As filed with the Securities and Exchange Commission on August ___, 2005
Registration Statement No. 333-______and No. 333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
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 06-1442101
(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........... $1,000,000 100% $1,000,000(1) $117.70
===========================================================================================================================
(1) This amount was estimated in order to calculate the amount of the fee.
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.
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. 333-121661/01 as
previously filed by the Registrants on Form S-3. Such Registration Statement
No. 333-121661/01 was declared effective on January 10, 2005.
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 August 9, 2005
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 2 of the 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
$___________. See "Method of Distribution" in this prospectus supplement.
_______________________
[Logos of Underwriters]
____________ __, 200_
Table of Contents
Page
----
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-60
Non-U.S. Persons.......................................................S-60
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-65
Method of Distribution.....................................................S-65
Legal Matters..............................................................S-66
Ratings....................................................................S-66
Glossary of Terms..........................................................S-68
Annex I.....................................................................A-1
Prospectus
Page
----
Important Notice About Information in This Prospectus and
Each Accompanying Prospectus Supplement.....................................1
Risk Factors..................................................................2
The Trust Fund...............................................................13
Use of Proceeds..............................................................30
The Depositors...............................................................30
Loan Program.................................................................31
Description of the Securities................................................35
Credit Enhancement...........................................................44
Yield and Prepayment Considerations..........................................55
Operative Agreements.........................................................58
Material Legal Aspects of the Loans..........................................79
Material Federal Income Tax Consequences....................................103
State Tax Considerations ...................................................150
ERISA Considerations .......................................................150
Legal Investment Considerations ............................................155
Method of Distribution .....................................................158
Legal Matters ..............................................................159
Financial Information ......................................................159
Available Information ......................................................159
Ratings ....................................................................159
Glossary of Terms ..........................................................161
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
(vii) 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
LLP] 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[, 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, 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 2 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
Terrorist activities and
related military and political
actions by the U.S. government
could cause reduction investor
confidence and substantial
market volatility in real
estate and securities markets....... It is impossible to predict the extent to
which terrorist activities may occur or,
if they do occur, the extent of the
effect on the certificates. Moreover, it
is uncertain what effects any past or
future terrorist activities or any
related military or political actions on
the part of the Untied States government
and others will have on the United
States and world financial markets,
local, regional and national economies,
real estate markets across the United
States, or particular business sectors,
including those affecting the
performance of borrowers on the
underlying mortgage loans. Among other
things, reduced investor confidence
could result in substantial volatility
in securities markets and a decline in
real estate-related investments. In
addition, defaults on the underlying
mortgage loans could increase and,
regardless of the performance of the
underlying mortgage loans, the liquidity
and market value of the certificates may
be impaired.
There is a Glossary of Terms beginning on page S-68 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 $[___].
The mortgage loans are expected to have the following characteristics as
of the cut-off date (the sum in any column may not equal the total indicated
due to rounding):
S-19
Principal Balances of the Mortgage Loans as of the Cut-off Date
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Principal Balance ($) of Mortgage 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
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Property Type of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------- ------------------- ------------------- -------------------
2-4 Units............................ $
Condominium..........................
Manufactured Housing.................
PUD..................................
One-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
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Purpose of Mortgage 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 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 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 Balance 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
Principal Balance Mortgage Loans
Number of Outstanding as of Outstanding as of
Maximum Loan Rate (%) Mortgage 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
Principal Balance Mortgage Loans
Number of Outstanding as of Outstanding as of
Gross Margins (%) Mortgage 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 Ter 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
Periodic 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, 2001, as of December 31, 2002 and as
of December 31, 2003], 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
December 31, 2001 December 31, 2002
---------------------------------------- --------------------------------------
Percent Percent Percent Percent
By No. By No. By By No. By No. By
of By Dollar of Dollar of By Dollar of Dollar
Loans Amount Loans Amount Loans Amount Loans Amount
------- ----------- --------- ---------- -------- ---------- -------- ---------
Total Portfolio............ 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................
As of
December 31, 2003
----------------------------------------
Percent Percent
By No. By No. By
of By Dollar of Dollar
Loans Amount Loans Amount
------- ----------- --------- ----------
Total Portfolio............ 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, 2001, as of December
31, 2002 and as of December 31, 2003], 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, 2001 December 31, 2002 December 31, 2003
------------------------ ------------------------ ------------------------
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, 2001 December 31, 2002 December 31, 2003
----------------------- ----------------------- -----------------------
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.
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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 Servicemembers Relief Act.
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 Luxembourg 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.
S-45
[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
Distribution Date Balance as of the
----------------- 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
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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. The trustee intends to treat the right to receive payments from this
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 the 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.]
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.
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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
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
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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.
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
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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 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 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."
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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. Any such plan which is qualified and exempt from taxation under
sections 401(a) and 501(a) of the Code may nevertheless 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 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 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
that represent an undivided interest in certain asset-backed
pass-through entities and 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 satisfied.
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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
sections I and III 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 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 and 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 acquirer 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 transferee 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 acquirer 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.]
S-64
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.
The sale of certificates to a Plan is in no respect a representation by
the issuer or any underwriter of the certificates 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.
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 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.
S-65
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 ___ .
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
S-66
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-69
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-70
"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-71
"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-72
"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-73
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 Mortgage
Pass-Through 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 Luxembourg 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 Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement). Secondary market trading between investors holding Global
Securities through DTC will be conducted according to the rules and procedures
applicable to U.S. corporate debt obligations. Secondary cross-market trading
between participants of Clearstream Luxembourg or Euroclear and DTC
participants holding certificates will be effected on a
delivery-against-payment basis through the Relevant Depositaries of
Clearstream Luxembourg 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
Luxembourg and Euroclear will hold positions on behalf of their participants
through their Relevant Depositaries, which in turn will hold such positions in
accounts as DTC participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. 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
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will
be credited to 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 Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue discount)
on registered debt issued by U.S. Persons, 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 of Beneficial Owner for United States Tax
Withholding). 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. 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
(Certificate of Foreign Person's Claim for Exemption from Withholding of
Tax on Income Effectively Connected with the Conduct of a Trade of
Business in the United States).
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, 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 the
Global Security). Form W-8BEN and Form W-8ECI are effective until the third
succeeding calendar years from the date such form is signed..
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership (including an entity treated as a
corporation or partnership for U.S. federal income tax purpose) organized in
or under the laws of the United States, any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations are
adopted that provide otherwise), (iii) an estate the income of which is
includible in gross income for U.S.
A-4
income tax purposes regardless of its source or (iv) a trust if a court in the
United States is able to exercise primary supervision over the administration
of the trust and one or more U.S. Persons have the authority to control all
substantial decisions of the trust. Notwithstanding the preceding sentence, to
the extent provided in Treasury regulations, certain trusts in existence on
August 20, 1996, and treated as United States Persons prior to such date, that
elect to continue to be treated as United States persons will also be U.S.
Persons.
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 (Approximate)
effecting transactions in the
Certificates offered by this prospectus Mortgage Loan Trust 200_-_
supplement, whether or not
participating in this distribution, may Mortgage Pass-Through Certificates
be required to deliver this prospectus Series 200__-
supplement and the prospectus. This
is in addition to the obligation of
dealers to deliver this prospectus $ Class A
supplement and the prospectus when [Variable Pass-Through Rate]
acting as underwriters and with
respect to their unsold allotments or
subscriptions. $__________ Class M
_________________________ [Variable Pass-Through Rate]
You should rely on the information
contained or incorporated by $__________ Class B
reference in this prospectus [Variable Pass-Through Rate]
supplement and the accompanying
prospectus. We have not authorized
anyone to provide you with different
information. [Greenwich Capital Acceptance, Inc.]
Depositor
We are not offering the certificates in
any state where the offer is not
permitted. [_________________]
Seller and Master Servicer
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 respective covers.
Prospectus Supplement
[__________ ___, 200_]
[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 August 9, 2005
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
RAWLE
$________ (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 2 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-16
Use of Proceeds............................................................S-17
The Depositor..............................................................S-17
The Seller.................................................................S-17
The Servicer...............................................................S-19
The Master Servicer, Custodian and Note Administrator......................S-20
The Home Loan Pool.........................................................S-20
Description of the Notes...................................................S-29
Servicing of the Home Loans................................................S-42
Note Insurance.............................................................S-50
Prepayment and Yield Considerations........................................S-55
Material Federal Income Tax Consequences...................................S-64
State Tax Consequences.....................................................S-69
ERISA Considerations.......................................................S-69
Experts....................................................................S-71
Underwriting...............................................................S-71
Legal Investment Considerations............................................S-73
Ratings....................................................................S-74
Legal Opinions.............................................................S-74
Glossary of Terms..........................................................S-75
Prospectus
Important Notice About Information in this Prospectus and
Each Accompanying Prospectus Supplement...................................1
Risk Factors.................................................................2
The Trust Fund..............................................................13
Use of Proceeds.............................................................30
The Depositors..............................................................30
Loan Program................................................................31
Description of the Securities...............................................35
Credit Enhancement..........................................................44
Yield and Prepayment Considerations.........................................55
Operative Agreements........................................................58
Material Legal Aspects of the Loans.........................................79
Material Federal Income Tax Considerations.................................103
State Tax Considerations...................................................150
ERISA Considerations.......................................................150
Legal Investment Considerations............................................155
Method of Distribution.....................................................158
Legal Matters..............................................................159
Financial Information......................................................159
Available Information......................................................159
Ratings....................................................................159
Glossary of Terms..........................................................161
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
On the closing date, the trust will issue the four classes of notes listed on
the cover of this prospectus supplement. Only the notes are being offered to
you by this prospectus supplement and the accompanying prospectus.
Each class of notes that is being offered will be in book-entry form in
minimum denominations of $__________ clearing through DTC [in the United
States or Clearstream or Euroclear in Europe].
See "Description of the Securities--Book-Entry Registration" in this
prospectus supplement.
The Trust
The trust will be a Delaware business trust formed under a trust agreement
among the depositor, the owner trustee and the co-owner trustee.
The assets of the trust include:
o a pool of fixed rate, closed-end home equity loans, secured
primarily by second liens on one- to four-family residential
properties and the related loan files;
o payments of interest due on the loans received on or after the
cut-off date;
o property that secured a home equity loan and has been acquired after
the closing date by foreclosure or deed in lieu of foreclosure;
o rights of the depositor under the home equity loan purchase
agreement under which the depositor purchased the home equity loans
from the seller;
o rights of the seller under certain hazard insurance policies
covering the mortgaged properties;
o funds on deposit in certain accounts described in this prospectus
supplement; and
o the rights of the indenture trustee under the note insurer's
insurance policy.
The Servicer
The servicer is a ____________. Under the terms of the sale and servicing
agreement, the servicer will have the contractual responsibility to service,
manage and make collections on the loans in the trust. Each calendar month the
servicer will retain as a fee for its services a portion of the interest
payments on the loans equal to one-twelfth of ___% of the principal balance of
each loan.
Depositor
The depositor is a Delaware corporation and an affiliate of Greenwich Capital
Markets, Inc. The depositor will acquire the loans from the seller and will
then sell them to the trust in exchange for the notes and the trust
certificates.
Payment Date
You will receive payments on the notes on the 25th day of each month,
beginning in ________ 200_. If the 25th day is not a business day, then the
distribution date will be the next business day.
S-4
Loan Statistics
The home loans will have the following characteristics as of the close of
business on ______________, 200_:
o number of loans: __________
o aggregate principal balance: $___________
o average principal balance of loans: $__________ (approximate)
o principal balances of loans range: $__________ to $_________
o mortgaged property location: ____ states
o interest rates range: ______% to ______%
o weighted average interest rate: ______% (approximate)
o loan age range: ___ to ___ months
o weighted average loan age: ___ months (approximate)
o combined loan-to-value ratio range: ______% to ______% (approximate)
o weighted average combined loan-to-value ratio: ______% (approximate)
See "The Home Loan Pool" in this prospectus supplement for additional
information.
Loan Characteristics
The home loans are fully amortizing. Interest on the home loans will accrue at
a fixed rate 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 (i.e., the related combined
loan-to-value ratios approach or exceed 100%).
Borrowers used their loan proceeds 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.
See "The Home Loan Pool" in this prospectus supplement for additional
information.
Interest Payments on the Notes
Class A-1 Notes
The interest rate on the Class A-1 Notes will equal the lesser of
o 1-Month LIBOR plus ___% and
o the weighted average of the interest rates on the home loans net of
certain trust expenses.
If for any payment date, the interest rate on the Class A-1 Notes is
calculated based on the second bullet point above, the excess of the amount of
interest calculated based on the first bullet point over the amount of
interest based on the second bullet point will be payable on the next payment
date, together with accrued interest on the excess amount, to the extent that
sufficient funds are available. However, the note insurance policy will not
guaranty the payment of any such excess amounts.
Interest payable on the Class A-1 Notes on any payment date will accrue from
the preceding payment date (or the closing date
S-5
in the case of the first payment date) through the day preceding the current
payment date. Calculations of interest on the Class A-1 Notes will be computed
on the basis of an assumed 360-day year and the actual number of days elapsed.
Class A-2, Class A-3 and Class A-4 Notes
The interest rates on the Class A-2, Class A-3 and Class A-4 Notes are
specified on the cover of this prospectus supplement.
Interest payable on the Class A-2, Class A-3 and Class A-4 Notes on any
payment date will accrue during the calendar month preceding the month in
which the current payment date occurs. Calculations of interest on the Class
A-2, Class A-3 and Class A-4 Notes will be computed on the basis of an assumed
360-day year consisting of twelve 30-day months.
Principal Payments on the Notes
On each payment date available funds remaining after the payment of certain
trust expenses will be applied to pay interest on the notes and then to pay
principal on the notes. Payments of principal will be made sequentially to the
holders of the Class A-1, Class A-2, Class A-3 and Class A-4 Notes, in that
order, until the balance of each class of notes is reduced to zero.
See "Description of the Notes--Payments" in this prospectus supplement for
additional information.
Stated Maturity Date
The stated maturity dates of the classes of notes are as follows:
Class A-1 ______________
Class A-2 ______________
Class A-3 ______________
Class A-4 ______________
The actual final payment date for each class of notes is likely to occur
earlier, and may occur significantly earlier, than its stated maturity date.
See "Prepayment and Yield Considerations" in this prospectus supplement for
additional information.
Credit Enhancement
The credit enhancement of the notes is achieved by means of a note insurance
policy and overcollateralization designed to increase the likelihood that
noteholders will receive regular payments of interest and principal.
Note Insurance Policy
The note insurer will issue the note insurance policy which will guarantee
principal and interest payments on the notes at the times and in the amounts
described in this prospectus supplement.
In the absence of payments under the note insurance policy, noteholders will
directly bear the credit risk and other risks associated with the loans.
On each payment date, the indenture trustee will determine whether funds
available to make the payments of principal and interest are sufficient. If an
insufficiency exists and is covered by the note insurance policy, then the
trustee will make a claim under the note insurance policy.
See "The Insurance Policy" in this prospectus supplement for additional
information.
S-6
Overcollateralization
It is anticipated that the home loans owned by the trust will pay interest
each month in an aggregate amount greater than the amount needed to pay trust
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 principal
balance of the notes at a faster rate than the principal balance of the loans
is being reduced. As a result, the principal balance of the loans is expected
to exceed the principal balance of the notes creating "overcollateralization."
The required level of overcollateralization may increase or decrease over
time. We cannot assure you that sufficient interest will be generated by the
loans to maintain overcollateralization.
See "Description of the Notes" in this prospectus supplement for additional
information.
Optional Redemption
The holders of the trust certificates or the note insurer may effect an early
redemption of the notes (and purchase of the trust certificates) on any
payment date after the aggregate principal balance of the loans in the trust
is reduced to 5% of the aggregate principal balance of the loans as of the
cut-off date.
See "Description of the Notes--Redemption" in this prospectus supplement for
additional information.
Federal Tax Considerations
In the opinion of [Sidley Austin Brown & Wood LLP] [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) taxable as a corporation or as a taxable mortgage pool.
See "Material Federal Tax Consequences" in this prospectus and in the
accompanying prospectus for additional information.
ERISA Considerations
The fiduciary responsibility provisions of ERISA and Section 4975 of the
Internal Revenue Code can limit investments by certain pension and other
employee benefit plans.
Pension and other employee benefit plans should be able to purchase the notes
provided that they make the representations or deemed representations set
forth in "ERISA Considerations". Any plan fiduciary considering whether to
purchase the notes on behalf of a plan should consult with its counsel
regarding the applicability of the relevant provisions of ERISA and the
Internal Revenue Code and the potential availability of any exemptions from
those provisions.
See "ERISA Considerations" in this prospectus supplement and in the
accompanying prospectus for additional information.
Legal Investment Considerations
The notes will not be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1974, as amended.
Note Ratings
The trust will not issue the notes unless they receive the ratings "_____" and
"_____" from ______ and ______, respectively.
S-7
A rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal by any rating agency.
See "Ratings" and "Risk Factors--Ratings of the Notes Should Be Viewed with
Caution" in this prospectus supplement for additional information
Listing
The notes are not listed, and no party to the transaction intends to list the
notes on any stock exchange or to quote them in the automated quotation system
of a registered securities association.
Risk Factors
There are risks associated with an investment in the notes. You should
consider carefully the material risks disclosed under the heading "Risk
Factors" beginning on page S-9 of this prospectus supplement and beginning on
page 2 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 is
available........................... ____________ has limited historical
delinquency and default 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.
Terrorist activities and
related military and political
actions by the U.S. government
could cause reduction investor
confidence and substantial
market volatility in real
estate and securities
markets............................. It is impossible to predict the extent to
which terrorist activities may occur or,
if they do occur, the extent of the
effect on the notes. Moreover, it
is uncertain what effects any past or
future terrorist activities or any
related military or political actions on
the part of the Untied States government
and others will have on the United
States and world financial markets,
local, regional and national economies,
real estate markets
S-14
across the United States, or particular
business sectors, including those
affecting the performance of borrowers
on the underlying mortgage loans. Among
other things, reduced investor
confidence could result in substantial
volatility in securities markets and a
decline in real estate-related
investments. In addition, defaults on
the underlying mortgage loans could
increase and, regardless of the
performance of the underlying mortgage
loans, the liquidity and market value of
the notes may be impaired.
S-15
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-16
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" 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 a limited purpose finance subsidiary
of Greenwich Capital Holdings, Inc. 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-17
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-18
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-19
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-20
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-21
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-22
Current Principal Balances
Percent of
Total
Aggregate by Aggregate
Range of Cut-off Date Number of Principal Principal
Principal Balances ($) Home Loans Balance 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 $_________.
Original Loan Principal Balances
Percent of
Total
Aggregate by Aggregate
Range of Original Number of Principal Principal
Principal Balances ($) Home Loans Balance 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-23
Remaining Terms to Maturity
Percent of
Total
Aggregate by Aggregate
Range of Remaining Number of Principal Principal
Terms to Maturity (Months) Home Loans Balance 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 Terms 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.
S-24
Geographic Concentration
Percent of
Total
Aggregate by Aggregate
Number of Principal Principal
State Home Loans Balance Balance
----- ------------ ----------- ---------------
[ ].................................................
[ ].................................................
[ ].................................................
------------ ----------- ---------------
Total................................................ 100.00%
============ =========== ===============
S-25
Credit Scores
Percent of
Total
Aggregate by Aggregate
Range of Number of Principal Principal
Credit Scores Home Loans Balance 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
Percent of
Total
Aggregate by Aggregate
Range of Number of Principal Principal
Debt-to-Income Ratios(%) Home Loans Balance 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 _____%.
S-26
Combined Loan-To-Value Ratios
Percent of
Total
Aggregate by Aggregate
Range of Combined Number of Principal Principal
Loan-to-Value Ratios(%) Home Loans Balance 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
Percent of
Total
Aggregate by Aggregate
Number of Principal Principal
Property Type Home Loans Balance Balance
- ------------- ------------ ----------- ---------------
Single Family..............................................
Condominium................................................
Multifamily................................................
Manufactured Housing.......................................
Two Families...............................................
------------ ----------- ---------------
Total................................................ 100.00%
============ =========== ===============
S-27
Lien Position
Percent of
Total
Aggregate by Aggregate
Number of Principal Principal
Lien Position Home Loans Balance Balance
- ------------- ------------ ----------- ---------------
First Lien.................................................
Second Lien................................................
Third Lien.................................................
------------ ----------- ---------------
Total................................................ 100.00%
============ =========== ===============
Occupancy Type
Percent of
Total
Aggregate by Aggregate
Number of Principal Principal
Occupancy Type Home Loans Balance Balance
- -------------- ------------ ----------- ---------------
Owner Occupied.............................................
Non-Owner Occupied.........................................
------------ ----------- ---------------
Total................................................ 100.00%
============ =========== ===============
S-28
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-29
(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-30
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-31
(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-32
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
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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
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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
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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 Servicemembers
Civil Relief Act.
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 prepare 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.
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Assumption of Loans
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.
S-46
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;
S-47
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-48
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-49
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-50
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-51
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-52
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-53
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-54
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
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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-to-value ratios, or on home loans secured by junior liens, may be higher
than that of home loans with lower loan-
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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-57
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.
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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
Outstanding Interest Term Term
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
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-63
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-64
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-65
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-66
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-67
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.
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.
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.
S-68
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 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 nevertheless 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 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
S-69
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. 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 characterization of the notes
as indebtedness may be re-evaluated, and their transfer to Plans, or to
persons acting on behalf of or investing assets of Plans, may be restricted.
Any Plan trustee or other person acting on behalf of a Plan or investing
assets of a Plan that is considering an investment in a note that is no longer
investment grade should consult with counsel.
Without regard to whether notes are considered to be equity interest in
the issuer, certain affiliates of the issuer might be considered or might
become Parties in Interest with respect to a Plan. In this case, the
acquisition or holding of the notes 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 certain 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 the notes, or that such an
exemption, if it did apply, would apply to all prohibited transactions that
may occur in connection with such 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.
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;
S-70
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
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, 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).
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.
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:
S-71
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
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.
S-72
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-73
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-74
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-75
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-76
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-77
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-78
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-79
============================================================ =========================================================
Until 90 days after the date of this prospectus ________________
supplement, all dealers effecting transactions in the
notes offered by this prospectus supplement, whether or Home Loan Owner Trust 200_-__
not participating in this distribution, may be required to Issuer of the Notes
deliver this prospectus supplement and the 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 to their unsold $__________ Home Loan Asset-Backed Notes, Series
allotments or subscriptions. 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. _________________________________
We are not offering the notes in any state where the offer PROSPECTUS SUPPLEMENT
is not permitted. _________________________________
We do not claim that the information in this prospectus Greenwich Capital Markets, Inc.
supplement and the accompanying prospectus is accurate as
of any date other than the dates stated on their
respective covers. ________, 200_
============================================================ =========================================================
S-80
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 August 9, 2005
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 2 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-17
General.................................................................S-17
Assignment of the Underlying Securities.................................S-17
Distributions - General.................................................S-18
Deposits to the Certificate Account.....................................S-18
Withdrawals from the Certificate Account................................S-19
Allocation of Available Funds...........................................S-19
Allocation of Losses....................................................S-21
Statements to Certificateholders........................................S-21
Representations and Warranties..........................................S-22
Termination of the Trust................................................S-22
The Trustee.............................................................S-23
Amendment of the Trust Agreement........................................S-23
Voting Under the Underlying Agreements..................................S-24
Book-Entry Registration and Definitive Certificates.....................S-24
Description of the Underlying Securities...................................S-29
General.................................................................S-29
Distributions on the Underlying Securities..............................S-30
Subordinated Interests..................................................S-31
Allocation of Losses to the Underlying Securities.......................S-31
Adjustment to the Servicing Fee in Each Underlying Trust Fund
in Connection with Prepaid Underlying Mortgage Loans..................S-32
Advances................................................................S-32
Optional Termination of the Underlying Trust Funds......................S-32
Description of the Underlying Mortgage Loans...............................S-33
The Depositor..............................................................S-38
Yield, Prepayment And Maturity Considerations..............................S-38
Yield Considerations....................................................S-38
Factors Affecting Prepayments on the Underlying Mortgage Loans..........S-39
Early Termination of the Underlying Trust Funds.........................S-40
Weighted Average Lives of the Certificates..............................S-40
Assumed Final Distribution Dates........................................S-40
Modeling Assumptions....................................................S-41
Use of Proceeds............................................................S-45
Material Federal Income Tax Consequences...................................S-45
Special Tax Attributes of the Offered Certificates......................S-45
Original Issue Discount.................................................S-45
Prohibited Transactions Tax and Other Taxes.............................S-46
S-2
The Residual Certificate................................................S-46
ERISA Considerations.......................................................S-47
Legal Investment Considerations............................................S-51
Method of Distribution.....................................................S-52
Legal Matters..............................................................S-52
Ratings....................................................................S-52
Glossary of Terms..........................................................S-54
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....................................1
Risk Factors.................................................................2
The Trust Fund..............................................................13
Use of Proceeds.............................................................30
The Depositors..............................................................30
Loan Program................................................................31
Description of the Securities...............................................35
Credit Enhancement..........................................................44
Yield and Prepayment Considerations.........................................55
Operative Agreements........................................................58
Material Legal Aspects of the Loans.........................................79
Material Federal Income Tax Consequences...................................103
State Tax Considerations...................................................150
ERISA Considerations.......................................................150
Legal Investment Considerations............................................155
Method of Distribution.....................................................158
Legal Matters..............................................................159
Financial Information......................................................159
Available Information......................................................159
Ratings....................................................................159
Glossary of Terms..........................................................161
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
On the closing date, [__________ Trust] will issue [________] classes of
certificates, [___] 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 Luxembourg or Euroclear in Europe].
Trust Fund
The assets of the trust that will support the certificates will consist
primarily of [___] previously issued mortgage pass-through securities. The
underlying mortgage pass-through securities represent senior ownership
interests in [___] respective underlying trust funds. The assets of the
underlying trust funds consist primarily of [fixed-rate, fully amortizing]
mortgage loans secured by first liens on one- to four-family residential
properties.
The following table identifies the mortgage pass-through securities held in
the trust and shows the approximate aggregate principal balances of the
mortgage loans in the related underlying trust funds as of __________, 200_.
Each of the underlying trust funds consist of multiple mortgage loan groups.
S-4
Class Principal Principal
Designations Balances of Balances
of Underlying Underlying of
Underlying Mortgage Mortgage Underlying
Trust Pass-Through Pass-Through Mortgage
Funds Securities Securities Loans
- ---------------- --------------- --------------- -------------
[___]
Trust Series
[___] Class [___] $[___] $[___]
[___]
Trust Series
[___] Class [___] $[___] $[___]
[___]
Trust Series
[___] Class [___] $[___] $[___]
The Depositor
[Greenwich Capital Acceptance, Inc.]
600 Steamboat Road
Greenwich, Connecticut 06830
(203) 625-2700
The Servicer
[________________]
The Trustee
[________________]
The Originator(s)
[________________]
Cut-off Date
______________, 200_
Closing Date
On or about ______________, 200_
Distribution Dates
The trustee will make distributions on the certificates on the [___] day of
each calendar month beginning in _________ 200_ to the holders of record of
the certificates as of the last business day of the preceding month. If the
[___] day is not a business day, then the distribution will be made on the
next business day.
Distributions on the Certificates
Interest Distributions
On each distribution date, interest payable on each class of offered
certificates will be calculated based on the pass-through rate specified on
the cover, subject to the limitations described under "Description of the
Certificates - Allocation of Available Funds" in this prospectus supplement.
Interest payable on the offered certificates on a distribution date will
accrue during the calendar month preceding the month in which that
distribution date occurs. Interest will be calculated on the basis of an
assumed 360-day year consisting of twelve 30-day months.
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 "Description of the Certificates--Allocation of Available
Funds" in this prospectus supplement.
See "Description of the Certificates" in this prospectus supplement.
Advances
The servicer of the mortgage loans held in the underlying trust funds will
make cash advances to cover 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.
S-5
See "Description of the Underlying Securities--Advances" in this prospectus
supplement.
Optional Termination of the Trust
The depositor may purchase the remaining assets of the trust when 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.
See "Description of the Certificates --Termination of the Trust" in this
prospectus supplement.
Optional Termination of the Underlying Trust Funds
The depositor of the mortgage loans held in any of the underlying trust funds
may terminate that trust fund on and after the distribution date for the
related underlying mortgage pass-through security on which the aggregate
outstanding principal amount of all mortgage loans in that trust fund is less
than [___]% of the aggregate principal amount of those mortgage loans as of
their cut-off date.
See "Description of the Underlying Securities --Optional Termination of the
Underlying Trust Funds" in this prospectus supplement.
Ratings
It is a condition of the issuance of the offered certificates that they be
assigned a rating of "[___]" by [_____________].
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.
Material Federal Income Tax Consequences
In the opinion of [Sidley Austin Brown & Wood LLP] [Thacher Proffitt & Wood
LLP], 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 REMIC. The Class [___] Certificate will represent the sole
class of "residual interests" in the REMIC. The holder of the Class [__]
Certificate will be subject to special federal income tax rules that may
significantly reduce the after-tax yield of that certificate.
See "Material Federal Income Tax Consequences" in this prospectus supplement
and in the prospectus.
ERISA Considerations
Assuming the accuracy of certain statements included in the disclosure
documentation prepared in connection with the public offering of the
underlying mortgage pass-through securities, it is expected that the Class [__
and Class __] Certificates may be purchased by a pension or other employee
benefit plan subject to ERISA or section 4975 of the Internal Revenue Code, so
long as certain conditions are met. A fiduciary of an employee benefit plan
must determine that the purchase of a certificate is consistent with its
fiduciary duties under applicable law and does not result in a non-exempt
prohibited transaction under applicable law.
S-6
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
Legal Investment Considerations
Assuming the accuracy of certain representations contained in the agreements
under which the underlying trust funds were created (which information is not
subject to independent verification) and on the basis of certain assumptions
derived from statements included in the disclosure documentation prepared in
connection with the public offering of the underlying mortgage pass-through
securities, the Class [__ and Class __] 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.
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 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-8 of this prospectus supplement and beginning on
page 2 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"
in this prospectus supplement 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 as of the cut-off date
S-14
for that trust fund. 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 the cut-off date
for that trust fund. 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.
Terrorist activities and related
military and political actions by
the U.S. government could cause
reduction investor confidence and
substantial market volatility in
real estate and securities
markets............................. It is impossible to predict the extent to
which terrorist activities may occur or,
if they do occur, the extent of the
effect on the certificates. Moreover, it
is uncertain what
S-15
effects any past or future terrorist
activities or any related military or
political actions on the part of the
Untied States government and others will
have on the United States and world
financial markets, local, regional and
national economies, real estate markets
across the United States, or particular
business sectors, including those
affecting the performance of borrowers
on the underlying mortgage loans. Among
other things, reduced investor
confidence could result in substantial
volatility in securities markets and a
decline in real estate-related
investments. In addition, defaults on
the underlying mortgage loans could
increase and, regardless of the
performance of the underlying mortgage
loans, the liquidity and market value of
the certificates may be impaired.
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-16
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 Luxembourg
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-17
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-18
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;
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(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 Luxembourg 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 Luxembourg and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Clearstream
Luxembourg's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank will act as
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depositary for Clearstream Luxembourg, 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 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 Luxembourg 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
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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 Luxembourg or Euroclear as a result of a transaction with a DTC
participant will be made during subsequent securities settlement processing
and dated the business day following the DTC settlement date. Such credits or
any transactions in such securities settled during such processing will be
reported to the relevant Euroclear or Clearstream Luxembourg participants on
such business day. Cash received in Clearstream Luxembourg or Euroclear as a
result of sales of securities by or through a Clearstream Luxembourg
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 Luxembourg or Euroclear cash account only as of the business day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the 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 Luxembourg 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
Luxembourg 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 Luxembourg 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.
S-26
[Clearstream Luxembourg Bank 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 Luxembourg is subject to regulation by the
Luxembourg Monetary Institute. Clearstream Luxembourg holds securities for its
participating organizations, thereby eliminating the need for physical
movement of certificates. Clearstream Luxembourg 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 Luxembourg is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Clearstream
Luxembourg 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 Clearance Systems S.C., 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
S-27
the trustee to Cede. [Distributions with respect to certificates held through
Clearstream Luxembourg or Euroclear will be credited to the cash accounts of
Clearstream Luxembourg 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 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 Luxembourg 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 Luxembourg 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
S-28
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.
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 Luxembourg and Euroclear] have agreed to the
foregoing procedures in order to facilitate transfers of offered certificates
among participants of DTC, [Clearstream Luxembourg 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
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[_______________], 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 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.
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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
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
S-31
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.
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
S-32
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 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.
S-33
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.
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-34
Underlying Mortgage Loan Delinquency Information as of __________, 200_
Relating to the Series [____] Underlying Security
Mortgage
Pool Mortgage
Principal Pool
Balance Principal 30 - 59 60 - 89
as of Balance Days Days 90 + Days In
Original as of Delinquent Delinquent Delinquent Foreclosure
Issue Date ______, 200_ # Balance % # Balance(1) % # Balance % # Balance(1) % #
----------- ------------ --- ---------- ----- --- ---------- ----- --- ---------- ----- --- ----------- ----- ---
$[________] $[________] [_] $[___] [__]% [_] $[___] [__]% [_] $[___] [__]% [_] $[___] [__]% [-]
R.E.O. Cumulative Cumulative
Balance % Losses Losses %
- ------- ----- ---------- -----------
$[___] [__]% $[___] [__]%
S-35
Underlying Mortgage Loan Delinquency Information as of __________, 200_
Relating to the Series [____] Underlying Security
Mortgage
Pool Mortgage
Principal Pool
Balance Principal 31 - 60 61 - 90
as of Balance Days Days 91 + Days In
Original as of Delinquent Delinquent Delinquent Foreclosure
Issue Date ______, 200_ # Balance % # Balance % # Balance % # Balance % #
----------- ------------ --- ---------- ----- --- ---------- ----- --- ---------- ----- --- ----------- ----- ---
$[________] $[________] [_] $[___] [__]% [_] $[___] [__]% [_] $[___] [__]% [_] $[___] [__]% [ ]
R.E.O. Cumulative Cumulative
Balance % Losses Losses %
- ------- ----- ---------- -----------
$[___] [__]% $[___] [__]%
S-36
Underlying Mortgage Loan Delinquency Information as of ___________, 200_
Relating to the Series [____] Underlying Security
Mortgage
Pool Mortgage
Principal Pool
Balance Principal 31 - 60 61 - 90
as of Balance Days Days 91 + Days In
Original as of Delinquent Delinquent Delinquent Foreclosure
Issue Date ______, 200_ # Balance % # Balance % # Balance % # Balance % #
----------- ------------ --- ---------- ----- --- ---------- ----- --- ---------- ----- --- ----------- ----- ---
$[________] $[________] [_] $[___] [__]% [_] $[___] [__]% [_] $[___] [__]% [_] $[___] [__]% [ ]
R.E.O. Cumulative Cumulative
Balance % Losses Losses %
- ------- ----- ---------- -----------
$[___] [__]% $[___] [__]%
S-37
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 a limited purpose finance
subsidiary of Greenwich Capital Holdings, Inc. 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-38
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-39
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-40
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-41
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-42
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-43
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-44
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-45
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 certificateholders. 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-46
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 interests 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. The
Treasury Department has issued final regulations, effective May 11, 2004, that
address the federal income tax treatment of "inducement fees" received by
transferees of non-economic REMIC residual interests. See "Material Federal
Income Tax Considerations--REMIC Certificates--Tax-Related Restrictions on
Transfer of Residual Certificates--Inducement Fees" 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 employee benefit plans (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
S-47
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. 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 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
that represent an undivided interest in certain asset-backed
pass-through entities and 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
S-48
rating categories from a rating agency, such as Standard & Poor's, Fitch
Ratings or Moody's Investor Services, Inc.;
(4) the trustee must not be an affiliate of any other member of the
"Restricted Group" (defined below) other than the underwriter;
(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
S-49
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 available to Plans
sponsored by the "Restricted Group," which consists 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 (5%) 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).
[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
sections I and III 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 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 and 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 rating requirement of the
Exemption) will not be registered by the trustee unless the trustee receives:
(i) a representation from the acquirer 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
S-50
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 transferee is an insurance company which is
purchasing that Certificate with funds 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 representation in (i) or (ii) of the preceding paragraph shall be
deemed to have been made to the trustee by the acquirer's 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.
The sale of certificates to a Plan is in no respect a representation by
the issuer or any underwriter of the certificates 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.
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
S-51
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.
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.
S-52
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.
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-53
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-54
"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-55
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-56
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__............................................. [__________]
__________, 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__............................................. [__________]
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
Class Rate Beginning Through Principal
Class Cusip Description Type Balance Rate (%) Distribution
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Totals
- -----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Current Cumulative
Interest Total Realized Ending Realized
Class Distribution Distribution Losses Balance Losses
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Totals
- --------------------------------------------------------------------------------------
B-1
distribution date: [_______]
[_______________] Trust
[__________] Certificates, Series [____]
Principal Distribution Detail
- ------------------ --------------- -------------- --------------- --------------- -------------- ---------------
Original Beginning Scheduled Unscheduled
Certificate Certificate Principal Accretion Principal
Class Cusip Balance Balance Distribution Principal Adjustments
- ------------------ --------------- -------------- --------------- --------------- -------------- ---------------
- ------------------ --------------- -------------- --------------- --------------- -------------- ---------------
- ------------------ --------------- -------------- --------------- --------------- -------------- ---------------
- ------------------ --------------- -------------- --------------- --------------- -------------- ---------------
- ------------------ --------------- -------------- --------------- --------------- -------------- ---------------
- ------------------ --------------- -------------- --------------- --------------- -------------- ---------------
- ------------------ --------------- -------------- --------------- --------------- -------------- ---------------
- ------------------ --------------- -------------- --------------- --------------- -------------- ---------------
- ------------------ --------------- -------------- --------------- --------------- -------------- ---------------
- ------------------ --------------- -------------- --------------- --------------- -------------- ---------------
- ------------------ --------------- -------------- --------------- --------------- -------------- ---------------
- ------------------ --------------- -------------- --------------- --------------- -------------- ---------------
- ------------------ --------------- -------------- --------------- --------------- -------------- ---------------
- ------------------ --------------- -------------- --------------- --------------- -------------- ---------------
Totals
- ------------------ --------------- -------------- --------------- --------------- -------------- ---------------
- ------------------ -------------- --------------- --------------- --------------
Net Current Ending Ending
Principal Realized Certificate Certificate
Class Distribution Losses Balance Factor
- ------------------ -------------- --------------- --------------- --------------
- ------------------ -------------- --------------- --------------- --------------
- ------------------ -------------- --------------- --------------- --------------
- ------------------ -------------- --------------- --------------- --------------
- ------------------ -------------- --------------- --------------- --------------
- ------------------ -------------- --------------- --------------- --------------
- ------------------ -------------- --------------- --------------- --------------
- ------------------ -------------- --------------- --------------- --------------
- ------------------ -------------- --------------- --------------- --------------
- ------------------ -------------- --------------- --------------- --------------
- ------------------ -------------- --------------- --------------- --------------
- ------------------ -------------- --------------- --------------- --------------
- ------------------ -------------- --------------- --------------- --------------
- ------------------ -------------- --------------- --------------- --------------
Totals
- ------------------ -------------- --------------- --------------- --------------
B-2
distribution date: [_______]
[_______________] Trust
[__________] Certificates, Series [____]
Interest Distribution Detail
- ------------------ --------------- ---------------- ---------------- --------------- ----------------
Beginning Pass Accrued Cumulative
Certificate Through Optimal Unpaid Deferred
Class Balance Rate (%) Interest Interest Interest
- ------------------ --------------- ---------------- ---------------- --------------- ----------------
- ------------------ --------------- ---------------- ---------------- --------------- ----------------
- ------------------ --------------- ---------------- ---------------- --------------- ----------------
Totals
- ------------------ --------------- ---------------- ---------------- --------------- ----------------
- ------------------ --------------- ---------------- ---------------- ---------------
Total Net Unscheduled
Interest Prepayment Interest Interest
Class Due Int Shortfall Adjustment Paid
- ------------------ --------------- ---------------- ---------------- ---------------
- ------------------ --------------- ---------------- ---------------- ---------------
- ------------------ --------------- ---------------- ---------------- ---------------
Totals
- ------------------ --------------- ---------------- ---------------- ---------------
B-3
distribution date: [______]
[_______________] Trust
[__________] Certificates, Series [____]
Current Payment Information Factors per $1,000
- ------------------ ----------------- ---------------- ----------------- -----------------
Original
Certificate Beginning Cert. Principal
Class Cusip Balance Notional Balance Distribution
- ------------------ ----------------- ---------------- ----------------- -----------------
- ------------------ ----------------- ---------------- ----------------- -----------------
- ------------------ ----------------- ---------------- ----------------- -----------------
Totals
- ------------------ ----------------- ---------------- ----------------- -----------------
- ------------------ ---------------- ----------------- -----------------
Pass
Interest Ending Cert. Through
Class 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 90+ Days
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
Luxembourg 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 Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement). Secondary market trading between investors holding Global
Securities through DTC will be conducted according to the rules and procedures
applicable to U.S. corporate debt obligations. Secondary cross-market trading
between participants of Clearstream Luxembourg or Euroclear and DTC
participants holding certificates will be effected on a
delivery-against-payment basis through the Relevant Depositaries of
Clearstream Luxembourg 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
Luxembourg and Euroclear will hold positions on behalf of their participants
through their Relevant Depositaries, which in turn will hold such positions in
accounts as DTC participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. 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
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will
be credited to 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 DTC Participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior
mortgage-backed and asset-backed issues in same-day funds.
Trading Between Clearstream Luxembourg and/or Euroclear Participants.
Secondary market trading between Clearstream Luxembourg participants or
Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading Between DTC Seller and Clearstream Luxembourg or Euroclear
Participants. When Global Securities are to be transferred from the account of
a DTC participant to the account of a Clearstream Luxembourg participant or of
a Euroclear participant, the purchaser will send instructions to Clearstream
Luxembourg or Euroclear through a Clearstream Luxembourg participant or
Euroclear participant at least one business day prior to settlement.
Clearstream Luxembourg or Euroclear will instruct the Relevant 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 Relevant Depositary to the DTC
participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream Luxembourg participant's or Euroclear
participant's account. The securities credit will appear the next day
(European time) and the cash debt will be back-valued to, and the interest on
the Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Clearstream
Luxembourg or Euroclear cash debt will be valued instead as of the actual
settlement date.
Clearstream Luxembourg participants and Euroclear participants will need
to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines
of credit, as they would for any settlement occurring within Clearstream
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream Luxembourg or Euroclear until the Global Securities are
credited to their accounts one day later.
As an alternative, if Clearstream Luxembourg or Euroclear has extended a
line of credit to them, Clearstream Luxembourg participants or Euroclear
participants can elect not to preposition funds and allow that credit line to
be drawn upon to finance settlement. Under this
C-2
procedure, Clearstream Luxembourg 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. 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 Luxembourg participant's or Euroclear participant's
particular cost of funds.
Because 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 Luxembourg 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 Luxembourg or Euroclear Seller and DTC
Purchaser. Due to time zone differences in their favor, Clearstream Luxembourg
participants and Euroclear participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the Relevant Depositary, to a DTC
participant. The seller will send instructions to Clearstream Luxembourg or
Euroclear through a Clearstream Luxembourg participant or Euroclear
participant at least one business day prior to settlement. In these cases,
Clearstream Luxembourg or Euroclear will instruct the Relevant 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 Luxembourg participant or Euroclear participant
the following day, and receipt of the cash proceeds in the Clearstream
Luxembourg participant's or Euroclear participant's account would be
back-valued to the value date (which would be the preceding day, when
settlement occurred in New York). Should the Clearstream Luxembourg
participant or Euroclear participant have a line of credit with its respective
clearing system and elect to be in debt in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in
the Clearstream Luxembourg participant's or Euroclear participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Clearstream Luxembourg or Euroclear and
that purchase Global Securities from DTC participants for delivery to
Clearstream Luxembourg participants or Euroclear participants should note that
these trades would automatically fail on the sale side unless affirmative
action were taken. At least three techniques should be readily available to
eliminate this potential problem:
C-3
(a) borrowing through Clearstream Luxembourg or Euroclear for one day
(until the purchase side of the day trade is reflected in their Clearstream
Luxembourg or Euroclear accounts) in accordance with the clearing system's
customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC participants
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream Luxembourg or
Euroclear account in order to settle the sale side of the trade; or
(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 participants is at least one
day prior to the value date for the sale to the Clearstream Luxembourg
participant or Euroclear participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Clearstream Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue discount)
on registered debt issued by U.S. Persons, 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 of Beneficial Owner for United States Tax
Withholding). 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. 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
(Certificate of Foreign Person's Claim for Exemption from Withholding of
Tax on Income Effectively Connected with the Conduct of a Trade of
Business in the United States).
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).
C-4
U.S. Federal Income Tax Reporting Procedure
The beneficial owner of a Global Security, files by submitting the
appropriate form to the person through whom it holds (the clearing agency, in
the case of persons holding directly on the books of the clearing agency the
Global Security). Form W-8BEN and Form W-8ECI are effective until the third
succeeding calendar years from the date such form is signed..
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership (including an entity treated as a
corporation or partnership for U.S. federal income tax purpose) organized in
or under the laws of the United States, any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations are
adopted that provide otherwise), (iii) an estate the income of which is
includible in gross income for U.S. income tax purposes regardless of its
source or (iv) a trust if a court in the United States is able to exercise
primary supervision over the administration of the trust and one or more U.S.
Persons have the authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in Treasury
regulations, certain trusts in existence on August 20, 1996, and treated as
United States Persons prior to such date, that elect to continue to be treated
as United States persons will also be U.S. Persons.
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.
C-5
==========================================================================================================
Until the expiration of 90 days after the date of $[__________]
this prospectus supplement, all dealers selling the (Approximate)
offered certificates, whether or not participating
in this distribution, will deliver a prospectus
supplement and the prospectus to which it relates. Resecuritization Mortgage Trust Certificates,
This delivery requirement is in addition to the Series 200_-_
obligation of dealers to deliver a prospectus
supplement and prospectus when acting as
underwriters and with respect to their unsold $ __________ Class [___] [___]% Certificates
allotment or subscriptions.
[Greenwich Capital Acceptance, Inc.]
Depositor
_________________________
You should rely on the information contained or
incorporated by reference in this prospectus
supplement and the accompanying prospectus. We have Prospectus Supplement
not authorized anyone to provide you with different [_____ __, 200_]
information.
We are not offering the offered certificates in any [Logo of Underwriter]
state where the offer is not permitted.
-----------------------
We do not claim that the information in this
prospectus supplement and the accompanying
prospectus is accurate as of any date other than the
dates dated on their respective covers.
==========================================================================================================
Subject to Completion, Dated August 9, 2005
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 2 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.
___________ __, 2005
Table of Contents
Page
----
Important Notice About Information in This Prospectus and
Each Accompanying Prospectus Supplement.................................1
Risk Factors.................................................................2
The Trust Fund..............................................................13
The Mortgage Loans--General............................................14
Single Family Loans....................................................18
Home Equity Loans......................................................19
Multifamily Loans......................................................19
Manufactured Housing Contracts.........................................20
Home Improvement Contracts.............................................21
Agency Securities......................................................21
Private Label Securities...............................................27
Incorporation of Certain Information by Reference......................30
Use of Proceeds.............................................................30
The Depositors..............................................................30
Loan Program................................................................31
Underwriting Standards.................................................31
Qualifications of Sellers..............................................33
Representations by Sellers; Repurchases or Substitutions...............33
Description of the Securities...............................................35
General................................................................36
Distributions on Securities............................................38
Advances...............................................................42
Reports to Securityholders.............................................43
Credit Enhancement..........................................................44
General................................................................44
Subordination..........................................................45
Pool Insurance Policies................................................46
FHA Insurance; VA Guarantees...........................................48
Special Hazard Insurance Policies......................................50
Bankruptcy Bonds.......................................................52
FHA Insurance on Multifamily Loans.....................................53
Reserve Accounts.......................................................53
ii
Cross Support..........................................................54
Other Insurance, Surety Bonds, Guaranties, Letters of Credit and
Similar Instruments or Agreements.................................54
Financial Instruments..................................................55
Yield and Prepayment Considerations.........................................55
Operative Agreements........................................................58
Assignment of Trust Fund Assets........................................59
Payments on Loans; Deposits to Security Account........................61
Pre-Funding Account....................................................64
Sub-Servicing of Loans.................................................64
Collection Procedures..................................................66
Hazard Insurance.......................................................67
Realization upon Defaulted Mortgage Loans..............................69
Servicing and Other Compensation and Payment of Expenses...............72
Evidence as to Compliance..............................................72
Certain Matters Regarding the Master Servicer and the Depositors.......73
Events of Default; Rights upon Event of Default........................74
Amendment..............................................................77
Termination; Optional Termination; Calls...............................78
The Trustee............................................................79
Material Legal Aspects of the Loans.........................................79
General................................................................79
Foreclosure............................................................83
Repossession of Manufactured Homes.....................................85
Rights of Redemption...................................................87
Equitable Limitations on Remedies......................................87
Anti-Deficiency Legislation and Other Limitations on Lenders...........88
Homeownership Act and Similar State Laws...............................89
Due-on-Sale Clauses....................................................91
Prepayment Charges; Late Fees..........................................92
Applicability of Usury Laws............................................92
Servicemembers Civil Relief Act........................................93
Environmental Risks....................................................93
The Home Improvement Contracts.........................................96
Installment Contracts..................................................97
Junior Mortgages; Rights of Senior Mortgagees..........................97
The Title I Program....................................................99
Material Federal Income Tax Consequences...................................103
General...............................................................103
Taxation of Debt Securities...........................................104
iii
Non-REMIC Certificates................................................112
REMIC Certificates....................................................124
State Tax Considerations...................................................150
ERISA Considerations.......................................................150
Insurance Company General Accounts....................................152
Prohibited Transaction Class Exemption 83-1...........................152
Underwriter Exemption.................................................153
Legal Investment Considerations............................................155
Method of Distribution.....................................................158
Legal Matters..............................................................159
Financial Information......................................................159
Available Information......................................................159
Ratings....................................................................159
Glossary of Terms..........................................................161
iv
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
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.
_____________________
1
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
2
securities. Moreover, at the times
specified in the related prospectus
supplement, assets of the trust may be
released to the applicable depositor,
master servicer, any servicer, credit
enhancement provider or other specified
person, if all payments then due on the
securities have been made and adequate
provision for future payments on the
remaining securities has been made. Once
released, these assets will no longer be
available to make payments on your
securities.
There will be no recourse against the
depositor, the master servicer, any
servicer or any of their affiliates if a
required distribution on the securities
is not made. The securities will not
represent an interest in, or an
obligation of, the depositor, the master
servicer, any servicer or any of their
affiliates.
The depositor's obligations are limited
to its representations and warranties
concerning the trust assets. Because the
depositor has no significant assets, if
it is required to repurchase trust
assets due to the breach of a
representation or warranty, the
depositor's source of funds for the
repurchase would be limited to:
o moneys obtained from enforcing any
similar obligation of the seller or
originator of the asset, or
o funds from a reserve account or
other credit enhancement
established to pay for asset
repurchases.
Credit enhancement may not be
adequate to prevent losses on
your securities..................... Credit enhancement is intended to reduce
the effect of delinquent payments or
loan losses on those classes of
securities that have the benefit of the
credit enhancement. Nevertheless, the
amount of any credit enhancement is
subject to the limits described in the
related prospectus supplement. Moreover,
the amount of credit enhancement may
decline or be depleted under certain
circumstances before the securities are
paid in full. As a result,
securityholders may suffer losses. In
addition, credit enhancement may not
cover all potential sources of risk of
loss, such as fraud or negligence by a
loan originator or other parties.
3
The interest accrual period
may reduce the effective yield
on your securities.................. Interest payable on the securities on any
distribution date will include all
interest accrued during the related
interest accrual period. The interest
accrual period for the securities
of each series will be specified in the
applicable prospectus supplement. If the
interest accrual period ends two or more
days before the related distribution
date, your effective yield will be less
than it would be if the interest accrual
period ended the day before the
distribution date. As a result, your
effective yield at par would be less
than the indicated coupon rate.
Economic, legal and other
factors could reduce the
amount and delay the timing of
recoveries on defaulted
loans............................... The following factors, among others, could
adversely affect property values in such
a way that the outstanding balance of
the related loans would equal or exceed
those values:
o an overall decline in the
residential real estate markets
where the properties are located,
o failure of borrowers to maintain
their properties adequately, and
o natural disasters that are not
necessarily covered by hazard
insurance, such as earthquakes and
floods.
If property values decline, actual rates
of delinquencies, foreclosures and
losses on the loans could be higher than
those currently experienced by the
mortgage lending industry in general.
Even if you assume that the mortgaged
properties provide adequate security for
the loans, substantial delays could
occur before defaulted loans are
liquidated and the proceeds forwarded to
investors. Property foreclosure actions
are regulated by state statutes and
rules and are subject to many of the
delays and expenses that characterize
other types of lawsuits if defenses or
counterclaims are made. As a result,
foreclosure actions can sometimes take
several years to complete. Moreover,
some states prohibit a mortgage lender
from obtaining a judgment against the
borrower for amounts not covered by
property proceeds if the property is
sold outside of a judicial proceeding.
As a result, if a
4
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 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
5
practical matter to foreclose on any
junior lien will be limited.
Loans to lower credit quality
borrowers are more likely to
experience late payments and
defaults and increase your
risk of loss........................ Trust assets may have been made to lower
credit quality borrowers who fall into
one of two categories:
o customers with moderate income,
limited assets and other income
characteristics that cause
difficulty in borrowing from banks
and other traditional lenders; or
o customers with a history of
irregular employment, previous
bankruptcy filings, repossession of
property, charged-off loans or
garnishment of wages.
The average interest rate charged on
loans made to these types of borrowers
is generally higher than that charged by
lenders that typically impose more
stringent credit requirements. There is
a greater likelihood of late payments on
loans made to these types of borrowers
than on loans to borrowers with a higher
credit quality. In particular, payments
from borrowers with a lower credit
quality are more likely to be sensitive
to changes in the economic climate in
the areas in which they reside.
As much as 20% (by principal balance) of
the trust assets for any particular
series of securities may be
contractually delinquent as of the
related cut-off date.
Failure to perfect security
interests in manufactured
homes may result in losses on
your securities..................... Each manufactured housing conditional
sales contract or installment loan
agreement that is included in a trust
fund will be secured by a security
interest in the related manufactured
home. The steps necessary to perfect the
security interest in a manufactured home
will vary from state-to-state. If, as a
result of clerical error or otherwise,
the master servicer fails to take the
appropriate steps to perfect the
security interest in a manufactured home
that secures a conditional sales
contract or installment loan agreement
included in the trust, the trustee may
not have a first priority
6
security interest in that manufactured
home. Moreover, the master servicer will
not amend the certificate of title to a
manufactured home to name the trustee as
lienholder, note the trustee's interest
on the certificate of title or deliver
the certificate of title to the trustee.
As a result, in some states the
assignment of the security interest in
the manufactured home to the trustee may
not be perfected or may not be effective
against creditors of the master servicer
or a bankruptcy trustee in the event of
a bankruptcy of the master servicer.
In addition, courts in many states have
held that manufactured homes may, in
certain circumstances, become subject to
real estate title and recording laws. As
a result, the security interest in each
manufactured home could be rendered
subordinate to the interests of other
parties claiming an interest in that
manufactured home under applicable state
real estate law.
The failure to properly perfect a valid,
first priority security interest in a
manufactured home that secures a
conditional sales contract or
installment loan agreement included in
the trust could lead to losses that, to
the extent not covered by any credit
enhancement, could adversely affect the
yield to maturity of the related
securities.
Multifamily loans generally
are riskier than single family
loans............................... Loans that are secured by first liens on
rental apartment buildings or projects
containing five or more residential
units, together with loans that are
secured by first liens on mixed-use
properties, shall not in the aggregate
constitute 10% or more of any pool by
principal balance. Multifamily loans are
generally considered riskier than
single-family loans for the following
reasons:
o Multifamily loans typically are
much larger in amount, which
increases the risk represented by
the default of a single borrower.
o Repayment of a multifamily loan
usually depends upon successful
management of the related mortgaged
property.
o Changing economic conditions in
particular markets can affect the
supply and demand of rental units
and the rents that those markets
will bear.
7
o Government regulations, including
rental control laws, may adversely
affect future income from mortgaged
properties that are subject to
those regulations.
In addition, because individual
multifamily loans often are relatively
large in amount, principal prepayments
resulting from defaults, casualties,
condemnations or breaches of
representations and warranties may
adversely affect your yield.
Loans with balloon payments
may increase your risk of
loss................................ Certain loans may not be fully amortizing
and may require a substantial principal
payment (a "balloon" payment) at their
stated maturity. Loans of this type
involve greater risk than fully
amortizing loans since the borrower must
generally be able to refinance the loan
or sell the related property prior to
the loan's maturity date. The borrower's
ability to do so will depend on such
factors as the level of available
mortgage rates at the time of sale or
refinancing, the relative strength of
the local housing market, the borrower's
equity in the property, the borrower's
general financial condition and tax
laws.
If amounts in any pre-funding
account are not used to
purchase trust assets, you
will receive a prepayment on
the related securities.............. The related prospectus supplement may
provide that the depositor transfer a
specified amount into a pre-funding
account on the date the securities are
issued. In this case, the transferred
funds may be used only to acquire
additional assets for the trust during a
set period after the issuance. Any
amounts remaining in the account at the
end of the period will be distributed as
a prepayment of principal to the holders
of the related securities. The resulting
prepayment could adversely affect the
yield on those securities.
Violations of applicable
federal laws may reduce or
delay mortgage loan
collections......................... The loans may also be subject to federal
laws relating to the origination and
underwriting. These laws
o require certain disclosures to the
borrowers regarding the terms of
the loans;
8
o prohibit discrimination on the
basis of age, race, color, sex,
religion, marital status, national
origin, receipt of public
assistance or the exercise of any
right under the consumer credit
protection act, in the extension of
credit;
o regulate the use and reporting of
information related to the
borrower's credit experience; and
o require additional application
disclosures, limit changes that may
be made to the loan documents
without the borrower's consent and
restrict a lender's ability to
declare a default or to suspend or
reduce a borrower's credit limit to
certain enumerated events.
Loans may also be subject to federal
laws that impose additional disclosure
requirements on creditors for
non-purchase money loans with high
interest rates or high upfront 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
9
principal amount of the outstanding
securities of that series. If trust
assets have to be sold because of an
event of default or otherwise, providers
of services to the trust (including the
trustee, the master servicer and the
credit enhancer, if any) generally will
be entitled to receive the proceeds of
the sale to the extent of their unpaid
fees and other amounts due them before
any proceeds are paid to investors. As a
result, the proceeds of such a sale may
be insufficient to pay the full amount
of interest and principal of the related
securities.
Mortgaged properties may be
subject to environmental risks
that could result in
losses.............................. Federal, state and local laws and
regulations impose a wide range of
requirements on activities that may
affect the environment, health and
safety. In certain circumstances, these
laws and regulations impose obligations
on owners or operators of residential
properties such as those that secure the
loans included in a trust. Failure to
comply with these laws and regulations
can result in fines and penalties that
could be assessed against the trust as
owner of the related property.
In some states, a lien on the property
due to contamination has priority over
the lien of an existing mortgage.
Further, a mortgage lender may be held
liable as an "owner" or "operator" for
costs associated with the release of
petroleum from an underground storage
tank under certain circumstances. If the
trust is considered the owner or
operator of a property, it will suffer
losses as a result of any liability
imposed for environmental hazards on the
property.
You may have difficulty
selling your securities or
obtaining your desired
price............................... No market will exist for the securities
before they are issued. In addition,
there can be no assurance that a
secondary market will develop following
the issuance and sale of the securities.
Even if a secondary market does develop,
you may not be able to sell your
securities when you wish to or at the
price you want.
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
10
recognized rating agency. A rating is
based on the adequacy of the value of
the trust assets and any credit
enhancement for that class and reflects
the rating agency's assessment of how
likely it is that holders of the class
of securities will receive the payments
to which they are entitled. A rating
does not constitute an assessment of how
likely it is that principal prepayments
on the loans will be made, the degree to
which the rate of prepayments might
differ from that originally anticipated
or the likelihood of early, optional
termination of the securities. You must
not view a rating as a recommendation to
purchase, hold or sell securities
because it does not address the market
price or suitability of the securities
for any particular investor.
There is no assurance that any rating
will remain in effect for any given
period of time or that the rating agency
will not lower or withdraw it entirely
in the future. The rating agency could
lower or withdraw its rating due to:
o any decrease in the adequacy of the
value of the trust assets or any
related credit enhancement,
o an adverse change in the financial
or other condition of a credit
enhancement provider, or
o a change in the rating of the
credit enhancement provider's
long-term debt.
Book--entry registration may
limit your ability to sell
securities and delay your
receipt of payments................. Limit on Liquidity of Securities.
Securities issued in book-entry form may
have only limited liquidity in the
resale market, since investors may be
unwilling to purchase securities for
which they cannot obtain physical
instruments.
Limit on Ability to Transfer or Pledge.
Transactions in book-entry securities
can be effected only through The
Depository Trust Company, its
participating organizations, its
indirect participants and certain banks.
As a result, your ability to transfer or
pledge securities issued in book-entry
form may be limited.
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
11
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 161 of this prospectus
where you will find definitions of the capitalized terms used in this
prospectus.
12
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
13
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.
14
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
15
- 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
16
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,
17
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
18
origination of not less than $25,000 and not more than $1,000,000, and
original terms to stated maturity of from ten to 40 years.
If specified in the related prospectus supplement, the mortgaged
properties securing Single Family Loans may include five- to eight-family
residential properties and small mixed-use properties. In the case of
leasehold interests, the term of the leasehold will exceed the scheduled
maturity of the related mortgage loan by at least five years, unless otherwise
specified in the related prospectus supplement.
Home Equity Loans
Unless otherwise specified in the related prospectus supplement, Home
Equity Loans will consist of closed-end and/or revolving home equity loans
generally secured by junior liens on one- to four-family residential
properties.
As more fully described in the related prospectus supplement, interest on
each revolving credit line loan, excluding introductory rates offered from
time to time during promotional periods, is computed and payable monthly on
the average daily outstanding principal balance of the loan. Principal amounts
on a revolving credit line loan may be drawn down (up to the maximum amount
specified in the related prospectus supplement) or repaid from time to time,
but may be subject to a minimum periodic payment. Except to the extent
provided in the related prospectus supplement, the trust fund will not include
any amounts borrowed under a revolving credit line loan after the cut-off
date. The full amount of a closed-end loan is advanced at the inception of the
loan and generally is repayable in equal (or substantially equal) installments
in an amount necessary to fully amortize such loan at its stated maturity.
Except to the extent provided in the related prospectus supplement, the
original terms to stated maturity of closed-end loans will not exceed 360
months. Under certain circumstances, under either a revolving credit line loan
or a closed-end loan, a borrower may choose an interest only payment option,
in which event the borrower is obligated to pay only the amount of interest
which accrued on the loan during the billing cycle. An interest only payment
option may be available for a specified period before the borrower must begin
paying at least the minimum monthly payment of a specified percentage of the
average outstanding balance of the loan.
Multifamily Loans
Multifamily Loans will consist of loans or participations or other
beneficial interests in loans secured by mortgages that create first liens on
rental apartment buildings or projects containing five or more residential
units. If specified in the related prospectus supplement, the mortgage assets
of a trust fund may include mortgage participation certificates evidencing
interests in Multifamily Loans. Multifamily Loans may be conventional loans or
FHA-insured loans, as specified in the related prospectus supplement. Unless
otherwise specified in the 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
19
cooperatives. A cooperative owns all the apartment units in its building and
all common areas and is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific apartments or units. Generally, a tenant-stockholder of a
cooperative must make a monthly payment to the cooperative representing such
tenant-stockholder's pro rata share of the cooperative's payments for the
cooperative's mortgage loan, real property taxes, maintenance expenses and
other capital or ordinary expenses. Those payments are in addition to any
payments of principal and interest the tenant-stockholder must make on any
loans to the tenant-stockholder secured by his shares in the cooperative. The
cooperative will be directly responsible for building management and, in most
cases, payment of real estate taxes and hazard and liability insurance. A
cooperative's ability to meet debt service obligations on a Multifamily Loan,
as well as all other operating expenses, will be dependent in large part on
the receipt of maintenance payments from the tenant-stockholders, as well as
any rental income from units or commercial areas the cooperative might
control. Unanticipated expenditures may in some cases have to be paid by
special assessments on the tenant-stockholders.
Manufactured Housing Contracts
Manufactured Housing Contracts will consist of manufactured housing
conditional sales contracts and installment sales or loan agreements, each
secured by a manufactured home. Manufactured Housing Contracts may be
conventional, insured by the FHA or partially guaranteed by the VA, as
specified in the related prospectus supplement. Unless otherwise specified in
the related prospectus supplement, each Manufactured Housing Contract will be
fully amortizing and will bear interest at a fixed percentage rate or APR.
Unless otherwise specified in the related prospectus supplement, Manufactured
Housing Contracts will all have individual principal balances at origination
of not less than $10,000 and not more than $1,000,000 and original terms to
stated maturity of from five to 30 years.
When we use the term "manufactured home" in this prospectus, we mean, as
stated in 42 U.S.C. ss. 5402(6), "a structure, transportable in one or more
sections which, in the traveling mode, is eight body feet or more in width or
forty body feet or more in length or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of this paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and
Urban Development and complies with the standards established under this
chapter."
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
20
trust fund, and the original maturities of the Manufactured Housing Contracts
and the last maturity date of any Manufactured Housing Contract.
Home Improvement Contracts
Home Improvement Contracts are originated by home improvement
contractors, thrifts or commercial mortgage bankers in the ordinary course of
business. As specified in the related prospectus supplement, the Home
Improvement Contracts will either be unsecured or secured by mortgages or
deeds of trust generally creating a junior lien on the related mortgaged
properties, or secured by purchase money security interests in the financed
home improvements. Unless otherwise specified in the related prospectus
supplement, the Home Improvement Contracts will be fully amortizing and may
have fixed interest rates or adjustable interest rates and may provide for
other payment characteristics as described in the related prospectus
supplement.
Unless otherwise specified in the related prospectus supplement, the home
improvements securing the Home Improvement Contracts will include, but are not
limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels.
Agency Securities
Government National Mortgage Association or Ginnie Mae. The Government
National Mortgage Association (Ginnie Mae) is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and
Urban Development. Section 306(g) of Title II of the National Housing Act of
1934, as amended, authorizes Ginnie Mae to guarantee the timely payment of the
principal of and interest on certificates which represent an interest in a
pool of FHA loans, which are mortgage loans insured by the FHA under the
National Housing Act or under Title V of the Housing Act of 1949, or VA loans,
which are mortgage loans partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or Chapter 37 of Title 38 of the United
States Code.
Section 306(g) of the National Housing Act provides that "the full faith
and credit of the United States is pledged to the payment of all amounts which
may be required to be paid under any guaranty under this subsection." In order
to meet its obligations under any such guarantee, Ginnie Mae may, under
Section 306(d) of the National Housing Act, borrow from the United States
Treasury in an unlimited amount which is at any time sufficient to enable
Ginnie Mae to perform its obligations under its guarantee.
Ginnie Mae Certificates. Each Ginnie Mae Certificate held in a trust fund
will be a "fully modified pass-through" mortgage-backed certificate issued and
serviced by a Ginnie Mae issuer that is a mortgage banking company or other
financial concern approved by Ginnie Mae or 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
21
agreement between Ginnie Mae and the Ginnie Mae issuer. Pursuant to its
guaranty agreement, a Ginnie Mae issuer will be required to advance its own
funds in order to make timely payments of all amounts due on each Ginnie Mae
Certificate, even if the payments received by the Ginnie Mae issuer on the
underlying FHA loans or VA loans are less than the amounts due on the related
Ginnie Mae Certificate.
The full and timely payment of principal of and interest on each Ginnie
Mae Certificate will be guaranteed by Ginnie Mae, which obligation is backed
by the full faith and credit of the United States. Each Ginnie Mae Certificate
will have an original maturity of not more than 30 years, but may have
original maturities of substantially less than 30 years. Each Ginnie Mae
Certificate will be based on and backed by a pool of FHA loans or VA loans
secured by one- to four-family residential properties and will provide for the
payment by or on behalf of the Ginnie Mae issuer to the registered holder of
the Ginnie Mae Certificate scheduled monthly payments of principal and
interest equal to the registered holder's proportionate interest in the
aggregate amount of the monthly principal and interest payment on each FHA
Loan or VA Loan underlying the Ginnie Mae Certificate, less the applicable
servicing and guarantee fee which together equal the difference between the
interest on the FHA Loan or VA Loan and the pass-through rate on the Ginnie
Mae Certificate. In addition, each payment will include proportionate
pass-through payments of any prepayments of principal on the FHA loans or VA
loans underlying the Ginnie Mae Certificate and liquidation proceeds in the
event of a foreclosure or other disposition of any such FHA loans or VA loans.
If a Ginnie Mae issuer is unable to make the payments on a Ginnie Mae
Certificate as they become due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make the payments. Upon notification and request, Ginnie Mae
will make payments directly to the registered holder of the Ginnie Mae
Certificate. In the event no payment is made by a Ginnie Mae issuer and the
Ginnie Mae issuer fails to notify and request Ginnie Mae to make the payment,
the holder of the Ginnie Mae Certificate will have recourse only against
Ginnie Mae to obtain payment. The trustee or its nominee, as registered holder
of the Ginnie Mae Certificates held in a trust fund, will have the right to
proceed directly against Ginnie Mae under the terms of the guaranty agreements
relating to those Ginnie Mae Certificates for any amounts that are not paid
when due.
All mortgage loans underlying a particular Ginnie Mae I Certificate must
have the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on a Ginnie
Mae I Certificate will equal the interest rate on the mortgage loans included
in the pool of mortgage loans underlying the Ginnie Mae I Certificate, less
one-half percentage point per annum of the unpaid principal balance of the
mortgage loans.
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).
22
Regular monthly installment payments on each Ginnie Mae Certificate held
in a trust fund will be comprised of interest due as specified on the Ginnie
Mae Certificate plus the scheduled principal payments on the FHA loans or VA
loans underlying the Ginnie Mae Certificate due on the first day of the month
in which the scheduled monthly installments on the Ginnie Mae Certificate are
due. Regular monthly installments on each Ginnie Mae Certificate are required
to be paid to the trustee as registered holder by the 15th day of each month
in the case of a Ginnie Mae I Certificate, and are required to be mailed to
the trustee by the 20th day of each month in the case of a Ginnie Mae II
Certificate. Any principal prepayments on any FHA loans or VA loans underlying
a Ginnie Mae Certificate held in a trust fund or any other early recovery of
principal on such loan will be passed through to the trustee as the registered
holder of the Ginnie Mae Certificate.
Ginnie Mae Certificates may be backed by graduated payment mortgage loans
or by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loans.
Payments due the registered holders of Ginnie Mae Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other Ginnie Mae Certificates and will include amounts
to be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of such mortgage loans, will be less than the
amount of stated interest on such mortgage loans. The interest not so paid
will be added to the principal of the graduated payment mortgage loans and,
together with interest thereon, will be paid in subsequent years. The
obligations of Ginnie Mae and of a Ginnie Mae Issuer will be the same
irrespective of whether the Ginnie Mae Certificates are backed by graduated
payment mortgage loans or "buydown" mortgage loans. No statistics comparable
to the FHA's prepayment experience on level payment, non-"buydown" mortgage
loans are available in respect of graduated payment or "buydown" mortgages.
Ginnie Mae Certificates related to a series of certificates may be held in
book-entry form.
If specified in a prospectus supplement, Ginnie Mae Certificates may be
backed by multifamily mortgage loans having the characteristics specified in
the prospectus supplement.
Federal Home Loan Mortgage Corporation or Freddie Mac. The Federal Home
Loan Mortgage Corporation (Freddie Mac) is a shareholder-owned, government
sponsored enterprise created pursuant to Title III of the Emergency Home
Finance Act of 1970, as amended. Freddie Mac was established primarily for the
purpose of increasing the availability of mortgage credit for the financing of
urgently needed housing. It seeks to provide an enhanced degree of liquidity
for residential mortgage investments primarily by assisting in the development
of secondary markets for conventional mortgages. The principal activity of
Freddie Mac currently consists of 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
23
loans. Freddie Mac Certificates are sold under the terms of a mortgage
participation certificate agreement. A Freddie Mac Certificate may be issued
under either Freddie Mac's Cash Program or its Guarantor Program.
Mortgage loans underlying the Freddie Mac Certificates held by a trust
fund will consist of mortgage loans with original terms to maturity of from
ten to 40 years. Each such mortgage loan must meet the applicable standards
set forth in the legislation that established Freddie Mac. The pool of loans
backing a Freddie Mac Certificate may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another Freddie Mac pool. Under the Guarantor
Program, however, the pool of loans backing a Freddie Mac Certificate may
include only whole loans or participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable certificate rate on the registered holder's pro
rata share of the unpaid principal balance outstanding on the underlying
mortgage loans represented by that Freddie Mac Certificate, whether or not
received. Freddie Mac also guarantees to each registered holder of a Freddie
Mac Certificate that the holder will collect all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such
holder's pro rata share thereof, but does not, except if and to the extent
specified in the related prospectus supplement for a series of certificates,
guarantee the timely payment of scheduled principal. Under Freddie Mac's Gold
PC Program, Freddie Mac guarantees the timely payment of principal based on
the difference between the pool factor, published in the month preceding the
month of distribution, and the pool factor published in such month of
distribution. Pursuant to its guarantees, Freddie Mac indemnifies holders of
Freddie Mac Certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. Freddie Mac may
remit the amount due on account of its guaranty of collection of principal at
any time after default on an underlying mortgage loan, but not later than (i)
30 days following foreclosure sale, (ii) 30 days following payment of the
claim by any mortgage insurer or (iii) 30 days following the expiration of any
right of redemption, whichever occurs later, but in any event no later than
one year after demand has been made upon the mortgagor for accelerated payment
of principal. In taking actions regarding the collection of principal after
default on the mortgage loans underlying Freddie Mac Certificates, including
the timing of demand for acceleration, Freddie Mac reserves the right to
exercise its judgment with respect to the mortgage loans in the same manner as
for mortgage loans which it has purchased but not sold. The length of time
necessary for Freddie Mac to determine that a mortgage loan should be
accelerated varies with the particular circumstances of each mortgagor, and
Freddie Mac has not adopted standards which require that the demand be made
within any specified period.
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.
24
Registered holders of Freddie Mac Certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial repayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or the seller thereof.
Freddie Mac is required to remit each registered Freddie Mac
Certificateholder's pro rata share of principal payments on the underlying
mortgage loans, interest at the Freddie Mac pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which those
payments are deemed to have been received by Freddie Mac.
Under Freddie Mac's Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a Freddie Mac
Certificate may exceed the pass-through rate on the Freddie Mac Certificate.
Under this program, Freddie Mac purchases groups of whole mortgage loans from
sellers at specified percentages of their unpaid principal balances, adjusted
for accrued or prepaid interest, which, when applied to the interest rate of
the mortgage loans and participations purchased, results in the yield
(expressed as a percentage) required by Freddie Mac. The required yield, which
includes a minimum servicing fee retained by the servicer, is calculated using
the outstanding principal balance. The range of interest rates on the mortgage
loans and participations in a particular Freddie Mac pool under the Cash
Program will vary since mortgage loans and participations are purchased and
assigned to a Freddie Mac pool based upon their yield to Freddie Mac rather
than on the interest rate on the underlying mortgage loans. Under Freddie
Mac's Guarantor Program, the pass-through rate on a Freddie Mac Certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of Freddie Mac's
management and guaranty income as agreed upon between the related seller and
Freddie Mac.
Freddie Mac Certificates duly presented for registration of ownership on
or before the last business day of a month are registered effective as of the
first day of the month. The first remittance to a registered holder of a
Freddie Mac Certificate will be distributed so as to be received normally by
the 15th day of the second month following the month in which the purchaser
becomes a registered holder of the Freddie Mac Certificates. Thereafter, such
remittance will be distributed monthly to the registered holder so as to be
received normally by the 15th day of each month. The Federal Reserve Bank of
New York maintains book-entry accounts with respect to Freddie Mac
Certificates sold by Freddie Mac, and makes payments of principal and interest
each month to the registered Freddie Mac Certificateholders in accordance with
the holders' instructions.
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
25
invest in mortgages, thereby expanding the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas.
Fannie Mae Certificates. Fannie Mae Certificates are Guaranteed Mortgage
Pass-Through Certificates representing fractional undivided interests in a
pool of mortgage loans formed by Fannie Mae. Each mortgage loan must meet the
applicable standards of the Fannie Mae purchase program. Mortgage loans
comprising a pool are either provided by Fannie Mae from its own portfolio or
purchased pursuant to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae Certificates held by a trust fund
will consist of conventional mortgage loans, FHA loans or VA loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a Fannie Mae Certificate are expected to be from eight to 15
years or from 20 to 40 years. The original maturities of substantially all of
the fixed rate level payment FHA loans or VA loans are expected to be 30
years.
Mortgage loans underlying a Fannie Mae Certificate may have annual
interest rates that vary by as much as two percentage points from one another.
The rate of interest payable on a Fannie Mae Certificate is equal to the
lowest interest rate of any mortgage loan in the related pool, less a
specified minimum annual percentage representing servicing compensation and
Fannie Mae's guaranty fee. Under a regular servicing option pursuant to which
the mortgagee or each other servicer assumes the entire risk of foreclosure
losses, the annual interest rates on the mortgage loans underlying a Fannie
Mae Certificate will be between 25 basis points and 250 basis points greater
than is its annual pass-through rate. Under a special servicing option
pursuant to which Fannie Mae assumes the entire risk for foreclosure losses,
the annual interest rates on the mortgage loans underlying a Fannie Mae
Certificate will generally be between 30 basis points and 255 basis points
greater than the annual Fannie Mae Certificate pass-through rate. If specified
in the related prospectus supplement, Fannie Mae Certificates may be backed by
adjustable rate mortgages.
Fannie Mae guarantees to each registered holder of a Fannie Mae
Certificate that it will distribute amounts representing the holder's
proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by the Fannie Mae Certificate on the
underlying mortgage loans, whether or not received, and the holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated mortgage loan, whether or not such principal amount is
actually recovered. The obligations of Fannie Mae under its 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.
26
Fannie Mae Certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae Certificates backed by
pools containing graduated payment mortgage loans or mortgage loans secured by
multifamily projects) are available in book-entry form only. Distributions of
principal and interest on each Fannie Mae Certificate will be made by Fannie
Mae on the 25th day of each month to the persons in whose name the Fannie Mae
Certificate is entered in the books of the Federal Reserve Banks (or
registered on the Fannie Mae Certificate register in the case of fully
registered Fannie Mae Certificates) as of the close of business on the last
day of the preceding month. With respect to Fannie Mae Certificates issued in
book-entry form, distributions will be made by wire and, with respect to fully
registered Fannie Mae Certificates, distributions will be made by check.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one
or more stripped mortgage-backed securities as described in this prospectus
and in the related prospectus supplement. Each Agency Security of this type
will represent an undivided interest in all or part of the principal
distributions - but not the interest distributions, or the interest
distributions - but not the principal distributions, or in some specified
portion of the principal and interest distributions on certain Freddie Mac,
Fannie Mae or Ginnie Mae Certificates. The underlying securities will be held
under a trust agreement by Freddie Mac, Fannie Mae or Ginnie Mae, each as
trustee, or by another trustee named in the related prospectus supplement.
Freddie Mac, Fannie Mae or Ginnie Mae will guaranty each stripped Agency
Security to the same extent as such entity guarantees the underlying
securities backing the stripped Agency Security, unless otherwise specified in
the related prospectus supplement.
Other Agency Securities. If specified in the related prospectus
supplement, a trust fund may include other mortgage pass-through certificates
issued or guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae. The
characteristics of any such mortgage pass-through certificates will be
described in the related prospectus supplement. If specified in the related
prospectus supplement, a combination of different types of Agency Securities
may be held in a trust fund.
Private Label Securities
General. Private Label Securities or PLS (i.e., private mortgage-backed
or asset-backed securities) may consist of
o pass-through certificates or participation certificates evidencing
an undivided interest in a pool of Single Family Loans, Home Equity
Loans, Multifamily Loans, Manufactured Housing Contracts or Home
Improvement Contracts,
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
27
the principal and interest distributions on certain mortgage loans. The
Private Label Securities will have been issued pursuant to a pooling and
servicing agreement, an indenture or similar agreement. Unless otherwise
specified in the related prospectus supplement, the seller/servicer of the
underlying loans will have entered into a PLS Agreement with a trustee under
that agreement. The PLS trustee or its agent, or a custodian, will possess the
mortgage loans underlying the Private Label Securities. The loans underlying
the Private Label Securities will be serviced by a PLS servicer directly or by
one or more sub-servicers 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;
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o each loan will have had an original term to stated maturity of not
less than five years and not more than 40 years;
o no loan that was more than 89 days delinquent as to the payment of
principal or interest will have been eligible for inclusion in the
assets under the related PLS agreement;
o each loan (other than a cooperative loan) will be required to be
covered by a standard hazard insurance policy (which may be a
blanket policy); and
o each loan (other than a cooperative loan or a Manufactured Housing
Contract) will be covered by a title insurance policy.
Credit Support Relating to Private Label Securities. Credit support in
the form of reserve funds, subordination of other private label securities
issued under the PLS agreement, letters of credit, surety bonds, insurance
policies or other types of credit support may be provided with respect to the
loans underlying the Private Label Securities or with respect to the Private
Label Securities themselves.
Additional Information. If the trust fund for a series of securities
includes Private Label Securities, the related prospectus supplement will
specify
o the aggregate approximate principal amount and type of Private Label
Securities to be included in the trust fund,
o the maximum original term-to-stated maturity of the PLS,
o the weighted average term-to-stated maturity of the PLS,
o the pass-through or certificate rate of the PLS,
o the weighted average pass-through or interest rate of the PLS,
o the PLS issuer, the PLS servicer (if other than the PLS issuer) and
the PLS trustee,
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
29
o the payment features of the mortgage loans,
o the approximate aggregate principal balance, if known, of underlying
loans insured or guaranteed by a governmental entity,
o the servicing fee or range of servicing fees with respect to the
loans, and
o the minimum and maximum stated maturities of the underlying loans at
origination.
Incorporation of Certain Information by Reference
We incorporate in this prospectus by reference all documents and reports
filed by the applicable depositor, Greenwich Capital Acceptance, Inc. (GCA) or
Financial Acceptance Securities Corp. (FASCO), with respect to a trust fund
pursuant to Section 13(a), 14 or 15(d) of the Securities Exchange Act of 1934,
as amended, prior to the termination of the offering of certificates
evidencing interests in that trust fund. Upon request by any person to whom
this prospectus is delivered in connection with the offering of one or more
classes of certificates, the applicable depositor will provide without charge
a copy of any such documents and/or reports incorporated herein by reference,
in each case to the extent that the documents or reports relate to those
classes of certificates, other than the exhibits to the documents (unless the
exhibits are specifically incorporated by reference in such documents).
Requests to the depositors should be directed in writing to: Paul D.
Stevelman, Greenwich Capital Acceptance, Inc. or Financial Acceptance
Securities Corp. as applicable, 600 Steamboat Road, Greenwich, Connecticut
06830, telephone number (203) 625-2700. Each depositor has determined that its
financial statements are not material to the offering of any of the
securities.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and
Exchange Commission at 450 Fifth Street, N.W., Washington, DC 20549. Investors
may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
http:\\www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each trust fund, that file
electronically with the SEC.
Use of Proceeds
The net proceeds to be received from the sale of the securities will be
applied by the applicable depositor to the purchase of trust fund assets or
will be used by the depositor for general corporate purposes. The depositors
expect to sell securities in series from time to time, but the timing and
amount of offerings of securities will depend on a number of factors,
including the volume of assets acquired by the depositors, prevailing interest
rates, availability of funds and general market conditions.
The Depositors
Greenwich Capital Acceptance, Inc. is a Delaware corporation organized on
April 23, 1987, and Financial Asset Securities Corp. is a Delaware corporation
organized on August 2, 1995, in each case for the limited purpose of
acquiring, owning and transferring mortgage assets and selling interests in
those assets or bonds secured by those assets. Each of the depositors is a
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limited purpose finance subsidiary of Greenwich Capital Holdings, Inc. and an
affiliate of Greenwich Capital Markets, Inc. Greenwich Capital Markets, Inc.
is a registered broker-dealer engaged in the U.S. government securities market
and related capital markets business. Each of the depositors maintains its
principal office at 600 Steamboat Road, Greenwich, Connecticut 06830 and the
telephone number is (203) 625-2700.
Neither the depositors nor any of their affiliates will ensure or
guarantee distributions on the securities of any series.
Loan Program
The depositor will have purchased the loans, either directly or through
affiliates, from sellers. Unless otherwise specified in the related prospectus
supplement, the loans acquired by the depositor will have been originated in
accordance with the underwriting criteria specified under the heading
"--Underwriting Standards" below.
Underwriting Standards
Unless otherwise specified in the related prospectus supplement, each
seller will represent and warrant that all the loans that it originated and/or
sold to the depositor or one of the depositor's affiliates will have been
underwritten in accordance with standards consistent with those utilized by
institutional lenders generally during the period of origination for similar
types of loans. As to any loan insured by the FHA or partially guaranteed by
the VA, the related seller will represent that it has complied with the
underwriting policies of the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to
evaluate a prospective borrower's credit standing and repayment ability, and
the value and adequacy of the mortgaged property as collateral. In general, a
prospective borrower applying for a loan is required to fill out a detailed
application designed to provide to the underwriting officer pertinent credit
information, including the principal balance and payment history of any senior
lien loan on the 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
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generally is based on the market value of comparable homes, the estimated
rental income (if considered applicable by the appraiser) and the cost of
replacing the subject home. In connection with a Manufactured Housing
Contract, the appraisal is based on recent sales of comparable manufactured
homes and, when deemed applicable, a replacement cost analysis based on the
cost of a comparable manufactured home. In connection with a Multifamily Loan,
the appraisal must specify whether an income analysis, a market analysis or a
cost analysis was used. An appraisal employing the income approach to value
analyzes a multifamily project's cashflow, expenses, capitalization and other
operational information in determining the property's value. The market
approach to value focuses its analysis on the prices paid for the purchase of
similar properties in the multifamily project's area, with adjustments made
for variations between these other properties and the multifamily project
being appraised. The cost approach calls for the appraiser to make an estimate
of land value and then determine the current cost of reproducing the building
less any accrued depreciation. In any case, the value of the property being
financed, as indicated by the appraisal, must be such that it currently
supports, and is anticipated to support in the future, the outstanding loan
balance.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available
o to meet the borrower's monthly obligations on the proposed loan,
generally determined on the basis of the monthly payments due in the
year of origination, and other expenses related to the mortgaged
property such as property taxes and hazard insurance, and
o to meet monthly housing expenses and other financial obligations and
monthly living expenses.
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.
32
Qualifications of Sellers
Unless otherwise specified in the related prospectus supplement, each
seller will be required to satisfy the qualifications set forth in the
following sentence. Each seller must
o be an institution experienced in originating and servicing loans of
the type contained in the related pool in accordance with accepted
practices and prudent guidelines,
o maintain satisfactory facilities to originate and service the loans,
o be a seller/servicer approved by either Fannie Mae or Freddie Mac,
and
o be a mortgagee approved by the FHA or an institution the deposit
accounts in which are insured by the Federal Deposit Insurance
Corporation (FDIC).
Representations by Sellers; Repurchases or Substitutions
Each seller will have made representations and warranties in respect of
the loans sold by that seller and evidenced by a series of securities. These
representations and warranties, unless otherwise provided in the related
prospectus supplement, generally include the following:
o Except in the case of a cooperative loan, each Single Family Loan,
Home Equity Loan or Multifamily Loan has a title insurance policy,
required hazard insurance policy and any required primary mortgage
insurance policy, each of which was in effect at the origination of
the loan and remained in effect on the date that the loan was
purchased from the seller by or on behalf of the depositor. If the
related mortgaged property is located in an area where title
insurance policies are generally not available, an attorney's
certificate of title may be substituted.
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.
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If specified in the related prospectus supplement, the representations
and warranties of a seller in respect of a loan will be made not as of the
related cut-off date but as of the date on which the seller sold the loan to
the depositor or one of its affiliates. Under these circumstances, a
substantial period of time may have elapsed between that date and the date of
initial issuance of the series of securities evidencing an interest in, or
secured by, the loan. Since the representations and warranties of a seller do
not address events that may occur following the sale of the loan by that
seller, the repurchase obligation described in the following paragraph will
not arise if the relevant event that would otherwise have given rise to the
obligation occurs after the date when the seller sold the loan to the
depositor or one of its affiliates. However, the depositor will not include
any loan in a trust fund if anything has come to the depositor's attention
that would cause it to believe that the representations and warranties of the
related seller regarding that loan will not be accurate and complete in all
material respects as of the date when the related series of securities is
issued. If the master servicer is also a seller of loans for a particular
series, these representations will be in addition to the representations and
warranties made by the master servicer in its capacity as master servicer.
Unless otherwise specified in the related prospectus supplement, the
seller will make certain representations and warranties in connection with
Manufactured Housing Contracts included in the trust with respect to the
enforceability of coverage under any related insurance policy or hazard
insurance policy. The seller, if required by the rating agencies rating the
related issue of securities, will obtain a surety bond, guaranty, letter of
credit or other acceptable instrument to support its repurchase or
substitution obligation specified in the immediately following paragraph.
The master servicer, or the trustee if the master servicer is the seller,
will promptly notify the relevant seller of any breach of any representation
or warranty made by that seller in respect of a loan which materially and
adversely affects the interests of the securityholders in the loan. Unless
otherwise specified in the related prospectus supplement, if the seller cannot
cure the 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.
34
If a REMIC election is to be made with respect to a trust fund, unless
otherwise provided in the related prospectus supplement, the master servicer
or a holder of the related residual certificate will be obligated to pay any
prohibited transaction tax which may arise in connection with a repurchase or
substitution. Unless otherwise specified in the related prospectus supplement,
the master servicer will be entitled to reimbursement for any such payment
from the assets of the related trust fund or from any holder of the related
residual certificate. See "Description of the Securities--General" in this
prospectus.
Neither the depositor nor the master servicer - unless the master
servicer is the seller - will be obligated to purchase a loan if the seller
defaults on its obligation to do so. No assurance can be given that sellers
will carry out their respective repurchase or substitution obligations with
respect to the loans. However, to the extent that a breach of a representation
and warranty of a seller may also constitute a breach of a representation made
by the master servicer, the master servicer may have a repurchase or
substitution obligation as described under the heading "Operative
Agreements--Assignment of Trust Fund Assets" in this prospectus.
Description of the Securities
Either Greenwich Capital Acceptance, Inc. or Financial Asset Securities
Corp., as depositor, will establish a trust fund for each series of
securities. A particular series of securities will consist of mortgage-backed
or asset-backed certificates or notes or both certificates and notes.
Each series of certificates will be issued pursuant to a pooling and
servicing agreement or a trust agreement, dated as of the related cut-off
date, among the depositor, the trustee and, if the trust includes loans, the
related master servicer. The provisions of each pooling and servicing
agreement or trust agreement will vary depending upon the nature of the
related certificates and 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
35
Asset Securities Corp., as applicable, 600 Steamboat Road, Greenwich,
Connecticut 06830, Attention: Asset Backed Finance Group.
General
Unless otherwise specified in the related prospectus supplement, the
securities of each series will
o be issued in fully registered form only, in the authorized
denominations specified in the prospectus supplement,
o evidence specified beneficial ownership interests in the trust fund
assets, in the case of a series of certificates, or be secured by
the pledge of the trust fund assets, in the case of a series of
notes, and
o not be entitled to payments in respect of the assets included in any
other trust fund established by the depositor.
The securities will not represent obligations of the depositor or any of its
affiliates. The loans will not be insured or guaranteed by any governmental
entity or other person, unless otherwise specified in the related prospectus
supplement.
To the extent provided in the related operative agreements, each trust
fund will consist of the following:
o the assets as from time to time are subject to the related
agreement, exclusive of any amounts specified in the related
prospectus supplement as "retained interest";
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,
36
o a special hazard insurance policy,
o a bankruptcy bond,
o one or more letters of credit,
o a surety bond,
o guaranties, or
o similar instruments or other agreements.
Each series of securities will be issued in one or more classes. Each
class of securities of a series will evidence beneficial ownership of a
specified portion or percentage - which may be 0% - of future interest
payments and a specified portion or percentage - which may be 0% - of future
principal payments on the assets in the related trust fund. A series of
securities may include one or more classes that are senior in right to payment
to one or more other classes of securities of the series. A series or classes
of securities may be covered by insurance policies, surety bonds or other
forms of credit enhancement, in each case as described in this prospectus and
in the related prospectus supplement. Distributions on one or more classes of
a series of securities may be made prior to being made on one or more other
classes, after the occurrence of specified events, in accordance with a
schedule or formula, on the basis of collections from designated portions of
the trust fund assets or on a different basis, in each case as specified in
the related prospectus supplement. The timing and amounts of distributions may
vary among classes or over time as specified in the related prospectus
supplement.
Unless otherwise specified in the related prospectus supplement,
distributions of principal and interest, or, where applicable, of principal
only or interest only, on the related securities will 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
securities 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
Section 4975 of the Internal Revenue Code may result in
37
"prohibited transactions" within the meaning of Section 406 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 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:
38
(i) the aggregate of all previously undistributed payments on account of
principal, including principal prepayments, if any, and prepayment
penalties, if so provided in the related prospectus supplement, and
interest on the mortgage loans in the related trust fund (including
Liquidation Proceeds and Insurance Proceeds and amounts drawn under
letters of credit or other credit enhancement instruments as
permitted thereunder and as specified in the related operative
agreement) received by the master servicer after the cut-off date
and on or prior to the related determination date specified in the
prospectus supplement except:
o all payments which were due on or before the cut-off date;
o all Liquidation Proceeds and all Insurance Proceeds, all
principal prepayments and all other proceeds of any loan
purchased by the depositor, the master servicer, any
sub-servicer or any seller pursuant to the related operative
agreement that were received after the prepayment period
specified in the prospectus supplement and all related payments
of interest representing interest for any period after the
related collection period;
o all scheduled payments of principal and interest due on a date
or dates subsequent to the first day of the month of
distribution;
o amounts received on particular loans as late payments of
principal or interest or other amounts required to be paid by
borrowers, but only to the extent of any unreimbursed advance
in respect of those loans made by the master servicer, the
related sub-servicers, support servicers or the trustee;
o amounts representing reimbursement, to the extent permitted by
the related operative agreement and as described under the
heading "--Advances" immediately below, for advances made by
the master servicer, sub-servicers, 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
39
(v) if applicable, the amount of any prepayment interest shortfall.
Distributions of Interest. Unless otherwise specified in the related
prospectus supplement, interest will accrue on the aggregate principal balance
of each class of securities or the aggregate notional principal balance of
each class of securities entitled to distributions of interest only at the
pass-through rate (or interest rate) and for the periods specified in the
prospectus supplement. Except in the case of a class of accrual securities
that provides for interest that accrues but is not currently payable, the
pass-through rate may be a fixed rate or an adjustable rate that adjusts as
specified in the prospectus supplement. Interest accrued during each specified
period on each class of securities entitled to interest will be distributable
on the distribution dates specified in the related prospectus supplement, to
the extent that funds are available, until the aggregate principal balance of
the securities of that class has been distributed in full or, in the case of a
class of securities entitled only to distributions allocable to interest,
until the aggregate notional principal balance of that class is reduced to
zero or for the period of time designated in the related prospectus
supplement. The original principal balance of each security will equal the
aggregate distributions allocable to principal to which that security is
entitled. Unless otherwise specified in the related prospectus supplement,
distributions allocable to interest on each security that is not entitled to
distributions allocable to principal will be calculated based on the notional
principal balance of that security. The notional principal balance of a
security will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in expressing
the calculation of interest and for certain other purposes.
With respect to any class of accrual securities, if specified in the
related prospectus supplement, any interest that has accrued but is not paid
on any distribution date will be added to the aggregate principal balance of
that class on that distribution date. Unless otherwise specified in the
related prospectus supplement, distributions of interest on each class of
accrual securities will commence only after the occurrence of the events
specified in the prospectus supplement. 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
40
o in the case of a class of accrual securities, all interest accrued
but not then distributable on that class and
subject to
o in the case of adjustable rate certificates, the effect of any
negative amortization.
The related prospectus supplement will specify the method by which the amount
of principal to be distributed on the securities on each distribution date
will be calculated and the manner in which the amount will be allocated among
the classes of securities entitled to distributions of principal.
If so provided in the related prospectus supplement, one or more classes
of senior securities will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments in the
percentages and under the circumstances or for the periods specified in the
prospectus supplement. Any allocation of principal prepayments to a class or
classes of senior securities will have the effect of accelerating the
amortization of the senior securities while increasing the interests evidenced
by the subordinated securities in the related trust fund. Increasing the
interests of the subordinated securities relative to that of the senior
securities is intended to preserve the availability of the subordination
provided by the subordinated securities. See "Credit
Enhancement--Subordination" in this prospectus.
Unscheduled Distributions. If specified in the related prospectus
supplement, the securities will be subject to receipt of distributions before
the next scheduled distribution date under the circumstances and in the manner
described in this paragraph and the following 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.
41
Advances
Unless otherwise provided in the related prospectus supplement, the
master servicer will be required to make advances, from its own funds, from
funds advanced by sub-servicers or support servicers or from funds held in the
security account for future distributions to the securityholders. On each
distribution date, the amount of any advances will be equal to the aggregate
of payments of principal and interest that were delinquent on the related
determination date and were not advanced by any sub-servicer, subject to the
master servicer's determination that these advances will be recoverable from
late payments by borrowers, Liquidation Proceeds, Insurance Proceeds or
otherwise. In the case of cooperative loans, the master servicer also will be
required to advance any unpaid maintenance fees and other charges under the
related proprietary leases as specified in the related prospectus supplement.
In making advances, the master servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to the
securityholders rather than to guarantee or insure against losses. If advances
are made by the master servicer from cash being held for future distribution
to securityholders, the master servicer will replace those funds on or before
any future distribution date to the extent that funds in the applicable
security account on a distribution date would be less than the amount required
to be available for distributions to securityholders on that date. Any funds
advanced by the master servicer will be reimbursable to the master servicer
out of recoveries on the specific loans with respect to which the advances
were made (e.g., late payments made by the related borrower, any related
Insurance Proceeds, Liquidation Proceeds or proceeds of any loan purchased by
a sub-servicer or a seller under the circumstances described in this
prospectus). Advances by the master servicer and any advances by a
sub-servicer or a support servicer also will be reimbursable to the master
servicer or sub-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
42
make the advance in its capacity as successor servicer. If the trustee makes
an advance, it will be entitled to be reimbursed for that advance to the same
extent and degree as the master servicer, a sub-servicer or a support servicer
is entitled to be reimbursed for advances. See "--Distributions on Securities"
above.
Reports to Securityholders
Prior to or concurrently with each distribution on a distribution date
and except as otherwise set forth in the related prospectus supplement, the
master servicer or the trustee will furnish to each securityholder of record
of the related series a statement setting forth, to the extent applicable to
that series of securities, among other things:
o the amount of the distribution that is allocable to principal,
separately identifying the aggregate amount of any principal
prepayments and, if specified in the prospectus supplement, any
prepayment penalties included in the distribution;
o the amount of the distribution allocable to interest;
o the amount of any advances;
o the aggregate amount (a) otherwise allocable to the subordinated
securityholders on that distribution date and (b) withdrawn from the
reserve fund, if any, that is included in the amounts distributed to
the senior securityholders;
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;
43
o the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure and, if the real estate
secured a Multifamily Loan, any additional information specified in
the prospectus supplement;
o if a class is entitled only to a specified portion of interest
payments on the loans in the related pool, the pass-through rate, if
adjusted from the date of the last statement, of the loans expected
to be applicable to the next distribution to that class;
o if applicable, the amount remaining in any reserve account at the
close of business on that distribution date;
o the pass-through rate as of the day prior to the immediately
preceding distribution date; and
o the amounts remaining under any letters of credit, pool policies or
other forms of credit enhancement applicable to the certificates.
Where applicable, any amount set forth in the above list may be expressed
as a dollar amount per single security of the relevant class having the
percentage interest specified in the prospectus supplement. The report to
securityholders for any series of securities may include additional or other
information of a similar nature to that specified in the above list.
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,
44
o the use of a cross-support feature,
o a pool insurance policy, bankruptcy bond, special hazard insurance
policy, surety bond, letter of credit, guaranteed investment
contract, or
o any other method of credit enhancement described in the related
prospectus supplement.
Unless otherwise specified in the related prospectus supplement, any credit
enhancement will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance of the securities and
interest. If losses occur which exceed the amount covered by the credit
enhancement or which are not covered by the credit enhancement,
securityholders will bear their allocable share of deficiencies.
Subordination
If specified in the related prospectus supplement, protection afforded to
holders of one or more classes of the senior securities of a series by means
of the subordination feature will be accomplished by the holders of one or
more other classes of that series having a preferential right to distributions
in respect of scheduled principal, principal prepayments, interest or any
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.
45
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
46
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
47
insurance policy, the master servicer will not be required to expend its own
funds to restore the damaged property unless it determines that
o the restoration will increase the proceeds to securityholders on
liquidation of the related loan after reimbursement to the master
servicer of its expenses, and
o the master servicer will be able to recover its expenses from
proceeds of the sale of the property or proceeds of the related pool
insurance policy or any related primary mortgage insurance policy.
Unless otherwise specified in the related prospectus supplement, no pool
insurance policy will insure against losses sustained by reason of a default
arising, among other things, from
o fraud or negligence in the origination or servicing of a loan,
including misrepresentation by the borrower, the originator or
persons involved in the origination of the loan, or
o failure to construct a mortgaged property in accordance with plans
and specifications.
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
48
principal amount and interest rates of the mortgage loans insured. Single
Family Loans insured by the FHA generally require a minimum down payment of
approximately 5% of the original principal amount of the loan. No FHA-insured
Single Family Loan relating to a series may have an interest rate or original
principal amount exceeding the applicable FHA limits at the time the loan was
originated.
The insurance premiums for Single Family Loans insured by the FHA are
collected by lenders approved by the Department of Housing and Urban
Development (HUD), or by the master servicer or any sub-servicer, and are paid
to the FHA. The regulations governing FHA single-family mortgage insurance
programs provide that insurance benefits are payable either upon foreclosure
(or other acquisition of possession) and conveyance of the mortgaged property
to HUD or upon assignment of the defaulted mortgage loan to HUD. With respect
to a defaulted FHA-insured Single Family Loan, the master servicer or any
sub-servicer is limited in its ability to initiate foreclosure proceedings.
When it is determined by the master servicer or sub-servicer or HUD that the
default was caused by circumstances beyond the mortgagor's control, the master
servicer or such sub-servicer is expected to make an effort to avoid
foreclosure by entering, if feasible, into one of a number of available forms
of forbearance plans with the mortgagor. These 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
49
Family Loan, bears interest from the date which is 30 days after the
mortgagor's first uncorrected failure to perform any obligation to make any
payment due under the mortgage loan and, upon assignment, from the date of
assignment to the date of payment of the claim, in each case at the same
interest rate as the applicable HUD debenture interest rate.
Single Family Loans designated in the related prospectus supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended, which permits a veteran,
the spouse of a veteran in certain cases, to obtain a mortgage loan guaranteed
by the VA covering financing of the purchase of a one- to four-family dwelling
unit at interest rates permitted by the VA. The program has no mortgage loan
limits, requires no down payment from the purchaser and permits the guaranty
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 guaranty that may be issued by the VA under a VA-guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 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
50
o loss by reason of damage to mortgaged properties caused by certain
hazards -including earthquakes and, to a limited extent, tidal waves
and related water damage or as otherwise specified in the prospectus
supplement - not insured against under the standard form of hazard
insurance policy for the respective states in which the mortgaged
properties are located or under a flood insurance policy if the
mortgaged property is located in a federally designated flood area,
and
o loss caused by reason of the application of the coinsurance clause
contained in hazard insurance policies.
See "Operative Agreements--Hazard Insurance" in this prospectus. No special
hazard insurance policy will cover losses occasioned by fraud or conversion by
the trustee or master servicer, war, insurrection, civil war, certain
governmental action, errors in design, faulty workmanship or materials (except
under certain circumstances), nuclear or chemical reaction, flood (if the
mortgaged property is located in a federally designated flood area), nuclear
or chemical contamination and certain other risks. The amount of coverage
under any special hazard insurance policy will be specified in the related
prospectus supplement. Each special hazard 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.
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Since each special hazard insurance policy will be designed to permit
full recovery under the mortgage pool insurance policy in circumstances in
which recoveries would otherwise be unavailable because mortgaged properties
have been damaged by a cause not insured against by a standard hazard policy
and thus would not be restored, each operative agreement will provide that,
unless otherwise specified in the related prospectus supplement, the master
servicer will be under no obligation to maintain the special hazard insurance
policy once the related pool insurance policy has been terminated or been
exhausted due to payment of claims.
To the extent specified in the related prospectus supplement, the master
servicer may deposit in a special trust account, cash, an irrevocable letter
of credit or any other instrument acceptable to each rating agency named in
the prospectus supplement, in order to provide protection in lieu of or in
addition to that provided by a special hazard insurance policy. The amount of
any special hazard insurance policy or of the deposit to the special trust
account relating to securities may be reduced so long as the reduction will
not result in a downgrading of the rating of the securities by any rating
agency named in the prospectus supplement.
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.
52
FHA Insurance on Multifamily Loans
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the National Housing Act
allow HUD to insure mortgage loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of mortgage loans made under Sections
221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of a mortgage loan may be up to 40 years and the ratio of loan amount to
property replacement cost can be up to 90%.
Section 223(f) of the National Housing Act allows HUD to insure mortgage
loans made for the purchase or refinancing of existing apartment projects
which are at least three years old. Section 244 also provides for co-insurance
of mortgage loans made under Section 223(f). Under Section 223(f), the loan
proceeds cannot be used for substantial rehabilitation work but repairs may be
made for, generally up to the greater of 15% of the value of the project or a
dollar amount per apartment unit established from time to time by HUD. In
general the loan term may 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
53
agreements of United States government securities with eligible commercial
banks. If a letter of credit is deposited with the trustee, the letter of
credit will be irrevocable. Unless otherwise specified in the related
prospectus supplement, any instrument deposited in a reserve account will name
the trustee, in its capacity as trustee for the securityholders, as
beneficiary and will be issued by an entity acceptable to each rating agency
named in the prospectus supplement. Additional information with respect to
instruments deposited in the reserve account will be set forth in the related
prospectus supplement.
Any amounts deposited, and payments on instruments deposited, in a
reserve account will be available for withdrawal from the reserve account for
distribution to securityholders, for the purposes, in the manner and at the
times specified in the related prospectus supplement.
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.
54
Financial Instruments
If specified in the related prospectus supplement, the trust fund may
include one or more swap arrangements or other financial instruments that are
intended to meet the following goals:
o to convert the payments on some or all of the assets from fixed to
floating payments, or from floating to fixed, or from floating based
on a particular index to floating based on another index;
o to provide payments in the event that any index rises above or falls
below specified levels; or
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
55
first mortgage loans. On the other hand, because Home Equity Loans that are
revolving credit line loans generally are not fully amortizing, the absence of
voluntary borrower prepayments could cause rates of principal payments to be
lower than, or similar to, those of traditional fully-amortizing first
mortgages. The prepayment experience of the related trust fund may also be
affected by the frequency and amount of any future draws on any revolving
credit line loans. Other factors that might be expected to affect the
prepayment rate of a pool of Home Equity Loans or Home Improvement Contracts
include the amounts of, and interest rates on, the underlying senior mortgage
loans, and the use of first mortgage loans as long-term financing for home
purchase and junior mortgage loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses and purchases of
consumer durables such as 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
56
operative agreement and certain legal matters that may affect the prepayment
experience of the loans.
The rate of prepayments of conventional mortgage loans has fluctuated
significantly in recent years. In general, prepayment rates may be influenced
by a variety of economic, geographic, social and other factors, including
changes in housing needs, job transfers, unemployment and servicing decisions.
In general, however, if prevailing rates fall significantly below the loan
rate borne by a loan, that loan is likely to be subject to a higher prepayment
rate than would be the case if prevailing interest rates remain at or above
its rate. Conversely, if prevailing interest rates rise appreciably above the
loan rate borne by a loan, that loan is likely to experience a lower
prepayment rate than would be the case if prevailing rates remain at or below
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
57
bearing different loan rates will affect the yield on the securities. In
general, the effective yield to securityholders will be slightly lower than
the yield otherwise produced by the applicable security pass-through rate and
purchase price because, while interest generally will accrue on each loan from
the first day of the month, the distribution of interest generally will not be
made earlier than the month following the month of accrual.
Under certain circumstances, the master servicer, the holders of the
residual interests in a REMIC or any other person named in the related
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
58
are similar to those described below, they will be described more fully in the
related prospectus supplement.
Assignment of Trust Fund Assets
Assignment of the Trust Fund Loans. When the securities of a series are
issued, the depositor named in the prospective supplement will cause the loans
comprising the related trust fund to be assigned to the trustee, together with
all principal and interest received by or on behalf of the depositor with
respect to those loans after the cut-off date, other than principal and
interest due on or before the cut-off date and other than any retained
interest specified in the related 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
59
o any other security documents as may be specified in the related
prospectus supplement, including those relating to any senior
lienholder interests in the related mortgaged property.
Unless otherwise specified in the related prospectus supplement, the
depositor will promptly cause the assignments of any Single Family Loan, Home
Equity Loan and Multifamily Loan (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
60
defaults on its obligation, unless the breach also constitutes a breach of the
representations or warranties of the master servicer or the depositor, as the
case may be. Unless otherwise specified in the related prospectus supplement,
the seller's obligation to cure, purchase or substitute constitutes the sole
remedy available to the securityholders or the trustee for the omission of, or
a material defect in, a constituent loan document.
The trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the loans as agent of the trustee.
The master servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the agreement. Upon a breach of any representation of the
master servicer which materially and adversely affects the interests of the
securityholders in a loan, the master servicer will be obligated either to
cure the breach in all material respects or to purchase the loan. Unless
otherwise specified in the related prospectus supplement, this obligation to
cure, purchase or substitute constitutes the sole remedy available to the
securityholders or the trustee for a breach of representation by the master
servicer.
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 sub-servicing account which meets the
requirements and is otherwise acceptable
61
to the master servicer. A sub-servicing account must be established with a
Federal Home Loan Bank or with a depository institution (including the
sub-servicer if it is a depository institution), the accounts in which are
insured by the Federal Deposit Insurance Corporation (FDIC). If a
sub-servicing account is maintained at an institution that is a Federal Home
Loan Bank or an FDIC-insured institution and, in either case, the amount on
deposit in the sub-servicing account exceeds the FDIC insurance coverage
amount, then such excess amount must be remitted to the master servicer within
one business day after receipt. In addition, the sub-servicer must maintain a
separate account for escrow and impound funds relating to the loans. Each
sub-servicer is required to deposit into its sub-servicing account on a daily
basis all amounts that it receives in respect of the loans described
immediately below under "--Sub-Servicing by Sellers", less its servicing or
other compensation. On or before the date specified in the sub-servicing
agreement, the sub-servicer will remit to the master servicer or the trustee
all funds held in the sub-servicing account with respect to the loans that are
required to be remitted. The sub-servicer is also required to advance, on the
scheduled remittance date, an amount corresponding to any monthly installment
of principal and interest, less its servicing or other compensation, on any
loan the payment of which was not received from the borrower. Unless otherwise
specified in the related prospectus supplement, this obligation of each
sub-servicer to advance continues up to and including the first of the month
following the date on which the related mortgaged property is 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
62
pending each succeeding distribution date in permitted investments. Unless
otherwise specified in the related prospectus supplement, the master servicer
or its designee will be entitled to receive any interest or other income
earned on funds in the security account as additional compensation and will be
obligated to deposit in the security account the amount of any loss
immediately as realized. The security account may be maintained with the
master servicer or with a depository institution that is an affiliate of the
master servicer, provided that the master servicer or its affiliate, as
applicable, meets the standards set forth above.
On a daily basis, the master servicer will deposit in the certificate
account for each trust fund, to the extent applicable and unless otherwise
specified in the related prospectus supplement and provided in the pooling and
servicing agreement, the following payments and collections received, or
advances made, by the master servicer or on its behalf subsequent to the
cut-off date, other than payments due on or before the cut-off date and
exclusive of any amounts representing a retained interest:
o all payments on account of principal, including principal
prepayments and, if specified in the related prospectus supplement,
prepayment penalties, on the loans;
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.
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Pre-Funding Account
If so provided in the related prospectus supplement, the master servicer
will establish and maintain a pre-funding account in the name of the trustee
on behalf of the related securityholders into which the applicable depositor
will deposit the pre-funded amount on the related closing date. The trustee
will use the pre-funded amount to purchase subsequent loans from the depositor
from time to time during the funding period which generally runs from the
closing date to the date specified in the related prospectus supplement. At
the end of the funding period, any amounts remaining in the pre-funding
account will be distributed to the related securityholders in the manner and
priority specified in the related prospectus supplement as a prepayment of
principal of the related securities.
Sub-Servicing of Loans
Each seller of a loan or any other servicing entity may act as the
sub-servicer for that loan pursuant to a sub-servicing agreement which will
not contain any terms inconsistent with the related operative agreement. While
each sub-servicing agreement will be a contract solely between the master
servicer and the related sub-servicer, the operative agreement pursuant to
which a series of securities is issued will provide that, the trustee or any
successor master servicer must recognize the sub-servicer's rights and
obligations under the sub-servicing 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;
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o inspecting and managing mortgaged properties under certain
circumstances;
o maintaining accounting records relating to the loans; and
o to the extent specified in the related prospectus supplement,
maintaining additional insurance policies or credit support
instruments and filing and settling claims under them.
A sub-servicer will also be obligated to make advances in respect of
delinquent installments of principal and interest on loans, as described more
fully in this prospectus under "--Payments on Loans; Deposits to Security
Account" above, and in respect of certain taxes and insurance premiums not
paid on a timely basis by borrowers.
As compensation for its servicing duties, each sub-servicer will be
entitled to a monthly servicing fee, to the extent the scheduled payment on
the related loan has been collected, in the amount set forth in the related
prospectus supplement. Each sub-servicer is also entitled to collect and
retain, as part of its servicing compensation, any prepayment or late charges
provided in the note or related instruments. Each sub-servicer will be
reimbursed by the master servicer for certain expenditures which it makes,
generally to the same extent the master servicer would be reimbursed under the
agreement. The master servicer may purchase the servicing of loans if 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
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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 agreementand 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
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due-on-sale clause, or if the loan is insured by the FHA or partially
guaranteed by the VA, the master servicer will enter into an assumption and
modification agreement with the person to whom such property has been or is
about to be conveyed. Pursuant to the assumption agreement, the transferee of
the property becomes liable for repayment of the loan and, to the extent
permitted by applicable law, the original borrower also remains liable on the
loan. Any fee collected by or on behalf of the master servicer for entering
into an assumption agreement will be retained by or on behalf of the master
servicer as additional servicing compensation. In the case of Multifamily
Loans and unless otherwise specified in the related prospectus supplement, the
master servicer will agree to exercise any right it may have to accelerate the
maturity of a Multifamily Loan to the extent it has knowledge of any further
encumbrance of the related mortgaged property effected in violation of any
applicable due-on-encumbrance clause. See "Material Legal Aspects of the
Mortgage Loans--Due-on-Sale Clauses" in this prospectus. In connection with
any assumption, the terms of the original loan may not be changed.
With respect to cooperative loans, any prospective purchaser of a
cooperative unit will generally have to obtain the approval of the board of
directors of the relevant cooperative before purchasing the shares and
acquiring rights under the related proprietary lease or occupancy agreement.
See "Material Legal Aspects of the Loans" in this prospectus. This approval is
usually based on the purchaser's income and net worth and numerous other
factors. Although the 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
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is located. This coverage will be in an amount not less than the replacement
value of the improvements or manufactured home securing the loan or the
principal balance owing on the loan, whichever is less. All amounts collected
by the master servicer under any hazard policy will be deposited in the
related security account, except for amounts to be applied to the restoration
or repair of the mortgaged property or released to the borrower in accordance
with the master servicer's normal servicing procedures. In the event that the
master servicer maintains a blanket policy insuring against hazard losses on
all the loans comprising part of a trust fund, it will conclusively be deemed
to have satisfied its obligation to maintain hazard insurance. A blanket
policy may contain a deductible clause, in which case the master servicer will
be required to deposit into the related security account from its own funds
the amounts which would have been deposited in the security account but for
the deductible clause. Any additional insurance coverage for mortgaged
properties with respect to a pool of Multifamily Loans will be specified in
the related prospectus supplement.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements or manufactured home
securing a loan by fire, lightning, explosion, smoke, windstorm and hail,
riot, strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Although the policies relating to the 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,
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the effect of this requirement may be that, in the event of a partial loss,
hazard insurance proceeds will be insufficient to restore the damaged property
fully. If specified in the related prospectus supplement, a special hazard
insurance policy will be obtained to insure against certain of the uninsured
risks described. See "Credit Enhancement--Special Hazard Insurance Policies"
in this prospectus.
The master servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
cooperative loan. Generally, the cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a cooperative and the related
borrower on a cooperative loan do not maintain such insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to the borrower's cooperative
dwelling or the cooperative's building could significantly reduce the value of
the collateral securing the cooperative loan to the extent not covered by
other credit support.
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.
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Primary mortgage insurance policies generally reimburse losses sustained
by reason of defaults in payments by borrowers. Primary mortgage insurance
policies do not insure against, and exclude from coverage, a loss sustained by
reason of a default arising from or involving the following matters, among
others:
o fraud or negligence in origination or servicing of the loan,
including misrepresentation by the originator, borrower or other
persons involved in the origination of the loan,
o failure to construct the related mortgaged property in accordance
with specified plans,
o physical damage to the mortgaged property and
o lack of approval by the primary mortgage insurance policy insurer of
the master servicer or sub-servicer to act as servicer of the loan.
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
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policy carrier, and all collections under the policy will be deposited in the
sub-servicing account. In all other cases, the master servicer, on behalf of
itself, the trustee and the securityholders, will present claims to the
carrier of each primary mortgage insurance policy and will take such
reasonable steps as are necessary to receive payment or to permit recovery
under the policy with respect to defaulted loans. As set forth above, all
collections by or on behalf of the master servicer under any primary mortgage
insurance policy and, when the mortgaged property has not been restored, the
hazard insurance policy are to be deposited in the security account, subject
to withdrawal as previously described.
If the mortgaged property securing a defaulted loan is damaged and
any proceeds from the related hazard insurance policy are insufficient to
restore the damaged property to a condition sufficient to permit recovery
under any related primary mortgage insurance policy, the master servicer is
not required to expend its own funds to restore the damaged property unless it
determines that
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
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Proceeds cannot exceed deficiency claims and certain expenses incurred by the
master servicer, no payment or recovery will result in a recovery to the trust
fund that exceeds the principal balance of the defaulted loan together with
accrued interest. See "Credit Enhancement" in this prospectus supplement.
Servicing and Other Compensation and Payment of Expenses
The master servicer's primary servicing compensation with respect to a
series of securities will come from the payment to it each month, out of each
interest payment on a loan, of an amount equal to the annual percentage
specified in the related prospectus supplement of the outstanding principal
balance of that loan. Since the master servicer's primary compensation is a
percentage of the outstanding principal balance of each mortgage loan, this
amount will decrease as the mortgage loans amortize. In addition to this
primary servicing compensation, the master servicer or the sub-servicers will
be entitled to retain all assumption fees and late payment 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
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by sub-servicers, upon comparable statements of firms of independent public
accountants rendered within one year with respect to the sub-servicers for
examinations conducted substantially in compliance with the Uniform Single
Audit Program for Mortgage Bankers or the Audit Program for Mortgages Serviced
for Freddie Mac.
Each operative agreement will also provide for delivery to the related
trustee, on or before a specified date in each year, of an annual statement
signed by two officers of the master servicer to the effect that the master
servicer has fulfilled its obligations under the agreement throughout the
preceding year.
Copies of the annual accountants' statement and the statement of officers
of the master servicer may be obtained by securityholders of the related
series without charge upon written request to the master servicer at the
address set forth in the related prospectus supplement.
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
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o any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence in the performance of duties
under the agreement or by reason of reckless disregard of
obligations and duties under the agreement.
In addition to the foregoing, if so provided in the agreement, the master
servicer, the depositor and any director, officer, employee or agent of the
master servicer or of the depositor may be entitled to indemnification by the
related trust fund and may be held harmless against any loss, liability or
expense in connection with any actions taken under the agreement.
In addition, each operative agreement will provide that neither the
master servicer nor the depositor will be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its
responsibilities under the agreement and which, in its opinion, may involve it
in any expense or liability. However, the master servicer or the depositor
may, in its discretion, undertake any action which it may deem necessary or
desirable with respect to the agreement 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,
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the depositor and the trustee by the holders of securities of any
class evidencing not less than 25% of the aggregate percentage
interests constituting that class; and
o events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and certain actions by or on
behalf of the master servicer indicating its insolvency,
reorganization or inability to pay its obligations.
If specified in the related prospectus supplement, the agreement will
permit the trustee to sell the assets of the trust fund in the event that
payments are insufficient to make the payments required under the agreement.
The assets of the trust fund will be sold only under the circumstances and in
the manner specified in the related prospectus supplement.
So long as an event of default under the related agreement remains
unremedied, the depositor or the trustee may, and, at the direction of holders
of securities of any class evidencing 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;
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o failure by the depositor or the trust to perform any other covenant
in the indenture, which failure continues unremedied for 30 days
after notice is given in accordance with the procedures described in
the related prospectus supplement;
o the material breach of any representation or warranty made by the
depositor or the trust in the indenture or in any document delivered
under the indenture, which breach continues uncured for 30 days
after notice is given in accordance with the procedures described in
the related prospectus supplement;
o events of bankruptcy insolvency, receivership or liquidation of the
depositor in the trust; or
o any other event of default specified in the indenture.
If an event of default with respect to the notes of a series (other than
principal only notes) occurs and is continuing, either the trustee or the
holders of a majority of the then aggregate outstanding amount of the notes of
that series may declare the principal amount of all the notes of that series
to be due and payable immediately. In the case of principal only notes, the
portion of the principal amount necessary to make such a declaration will be
specified in the related prospective supplement. This declaration may, under
certain circumstances, be rescinded and annulled by the holders of more than
50% of the percentage ownership interest of the notes of that series.
If, following an event of default with respect to any series of notes,
the notes of that series have been declared to be due and payable, the trustee
may, in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of that series and to continue
to apply distributions on the collateral as if there had been no declaration
of acceleration so long as the collateral continues to provide sufficient
funds for the payment of principal and interest on the notes as they would
have become due if there had not been a declaration. In addition, the trustee
may not sell or otherwise liquidate the collateral securing the notes of a
series following an event of default, unless one of the following conditions
precedent has occurred:
o the holders of 100% of the percentage ownership interest in the
related notes consent to the sale or liquidation;
o the proceeds of the sale or liquidation are sufficient to pay the
full amount of principal and accrued interest, due and unpaid, on
the related notes at the date of the sale or liquidation; or
o the trustee determines that the collateral would not be sufficient
on an ongoing basis to make all payments on the related notes as
they would have become due if the notes had not been declared due
and payable, and the trustee obtains the consent of the holders of
66% of the percentage ownership interest of each class of the
related notes.
Unless otherwise specified in the related prospectus supplement, in the
event the principal of the notes of a series is declared due and payable as
described above, the holders of
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any of those notes issued at a discount from par may be entitled to receive no
more than an amount equal to the unpaid principal amount of those notes less
the amount of the unamortized discount.
Subject to the provisions of the indenture relating to the duties of the
trustee, in case an event of default shall occur and be continuing with
respect to a series of notes, the trustee shall be under no obligation to
exercise any of the rights or powers under the indenture at the request or
direction of any of the holder of the related notes, unless the holders offer
to the trustee satisfactory security or indemnity against the trustee's costs,
expenses and liabilities which might be incurred in complying with their
request or direction. Subject to the indemnification provisions and certain
limitations contained in the indenture, the holders of a majority of the then
aggregate outstanding amount of the related notes of the series shall have the
right to direct the time, method and place of conducting any proceeding for
any remedy available to the trustee or exercising any trust or power conferred
on the trustee with respect to the related notes, and holders of a majority of
the then aggregate outstanding amount of the related notes may, in certain
cases, waive any default other than a 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.
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Unless otherwise specified in the related prospectus supplement, each
operative agreement may also be amended by the depositor, the master servicer
and the trustee with consent of holders of securities evidencing not less than
66% of the aggregate percentage ownership interests of each affected class for
the purpose of adding any provisions to, or changing in any manner or
eliminating any of the provisions of, the agreement or of modifying in any
manner the rights of the holders of the related securities. In no event,
however, shall any amendment
o reduce in any manner the amount of, or delay the timing of, payments
received on loans which are required to be distributed on any
security without the consent of the holder of that security, or
o reduce the percentage of the securities of any class the holders of
which are required to consent to any amendment without the consent
of the holders of all securities of that class then outstanding.
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
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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 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
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prevailing practice in the state in which the property subject to the loan is
located. A mortgage creates a lien upon the real property encumbered by the
mortgage. The mortgage lien generally is not prior to the lien for real estate
taxes and assessments. Priority between mortgages depends on their terms and
generally on the order of recording with a state or county office. There are
two parties to a mortgage: the mortgagor, who is the borrower and owner of the
mortgaged property, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
formally has three parties: the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid,
in trust, generally with a power of sale, to the trustee to secure payment of
the obligation. A security deed and a deed to secure debt are special types of
deeds which indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys to the grantee title to, as opposed to 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
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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.
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
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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
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
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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 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
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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
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
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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.
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.
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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 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.
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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 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
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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.
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 Servicemembers Civil Relief Act 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.
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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 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. Further, the failure of the originator
to use the correct form of notice of right to cancel in connection with
non-purchase money transactions could subject the originator and assigneees to
extended borrower rescission rights.
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 rates 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.
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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 defendants in these cases include numerous
participants within the secondary mortgage market, including some
securitization trusts. Under the anti- predatory lending laws of some states,
the borrower is required to meet a net tangible benefits test in connection
with the origination of the related mortgage loan. This test may be highly
subjective and open to interpretation. As a result, a court may determine that
a mortgage loan does not meet the test even if the originator reasonably
believed that the test was satisfied. Any determination by a court that the
mortgage loan does not meet the test will result in a violation of the state
anti-predatory lending law, in which case the related seller will be required
to purchase that mortgage loan from the trust.
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.
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Under the FTC Rule discussed above, the holder of a Manufactured Housing
Contract secured by a manufactured home with respect to which a formaldehyde
claim has been asserted successfully may be liable to the borrower for the
amount paid by the borrower on that Manufactured Housing Contract and may be
unable to collect amounts still due under that Manufactured Housing Contract.
Because the successful assertion of this type of claim would constitute the
breach of a representation or warranty of the seller, the related
securityholders would suffer a loss only to the extent that
o the seller fails to perform its obligation to repurchase that
Manufactured Housing Contract, and
o the seller, the applicable depositor or the trustee is unsuccessful
in asserting a claim of contribution or subrogation on behalf of the
securityholders against the manufacturer or other who are directly
liable to the plaintiff for damages.
Typical product liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities from the
presence of formaldehyde in manufactured housing. As a result, recoveries from
manufacturers and component suppliers may be limited to their corporate assets
without the benefit of insurance.
Due-on-Sale Clauses
Unless otherwise provided in the related prospectus supplement, each
conventional loan will contain a due-on-sale clause which will generally
provide that, if the mortgagor or obligor sells, transfers or conveys the
mortgaged property, the loan may be accelerated by the mortgagee or secured
party. Unless otherwise provided in the related prospectus supplement, the
master servicer will, to the extent it has knowledge of the sale, transfer or
conveyance, exercise its rights to accelerate the maturity of the related
loans through enforcement of the due-on-sale clauses, subject to applicable
state law. Section 341(b) of the Garn-St. Germain Depository Institutions Act
of 1982 (Garn-St. Germain) permits a lender, subject to certain conditions, to
"enter into or enforce a contract containing a due-on-sale clause with respect
to a real property loan," notwithstanding any contrary state law. Garn-St.
Germain gave states that previously had enacted "due-on-sale" restrictions a
three-year window to reenact the previous restrictions or enact new
restrictions. Only six states acted within this window period: Arizona,
Florida, Michigan, Minnesota, New Mexico and Utah. Consequently, due-on-sale
provisions in documents governed by the laws of those state are not preempted
by federal law. With respect to loans secured by an owner-occupied residence
including a manufactured home, the Garn-St Germain Act sets forth nine
specific instances in which a mortgagee covered by the act may not exercise
its rights under a due-on-sale clause, notwithstanding the fact that a
transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the mortgaged property to an
uncreditworthy person, which could increase the likelihood of default, or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
loans and the number of loans which may extend to maturity.
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In addition, under the federal Bankruptcy Code, due-on-sale clauses may
not be enforceable in bankruptcy proceedings and under certain circumstances
may be eliminated in a resulting loan modification.
Prepayment Charges; Late Fees
Under certain state laws, prepayment charges with respect to prepayments
on loans secured by liens encumbering owner-occupied residential properties
may not be imposed after a certain period of time following the origination of
a loan. Since many of the mortgaged properties will be owner-occupied, it is
anticipated that prepayment charges may not be imposed with respect to many of
the loans. The absence of this type of a restraint on prepayment, particularly
with respect to fixed rate loans having higher loan rates or APRs, may
increase the likelihood of refinancing or other early retirement of the loans.
Legal restrictions, if any, on prepayment of Multifamily Loans will be
described in the related prospectus supplement.
Loans may also contain provisions obligating the borrower to pay a late
fee if payments are not timely made. In some states there may be specific
limitations on the late charges that a lender may collect from the borrower
for delinquent payments. Unless otherwise specified in the related prospectus
supplement, late fees will be retained by the applicable servicer as
additional servicing compensation.
Some state laws restrict the imposition of prepayment charges and late
fees even when the loans expressly provide for the collection of those
charges. Although the Alternative Mortgage Transaction Parity Act 1982, or the
Parity Act, permits the collection of prepayment charges and late fees in
connection with some types of eligible loans preempting any contrary state law
prohibitions, some states may not recognize the preemptive authority of the
Parity Act or have formally opted out of the Parity Act. As a result, it is
possible that prepayment charges may not be collected even on loans that
provide for the payment of those charges unless otherwise specified in the
accompanying prospectus supplement. The master servicer or any entity
identified in the accompanying prospectus supplement will be entitled to all
prepayment charges and late payment charges received on the loans and these
amounts will not be available for payment on the securities. The Office of
Thrift Supervision or OTS, the agency that administers the Parity Act for
unregulated housing creditors, has withdrawn its favorable Parity Act
regulations and chief counsel opinions that authorized lenders to charge
prepayment charges and late fees in certain circumstances notwithstanding
contrary state law, effective July 1, 2003. However, the OTS's ruling does not
have retroactive effect on loans originated before July 1, 2003.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 provides that state usury limitations shall not apply to certain
types of residential first mortgage loans originated by certain lenders after
March 31, 1980. The Office of Thrift Supervision, as successor to the Federal
Home Loan Bank Board, is authorized to issue rules and regulations and to
publish interpretations governing implementation of Title V. The statute
authorized any state to reimpose limitations on interest rates and finance
charges by adopting before April 1, 1983 a law or constitutional provision
which expressly rejects application of the federal law. Fifteen
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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.
Servicemembers Civil Relief Act
Generally, under the terms of the Servicemembers Civil Relief Act
(referred to herein as the Relief Act), borrowers who enter military service
after the origination of their mortgage loan may not be charged interest above
an annual rate of 6% during the period of active duty status. In addition to
adjusting the interest, the lender must forgive any such interest in excess of
the annual 6% rate, unless a court or administrative agency of the United
States or of any state orders otherwise upon application of the lender. The
Relief Act applies to borrowers who are members of the Air Force, Army,
Marines, Navy or Coast Guard, and officers of the U.S. Public Health Service
or the National Oceanic and Atmospheric Administration assigned to duty with
the military. 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.
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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 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,
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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.
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.
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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 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
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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 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
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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.
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
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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.
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
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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.
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
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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 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
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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 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
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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.
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
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"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.
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:
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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
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
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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 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
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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 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
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- 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. 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.
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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 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
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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 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
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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 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
111
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
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
112
represented by that senior certificate and will be considered the equitable
owner of a pro rata undivided interest in each of the mortgage loans in the
related mortgage pool. Any amounts received by a senior certificateholder in
lieu of amounts due with respect to any mortgage loan because of a default or
delinquency in payment will be treated for federal income tax purposes as
having the same character as the payments they replace.
Each holder of a senior certificate will be required to report on its
federal income tax return its pro rata share of the entire income from the
mortgage loans in the trust fund represented by that senior certificate,
including interest, original issue discount, if any, prepayment fees,
assumption fees, any gain recognized upon an assumption and late payment
charges received by the master servicer in accordance with the senior
certificateholder's method of accounting. Under section 162 or 212 of the
Code, each senior certificateholder will be entitled to deduct its pro rata
share of servicing fees, prepayment fees, assumption fees, any loss recognized
upon an assumption and late payment charges retained by the master servicer,
provided that these amounts are reasonable compensation for services rendered
to the trust fund. A senior certificateholder that is an individual, estate or
trust will be entitled to deduct its share of expenses only to the extent such
expenses, plus all other section 212 expenses, exceed 2% of that senior
certificateholder's adjusted gross income. A senior certificateholder using
the cash method of accounting must take into account its pro rata share of
income and deductions as and when collected by or paid to the master servicer.
A senior certificateholder using an accrual method of accounting must take
into account its pro rata share of income and deductions as they become due or
are paid to the master servicer, whichever is earlier. If the servicing fees
paid to the master servicer were deemed to exceed reasonable servicing
compensation, the amount of such excess could be considered as a retained
ownership interest by the master servicer, or any person to whom the master
servicer assigned for value all or a portion of the servicing fees, in a
portion of the interest payments on the mortgage loans. The mortgage loans
might then be subject to the "coupon stripping" rules of the Code discussed
below.
Unless otherwise specified in the related prospectus supplement, tax
counsel will deliver its opinion to the depositor with respect to each series
of certificates that:
o a senior certificate owned by a "domestic building and loan
association" within the meaning of section 7701(a)(19) of the Code
representing principal and interest payments on mortgage loans will
be considered to represent "loans . . . secured by an interest in
real property which is . . . residential property" within the
meaning of section 7701(a)(19)(C)(v) of the Code to the extent that
the mortgage loans represented by that senior certificate are of a
type described in the section;
o a senior certificate owned by a real estate investment trust
representing an interest in mortgage loans will be considered to
represent "real estate assets" within the meaning 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
113
o a senior certificate owned by a REMIC will be an "obligation . . .
which is principally secured by an interest in real property" within
the meaning of section 860G(a)(3)(A) of the Code.
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application
of section 593(d) of the Code to any taxable year beginning after December 31,
1995.
The assets constituting certain trust funds may include "buydown"
mortgage loans. The characterization of any investment in "buydown" mortgage
loans will depend upon the precise terms of the related buydown agreement, but
to the extent that such "buydown" mortgage loans are secured in part by a bank
account or other personal property, they may not be treated in their entirety
as assets described in the foregoing sections of the Code. There are no
directly applicable precedents with respect to the federal income tax
treatment or the characterization of investments in "buydown" mortgage loans.
Accordingly, holders of senior certificates should consult their own tax
advisors with respect to characterization of investments in senior
certificates representing an interest in a trust fund that includes "buydown"
mortgage loans.
Premium. The price paid for a senior certificate by a holder will be
allocated to the holder's undivided interest in each mortgage loan based on
each mortgage loan's relative fair market value, so that the holder's
undivided interest in each mortgage loan will have its own tax basis. A senior
certificateholder that acquires an interest in mortgage loans at a premium may
elect to amortize the premium under a constant interest method, provided that
the mortgage loan was originated after September 27, 1985. Premium allocable
to a mortgage loan originated on or before September 27, 1985 should be
allocated among the principal payments on the mortgage loan and allowed as an
ordinary deduction as principal payments are made. Amortizable bond premium
will be treated as an offset to interest income on a senior certificate. The
basis for a senior certificate will be reduced to the extent that amortizable
premium is applied to offset interest payments.
It is not clear whether a reasonable prepayment assumption should be used
in computing amortization of premium allowable under section 171 of the Code.
A certificateholder that makes this election for a certificate that is
acquired at a premium will be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that the certificateholder acquires during the year of the election or
thereafter.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a senior certificate acquired at a premium should
recognize a loss, if a mortgage loan prepays in full, equal to the difference
between the portion of the prepaid principal amount of the mortgage loan that
is allocable to the senior certificate and the portion of the adjusted basis
of the senior certificate that is allocable to the mortgage loan. If a
reasonable prepayment assumption is used to amortize the premium, it appears
that a loss would be available, if at all, 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.
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On December 30, 1997, the Internal Revenue Service issued final
amortizable bond premium regulations. These regulations, which generally are
effective for bonds issued or acquired on or after March 2, 1998 (or, for
holders making an election for the taxable year that included March 2, 1998 or
any subsequent taxable year, shall apply to bonds held on or after the first
day of the taxable year of the election). The amortizable bond premium
regulations specifically do not apply to prepayable debt instruments or any
pool of debt instruments, such as the trust fund, the yield on which may be
affected by prepayments which are subject to section 1272(a)(6) of the Code.
Absent further guidance from the IRS and unless otherwise specified in the
related prospectus supplement, the trustee will account for amortizable bond
premium in the manner described above. Prospective purchasers should consult
their tax advisors regarding amortizable bond premium and the amortizable bond
premium regulations.
Original Issue Discount. The IRS has stated in published rulings that, in
circumstances similar to those described herein, the special rules of the Code
(currently sections 1271 through 1273 and section 1275) relating to original
issue discount (OID) will be applicable to a senior certificateholder's
interest in those mortgage loans meeting the conditions necessary for these
sections to apply. Accordingly, the following discussion is based in part on
the Treasury's OID Regulations issued on February 2, 1994 under sections 1271
through 1273 and section 1275 of the Code. Certificateholders should be aware,
however, that the OID Regulations do not adequately address certain issues
relevant to prepayable securities, such as the certificates. Rules regarding
periodic inclusion of OID income are applicable to mortgages of corporations
originated after May 27, 1969, mortgages of noncorporate mortgagors (other
than individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. OID could arise by the financing of points or
other charges by the originator of the mortgages in an amount greater than a
statutory de minimis exception to the extent that the points are not currently
deductible under applicable provisions of the Code or are not for services
provided by the lender. OID generally must be reported as ordinary gross
income as it accrues under a constant interest method. See "--B. Multiple
Classes of Senior Certificates--Senior Certificates Representing Interests in
Loans Other than ARM Loans--Accrual of Original Issue Discount" below.
Market Discount. A senior certificateholder that acquires an undivided
interest in mortgage loans may be subject to the market discount rules of
sections 1276 through 1278 to the extent an undivided interest in a mortgage
loan is considered to have been purchased at a "market discount". Generally,
the excess of the portion of the principal amount of a mortgage loan allocable
to the holder's undivided interest over the holder's tax basis in such
interest. Market discount with respect to a senior certificate will be
considered to be zero if the amount allocable to the senior certificate is
less than 0.25% of the senior certificate's stated redemption price at
maturity multiplied by the weighted average maturity remaining after the date
of purchase. Treasury regulations implementing the market discount rules have
not yet been issued; therefore, investors should consult their own tax
advisors regarding the application of these rules 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
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accrued market discount at the time of such payment. The amount of accrued
market discount for purposes of determining the tax treatment of subsequent
principal payments or dispositions of the market discount bond is to be
reduced by the amount so treated as ordinary income.
The Code also grants to the Department of the Treasury authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Although the Treasury has not yet issued regulations, rules described in the
relevant legislative history will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis
of a constant interest rate or according to one of the following methods. If a
senior certificate is issued with OID, the amount of market discount that
accrues during any accrual period is equal to the product of
o the total remaining market discount
times
o a fraction, the numerator of which is the original issue discount
accruing during the period and the denominator of which is the total
remaining original issue discount at the beginning of the accrual
period.
For senior certificates issued without OID, the amount of market discount that
accrues during a period is equal to the product of
o the total remaining market discount
times
o a fraction, the numerator of which is the amount of stated interest
paid during the accrual period and the denominator of which is the
total amount of stated interest remaining to be paid at the
beginning of the accrual period.
For purposes of calculating market discount under any of the above methods in
the case of instruments (such as the senior certificates) which provide for
payments which may be accelerated by reason of prepayments of other
obligations securing such instruments, the same prepayment assumption
applicable to calculating the accrual of original issue discount will apply.
Because the regulations described above have not been issued, it is impossible
to predict what effect those regulations might have on the tax treatment of a
senior certificate purchased at a discount or premium in the secondary market.
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
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holder held the senior certificate and, in general, would be deductible when
such market discount is includible in income. The amount of any remaining
deferred deduction is to be taken into account in the taxable year in which
the senior certificate matures or is disposed of in a taxable transaction. In
the case of a disposition in which gain or loss is not recognized in whole or
in part, any remaining deferred deduction will be allowed to the extent of
gain recognized on the disposition. This deferral rule does not apply if the
senior certificateholder elects to include such market discount in income
currently as it accrues on all market discount obligations acquired by the
senior certificateholder in that taxable year or thereafter.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a certificateholder to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium
in income as interest, based on a constant yield method for certificates
acquired on or after April 4, 1994. If such an election is made with respect
to a mortgage loan with market discount, the certificateholder will be deemed
to have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that such
certificateholder acquires during the year of the election or thereafter.
Similarly, a certificateholder that makes this election for a certificate that
is acquired at a premium will be deemed to have made an election to amortize
bond premium with respect to all debt instruments having amortizable bond
premium that such certificateholder owns or acquires. See "--Regular
Certificates--Original Issue Discount and Premium" below. The election to
accrue interest, discount and premium on a constant yield method with respect
to a certificate is irrevocable.
Anti-abuse Rule. The IRS is permitted to apply or depart from the rules
contained in the OID Regulations as necessary or appropriate to achieve a
reasonable result where a principal purpose in structuring a mortgage asset,
mortgage loan or senior certificate, or the effect of applying the otherwise
applicable rules, is to achieve a result that is unreasonable in light of the
purposes of the applicable statutes (which generally are intended to achieve
the clear reflection of income for both issuers and holders of debt
instruments).
B. Multiple Classes of Senior Certificates
Stripped Bonds and Stripped Coupons
General. Pursuant to section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the principal
payments results in the creation of "stripped bonds" with respect to principal
payments and "stripped coupons" with respect to interest payments. For
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
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mortgage loan principal balance) or the certificates are initially sold with a
de minimis discount (assuming no prepayment assumption is required), any
non-de minimis discount arising from a subsequent transfer of the certificates
should be treated as market discount. The IRS appears to require that
reasonable servicing fees be calculated on a mortgage loan by mortgage loan
basis, which could result in some mortgage loans being treated as having more
than 100 basis points of interest stripped off.
Although not entirely clear, a stripped bond certificate generally should
be treated as a single debt instrument issued on the day it is purchased for
purposes of calculating any original issue discount. Generally, if the
discount on a stripped bond certificate is larger than a de minimis amount (as
calculated for purposes of the original issue discount rules), a purchaser of
such a certificate will be required to accrue the discount under the original
issue discount rules of the Code. See "--Single Class of Senior
Certificates--Original Issue Discount" above. However, a purchaser of a
stripped bond certificate will be required to account for any discount on the
certificate as market discount rather than original issue discount if either
o the amount of OID with respect to the certificate was treated as
zero under the OID de minimis rule when the certificate was
stripped, or
o no more than 100 basis points (including any amount of servicing in
excess of reasonable servicing) are stripped off the trust fund's
mortgage loans.
Pursuant to Revenue Procedure 91-49 issued on August 8, 1991, purchasers of
stripped bond certificates using an inconsistent method of accounting must
change their method of accounting and request the consent of the IRS to the
change in their accounting method on a statement attached to their first
timely tax return filed after August 8, 1991.
The precise tax treatment of stripped coupon certificates is
substantially uncertain. The Code could be read literally to require that
original issue discount computations be made on a mortgage loan by mortgagee
loan basis. However, based on recent IRS guidance, it appears that a stripped
coupon certificate should be treated as a single installment obligation
subject to the original issue discount rules of the Code. As a result, all
payments on a stripped coupon certificate would be included in the
certificate's stated redemption price at maturity for purposes of calculating
income on such certificate under the original issue discount rules of the
Code.
It is unclear under what circumstances, if any, the prepayment of
mortgage loans will give rise to a loss to the holder of a stripped bond
certificate purchased at a premium or a stripped coupon certificate. If a
senior certificate is treated as a single instrument (rather than an 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.
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Because of the complexity of these issues, we strongly suggest that
holders of stripped bond certificates and stripped coupon certificates consult
with their own tax advisors regarding the proper treatment of these
certificates for federal income tax purposes.
Treatment of Certain Owners. Several sections of the Code provide
beneficial treatment to certain taxpayers that invest in mortgage loans of the
type that make up the trust fund. With respect to these sections, no specific
legal authority exists regarding whether the character of the senior
certificates, for federal income tax purposes, will be the same as that of the
underlying mortgage loans. While section 1286 treats a stripped obligation as
a separate obligation for purposes of the provisions of the Code addressing
original issue discount, it is not clear whether such characterization would
apply with regard to these other sections. Although the issue is not free from
doubt, in the opinion of tax counsel, based on policy considerations, each
class of senior certificates should be considered to represent "real estate
assets" within the meaning of section 856(c)(4)(A) of the Code and "loans . .
.. secured by, an interest in real property which is . . . residential real
property" within the meaning of section 7701(a)(19)(C)(v) of the Code, and
interest income attributable to senior certificates should be considered to
represent "interest on obligations secured by mortgages on real property"
within the meaning of section 856(c)(3)(B) of the Code, provided that in each
case the underlying mortgage loans and interest on such mortgage loans qualify
for such treatment. Prospective purchasers to which such characterization of
an investment in senior certificates is material should consult their own tax
advisors regarding the characterization of the senior certificates and related
income. Senior certificates will be "obligations (including any participation
or certificate of beneficial ownership therein) which are principally secured
by an interest in real property" within the meaning of section 860G(a)(3)(A)
of the Code.
Senior Certificates Representing Interests in Loans Other Than ARM Loans
General. The OID rules of sections 1271 through 1275 of the Code will be
applicable to a senior certificateholder's interest in those mortgage loans as
to which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount in income are
applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated after
July 1, 1982, and mortgages of individuals originated after March 2, 1984.
Under the OID Regulations, OID could arise by the charging of points by the
originator of the mortgage in an amount greater than the statutory de minimis
exception, including a payment of points that is currently deductible by the
borrower under applicable provisions of the Code, or, under certain
circumstances, by the presence of "teaser" rates on the mortgage loans. OID on
each senior certificate must be included in the owner's ordinary income for
federal income tax purposes as it accrues, in 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
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after December 21, 1992. Alternatively, proposed Treasury regulations issued
December 21, 1992 may be treated as authority for debt instruments issued
after December 21, 1992 and prior to April 4, 1994, and proposed Treasury
regulations issued in 1986 and 1991 may be treated as authority for
instruments issued before December 21, 1992. In applying these dates, the
issue date of the mortgage loans should be used or, in the case of stripped
bond certificates or stripped coupon certificates, the date when these
certificates are acquired. The holder of a senior certificate should be aware,
however, that neither the proposed OID Regulations nor the OID Regulations
adequately address certain issues relevant to prepayable securities.
Under the Code, the mortgage loans underlying each senior certificate
will be treated as having been issued on the date they were originated with an
amount of OID equal to the excess of such mortgage loan's stated redemption
price at maturity over its issue price. The issue price of a mortgage loan is
generally the amount lent to the mortgagee, which may be adjusted to take into
account certain loan origination fees. The stated redemption price at maturity
of a mortgage loan is the sum of all payments to be made on such mortgage loan
other than payments that are treated as qualified stated interest payments.
The accrual of this OID, as described under "--Accrual of Original Issue
Discount" below, will, unless otherwise specified in the related prospectus
supplement, utilize the original yield to maturity of the senior certificate
calculated based on a reasonable assumed prepayment rate for the mortgage
loans underlying the senior certificates and will take into account events
that occur during the calculation period. This prepayment assumption will be
determined in the manner prescribed by regulations that have not yet been
issued. The legislative history of the Tax Reform Act provides, however, that
the regulations will require that this prepayment assumption be the prepayment
assumption that is used in determining the offering price of the certificate.
No representation is made that any certificate will prepay at the prepayment
assumption or at any other rate. The prepayment assumption contained in the
Code literally only applies to debt instruments collateralized by other debt
instruments that are subject to prepayment rather than direct ownership
interests in such debt instruments, such as the certificates represent.
However, no other legal authority provides guidance with regard to the proper
method for accruing OID on obligations that are subject to prepayment, and,
until further guidance is issued, the master servicer intends to calculate and
report OID under the method described below.
Accrual of Original Issue Discount. Generally, the owner of a senior
certificate must include in gross income the sum of the "daily portions", as
defined below, of the OID on that senior certificate for each day on which it
owns the senior certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily portions of
original issue discount with respect to each component generally will be
determined 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
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Prepayment Assumption) of all remaining payments to be received
under the Prepayment Assumption on the respective component, and
o any payments received during such accrual period (other than a
payment of qualified stated interest), and subtracting from that
total the "adjusted issue price" of the respective component at the
beginning of such accrual period.
The "adjusted issue price" of a senior certificate at the beginning of the
first accrual period is its issue price; the "adjusted issue price" of a
senior certificate at the beginning of a subsequent accrual period is the
"adjusted issue price" at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period reduced by the
amount of any payment (other than a payment of qualified stated interest) made
at the end of or during that accrual period. The OID during the accrual period
will then be divided by the number of days in the period to determine the
daily portion of OID for each day in the period. With respect to an initial
accrual period shorter than a full monthly accrual period, the daily portions
of original issue discount must be determined according to an appropriate
allocation under any reasonable method.
OID generally must be reported as ordinary gross income as it accrues
under a constant interest method that takes into account the compounding of
interest as it accrues rather than when received. However, the amount of OID
includible in the income of a holder of an obligation is reduced when the
obligation is acquired after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued OID, less prior
payments of principal. Accordingly, if mortgage loans acquired by a
certificateholder are purchased at a price equal to the then unpaid principal
amount of such mortgage loan, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
mortgage loan (i.e., points) will be includible by such holder. Other OID on
the mortgage loans (e.g., that arising from a "teaser" rate) would still need
to be accrued.
Senior Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such as
the senior certificates (if the related trust fund includes ARM loans), which
represent interests in ARM loans. Additionally, the IRS has not issued
guidance under the coupon stripping rules of the Code with respect to these
instruments. In the absence of any authority, the master servicer will report
OID on senior certificates attributable to ARM loans ("stripped ARM
obligations") to holders in a manner it believes to be consistent with the
rules described under the heading "--Senior Certificates Representing
Interests in Loans Other Than ARM Loans" above and with the 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.
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Because the treatment of stripped ARM obligations is uncertain, investors
are urged to consult their tax advisors regarding how income will be
includible with respect to these certificates.
C. Possible Application of Contingent Payment Regulations to Certain
Non-REMIC Certificates
Final regulations issued on June 11, 1996 with respect to OID under
section 1275 include "contingent payment regulations" covering obligations
that provide for one or more contingent payments. Rights to interest payments
on a mortgage loan might be considered to be contingent within the meaning of
the contingent payment regulations if the interest would not be paid if the
borrower exercised its right to prepay the mortgage loan. However, in the case
of an investor having a right to shares of the interest and principal payments
on a mortgage loan when the share of interest is not substantially greater
than the share of principal, the possibility of prepayment should not be
considered to characterize otherwise noncontingent interest payments as
contingent payments. The absence of interest payments following a prepayment
would be the normal consequence of the return of the investor's capital in the
form of a principal payment. On the other hand, a right to interest on such a
mortgage loan is more likely to be regarded as contingent if held by an
investor that does not also hold a right to the related principal. Such an
investor would not recover its capital through receipt of a principal payment
at the time of the prepayment of the mortgage loan.
Applying these principles to the senior certificates, because the
mortgage loans are subject to prepayment at any time, payments on a class of
senior certificates representing a right to interest on the mortgage loans
could be considered to be contingent within the meaning of the contingent
payment regulations, at least if the senior certificate was issued at a
premium. The likelihood that such payments will be considered contingent
increases the greater the amount of such premium.
In the event that payments on a senior certificate in respect of interest
on the mortgage loans are considered contingent, then the holder would
generally report income or loss as described under the heading "--Stripped
Bonds and Stripped Coupons" above; provided, however, that the yield that
would be used in calculating interest income would not be the actual yield but
would instead equal the "applicable Federal rate" (AFR), in effect at the time
of purchase of the senior certificate by the holder. The AFR generally is an
average of current yields on Treasury securities computed and published
monthly by the IRS. In addition, once the holder's adjusted basis in the
senior certificate has been reduced (by prior distributions or losses) to an
amount equal to the aggregate amount of the remaining noncontingent payments
of the mortgage loans that are allocable to the senior certificate (or to zero
if the senior certificate does 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.
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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.
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
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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.
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
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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 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.
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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 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
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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 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
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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.
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.
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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 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
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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.
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
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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.
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 sections
1276 through 1278 of the Code.
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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.
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
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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 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.
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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.
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
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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 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.
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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 Reconciliation 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 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
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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.
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
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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.
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.
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.
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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 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
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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. The Treasury Department has issued final regulations,
effective May 11, 2004, that address the federal income tax treatment of
"inducement fees" received by transferees of noneconomic REMIC residual
interests. The final regulations 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
allocable to the holder. The final regulations provide two safe harbor methods
that permit transferees to include inducement fees in income either (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. If the holder of a REMIC residual interest sells or otherwise
disposes of the residual certificate, any unrecognized portion of the
inducement fee must be taken into account at the time of the sale or
disposition. The final regulations also provide that an inducement fee shall
be treated as income from sources within the United States. In addition, the
IRS has issued administrative guidance addressing the procedures by which
transferees of noneconomic REMIC residual interests may obtain automatic
consent from the IRS to change the method of accounting for REMIC inducement
fee income to one of the safe harbor methods provided in these final
regulations (including a change from one safe harbor method to the other safe
harbor method). Prospective purchasers of the residual certificates should
consult with their tax advisors regarding the effect of these final
regulations and the related guidance regarding the procedures for obtaining
automatic consent to change the method of accounting.
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
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gross income and to treat the same amount as an item of investment expense.
Individuals are generally allowed a deduction for such an investment expense
only as a miscellaneous itemized deduction subject to the limitations under
section 67 of the Code which allows such deduction only to the extent that, in
the aggregate, all such expenses exceed 2% of an individual's adjusted gross
income. In addition, the personal exemptions and itemized deductions of
individuals with adjusted gross incomes above particular levels are subject to
certain limitations which reduce or eliminate the benefit of such items. The
REMIC is required to report to each pass-through interest holder and to the
IRS the holder's allocable share, if any, of the REMIC's non-interest
expenses. The term "pass-through interest holder" generally refers to
individuals, entities taxed as individuals and certain pass-through entities,
but does not include real estate investment trusts. Residual securityholders
that are "pass-through interest holders" should consult their own tax advisors
about the impact of these rules on an investment in the residual certificates.
See "--Regular Certificates--Non-Interest Expenses of the REMIC" above.
Excess Inclusions. A portion of the income on a residual certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter
will, with an exception discussed below for certain thrift institutions, be
subject to federal income tax in all events. Thus, for example, an excess
inclusion
o may not, except as described below, be offset by any unrelated losses,
deductions or loss carryovers of a residual certificateholder;
o will be treated as "unrelated business taxable income" within the meaning
of section 512 of the Code if the residual certificateholder is a pension
fund or any other organization that is subject to tax only on its
unrelated business taxable income (see "Tax-Exempt Investors" below); and
o is not eligible for any reduction in the rate of withholding tax in the
case of a residual certificateholder that is a foreign investor.
See "--Non-U.S. Persons" below. The exception for thrift institutions is
available only to the institution holding the residual certificate and not to
any affiliate of the institution, unless the affiliate is a subsidiary all the
stock of which, and substantially all the indebtedness of which, is held by
the institution, and which is organized and operated exclusively in connection
with the organization and operation of one or more REMICs.
Except as discussed in the following paragraph, with respect to any
residual certificateholder, the excess inclusions for any calendar quarter is
the excess, if any, of
o the income of the residual certificateholder for that calendar
quarter from its residual certificate
over
o the sum of the "daily accruals" for all days during the calendar
quarter on which the residual certificateholder holds the residual
certificate.
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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.
In addition, the Code provides three rules for determining the effect of
excess inclusions on the alternative minimum taxable income of a residual
certificateholder. First, the alternative minimum taxable income for the
residual certificateholder is determined without regard to the special rule
that taxable income cannot be less than excess inclusion. Second, the amount
of any alternative minimum tax net operating loss deductions must be computed
without regard to any excess inclusions. Third, the residual
certificateholder's alternative minimum taxable income for a tax year cannot
be less than excess inclusions for the year. The effect of this last statutory
amendment is to prevent the use of nonrefundable tax credits to reduce a
taxpayer's income tax below its tentative minimum tax computed only on excess
inclusions.
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
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disallowance of this deduction coupled with the allocation of additional
income may have a significant impact on the yield of the regular certificate
to such a holder. Further, holders (other than corporations) subject to the
alternative minimum tax may not deduct miscellaneous itemized deductions in
determining such holders' alternative minimum taxable income. In general
terms, a single class REMIC is one that either (i) would qualify, under
existing Treasury regulations, as a grantor trust if it were not a REMIC
(treating all interests as ownership interests, even if they would be
classified as debt for federal income tax purposes) or (ii) is similar to such
a trust and is structured with the principal purpose of avoiding the single
class REMIC rules. Unless otherwise stated in the applicable prospectus
supplement, the expenses of the REMIC will be allocated to holders of the
related residual certificates in their entirety and not to holders of the
related regular certificates.
Sale or Exchange of Residual Certificates. If a residual certificate is
sold or exchanged, the seller will generally recognize gain or loss equal to
the difference between the amount realized on the sale or exchange and its
adjusted basis in the residual certificate (except that the recognition of
loss may be limited under the "wash sale" rules described below). A holder's
adjusted basis in a residual certificate generally equals the cost of the
residual certificate to the residual certificateholder, increased by the
taxable income of the REMIC that was included in the income of the residual
certificateholder with respect to the residual certificate, and decreased (but
not below zero) by the net losses that have been allowed as deductions to the
residual certificateholder with respect to the residual certificate and by the
distributions received thereon by the residual certificateholder. In general,
any such gain or loss will be capital gain or loss provided the residual
certificate is held as a capital asset. However, residual certificates will be
"evidences of indebtedness" within the meaning of section 582(c)(1) of the
Code, so that gain or loss recognized from sale of a residual certificate by a
bank or thrift institution to which such section applies would be ordinary
income or loss.
Except as provided in Treasury regulations yet to be issued, if the
seller of a residual certificate reacquires the residual certificate or
acquires any other residual certificate, any residual interest in another
REMIC or similar interest in a "taxable mortgage pool" (as defined in section
7701(i)) of the Code during the period beginning six months before, and ending
six 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
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disposition of an asset representing a temporary investment of payments on the
mortgage loans pending payment on the residual certificates or regular
certificates. In addition, the assumption of a mortgage loan by a subsequent
purchaser could cause the REMIC to recognize gain which would also be subject
to the 100% tax on prohibited transactions.
In addition, certain contributions to a REMIC made after the initial
issue date of the certificates could result in the imposition of a tax on the
REMIC equal to 100% of the value of the contributed property.
It is not anticipated that the REMIC will engage in any prohibited
transactions or receive any contributions subject to the contributions tax.
However, in the event that the REMIC is subject to any such tax, unless
otherwise disclosed in the related prospectus supplement, such tax would be
borne first by the residual securityholders, to the extent of amounts
distributable to them, and then by the master servicer.
F. Liquidation and Termination
If the REMIC adopts a plan of complete liquidation, within the meaning of
section 860F(a)(4)(A)(i) of the Code, which may be accomplished by designating
in the REMIC's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC will not be subject to any prohibited
transaction tax, provided that the REMIC credits or distributes in liquidation
all of the sale proceeds plus its cash (other than the amounts retained to
meet claims) to holders of regular and residual certificates within the 90-day
period.
The REMIC will terminate shortly following the retirement of the regular
certificates. If a residual certificateholder's adjusted basis in the residual
certificate exceeds the amount of cash distributed to the residual
certificateholder in final liquidation of its interest, it would appear that
the residual certificateholder would be entitled to a loss equal to the amount
of such excess. It is unclear whether such a loss, if allowed, will be a
capital loss or an ordinary loss.
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
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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
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
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o an amount (as determined under the REMIC Regulations) equal to the
present value of the total anticipated "excess inclusions" with
respect to such interest for periods after the transfer
multiplied by
o the highest marginal federal income tax rate applicable to
corporations.
The tax is imposed on the transferor unless the transfer is through an agent
(including a broker or other middlemen) for a disqualified organization, in
which event the tax is imposed on the agent. The person otherwise liable for
the tax shall be relieved of liability for the tax if the transferee furnished
to such person an affidavit that the transferee is not a disqualified
organization and, at the time of the transfer, such person does not have
actual knowledge that the affidavit is false. A "disqualified organization"
means
o the United States, any state, possession, or political subdivision
thereof, any foreign government, any international organization, or
any agency or instrumentality of any of the foregoing (provided that
such term does not include an instrumentality if all its activities
are subject to tax and, except for Freddie Mac, a majority of its
board of directors is not selected by any such governmental agency),
o any organization (other than certain farmers' cooperatives)
generally exempt from federal income taxes unless such organization
is subject to the tax on "unrelated business taxable income",
o a rural electric or telephone cooperative, and
o electing large partnerships.
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
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o certain cooperatives.
Except as may be provided in Treasury regulations not yet issued, any person
holding an interest in a pass-through entity as a nominee for another will,
with respect to such interest, be treated as a pass-through entity. The tax on
pass-through entities is generally effective for periods after March 31, 1988,
except that in the case of regulated investment companies, real estate
investment trusts, common trust funds and publicly-traded partnerships the tax
shall apply only to taxable years of such entities beginning after December
31, 1988.
In order to comply with these rules, the pooling and servicing agreement
will provide that no record or beneficial ownership interest in a residual
certificate may be, directly or indirectly, purchased, transferred or sold
without the express written consent of the master servicer. The master
servicer will grant such consent to a proposed transfer only if it receives
the following: (i) an affidavit from the proposed transferee to the effect
that it is not a disqualified organization and is not acquiring the residual
certificate as a nominee or agent for a disqualified organization and (ii) a
covenant by the proposed transferee to the effect that the proposed transferee
agrees to be bound by and to abide by the transfer restrictions applicable to
the residual certificate.
Non-economic Residual Certificates. The REMIC Regulations disregard, for
federal income tax purposes, any transfer of a non-economic residual
certificate to a U.S. Person, unless no significant purpose of the transfer is
to enable the transferor to impede the assessment or collection of tax. A
"non-economic residual certificate" is any residual certificate (including a
residual certificate with a positive value at issuance) unless at the time of
transfer, taking into account the prepayment assumption and any required or
permitted clean up calls or required liquidation provided for in the REMIC's
organizational documents,
o the present value of the expected future distributions on the
residual certificate at least equals the product of the present
value of the anticipated excess inclusions and the 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
147
o the transferee acknowledges to the transferor that the residual
interest may generate tax liabilities in excess of the cash flow and
the transferee represents that it intends to pay such taxes
associated with the residual interest as they become due.
Final Treasury regulations issued on July 18, 2002 (the "New REMIC
Regulations"), provide that transfers of non-economic residual interests must
meet two additional requirements to qualify for the safe harbor:
o the transferee must represent that it will not cause income from the
non-economic residual interest to be attributable to a foreign
permanent establishment or fixed base (within the meaning of an
applicable income tax treaty, hereafter a "foreign branch") of the
transferee or another U.S. taxpayer; and
o the transfer must satisfy either an "asset test" or a "formula test"
provided under the REMIC Regulations.
A transfer to an "eligible corporation," generally a domestic
corporation, will satisfy the asset test if:
o at the time of the transfer, and at the close of each of the
transferee's two fiscal years preceding the transferee's fiscal year
of transfer, the transferee's gross and net assets for financial
reporting purposes exceed $100 million and $10 million,
respectively, in each case, exclusive of any obligations of certain
related persons;
o the transferee agrees in writing that any subsequent transfer of the
interest will be to another eligible corporation in a transaction
that satisfies the asset test, and the transferor does not know or
have reason to know that the transferee will not honor these
restrictions on subsequent transfers, and
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
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o any anticipated tax savings associated with holding the interest as
the REMIC generates losses.
For purposes of this calculation, the present value is calculated using a
discount rate equal to the lesser of the applicable federal rate and the
transferee's cost of borrowing.
If the transferee has been subject to the alternative minimum tax in the
preceding two years and will compute its taxable income in the current taxable
year using the alternative minimum tax rate, then it may use the alternative
minimum tax rate in lieu of the corporate tax rate. In addition, the direct or
indirect transfer of the residual interest to a foreign branch of a domestic
corporation is not treated as a transfer to an eligible corporation under the
formula test.
The New REMIC Regulations generally apply to transfers of non-economic
residual interests occurring on or after February 4, 2000. The requirement of
a representation that a transfer of a non-economic residual interest is not
made to a foreign branch of a domestic corporation and the requirement of
using the short term applicable federal rate for purposes of the formula test
apply to transfers occurring on or after August 19, 2002.
If a transfer of a non-economic residual certificate is disregarded, the
transferor would continue to be treated as the owner of the residual
certificate and would continue to be subject to tax on its allocable portion
of the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
residual certificate that has a "tax avoidance potential" to a "foreign
person" will be disregarded for federal income tax purposes. This rule appears
to apply to a transferee who is not a U.S. Person, unless such transferee's
income in respect of the residual certificate is effectively connected with
the conduct of a United States trade or business. A residual certificate is
deemed to have a tax avoidance potential unless, at the time of transfer, the
transferor reasonably expects that the REMIC will distribute to the transferee
amounts that will equal at least 30% of each excess inclusion and that such
amounts will be distributed at or after the time the excess inclusion 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 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, pass-through entities are advised to consult
their own tax advisors with respect to any tax which may be imposed on a
pass-through entity.
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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 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. 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. 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.
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The United States Department of Labor (DOL) issued regulations concerning
the definition of what constitutes the assets of a Plan (DOL 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 could become subject to the fiduciary responsibility
provisions of Title I of ERISA to the extent that they exercised discretionary
control of Plan assets. In addition, parties with certain relationships to
investing plans or providing services with respect to the issuer's assets
could be deemed to be Parties in Interest with respect to investing plans and
could become subject to the prohibited transaction provisions of 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 may not only be a prohibited
transaction under ERISA and subject to an excise tax under Section 4975 of the
Code, but 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
151
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 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.
Prohibited Transaction Class Exemption 83-1
Any fiduciary or other Plan asset investor that proposes to purchase
securities on behalf of, or with assets of, a Plan should consult with its
counsel on the potential applicability of ERISA and Section 4975 of 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 certificates, but not notes, 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 certificates 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
an interest rate swap ("a swap"), a yield maintenance agreement (a "cap") 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.
152
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
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 an 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.
153
If an issuer holds obligations that have high loan-to-value ratios in
excess of 100%, 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;
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
pre-funding accounts meet certain requirements.
The Exemption, as amended, extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions involving trusts that
contain a swap or a cap, provided the
154
swap or cap satisfies certain criteria and the other requirements of the
Exemption are met. Among other requirements, the counterparty to the swap or
cap must maintain ratings at certain levels from Exemption rating agencies,
and the documentation for the swap or cap must provide for certain remedies if
the rating declines. The swap or cap must be an interest rate notional
contract denominated in U.S. dollars, may not be leveraged, and must satisfy
several other criteria including limitations on its notional amount.
Securities of any class affected by the swap or cap 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 or
cap and the effects of the swap or cap 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). However, PTCE 95-60, which
is applicable to Plan investors that are insurance company general accounts,
may be available in such circumstances.
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, 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, is permissible under applicable law, will not give
rise to a non-exempt prohibited transaction under ERISA or Section 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
155
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 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 "highrisk 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."
156
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 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
157
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 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.
158
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 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
159
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.
160
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;
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
161
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 is includible in gross income for federal
income tax purposes regardless of its source; or
o a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or
more 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.
162
****
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.................................. $117.70
Trustee's Fees and Expenses........................... [o]
Printing and Engraving................................ [o]
Legal Fees and Expenses............................... [o]
Blue Sky Fees......................................... [o]
Accounting Fees and Expenses.......................... [o]
Rating Agency Fees.................................... [o]
Miscellaneous......................................... [o]
----------
Total................................................. $[o]
==========
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 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.
II-1
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 (included on pages II-5 and II-6
hereof)
24.2 Statement of Eligibility and Qualification of Trusteess.
- ---------
* 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.
+ 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.
+++ To be filed by amendment.
ss To be filed on Form 8-K, as applicable.
II-2
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 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.
II-3
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 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 August, 2005.
GREENWICH CAPITAL ACCEPTANCE, INC.
By: /s/ Joseph N. Walsh III
------------------------
Joseph N. Walsh III
President
FINANCIAL ASSET SECURITIES CORP.
By: /s/ Joseph N. Walsh III
------------------------
Joseph N. Walsh III
President
II-4
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of Joseph N. Walsh III,
Carol P. Mathis, Robert J. McGinnis, John C. Anderson and James M. Esposito,
whose signatures appear below, constitutes and appoints each of Joseph N.
Walsh III, Carol P. Mathis, John C. Anderson, Robert J. McGinnis and James M.
Esposito, or any of them, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement on behalf of Greenwich Capital Acceptance, Inc., and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
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/ Joseph N. Walsh III Director and President (Principal August 9, 2005
------------------------ Executive Officer)
Joseph N. Walsh III
/s/ Carol P. Mathis Managing Director and Chief Financial August 9, 2005
-------------------- Officer (Principal Financial Officer
Carol P. Mathis and Principal Accounting Officer)
/s/ Robert J. McGinnis Director and Managing Director August 9, 2005
-----------------------
Robert J. McGinnis
/s/ John C. Anderson Director and Managing Director August 9, 2005
----------------------
John C. Anderson
/s/ James M. Esposito Director, Managing Director, General August 9, 2005
---------------------- Counsel and Secretary
James M. Esposito
II-5
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of Joseph N. Walsh III,
Carol P. Mathis, Robert J. McGinnis, John C. Anderson and James M. Esposito,
whose signatures appear below, constitutes and appoints each of Joseph N.
Walsh III, Carol P. Mathis, John C. Anderson, Robert J. McGinnis and James M.
Esposito, or any of them, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement on behalf of Financial Asset Securities Corp., and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
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/ Joseph N. Walsh III Director and President (Principal August 9, 2005
------------------------ Executive Officer)
Joseph N. Walsh III
/s/ Carol P. Mathis Managing Director and Chief Financial August 9, 2005
-------------------- Officer (Principal Financial Officer
Carol P. Mathis and Principal Accounting Officer)
/s/ Robert J. McGinnis Director and Managing Director August 9, 2005
-----------------------
Robert J. McGinnis
/s/ John C. Anderson Director and Managing Director August 9, 2005
----------------------
John C. Anderson
/s/ James M. Esposito Director, Managing Director, General August 9, 2005
---------------------- Counsel and Secretary
James M. Esposito
II-6
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 (included on pages II-5 and II-6
hereof)
24.2..................Statement of Eligibility and Qualification of Trusteess.
- ---------
* 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.
+ 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.
+++ To be filed by amendment.
ss To be filed on Form 8-K, as applicable.
II-7