective purchasers of a residual
certificate should be aware that the IRS finalized mark-to-market regulations
which provide that a residual certificate acquired after January 3, 1995 cannot
be marked to market. The mark-to-market regulations replaced the temporary
regulations which allowed a residual certificate to be marked to market provided
that it was not a "negative value" residual interest.
Inducement Fees. Regulations have been proposed addressing the federal
income tax treatment of "inducement fees" received by transferees of
non-economic REMIC residual interests. The proposed regulations would require
inducement fees to be included in income over a period reasonably related to the
period in which the related REMIC residual interest is expected to generate
taxable income or net loss to its holder. Under two proposed safe harbor
methods, inducement fees would be permitted to be included in income
(i) in the same amounts and over the same period that the taxpayer uses
for financial reporting purposes, provided that such period is not
shorter than the period the REMIC is expected to generate taxable
income or
(ii) ratably over the remaining anticipated weighted average life of all
the regular and residual interests issued by the REMIC, determined
based on actual distributions projected as remaining to be made on
such interests under the Prepayment Assumption.
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If the holder of a residual interest sells or otherwise disposes of the residual
interest, any unrecognized portion of the inducement fee would be required to be
taken into account at the time of the sale or disposition.
If these rules are adopted without change, they will apply to taxable years
ending on or after the date that they are published as final regulations, and
consequently these rules may govern the treatment of any inducement fee received
in connection with the purchase of non-economic REMIC residual interests.
Prospective purchasers of the non-economic REMIC residual interests should
consult with their tax advisors regarding the effect of these proposed
regulations
Non-Interest Expenses of the REMIC. The REMIC's taxable income will be
determined in the same manner as if the REMIC were an individual. However, all
or a portion of the REMIC's servicing, administrative and other non-interest
expenses will be allocated as a separate item to residual securityholders that
are "pass-through interest holders". Such a holder would be required to add an
amount equal to its allocable share, if any, of such expenses to its gross
income and to treat the same amount as an item of investment expense.
Individuals are generally allowed a deduction for such an investment expense
only as a miscellaneous itemized deduction subject to the limitations under
section 67 of the Code which allows such deduction only to the extent that, in
the aggregate, all such expenses exceed 2% of an individual's adjusted gross
income. In addition, the personal exemptions and itemized deductions of
individuals with adjusted gross incomes above particular levels are subject to
certain limitations which reduce or eliminate the benefit of such items. The
REMIC is required to report to each pass-through interest holder and to the IRS
the holder's allocable share, if any, of the REMIC's non-interest expenses. The
term "pass-through interest holder" generally refers to individuals, entities
taxed as individuals and certain pass-through entities, but does not include
real estate investment trusts. Residual securityholders that are "pass-through
interest holders" should consult their own tax advisors about the impact of
these rules on an investment in the residual certificates. See "--Regular
Certificates--Non-Interest Expenses of the REMIC" above.
Excess Inclusions. A portion of the income on a residual certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter
will, with an exception discussed below for certain thrift institutions, be
subject to federal income tax in all events. Thus, for example, an excess
inclusion
o may not, except as described below, be offset by any unrelated losses,
deductions or loss carryovers of a residual certificateholder;
o will be treated as "unrelated business taxable income" within the
meaning of section 512 of the Code if the residual certificateholder
is a pension fund or any other organization that is subject to tax
only on its unrelated business taxable income (see "Tax-Exempt
Investors" below); and
o is not eligible for any reduction in the rate of withholding tax in
the case of a residual certificateholder that is a foreign investor.
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See "--Non-U.S. Persons" below. The exception for thrift institutions is
available only to the institution holding the residual certificate and not to
any affiliate of the institution, unless the affiliate is a subsidiary all the
stock of which, and substantially all the indebtedness of which, is held by the
institution, and which is organized and operated exclusively in connection with
the organization and operation of one or more REMICs.
Except as discussed in the following paragraph, with respect to any
residual certificateholder, the excess inclusions for any calendar quarter is
the excess, if any, of
o the income of the residual certificateholder for that calendar quarter
from its residual certificate
over
o the sum of the "daily accruals" for all days during the calendar
quarter on which the residual certificateholder holds the residual
certificate.
For this purpose, the daily accruals with respect to a residual certificate are
determined by allocating to each day in the calendar quarter its ratable portion
of the product of the "adjusted issue price" of the residual certificate at the
beginning of the calendar quarter and 120% of the "Federal long-term rate" in
effect at the time the residual certificate is issued. For this purpose, the
"adjusted issue price" of a residual certificate at the beginning of any
calendar quarter equals the issue price of the residual certificate, increased
by the amount of daily accruals for all prior quarters, and decreased (but not
below zero) by the aggregate amount of payments made on the residual certificate
before the beginning of such quarter. The "Federal long-term rate" is an average
of current yields on Treasury securities with a remaining term of greater than
nine years, computed and published monthly by the IRS.
In the case of any residual certificates held by a real estate investment
trust, the aggregate excess inclusions with respect to such residual
certificates, reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of section 857(b)(2) of the Code, excluding
any net capital gain), will be allocated among the shareholders of such trust in
proportion to the dividends received by the shareholders from such trust, and
any amount so allocated will be treated as an excess inclusion with respect to a
residual certificate as if held directly by such shareholder. Regulated
investment companies, common trust funds and certain cooperatives are subject to
similar rules.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess inclusion
income from residual certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995 except with respect to residual certificates continuously held
by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act provides three rules for
determining the effect of excess inclusions on the alternative minimum taxable
income of a residual certificateholder. First, the alternative minimum taxable
income for the residual certificateholder is determined without regard to the
special rule that taxable income cannot be less than excess
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inclusion. Second, the amount of any alternative minimum tax net operating loss
deductions must be computed without regard to any excess inclusions. Third, the
residual certificateholder's alternative minimum taxable income for a tax year
cannot be less than excess inclusions for the year. The effect of this last
statutory amendment is to prevent the use of nonrefundable tax credits to reduce
a taxpayer's income tax below its tentative minimum tax computed only on excess
inclusions. These rules are effective for tax years beginning after December 31,
1996, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
Payments. Any distribution made on a residual certificate to a residual
certificateholder will be treated as a non-taxable return of capital to the
extent it does not exceed the residual certificateholder's adjusted basis in the
residual certificate. To the extent a distribution exceeds such adjusted basis,
it will be treated as gain from the sale of the residual certificate.
Pass-Through of Miscellaneous Itemized Deductions. As a general rule,
all of the fees and expenses of a REMIC will be taken into account by holders of
the residual certificates. In the case of a "single class REMIC", however, the
expenses and a matching amount of additional income will be allocated, under
temporary Treasury regulations, among the holders of the regular certificates
and the holders of the residual certificates on a daily basis in proportion to
the relative amounts of income accruing to each certificateholder on that day.
In the case of individuals (or trusts, estates or other persons who compute
their income in the same manner as individuals) who own an interest in a regular
certificate directly or through a pass-through entity which is required to pass
miscellaneous itemized deductions through to its owners or beneficiaries (e.g.,
a partnership, an S corporation or a grantor trust), such expenses will be
deductible only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such individual's adjusted
gross income. The reduction or disallowance of this deduction coupled with the
allocation of additional income may have a significant impact on the yield of
the regular certificate to such a holder. Further, holders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holders' alternative
minimum taxable income. In general terms, a single class REMIC is one that
either (i) would qualify, under existing Treasury regulations, as a grantor
trust if it were not a REMIC (treating all interests as ownership interests,
even if they would be classified as debt for federal income tax purposes) or
(ii) is similar to such a trust and is structured with the principal purpose of
avoiding the single class REMIC rules. Unless otherwise stated in the applicable
prospectus supplement, the expenses of the REMIC will be allocated to holders of
the related residual certificates in their entirety and not to holders of the
related regular certificates.
Sale or Exchange of Residual Certificates. If a residual certificate is
sold or exchanged, the seller will generally recognize gain or loss equal to the
difference between the amount realized on the sale or exchange and its adjusted
basis in the residual certificate (except that the recognition of loss may be
limited under the "wash sale" rules described below). A holder's adjusted basis
in a residual certificate generally equals the cost of the residual certificate
to the residual certificateholder, increased by the taxable income of the REMIC
that was included in the income of the residual certificateholder with respect
to the residual certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to the residual certificateholder
with respect to the residual certificate and by the distributions received
thereon
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by the residual certificateholder. In general, any such gain or loss will be
capital gain or loss provided the residual certificate is held as a capital
asset. However, residual certificates will be "evidences of indebtedness" within
the meaning of section 582(c)(1) of the Code, so that gain or loss recognized
from sale of a residual certificate by a bank or thrift institution to which
such section applies would be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the seller
of a residual certificate reacquires the residual certificate or acquires any
other residual certificate, any residual interest in another REMIC or similar
interest in a "taxable mortgage pool" (as defined in section 7701(i)) of the
Code during the period beginning six months before, and ending six months after,
the date of such sale, such sale will be subject to the "wash sale" rules of
section 1091 of the Code. In that event, any loss realized by the residual
certificateholder on the sale will not be deductible, but instead will increase
the residual certificateholder's adjusted basis in the newly acquired asset.
Non-corporate taxpayers are subject to reduced maximum rates on long-term
capital gains and are generally subject to tax at ordinary income rates on
short-term capital gains. The deductibility of capital losses is subject to
certain limitations. Prospective investors should consult their own tax advisors
concerning these tax law provisions.
E. Prohibited Transactions and Other Taxes
The REMIC is subject to a tax at a rate equal to 100% of the net income
derived from "prohibited transactions". In general, a prohibited transaction
means the disposition of a mortgage loan other than pursuant to certain
specified exceptions, the receipt of investment income from a source other than
a mortgage loan or certain other permitted investments or the disposition of an
asset representing a temporary investment of payments on the mortgage loans
pending payment on the residual certificates or regular certificates. In
addition, the assumption of a mortgage loan by a subsequent purchaser could
cause the REMIC to recognize gain which would also be subject to the 100% tax on
prohibited transactions.
In addition, certain contributions to a REMIC made after the initial issue
date of the certificates could result in the imposition of a tax on the REMIC
equal to 100% of the value of the contributed property.
It is not anticipated that the REMIC will engage in any prohibited
transactions or receive any contributions subject to the contributions tax.
However, in the event that the REMIC is subject to any such tax, unless
otherwise disclosed in the related prospectus supplement, such tax would be
borne first by the residual securityholders, to the extent of amounts
distributable to them, and then by the master servicer.
F. Liquidation and Termination
If the REMIC adopts a plan of complete liquidation, within the meaning of
section 860F(a)(4)(A)(i) of the Code, which may be accomplished by designating
in the REMIC's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC will not be subject to any prohibited
transaction tax, provided that the REMIC credits or distributes in liquidation
all of the
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sale proceeds plus its cash (other than the amounts retained to meet claims) to
holders of regular and residual certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the regular
certificates. If a residual certificateholder's adjusted basis in the residual
certificate exceeds the amount of cash distributed to the residual
certificateholder in final liquidation of its interest, it would appear that the
residual certificateholder would be entitled to a loss equal to the amount of
such excess. It is unclear whether such a loss, if allowed, will be a capital
loss or an ordinary loss.
G. Administrative Matters
Solely for the purpose of the administrative provisions of the Code, the
REMIC will be treated as a partnership and the residual securityholders will be
treated as the partners. Under temporary regulations, however, if there is at no
time during the taxable year more than one residual certificateholder, a REMIC
shall not be subject to the rules of subchapter C of chapter 63 of the Code
relating to the treatment of partnership items for a taxable year. Accordingly,
the REMIC will file an annual tax return on Form 1066, U.S. Real Estate Mortgage
Investment Conduit Income Tax Return. In addition, certain other information
will be furnished quarterly to each residual certificateholder who held the
residual certificate on any day in the previous calendar quarter.
Each residual certificateholder is required to treat items on its return
consistently with their treatment on the REMIC's return, unless the residual
certificateholder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC. The IRS may assert a deficiency resulting from a failure to
comply with the consistency requirement without instituting an administrative
proceeding at the REMIC level. Any person that holds a residual certificate as a
nominee for another person may be required to furnish the REMIC, in a manner to
be provided in Treasury regulations, with the name and address of such person
and other information.
H. Tax-Exempt Investors
Any residual certificateholder that is a pension fund or other entity that
is subject to federal income taxation only on its "unrelated business taxable
income" within the meaning of section 512 of the Code will be subject to such
tax on that portion of the distributions received on a residual certificate that
is considered an "excess inclusion." See "--Residual Certificates--Excess
Inclusions" above.
I. Non-U.S. Persons
Amounts paid to residual securityholders who are not U.S. Persons (see
"--Regular Certificates--Non-U.S. Persons" above) are treated as interest for
purposes of the 30% (or lower treaty rate) United States withholding tax.
Amounts distributed to residual securityholders should qualify as "portfolio
interest", subject to the conditions described in "--Regular Certificates"
above, but only to the extent that the mortgage loans were originated after July
18, 1984. Furthermore, the rate of withholding on any income on a residual
certificate that is excess inclusion income will not be subject to reduction
under any applicable tax treaties. See "--Residual Certificates--Excess
Inclusions" above. If the portfolio interest exemption is
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unavailable, such amount will be subject to United States withholding tax when
paid or otherwise distributed (or when the residual certificate is disposed of)
under rules similar to those for withholding upon disposition of debt
instruments that have OID. The Code, however, grants the Treasury authority to
issue regulations requiring that those amounts be taken into account earlier
than otherwise provided where necessary to prevent avoidance of tax (e.g., where
the residual certificates do not have significant value). See "--Residual
Certificates--Excess Inclusions" above. If the amounts paid to residual
securityholders that are not U.S. Persons are effectively connected with their
conduct of a trade or business within the United States, the 30% (or lower
treaty rate) withholding tax will not apply. Instead, the amounts paid to such
non-U.S. Person will be subject to U. S. federal income taxation at regular
graduated rates. For special restrictions on the transfer of residual
certificates, see "--Tax-Related Restrictions on Transfers of Residual
Certificates" below.
Regular securityholders and persons related to such holders should not
acquire any residual certificates, and residual securityholders and persons
related to residual securityholders should not acquire any regular certificates
without consulting their tax advisors as to the possible adverse tax
consequences of such acquisition.
J. Tax-Related Restrictions on Transfers of Residual Certificates
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
such entity are not held by "disqualified organizations". Further, a tax is
imposed on the transfer of a residual interest in a REMIC to a disqualified
organization. The amount of the tax equals the product of
o an amount (as determined under the REMIC Regulations) equal to the
present value of the total anticipated "excess inclusions" with
respect to such interest for periods after the transfer
multiplied by
o the highest marginal federal income tax rate applicable to
corporations.
The tax is imposed on the transferor unless the transfer is through an agent
(including a broker or other middlemen) for a disqualified organization, in
which event the tax is imposed on the agent. The person otherwise liable for the
tax shall be relieved of liability for the tax if the transferee furnished to
such person an affidavit that the transferee is not a disqualified organization
and, at the time of the transfer, such person does not have actual knowledge
that the affidavit is false. A "disqualified organization" means
o the United States, any state, possession, or political subdivision
thereof, any foreign government, any international organization, or
any agency or instrumentality of any of the foregoing (provided that
such term does not include an instrumentality if all its activities
are subject to tax and, except for Freddie Mac, a majority of its
board of directors is not selected by any such governmental agency),
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o any organization (other than certain farmers' cooperatives) generally
exempt from federal income taxes unless such organization is subject
to the tax on "unrelated business taxable income",
o a rural electric or telephone cooperative, and
o electing large partnerships.
A tax is imposed on a "pass-through entity" holding a residual interest in
a REMIC if at any time during the taxable year of the pass-through entity a
disqualified organization is the record holder of an interest in such entity.
The amount of the tax is equal to the product of
o the amount of excess inclusions for the taxable year allocable to the
interest held by the disqualified organization, and
o the highest marginal federal income tax rate applicable to
corporations.
The pass-through entity otherwise liable for the tax, for any period during
which the disqualified organization is the record holder of an interest in such
entity, will be relieved of liability for the tax if such record holder
furnishes to such entity an affidavit that such record holder is not a
disqualified organization and, for such period, the pass-through entity does not
have actual knowledge that the affidavit is false. For this purpose, a
"pass-through entity" means
o a regulated investment company, real estate investment trust or common
trust fund,
o a partnership, trust or estate, and
o certain cooperatives.
Except as may be provided in Treasury regulations not yet issued, any person
holding an interest in a pass-through entity as a nominee for another will, with
respect to such interest, be treated as a pass-through entity. The tax on
pass-through entities is generally effective for periods after March 31, 1988,
except that in the case of regulated investment companies, real estate
investment trusts, common trust funds and publicly-traded partnerships the tax
shall apply only to taxable years of such entities beginning after December 31,
1988.
In order to comply with these rules, the pooling and servicing agreement
will provide that no record or beneficial ownership interest in a residual
certificate may be, directly or indirectly, purchased, transferred or sold
without the express written consent of the master servicer. The master servicer
will grant such consent to a proposed transfer only if it receives the
following: (i) an affidavit from the proposed transferee to the effect that it
is not a disqualified organization and is not acquiring the residual certificate
as a nominee or agent for a disqualified organization and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the residual
certificate.
Non-economic Residual Certificates. The REMIC Regulations disregard, for
federal income tax purposes, any transfer of a non-economic residual certificate
to a U.S. Person, unless no significant purpose of the transfer is to enable the
transferor to impede the assessment or
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collection of tax. A "non-economic residual certificate" is any residual
certificate (including a residual certificate with a positive value at issuance)
unless at the time of transfer, taking into account the prepayment assumption
and any required or permitted clean up calls or required liquidation provided
for in the REMIC's organizational documents,
o the present value of the expected future distributions on the residual
certificate at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax
rate in effect for the year in which the transfer occurs, and
o the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which taxes
accrue on the anticipated excess inclusions in an amount sufficient to
satisfy the accrued taxes.
A significant purpose to impede the assessment or collection of tax exists if
the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A transferor is presumed not to have such
knowledge if
o the transferor conducted a reasonable investigation of the
transferee's financial condition and found that the transferee had
historically paid its debts as they come due and found no evidence to
indicate that the transferee would not continue to pay its debts in
the future; and
o the transferee acknowledges to the transferor that the residual
interest may generate tax liabilities in excess of the cash flow and
the transferee represents that it intends to pay such taxes associated
with the residual interest as they become due.
Final Treasury regulations issued on July 18, 2002 (the "New REMIC
Regulations"), provide that transfers of non-economic residual interests must
meet two additional requirements to qualify for the safe harbor:
o the transferee must represent that it will not cause income from the
non-economic residual interest to be attributable to a foreign
permanent establishment or fixed base (within the meaning of an
applicable income tax treaty, hereafter a "foreign branch") of the
transferee or another U.S. taxpayer; and
o the transfer must satisfy either an "asset test" or a "formula test"
provided under the REMIC Regulations.
A transfer to an "eligible corporation," generally a domestic corporation,
will satisfy the asset test if:
o at the time of the transfer, and at the close of each of the
transferee's two fiscal years preceding the transferee's fiscal year
of transfer, the transferee's gross and net assets for financial
reporting purposes exceed $100 million and $10 million, respectively,
in each case, exclusive of any obligations of certain related persons;
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o the transferee agrees in writing that any subsequent transfer of the
interest will be to another eligible corporation in a transaction that
satisfies the asset test, and the transferor does not know or have
reason to know that the transferee will not honor these restrictions
on subsequent transfers, and
o a reasonable person would not conclude, based on the facts and
circumstances known to the transferor on or before the date of the
transfer (specifically including the amount of consideration paid in
connection with the transfer of the non-economic residual interest),
that the taxes associated with the residual interest will not be paid.
In addition, the direct or indirect transfer of the residual interest to a
foreign branch of a domestic corporation is not treated as a transfer to an
eligible corporation under the asset test.
The formula test provides that the transfer of a non-economic residual
interest will not qualify under the formula test unless the present value of the
anticipated tax liabilities associated with holding the residual interest does
not exceed the present value of the sum of
o any consideration given to the transferee to acquire the interest (the
inducement payment),
o future distributions on the interest, and
o any anticipated tax savings associated with holding the interest as
the REMIC generates losses.
For purposes of this calculation, the present value is calculated using a
discount rate equal to the lesser of the applicable federal rate and the
transferee's cost of borrowing.
If the transferee has been subject to the alternative minimum tax in the
preceding two years and will compute its taxable income in the current taxable
year using the alternative minimum tax rate, then it may use the alternative
minimum tax rate in lieu of the corporate tax rate. In addition, the direct or
indirect transfer of the residual interest to a foreign branch of a domestic
corporation is not treated as a transfer to an eligible corporation under the
formula test.
The New REMIC Regulations generally apply to transfers of non-economic
residual interests occurring on or after February 4, 2000. The requirement of a
representation that a transfer of a non-economic residual interest is not made
to a foreign branch of a domestic corporation and the requirement of using the
short term applicable federal rate for purposes of the formula test apply to
transfers occurring on or after August 19, 2002.
If a transfer of a non-economic residual certificate is disregarded, the
transferor would continue to be treated as the owner of the residual certificate
and would continue to be subject to tax on its allocable portion of the net
income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
residual certificate that has a "tax avoidance potential" to a "foreign person"
will be disregarded for federal income tax purposes. This rule appears to apply
to a transferee who is not a U.S. Person, unless such transferee's income in
respect of the residual certificate is effectively connected with
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the conduct of a United States trade or business. A residual certificate is
deemed to have a tax avoidance potential unless, at the time of transfer, the
transferor reasonably expects that the REMIC will distribute to the transferee
amounts that will equal at least 30% of each excess inclusion and that such
amounts will be distributed at or after the time the excess inclusion accrues
and not later than the end of the calendar year following the year of accrual.
If the non-U.S. Person transfers the residual certificate to a U.S. Person, the
transfer will be disregarded and the foreign transferor will continue to be
treated as the owner, if the transfer has the effect of allowing the transferor
to avoid tax on accrued excess inclusions. The provisions in the REMIC
Regulations regarding transfers to foreign persons of residual certificates that
have tax avoidance potential are effective for all transfers after June 30,
1992. The pooling and servicing agreement will provide that no record or
beneficial ownership interest in a residual certificate may be, directly or
indirectly, transferred to a non-U.S. Person unless such person provides the
trustee with a duly completed IRS Form W-8ECI and the trustee consents to such
transfer in writing.
Any attempted transfer or pledge in violation of the transfer restrictions
shall be absolutely null and void and shall vest no rights in any purported
transferee. Investors in residual certificates are advised to consult their own
tax advisors with respect to transfers of the residual certificates and, in
addition, passthrough entities are advised to consult their own tax advisors
with respect to any tax which may be imposed on a pass-through entity.
State Tax Considerations
In addition to the federal income tax consequences described in this
prospectus under "Material Federal Income Tax Considerations" above, potential
investors should consider the state and local income tax consequences of the
acquisition, ownership, and disposition of the certificates. State and local
income tax law may differ substantially from the corresponding federal law, and
this discussion does not purport to describe any aspect of the income tax laws
of any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various tax consequences of investments in
the certificates.
ERISA Considerations
The following describes certain considerations under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code.
The related prospectus supplement will contain information concerning
considerations relating to ERISA and the Code that are applicable to the
particular securities offered by the prospectus supplement.
ERISA imposes requirements on certain employee benefit plans (and the Code
imposes requirements on certain other retirement plans and arrangements,
including individual retirement accounts and annuities and Keogh plans) as well
as on collective investment funds and separate accounts in which these plans,
accounts or arrangements are invested, and on persons who bear specified
relationships to these types of plans or arrangements ("Parties in Interest") or
are fiduciaries with respect to these types of plans or arrangements. In this
prospectus we refer to these types of plans and arrangements as "Plans."
Generally, ERISA applies to investments made by Plans. Among other things, ERISA
requires that the assets of a Plan be held in trust and that the trustee, or
other duly authorized fiduciary, have exclusive authority and discretion to
manage and control the assets of the Plan. ERISA also imposes certain duties on
persons who are
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fiduciaries of Plans, such as the duty to invest prudently, to diversify
investments unless it is prudent not to do so, and to invest in accordance
with the documents governing the Plan. Under ERISA, any person who exercises
any authority or control respecting the management or disposition of the
assets of a Plan is considered to be a fiduciary of that Plan (subject to
certain exceptions not here relevant). In addition to the imposition of
general fiduciary standards of investment prudence and diversification, ERISA
and Section 4975 of the Code prohibit a broad range of transactions involving
Plan assets and Parties in Interest, and impose additional prohibitions where
Parties in Interest are fiduciaries with respect to a Plan. Certain Parties in
Interest that participate in a prohibited transaction may be subject to excise
taxes imposed pursuant to Section 4975 of the Code, or penalties imposed
pursuant to Section 502(i) of ERISA, unless a statutory, regulatory or
administrative exemption is available.
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA), are not
subject to ERISA's requirements. Accordingly, assets of such plans may be
invested in securities without regard to the ERISA considerations described
above and below, subject to the provisions of applicable federal, state and
local law. Moreover, any such plan which is qualified and exempt from taxation
under Sections 401(a) and 501(a) of the Code is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
The DOL issued regulations concerning the definition of what constitutes
the assets of a Plan (Labor Reg. Section 2510.3-101). Under this Plan Assets
Regulation, the underlying assets and properties of corporations, partnerships,
trusts and certain other entities in which a Plan makes an "equity" investment
could be deemed, for purposes of ERISA, to be assets of the investing Plan in
certain circumstances.
The Plan Assets Regulation provides that, generally, the assets of an
entity in which a Plan invests will not be deemed to be assets of the Plan for
purposes of ERISA if the equity interest acquired by the investing Plan is a
"publicly-offered security", or if equity participation by "benefit plan
investors" is not "significant". In general, a publicly-offered security, as
defined in the Plan Assets Regulation, is a security that is widely held, freely
transferable and registered under the Securities Exchange Act of 1934. Equity
participation in an entity by "benefit plan investors" is not significant if,
after the most recent acquisition of an equity interest in the entity, less than
25% of the value of each class of equity interest in the entity is held by
benefit plan investors, which include benefit plans described in ERISA or under
Section 4975 of the Code, whether or not they are subject to ERISA, as well as
entities the underlying assets of which include assets of the benefit plan by
reason of investment in the entity by the benefit plan.
If no exception under the Plan Assets Regulation applies and if a Plan
(or a person investing assets of a Plan, such as an insurance company general
account) acquires an equity interest in the trust, then the assets of the
trust could be considered to be assets of the Plan. In that event, the master
servicer and other persons exercising management or discretionary control over
the assets of the trust or providing services with respect to those assets
could be deemed to be Parties in Interest with respect to investing Plans;
this would subject the master servicer and such other persons to the fiduciary
responsibility provisions of Title I of ERISA to the extent that they
exercised discretionary control of Plan assets, and to the prohibited
transaction provisions of
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Section 406 of ERISA and Section 4975 of the Code with respect to transactions
involving the assets of the trust. Because the loans held by the trust may be
deemed assets of each Plan that purchases an equity interest, an investment in
an equity interest issued by the trust by a Plan might be a prohibited
transaction under ERISA and subject to an excise tax under Section 4975 of the
Code, and may cause transactions undertaken in the course of operating the
trust to constitute prohibited transactions, unless a statutory, regulatory or
administrative exemption applies.
Without regard to whether securities are considered to be equity
interest in the trust, the trust, certain affiliates of the trust (including
the holder of the trust certificate), or a seller of a security (including an
underwriter) might be considered or might become Parties in Interest with
respect to a Plan. In this case, the acquisition or holdings of the securities
by or on behalf of the Plan could constitute or give rise to a prohibited
transaction, within the meaning of ERISA and the Code, unless they were
subject to one or more exemptions. Depending on the relevant facts and
circumstances, certain prohibited transaction exemptions may apply to the
purchase or holding of securities-for example, Prohibited Transaction Class
Exemption ("PTCE") 96-23, which exempts certain transactions effected on
behalf of a Plan by an "in-house asset manager"; PTCE 95-60, which exempts
certain transactions by insurance company general accounts; PTCE 91-38, which
exempts certain transactions by bank collective investment funds; PTCE 90-1,
which exempts transactions by insurance company pooled separate accounts; or
PTCE 84-14; which exempts certain transactions effected on behalf of a Plan by
a "qualified professional asset manager". There can be no assurance that any
of these exemptions will apply with respect to any Plan's investment in
securities, or that such an exemption, if it did apply, would apply to all
prohibited transactions that may occur in connection with the investment.
Furthermore, these exemptions would not apply to transactions involved in
operation of the trust if, as described above, the assets of the trust were
considered to include Plan assets.
Insurance Company General Accounts
The United States Department of Labor (DOL) has published final
regulations under Section 401(c) of ERISA describing a safe harbor for
insurers that, on or before December 31, 1998, issued certain non-guaranteed
policies supported by their general accounts to Plans (Labor Reg. Section
2550.401c-1). Under this regulation, an insurer will not be considered an
ERISA fiduciary with respect to its general account by virtue of a Plan's
investment in such a policy. In general, to meet the safe harbor, an insurer
must
o disclose certain specified information to investing Plan fiduciaries
initially and on an annual basis;
o allow Plans to terminate or discontinue a policy on 90 days' notice to
the insurer, and to elect, without penalty, either a lump-sum payment
or annual installment payments over a ten-year period, with interest;
and
o give Plans written notice of "insurer-initiated amendments" 60 days
before the amendments take effect.
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Prohibited Transaction Class Exemption 83-1
Any fiduciary or other Plan asset investor that proposes to purchase
securities on behalf of a Plan or with Plan assets should consult with its
counsel on the potential applicability of ERISA and the Code to that
investment and the availability of any prohibited transaction class exemption
in connection therewith. In particular, in connection with a contemplated
purchase of securities representing a beneficial ownership interest in a pool
of single-family residential mortgages, the fiduciary should consider the
availability of PTCE 83-1 for various transactions involving mortgage pool
investment trusts. PTCE 83-1 permits, subject to certain conditions,
transactions that might otherwise be prohibited between Plans and Parties in
Interest with respect to those plans related to the origination, maintenance
and termination of mortgage pools consisting of mortgage loans secured by
first or second mortgages or deeds of trust on single-family residential
property, and the acquisition and holding of certain mortgage pool
pass-through certificates representing an interest in those mortgage pools by
Plans. However, PTCE 83-1 does not provide exemptive relief with respect to
securities evidencing interests in trusts which include mortgage loans secured
by third or more junior liens, revolving credit loans, loans on unimproved
land, contracts, cooperative loans, multifamily or mixed-use mortgage loans or
some types of private securities, or which contain a swap or a pre-funding
arrangement. In addition, PTCE 83-1 does not provide exemptive relief for
transactions involving subordinated securities. The prospectus supplement may
indicate whether it is expected that PTCE 83-1 will apply to securities
offered by that prospectus supplement.
Underwriter Exemption
On September 6, 1990 the DOL issued to Greenwich Capital Markets, Inc. an
underwriter exemption (PTE 90-59, Application No. D-8374, 55 Fed. Reg. 36724
(1990)) (the "Exemption") from certain of the prohibited transaction rules of
ERISA and the related excise tax provisions of Section 4975 of the Code with
respect to the initial purchase, holding and subsequent resale by Plans of
"securities" that are obligations of an issuer containing certain receivables,
loans and other obligations, and with respect to which Greenwich Capital
Markets, Inc. is the underwriter, manager or co-manager of an underwriting
syndicate. The Exemption, which was amended and expanded by PTE 97-34, 62 Fed.
Reg. 39021 (1997); PTE 2000-58, 65 Fed. Reg. 67765 (2000); and PTE 2002-41, 67
Fed. Reg. 54487 (2002), provides relief which is generally similar to that
provided by PTCE 83-1, but is broader in several respects.
The Exemption contains a number of requirements. It does not apply to any
investment pool unless, among other things, the investment pool satisfies the
following conditions:
o the investment pool consists only of assets of a type which have been
included in other investment pools;
o securities evidencing interests in such other investment pools have
been purchased by investors other than Plans for at least one year
prior to the Plan's acquisition of securities pursuant to the
exemption; and
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o securities in such other investment pools have been rated in one of
the three (or four, if the investment pool contains certain types of
assets) highest generic rating categories by one of the credit rating
agencies noted below.
The Exemption sets forth general conditions which must be satisfied for a
transaction to be eligible for exemptive relief thereunder. Generally, the
Exemption holds that the acquisition of the securities by a Plan must be on
terms (including the price for the securities) that are at least as favorable
to the Plan as they would be in an arm's length transaction with an unrelated
party. The Exemption requires that the rights and interests evidenced by the
securities not be "subordinated" to the rights and interests evidenced by
other securities of the same trust, except when the trust holds certain types
of assets. The Exemption requires that securities acquired by a Plan have
received a rating at the time of their acquisition that is in one of the three
(or four, if the trust holds certain types of assets) highest generic rating
categories of Standard & Poor's, Moody's Investors Service, Inc. or Fitch
Ratings. The Exemption specifies that the pool trustee must not be an
affiliate of any other member of the "Restricted Group" (defined below), other
than the underwriter. The Exemption stipulates that any Plan investing in the
securities must be an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the SEC under the Securities Act of 1933, as amended. The
Exemption requires that certain payments made in connection with the creation
and operation of the trust and the sale of its securities be reasonable.
Finally, the Exemption requires that, depending on the type of issuer, the
documents establishing the issuer and governing the transaction contain
certain provisions to protect the assets of the issuer, and that the issuer
receive certain legal opinions.
If an issuer holds obligations that have high loan-to-value ratios, the
Exemption may apply to only the issuer's non-subordinated securities rated in
one of the two highest generic rating categories by at least one of the rating
agencies named in the Exemption if both of the following conditions are met:
o the obligations are residential or home equity loans, and
o the fair market value of the real property collateral securing the
loan on the closing date is at least 80% of the sum of the outstanding
principal balance of the loan held in the investment pool and the
outstanding principal balance of any other loan of higher lien
priority secured by the same real property collateral.
Moreover, the Exemption generally provides relief from certain self-dealing
and conflict of interest prohibited transactions that may occur when the Plan
fiduciary causes a Plan to acquire securities of an issuer holding receivables
as to which the fiduciary (or its affiliate) is an obligor, provided that, among
other requirements:
o in the case of an acquisition in connection with the initial issuance
of securities, at least 50% of each class of securities in which Plans
have invested and at least 50% of the aggregate interest in the issuer
is acquired by persons independent of the Restricted Group;
o the fiduciary (or its affiliate) is an obligor with respect to not
more than 5% of the fair market value of the obligations contained in
the issuer;
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o the Plans' investment in securities of any class does not exceed 25%
of all of the securities of that class outstanding at the time of the
acquisition; and
o immediately after the acquisition, no more than 25% of the assets of
any Plan with respect to which the person is a fiduciary is invested
in securities representing an interest in one or more issuers
containing assets sold or serviced by the same entity.
This relief is not available to Plans sponsored by the "Restricted
Group", which consists of the seller, the underwriter, the trustee, the master
servicer, any servicer, any counterparty of a permitted swap or notional
principal contract or any insurer with respect to the mortgage loans, any
obligor with respect to mortgage loans included in the investment pool
constituting more than 5% of the aggregate principal balance of the assets in
the investment pool, or any affiliate of those parties, and in general the
Exemption provides only limited relief to such Plans.
If pre-funding is anticipated, the Exemption extends exemptive relief to
securities issued in transactions using pre-funding accounts, whereby a
portion of the loans backing the securities are transferred to the trust fund
within a specified period following the closing date (the "DOL Pre-Funding
Period"), when the conditions of the Exemption are satisfied and the
prefunding accounts meet certain requirements.
The Exemption, as amended, extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions involving trusts that
contain an interest rate swap, provided the swap satisfies certain criteria
and the other requirements of the Exemption are met. Among other requirements,
the counterparty to the swap must maintain ratings at certain levels from
Exemption rating agencies, and the documentation for the swap must provide for
certain remedies if the rating declines. The swap must be an interest rate
swap denominated in U.S. dollars, may not be leveraged, and must satisfy
several other criteria. Securities of any class affected by the swap may be
sold to Plan investors only if they are "qualified plan investors" that
satisfy several requirements relating to their ability to understand the terms
of the swap and the effects of the swap on the risks associated with an
investment in the security.
The rating of a security may change. If a class of securities no longer
satisfies the applicable rating requirement of the Exemption, securities of
that class will no longer be eligible for relief under the Exemption (although
a Plan that had purchased the security when it had an appropriate rating would
not be required by the Exemption to dispose of it).
The prospectus supplement for each series of securities will indicate the
classes of securities, if any, offered thereby as to which it is expected that
the Exemption will apply.
In the case of certain types of securities, transfer of the securities
will not be registered unless the transferee represents that it is not, and is
not purchasing on behalf of, or with assets of, a plan, account or other
retirement arrangement or provides an opinion of counsel or a certification,
which opinion of counsel or certification will not be at the expense of the
trustee or depositor, satisfactory to the trustee and the depositor that the
purchase of the securities by or on behalf of, or with assets of, a plan,
account or other retirement arrangement is permissible under applicable law,
will not give rise to a non-exempt prohibited transaction under ERISA or
Section
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4975 of the Code and will not subject the trustee, the master servicer
or the depositor to any obligation or liability in addition to those
undertaken in the operative agreements.
Any Plan fiduciary which proposes to cause a Plan to purchase securities
should consult with their counsel concerning the impact of ERISA and the Code,
the applicability of the Exemption or any other available exemption, and the
potential consequences in their specific circumstances, prior to making such
investment. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification an
investment in the securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
Legal Investment Considerations
The prospectus supplement for each series of certificates will specify
which, if any, of those classes of certificates constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended (SMMEA). Classes of certificates that qualify as "mortgage
related securities" will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulation to the same
extent as, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any such entities. Under SMMEA,
if a state enacts legislation prior to October 4, 1991 specifically limiting
the legal investment authority of any of these entities with respect to
"mortgage related securities," certificates will constitute legal investments
for entities subject to the legislation only to the extent provided therein.
Approximately twenty-one states adopted the legislation prior to the October
4, 1991 deadline. SMMEA provides, however, that in no event will the enactment
of any such legislation affect the validity of any contractual commitment to
purchase, hold or invest in certificates, or require the sale or other
disposition of certificates, so long as such contractual commitment was made
or such certificates were acquired prior to the enactment of the legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in certificates
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase certificates for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to such regulations as the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration (NCUA) Letter to Credit Unions No. 96,
as modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage related
securities, and the NCUA's regulation "Investment and Deposit Activities" (12
C.F.R. Part 703), which sets forth certain restrictions on investment by federal
credit unions in mortgage related securities.
All depository institutions considering an investment in the certificates
(whether or not the class of certificates under consideration for purchase
constitutes a "mortgage related
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security") should review the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on the Securities Activities (to the
extent adopted by their respective regulators), setting forth, in relevant
part, certain securities trading and sales practices deemed unsuitable for an
institution's investment portfolio, and guidelines for (and restrictions on)
investing in mortgage derivative products, including "mortgage related
securities", which are "high-risk mortgage securities" as defined in the
Policy Statement. According to the Policy Statement, "high-risk mortgage
securities" include securities such as certificates not entitled to
distributions allocated to principal or interest, or subordinated
certificates. Under the Policy Statement, it is the responsibility of each
depository institution to determine, prior to purchase (and at stated
intervals thereafter), whether a particular mortgage derivative product is a
"high-risk mortgage security", and whether the purchase (or retention) of such
a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
The Office of Thrift Supervision, or OTS, has issued Thrift Bulletin 73a,
entitled "Investing in Complex Securities" ("TB 73a"), which applies to savings
associations regulated by the OTS, and Thrift Bulletin 13a, entitled "Management
of Interest Rate Risk, Investment Securities, and Derivatives Activities" ("TB
13a"), which applies to thrift institutions regulated by the OTS.
One of the primary purposes of TB 73a is to require savings associations,
prior to taking any investment position, to determine that the investment
position meets applicable regulatory and policy requirements (including those
set forth TB 13a (see below)) and internal guidelines, is suitable for the
institution, and is safe and sound. OTS recommends, with respect to purchases
of specific securities, additional analyses, including, among others, analysis
of repayment terms, legal structure, expected performance of the issuer and
any underlying assets as well as analysis of the effects of payment priority,
with respect to security which is divided into separate tranches with unequal
payments, and collateral investment parameters, with respect to a security
that is prefunded or involves a revolving period. TB 73a reiterates the due
diligence requirements of the OTS for investing in all securities and warns
that if a savings association makes an investment that does not meet the
applicable regulatory requirements, the savings association's investment
practices will be subject to criticism, and OTS any require divestiture of
such securities. OTS also recommends, with respect to an investment in any
"complex securities," that savings associations should take into account
quality and suitability, interest rate risk and classification factors. For
the purpose of each of TB 73a and TB 13a, the term "complex security" includes
among other things any collateralized mortgage obligation or real estate
mortgage investment conduit security, other than any "plain vanilla" mortgage
pass-through security (i.e., securities that are part of a single class of
securities in the related pool that are non-callable and do not have any
special features). Accordingly, all Classes of the Offered Certificates would
likely be viewed as "complex securities." With respect to quality and
suitability factors, TB 73a warns (i) that a savings association's sole
reliance on outside ratings for material purchases of complex securities is an
unsafe and unsound practice, (ii) that a savings
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association should only use ratings and analyses from nationally recognized
rating agencies in conjunction with, and in validation of, its own
underwriting processes, and (iii) that it should not use ratings as a
substitute for its own thorough underwriting analyses. With respect the
interest rate risk factor, TB 73a recommends that savings associations should
follow the guidance set forth in TB 13a. With respect to collateralized loan
or bond obligations, TB 73a also requires that the savings associations meet
similar requirements with respect to the underlying collateral, and warns that
investments that are not fully rated as to both principal and interest do not
meet OTS regulatory requirements.
One of the primary purposes of TB 13a is to require thrift institutions,
prior to taking any investment position, to (i) conduct a pre-purchase portfolio
sensitivity analysis for any "significant transaction" involving securities or
financial derivatives, and (ii) conduct a pre-purchase price sensitivity
analysis of any "complex security" or financial derivative. The OTS recommends
that a thrift institution should conduct its own in-house pre acquisition
analysis, although it may rely on an analysis conducted by an independent
third-party as long as management understands the analysis and its key
assumptions. Further, TB 13a recommends that the use of "complex securities with
high price sensitivity" be limited to transactions and strategies that lower a
thrift institution's portfolio interest rate risk. TB 13a warns that investment
in complex securities by thrift institutions that do not have adequate risk
measurement, monitoring and control systems may be viewed by OTS examiners as an
unsafe and unsound practice.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase certificates or to
purchase certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the certificates constitute legal
investments for them.
Method of Distribution
The certificates offered by this prospectus and by the related prospectus
supplement will be offered in series. The distribution of the certificates may
be effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related prospectus supplement and subject to the receipt of any
required approvals from the Board of Governors of the Federal Reserve System,
the certificates will be distributed in a firm commitment underwriting, subject
to the terms and conditions of the underwriting agreement, by Greenwich Capital
Markets, Inc. (GCM) acting as underwriter with other underwriters, if any, named
in the prospectus supplement. In such event, the related prospectus supplement
may also specify that the underwriters will not be obligated to pay for any
certificates agreed to be purchased by purchasers pursuant to purchase
agreements acceptable to the depositor. In connection with the sale of the
certificates, underwriters may receive compensation from the depositor or from
purchasers of the certificates in the form of discounts, concessions or
commissions. The related prospectus supplement will describe any compensation
paid by the depositor.
Alternatively, the related prospectus supplement may specify that the
certificates will be distributed by GCM acting as agent or in some cases as
principal with respect to certificates that
161
it has previously purchased or agreed to purchase. If GCM acts as agent in the
sale of certificates, GCM will receive a selling commission with respect to
each series of certificates, depending on market conditions, expressed as a
percentage of the aggregate principal balance of the related mortgage assets
as of the cut-off date. The exact percentage for each series of certificates
will be disclosed in the related prospectus supplement. To the extent that GCM
elects to purchase certificates as principal, GCM may realize losses or
profits based upon the difference between its purchase price and the sales
price. The prospectus supplement with respect to any series offered other than
through underwriters will contain information regarding the nature of such
offering and any agreements to be entered into between the depositor and
purchasers of certificates of that series.
The depositor will indemnify GCM and any underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, or will
contribute to payments GCM and any underwriters may be required to make in
respect of those liabilities.
In the ordinary course of business, GCM and the depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the depositor's mortgage loans pending the sale
of the mortgage loans or interests in the loans, including the certificates.
The depositor anticipates that the certificates will be sold primarily to
institutional investors. Purchasers of certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, in connection
with reoffers and sales of certificates by them. Holders of certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
Legal Matters
The legality of the certificates of each series, including certain material
federal income tax consequences with respect to the certificates, will be passed
upon for the depositor by Sidley Austin Brown & Wood LLP, 787 Seventh Avenue,
New York, New York 10019, or by Thacher Proffitt & Wood LLP, Two World Financial
Center, New York, New York 10281, as specified in the related prospectus
supplement.
Financial Information
A new trust fund will be formed with respect to each series of certificates
and no trust fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of certificates.
Accordingly, no financial statements with respect to any trust fund will be
included in this Prospectus or in the related prospectus supplement.
Available Information
The depositor has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended, with respect to the certificates. This
prospectus, which forms a part of the Registration Statement, and the prospectus
supplement relating to each series of certificates contain summaries of the
material terms of the documents referred to herein and therein, but do
162
not contain all of the information set forth in the Registration Statement
pursuant to the Rules and Regulations of the SEC. For further information,
reference is made to the Registration Statement and the exhibits thereto. The
Registration Statement and exhibits can be inspected and copied at prescribed
rates at the public reference facilities maintained by the SEC at its Public
Reference Section, 450 Fifth Street, N. W., Washington, D.C. 20549. In
addition, the SEC maintains a website at http://www.sec.gov containing
reports, proxy and information statements and other information regarding
registrants, including the depositor, that file electronically with the SEC.
Ratings
It is a condition to the issuance of the certificates of each series
offered by this prospectus and the accompanying prospectus supplement that they
shall have been rated in one of the four highest rating categories by the
nationally recognized statistical rating agency or agencies specified in the
related prospectus supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the credit enhancer or guarantor, if any. Ratings on
mortgage pass-through certificates do not represent any assessment of the
likelihood of principal prepayments by mortgagors or of the degree by which such
prepayments might differ from those originally anticipated. As a result,
securityholders might suffer a lower than anticipated yield, and, in addition,
holders of stripped pass-through certificates in certain cases might fail to
recoup their underlying investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
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Glossary of Terms
Agency Securities: Mortgage pass-through securities issued or guaranteed by
Ginnie Mae, Fannie Mae or Freddie Mac.
Home Equity Loans: Closed end and/or revolving home equity loans generally
secured by junior liens on one- to four-family residential properties.
Home Improvement Contracts: Home improvement installment sales contracts
and loan agreements that are either unsecured or secured by senior or junior
liens on one- to four-family residential or mixed-use properties or by purchase
money security interests in the related home improvements.
Insurance Proceeds: All proceeds of the related hazard insurance policies
and any primary mortgage insurance policies to the extent the proceeds are not
applied to property restoration or released to mortgagors in accordance with the
master servicer's normal servicing procedures, net of insured expenses including
unreimbursed payments of property taxes, insurance premiums and other items
incurred by any related sub-servicer and net of reimbursed advances made by the
sub-servicer.
Liquidation Proceeds: All cash amounts (other than Insurance Proceeds)
received and retained in connection with the liquidation of defaulted mortgage
loans, by foreclosure or otherwise, net of unreimbursed liquidation and
foreclosure expenses incurred by any related sub-servicer and net of
unreimbursed advances made by the sub-servicer.
Manufactured Housing Contracts: Conditional sales contracts and installment
sales or loan agreements secured by manufactured housing.
Multifamily Loans: First lien mortgage loans, or participation interests in
the loans, secured by residential properties consisting of five or more
residential units, including cooperative apartment buildings.
Private Label Securities: Mortgage-backed or asset-backed securities that
are not Agency Securities.
REMIC Regulations: Regulations promulgated by the Department of the
Treasury on December 23, 1992 and generally effective for REMICs with start-up
dates on or after November 12, 1991.
Single Family Loans: First lien mortgage loans, or participation interests
in the loans, secured by one- to four-family residential properties.
U.S. Person: Any of the following:
o a citizen or resident of the United States;
164
o a corporation or a partnership (including an entity treated as a
corporation or partnership for U.S. federal income tax purposes)
organized in or under the laws of the United States, or any State
thereof or the District of Columbia (unless in the case of a
partnership Treasury regulations are adopted that provide otherwise);
o an estate whose income from sources outside the United States is
includible in gross income for federal income tax purposes regardless
of its connection with the conduct of a trade or business within the
United States; or
o a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more
U.S. Persons have the authority to control all substantial decisions
of the trust.
In addition, certain trusts which would not qualify as U.S. Persons under
the above definition but which are eligible to and make an election to be
treated as U.S. Persons will also be treated as U.S. Persons.
165
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be incurred
in connection with the offering of the Securities, other than underwriting
discounts and commissions:
SEC Registration Fee............................................................ $2,071,691.05*
Trustee's Fees and Expenses..................................................... 1,113,750.00
Printing and Engraving.......................................................... 2,835,000.00
Legal Fees and Expenses......................................................... 8,100,000.00
Blue Sky Fees................................................................... 150,000.00
Accounting Fees and Expenses.................................................... 2,835,000.00
Rating Agency Fees.............................................................. 5,670,000.00
Miscellaneous................................................................... 1,620,000.00
-----------------
Total........................................................................... $24,395,441.05
=================
_____________________
*This amount has been paid as follows:
o $49,191.05 was previously paid in connection with $608,047,536 in
securities registered under Registation Statement No. 333-108195/01
and being carried forward;
o $80.90 was previously paid in conection with this Registration
Statement; and
o $2,022,419.10 is being paid with this Amendment No. 1.
Item 15. Indemnification of Directors and Officers.
Under Section 8(b) of the proposed form of Underwriting Agreement,
the Underwriters are obligated under certain circumstances to indemnify
certain controlling persons of the Depositor against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
The Bylaws of Greenwich Capital Acceptance, Inc. ("GCA") provide for
indemnification of its directors and officers to the full extent permitted by
Delaware law.
The Bylaws of Financial Asset Securities Corp. ("FASCO") provide for
indemnification of its directors and officers to the full extent permitted by
Delaware law.
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceedings brought against them by a third
party or in the right of the corporation, by reason of the fact that they are
or were such directors, officers, employees or agents, against expenses
incurred in any such action, suit or proceeding.
The Pooling and Servicing Agreements will provide that no director,
officer, employee or agent of the applicable depositor is liable to the Trust
Fund or the Certificateholders, except for such person's
II-1
own willful misfeasance, bad faith, gross negligence in the performance of
duties or reckless disregard of obligations and duties. The Pooling and
Servicing Agreements will provide further that, with the exceptions stated
above, a director, officer, employee or agent of the applicable depositor is
entitled to be indemnified against any loss, liability or expenses incurred in
connection with legal actions relating to such Pooling and Servicing
Agreements and the related Certificates, other than such expenses relating to
particular Mortgage Loans.
Item 16. Exhibits.
(a) Financial Statements:
None.
(b) Exhibits:
1.1 Form of Underwriting Agreement*
3.1(a) Certificate of Incorporation of GCA*
3.1(b) Restated Certificate of Incorporation of FASCO**
3.2(a) Bylaws of GCA*
3.2(b) Bylaws of FASCO***
4.1(a) Form of Pooling and Servicing Agreement with
respect to fixed-rate mortgage loans, including
forms of Certificates*
4.1(b) Form of Pooling and Servicing Agreement with respect
to adjustable-rate mortgage loans, including forms
of Certificates+
4.1(c) Form of Pooling and Servicing Agreement with
respect to revolving home equity loans++
4.2(a) Form of Trust Agreement in connection with
resecuritization trusts
4.2(b) Form of Trust Agreement in connection with issues
of Notes++
4.3 Form of Indenture in connection with issues of
Notes++
5.1(a) Opinion of Sidley Austin Brown & Wood LLP as to
legality of the Securities
5.1(b) Opinion of Thacher Proffitt & Wood LLP as to
legality of the Securities
8.1(a) Opinion of Sidley Austin Brown & Wood LLP as to
certain tax matters
8.1(b) Opinion of Thacher Proffitt & Wood LLP as to
certain tax matters
10.1 Form of Mortgage Loan Purchase Agreement between
Seller and Purchaser*
23.1(a) Consent of Sidley Austin Brown & Wood LLP (included
in Exhibits 5.1(a) and 8.1(a) hereto)
23.1(b) Consent of Thacher Proffitt & Wood LLP (included
in Exhibits 5.1(b) and 8.1(b) hereto)
24.1 Powers of Attorney+++
24.2 Statement of Eligibility and Qualification of
Trustee.++++
- ---------------------
* Filed as an exhibit to Registration Statement No. 33-42443
on Form S-11 and incorporated herein by reference.
** Filed as an exhibit to Registration Statement No. 333-44067
on Form S-3 and incorporated herein by reference.
*** Filed as an exhibit to Registration Statement Nos. 333-60904
and 333-60904-01 on Form S-3 and incorporated herein by
reference.
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+ Filed as an exhibit to Registration Statement No. 33-52720
on Form S-11 and incorporated herein by reference.
++ Filed as an exhibit to Registration Statement No. 33-99018
on Form S-3 and incorporated herein by reference.
+++ Previously filed as part of this Registration Statement.
++++ To be filed on Form 8-K, as applicable.
Item 17. Undertakings.
Each of the undersigned registrants hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended;
(ii) to reflect in the Prospectus any facts or events
arising after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered that remain unsold at the
termination of the offering.
Each of the undersigned registrants hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, as
amended, each filing of the registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended
(and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934, as
amended), that is incorporated by reference in the registration statement
shall be deemed a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrants have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933, as amended,
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of a registrant in the successful defense of any action, suit or
proceeding) is asserted
II-3
by such director, officer or controlling person in connection with the
securities being registered, the registrants will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933, as
amended, and will be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, each Registrant certifies with respect to itself that it has
reasonable grounds to believe that it meets all of the requirements for filing
on Form S-3 and has duly caused this to Registration Statement on Form S-3 to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Greenwich, Connecticut, on the 9th day of January, 2004.
GREENWICH CAPITAL ACCEPTANCE, INC.
By: /s/ Robert J. McGinnis
--------------------------------------
Robert J. McGinnis
President
FINANCIAL ASSET SECURITIES CORP.
By: /s/ Robert J. McGinnis
--------------------------------------
Robert J. McGinnis
President
II-5
GREENWICH CAPITAL ACCEPTANCE, INC.
----------------------------------
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert J. McGinnis President (Principal Executive
----------------------------- Officer) and Director January 9, 2004
Robert J. McGinnis
Managing Director and Chief Financial
/s/ Carol P. Mathis Officer (Principal Financial Officer and
------------------------------ Principal Accounting Officer) January 9, 2004
Carol P. Mathis
/s/ John C. Anderson
------------------------------
John C. Anderson Director and Managing Director January 9, 2004
/s/ Paul D. Stevelman Director, Managing Director and
-------------------------------- Assistant Secretary January 9, 2004
Paul D. Stevelman
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FINANCIAL ASSET SECURITIES CORP.
--------------------------------
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert J. McGinnis President (Principal Executive Officer)
-------------------------- and Director January 9, 2004
Robert J. McGinnis
Managing Director and Chief Financial
/s/ Carol P. Mathis Officer (Principal Financial Officer and
-------------------------- Principal Accounting Officer) January 9, 2004
Carol P. Mathis
/s/ John C. Anderson
--------------------------
John C. Anderson Director and Managing Director January 9, 2004
/s/ Paul D. Stevelman Director, Managing Director and
---------------------------- Principal Accounting Officer) January 9, 2004
Paul D. Stevelman
II-7
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
1.1..................................................Form of Underwriting Agreement*
3.1(a)...............................................Certificate of Incorporation of GCA*
3.1(b)...............................................Restated Certificate of Incorporation of FASCO**
3.2(a)...............................................Bylaws of GCA*
3.2(b)...............................................Bylaws of FASCO***
4.1(a)...............................................Form of Pooling and Servicing Agreement with respect to
fixed-rate mortgage loans, including forms of Certificates*
4.1(b)...............................................Form of Pooling and Servicing Agreement with respect to
adjustable-rate mortgage loans, including forms of
Certificates+
4.1(c)...............................................Form of Pooling and Servicing Agreement with respect to
revolving home equity loans++
4.2(a)...............................................Form of Trust Agreement in connection with resecuritization
trusts
4.2(b)...............................................Form of Trust Agreement in connection with issues
of Notes++
4.3..................................................Form of Indenture in connection with issues of Notes++
5.1(a)...............................................Opinion of Sidley Austin Brown & Wood LLP as to legality
of the Securities
5.1(b)...............................................Opinion of Thacher Proffitt & Wood LLP as to legality of
the Securities
8.1(a)...............................................Opinion of Sidley Austin Brown & Wood LLP as to certain tax
matters
8.1(b)...............................................Opinion of Thacher Proffitt & Wood LLP as to certain tax
matters
10.1.................................................Form of Mortgage Loan Purchase Agreement between Seller and
Purchaser*
23.1(a)..............................................Consent of Sidley Austin Brown & Wood LLP (included in
Exhibits 5.1(a) and 8.1(a) hereto)
23.1(b)..............................................Consent of Thacher Proffitt & Wood LLP (included in Exhibits
5.1(b) and 8.1(b) hereto)
24.1.................................................Powers of Attorney+++
24.2.................................................Statement of Eligibility and Qualification of Trustee.++++
- -----------------------------------------
* Filed as an exhibit to Registration Statement No. 33-42443 on Form S-11
and incorporated herein by reference.
** Filed as an exhibit to Registration Statement No. 333-44067 on Form S-3
and incorporated herein by reference.
*** Filed as an exhibit to Registration Statement Nos 333-60904 and
333-60904-05 on Form S-3 and incorporated herein by reference.
+ Filed as an exhibit to Registration Statement No. 33-52720 on Form S-11
and incorporated herein by reference.
++ Filed as an exhibit to Registration Statement No. 33-99018 on Form S-3 and
incorporated herein by reference.
+++ Previously filed as part of this Registration Statement.
++++ To be filed on Form 8-K, as applicable.
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