Filed Pursuant to Rule 424(b)(5)
File No.: 333-132249-10
PROSPECTUS SUPPLEMENT
(To Prospectus Dated September 26, 2006)
[LOGO - Bank of America]
Banc of America Mortgage Securities, Inc.
Depositor
Bank of America, National Association
Sponsor and Servicer
Banc of America Alternative Loan Trust 2006-8
Issuing Entity
$504,803,622
(Approximate)
Mortgage Pass-Through Certificates, Series 2006-8
Principal and interest payable monthly, commencing in
November 2006
- --------------------------------------------------------------------------------
You should carefully consider the risk factors beginning on page S-26 of this
prospectus supplement.
Neither the offered certificates nor the underlying mortgage loans are insured
or guaranteed by any governmental agency or instrumentality.
The offered certificates will represent interests in the issuing entity only and
will not represent interests in or obligations of the depositor, the sponsor or
any other entity.
This prospectus supplement may be used to offer and sell the offered
certificates only if accompanied by the prospectus.
- --------------------------------------------------------------------------------
The Issuing Entity will Issue -
o Three groups consisting of thirteen classes of senior certificates.
o Seven classes of subordinate certificates all of which are
subordinated to, and provide credit enhancement for, the senior
certificates. Each class of subordinate certificates is also
subordinated to those classes of subordinate certificates, if any,
higher in order of payment priority.
The classes of offered certificates are listed and their sizes and basic payment
characteristics are described under the heading "Offered Certificates" in the
table beginning on page S-6 of this prospectus supplement.
The Assets of the Issuing Entity will Include -
o Three loan groups of fully amortizing, fixed interest rate, one- to
four-family, residential first mortgage loans, substantially all of
which have original terms to stated maturity of approximately 10 to 40
years.
Credit Enhancement will Consist of -
o Subordination of the subordinate certificates to the senior
certificates for the distributions of principal and interest and the
allocation of losses.
o Shifting interest in prepayments through the allocation, subject to
certain exceptions, of most principal collections to the senior non-PO
certificates for the first five years and a lesser, but still
disproportionately large, allocation of these collections to the
senior non-PO certificates during the following four years.
o In the case of a class of super senior certificates, the subordination
of the related class of super senior support certificates for losses
if the subordinate certificates are no longer outstanding.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the offered certificates or determined that this
prospectus supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
The offered certificates will be offered by Banc of America Securities LLC, as
underwriter, at varying prices to be determined at the time of sale to
investors. The offered certificates are expected to be delivered on or about
October 30, 2006. Total proceeds to the depositor for the offered certificates
will be approximately 101.707% of the initial class balance of the offered
certificates, plus accrued interest, if applicable, before deducting expenses
payable by the depositor.
Banc of America Securities LLC
October 27, 2006
TABLE OF CONTENTS
Important Notice About Information Presented in this
Prospectus Supplement and the Prospectus ....................................S-4
SUMMARY OF TERMS.............................................................S-9
RISK FACTORS................................................................S-26
The Rate of Principal Payments on the Mortgage Loans Will
Affect the Yield on the Offered Certificates..........................S-26
Delinquencies and Losses on the Mortgage Loans Will
Adversely Affect Your Yield...........................................S-28
Mortgage Loans Paying Interest Only During the First Ten
or Fifteen Years May Have a Higher Risk of Default or
Rates of Prepayment...................................................S-28
Alternative Underwriting Standards May Increase Risk of
Loss..................................................................S-29
The Rate of Default on Mortgage Loans that Are Secured by
Investor Properties May be Higher than on Other
Mortgage Loans........................................................S-29
There Are Risks Relating to Mortgaged Properties Subject
to Second Lien Mortgage Loans.........................................S-30
Credit Scores May Not Accurately Predict the Likelihood of
Default...............................................................S-30
Subordination of Super Senior Support Certificates and
Subordinate Certificates Increases Risk of Loss.......................S-30
Yield on the Class XB-IO Certificates Will Be Particularly
Sensitive to Losses on the Mortgage Loans.............................S-31
Subordinate Certificates Provide Subordination for All
Groups................................................................S-31
High Balance Loans May Increase Risk of Loss on
Certificates..........................................................S-31
Decrement and Sensitivity Tables Are Based Upon
Assumptions and Models................................................S-31
Geographic Concentration May Increase Risk of Loss Due to
Adverse Economic Conditions or Natural Disasters......................S-32
Residential Real Estate Values May Fluctuate and Adversely
Affect Your Investment................................................S-33
Tax Consequences of Residual Certificate.................................S-33
United States Military Operations May Increase Risk of
Relief Act Shortfalls.................................................S-34
THE MORTGAGE POOL...........................................................S-35
THE SPONSOR.................................................................S-36
STATIC POOL INFORMATION.....................................................S-36
THE DEPOSITOR...............................................................S-37
THE ISSUING ENTITY..........................................................S-37
THE TRUSTEE.................................................................S-37
THE SERVICER................................................................S-39
THE POOLING AGREEMENT.......................................................S-39
General..................................................................S-39
Compensating Interest....................................................S-39
Compensation and Payment of Expenses of the Servicer and
the Trustee...........................................................S-40
Voting Rights............................................................S-41
DESCRIPTION OF THE CERTIFICATES.............................................S-41
Distributions............................................................S-41
Pool Distribution Amount.................................................S-42
Priority of Distributions................................................S-43
Interest.................................................................S-44
LIBOR....................................................................S-47
Principal................................................................S-48
Cross-Collateralization..................................................S-54
Allocation of Losses.....................................................S-55
Restrictions on Transfer of the Class 1-A-R Certificate..................S-57
Restrictions on Transfer of the Class 1-A-3 and
Subordinate Certificates..............................................S-60
PREPAYMENT AND YIELD CONSIDERATIONS.........................................S-62
Assumptions Relating to Tables...........................................S-64
Weighted Average Lives of the Offered Certificates.......................S-66
Yield on the Inverse Floating Rate Certificates..........................S-68
Yield on the Class X-IO and Class XB-IO Certificates.....................S-69
Yield on the Class X-PO Certificates.....................................S-70
Yield on the Class 1-A-R Certificate.....................................S-71
Yield on the Subordinate Certificates....................................S-71
Yield Considerations with Respect to the Class B-2 and
Class B-3 Certificates................................................S-72
USE OF PROCEEDS.............................................................S-73
S-2
FEDERAL INCOME TAX CONSEQUENCES.............................................S-73
Regular Certificates.....................................................S-73
Residual Certificate.....................................................S-74
Backup Withholding and Reporting Requirements............................S-74
ERISA CONSIDERATIONS........................................................S-75
REPORTS TO CERTIFICATEHOLDERS...............................................S-76
METHOD OF DISTRIBUTION......................................................S-77
LEGAL MATTERS...............................................................S-77
CERTIFICATE RATINGS.........................................................S-77
INDEX OF PROSPECTUS SUPPLEMENT DEFINITIONS..................................S-79
Appendix A: Mortgage Loan Data.............................................. A-1
Appendix B: Decrement Tables................................................ B-1
Appendix C: Hypothetical Mortgage Loans..................................... C-1
Appendix D: Sensitivity and Aggregate Realized Loss Tables.................. D-1
S-3
Important Notice About Information Presented
in this Prospectus Supplement and the Prospectus
The offered certificates are described in two separate documents that
progressively provide more detail: (i) the accompanying prospectus, which
provides general information, some of which may not apply to a particular series
of certificates such as your certificates; and (ii) this prospectus supplement,
which incorporates and includes the appendices, and describes the specific terms
of your certificates.
Cross-references are included in this prospectus supplement and the
prospectus to captions in these materials where you can find additional
information. The table of contents in this prospectus supplement and the table
of contents in the prospectus provide the locations of these captions.
The Index of Prospectus Supplement Definitions beginning on page S-79 of
this prospectus supplement and the Index of Prospectus Definitions beginning on
page 147 of the prospectus direct you to the locations of the definitions of
capitalized terms used in each of the documents. Any capitalized terms that are
not defined in this prospectus supplement and that do not have obvious meanings
are defined in the prospectus.
Banc of America Mortgage Securities, Inc.'s principal offices are located
at 214 North Tryon Street, Mail Code NC1-027-22-02, Charlotte, North Carolina
28255. Its phone number is (704) 387-8239.
---------------------------
This prospectus supplement and the accompanying prospectus contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended. Specifically, forward-looking statements, together with
related qualifying language and assumptions, are found in the material
(including tables) under the headings "Risk Factors" and "Prepayment and Yield
Considerations" and in the appendices. Forward-looking statements are also found
in other places throughout this prospectus supplement and the prospectus, and
may be identified by, among other things, accompanying language such as
"expects," "intends," "anticipates," "estimates" or analogous expressions, or by
qualifying language or assumptions. These statements involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results or performance to differ materially from the forward-looking statements.
These risks, uncertainties and other factors include, among others, general
economic and business conditions, competition, changes in political, social and
economic conditions, regulatory initiatives and compliance with governmental
regulations, customer preference and various other matters, many of which are
beyond the depositor's control. These forward-looking statements speak only as
of the date of this prospectus supplement. The depositor expressly disclaims any
obligation or undertaking to disseminate any updates or revisions to any
forward-looking statements to reflect changes in the depositor's expectations
with regard to those statements or any change in events, conditions or
circumstances on which any forward-looking statement is based.
European Economic Area
In relation to each Member State of the European Economic Area which
has implemented the Prospectus Directive (each, a "Relevant Member State"), the
underwriter has represented and agreed that with effect from and including the
date on which the Prospectus Directive is implemented in that Relevant Member
State (the "Relevant Implementation Date"), it has not made and will not make an
offer of certificates to the public in that Relevant Member State prior to the
publication of a prospectus in relation to the certificates which has been
approved by the competent authority in that Relevant Member State or, where
appropriate, approved in another Relevant Member State and notified to the
competent authority in that Relevant Member State, all in accordance with the
Prospectus Directive, except that it
S-4
may, with effect from and including the Relevant Implementation Date, make an
offer of certificates to the public in that Relevant Member State at any time:
(a) to legal entities which are authorized or regulated to operate in
the financial markets or, if not so authorized or regulated, whose
corporate purpose is solely to invest in securities;
(b) to any legal entity which has two or more of (1) an average of at
least 250 employees during the last financial year; (2) a total balance
sheet of more than (euro)43,000,000 and (3) an annual net turnover of more
than (euro)50,000,000, as shown in its last annual or consolidated
accounts; or
(c) in any other circumstances which do not require the publication by
the issuer of a prospectus pursuant to Article 3 of the Prospectus
Directive.
For the purposes of this provision, the expression an "offer of
certificates to the public" in relation to any offered certificates in any
Relevant Member State means the communication in any form and by any means of
sufficient information on the terms of the offer and the certificates to be
offered so as to enable an investor to decide to purchase or subscribe the
certificates, as the same may be varied in that Member State by any measure
implementing the Prospectus Directive in that Member State and the expression
"Prospectus Directive" means Directive 2003/71/EC and includes any relevant
implementing measure in each Relevant Member State.
United Kingdom
The underwriter has represented and agreed that:
(a) it has only communicated or caused to be communicated and will
only communicate or cause to be communicated an invitation or inducement to
engage in investment activity (within the meaning of Section 21 of the
Financial Services and Markets Act 2000 (the "FSMA")) received by it in
connection with the issue or sale of the offered certificates in
circumstances in which Section 21(1) of the FSMA does not apply to the
Trust; and
(b) it has complied and will comply with all applicable provisions of
the FSMA with respect to anything done by it in relation to the offered
certificates in, from or otherwise involving the United Kingdom.
Notice to United Kingdom Investors
The distribution of this prospectus supplement and the accompanying
prospectus, if made by a person who is not an authorized person under the FSMA,
is being made only to, or directed only at persons who (1) are outside the
United Kingdom, or (2) have professional experience in matters relating to
investments, or (3) are persons falling within Articles 49(2)(a) through (d)
("high net worth companies, unincorporated associations, etc.") or 19
(Investment Professionals) of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2005 (all such persons together being referred to as
the "Relevant Persons"). This prospectus supplement and the accompanying
prospectus must not be acted on or relied on by persons who are not Relevant
Persons. Any investment or investment activity to which this prospectus
supplement and the accompanying prospectus relates, including the offered
certificates, is available only to Relevant Persons and will be engaged in only
with Relevant Persons.
Potential investors in the United Kingdom are advised that all, or most, of
the protections afforded by the United Kingdom regulatory system will not apply
to an investment in the offered certificates and that compensation will not be
available under the United Kingdom Financial Services Compensation Scheme.
S-5
THE SERIES 2006-8 CERTIFICATES
Initial Class
Balance or Pass-
Class or Component Through Minimum Incremental Certificate
Component Balance(1) Rate Principal Types(2) Interest Types(2) Denomination Denomination Form
- ---------------- ------------- ------- ----------------------- ------------------- ------------ ------------ -----------
Offered
Certificates
- ------------
Class 1-A-1...... (5) (6) Senior, Notional Amount Inverse Floating $1,000,000 $1 Book-Entry
Rate, Interest Only
Class 1-A-2...... $66,780,000 (7) Super Senior, Floating Rate $1,000 $1 Book-Entry
Pass-Through
Class 1-A-3...... $3,220,000 (8) Super Senior Support, Floating Rate $1,000 $1 Book-Entry
Pass-Through
Class 1-A-4...... $299,079,000 (9) Senior, Pass-Through Floating Rate $1,000 $1 Book-Entry
Class 1-A-5...... (5) (10) Senior, Notional Amount Inverse Floating $1,000,000 $1 Book-Entry
Rate, Interest Only
Class 1-A-R...... $100 7.000% Senior, Sequential Pay Fixed Rate $100 N/A Definitive
Class 2-A-1...... $30,595,000 (11) Super Senior, Floating Rate $1,000 $1 Book-Entry
Pass-Through
Class 2-A-2...... $7,649,000 (12) Super Senior, Inverse Floating $1,000 $1 Book-Entry
Pass-Through Rate
Class 2-A-3...... $1,844,000 6.000% Super Senior Support, Fixed Rate $1,000 $1 Book-Entry
Pass-Through
Class X-IO....... (13) (13) Senior, Component Interest Only $1,000,000 $1 Book-Entry
Class X-PO....... (14) (14) Senior, Component Principal Only $25,000 $1 Book-Entry
Class 3-A-1...... $57,919,000 (15) Senior, Pass-Through Variable Rate $1,000 $1 Book-Entry
Class XB-IO...... (5) 7.000% Senior, Notional Amount Fixed Rate, $100,000 $1 Book-Entry
Interest Only
Class M.......... $5,000,000 (16) Subordinated Variable Rate $25,000 $1 Book-Entry
Class B-1........ $5,969,000 (16) Subordinated Variable Rate $25,000 $1 Book-Entry
Class B-2........ $4,081,000 (16) Subordinated Variable Rate $25,000 $1 Book-Entry
Class B-3........ $3,061,000 (16) Subordinated Variable Rate $25,000 $1 Book-Entry
Components
Class 1-X-IO (17) 6.000% Notional Amount Fixed Rate, N/A N/A N/A
Interest Only
Class 2-X-IO (17) 6.000% Notional Amount Fixed Rate, N/A N/A N/A
Interest Only
Class 1-X-PO $19,602,882 (18) Ratio Strip Principal Only N/A N/A N/A
Class 2-X-PO $3,640 (18) Ratio Strip Principal Only N/A N/A N/A
[TABLE CONTINUED]
Initial Rating of
Certificates(4)
Class or Final Scheduled -----------------------
Component Distribution Date(3) Fitch Moody's S&P
- ---------------- ------------------- ----- ------- ----
Offered
Certificates
- ------------
Class 1-A-1...... November 25, 2036 AAA Aaa None
Class 1-A-2...... November 25, 2036 AAA Aaa AAA
Class 1-A-3...... November 25, 2036 AAA Aa1 None
Class 1-A-4...... November 25, 2036 AAA Aaa None
Class 1-A-5...... November 25, 2036 AAA Aaa None
Class 1-A-R...... November 25, 2036 AAA None None
Class 2-A-1...... November 25, 2046 AAA Aaa None
Class 2-A-2...... November 25, 2046 AAA Aaa None
Class 2-A-3...... November 25, 2046 AAA Aa1 None
Class X-IO....... November 25, 2046 AAA Aaa None
Class X-PO....... November 25, 2046 AAA Aaa None
Class 3-A-1...... November 25, 2021 AAA Aaa None
Class XB-IO...... November 25, 2046 AAA None None
Class M.......... November 25, 2046 AA+ Aa1 None
Class B-1........ November 25, 2046 AA None None
Class B-2........ November 25, 2046 A None None
Class B-3........ November 25, 2046 BBB None None
Components
Class 1-X-IO N/A N/A N/A N/A
Class 2-X-IO N/A N/A N/A N/A
Class 1-X-PO N/A N/A N/A N/A
Class 2-X-PO N/A N/A N/A N/A
S-6
Initial Class
Balance or Pass-
Class or Component Through Minimum Incremental Certificate
Component Balance(1) Rate Principal Types(2) Interest Types(2) Denomination Denomination Form
- ---------------- ------------- ------- ----------------------- ------------------- ------------ ------------ -----------
Non-Offered
Certificates
Class B-4........ $2,296,000 (19) Subordinated Variable Rate N/A N/A N/A
Class B-5........ $1,531,000 (19) Subordinated Variable Rate N/A N/A N/A
Class B-6........ $1,530,579 (19) Subordinated Variable Rate N/A N/A N/A
[TABLE CONTINUED
Initial Rating of
Certificates(4)
-----------------------
Class or Final Scheduled Initial Rating of
Component Distribution Date(3) Fitch Moody's S&P
- ---------------- ------------------- ----- ------- ----
Non-Offered
Certificates
Class B-4........ N/A BB None None
Class B-5........ N/A B None None
Class B-6........ N/A None None None
- ---------
(1) Approximate. The initial class balance of the offered certificates may vary
by a total of plus or minus 5%.
(2) See "Description of the Certificates -- Categories of Classes of
Certificates" in the prospectus for a description of these principal and
interest types and see "Description of the Certificates -- Priority of
Distributions" and "-- Allocation of Losses" in this prospectus supplement
for a description of the effects of subordination.
(3) The final scheduled distribution date represents the distribution date in
the month following the latest maturity date of any mortgage loan in the
related loan group or loan groups or the mortgage pool, as the case may be.
The actual final payment on your offered certificates could occur earlier
or later than the final scheduled distribution date.
(4) The offered certificates will not be issued unless they receive at least
the ratings set forth in this table. See "Certificate Ratings" in this
prospectus supplement.
(5) The Class 1-A-1, Class 1-A-5 and Class XB-IO Certificates are interest only
certificates, have no class balances and will bear interest on their
notional amounts (initially approximately $369,079,000, $3,075,658 and
$1,509,018, respectively) as described in this prospectus supplement under
"Description of the Certificates -- Interest."
(6) During the initial interest accrual period, interest will accrue on the
Class 1-A-1 Certificates at the rate of 1.180% per annum. During each
interest accrual period after the initial, interest will accrue on the
Class 1-A-1 Certificates at a per annum rate equal to (i) 6.500% minus (ii)
one-month LIBOR, determined monthly as set forth under "Description of the
Certificates -- LIBOR" in this prospectus supplement, subject to a minimum
rate of 0.000% and a maximum rate of 6.500%. See "Description of the
Certificates -- Interest" in this prospectus supplement.
(7) During the initial interest accrual period, interest will accrue on the
Class 1-A-2 Certificates at the rate of 5.770% per annum. During each
interest accrual period after the initial, interest will accrue on the
Class 1-A-2 Certificates at a per annum rate equal to (i) 0.450% plus (ii)
one-month LIBOR, determined monthly as set forth under "Description of the
Certificates -- LIBOR" in this prospectus supplement, subject to a minimum
rate of 0.450% and a maximum rate of 7.000%.
(8) During the initial interest accrual period, interest will accrue on the
Class 1-A-3 Certificates at the rate of 5.770% per annum. During each
interest accrual period after the initial, interest will accrue on the
Class 1-A-3 Certificates at a per annum rate equal to (i) 0.450% plus (ii)
one-month LIBOR, determined monthly as set forth under "Description of the
Certificates -- LIBOR" in this prospectus supplement, subject to a minimum
rate of 0.450% and a maximum rate of 7.000%.
(9) During the initial interest accrual period, interest will accrue on the
Class 1-A-4 Certificates at the rate of 5.770% per annum. During each
interest accrual period after the initial, interest will accrue on the
Class 1-A-4 Certificates at a per annum rate equal to (i) 0.450% plus (ii)
one-month LIBOR, determined monthly as set forth under "Description of the
Certificates -- LIBOR" in this prospectus supplement, subject to a minimum
rate of 0.450% and a maximum rate of 7.000%.
(10) During the initial interest accrual period, interest will accrue on the
Class 1-A-5 Certificates at the rate of 6.000% per annum. During each
interest accrual period after the initial, interest will accrue on the
Class 1-A-5 Certificates at a per annum rate equal to (i) 786.000% minus
(ii) the product of 120.000 and one-month LIBOR, determined monthly as set
forth under "Description of the Certificates -- LIBOR" in this prospectus
supplement, subject to a minimum rate of 0.000% and a maximum rate of
6.000%. See "Description of the Certificates -- Interest" in this
prospectus supplement.
(11) During the initial interest accrual period, interest will accrue on the
Class 2-A-1 Certificates at the rate of 5.720% per annum. During each
interest accrual period after the initial, interest will accrue on the
Class 2-A-1 Certificates at a per annum rate equal to (i) 0.400% plus (ii)
one-month LIBOR, determined monthly as set forth under "Description of the
Certificates -- LIBOR" in this prospectus supplement, subject to a minimum
rate of 0.400% and a maximum rate of 7.500%.
S-7
(12) During the initial interest accrual period, interest will accrue on the
Class 2-A-2 Certificates at the rate of 7.120% per annum. During each
interest accrual period after the initial, interest will accrue on the
Class 2-A-2 Certificates at a per annum rate equal to (i) 28.400% minus
(ii) the product of 4.000 and one-month LIBOR, determined monthly as set
forth under "Description of the Certificates -- LIBOR" in this prospectus
supplement, subject to a minimum rate of 0.000% and a maximum rate of
28.400%. See "Description of the Certificates -- Interest" in this
prospectus supplement.
(13) The Class X-IO Certificates are interest only certificates and will be
deemed for purposes of distributions of interest to consist of two
components: the Class 1-X-IO and Class 2-X-IO Components. The components of
a class are not severable. The initial notional amount of the Class X-IO
Certificates will be approximately $11,648,230.
(14) The Class X-PO Certificates are principal only certificates and will be
deemed for purposes of distributions of principal to consist of two
components: the Class 1-X-PO and Class 2-X-PO Components. The components of
a class are not severable. The initial class balance of the Class X-PO
Certificates will be approximately $19,606,522.
(15) Interest will accrue on the Class 3-A-1 Certificates at a per annum rate
equal to the weighted average of the net mortgage interest rates of the
mortgage loans in loan group 3. For the initial distribution date in
November 2006, this rate is expected to be approximately 6.29103%.
(16) Interest will accrue on these Certificates for each distribution date at a
per annum rate equal to (a) the weighted average (based on the excess, if
any, of the sum of the non-PO portion of the mortgage loans in each loan
group over the sum of the class balances of the senior non-PO certificates
in the related group) of (i) with respect to loan group 1, 7.000%, (ii)
with respect to loan group 2, 6.000% and (iii) with respect to loan group
3, the weighted average of the net mortgage interest rates of the mortgage
loans in loan group 3, minus (b) 0.583244%. For the initial distribution
date in November 2006, this rate is expected to be approximately 6.250% per
annum.
(17) The Class 1-X-IO and Class 2-X-IO Components are interest only components,
have no principal balance and will bear interest on their notional amounts
(initially approximately $4,648,177 and $7,000,053, respectively) as
described in this prospectus supplement under "Description of the
Certificates -- Interest."
(18) The Class 1-X-PO and 2-X-PO Components are principal only components and
will not be entitled to distributions of interest.
(19) Interest will accrue on these Certificates for each distribution date at a
per annum rate equal to the weighted average (based on the excess, if any,
of the sum of the non-PO portion of the mortgage loans in each loan group
over the sum of the class balances of the senior non-PO certificates in the
related group) of (i) with respect to loan group 1, 7.000%, (ii) with
respect to loan group 2, 6.000% and (iii) with respect to loan group 3, the
weighted average of the net mortgage interest rates of the mortgage loans
in loan group 3. For the initial distribution date in November 2006, this
rate is expected to be approximately 6.83324% per annum.
S-8
- --------------------------------------------------------------------------------
SUMMARY OF TERMS
- --------------------------------------------------------------------------------
This summary highlights selected information from this prospectus
supplement. It does not contain all of the information that you need to consider
in making your investment decision. To understand the terms of the offered
certificates, you should read this entire prospectus supplement and the
prospectus carefully.
Title of Series: Banc of America Alternative Loan Closing Date: On or about October 30, 2006
Trust 2006-8, Mortgage
Pass-Through Certificates, Cut-off Date: October 1, 2006
Series 2006-8
Distribution Date: The 25th day of each month (or, if
Sponsor: Bank of America, National not a business day, the next
Association business day) beginning November
27, 2006
Depositor: Banc of America Mortgage
Securities, Inc.
Determination Date: The sixteenth day of each month in
Servicer Bank of America, National which a distribution date occurs
Association (or, if not a business day, the
immediately preceding business
day).
Issuing Entity: Banc of America Alternative Loan
Trust 2006-8
Trustee: Wells Fargo Bank, N.A. Record Date: The last business day of the month
preceding the month in which a
distribution date occurs.
Counterparty: Bank of America, National
Association
-------------------------
The Transaction Parties
The sponsor originated and currently services the mortgage loans. On the
closing date the sponsor will sell the mortgage loans to the depositor, who will
in turn deposit them into a common law trust, which is the issuing entity. The
trust will be formed by a pooling and servicing agreement, to be dated the
closing date, among the depositor, the servicer and the trustee. The servicer
will service the mortgage loans in accordance with the pooling and servicing
agreement and provide the information to the trustee necessary for the trustee
to calculate distributions and other information regarding the certificates.
S-9
The transfers of the mortgage loans from the sponsor to the depositor to
the issuing entity in exchange for the certificates is illustrated below:
-----------------
Sponsor
-----------------
| ^ Offered -------------
| | Certificates Underwriter
| | |------------------------> -------------
Mortgage | | | ------------------------ | ^
Loans | | | | | |
| | Cash | | Cash | | Cash
| | | | Offered | |
v | | | Certificates| |
----------------- -------- | | |
Depositor <------- | | |
----------------- | |
| ^ v |
Mortgage | | -------------
Loans | | All Certificates Investors
| | -------------
v |
-----------------
Issuing
Entity
-----------------
The Certificates
A summary chart of the initial class balances, initial component principal
balances, initial notional amounts, principal types, pass-through rates,
interest types, denominations, certificate forms, final scheduled distribution
dates and ratings of the certificates is set forth in the table beginning on
page S-6.
S-10
The certificates represent all of the beneficial ownership interest in the
trust.
- --------------------------------------------------------------------------------
Classifications of Classes of Certificates
- --------------------------------------------------------------------------------
Offered Certificates: 1-A-1, 1-A-2, 1-A-3, 1-A-4, 1-A-5,
1-A-R, 2-A-1, 2-A-2, 2-A-3, X-IO, X-PO,
3-A-1, XB-IO, M, B-1, B-2 and B-3
- --------------------------------------------------------------------------------
Non-Offered Certificates B-4, B-5 and B-6
- --------------------------------------------------------------------------------
Senior Certificates: 1-A-1, 1-A-2, 1-A-3, 1-A-4, 1-A-5,
1-A-R, 2-A-1, 2-A-2, 2-A-3, X-IO, X-PO,
3-A-1 and XB-IO
- --------------------------------------------------------------------------------
Senior Non-PO Certificates: 1-A-1, 1-A-2, 1-A-3, 1-A-4, 1-A-5,
1-A-R, 2-A-1, 2-A-2, 2-A-3, X-IO, 3-A-1
and XB-IO
- --------------------------------------------------------------------------------
Subordinate Certificates: M, B-1, B-2, B-3, B-4, B-5 and B-6
- --------------------------------------------------------------------------------
Group 1 Certificates and Components: Classes: 1-A-1, 1-A-2, 1-A-3, 1-A-4,
1-A-5 and 1-A-R
Components: 1-X-IO and 1-X-PO
- --------------------------------------------------------------------------------
Group 2 Certificates and Components: Classes: 2-A-1, 2-A-2 and 2-A-3
Components: 2-X-IO and 2-X-PO
- --------------------------------------------------------------------------------
Group 3 Certificates: Class: 3-A-1
- --------------------------------------------------------------------------------
Component Certificates: X-IO and X-PO
- --------------------------------------------------------------------------------
Components: 1-X-IO, 1-X-PO, 2-X-IO and 2-X-PO
- --------------------------------------------------------------------------------
Floating Rate Certificates: 1-A-2, 1-A-3, 1-A-4 and 2-A-1
- --------------------------------------------------------------------------------
Inverse Floating Rate Certificates: 1-A-1, 1-A-5 and 2-A-2
- --------------------------------------------------------------------------------
Interest Only Certificates: 1-A-1, 1-A-5, X-IO and XB-IO
- --------------------------------------------------------------------------------
IO Components: 1-X-IO and 2-X-IO
- --------------------------------------------------------------------------------
PO Components: 1-X-PO and 2-X-PO
- --------------------------------------------------------------------------------
Principal Only Certificates: X-PO
- --------------------------------------------------------------------------------
Residual Certificate: 1-A-R
- --------------------------------------------------------------------------------
Super Senior Certificates: 1-A-2, 2-A-1 and 2-A-2
- --------------------------------------------------------------------------------
Super Senior Support Certificates: 1-A-3 and 2-A-3
- --------------------------------------------------------------------------------
The senior certificates (other than the Class XB-IO Certificates) are
divided into three groups. Other than as to certain cross-collateralization
payments described under "Description of the Certificates --
Cross-Collateralization" and the payment of any PO deferred amounts described
under "-- Allocation of Losses," the senior certificates and components whose
class or component designations begin with "1" correspond to loan group 1, the
senior certificates and components whose class or component designations begin
with "2" correspond to loan group 2 and the senior certificates whose class
designations begin with "3" correspond to loan group 3. The Class XB-IO
Certificates and the subordinate certificates correspond to all loan groups.
The total principal balance of the mortgage loans in a loan group is
represented by the senior certificates and components indicated in the preceding
paragraph and a portion of each class of subordinate certificates. The principal
only components will each represent a portion of the principal balance of the
discount mortgage loans in the related loan group. Discount mortgage loans are
mortgage loans with net mortgage interest rates as of the cut-off date lower
than 7.000% for loan group 1 and 6.000% for loan group 2. Because each principal
only component represents an interest solely in the discount mortgage loans in
the related loan group, referred to as the PO portion, only principal payments,
including prepayments of principal, and realized losses on the discount mortgage
loans in the related loan
S-11
group will affect the principal only components. The portion of the total
principal balance of the mortgage loans in loan group 1 or loan group 2 not
represented by the principal only component of such group is the non-PO portion
and is represented by the other senior certificates of such group, referred to
as the senior non-PO certificates, and a portion of the subordinate
certificates. With respect to loan group 3, the entire principal balance of the
mortgage loans is the non-PO portion and is represented by all of the senior
certificates of group 3, referred to as senior non-PO certificates, and a
portion of the subordinate certificates.
The subordinate certificates are subordinated to the senior certificates
for distributions of principal and interest and for allocations of losses on the
mortgage loans in all loan groups and each class of subordinate certificates is
subordinated to those classes of subordinate certificates higher in order of
payment priority for distributions of principal and interest and for allocations
of losses on the mortgage loans in all loan groups.
Only the senior, Class M, Class B-1, Class B-2 and Class B-3 Certificates
are being offered by this prospectus supplement.
The Class B-4, Class B-5 and Class B-6 Certificates are not offered by this
prospectus supplement. Information provided about the non-offered certificates
is included in this prospectus supplement only to aid your understanding of the
offered certificates.
Mortgage Pool
The mortgage pool will consist of a pool (the "Mortgage Pool") of
fully-amortizing mortgage loans (the "Mortgage Loans") secured by first liens on
one- to four-family residential properties. The following table shows the loan
group names and the related mortgage loans:
Loan Group Related Mortgage Loans
----------- ----------------------
Loan Group 1 Group 1 Mortgage Loans
Loan Group 2 Group 2 Mortgage Loans
Loan Group 3 Group 3 Mortgage Loans
The tables below indicate the original terms of the mortgage loans next to
the row heading "Original Term," any seasoning of the mortgage loans next to the
row headings "Remaining Terms to Stated Maturity" and "Number of Months Since
Origination" and the latest maturing mortgage loan next to the row heading
"Latest Maturity Date." The "Loan-to-Value Ratio" of a mortgage loan at
origination shown in the tables below is the percentage equal to (i) the
principal balance of the mortgage loan divided by (ii) the lesser of (a) the
appraised value of the related mortgaged property determined in an appraisal
obtained by the originator at origination of the mortgage loan or an automated
valuation model or tax assessed value (if permitted by the applicable mortgage
loan program) and (b) except for mortgage loans made for refinancing purposes,
the sales price for the mortgaged property. The "Credit Scores" shown in the
tables below are statistical credit scores obtained by the sponsor in connection
with the loan application to help assess a borrower's creditworthiness. Credit
scores are generated by models developed by a third party and are made available
to lenders through three national credit bureaus, Experian (FICO), Equifax
(Beacon) and TransUnion (Empirica).
The mortgage pool also includes mortgage loans that (i) are subject to
temporary buy-down plans under which the monthly payments made by the mortgagor
during the early years of the mortgage loan will be less than the scheduled
monthly payments on the mortgage loan, with the resulting difference in payment
to be compensated for from an amount contributed by the seller of the related
Mortgaged Property or another source, including the originator of the mortgage
loan ("Buy-Down Loans"), (ii) have a Borrowers Protection Plan(R) addendum to
the related mortgage note ("BPP Mortgage Loans")
S-12
whereby the sponsor agrees to cancel (a) certain payments of principal and
interest on the mortgage loan for up to twelve months upon the disability or
involuntary unemployment of the mortgagor or (b) the outstanding principal
balance of the mortgage loan upon the accidental death of the mortgagor;
provided that the plan has not been terminated in accordance with its terms,
(iii) require only payments of interest for a term specified in the related
mortgage note ("Interest Only Mortgage Loans"), or (iv) are secured by leases on
real property meeting the requirements of the prospectus and the pooling
agreement. All of the mortgage loans were originated by the sponsor under either
the sponsor's general underwriting standards or "Alternative A" underwriting
standards. See "The Mortgage Loan Programs -- Mortgage Loan Underwriting -- Bank
of America General Underwriting Standards" and "-- Bank of America Alternative
Underwriting Standards" in the prospectus.
The servicing fees for the mortgage loans are payable out of the interest
payments on the mortgage loans, prior to any payments to the trustee or
distributions to certificateholders. The servicing fees accrue on the mortgage
loans at the servicing fee rate set forth in the tables below. In addition to
the servicing fees, the servicer will be entitled to retain as additional
servicing compensation (i) any late payment fees, assumption fees and other
similar charges, (ii) net income from investment of funds in the servicer
custodial account and (iii) any profits from the liquidation of mortgage loans.
See "The Pooling Agreement -- Compensation and Payment of Expenses of the
Servicer and the Trustee" in this prospectus supplement for more information
about fees and expenses of the servicer and the trustee.
The depositor expects the mortgage loans to have the following approximate
characteristics:
S-13
Selected Group 1 Mortgage Loan Data as of October 1, 2006
Range or Total Weighted Average
---------------------------- ----------------------
Number of Group 1 Mortgage Loans 2,652 --
Aggregate Unpaid Principal Balance $407,424,097.43 --
Unpaid Principal Balance $9,990.96 to $1,694,539.77 $153,629.00(1)
Mortgage Interest Rates 5.625% to 8.250% 6.986%
Servicing Fee Rate 0.2500% --
Trustee Fee Rate 0.0045% --
Administrative Fee Rate 0.2545% --
Remaining Terms to Stated Maturity 236 to 360 months 358 months
Original Term 240 to 360 months 359 months
Number of Months Since Origination 1 to 21 months 2 months
Original Loan-to-Value Ratio 4.29% to 103.00% 76.15%
Credit Scores 600 to 839 720
Latest Maturity Date October 1, 2036 --
Number of Interest Only Mortgage Loans 17 --
Aggregate Unpaid Principal Balance of Interest
Only Mortgage Loans $6,960,374.63 --
Unpaid Principal Balance of Interest Only Mortgage
Loans $110,000.00 to $1,500,000.00 $409,433.80
Number of Buy-Down Mortgage Loans 1 --
Aggregate Unpaid Principal Balance of Buy-Down $157,067.93
Mortgage Loans --
Unpaid Principal Balance of Buy-Down Mortgage Loans $157,067.93 --
Number of BPP Mortgage Loans 356 --
Aggregate Unpaid Principal Balance of BPP Mortgage
Loans $39,286,130.77 --
Unpaid Principal Balance of BPP Mortgage Loans $13,600.00 to $228,208.11 $110,354.30(1)
Number of Mortgage Loans underwritten using
"Alternative A" underwriting standards 575 --
Aggregate Unpaid Principal Balance of Mortgage
Loans underwritten using "Alternative A"
underwriting standards $154,691,059.90 --
Unpaid Principal Balance of Mortgage Loans
underwritten using "Alternative A" underwriting
standards $9,990.96 to $1,694,539.77 $269,027.93(1)
Number of Mortgage Loans secured by leases on real
property 34 --
Aggregate Unpaid Principal Balance of Mortgage
Loans secured by leases on real property $4,702,384.87 --
Unpaid Principal Balance of Mortgage Loans secured
by leases on real property $29,600.00 to $1,640,698.61 $138,305.44(1)
Geographic Concentration of Mortgaged Properties in
Excess of 5.00% of the Aggregate Unpaid Principal
Balance
Florida................................ 15.39%
California............................. 14.20%
Texas.................................. 9.41%
North Carolina......................... 6.31%
Maximum Single Five-Digit Zip Code Concentration 0.42%
- ---------
(1) The balance shown is the average unpaid principal balance.
S-14
Selected Group 2 Mortgage Loan Data as of October 1, 2006
Range or Total Weighted Average
---------------------------- ----------------------
Number of Group 2 Mortgage Loans 159 --
Aggregate Unpaid Principal Balance $42,024,831.24 --
Unpaid Principal Balance $32,337.53 to $2,970,000.00 $264,307.11(1)
Mortgage Interest Rate 6.000% to 8.750% 7.253%
Servicing Fee Rate 0.2500% --
Trustee Fee Rate 0.0045% --
Administrative Fee Rate 0.2545% --
Remaining Terms to Stated Maturity 474 to 480 months 478 months
Original Term 480 months --
Number of Months Since Origination 1 to 7 months 3 months
Original Loan-to-Value Ratio 22.77% to 95.00% 72.46%
Credit Scores 609 to 811 722
Latest Maturity Date October 1, 2046 --
Number of Interest Only Mortgage Loans 0 --
Aggregate Unpaid Principal Balance of Interest
Only Mortgage Loans $0.00 --
Unpaid Principal Balance of Interest Only Mortgage
Loans $0.00 --
Number of Buy-Down Mortgage Loans 1 --
Aggregate Unpaid Principal Balance of Buy-Down
Mortgage Loans $551,498.27 --
Unpaid Principal Balance of Buy-Down Mortgage Loans $551,498.27 --
Number of BPP Mortgage Loans 12 --
Aggregate Unpaid Principal Balance of BPP Mortgage
Loans $2,904,678.99 --
Unpaid Principal Balance of BPP Mortgage Loans $59,099.73 to $799,705.74 $242,056.58 (1)
Number of Mortgage Loans underwritten using
"Alternative A" underwriting standards 60 --
Aggregate Unpaid Principal Balance of Mortgage
Loans underwritten using "Alternative A"
underwriting standards $21,050,210.27 --
Unpaid Principal Balance of Mortgage Loans
underwritten using "Alternative A" underwriting
standards $72,912.39 to $2,970,000.00 $350,836.84 (1)
Number of Mortgage Loans secured by leases on real
property 1 --
Aggregate Unpaid Principal Balance of Mortgage
Loans secured by leases on real property $119,892.38 --
Unpaid Principal Balance of Mortgage Loans secured
by leases on real property $119,892.38 --
Geographic Concentration of Mortgaged Properties in
Excess of 5.00% of the Aggregate Unpaid Principal
Balance
California............................. 33.71%
Florida................................ 12.48%
South Carolina......................... 9.55%
Maryland............................... 7.13%
Maximum Single Five-Digit Zip Code Concentration 7.07%
- ---------
(1) The balance shown is the average unpaid principal balance.
S-15
Selected Group 3 Mortgage Loan Data as of October 1, 2006
Range or Total Weighted Average
---------------------------- ----------------------
Number of Group 3 Mortgage Loans 531 --
Aggregate Unpaid Principal Balance $60,712,273.20 --
Unpaid Principal Balance $11,261.76 to $1,696,512.65 $114,335.73(1)
Mortgage Interest Rate 5.250% to 8.000% 6.546%
Servicing Fee Rate 0.2500% --
Trustee Fee Rate 0.0045% --
Administrative Fee Rate 0.2545% --
Remaining Terms to Stated Maturity 115 to 180 months 176 months
Original Term 120 to 180 months 178 months
Cut-Off Months Since Origination 1 to 23 months 4 months
Original Loan-to-Value Ratio 3.46% to 95.00% 66.74%
Credit Scores 605 to 826 732
Latest Maturity Date October 1, 2021 --
Number of Interest Only Mortgage Loans 0 --
Aggregate Unpaid Principal Balance of Interest
Only Mortgage Loans $0.00 --
Unpaid Principal Balance of Interest Only Mortgage
Loans $0.00 --
Number of Buy-Down Mortgage Loans 0 --
Aggregate Unpaid Principal Balance of Buy-Down
Mortgage Loans $0.00 --
Unpaid Principal Balance of Buy-Down Mortgage Loans $0.00 --
Number of BPP Mortgage Loans 64 --
Aggregate Unpaid Principal Balance of BPP Mortgage
Loans $4,343,453.42 --
Unpaid Principal Balance of BPP Mortgage Loans $11,261.76 to $171,439.43 $67,866.46(1)
Number of Mortgage Loans underwritten using
"Alternative A" underwriting standards 83 --
Aggregate Unpaid Principal Balance of Mortgage
Loans underwritten using "Alternative A"
underwriting standards $16,152,448.97 --
Unpaid Principal Balance of Mortgage Loans
underwritten using "Alternative A" underwriting
standards $23,130.70 to $1,696,512.65 $194,607.82(1)
Number of Mortgage Loans secured by leases on real
property 4 --
Aggregate Unpaid Principal Balance of Mortgage
Loans secured by leases on real property $344,984.00 --
Unpaid Principal Balance of Mortgage Loans secured
by leases on real property $52,825.39 to $104,661.47 $86,246.00(1)
Geographic Concentration of Mortgaged Properties in
Excess of 5.00% of the Aggregate Unpaid Principal
Balance
California............................. 19.23%
Florida................................ 13.45%
Texas.................................. 12.60%
North Carolina......................... 7.07%
Maximum Single Five-Digit Zip Code Concentration 2.79%
- ---------
(1) The balance shown is the average unpaid principal balance.
S-16
Selected Aggregate Mortgage Loan Data as of October 1, 2006
Range or Total Weighted Average
---------------------------- ----------------------
Number of Mortgage Loans 3,342 --
Aggregate Unpaid Principal Balance $510,161,201.87 --
Unpaid Principal Balance $9,990.96 to $2,970,000.00 $152,651.47(1)
Mortgage Interest Rate 5.250% to 8.750% 6.956%
Servicing Fee Rate 0.2500% --
Trustee Fee Rate 0.0045% --
Administrative Fee Rate 0.2545% --
Remaining Terms to Stated Maturity 115 to 480 months 347 months
Original Term 120 to 480 months 348 months
Number of Months Since Origination 1 to 23 months 2 months
Original Loan-to-Value Ratio 3.46% to 103.00% 74.72%
Credit Scores 600 to 839 722
Latest Maturity Date October 1, 2046 --
Number of Interest Only Mortgage Loans 17 --
Aggregate Unpaid Principal Balance of Interest
Only Mortgage Loans $6,960,374.63 --
Unpaid Principal Balance of Interest Only Mortgage
Loans $110,000.00 to $1,500,000.00 $409,433.80
Number of Buy-Down Mortgage Loans 2 --
Aggregate Unpaid Principal Balance of Buy-Down
Mortgage Loans $708,566.20 --
Unpaid Principal Balance of Buy-Down Mortgage Loans $157,067.93 to $551,498.27 $354,283.10(1)
Number of BPP Mortgage Loans 432 --
Aggregate Unpaid Principal Balance of BPP Mortgage
Loans $46,534,263.18 --
Unpaid Principal Balance of BPP Mortgage Loans $11,261.76 to $799,705.74 $107,718.20(1)
Number of Mortgage Loans underwritten using
"Alternative A" underwriting standards 718 --
Aggregate Unpaid Principal Balance of Mortgage
Loans underwritten using "Alternative A"
underwriting standards $191,893,719.14 --
Unpaid Principal Balance of Mortgage Loans
underwritten using "Alternative A" underwriting
standards $9,990.96 to $2,970,000.00 $267,261.45(1)
Number of Mortgage Loans secured by leases on real
property 39 --
Aggregate Unpaid Principal Balance of Mortgage
Loans secured by leases on real property $5,167,261.25 --
Unpaid Principal Balance of Mortgage Loans secured
by leases on real property $29,600.00 to $1,640,698.61 $132,493.88(1)
Geographic Concentration of Mortgaged Properties in
Excess of 5.00% of the Aggregate Unpaid Principal
Balance
California............................. 16.41%
Florida................................ 14.92%
Texas.................................. 9.35%
North Carolina......................... 5.93%
Maximum Single Five-Digit Zip Code Concentration 0.86%
- ---------
(1) The balance shown is the average unpaid principal balance.
S-17
The characteristics of the loan groups may change because:
o Before the closing date, the depositor may remove mortgage loans from
a loan group. The depositor also may substitute new mortgage loans for
mortgage loans in a loan group prior to the closing date.
o After the certificates are issued, mortgage loans in a loan group may
be removed from the trust because of repurchases by the depositor for
breaches of representations or failure to deliver required documents.
Under certain circumstances and generally only during the two-year
period following the closing date, the depositor may instead make
substitutions for these mortgage loans.
See "The Pooling Agreement -- Repurchases of Mortgage Loans" in the
prospectus for a discussion of the circumstances under which the depositor is
required to repurchase or substitute for mortgage loans. These removals and/or
substitutions may result in changes in the loan group characteristics shown
above. These changes may affect the weighted average lives and yields to
maturity of the related offered certificates.
Additional information on the mortgage pool and each loan group is set
forth in the tables in Appendix A to this prospectus supplement and information
regarding repurchases and substitutions of the mortgage loans after the closing
date will be available on the trust's monthly distribution reports on Form 10-D.
See "Reports to Certificateholders" in this prospectus supplement.
Optional Termination
At its option, the depositor may, subject to certain conditions, purchase
all remaining mortgage loans in the trust on any distribution date on which the
aggregate stated principal balance of the mortgage loans is less than 10% of the
aggregate unpaid principal balance of the mortgage loans as of the cut-off date.
See "The Pooling Agreement -- Termination; Optional Purchase of Mortgage
Loans" in the prospectus.
If the depositor exercises its right to repurchase all of the mortgage
loans, the certificates outstanding at that time will be retired earlier than
would otherwise be the case.
See "Prepayment and Yield Considerations" in this prospectus supplement.
Priority of Distributions
Distributions on each group of senior certificates and components and the
Class XB-IO Certificates (except to the extent of cross-collateralization
payments and PO deferred amounts) and on the subordinate certificates will be
made on each distribution date from the collections on the mortgage loans in the
related loan group, in the case of the senior certificates (other than the Class
XB-IO Certificates) and components, or all loan groups, in the case of the Class
XB-IO and subordinate certificates, less certain expenses (such as servicing
fees, reimbursements for advances made by the servicer and payment of other
expenses and indemnities described in this prospectus supplement) in the
following order of priority:
S-18
-------------------------------------------------------------
first, to the trustee to pay trustee fees relating to the
loan group;
-------------------------------------------------------------
|
|
V
-------------------------------------------------------------
second, to the senior certificates and interest only
component of the related group, if any, and to the
Class XB-IO Certificates to pay interest;
-------------------------------------------------------------
|
|
V
-------------------------------------------------------------
third, to the senior certificates and principal only
component of the related group, if any, to pay principal;
-------------------------------------------------------------
|
|
V
-------------------------------------------------------------
fourth, to the principal only component of the related
group, if any, to pay any applicable PO deferred amounts,
but only from amounts that would otherwise be distributable
on such distribution date as principal of the subordinate
certificates;
-------------------------------------------------------------
|
|
V
-------------------------------------------------------------
fifth, from the collections for all loan groups, to each
class of subordinate certificates, subject to any payments
described under "Descriptions of the Certificates -- Cross
Collateralization," first to pay interest and then to pay
principal sequentially first to the Class M Certificates and
then to the remaining classes of subordinate certificates,
in numerical order, beginning with the Class B-1
Certificates; and
-------------------------------------------------------------
|
|
V
-------------------------------------------------------------
sixth, to the Class 1-A-R Certificate, any remaining amounts.
-------------------------------------------------------------
The source of the distributions to certificateholders is more fully
described under "Description of the Certificates -- Pool Distribution Amount" in
this prospectus supplement. The amount of interest and principal distributions
on each class of certificates is more fully described under "Description of the
Certificates -- Interest" and "-- Principal" in this prospectus supplement.
Interest Distributions
The amount of interest that will accrue on each interest-bearing class of
certificates or, in the case of the Class X-IO Certificates, each applicable
component, during each interest accrual period equals:
o one-twelfth of the pass-through rate for that class or component (as
described in the table beginning on page S-6 of this prospectus
supplement) multiplied by the class balance or notional amount of the
certificate or component on the distribution date, minus
o the class' or component's share of certain interest shortfalls arising
from the timing of prepayments on the mortgage loans and interest
limitations applicable to certain military or
S-19
similar personnel and the class' or component's share of interest
losses, as described under "The Pooling Agreement -- Compensating
Interest" and "Description of the Certificates -- Interest" in this
prospectus supplement.
The Class X-PO Certificates are principal only certificates and are not
entitled to distributions of interest.
See "Description of the Certificates -- Distributions" and "-- Interest" in
this prospectus supplement.
Principal Distributions
Principal received or advanced on the mortgage loans generally will be
allocated between the applicable senior certificates and the subordinate
certificates as described below under "-- Credit Support -- Shifting Interest in
Prepayments."
On each distribution date on which the subordinate certificates are
outstanding, the portion of principal received or advanced on the mortgage loans
in each loan group allocated to the related senior non-PO certificates will be
distributed among the senior non-PO certificates of the group as described in
"Description of the Certificates -- Principal -- Senior Principal Distribution
Amount" in this prospectus supplement. However, if the subordinate certificates
are no longer outstanding, each class of senior non-PO certificates of a group
will generally receive principal pro rata according to its class balance. The
Class X-PO Certificates will generally receive principal as described in
"Description of the Certificates -- Principal -- PO Principal Distribution
Amount" in this prospectus supplement.
The Class 1-A-1, Class 1-A-5, Class X-IO and Class XB-IO Certificates are
interest only certificates and are not entitled to distributions of principal.
See "Description of the Certificates -- Priority of Distributions" and "--
Principal" in this prospectus supplement.
S-20
Credit Support
Credit support for the offered certificates is provided by subordination as
follows:
Subordination of Subordinate Certificates(1)
-----------------------------------------------------------
Priority of | Senior | ^
Payment | (Credit Support 4.60%) | |
-------------|----------------------------- | |
| | Class M | |
| | (Credit Support 3.62%) | |
| | ---------------------------- | |
| | Class B-1 | |
| | (Credit Support 2.45%) | |
| | ---------------------------- | |
| | Class B-2 | |
| | (Credit Support 1.65%) | |
| | ---------------------------- | |
| | Class B-3 | |
| | (Credit Support 1.05%) | |
| | ---------------------------- | |
| | Class B-4 | |
| | (Credit Support 0.60%) |
v | ---------------------------- |
| Class B-5 |
| (Credit Support 0.30%) |
| -----------------------------|---------------
| Class B-6 | Order of
| (Credit Support 0.00%) |Loss Allocation
------------------------------------------------------------
- ---------
(1) The credit support percentages set forth in this chart show the aggregate
initial class balance of the classes of certificates subordinate to a class
or classes as a percentage of the initial aggregate principal balance of
the mortgage loans.
See "Description of the Certificates -- Priority of Distributions" and "--
Allocation of Losses" in this prospectus supplement.
Under certain circumstances, certain principal payments on the mortgage
loans in a loan group otherwise distributable to the subordinate certificates
may be allocated to one or more unrelated groups of senior non-PO certificates
and interest only components, if any, and the Class XB-IO Certificates as
discussed in "Description of the Certificates -- Cross-Collateralization" in
this prospectus supplement.
After the subordinate certificates are no longer outstanding, any principal
losses allocated to a class of super senior certificates will be borne by the
related class of super senior support certificates, for so long as the related
class of super senior support certificates is outstanding.
Shifting Interest in Prepayments
Additional credit enhancement is provided by the allocation, subject to
certain exceptions, of the applicable non-PO percentage of principal prepayments
and certain liquidation proceeds on the mortgage loans in a loan group to the
senior non-PO certificates of the related group during the first five years
after the closing date. In addition, a reduced, but still disproportionately
large, allocation of these principal collections to those senior certificates
will occur during the sixth through ninth years following the closing date. This
disproportionate allocation of the applicable non-PO percentage of prepayments
and certain liquidation proceeds on the mortgage loans in a loan group will
accelerate the amortization of the senior non-PO certificates of the related
group relative to the amortization of the subordinate certificates.
S-21
As a result, it is more likely that the credit support percentage for the senior
certificates of a group will be maintained and may be increased during the first
nine years.
See "Description of the Certificates -- Principal" in this prospectus
supplement.
Prepayment and Yield Considerations
The yield to maturity on your offered certificates will be sensitive to the
rate and timing of principal payments (which will be affected by prepayments,
defaults and liquidations) on the mortgage loans in the related loan group or
loan groups. As a result, your yield may fluctuate significantly.
o In general, if you purchased your offered certificates at a premium or
if you purchased an interest only certificate (which has no class
balance) and principal distributions occur at a rate faster than you
assumed, your actual yield to maturity will be lower than anticipated.
o Conversely, if you purchased your offered certificates at a discount
or if you purchased a principal only certificate and principal
distributions occur at a rate slower than you assumed, your actual
yield to maturity will be lower than anticipated.
Because each principal only component represents only the right to receive
a portion of the principal received with respect to the discount mortgage loans
in the related loan group, the yield to maturity on the Class X-PO Certificates
will be extremely sensitive to the rate and timing of principal prepayments on
the discount mortgage loans in the related loan groups.
Because the interest accrued on each distribution date on each interest
only component will be based on the aggregate stated principal balances of the
premium mortgage loans in the related loan group multiplied by a fraction, the
numerator of which is equal to the weighted average of the net mortgage interest
rates of the premium mortgage loans in the related loan group minus 7.000% for
loan group 1 and 6.000% for loan group 2 and the denominator of which is equal
to 6.000%, the yield to maturity on the interest only certificates will be
extremely sensitive to the rate and timing of principal payments on the premium
mortgage loans in the applicable loan groups, particularly the premium mortgage
loans with higher mortgage interest rates. The mortgage loans in loan group 1
and loan group 2 that are not discount mortgage loans are premium mortgage
loans.
Because a class of the super senior support certificates will bear
principal losses allocated to the related class or classes of super senior
certificates, as well as its own share of principal losses, once the subordinate
certificates are no longer outstanding, the yield to maturity of each class of
super senior support certificates will be more sensitive to the amount and
timing of losses on the mortgage loans in the related loan group than the
related class or classes of super senior certificates. See "Description of the
Certificates -- Allocation of Losses" in this prospectus supplement.
The yield to maturity on the floating rate certificates will be sensitive
to changes in the rate of one-month LIBOR. The yield to maturity on the inverse
floating rate certificates will be extremely sensitive to changes in the rate of
one-month LIBOR. In the case of the inverse floating rate certificates,
increases in one-month LIBOR may result in a lower yield than you expected or a
negative yield. In particular, if you are purchasing inverse floating rate
certificates, which are also interest only certificates, you should consider the
risk that high constant rates of one-month LIBOR combined with high constant
prepayment rates on the related mortgage loans may result in the failure to
recover your initial investment.
The yield to maturity of the Class M, Class B-1, Class B-2 and Class B-3
Certificates will be increasingly sensitive to the amounts and timing of losses
on the mortgage loans due to the fact that, once the total class balance of the
more junior classes of subordinate certificates has been reduced to zero, all
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losses will be allocated to the Class B-3, Class B-2, Class B-1 and Class M
Certificates, in that order, until the class balance of each class has been
reduced to zero.
Because the notional amount of the Class XB-IO Certificates will be equal
to a portion of the class balances of the Class M, Class B-1, Class B-2 and
Class B-3 Certificates, losses allocated to the Class M, Class B-1, Class B-2
and Class B-3 Certificates will adversely affect the yield to maturity of the
Class XB-IO Certificates.
Because the mortgage loans may be prepaid at any time, it is not possible
to predict the rate at which you will receive distributions of principal. Since
prevailing interest rates are subject to fluctuation, you may not be able to
reinvest your distributions at yields equaling or exceeding the yields on the
offered certificates. Yields on any reinvestments may be lower, and could be
significantly lower, than the yields on your offered certificates.
See "Prepayment and Yield Considerations" in this prospectus supplement and
in the prospectus.
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Weighted Average Life (in years)(1)
PPC(2)
Class 0% 50% 100% 150% 200%
- ------------------------- ------- ----- ------- ------ -------
Class 1-A-1.............. 19.84 7.22 3.81 2.43 1.76
Class 1-A-2.............. 19.84 7.22 3.81 2.43 1.76
Class 1-A-3.............. 19.84 7.22 3.81 2.43 1.76
Class 1-A-4.............. 19.84 7.22 3.81 2.43 1.76
Class 1-A-5.............. 19.84 7.22 3.81 2.43 1.76
Class 1-A-R.............. 0.07 0.07 0.07 0.07 0.07
Class 2-A-1.............. 28.36 7.23 3.52 2.18 1.56
Class 2-A-2.............. 28.36 7.23 3.52 2.18 1.56
Class 2-A-3.............. 28.36 7.23 3.52 2.18 1.56
Class X-IO............... 25.34 7.55 3.94 2.58 1.88
Class X-PO............... 19.66 7.44 4.09 2.73 2.01
Class 3-A-1.............. 8.52 5.02 3.23 2.23 1.65
Class XB-IO.............. 19.19 11.95 9.46 8.27 6.76
Class M.................. 19.08 11.95 9.46 8.27 6.76
Class B-1................ 19.23 11.95 9.46 8.27 6.76
Class B-2................ 19.23 11.95 9.46 8.27 6.76
Class B-3................ 19.23 11.95 9.46 8.27 6.76
- ---------
(1) Determined as described under "Prepayment and Yield Considerations" in this
prospectus supplement. Prepayments will not occur at any assumed rate shown
or any other constant rate, and the actual weighted average lives of any or
all of the classes of offered certificates are likely to differ from those
shown, perhaps significantly.
(2) "PPC" is an abbreviation for prepayment curve. The prepayment curve is
described under "Prepayment and Yield Considerations -- Weighted Average
Lives of the Offered Certificates" in this prospectus supplement.
Federal Income Tax Consequences
The issuing entity of your certificates is a New York common law trust. For
federal income tax purposes, elections will be made to treat this trust as
multiple "real estate mortgage investment conduits" or "REMICs" in a tiered
structure.
o The certificates (other than the Class X-IO, Class X-PO and Class
1-A-R Certificates) and each component will constitute "regular
interests" in a REMIC and will be treated as debt instruments for
federal income tax purposes.
o The Class 1-A-R Certificate will constitute the sole "residual
interest" in each REMIC.
Interest on the certificates must be included in your income under an
accrual method of tax accounting, even if you are otherwise a cash method
taxpayer.
The interest only and principal only certificates will, and certain other
classes may, be issued with original issue discount for federal income tax
purposes. If you hold a certificate of one of these classes, you will be
required to include original issue discount in income as it accrues on a
constant yield method, regardless of when you receive the cash related to the
original issue discount.
The holder of the Class 1-A-R Certificate will be required to report as
ordinary income or loss the net income or the net loss of each REMIC and will be
required to fund tax liabilities relating to any of this net income although no
cash distributions are expected to be made to the Class 1-A-R Certificate other
than the distribution of its class balance and interest on that balance.
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See "Federal Income Tax Consequences" in this prospectus supplement and in
the accompanying prospectus.
Legal Investment
Prospective purchasers, particularly those whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities, then you may be subject to
restrictions on investment in the offered certificates. You are encouraged to
consult your legal, tax, financial and accounting advisers for assistance in
determining the suitability of and consequences to you of the purchase,
ownership and sale of offered certificates.
o The senior certificates, the Class M and the Class B-1 Certificates
will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended, or
"SMMEA," so long as they are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
agency.
o The Class B-2 and Class B-3 Certificates will not constitute "mortgage
related securities" under SMMEA.
See "Legal Investment" in the prospectus.
ERISA Considerations
If you are a fiduciary or other person acting on behalf of any employee
benefit plan or arrangement, including an individual retirement account, subject
to the Employee Retirement Income Security Act of 1974, as amended, or "ERISA,"
the Internal Revenue Code of 1986, as amended, or the "Code," or any federal,
state or local law which is similar to ERISA or the Code, you should carefully
review with your legal advisors whether the purchase or holding of an offered
certificate could give rise to a transaction prohibited or not otherwise
permissible under ERISA, the Code or a similar law.
Subject to the considerations and conditions described under "ERISA
Considerations" in this prospectus supplement, it is expected that the offered
senior certificates (other than the Class 1-A-3 and Class 1-A-R Certificates)
may be purchased by benefit plans. The Class 1-A-R Certificate may not be
acquired by benefit plans and the Class 1-A-3 Certificates and the offered
subordinate certificates may not be acquired by benefit plans except under
certain conditions.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
Affiliations
Bank of America, National Association, which is the sponsor and the
originator and servicer of the mortgage loans, is the direct parent of the
depositor and is an affiliate of the underwriter. There are no additional
relationships, agreements or arrangements outside of this transaction among the
affiliated parties that are material to an understanding of the offered
certificates.
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- --------------------------------------------------------------------------------
RISK FACTORS
- --------------------------------------------------------------------------------
o The risk factors discussed below and under the heading "Risk Factors"
in the prospectus describe the material risks of an investment in the
offered certificates and should be carefully considered by all
potential investors.
o The offered certificates are not suitable investments for all
investors and may especially not be suitable for individual investors.
o The offered certificates are complex financial instruments, so you
should not purchase any offered certificates unless you or your
financial advisor possess the necessary expertise to analyze the
potential risks associated with an investment in mortgage-backed
securities.
o You should not purchase any offered certificates unless you
understand, and are able to bear, the prepayment, credit, liquidity
and market risks associated with such offered certificates.
The Rate of Principal Payments on the Mortgage Loans Will Affect the Yield on
the Offered Certificates
Because principal payments on the mortgage loans in a loan group will be
distributed currently on the senior certificates or component, if any, in the
related group and the subordinate certificates, the rate of distributions of
principal and the yield to maturity on your certificates will be directly
related to (i) the rate and timing of payments of principal on the applicable
mortgage loans and (ii) the amount and timing of defaults by borrowers that
result in losses on the applicable mortgage loans. Borrowers are permitted to
prepay their mortgage loans, in whole or in part, at any time without penalty.
The principal payments on the mortgage loans may be in the form of scheduled
principal payments or principal prepayments (for this purpose, the term
"principal prepayment" includes prepayments and any other recovery of principal
in advance of the scheduled due date, including repurchases and liquidations due
to default, casualty, condemnation and the like). Any of these prepayments will
result in distributions to you of amounts that would otherwise be distributed
over the remaining term of the mortgage loans.
The rate of principal payments on the mortgage loans will be affected by
the following:
o the amortization schedules of the mortgage loans;
o the rate of partial prepayments and full prepayments by borrowers due
to refinancing, job transfer, changes in property values or other
factors;
o liquidations of the properties that secure defaulted mortgage loans;
o repurchases of mortgage loans by the depositor as a result of
defective documentation or breaches of representations or warranties;
o the exercise of due-on-sale clauses by the servicer in connection with
transfers of mortgaged properties;
o the optional repurchase of all the mortgage loans by the depositor to
effect a termination of the trust when the aggregate stated principal
balance of the mortgage loans is less than 10% of the aggregate unpaid
principal balance of the mortgage loans as of the cut-off date; and
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o general and targeted solicitations for refinancing by mortgage
originators (including the sponsor).
The rate of principal payments on the mortgage loans will depend greatly on
the level of mortgage interest rates:
o If prevailing interest rates for similar mortgage loans fall below the
interest rates on the mortgage loans in the trust, the rate of
prepayment is likely to increase.
o Conversely, if prevailing interest rates for similar mortgage loans
rise above the interest rates on the mortgage loans in the trust, the
rate of prepayment is likely to decrease.
If you are purchasing offered certificates at a discount, or if you are
purchasing principal only certificates, you should consider the risk that if
principal payments on the mortgage loans in the related loan group or loan
groups, or, in the case of the Class X-PO Certificates, the discount mortgage
loans in related loan groups, occur at a rate slower than you expected, your
yield will be lower than you expected. See "Prepayment and Yield
Considerations--Yield on the Class X-PO Certificates" in this prospectus
supplement for a more detailed description of risks associated with the purchase
of the principal only certificates. See Appendix D for a table demonstrating the
particular sensitivity of the principal only certificates to the rate of
prepayments on the discount mortgage loans in the related loan groups.
If you are purchasing offered certificates at a premium, or if you are
purchasing interest only certificates (which have no class balance), you should
consider the risk that if principal payments on the mortgage loans in the
related loan group or loan groups or, in the case of the Class X-IO
Certificates, the premium mortgage loans in the related loan groups, occur at a
rate faster than you expected, your yield may be lower than you expected. If you
are purchasing Class X-IO or Class XB-IO Certificates, you should consider the
risk that a rapid rate of principal payments on the applicable mortgage loans in
the related loan groups could result in your failure to recover your initial
investment. See "Prepayment and Yield Considerations -- Yield on the Inverse
Floating Rate Certificates" and "-- Yield on the Class X-IO and Class XB-IO
Certificates" in this prospectus supplement for a more detailed description of
risks associated with the purchase of the Class 1-A-1, Class 1-A-5, Class 2-A-2,
Class X-IO and Class XB-IO Certificates. See Appendix D for tables demonstrating
the particular sensitivities of the Class 1-A-1, Class 1-A-5, Class 2-A-2, Class
X-IO and Class XB-IO Certificates to the rate of prepayments on the applicable
mortgage loans in the related loan group or loan groups.
If you are purchasing the inverse floating rate certificates (i.e., the
Class 1-A-1, Class 1-A-5 or Class 2-A-2 Certificates), you should also consider
the risk that a high rate of one-month LIBOR may result in a lower actual yield
than you expected or a negative yield. If the inverse floating rate certificates
are also interest only certificates, the yield on the inverse floating rate
certificates will also be highly sensitive to the rate of principal payment on
the group 1 or group 2 mortgage loans, as applicable. In particular, if you are
purchasing inverse floating rate certificates, which are also interest only
certificates, you should consider the risk that high constant rates of one-month
LIBOR or high constant prepayment rates on the group 1 or group 2 mortgage
loans, as applicable, may result in the failure to recover your initial
investment. See "Prepayment and Yield Considerations -- Yield on the Inverse
Floating Rate Certificates" in this prospectus supplement for a more detailed
description of the risks associated with the purchase of the inverse floating
rate certificates, and Appendix D for tables demonstrating the particular
sensitivities of the inverse floating rate certificates to the rate of
prepayments on the group 1 or group 2 mortgage loans, as applicable, and to the
rate of one-month LIBOR.
You must make your own decisions as to the appropriate prepayment
assumptions to be used when purchasing offered certificates.
S-27
As described in this prospectus supplement under "Description of the
Certificates -- Principal," the senior prepayment percentage for a loan group of
the applicable non-PO percentage of principal prepayments (excluding for this
purpose, partial liquidations due to default, casualty, condemnation and the
like) initially will be distributed to the classes of senior non-PO certificates
of the related group that are entitled to receive principal prepayment
distributions at that time. This may result in all (or a disproportionately high
percentage) of those principal prepayments being distributed to the senior
non-PO certificates of that group and none (or a disproportionately low
percentage) of those principal prepayments being distributed to holders of the
subordinate certificates during the periods of time described in the definition
of "Senior Prepayment Percentage."
The timing of changes in the rate of prepayments may significantly affect
the actual yield to you, even if the average rate of principal prepayments is
consistent with your expectations. In general, the earlier the payment of
principal of the mortgage loans, the greater the effect on your yield to
maturity. As a result, the effect on your yield of principal prepayments
occurring at a rate higher (or lower) than the rate you anticipate during the
period immediately following the issuance of the certificates will not be offset
by a subsequent like reduction (or increase) in the rate of principal
prepayments.
Delinquencies and Losses on the Mortgage Loans Will Adversely Affect Your Yield
Delinquencies on the mortgage loans in a loan group that are not advanced
by or on behalf of the servicer (because the servicer has determined that these
amounts, if advanced, would be nonrecoverable), will adversely affect the yield
on the senior certificates of the related group, the component certificates, the
Class XB-IO Certificates and subordinate certificates. The servicer will
determine that a proposed advance is nonrecoverable when, in the good faith
exercise of its servicing judgment, it believes the proposed advance would not
be ultimately recoverable from the related mortgagor, related liquidation
proceeds, or other recoveries in respect of the mortgage loan. Because of the
priority of distributions, shortfalls resulting from delinquencies that are not
covered by advances will be borne first by the subordinate certificates (in
reverse order of payment priority), and then by the senior certificates and
components, if any, of the group and the Class XB-IO Certificates.
Net interest shortfalls will adversely affect the yields on the offered
certificates. In addition, the non-PO percentage of the principal portion of
realized losses generally will be borne by the subordinate certificates, as
described in this prospectus supplement under "Description of the Certificates
- -- Allocation of Losses." As a result, the yields on the offered certificates
will depend on the rate and timing of realized losses on the applicable mortgage
loans in the related loan group or loan groups.
Mortgage Loans Paying Interest Only During the First Ten or Fifteen Years May
Have a Higher Risk of Default or Rates of Prepayment
Certain of the mortgage loans have an initial interest only period of up to
fifteen years after the date of origination. During this interest only period,
the payment due from the related mortgagor will be less than that of a
traditional mortgage loan. In addition, the principal balance of the mortgage
loan will not be reduced (except in the case of prepayments) because there will
be no scheduled monthly payments of principal during this period. Accordingly,
no principal payments will be distributed to the related certificates from these
mortgage loans during their interest only period except in the case of a
prepayment.
After the initial interest only period, payments on a mortgage loan with an
interest only period will be recalculated to amortize fully its unpaid principal
balance over its remaining life and the mortgagor will be required to make
scheduled payments of both principal and interest. The required payment of
principal will increase the burden on the mortgagor and may increase the risk of
default or prepayment under the
S-28
related mortgage loan. In underwriting mortgage loans with interest only
periods, the sponsor generally does not consider the ability of mortgagors to
make payments of principal at the end of the interest only period. Higher
scheduled monthly payments may induce the related mortgagors to refinance their
mortgage loans, which would result in higher prepayments. In addition, in
default situations losses may be greater on these mortgage loans because they do
not amortize during the initial period. These losses will be allocated to the
certificates.
The performance of mortgage loans with an interest only period may be
significantly different from mortgage loans that amortize from origination. In
particular these mortgagors may be more likely to refinance their mortgage
loans, which may result in higher prepayment speeds than would otherwise be the
case.
Alternative Underwriting Standards May Increase Risk of Loss
The following chart lists the expected approximate percentage of mortgage
loans in each loan group and the mortgage pool (in each case, by aggregate
stated principal balance as of the cut-off date) originated using the sponsor's
"Alternative A" underwriting standards:
Loan Group 1 Loan Group 2 Loan Group 3 Mortgage Pool
------------ ------------ ------------ -------------
37.97% 50.09% 26.60% 37.61%
See "The Mortgage Loan Programs -- Mortgage Loan Underwriting -- Bank of
America Alternative Underwriting Standards" in the prospectus. These
underwriting standards are different from and, in certain respects, less
stringent than the general underwriting standards employed by the sponsor. For
example, certain of the mortgage loans may have been originated with less than
standard documentation or with higher maximum loan-to-value ratios. Accordingly,
the mortgage loans may experience rates of delinquencies, defaults, foreclosure,
bankruptcy and loss that are higher than those experienced by mortgage loans
underwritten using the sponsor's general underwriting standards.
The Rate of Default on Mortgage Loans that Are Secured by Investor Properties
May be Higher than on Other Mortgage Loans
The following chart lists the expected approximate percentage of mortgage
loans in each loan group and the mortgage pool (in each case, by aggregate
stated principal balance as of the cut-off date) secured by investor properties:
Loan Group 1 Loan Group 2 Loan Group 3 Mortgage Pool
------------ ------------ ------------ -------------
28.94% 23.91% 50.68% 31.11%
An investor property is a property which, at the time of origination, the
mortgagor represented would not be used as the mortgagor's primary residence or
second home. Because the mortgagor is not living on the property, the mortgagor
may be more likely to default on the mortgage loan than on a comparable mortgage
loan secured by a primary residence, or to a lesser extent, a second home. In
addition, income expected to be generated from an investor property may have
been considered for underwriting purposes in addition to the income of the
mortgagor from other sources. Should this income not materialize, it is possible
the mortgagor would not have sufficient resources to make payments on the
mortgage loan.
S-29
There Are Risks Relating to Mortgaged Properties Subject to Second Lien Mortgage
Loans
At the time of origination of certain of the mortgage loans, a lender other
than the sponsor may have originated a second lien mortgage loan. Mortgage loans
that have second lien mortgage loans encumbering the same mortgaged property may
have higher rates of delinquency and foreclosure relative to mortgage loans that
do not have second lien mortgage loans behind them. This may be due to changes
in the mortgagor's debt-to-income profile, the fact that mortgagors may then
have less equity in the mortgaged property or other factors. You should also
note that any mortgagor could obtain a second lien mortgage loan at any time
subsequent to the date of origination of their first lien mortgage loan from any
lender.
Credit Scores May Not Accurately Predict the Likelihood of Default
The sponsor generally uses credit scores as part of its underwriting
process. The tables in Appendix A show credit scores for the mortgagors obtained
at the time of origination of their mortgage loans. A credit score purports only
to be a measurement of the relative degree of risk a borrower represents to a
lender, i.e., that a borrower with a higher score is statistically expected to
be less likely to default in payment than a borrower with a lower score. In
addition, it should be noted that credit scores were developed to indicate a
level of default probability over a two-year period, which does not correspond
to the life of most mortgage loans. Furthermore, credit scores were not
developed specifically for use in connection with mortgage loans, but for
consumer loans in general. Therefore, credit scores do not address particular
mortgage loan characteristics that influence the probability of repayment by the
borrower. Neither the depositor nor the sponsor makes any representations or
warranties as to any borrower's current credit score or the actual performance
of any mortgage loan or that a particular credit score should be relied upon as
a basis for an expectation that a borrower will repay its mortgage loan
according to its terms.
Subordination of Super Senior Support Certificates and Subordinate Certificates
Increases Risk of Loss
Subordinate certificateholders are more likely to suffer losses as a result
of losses or delinquencies on the mortgage loans than are senior
certificateholders.
o The rights of each class of subordinate certificates to receive
distributions of interest and principal are subordinated to the rights
of the senior certificates and each class of subordinate certificates
higher in order of payment priority. For example, the Class B-1
Certificates will not receive principal or interest on a distribution
date until the senior certificates and Class M Certificates have
received the amounts to which they are entitled on that distribution
date.
o The non-PO percentage of losses that are realized on the mortgage
loans will be allocated to the subordinate certificates beginning with
the Class B-6 Certificates then to the Class B-5 Certificates and so
on, in reverse order of payment priority, until the outstanding class
balances of the subordinate certificates have been reduced to zero.
o The principal only components will be entitled to reimbursement for
certain losses allocated to them from amounts otherwise distributable
as principal on the subordinate certificates in reverse order of
payment priority regardless of the loan group from which such payments
are received.
Super senior support certificateholders should consider the risk that after
the subordinate certificates are no longer outstanding, the principal portion of
losses realized on the related mortgage loans that are allocated to the related
class or classes of super senior certificates will be borne by your class of
super
S-30
senior support certificates, rather than the related class or classes of super
senior certificates, for so long as your class of super senior support
certificates is outstanding.
For a more detailed description of the subordination feature of the
subordinate certificates, see "Description of the Certificates -- Allocation of
Losses" and "-- Cross-Collateralization" in this prospectus supplement.
Yield on the Class XB-IO Certificates Will Be Particularly Sensitive to Losses
on the Mortgage Loans
Even though the Class XB-IO Certificates are senior certificates, the
notional amount of such certificates will equal a percentage of the sum of the
class balances of the Class M, Class B-1, Class B-2 and Class B-3 Certificates,
which are subordinate certificates. Subordinate certificates are more likely to
suffer losses than are senior certificates. Any losses allocated to the Class M,
Class B-1, Class B-2 and Class B-3 Certificates will reduce the notional amount
of the Class XB-IO Certificates and adversely affect the yield to maturity of
such certificates.
Subordinate Certificates Provide Subordination for All Groups
Because the subordinate certificates provide credit support for all groups,
the outstanding class balances of the subordinate certificates could be reduced
to zero as a result of a disproportionate amount of principal losses on the
mortgage loans in one or more loan groups. Therefore, losses on the mortgage
loans in one loan group will reduce the subordination provided by the
subordinate certificates to the other groups of senior certificates and
components and the Class XB-IO Certificates and increase the likelihood that
losses may be allocated to the other groups of senior certificates and
components and the Class XB-IO Certificates. See "Description of the
Certificates -- Allocation of Losses" in this prospectus supplement.
Under certain circumstances, principal otherwise payable to the subordinate
certificates will be paid to the senior non-PO certificates and interest only
components as described under "Description of the Certificates --
Cross-Collateralization" in this prospectus supplement.
High Balance Loans May Increase Risk of Loss on Certificates
Mortgage loans with large balances relative to the class balances of
the classes of subordinate certificates may, in the event of liquidation, result
in realized losses large enough to significantly reduce or eliminate the class
balance of one or more of such classes. In the event such mortgage loans are
discount mortgage loans, a realized loss may have a similar impact on the Class
X-PO Certificates.
In addition, any realized loss that reduces the class balances of the
subordinate certificates decreases the subordination provided to the senior
certificates and increases the risk that the senior non-PO certificates will
have to bear realized losses in the future and the Class X-PO Certificates will
not be reimbursed for principal losses.
The current principal balances of the mortgage loans and the
percentages they represent of the mortgage pool and each loan group are
specified in Appendix A.
Decrement and Sensitivity Tables Are Based Upon Assumptions and Models
The decrement tables set forth in Appendix B and the sensitivity tables set
forth in Appendix D have been prepared on the basis of the modeling assumptions
described under "Prepayment and Yield Considerations -- Assumptions Relating to
Tables." There will likely be discrepancies between the
S-31
characteristics of the actual mortgage loans included in each loan group and the
characteristics of the assumed mortgage loans used in preparing the decrement
tables and the sensitivity tables. Any such discrepancy may have an effect upon
the percentages of initial class balances (or initial notional amounts)
outstanding set forth in the decrement tables (and the weighted average lives of
the offered certificates) and the yields to maturity set forth in the yield
tables. In addition, to the extent that the mortgage loans that actually are
included in a loan group have characteristics that differ from those assumed in
preparing the decrement tables and the sensitivity tables, the class balance or
notional amount of a class of offered certificates could be reduced to zero
earlier or later than indicated by the decrement tables and the yield to
maturity may be higher or lower than indicated in the sensitivity tables.
The models used in this prospectus supplement for prepayments and defaults
also do not purport to be a historical description of prepayment or default
experience or a prediction of the anticipated rate of prepayment or default of
any pool of mortgage loans, including the mortgage loans contained in the trust.
It is highly unlikely that the mortgage loans of a loan group will prepay or
liquidate at any of the rates specified or that losses will be incurred
according to one particular pattern. The assumed percentages of SDA and PPC and
the loss severity percentages shown in the Appendices are for illustrative
purposes only. For a description of SDA and PPC, see "Prepayment and Yield
Considerations" in this prospectus supplement. The actual rates of prepayment
and liquidation and loss severity experience of the mortgage loans of a loan
group may not correspond to any of the assumptions made in this prospectus
supplement. For these reasons, the weighted average lives of the offered
certificates may differ from the weighted average lives shown in the tables in
Appendix B. Further, because the timing of cash flows is critical to determining
yield, the pre-tax yields to maturity of the Class 1-A-1, Class 1-A-5, Class
2-A-2, Class X-IO, Class X-PO, Class XB-IO, Class B-2 and Class B-3 Certificates
are likely to differ from the pre-tax yields to maturity shown in the tables in
Appendix D.
Geographic Concentration May Increase Risk of Loss Due to Adverse Economic
Conditions or Natural Disasters
At various times, certain geographic regions will experience weaker
economic conditions and housing markets and, consequently, will experience
higher rates of delinquency and loss on mortgage loans generally. In addition,
certain states have experienced natural disasters, including earthquakes, fires,
floods and hurricanes, which may adversely affect property values. Although
mortgaged properties located in certain identified flood zones will be required
to be covered, to the maximum extent available, by flood insurance, no mortgaged
properties will otherwise be required to be insured against earthquake damage or
any other loss not covered by standard hazard insurance policies. Any
concentration of mortgaged properties in a state or region may present unique
risk considerations. The following chart lists the states with expected
concentrations of mortgaged properties in excess of 10% in any loan group and in
the mortgage pool (in each case, by aggregate stated principal balance as of the
cut-off date):
Loan Group 1 Loan Loan Mortgage
Group 2 Group 3 Pool
------------ ---------- ---------- ----------
Florida California California California
California Florida Florida Florida
Texas
Any deterioration in housing prices in a state or region due to adverse
economic conditions, natural disaster or other factors, and any deterioration of
economic conditions in a state or region that adversely affects the ability of
borrowers to make payments on the mortgage loans, may result in losses on the
mortgage loans. Any losses may adversely affect the yield to maturity of the
offered certificates.
S-32
Residential Real Estate Values May Fluctuate and Adversely Affect Your
Investment
There can be no assurance that values of the mortgaged properties have
remained or will remain at their levels on the dates of origination of the
related mortgage loans. The value of any mortgaged property generally will
change over time from its value on the appraisal or sales date. If residential
real estate values generally or in a particular geographic area decline, the
loan-to-value ratios shown in the tables in Appendix A might not be a reliable
indicator of the rates of delinquencies, foreclosures and losses that could
occur on the mortgage loans. If the residential real estate market should
experience an overall decline in property values large enough to cause the
outstanding balances of the mortgage loans and any secondary financing on the
related mortgaged properties to equal or exceed the value of the mortgaged
properties, delinquencies, foreclosures and losses could be higher than those
now generally experienced in the mortgage lending industry or in the sponsor's
prior securitizations involving the depositor.
In addition, adverse economic conditions and other factors (which may or
may not affect real property values) may affect the mortgagors' timely payment
of scheduled payments of principal and interest on the mortgage loans and,
accordingly, the actual rates of delinquencies, foreclosures and losses with
respect to the mortgage pool. These other factors could include excessive
building resulting in an oversupply of housing in a particular area or a
decrease in employment reducing the demand for housing in an area. To the extent
that credit enhancements do not cover such losses, your yield may be adversely
impacted.
Tax Consequences of Residual Certificate
o The Class 1-A-R Certificate will be the sole "residual interest" in
each REMIC for federal income tax purposes.
o The holder of the Class 1-A-R Certificate must report as ordinary
income or loss the net income or the net loss of each REMIC whether or
not any cash distributions are made to it. This allocation of income
or loss may result in a zero or negative after-tax return. No cash
distributions are expected to be made on the Class 1-A-R Certificate
other than the distribution of its class balance and interest on that
balance.
o Under current law, the holder of the Class 1-A-R Certificate must
account separately for its interest in each REMIC, and may not offset
income from one REMIC with deductions from another REMIC.
o Treasury regulations require a seller of the Class 1-A-R Certificate
either to pay the buyer an amount designed to compensate the buyer for
assuming the tax liability or transfer only to certain eligible
transferees should the seller wish to qualify for "safe harbor"
protection from possible disregard of such a transfer.
o Due to its tax consequences, the Class 1-A-R Certificate will be
subject to restrictions on transfer that affect its liquidity. In
addition, the Class 1-A-R Certificate may not be acquired by benefit
plans.
See "Description of the Certificates -- Restrictions on Transfer of the
Class 1-A-R Certificate," "Prepayment and Yield Considerations -- Yield on the
Class 1-A-R Certificate," "ERISA Considerations" and "Federal Income Tax
Consequences" in this prospectus supplement.
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United States Military Operations May Increase Risk of Relief Act Shortfalls
As a result of military operations in Afghanistan and Iraq, the United
States has placed a substantial number of armed forces reservists and members of
the National Guard on active duty status. It is possible that the number of
reservists and members of the National Guard placed on active duty status may
remain at high levels for an extended time. To the extent that a member of the
military, or a member of the armed forces reserves or National Guard who is
called to active duty, is a mortgagor of a mortgage loan in the trust, the
interest rate limitation of the Servicemembers Civil Relief Act, and any
comparable state law, will apply. This may result in interest shortfalls on the
mortgage loans in the trust, which will be borne by all classes of
interest-bearing certificates and components as described herein. Neither the
sponsor nor the depositor has taken any action to determine whether any of the
mortgage loans would be affected by these interest rate limitations. See
"Description of the Certificates -- Interest" in this prospectus supplement and
"Certain Legal Aspects of the Mortgage Loans -- Servicemembers Civil Relief Act
and Similar Laws" in the prospectus.
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THE MORTGAGE POOL
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The descriptions of the Mortgage Loans and the Mortgaged Properties below
and in Appendix A are based upon the expected characteristics of the Mortgage
Loans as of the close of business on the Cut-off Date. The balances shown have
been adjusted for the scheduled principal payments due on or before the Cut-off
Date. Prior to the Closing Date, Mortgage Loans may be removed from the loan
groups and other Mortgage Loans may be substituted for them. The Depositor
believes that the information set forth in this prospectus supplement is
representative of the characteristics of the loan groups as they will be
constituted on the Closing Date. Unless the context requires otherwise,
references below and in Appendix A to percentages of the Mortgage Loans in a
loan group are approximate percentages of the aggregate Stated Principal Balance
of the Mortgage Loans in the loan group as of the Cut-off Date and references
below to percentages of all Mortgage Loans are approximate percentages of the
aggregate Stated Principal Balance of the Mortgage Loans in all loan groups as
of the Cut-off Date.
The Mortgage Pool has been divided into three loan groups as described
under "Summary of Terms -- Mortgage Pool." Each Mortgage Loan in the Mortgage
Pool will be fully amortized by its maturity.
The Mortgage Loans were selected by the Sponsor, with advice from Banc of
America Securities LLC (the "Underwriter") as to the characteristics of the
Mortgage Loans in each loan group that will optimize marketability of the
Certificates, from the Sponsor's portfolio of first lien, closed-end, fixed-rate
mortgage loans, and were chosen to meet the requirements imposed by the rating
agencies to achieve the credit support percentages listed under "Summary of
Terms -- Credit Support."
The Mortgage Pool consists of Mortgage Loans originated by the Sponsor. For
a description of the underwriting standards generally applicable to the Mortgage
Loans, see "The Mortgage Loan Programs -- Mortgage Loan Underwriting -- Bank of
America General Underwriting Standards" and "-- Bank of America Alternative
Underwriting Standards" in the prospectus. The Mortgage Loans will be sold by
the Sponsor to the Depositor on the Closing Date by a mortgage loan purchase
agreement between the Sponsor and the Depositor (the "Mortgage Loan Purchase
Agreement"). The representations and warranties made by the Sponsor in the
Mortgage Loan Purchase Agreement will provide the basis for the Depositor's
representations and warranties made in the Pooling Agreement regarding to the
Mortgage Loans. See "The Mortgage Loan Programs -- Representations and
Warranties" in the prospectus. In addition, the Mortgage Loan Purchase Agreement
will provide the Depositor with remedies against the Sponsor for the failure by
the Sponsor to deliver the Mortgage Loan documentation required to be delivered
to the Trustee or a custodian under the Pooling Agreement.
As of the Cut-off Date, no Mortgage Loan was delinquent and no Mortgage
Loan has been more than 30 days delinquent more than twice during the preceding
twelve months.
As of the Cut-off Date, no Mortgage Loan had a Loan-to-Value Ratio of more
than 103.00%. For more information on the Loan-to-Value Ratios of the Mortgage
Loans, see the Original Loan-to-Value Ratios tables in Appendix A. Subject to
minor exceptions permitted in the Sponsor's discretion, each Mortgage Loan with
a Loan-to-Value Ratio at origination in excess of 80% generally will be covered
by a primary mortgage guaranty insurance policy which conforms to the standards
of Fannie Mae or Freddie Mac. No primary mortgage insurance coverage will be
required for any Mortgage Loan after the date on which the related Loan-to-Value
Ratio is less than 80%. You should note, however, that a Mortgage Loan which at
origination was covered by a primary mortgage guaranty insurance policy may no
longer be covered by the policy if the mortgagor obtains an appraisal after
origination indicating the Loan-to-Value Ratio at the time of that appraisal is
less than 80%.
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THE SPONSOR
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The Sponsor, Bank of America, National Association ("Bank of America"), is
an indirect wholly-owned subsidiary of Bank of America Corporation.
See "The Sponsor," "The Mortgage Loan Programs," "Servicing of the Mortgage
Loans" and "The Pooling Agreement" in the prospectus for more information about
the Sponsor, its securitization programs, its solicitation and underwriting
criteria used to originate the Mortgage Loans and its material roles and duties
in this securitization.
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STATIC POOL INFORMATION
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Information concerning the Sponsor's prior residential mortgage loan
securitizations involving both fixed-rate first lien mortgage loans underwritten
in accordance with the Sponsor's general underwriting standards described in the
prospectus under "The Mortgage Loan Programs -- Mortgage Loan Underwriting --
Bank of America General Underwriting Standards" and first lien mortgage loans
underwritten in accordance with the Sponsor's alternative underwriting standards
described in the prospectus under "The Mortgage Loan Programs -- Mortgage Loan
Underwriting -- Bank of America Alternative Underwriting Standards," and, in
each case, issued by the Depositor or the Depositor's predecessor is available
on the internet at http://www.bofa.com/boams. Although those securitizations
involve the most comparable type of mortgage loans to the type of Mortgage Loans
contained in the Mortgage Pool, the Sponsor also maintains on that website, for
the information of investors, statistical data concerning the Sponsor's prior
residential mortgage loan securitizations involving either fixed-rate first lien
mortgage loans or adjustable-rate first lien mortgage loans underwritten in
accordance with the Sponsor's general underwriting standards issued by the
Depositor or the Depositor's predecessor.
Without charge or registration, investors can view on this website the
following information for each of those securitizations:
o summary initial pool information; and
o delinquency, cumulative loss, and prepayment information as of each
distribution date for the five years preceding the date of first use
of this prospectus supplement.
In the event any changes or updates are made to the information available
on the Sponsor's website, the Depositor will provide a copy of the original
information upon request to any person who writes or calls the Depositor. The
Depositor's address is 214 North Tryon Street, Mail Code NC1-027-22-02,
Charlotte, North Carolina 28255. Its telephone number is 704-387-8239.
The static pool data available on the Sponsor's website relating to any of
the Sponsor's mortgage loan securitizations issued prior to January 1, 2006 is
not deemed to be part of this prospectus supplement, the accompanying prospectus
or the Depositor's registration statement.
This static pool data may have been influenced in the past by factors
beyond the Sponsor's control, such as unusually robust housing prices, low
interest rates and changes in product type. Therefore, the performance of prior
residential mortgage loan securitizations may not be indicative of the future
performance of the Mortgage Loans.
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THE DEPOSITOR
- --------------------------------------------------------------------------------
The Depositor was incorporated in the State of Delaware on November 26,
2002 under the name "BA Residential Securities, Inc." and filed a Certificate of
Amendment of Certificate of Incorporation changing its name to "Banc of America
Mortgage Securities, Inc." on December 4, 2002. The Depositor is a direct,
wholly-owned subsidiary of the Sponsor. It is not expected that the Depositor
will have any business operations other than offering mortgage pass-through
certificates and related activities. The Depositor will have limited obligations
and rights under the Pooling Agreement after the Closing Date, including, but
not limited to, repurchasing or substituting Mortgage Loans due to breaches of
representations and warranties or, in the circumstances described in the
prospectus under "The Pooling Agreement -- Termination; Optional Purchase of
Mortgage Loans," repurchasing all of the Mortgage Loans.
The Depositor maintains its principal executive office at 214 North Tryon
Street, Mail Code NC1-027-22-02, Charlotte, North Carolina 28255. Its telephone
number is 704-387-8239.
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THE ISSUING ENTITY
- --------------------------------------------------------------------------------
The Issuing Entity will be a New York common law trust (the "Trust"),
formed on the Closing Date pursuant to the Pooling Agreement. The Mortgage Loans
will be deposited by the Depositor into the Trust under the Pooling Agreement as
described in the prospectus under "The Pooling Agreement -- Assignment of
Mortgage Loans." The Trust will have no officers or directors and no activities
or continuing duties other than to hold the assets underlying the Certificates
and to issue the Certificates. The fiscal year end of the Trust will be December
31 of each year.
The Trust will be administered by the Trustee pursuant to the terms of the
Pooling Agreement as described under "The Pooling Agreement -- The Trustee" in
the prospectus. The Trustee, on behalf of the Trust, is only permitted to take
the actions specifically provided in the Pooling Agreement. Under the Pooling
Agreement, the Trustee on behalf of the Trust will not have the power to issue
additional certificates representing interests in the Trust, borrow money on
behalf of the Trust or make loans from the assets of the Trust to any person or
entity.
The Issuing Entity, as a common law trust, is not eligible to be a debtor
in a bankruptcy proceeding. In the event of the insolvency or bankruptcy of the
Sponsor or the Depositor, the transfer of the Mortgage Loans to the Trust may be
challenged. See "Risk Factors -- Special Powers of the FDIC in the Event of
Insolvency of the Sponsor Could Delay or Reduce Distributions on the
Certificates" and "-- Insolvency of the Depositor May Delay or Reduce
Collections on Mortgage Loans" in the prospectus.
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THE TRUSTEE
- --------------------------------------------------------------------------------
Wells Fargo Bank, National Association ("Wells Fargo Bank") will act as
Trustee and custodian under the Pooling Agreement. Wells Fargo Bank is a
national banking association and a wholly-owned subsidiary of Wells Fargo &
Company. A diversified financial services company with approximately $482
billion in assets, 23 million customers and 153,000+ employees as of December
31, 2005, Wells Fargo & Company is a U.S. bank holding company, providing
banking, insurance, trust, mortgage and consumer finance services throughout the
United States and internationally. Wells Fargo Bank provides retail and
commercial banking services and corporate trust, custody, securities lending,
securities transfer, cash management, investment management and other financial
and fiduciary services. The Depositor, the
S-37
Sponsor, the Servicer, the Counterparty and the Underwriter may maintain banking
and other commercial relationships with Wells Fargo Bank and its affiliates.
Wells Fargo Bank maintains its principal corporate trust offices located at 9062
Old Annapolis Road, Columbia, Maryland 21045-1951 (among other locations), and
its office for certificate transfer services is located at Sixth Street and
Marquette Avenue, Minneapolis, Minnesota 55479 (together, the "Corporate Trust
Office"). The Trustee may appoint one or more co-trustees if necessary to comply
with the fiduciary requirements imposed by any jurisdiction in which a Mortgaged
Property is located.
In the case of any appointment of a co-trustee, all rights, powers, duties
and obligations conferred or imposed upon the Trustee will be conferred or
imposed upon and exercised or performed by the Trustee and the co-trustee
jointly, unless the law of a jurisdiction prohibits the Trustee from performing
its duties under the Pooling Agreement, in which event such rights, powers,
duties and obligations (including the holding of title to the Trust or any
portion of the Trust in any such jurisdiction) shall be exercised and performed
by the co-trustee at the direction of the Trustee.
Wells Fargo Bank has provided corporate trust services since 1934. As of
June 30, 2006, Wells Fargo Bank acts as trustee for a variety of transactions
and asset types, including corporate and municipal bonds, mortgage-backed and
asset-backed securities and collateralized debt obligations. As of June 30,
2006, Wells Fargo Bank was acting as trustee on more than 1,230 series of
residential mortgage-backed securities with an aggregate principal balance of
approximately $282,142,062,265.
Under the terms of the Pooling Agreement, the Trustee also is responsible
for securities administration, which includes pool performance calculations,
distribution calculations and the preparation of monthly distribution reports.
The Trustee does not independently verify the information received from the
Servicer that it uses for these calculations nor does it monitor access to and
activity in the Servicer Custodial Account, compliance with covenants in the
Pooling Agreement or the basis for the addition, substitution or removal of
Mortgage Loans from the Mortgage Pool. As securities administrator, the Trustee
is responsible for the preparation and filing of all REMIC tax returns on behalf
of the Trust and the preparation of monthly reports on Form 10-D, annual reports
on Form 10-K and current reports on Form 8-K that are required to be filed with
the Securities and Exchange Commission on behalf of the Trust. Wells Fargo Bank
has been engaged in the business of securities administration since June 30,
1995. As of June 30, 2006, Wells Fargo Bank was acting as securities
administrator with respect to more than $894,773,136,436 of outstanding
residential mortgage-backed securities.
Wells Fargo Bank will also act as custodian of the Mortgage Files pursuant
to the Pooling Agreement. In that capacity, Wells Fargo Bank is responsible to
hold and safeguard the Mortgage Notes and other contents of the Mortgage Files
on behalf of the Certificateholders. Wells Fargo Bank maintains each Mortgage
File in a separate file folder marked with a unique bar code to assure
loan-level file integrity and to assist in inventory management. Files are
segregated by transaction or investor. Wells Fargo Bank has been engaged in the
mortgage document custody business for more than 25 years. Wells Fargo Bank
maintains document custody facilities in its Minneapolis, Minnesota headquarters
and in three regional offices located in Richfield, Minnesota, Irvine,
California, and Salt Lake City, Utah. As of June 30, 2006, Wells Fargo Bank
maintains mortgage custody vaults in each of those locations with an aggregate
capacity of over eleven million files.
Wells Fargo Bank serves or has served within the past two years as loan
file custodian for various mortgage loans owned by the Sponsor or an affiliate
of the Sponsor and anticipates that one or more of those mortgage loans may be
included in the Trust. The terms of any custodial agreement under which those
services are provided by Wells Fargo are customary for the mortgage-backed
securitization industry and provide for the delivery, receipt, review and
safekeeping of mortgage loan files.
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See "The Pooling Agreement -- The Trustee" in the prospectus for more
information about the Trustee and its obligations and rights (including its
right to indemnity and reimbursement in certain circumstances) under the Pooling
Agreement.
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THE SERVICER
- --------------------------------------------------------------------------------
All of the Mortgage Loans will be serviced by the Sponsor, as "Servicer,"
in accordance with the terms of the Pooling Agreement. The Servicer may perform
any of its obligations under the Pooling Agreement through one or more
subservicers. Despite the existence of subservicing arrangements, the Servicer
will be liable for its servicing duties and obligations under the Pooling
Agreement as if the Servicer alone were servicing the Mortgage Loans. See "The
Sponsor," "Servicing of the Mortgage Loans -- The Servicers," "-- Servicing
Experience and Procedures of Bank of America" and "The Pooling Agreement" in the
prospectus for more information about the Servicer, the Servicer's experience,
its servicing procedures and its obligations under the Pooling Agreement.
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THE POOLING AGREEMENT
- --------------------------------------------------------------------------------
General
The Certificates will be issued on the Closing Date pursuant to the pooling
and servicing agreement, dated the Closing Date (the "Pooling Agreement" ),
among the Depositor, the Servicer and the Trustee. The prospectus contains
important additional information regarding the terms and conditions of the
Certificates and the Pooling Agreement beyond the summaries below of certain
provisions specific to this transaction. See "Description of the Certificates,"
"The Pooling Agreement" and "Servicing of the Mortgage Loans" in the prospectus.
Compensating Interest
When a mortgagor prepays its mortgage loan in part or in full between due
dates, the mortgagor is required to pay interest on the amount prepaid only to
the date of prepayment in the case of a prepayment in full or to the due date in
the month in which a partial prepayment is made. No interest will be paid by the
mortgagor on the amount prepaid after those dates. Prepayments will be
distributed to Certificateholders on the Distribution Date in the month
following the month of receipt.
In the Pooling Agreement, the aggregate Servicing Fee payable to the
Servicer for any month will be reduced (but not below zero) by an amount equal
to the lesser of (i) the Prepayment Interest Shortfall for the related
Distribution Date and (ii) one-twelfth of 0.25% of the aggregate Stated
Principal Balance of the Mortgage Loans as of the Due Date in the month
preceding the month of the related Distribution Date (this amount, "Compensating
Interest").
The "Prepayment Interest Shortfall" for a Distribution Date is equal to the
difference between (x) 30 days' interest at the mortgage interest rate (less the
Servicing Fee Rate) on the amount of each prepayment on the Mortgage Loans minus
(y) the amount of interest actually paid by the related mortgagors on the amount
of the prepayments during the preceding month.
Any Prepayment Interest Shortfalls in excess of the amount of the
Compensating Interest for a month will reduce the amount of interest available
to be distributed on the Certificates from what would have been the case in the
absence of these Prepayment Interest Shortfalls. See "Description of the
Certificates -- Interest" in this prospectus supplement.
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Compensation and Payment of Expenses of the Servicer and the Trustee
The fees payable each month from interest payments received on each
Mortgage Loan in each loan group are called the Administrative Fees. The
"Administrative Fees" consist of (a) a servicing fee payable to the Servicer in
respect of its servicing activities (the "Servicing Fee") and (b) a fee paid to
the Trustee for its services (the "Trustee Fee"). The Administrative Fees will
accrue on the Stated Principal Balance of each Mortgage Loan as of the Due Date
in the month preceding the month of the related Distribution Date at a rate (the
"Administrative Fee Rate") equal to the sum of the Servicing Fee Rate and the
Trustee Fee Rate. The "Trustee Fee Rate" and the "Servicing Fee Rate" for each
Mortgage Loan will be a per annum rate set forth in the table below:
Servicing Fee Rate Trustee Fee Rate
----------------------- --------------------
0.2500% 0.0045%
In the event the Trustee succeeds to the role of Servicer, it will be
entitled to the same Servicing Fee as the predecessor servicer and if the
Trustee appoints a successor servicer under the Pooling Agreement, the Trustee
may make such arrangements for the compensation of such successor out of the
payments on the Mortgage Loans serviced by the predecessor Servicer as it and
such successor shall agree, not to exceed the Servicing Fee Rate. In addition to
the Servicing Fee, the Servicer will be entitled to retain as additional
servicing compensation (i) any ancillary income, consisting of late payment
fees, assumption fees and other similar charges, (ii) net income from investment
of funds in the Servicer Custodial Account and (iii) any Foreclosure Profits
from the liquidation of Mortgage Loans.
Any co-trustee, if applicable, will be paid by the Trustee, without
reimbursement from the Trust.
The Servicing Fee for the Mortgage Loans will be retained by the Servicer
out of the interest payments on the Mortgage Loans, prior to any payments to the
trustee or distributions to Certificateholders. The Trustee Fee will be paid
from the Pool Distribution Amount (as described under "Description of the
Certificates -- Pool Distribution Amount") for each loan group to the Trustee
for its services relating to that loan group prior to any distributions to
Certificateholders.
The Servicer is generally obligated to pay expenses incurred by it in
connection with its responsibilities under the Pooling Agreement. Those amounts,
including the fees of any subservicer hired by the Servicer, will be paid by the
Servicer out of its own funds, without reimbursement. The Servicer is entitled
to be reimbursed from collections on the Mortgage Loans for any Advances
previously made by it, as described under "Servicing of the Mortgage Loans --
Periodic Advances and Servicing Advances" in the prospectus.
The amount of the Servicer's Servicing Fee will be reduced by payments of
Compensating Interest for prepaid Mortgage Loans, as described above under "--
Compensating Interest."
The Trustee is obligated to pay routine ongoing expenses incurred by it in
connection with its responsibilities under the Pooling Agreement. Those amounts
will be paid by the Trustee out of its own funds, without reimbursement. In
addition to the Trustee Fee, the Trustee is also entitled to all investment
income earned on amounts on deposit in the Certificate Account.
The Depositor, the Servicer and the Trustee are entitled to indemnification
and reimbursement of certain expenses from the Trust under the Pooling Agreement
as discussed in the prospectus under the headings "The Depositor," "Servicing of
the Mortgage Loans -- The Servicers" and "The Pooling Agreement -- The Trustee."
S-40
Voting Rights
Voting Rights for certain actions specified in the Pooling Agreement will
be allocated as follows:
o 95% of all Voting Rights will be allocated among the holders of the
Senior Certificates (other than the Class 1-A-1, Class 1-A-5, Class
X-IO, Class XB-IO, and Class 1-A-R Certificates) and Subordinate
Certificates based on the outstanding balances of their Certificates.
o 1% of all Voting Rights will be allocated to the holders of the Class
1-A-1 Certificates.
o 1% of all Voting Rights will be allocated to the holders of the Class
1-A-5 Certificates.
o 1% of all Voting Rights will be allocated to the holders of the Class
X-IO Certificates.
o 1% of all Voting Rights will be allocated to the holders of the Class
XB-IO Certificates.
o 1% of all Voting Rights will be allocated to the holder of the Class
1-A-R Certificate.
The Voting Rights allocated to each class will be allocated among the
Certificates of that class based on their Percentage Interests.
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DESCRIPTION OF THE CERTIFICATES
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The Certificates will consist of (i) the seventeen classes of Offered
Certificates listed in the table beginning on page S-6 of this prospectus
supplement and (ii) the Class B-4, Class B-5 and Class B-6 Certificates, which
are not offered by this prospectus supplement.
The Class X-PO Certificates are divided into two Principal Only Components
for purposes of distributing principal: the Class 1-X-PO Component and the Class
2-X-PO Component. The Class X-IO Certificates are divided into two Interest Only
Components for purposes of distributing interest: the Class 1-X-IO Component and
the Class 2-X-IO Component. The Components are not severable.
The Senior Certificates (other than the Class XB-IO Certificates) and
Components are divided into three groups and each group will in the aggregate
evidence an initial beneficial ownership interest of approximately 95.40% in the
related loan group. The Class XB-IO Certificates and Subordinate Certificates in
the aggregate represent the remaining initial beneficial ownership interest in
each loan group. The Class X-PO Certificates are Principal Only Certificates and
are not entitled to distributions in respect of interest. The Class 1-A-1, Class
1-A-5, Class X-IO and Class XB-IO Certificates are Interest Only Certificates
and are not entitled to distributions in respect of principal.
The Offered Certificates will be issuable in the forms and denominations
set forth in the table beginning on page S-6 of this prospectus supplement. The
Offered Certificates are not intended to be and should not be directly or
indirectly held or beneficially owned in amounts lower than the minimum
denominations in the table.
Distributions
Distributions on the Certificates will be made by the Trustee on each
Distribution Date to the persons in whose names the Certificates are registered
on the Record Date.
Distributions on each Distribution Date will be made by check mailed to
your address as it appears on the applicable certificate register or, if you
have notified the Trustee in writing in accordance with the
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Pooling Agreement, by wire transfer in immediately available funds to your
account at a bank or other depository institution having appropriate wire
transfer facilities. However, the final distribution on a Certificate will be
made only upon presentment and surrender of the Certificate at the Corporate
Trust Office of the Trustee in Minnesota. If you own a Book-Entry Certificate,
distributions will be made to you through the facilities of DTC, as described
under "Description of the Certificates -- Book-Entry Form" in the prospectus.
Pool Distribution Amount
The "Pool Distribution Amount" for each loan group and each Distribution Date
will be the sum of the following:
(i) all scheduled installments of interest (net of the related
Servicing Fee) and principal due on the Mortgage Loans in the loan group on
the Due Date in the month in which the Distribution Date occurs and
received prior to the related Determination Date, together with any
Advances (as described under "Servicing of the Mortgage Loans -- Periodic
Advances and Servicing Advances" in the prospectus) and payments of
Compensating Interest made by the Servicer allocable to the Mortgage Loans
in the loan group;
(ii) all proceeds of any primary mortgage guaranty insurance policies
and any other insurance policies relating to the Mortgage Loans in the loan
group, to the extent these proceeds are not applied to the restoration of
the related Mortgaged Property or released to the mortgagor in accordance
with the Servicer's normal servicing procedures and all other cash amounts
received and retained in connection with the liquidation of defaulted
Mortgage Loans in the loan group, by foreclosure or otherwise
(collectively, "Liquidation Proceeds"), during the calendar month preceding
the month of the Distribution Date;
(iii) all partial or full prepayments received on the Mortgage Loans
in the loan group during the calendar month preceding the month of the
Distribution Date;
(iv) amounts received for the Distribution Date as the Substitution
Adjustment Amount or Purchase Price (each as described under "The Pooling
Agreement -- Repurchases of Mortgage Loans" in the prospectus) for any
Deleted Mortgage Loan in the loan group or amounts received in connection
with the optional termination of the Trust as of the Distribution Date;
(v) any amount required to be deposited by the Servicer in connection
with any losses on investments of funds in the Servicer Custodial Account
and net income received in connection with REO Property;
(vi) any amounts received from the Depositor representing a
reimbursement to the Trust for all costs or damages incurred by the Trust
as a result of the violation of Depositor's representation that all
Mortgage Loans complied with all applicable predatory or abusive lending
laws; and
(vii) any Recoveries (as described below under "-- Allocation of
Losses") received during the calendar month preceding the month of the
Distribution Date;
minus the sum of the amounts which the Servicer or the Trustee are
permitted to withdraw from the Servicer Custodial Account or Certificate Account
as described under "Servicing of the Mortgage Loans -- Payments on Mortgage
Loans; Certificate and Custodial Accounts" in the prospectus, including, among
other things:
(i) amounts payable to the Servicer representing servicing
compensation (to the extent not previously retained);
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(ii) reimbursements to the Servicer for Advances (as described under
"Servicing of the Mortgage Loans -- Periodic Advances and Servicing
Advances" in the prospectus);
(iii) reimbursements to the Servicer for the amount of any expenses
incurred in connection with the liquidation of Mortgage Loans;
(iv) reimbursements to the Servicer for expenses covered by insurance
policies from proceeds of those policies;
(v) amounts to the Depositor, the Servicer or the Trustee representing
any indemnification payments or reimbursable expenses payable as described
in the prospectus under "The Depositor," "Servicing of the Mortgage Loans
-- The Servicers" and "The Pooling Agreement -- The Trustee";
(vi) amounts payable to the Depositor or the Servicer representing
collections received after the date of repurchase or purchase of any
Mortgage Loan or REO Property repurchased by the Depositor or purchased by
the Servicer; and
(vii) any amounts deposited in error.
Priority of Distributions
As more fully described below under "-- Interest" and "-- Principal,"
distributions will be made on each Distribution Date from the Pool Distribution
Amounts in the following order of priority (the "Pool Distribution Amount
Allocation"):
(a) for each group of Senior Certificates and Components and the Class
XB-IO Certificates from the applicable Pool Distribution Amount for the related
loan group, as follows:
(i) to the Trustee, to pay for its services with respect to the
related loan group for such Distribution Date;
(ii) to the Senior Certificates and IO Component, if any, of the
related group based on their respective Interest Distribution Amounts and
to the Class XB-IO Certificates, based on the applicable Class XB-IO
Interest Distribution Amount, in each case as described below under "--
Interest," to pay interest;
(iii) (a) with respect to group 1 and group 2 pro rata (1) to the
applicable PO Component based on the applicable PO Principal Amount, and
(2) to the Senior Non-PO Certificates based on the applicable Senior
Principal Distribution Amount, as described below under "-- Principal," to
pay principal and (b) with respect to group 3, to the Senior Non-PO
Certificates of group 3 based on the Senior Principal Distribution Amount
for group 3, as described below under "-- Principal," to pay principal; and
(iv) with respect to group 1 and group 2, to the applicable PO
Component to pay any applicable PO Deferred Amounts, but only from amounts
that would otherwise be distributable on such Distribution Date as
principal to the Subordinate Certificates; and
(b) from the Pool Distribution Amounts for all loan groups, to each class
of Subordinate Certificates, subject to any payments described below under "--
Cross Collateralization," first to pay interest and then to pay principal
sequentially first to the Class M Certificates and then to the remaining classes
of Subordinate Certificates in numerical order.
S-43
The Class 1-A-R Certificate will be entitled to any remaining amounts in
each REMIC, subject to the limitations set forth below under "-- Interest" and
"-- Principal."
Interest
The pass-through rate for each class of Offered Certificates (other than
the Class X-IO Certificates) and each IO Component for each Distribution Date is
set forth or described in the table beginning on page S-6 of this prospectus
supplement.
On each Distribution Date, to the extent funds are available, each class of
interest-bearing Certificates (other than the Class X-IO Certificates) and each
IO Component will be entitled to receive interest (as to each class, the
"Interest Distribution Amount") for the related Interest Accrual Period. The
Interest Distribution Amount for any class of Certificates or IO Component will
be equal to the sum of (i) interest accrued during the related Interest Accrual
Period at the applicable pass-through rate on the related Class Balance or
notional amount and (ii) the sum of the amounts, if any, by which the amount
described in clause (i) above on each prior Distribution Date exceeded the
amount actually distributed as interest on each prior Distribution Date and not
subsequently distributed.
The "Class XB-IO Interest Distribution Amount" for the Class XB-IO
Certificates represents the portion of such class' Interest Distribution Amount
payable from the Pool Distribution Amount for each loan group and will equal for
each Distribution Date and Pool Distribution Amount for each loan group (i) the
Interest Distribution Amount for the Class XB-IO Certificates for such
Distribution Date multiplied by (ii) a fraction, the numerator of which is the
Group Subordinate Amount for the applicable loan group and the denominator of
which is the sum of the Group Subordinate Amounts for all loan groups.
The Class X-PO Certificates are Principal Only Certificates and will not
bear interest.
The interest entitlement described in clause (i) of the Interest
Distribution Amount for each class of interest-bearing Certificates (other than
the Class X-IO Certificates) and each IO Component will be reduced by the amount
of Net Interest Shortfalls for each Distribution Date. For any Distribution
Date, the "Net Interest Shortfall" is equal to the sum of (i) the shortfall in
interest received relating to any Mortgage Loan as a result of a Relief Act
Reduction and (ii) any Non-Supported Interest Shortfalls. Net Interest
Shortfalls on any Distribution Date will be allocated pro rata among all classes
of interest-bearing Certificates (other than the Class X-IO Certificates) and
each IO Component, based on the amount of interest accrued on each such class of
Certificates or IO Component on the Distribution Date before taking into account
any reduction in the amount of interest accrued resulting from Net Interest
Shortfalls. A "Relief Act Reduction" is a reduction in the amount of the monthly
interest payment on a Mortgage Loan due to the Servicemembers Civil Relief Act
or similar state legislation. See "Certain Legal Aspects of the Mortgage Loans
- -- Servicemembers Civil Relief Act and Similar Laws" in the prospectus. For a
Distribution Date, the "Non-Supported Interest Shortfall" is the amount by which
the aggregate of Prepayment Interest Shortfalls for the Mortgage Loans during
the calendar month preceding the month of the Distribution Date exceeds the
Compensating Interest paid by the Servicer for that Distribution Date.
By virtue of the priority of distributions, the interest portion of
Realized Losses on the Mortgage Loans in a loan group will be allocated first to
the Subordinate Certificates in reverse order of payment priority and then to
the related Senior Certificates and Components, if any, and the Class XB-IO
Certificates because these losses will reduce the applicable Pool Distribution
Amount, which is paid first to the Senior Certificates and Components, if any,
of the related group and the Class XB-IO Certificates and then to the classes of
Subordinate Certificates in order of payment priority. After the Senior Credit
Support Depletion Date (as described below under "-- Principal"), the
interest-bearing Senior Certificates
S-44
and Component (if any) of a group will bear the interest portion of any Realized
Losses on the Mortgage Loans in the related loan group pro rata based on the
interest entitlement described in clause (i) of the applicable Interest
Distribution Amount. For a description of Realized Losses, see "-- Allocation of
Losses" below.
Accrued interest to be distributed on any Distribution Date will be
calculated for each class of interest-bearing Certificates or IO Component on
the basis of the related Class Balance or notional amount for the Distribution
Date. Interest will be calculated and payable on the basis of a 360-day year
consisting of twelve 30-day months.
If on a particular Distribution Date, the applicable Pool Distribution
Amount or, in the case of the Subordinate Certificates, the Pool Distribution
Amounts, applied in the order described above under "-- Priority of
Distributions" is not sufficient to make a full distribution of the Interest
Distribution Amount (or, in the case of the Class XB-IO Certificates, the
applicable Class XB-IO Interest Distribution Amount) for each interest-bearing
class or component, interest will be distributed on each interest-bearing class
or Component of equal priority pro rata based on the Interest Distribution
Amount (or, in the case of the Class XB-IO Certificates, the applicable Class
XB-IO Interest Distribution Amount) these classes and Components would otherwise
have been entitled to receive in the absence of the shortfall. Any unpaid amount
of interest entitlement described in clause (i) (reduced by Net Interest
Shortfalls) will be carried forward and added to the Interest Distribution
Amount of that class or Component on the next Distribution Date. A shortfall
could occur, for example, if Realized Losses (as described below under "--
Allocation of Losses") on the Mortgage Loans were exceptionally high or were
concentrated in a particular month. These unpaid interest amounts will not bear
interest.
Under certain circumstances, amounts otherwise distributable as principal
on the Subordinate Certificates (in reverse order of payment priority) will be
distributed to pay the unpaid interest amounts for a group of interest-bearing
Senior Certificates and Component, if any, and the Class XB-IO Certificates. See
"--Cross-Collateralization" in this prospectus supplement.
Interest will accrue on each class of interest-bearing Certificates (other
than the Class 1-A-1, Class 1-A-2, Class 1-A-3, Class 1-A-4, Class 1-A-5, Class
2-A-1, Class 2-A-2 and Class X-IO Certificates) and each IO Component during
each one-month period ending on the last day of the month preceding the month in
which each Distribution Date occurs (each, a "Regular Interest Accrual Period").
The initial Regular Interest Accrual Period will be deemed to have commenced on
October 1, 2006. Interest which accrues on each class of interest-bearing
Certificates and each IO Component during a Regular Interest Accrual Period will
be calculated on the assumption that distributions in reduction of the Class
Balances or notional amount of each such class of Certificates or each such
Component, as the case may be, on the Distribution Date in that Regular Interest
Accrual Period are made on the first day of the Regular Interest Accrual Period.
Interest will accrue on the Class 1-A-1, Class 1-A-2, Class 1-A-3, Class 1-A-4,
Class 1-A-5, Class 2-A-1 and Class 2-A-2 Certificates during each one-month
period commencing on the 25th day of the month preceding the month in which each
Distribution Date occurs and ending on the 24th day of the month in which such
Distribution Date occurs (each, a "LIBOR Based Interest Accrual Period" and,
together with a Regular Interest Accrual Period, an "Interest Accrual Period").
The initial LIBOR Based Interest Accrual Period will be deemed to have commenced
on October 25, 2006.
The "Class 1-A-1 Notional Amount" with respect to each Distribution Date
and the Class 1-A-1 Certificates will be equal to the sum of the Class Balances
of the Class 1-A-2, Class 1-A-3 and Class 1-A-4 Certificates. Accordingly, any
distribution in respect of principal made to, or losses in respect of principal
allocated in reduction of, the Class Balances of the Class 1-A-2, Class 1-A-3 or
Class 1-A-4 Certificates will result in a proportional reduction in the Class
1-A-1 Notional Amount. See "--
S-45
Principal" and "-- Allocation of Losses" in this Prospectus Supplement. The
Class 1-A-1 Notional Amount with respect to the first Distribution Date will be
approximately $369,079,000.
The "Class 1-A-5 Notional Amount" with respect to each Distribution Date
and the Class 1-A-5 Certificates will be equal to approximately 0.8333333324% of
the sum of the Class Balances of the Class 1-A-2, Class 1-A-3 and Class 1-A-4
Certificates. Accordingly, any distribution in respect of principal made to, or
losses in respect of principal allocated in reduction of, the Class Balances of
the Class 1-A-2, Class 1-A-3 or Class 1-A-4 Certificates will result in a
proportional reduction in the Class 1-A-5 Notional Amount. See "-- Principal"
and "-- Allocation of Losses" in this Prospectus Supplement. The Class 1-A-5
Notional Amount with respect to the first Distribution Date will be
approximately $3,075,658.
The "Class 1-X-IO Notional Amount" with respect to each Distribution Date
and the Class 1-X-IO Component will be equal to the product of (i) the aggregate
of the Stated Principal Balances of the Group 1 Premium Mortgage Loans as of the
due date in the month preceding the month of the Distribution Date and (ii) a
fraction, (a) the numerator of which is equal to the weighted average of the Net
Mortgage Interest Rates of the Group 1 Premium Mortgage Loans (based on the
Stated Principal Balances of the Group 1 Premium Mortgage Loans as of the due
date in the month preceding the month of the Distribution Date) minus 7.000% and
(b) the denominator of which is equal to 6.000%. The Class 1-X-IO Notional
Amount with respect to the first Distribution Date will be approximately
$4,648,177.
The "Class 2-X-IO Notional Amount" with respect to each Distribution Date
and the Class 2-X-IO Component will be equal to the product of (i) the aggregate
of the Stated Principal Balances of the Group 2 Premium Mortgage Loans as of the
due date in the month preceding the month of the Distribution Date and (ii) a
fraction, (a) the numerator of which is equal to the weighted average of the Net
Mortgage Interest Rates of the Group 2 Premium Mortgage Loans (based on the
Stated Principal Balances of the Group 2 Premium Mortgage Loans as of the due
date in the month preceding the month of the Distribution Date) minus 6.000% and
(b) the denominator of which is equal to 6.000%. The Class 2-X-IO Notional
Amount with respect to the first Distribution Date will be approximately
$7,000,053.
The notional amount of the Class X-IO Certificates is equal to the sum of
the Class 1-X-IO Notional Amount and the Class 2-X-IO Notional Amount.
The "Class XB-IO Notional Amount" with respect to each Distribution Date
and the Class XB-IO Certificates will be equal to approximately 8.3320571429% of
the sum of the Class Balances of the Class M-1, Class B-1, Class B-2 and Class
B-3 Certificates. Accordingly, any distribution in respect of principal made to,
or losses in respect of principal allocated in reduction of, the Class Balances
of the Class M-1, Class B-1, Class B-2 or Class B-3 Certificates will result in
a proportional reduction in the Class XB-IO Notional Amount. See "-- Principal"
and "-- Allocation of Losses" in this Prospectus Supplement. The Class XB-IO
Notional Amount with respect to the first Distribution Date will be
approximately $1,509,018.
The "Class Balance" of a class of Certificates (other than the Class X-PO
Certificates) at any time will equal its initial Class Balance set forth in the
table beginning on page S-6 of this prospectus supplement less (i) all
distributions of principal made to that class and (ii) losses allocated to that
class as described under "--Allocation of Losses" below.
The principal balance of a PO Component at any time will equal its initial
principal balance less (i) all distributions of principal made on the Component
and (ii) losses allocated to the Component as described
S-46
under "-- Allocation of Losses" below. The Class Balance of the Class X-PO
Certificates will equal the sum of the principal balances of the Class 1-X-PO
Component and the Class 2-X-PO Component.
The "Net Mortgage Interest Rate" of a Mortgage Loan is the excess of the
mortgage interest rate payable by the related borrower over the applicable
Administrative Fee Rate.
LIBOR
The Floating Rate Certificates and the Inverse Floating Rate Certificates
will bear interest at their respective pass-through rates, which are each based
on one-month LIBOR determined by the Trustee as described below. The Trustee
will determine one-month LIBOR and the respective pass-through rates for the
Floating Rate Certificates and the Inverse Floating Rate Certificates for each
Interest Accrual Period (after the first Interest Accrual Period) on the second
business day (in both New York and London) prior to the day on which such
Interest Accrual Period commences (each, a "LIBOR Determination Date").
On each LIBOR Determination Date, the Trustee will determine one-month
LIBOR for the succeeding Interest Accrual Period on the basis of the British
Bankers' Association ("BBA") "Interest Settlement Rate" for one-month deposits
in U.S. dollars as found on Telerate page 3750 as of 11:00 A.M. London time on
that LIBOR Determination Date. These Interest Settlement Rates currently are
based on rates quoted by 16 BBA designated banks as being, in the view of these
banks, the offered rate at which deposits are being quoted to prime banks in the
London interbank market. These Interest Settlement Rates are calculated by
eliminating the four highest rates and the four lowest rates, averaging the
eight remaining rates, carrying the results (expressed as a percentage) out to
six decimal places, and rounding to five decimal places. As used in this
prospectus supplement, "Telerate page 3750" means the display designated as page
3750 on the Reuters Telerate Service.
If on any LIBOR Determination Date the Trustee is unable to determine
one-month LIBOR on the basis of the method set forth in the preceding paragraph,
one-month LIBOR for the next Interest Accrual Period will be the higher of (i)
one-month LIBOR as determined on the previous LIBOR Determination Date or (ii)
the Reserve Interest Rate.
The "Reserve Interest Rate" will be the per annum rate that the Trustee
determines to be either (a) the arithmetic mean (rounded upwards if necessary to
the nearest whole multiple of 1/16%) of the one-month U.S. dollar lending rate
that New York City banks selected by the Trustee are quoting on the relevant
LIBOR Determination Date to the principal London offices of at least two leading
banks in the London interbank market or (b) in the event that the Trustee cannot
determine an arithmetic mean, the lowest one-month U.S. dollar lending rate that
the New York City banks selected by the Trustee are quoting on the relevant
LIBOR Determination Date to leading European banks.
If on any LIBOR Determination Date the Trustee is required, but is unable
to determine the Reserve Interest Rate in the manner provided in the preceding
paragraph, one-month LIBOR for the next Interest Accrual Period will be
one-month LIBOR as determined on the previous LIBOR Determination Date or, in
the case of the first LIBOR Determination Date for which the Trustee is required
to determine one-month LIBOR, 5.32%.
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 Floating Rate Certificates and the Inverse Floating Rate Certificates for
the related Interest Accrual Period shall (in the absence of manifest error) be
final and binding. Each of these rates of interest may be obtained by
telephoning the Trustee at (301) 815-6600.
S-47
Principal
On each Distribution Date, Certificateholders will be entitled to receive
principal distributions from the applicable Pool Distribution Amount or Amounts
to the extent described below and in accordance with the priorities set forth
under "-- Priority of Distributions" above. The principal distributions
distributed to a class on any Distribution Date will be allocated among the
holders of the class pro rata in accordance with their respective Percentage
Interests. The Class 1-A-1, Class 1-A-5, Class X-IO and Class XB-IO Certificates
are Interest Only Certificates and are not entitled to distributions of
principal.
All payments and other amounts received in respect of principal of the
Mortgage Loans in loan group 1 and loan group 2 will be allocated between (i)
the Senior Non-PO Certificates of the related group and the Subordinate
Certificates and (ii) the PO Component of the related group, in each case based
on the applicable Non-PO Percentage and the applicable PO Percentage,
respectively, of such amounts. All payments and other amounts received in
respect of principal of the Mortgage Loans in loan group 3 will be allocated
between the Senior Non-PO Certificates of group 3 and the Subordinate
Certificates.
The "Non-PO Percentage" with respect to any group 1 Mortgage Loan with a
Net Mortgage Interest Rate as of the Cut-off Date less than 7.000% (each such
Mortgage Loan, a "Group 1 Discount Mortgage Loan" ) will be equal to the Net
Mortgage Interest Rate as of the Cut-off Date divided by 7.000%. The Non-PO
Percentage with respect to any group 1 Mortgage Loan with a Net Mortgage
Interest Rate as of the Cut-off Date greater than or equal to 7.000% (each such
Mortgage Loan, a "Group 1 Premium Mortgage Loan" ) will be 100%.
The "Non-PO Percentage" with respect to any group 2 Mortgage Loan with a
Net Mortgage Interest Rate as of the Cut-off Date less than 6.000% (each such
Mortgage Loan, a "Group 2 Discount Mortgage Loan" and, collectively with the
Group 1 Discount Mortgage Loans, the "Discount Mortgage Loans") will be equal to
the Net Mortgage Interest Rate as of the Cut-off Date divided by 6.000%. The
Non-PO Percentage with respect to any group 2 Mortgage Loan with a Net Mortgage
Interest Rate as of the Cut-off Date greater than or equal to 6.000% (each such
Mortgage Loan, a "Group 2 Premium Mortgage Loan" and, collectively with the
Group 1 Premium Mortgage Loans, the "Premium Mortgage Loans") will be 100%.
The "Non-PO Percentage" with respect to any group 3 Mortgage Loan will be
100%.
The "PO Percentage" with respect to any Discount Mortgage Loan will be
equal to 100% minus the Non-PO Percentage for such Mortgage Loan. The PO
Percentage with respect to any Premium Mortgage Loan will be 0%.
The "PO Percentage" with respect to any group 3 Mortgage Loan will be 0%.
The "Group Subordinate Amount" for any Distribution Date and any loan group
is equal to the excess of the Pool Principal Balance (Non-PO Portion) for such
loan group over the aggregate Class Balance of the Senior Certificates of such
loan group immediately prior to such date.
Non-PO Principal Amount
On each Distribution Date, the Non-PO Principal Amount for a loan group
will be distributed (i) as principal of the Senior Non-PO Certificates of the
related group in an amount up to the Senior Principal Distribution Amount for
the loan group and (ii) as principal of the Subordinate Certificates in an
amount up to the Subordinate Principal Distribution Amount for the loan group.
The "Non-PO Principal Amount" for a Distribution Date and a loan group
will equal the sum of the applicable Non-PO Percentage of:
S-48
(a) all monthly payments of principal due on each Mortgage Loan in the
loan group on the Due Date in the month of that Distribution Date;
(b) the principal portion of the Purchase Price (as described under
"The Pooling Agreement -- Repurchases of Mortgage Loans" in the prospectus
and net of unreimbursed Advances) of each Mortgage Loan in the loan group
that was repurchased by the Depositor pursuant to the Pooling Agreement
received during the calendar month preceding the month of that Distribution
Date;
(c) any Substitution Adjustment Amount (net of unreimbursed Advances)
in connection with a Deleted Mortgage Loan in the loan group received
during the calendar month preceding the month of that Distribution Date as
described under "The Pooling Agreement -- Repurchases of Mortgage Loans" in
the prospectus;
(d) any Liquidation Proceeds (net of unreimbursed liquidation expenses
and unreimbursed Advances, if any) related to recoveries of principal of
Mortgage Loans in the loan group that are not yet Liquidated Mortgage Loans
(as described below under "-- Allocation of Losses") received during the
calendar month preceding the month of that Distribution Date;
(e) for each Mortgage Loan in the loan group that became a Liquidated
Mortgage Loan (as described below under "-- Allocation of Losses") during
the calendar month preceding the month of that Distribution Date, the
amount of the Liquidation Proceeds (other than any Foreclosure Profits and
net of unreimbursed liquidation expenses and unreimbursed Advances, if any)
related to principal received with respect to that Mortgage Loan; and
(f) all partial and full principal prepayments on the Mortgage Loans
in the loan group by mortgagors received during the calendar month
preceding the month of that Distribution Date.
The amounts described in clauses (a) through (d) are referred to as
"Scheduled Principal Payments." The amounts described in clauses (e) and (f) are
referred to as "Unscheduled Principal Payments."
Senior Principal Distribution Amount
For the Senior Non-PO Certificates of group 1:
On each Distribution Date, the Trustee will distribute an amount equal to
the lesser of (a) the Senior Principal Distribution Amount for loan group 1 for
that Distribution Date and (b) the product of (1) the Pool Distribution Amount
for loan group 1 remaining after payment of funds due to the Trustee and
distributions of interest on the group 1 Certificates, IO Component and Class
XB-IO Certificates and (2) a fraction, the numerator of which is the Senior
Principal Distribution Amount for loan group 1 and the denominator of which is
the sum of the PO Principal Amount for loan group 1 and the Senior Principal
Distribution Amount for loan group 1, as principal, sequentially, as follows:
first, to the Class 1-A-R Certificate, until its Class Balance has been
reduced to zero; and
second, concurrently, to the Class 1-A-2, Class 1-A-3 and Class 1-A-4
Certificates, pro rata, until their Class Balances have been reduced to zero.
For the Senior Non-PO Certificates of group 2:
On each Distribution Date, the Trustee will distribute an amount equal to
the lesser of (a) the Senior Principal Distribution Amount for loan group 2 for
that Distribution Date and (b) the product of (1) the Pool Distribution Amount
for loan group 2 remaining after payment of funds due to the Trustee and
S-49
distributions of interest on the group 2 Certificates, IO Component and Class
XB-IO Certificates and (2) a fraction, the numerator of which is the Senior
Principal Distribution Amount for loan group 2 and the denominator of which is
the sum of the PO Principal Amount for loan group 2 and the Senior Principal
Distribution Amount for loan group 2, as principal, concurrently, to the Class
2-A-1, Class 2-A-2 and Class 2-A-3 Certificates, pro rata, until their Class
Balances have been reduced to zero.
For the Senior Non-PO Certificates of group 3:
On each Distribution Date, the Trustee will distribute an amount equal to
the lesser of (a) the Senior Principal Distribution Amount for loan group 3 for
that Distribution Date and (b) the Pool Distribution Amount for loan group 3
remaining after payment of funds due to the Trustee and distributions of
interest on the group 3 Certificates and Class XB-IO Certificates, as principal
to the Class 3-A-1 Certificates until their Class Balance has been reduced to
zero.
The preceding distribution priorities for a group will not apply on any
Distribution Date on or after the Senior Credit Support Depletion Date. On each
of those Distribution Dates, the amount to be distributed as principal to the
Senior Non-PO Certificates of a group will be distributed, concurrently, as
principal of the classes of Senior Non-PO Certificates of that group pro rata.
The "Senior Credit Support Depletion Date" is the date on which the
aggregate Class Balance of the Subordinate Certificates has been reduced to
zero.
The "Senior Principal Distribution Amount" for a loan group for any
Distribution Date will equal the sum of:
(a) the Senior Percentage for that loan group of the applicable Non-PO
Percentage of the Scheduled Principal Payments for that Distribution Date;
and
(b) the Senior Prepayment Percentage for that loan group of the
applicable Non-PO Percentage of the Unscheduled Principal Payments for that
Distribution Date.
The "Pool Principal Balance" for a loan group for any Distribution Date
equals the sum of the Stated Principal Balances of the Mortgage Loans in that
loan group outstanding on the Due Date in the month preceding the month of that
Distribution Date.
The "Pool Principal Balance (Non-PO Portion)" for a loan group for any
Distribution Date equals the sum of the product, for each Mortgage Loan in that
loan group, of the Non-PO Percentage of each Mortgage Loan multiplied by its
Stated Principal Balance on the Due Date in the month preceding the month of
that Distribution Date.
The "Senior Percentage" for a loan group for any Distribution Date will
equal (i) the sum of the Class Balances of the Senior Non-PO Certificates of the
related group, divided by (ii) the Pool Principal Balance (Non-PO Portion) of
the loan group.
The "Subordinate Percentage" for a loan group for any Distribution Date
will equal 100% minus the Senior Percentage for that loan group and that
Distribution Date.
S-50
As of the Cut-off Date, the approximate Senior Percentage and Subordinate
Percentage for each loan group are expected to be as follows:
Loan Group Senior Percentage Subordinate Percentage
--------------- ---------------------- ---------------------------
1 95.1673% 4.8327%
2 95.3995% 4.6005%
3 95.3992% 4.6008%
The "Senior Prepayment Percentage" for a loan group for any Distribution
Date occurring during the periods set forth below will be as follows:
Distribution Date Occurring In Senior Prepayment Percentage
- ----------------------------------------- --------------------------------------
November 2006 through October 2011....... 100%
November 2011 through October 2012....... the applicable Senior Percentage,
plus 70% of the applicable Subordinate
Percentage;
November 2012 through October 2013....... the applicable Senior Percentage,
plus 60% of the applicable Subordinate
Percentage;
November 2013 through October 2014....... the applicable Senior Percentage,
plus 40% of the applicable Subordinate
Percentage;
November 2014 through October 2015....... the applicable Senior Percentage,
plus 20% of the applicable Subordinate
Percentage; and
November 2015 and thereafter............. the applicable Senior Percentage.
If, however, on any Distribution Date the percentage equal to (x) the sum
of the Class Balances of the Senior Non-PO Certificates of all groups divided by
(y) the sum of the Pool Principal Balance (Non-PO Portion) for all loan groups
(this percentage, the "Total Senior Percentage") exceeds the Total Senior
Percentage calculated on the Closing Date, then the Senior Prepayment Percentage
for all loan groups for that Distribution Date will equal 100%.
In addition, no decrease in the Senior Prepayment Percentages for the loan
groups will occur if the following occurs as of any Distribution Date as to
which any such decrease applied with respect to the Mortgage Loans in the
aggregate: (i) the outstanding principal balance of all Mortgage Loans
(including, for this purpose, any Mortgage Loans in foreclosure, any REO
Property and any Mortgage Loan for which the mortgagor has filed for bankruptcy
after the Closing Date) delinquent 60 days or more (averaged over the preceding
six-month period), as a percentage of the sum of the Class Balances of the
Subordinate Certificates, is equal to or greater than 50% or (ii) cumulative
Realized Losses (as described under "-- Allocation of Losses") on the Mortgage
Loans exceed the percentages of the sum of the Class Balances of the Subordinate
Certificates on the Closing Date (the "Original Subordinate Principal Balance")
indicated below:
Percentage of Original Subordinate
Distribution Date Occurring In Principal Balance
- --------------------------------------------- ----------------------------------
November 2011 through October 2012........... 30%
November 2012 through October 2013........... 35%
November 2013 through October 2014........... 40%
November 2014 through October 2015........... 45%
November 2015 and thereafter................. 50%
This disproportionate allocation of certain unscheduled payments in respect
of principal will have the effect of accelerating the amortization of the Senior
Non-PO Certificates of a group while, in the absence of Realized Losses (as
described under "-- Allocation of Losses") on the Mortgage Loans in the related
loan group, increasing the relative interest in the Pool Principal Balance
evidenced by the Subordinate
S-51
Certificates. Increasing the interest of the Subordinate Certificates relative
to that of the Senior Certificates of a group is intended to preserve the
availability of the subordination provided by the Subordinate Certificates.
The "Subordinate Prepayment Percentage" for a loan group as of any
Distribution Date will equal 100% minus the Senior Prepayment Percentage for the
loan group for that date.
The "Total Subordinate Percentage" as of any date will equal 100% minus the
Total Senior Percentage for that date.
If a distribution of full and partial prepayments and other amounts on a
Distribution Date in accordance with the applicable Senior Prepayment
Percentage, as described above, would reduce the outstanding Class Balance of a
class below zero, the distribution to that class of the applicable Senior
Prepayment Percentage of those amounts for that Distribution Date will be
limited to the percentage necessary to reduce the Class Balance of that class to
zero.
PO Principal Distribution Amount
On each Distribution Date, distributions of principal to the PO Component
of the related group will be made in an amount with respect to each group (the
"PO Principal Distribution Amount") equal to the lesser of:
(a) the applicable PO Principal Amount for the related loan group for
such Distribution Date; and
(b) the product of (1) the Pool Distribution Amount for the related
loan group remaining after distribution of funds due to the Trustee and
interest on the Senior Certificates and IO Component, if any, and (2) a
fraction, the numerator of which is the PO Principal Amount for the loan
group and the denominator of which is the sum of the PO Principal Amount
for the loan group and the Senior Principal Distribution Amount for the
loan group.
The "PO Principal Amount" for any Distribution Date and any loan group will
equal the sum of the applicable PO Percentage of:
(a) all monthly payments of principal due on each Discount Mortgage
Loan in the loan group on the related Due Date;
(b) the principal portion of the Purchase Price (net of unreimbursed
Advances and other amounts as to which the Servicer is entitled to be
reimbursed pursuant to the Pooling Agreement) of each Discount Mortgage
Loan in the loan group that was repurchased by the Depositor pursuant to
the Pooling Agreement during the calendar month preceding the month of such
Distribution Date;
(c) any Substitution Adjustment Amount (net of unreimbursed Advances
and other amounts as to which the Servicer is entitled to be reimbursed
pursuant to the Pooling Agreement) in connection with a Deleted Mortgage
Loan in the loan group that was a Discount Mortgage Loan received during
the calendar month preceding the month of such Distribution Date;
(d) any Liquidation Proceeds (net of unreimbursed expenses and
unreimbursed Advances, if any) allocable to recoveries of principal of
Discount Mortgage Loans in the loan group that are not yet Liquidated
Mortgage Loans received during the calendar month preceding the month of
that Distribution Date;
(e) with respect to each Discount Mortgage Loan in the loan group that
became a Liquidated Mortgage Loan during the calendar month preceding the
month of such Distribution Date, the amount
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of Liquidation Proceeds (other than any Foreclosure Profits and net of
unreimbursed expenses and unreimbursed Advances, if any) allocable to
principal received with respect to that Discount Mortgage Loan; and
(f) all partial and full principal prepayments by mortgagors on
Discount Mortgage Loans in the loan group received during the calendar
month preceding that Distribution Date.
Subordinate Principal Distribution Amount
The "Subordinate Principal Distribution Amount" for a loan group for any
Distribution Date will equal the sum of:
(a) the Subordinate Percentage for that loan group of the applicable
Non-PO Percentage of the Scheduled Principal Payments for that Distribution
Date; and
(b) the Subordinate Prepayment Percentage for that loan group of the
applicable Non-PO Percentage of the Unscheduled Principal Payments for that
Distribution Date.
On each Distribution Date, each class of Subordinate Certificates that is
entitled to receive a principal distribution will receive its pro rata share
(calculated based on the Class Balances of all the Subordinate Certificates that
are entitled to receive a principal distribution) of the Subordinate Principal
Distribution Amounts, to the extent of the remaining Pool Distribution Amounts
from all loan groups. For each class of Subordinate Certificates, if on any
Distribution Date the Fractional Interest is less than the Fractional Interest
for that class on the Closing Date, no classes junior to that class will be
entitled to receive a principal distribution.
Distributions of principal on the Subordinate Certificates that are
entitled to receive a principal distribution on a Distribution Date will be made
sequentially in order of payment priority, beginning with the Class M
Certificates, until each class has received its pro rata share for the
Distribution Date. However, the PO Deferred Amounts will be paid to the PO
Components from amounts otherwise distributable as principal to the Subordinate
Certificates, beginning with the amounts otherwise distributable as principal to
the class of Subordinate Certificates lowest in order of payment priority.
The "Fractional Interest" for any Distribution Date and each class of
Subordinate Certificates will equal (i) the sum of the Class Balances of all
classes of Subordinate Certificates lower in order of payment priority, divided
by (ii) the sum of the Pool Principal Balances (Non-PO Portion) for all loan
groups for the Distribution Date.
The approximate Fractional Interests for the Subordinate Certificates on
the Closing Date are expected to be as follows:
Class M..................................... 3.76%
Class B-1................................... 2.55%
Class B-2................................... 1.72%
Class B-3................................... 1.09%
Class B-4................................... 0.62%
Class B-5................................... 0.31%
Class B-6................................... 0.00%
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Residual Certificate
The Class 1-A-R Certificate will remain outstanding for so long as the
Trust exists, whether or not it is receiving current distributions of principal
or interest. In addition to distributions of interest and principal as described
above, on each Distribution Date, the holder of the Class 1-A-R Certificate will
be entitled to receive any Pool Distribution Amount for a loan group remaining
after the payment of (i) interest and principal on the Senior Certificates and
Components, if any, of the related group, (ii) PO Deferred Amounts on the PO
Components and (iii) interest and principal on the Subordinate Certificates, as
described above. It is not anticipated that there will be any significant
amounts remaining to distribute on the Class 1-A-R Certificate.
Cross-Collateralization
On each Distribution Date before the Senior Credit Support Depletion Date but
on or after the date on which the Class Balances of the Senior Non-PO
Certificates of a group have been reduced to zero, amounts otherwise
distributable as principal payments for the related loan group on the
Subordinate Certificates will be distributed as principal to the remaining
classes of Senior Non-PO Certificates together with the applicable Senior
Principal Distribution Amount in accordance with the priorities set forth for
the applicable group above under "--Principal--Senior Principal Distribution
Amount," provided that on that Distribution Date either:
(a) the Total Subordinate Percentage for that Distribution Date is
less than twice the initial Total Subordinate Percentage; or
(b) the outstanding principal balance of all Mortgage Loans
(including, for this purpose, any Mortgage Loans in foreclosure, any REO
Property and any Mortgage Loan for which the mortgagor has filed for
bankruptcy after the Closing Date) delinquent 60 days or more (averaged
over the preceding six month period) as a percentage of the sum of the
Class Balances of the Subordinate Certificates is greater than or equal to
50%.
If the Senior Non-PO Certificates of two groups remain outstanding, the
distributions described above will be made to the Senior Non-PO Certificates of
those groups, pro rata, in proportion to the aggregate Class Balance of the
Senior Non-PO Certificates of each of those groups.
In addition, if on any Distribution Date the sum of the Class Balances of
the Senior Non-PO Certificates of a group (after giving effect to distributions
to be made on that Distribution Date) is greater than the Adjusted Pool Amount
(Non-PO Portion) (as described below under "-- Allocation of Losses") of the
related loan group (any such group, the "Undercollateralized Group" and any such
excess, the "Undercollateralized Amount"), all amounts otherwise distributable
as principal on the Subordinate Certificates, in reverse order of payment
priority will be paid as principal to the Senior Non-PO Certificates of the
Undercollateralized Group together with the applicable Senior Principal
Distribution Amount in accordance with the priorities set forth above under
"--Principal--Senior Principal Distribution Amount," until the sum of the Class
Balances of the Senior Non-PO Certificates of the Undercollateralized Group
equals the Adjusted Pool Amount (Non-PO Portion) of the related loan group.
Also, the amount of any unpaid interest shortfall amounts for the
Certificates of the Undercollateralized Group (including any interest shortfall
amount for that Distribution Date) will be paid to the Undercollateralized
Group, including the IO Component of such group, if any, and the Class XB-IO
Certificates in the manner described in clause (a)(ii) in the definition of
"Pool Distribution Amount Allocation" prior to the payment of any
Undercollateralized Amount from amounts otherwise distributable as principal on
the Subordinate Certificates, in reverse order of payment priority.
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If two groups are Undercollateralized Groups, the distributions described
above will be made, pro rata, in proportion to their Undercollateralized
Amounts.
The PO Deferred Amounts for the PO Components will be paid from amounts
otherwise distributable as principal on the Subordinate Certificates before any
payments are made pursuant to the preceding paragraphs.
Allocation of Losses
On each Distribution Date, the applicable PO Percentage of any Realized
Loss on a Discount Mortgage Loan in loan group 1 and loan group 2 will be
allocated to the applicable PO Component until its principal balance is reduced
to zero. This allocation will be effected on each Distribution Date by reducing
the principal balance of the applicable PO Component, if and to the extent that
the principal balance (after taking into account the amount of all distributions
to be made to the related group on that Distribution Date) exceeds the related
Adjusted Pool Amount (PO Portion) for the related loan group for that
Distribution Date. The amount of any Realized Loss allocated to a PO Component
will be treated as a "PO Deferred Amount." To the extent funds are available on
that Distribution Date or on any future Distribution Date from amounts that
would otherwise be allocable to the Subordinate Principal Distribution Amounts,
the PO Deferred Amounts for the PO Component of a group will be paid on that PO
Component prior to distributions of principal on the Subordinate Certificates.
Payments of the PO Deferred Amounts will be made from the principal payable to
the Subordinate Certificates beginning with the principal payable to the class
of Subordinate Certificates lowest in order of payment priority. Any
distribution in respect of unpaid PO Deferred Amounts for a PO Component will
not further reduce the principal balance of that PO Component. The PO Deferred
Amounts will not bear interest. The Class Balance of the class of Subordinate
Certificates then outstanding lowest in order of payment priority will be
reduced by the amount of any payments in respect of PO Deferred Amounts for the
PO Components. Any excess of these PO Deferred Amounts over the Class Balance of
that class will be allocated to the next most subordinate class of Subordinate
Certificates to reduce its Class Balance and so on, as necessary.
On each Distribution Date, the applicable Non-PO Percentage of any Realized
Loss will be allocated first to the Subordinate Certificates, in reverse order
of payment priority (beginning with the class of Subordinate Certificates then
outstanding lowest in order of payment priority), in each case until the Class
Balance of each class of Subordinate Certificates has been reduced to zero, and
then to the Senior Non-PO Certificates of the related group pro rata based on
their Class Balances.
This allocation of Realized Losses will be accomplished on each
Distribution Date by reducing the Class Balance of the class of Subordinate
Certificates then outstanding lowest in order of payment priority if and to the
extent that the sum of the Class Balances of all classes of Senior Non-PO
Certificates and Subordinate Certificates (after taking into account the amount
of all distributions to be made on the Distribution Date) exceeds the sum of the
Adjusted Pool Amounts (Non-PO Portion) for the Distribution Date.
In the event that on any Distribution Date after giving effect to the
allocation of Realized Losses, the amount which is available for the
distribution of principal to a class of Subordinate Certificates is greater than
the Class Balance of such class, such excess instead will be distributed first
to the other classes of Subordinate Certificates in order of payment priority
and then to the Senior Non-PO Certificates, pro rata based on their Class
Balances.
After the Senior Credit Support Depletion Date, on each Distribution Date,
the sum of the Class Balances of all classes of Senior Non-PO Certificates of a
group then outstanding will be reduced if and to the extent that sum (after
taking into account the amount of all distributions to be made on the
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Distribution Date) exceeds the Adjusted Pool Amount (Non-PO Portion) for the
related loan group for the Distribution Date. The amount of the reduction will
be allocated among the Senior Non-PO Certificates of the applicable group pro
rata based on their Class Balances.
After the Senior Credit Support Depletion Date, the Class Balance of a
class of Super Senior Support Certificates will be reduced not only by the
principal portion of Realized Losses allocated to that class as provided in the
preceding paragraph, but also by the portion allocated to the related class or
classes of Super Senior Certificates indicated in the following table.
The related classes of Super Senior and Super Senior Support Certificates
are as follows:
Super Senior Classes Super Senior Support Classes
----------------------------- ------------------------------------
1-A-2 1-A-3
2-A-1 and 2-A-2 2-A-3
Realized Losses allocated to any of the Class 1-A-2, Class 1-A-3 or Class
1-A-4 Certificates will reduce the Class 1-A-1 Notional Amount, Realized Losses
allocated to any of the Class 1-A-2, Class 1-A-3 or Class 1-A-4 Certificates
will reduce the Class 1-A-5 Notional Amount and Realized Losses allocated to any
of the Class M Certificates, Class B-1 Certificates, Class B-2 Certificates and
Class B-3 Certificates will reduce the Class XB-IO Notional Amount.
In the event an amount is received relating to a Mortgage Loan in loan
group 1 or loan group 2 as to which a Realized Loss had previously been
allocated to a class of Certificates (a "Group 1 Recovery" or "Group 2
Recovery", as the case may be), it will be distributed to the related PO
Component in an amount equal to the applicable PO Percentage of such Group 1
Recovery or Group 2 Recovery provided that the sum of the Group 1 Recoveries or
Group 2 Recovery, as applicable, distributed to any PO Component on any
Distribution Date will not exceed the related PO Deferred Amount. The remaining
portion of any Group 1 Recovery or Group 2 Recovery, as the case may be, will be
distributed to the Senior Non-PO Certificates of the related group and the
then-outstanding Subordinate Certificates in the same manner as Liquidation
Proceeds are distributed.
In the event an amount is received relating to a Mortgage Loan in loan
group 3 as to which a Realized Loss had previously been allocated to a class of
Certificates (a "Group 3 Recovery," and together with the Group 1 Recovery and
Group 2 Recovery, the "Recoveries" ), it will be distributed to the Senior
Non-PO Certificates of the group 3 and the then-outstanding Subordinate
Certificates in the same manner as Liquidation Proceeds are distributed.
In general, a "Realized Loss" means, (a) for a Liquidated Mortgage Loan,
the amount by which the remaining unpaid principal balance of the Mortgage Loan
exceeds the amount of Liquidation Proceeds applied to the principal balance of
the Mortgage Loan and (b) a Bankruptcy Loss.
"Bankruptcy Losses" are losses that are incurred as a result of Debt
Service Reductions or Deficient Valuations. As used in this prospectus
supplement, a "Deficient Valuation" occurs when a bankruptcy court establishes
the value of a Mortgaged Property at an amount less than the then-outstanding
principal balance of the Mortgage Loan secured by such Mortgaged Property or
reduces the then-outstanding principal balance of a Mortgage Loan. In the case
of a reduction in the value of the related Mortgaged Property, the amount of the
secured debt could be reduced to the value established by the court, and the
holder of the affected Mortgage Loan would become an unsecured creditor to the
extent the then-outstanding principal balance of the Mortgage Loan exceeds the
value assigned to the Mortgaged Property by the bankruptcy court. In addition,
certain other modifications of the terms of a Mortgage Loan can result from a
bankruptcy proceeding, including the reduction (a "Debt Service Reduction") of
the amount of the Monthly Payment on the related Mortgage Loan. However, none of
these events will be considered a Debt Service Reduction or Deficient Valuation
so long as the Servicer is pursuing any other
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remedies that may be available for the Mortgage Loan and (i) the Mortgage Loan
is not in default or (ii) scheduled Monthly Payments are being advanced by the
Servicer without giving effect to any Debt Service Reduction.
A "Liquidated Mortgage Loan" is a defaulted Mortgage Loan as to which the
Servicer has determined that all recoverable Liquidation Proceeds have been
received.
With respect to any Distribution Date, the "Adjusted Pool Amount" for a
loan group will equal the aggregate unpaid principal balance of the Mortgage
Loans in the loan group as of the Cut-off Date minus the sum of (i) all
principal amounts received relating to the Mortgage Loans in the loan group
(including amounts received as Advances, as described under "Servicing of the
Mortgage Loans -- Periodic Advances and Servicing Advances" in the prospectus,
principal prepayments and Liquidation Proceeds relating to principal) and
distributed on the Certificates on that Distribution Date and all prior
Distribution Dates and (ii) the principal portion of all Realized Losses (other
than Debt Service Reductions) incurred on the Mortgage Loans in the loan group
from the Cut-off Date through the end of the month preceding the Distribution
Date.
With respect to any Distribution Date, the "Adjusted Pool Amount (PO
Portion)" for loan group 1 and loan group 2 will equal the sum as to each
Mortgage Loan outstanding in the loan group as of the Cut-off Date of the
product of (A) the PO Percentage for the Mortgage Loan and (B) the principal
balance of the Mortgage Loan as of the Cut-off Date less the sum of (i) all
principal amounts received relating to the Mortgage Loan (including amounts
received as Advances, as described under "Servicing of the Mortgage Loans --
Periodic Advances and Servicing Advances" in the prospectus, principal
prepayments and Liquidation Proceeds relating to principal) and distributed on
the Certificates on that Distribution Date and all prior Distribution Dates and
(ii) the principal portion of any Realized Loss (other than a Debt Service
Reduction) incurred on the Mortgage Loan from the Cut-off Date through the end
of the month preceding the month in which that Distribution Date occurs. The
Adjusted Pool Amount (PO Portion) for loan group 3 will be zero.
With respect to any Distribution Date, the "Adjusted Pool Amount (Non-PO
Portion)" for loan group 1 and loan group 2 will equal the difference between
the Adjusted Pool Amount for the applicable loan group and the Adjusted Pool
Amount (PO Portion) for such loan group. The "Adjusted Pool Amount (Non-PO
Portion)" for loan group 3 will equal the Adjusted Pool Amount for loan group 3.
Restrictions on Transfer of the Class 1-A-R Certificate
The Class 1-A-R Certificate will be subject to the following restrictions
on transfer and will contain a legend describing these restrictions.
The REMIC provisions of the Code impose certain taxes on (i) transferors of
residual interests to, or agents that acquire residual interests on behalf of,
Disqualified Organizations (as defined in the prospectus) and (ii) certain
Pass-Through Entities (as defined in the prospectus) that have Disqualified
Organizations as beneficial owners. No tax will be imposed on a Pass-Through
Entity (other than an "electing large partnership" (as defined in the
prospectus)) because of the Class 1-A-R Certificate to the extent the
Pass-Through Entity has received an affidavit from each owner of the
Pass-Through Entity that it is not a Disqualified Organization or a nominee for
a Disqualified Organization.
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The Pooling Agreement will provide that no legal or beneficial interest in
the Class 1-A-R Certificate may be transferred to or registered in the name of
any person unless:
o the proposed purchaser provides to the Trustee an affidavit to the
effect that, among other items, the transferee is not a Disqualified
Organization and is not purchasing the Class 1-A-R Certificate as an
agent for a Disqualified Organization (i.e., as a broker, nominee or
other middleman); and
o the transferor states in writing to the Trustee that it has no actual
knowledge that the affidavit is false.
Further, the affidavit will require the transferee to affirm that it (a)
historically has paid its debts as they have come due and intends to do so in
the future, (b) understands that it may incur tax liabilities relating to the
Class 1-A-R Certificate in excess of cash flows generated by the Class 1-A-R
Certificate, (c) intends to pay taxes associated with holding the Class 1-A-R
Certificate as these taxes become due and (d) will not transfer the Class 1-A-R
Certificate to any person or entity that does not provide a similar affidavit.
The transferor must certify in writing to the Trustee that, as of the date of
the transfer, it had no knowledge or reason to know that the affirmations made
by the transferee stated in the preceding sentence were false.
Treasury regulations applicable to REMICs (the "REMIC Regulations")
disregard certain transfers of residual certificates, and if applicable to a
purported transfer of the Class 1-A-R Certificate, the transferor would continue
to be treated as the owner of the Class 1-A-R Certificate and therefore would
continue to be subject to tax on its allocable portion of the net income of each
REMIC. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a holder generally is disregarded for all
federal income tax purposes if a significant purpose of the transfer is to
impede the assessment or collection of tax. A residual interest in a REMIC
(including a residual interest with a positive value at issuance) is a
"noneconomic residual interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The REMIC Regulations
explain that a significant purpose to impede the assessment or collection of tax
exists if the transferor, at the time of the transfer, either knew or should
have known that the transferee would be unwilling or unable to pay taxes due on
its share of the taxable income of the REMIC. Under the REMIC Regulations, a
safe harbor is provided if (i) the transferor conducted, at the time of the
transfer, a reasonable investigation of the financial condition of the
transferee and found that the transferee historically had paid its debts as they
came due and found no significant evidence to indicate that the transferee would
not continue to pay its debts as they came due in the future, (ii) the
transferee represents to the transferor that it understands that, as the holder
of the noneconomic residual interest, the transferee may incur liabilities in
excess of any cash flows generated by the interest and that the transferee
intends to pay taxes associated with holding the residual interest as they
become due and (iii) the transferee represents to the transferor that it will
not cause income from the noneconomic residual interest to be attributable to a
foreign permanent establishment or fixed base, within the meaning of an
applicable income tax treaty, and the noneconomic residual interest is, in fact,
not transferred to a foreign permanent establishment or fixed base of the
transferee or any other person. The Pooling Agreement will require the
transferee of a Class 1-A-R Certificate to certify to the matters in the
preceding sentence as part of the affidavit described above.
In addition to the three conditions set forth above for the transferor
of a noneconomic residual interest to be presumed not to have knowledge that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC, the REMIC Regulations contain a fourth condition
for
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the transferor to be presumed to lack such knowledge. This fourth condition
requires that one of the two following tests be satisfied:
(a) the present value of the anticipated tax liabilities associated
with holding the noneconomic residual interest not exceed the sum of:
(i) the present value of any consideration given to the
transferee to acquire the interest;
(ii) the present value of the expected future distributions on
the interest; and
(iii) the present value of the anticipated tax savings associated
with holding the interest as the applicable REMIC generates losses; or
(b) (i) the transferee must be a domestic "C" corporation (other than
a corporation exempt from taxation or a regulated investment company or
real estate investment trust) that meets certain asset tests;
(ii) the transferee must agree in writing that any subsequent
transfer of the residual interest would be to an eligible "C"
corporation and would meet the requirements for a safe harbor
transfer; and
(iii) the facts and circumstances known to the transferor on or
before the date of the transfer must not reasonably indicate that the
taxes associated with ownership of the residual interest will not be
paid by the transferee.
For purposes of the computations in clause (a), the transferee is assumed
to pay tax at the highest corporate rate of tax specified in the Code or, in
certain circumstances, the alternative minimum tax rate. Further, present values
generally are computed using a discount rate equal to the short-term Federal
rate set forth in Section 1274(d) of the Code for the month of the transfer and
the compounding period used by the transferee.
The Pooling Agreement will not require that transfers of the Class 1-A-R
Certificate meet the fourth requirement above, and therefore transfers may not
meet the safe harbor. The holder of the Class 1-A-R Certificate is advised to
consult its tax advisor regarding the advisability of meeting the safe harbor.
In addition, the Class 1-A-R Certificate may not be purchased by or
transferred to any person that is not a U.S. Person, unless:
o that person holds the Class 1-A-R Certificate in connection with the
conduct of a trade or business within the United States and furnishes
the transferor and the Trustee with an effective Internal Revenue
Service Form W-8ECI; or
o the transferee delivers to both the transferor and the Trustee an
opinion of a nationally-recognized tax counsel to the effect that the
proposed transfer is in accordance with the requirements of the Code
and the related Treasury regulations and that the proposed transfer of
the Class 1-A-R Certificate will not be disregarded for federal income
tax purposes.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation or partnership (unless, in the case of a partnership, Treasury
regulations are adopted that provide otherwise) created or organized in or under
the laws of the United States, the District of Columbia or any state, including
an entity treated as a corporation or partnership for federal income tax
purposes, an estate whose income is subject to United States federal income tax
regardless of its source, or a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust, and one or
more U.S.
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Persons have the authority to control all substantial decisions of the trust
(or, to the extent provided in applicable Treasury regulations, certain trusts
in existence on August 20, 1996 which are eligible to elect to be treated as
U.S. Persons).
The Pooling Agreement will provide that any attempted or purported transfer
in violation of these transfer restrictions will be null and void and will vest
no rights in any purported transferee.
Any transferor or agent to whom the Trustee provides information as to any
applicable tax imposed on such transferor or agent may be required to bear the
cost of computing or providing this information.
See "Federal Income Tax Consequences -- Federal Income Tax Consequences for
REMIC Certificates -- Taxation of Residual Certificates -- Tax-Related
Restrictions on Transfer of Residual Certificates" in the prospectus.
The Class 1-A-R Certificate may not be purchased by or transferred to any
Plan or any person acting on behalf of or investing the assets of a Plan.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
Restrictions on Transfer of the Class 1-A-3 and Subordinate Certificates
Under current law the purchase and holding of the Class 1-A-3 and Subordinate
Certificates by or on behalf of a Plan may result in "prohibited transactions"
within the meaning of ERISA, Section 4975 of the Code or Similar Law. Transfers
of the Class 1-A-3 or Subordinate Certificates will not be made unless the
transferee delivers to the Trustee either:
(a) a representation letter, in form and substance satisfactory to the
Trustee, stating that:
(1) it is not, and is not acting on behalf of, any such Plan or
using the assets of any such Plan to effect such purchase; or
(2) if it is an insurance company, that the source of funds used
to purchase the Class 1-A-3 or Subordinate Certificates is an
"insurance company general account" (as such term is defined in
Section V(e) of Prohibited Transaction Class Exemption 95-60 ("PTE
95-60"), 60 Fed. Reg. 35925 (July 12, 1995)), that there is no Plan
with respect to which the amount of such general account's reserves
and liabilities for the contract(s) held by or on behalf of such Plan
and all other Plans maintained by the same employer (or affiliate
thereof as defined in Section V(a)(1) of PTE 95-60) or by the same
employee organization exceeds 10% of the total of all reserves and
liabilities of such general account (as such amounts are determined
under Section I(a) of PTE 95-60) at the date of acquisition and that
all Plans that have an interest in such general account are Plans to
which PTE 95-60 applies; or
(b) an opinion of counsel, in form and substance satisfactory to the
Trustee and the Servicer, to the effect that the purchase or holding of the
Class 1-A-3 or Subordinate Certificates by or on behalf of such Plan will
not constitute or result in a non-exempt prohibited transaction within the
meaning of ERISA, Section 4975 of the Code or Similar Law and will not
subject the Depositor, the Servicer or the Trustee to any obligation in
addition to those undertaken in the Pooling Agreement.
The Class 1-A-3 and Subordinate Certificates will contain a legend
describing these restrictions on transfer. Any transferee of a Class 1-A-3 or
Subordinate Certificate that does not comply with either clause (a) or clause
(b) above will be deemed to have made the representation described in clause (a)
above.
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The Pooling Agreement will provide that any attempted or purported transfer
in violation of these transfer restrictions will be null and void and will vest
no rights in any purported transferee.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
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PREPAYMENT AND YIELD CONSIDERATIONS
- --------------------------------------------------------------------------------
Delinquencies on the Mortgage Loans in a loan group or loan groups which
are not advanced by or on behalf of the Servicer (because the Servicer has
determined that these amounts, if advanced, would be nonrecoverable), will
adversely affect the yield on the Senior Certificates of the related group, the
Component Certificates, Class XB-IO Certificates and the Subordinate
Certificates. See "Servicing of the Mortgage Loans -- Periodic Advances and
Servicing Advances" in the prospectus. Because of the priority of distributions,
shortfalls resulting from delinquencies that are not advanced will be borne
first by the Subordinate Certificates (in reverse order of payment priority),
and then by the Senior Certificates and Components, if any, of the group and
Class XB-IO Certificates.
Net Interest Shortfalls will adversely affect the yields on the Offered
Certificates. In addition, losses generally will be borne by the Subordinate
Certificates, as described in this prospectus supplement under "Description of
the Certificates -- Allocation of Losses." As a result, the yields on the
Offered Certificates will depend on the rate and timing of Realized Losses on
the Mortgage Loans in the related loan group or loan groups.
The effective yields to investors (other than investors in the Class 1-A-1,
Class 1-A-2, Class 1-A-3, Class 1-A-4, Class 1-A-5, Class 2-A-1 and Class 2-A-2
Certificates) will be lower than the yields otherwise produced by the applicable
rate at which interest is passed through to investors and the purchase price of
their Certificates because monthly distributions will not be payable to
investors until the 25th day (or, if not a business day, the next business day)
of the month following the month in which interest accrues on the Mortgage Loans
(without any additional distribution of interest or earnings to cover the
delay).
Because principal payments on the Mortgage Loans in a loan group will be
distributed currently on the Senior Non-PO Certificates in the related group and
the PO Component, in the case of loan group 1 and loan group 2, and the
Subordinate Certificates, the rate of principal payments on the Offered
Certificates entitled to payments of principal, the aggregate amount of each
interest payment on the Offered Certificates entitled to interest payments, and
the yield to maturity of Offered Certificates purchased at a price other than
par are directly related to the rate of payments of principal on the Mortgage
Loans in the related loan group or loan groups. The principal payments on the
Mortgage Loans may be in the form of scheduled principal payments or principal
prepayments (for this purpose, the term "principal prepayment" includes
prepayments and any other recovery of principal in advance of the scheduled Due
Date, including repurchases and liquidations due to default, casualty,
condemnation and the like). Any of these prepayments will result in
distributions to you of amounts that would otherwise be distributed over the
remaining term of the Mortgage Loans. See "Prepayment and Yield Considerations"
in the prospectus.
The rate at which mortgage loans in general prepay may be influenced by a
number of factors, including general economic conditions, mortgage market
interest rates, availability of mortgage funds and homeowner mobility.
o In general, if prevailing mortgage interest rates fall significantly
below the mortgage interest rates on the Mortgage Loans, the Mortgage
Loans are likely to prepay at higher rates than if prevailing mortgage
interest rates remain at or above the mortgage interest rates on the
Mortgage Loans.
o Conversely, if prevailing mortgage interest rates rise above the
mortgage interest rates on the Mortgage Loans, the rate of prepayment
would be expected to decrease.
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The timing of changes in the rate of prepayments may significantly affect
the actual yield to you, even if the average rate of principal prepayments is
consistent with your expectations. In general, the earlier the payment of
principal of the Mortgage Loans, the greater the effect on your yield to
maturity. As a result, the effect on your yield of principal prepayments
occurring at a rate higher (or lower) than the rate you anticipate during the
period immediately following the issuance of the Certificates will not be offset
by a subsequent like reduction (or increase) in the rate of principal
prepayments. You should also consider the risk, in the case of an Offered
Certificate purchased at a discount, particularly a Principal Only Certificate,
that a slower than anticipated rate of payments in respect of principal
(including prepayments) on the Mortgage Loans in the related loan group or loan
groups, or the Discount Mortgage Loans in the related loan groups in the case of
the Class X-PO Certificates, will have a negative effect on the yield to
maturity of the Offered Certificate. You should also consider the risk, in the
case of an Offered Certificate purchased at a premium or in the case of the
Interest Only Certificates (which have no Class Balance), that a faster than
anticipated rate of payments in respect of principal (including prepayments) on
the Mortgage Loans in the related loan group or loan groups, or the Premium
Mortgage Loans in the related loan groups in the case of the Class X-IO
Certificates, particularly those Premium Mortgage Loans with higher mortgage
interest rates, will have a negative effect on the yield to maturity of the
Offered Certificates. You must make your own decisions as to the appropriate
prepayment assumptions to be used in deciding whether to purchase Offered
Certificates.
Mortgagors are permitted to prepay the Mortgage Loans, in whole or in part,
at any time without penalty. The rate of payment of principal may also be
affected by any repurchase of the Mortgage Loans permitted or required by the
Pooling Agreement, including any optional termination of the Trust by the
Depositor. See "The Pooling Agreement -- Termination; Optional Purchase of
Mortgage Loans" in the prospectus for a description of the Depositor's option to
repurchase the Mortgage Loans when the aggregate Stated Principal Balance of the
Mortgage Loans is less than 10% of the aggregate unpaid principal balance of the
Mortgage Loans as of the Cut-off Date. The Depositor may be required to
repurchase Mortgage Loans because of defective documentation or material
breaches in its representations and warranties relating to such Mortgage Loans.
Any repurchases will shorten the weighted average lives of the related classes
of Offered Certificates.
All of the Mortgage Loans will include "due-on-sale" clauses which allow
the holder of the Mortgage Loan to demand payment in full of the remaining
principal balance upon sale or certain transfers of the property securing the
Mortgage Loan. To the extent that the Servicer has knowledge of the conveyance
or proposed conveyance of the underlying Mortgaged Property, the Servicer will
enforce "due-on-sale" clauses to the extent permitted by applicable law.
However, the Servicer will not take any action in relation to the enforcement of
any "due-on-sale" provisions which would impair or threaten to impair any
recovery under any related primary mortgage insurance policy. See "Prepayment
and Yield Considerations" in the prospectus. Acceleration of Mortgage Loans as a
result of enforcement of "due-on-sale" provisions in connection with transfers
of the related Mortgaged Properties or the occurrence of certain other events
resulting in acceleration would affect the level of prepayments on the Mortgage
Loans, which in turn would affect the weighted average lives of the related
classes of Offered Certificates.
As described in this prospectus supplement under "Description of the
Certificates -- Principal," the Senior Prepayment Percentage for a group of the
applicable Non-PO Percentage of principal prepayments (excluding for this
purpose, partial liquidations due to default, casualty, condemnation and the
like) initially will be distributed to the classes of Senior Non-PO Certificates
of the group that are entitled to receive principal prepayment distributions at
that time. This may result in all (or a disproportionate percentage) of those
principal prepayments being distributed to the Senior Non-PO Certificates of
that group and none (or less than their pro rata share) of those principal
prepayments being distributed to
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holders of the Subordinate Certificates during the periods of time described in
the definition of "Senior Prepayment Percentage."
Investors in the Class 1-A-2, Class 1-A-3 and Class 1-A-4 Certificates
should also understand that if one-month LIBOR is greater than or equal to
6.550% per annum, their pass-through rates will remain at their maximum rate of
7.000% per annum, respectively.
Investors in the Class 2-A-1 Certificates should also understand that if
one-month LIBOR is greater than or equal to 7.100% per annum, their pass-through
rate will remain at their maximum rate of 7.500% per annum.
Investors in the Class 1-A-2, Class 1-A-3, Class 1-A-4 and Class 2-A-1
Certificates should consider the risk that if one-month LIBOR is lower than
anticipated, the actual yield to such investors will be lower than the
anticipated yield. Conversely, investors in the Class 1-A-1, Class 1-A-5 and
Class 2-A-2 Certificates should consider the risk that if one-month LIBOR is
higher than anticipated, the actual yields to such investors will be
significantly lower than the anticipated yield or may be negative.
Investors in the Class 1-A-1, Class 1-A-5 and Class 2-A-2 Certificates
should understand that if one-month LIBOR is greater than or equal to 6.500%,
6.550% and 7.100% per annum, respectively, the Class 1-A-1, Class 1-A-5 and
Class 2-A-2 Certificates will accrue interest at the minimum rate of 0.000% per
annum. See "-- Yield on the Inverse Floating Rate Certificates" below.
Investors in the Floating Rate and Inverse Floating Rate Certificates
should understand that the timing of changes in one-month LIBOR may affect the
actual yields to such investors even if the average rate of one-month LIBOR is
consistent with such investors' expectations. Each investor must make an
independent decision as to the appropriate LIBOR assumptions to be used in
deciding whether to purchase a Floating Rate or Inverse Floating Rate
Certificate.
Assumptions Relating to Tables
The decrement tables set forth in Appendix B have been prepared on the
basis of the following assumptions (the "Modeling Assumptions"):
(a) each loan group consists of the hypothetical mortgage loans
presented in Appendix C;
(b) the initial Class Balances, component principal balances and
notional amounts for the Offered Certificates and Components are as set
forth in the following table:
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Initial Class Balance,
Component Balance
Class or Component or Notional Balance
---------------------------- ----------------------------
Class 1-A-1............... $369,106,000
Class 1-A-2............... $66,780,000
Class 1-A-3............... $3,220,000
Class 1-A-4............... $299,106,000
Class 1-A-5............... $3,075,883
Class 1-A-R............... $100
Class 2-A-1............... $30,595,000
Class 2-A-2............... $7,649,000
Class 2-A-3............... $1,844,000
Class X-IO................ $11,529,057
Class X-PO................ $19,579,768
Class 3-A-1............... $57,919,000
Class XB-IO............... $1,509,011
Class M................... $5,000,000
Class B-1................. $5,969,000
Class B-2................. $4,081,000
Class B-3................. $3,061,000
Class B-4................. $2,296,000
Class B-5................. $1,530,000
Class B-6................. $1,531,196
Class 1-X-IO.............. $4,529,004
Class 2-X-IO.............. $7,000,053
Class 1-X-PO.............. $19,576,128
Class 2-X-PO.............. $3,640
(c) the initial pass-through rates for the Offered Certificates and
Components are as set forth or described in the table beginning on page S-6
of this prospectus supplement;
(d) there are no Net Interest Shortfalls, delinquencies or Realized
Losses on the Mortgage Loans;
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(e) scheduled payments of principal and interest on the Mortgage Loans
are received on the applicable Due Date beginning on November 1, 2006;
(f) prepayments are received, together with a full 30 days of
interest, on the last day of each month beginning in October 2006;
(g) the Mortgage Loans prepay at the indicated percentages of the PPC;
(h) the Depositor does not exercise its option to purchase the
Mortgage Loans and related property;
(i) no Mortgage Loans are required to be repurchased from the Trust
and no Mortgage Loans are substituted for the Mortgage Loans included in
the Trust on the Closing Date;
(j) the Certificates are issued on the Closing Date;
(k) cash payments on the Certificates are received on the 25th day of
each month beginning in November 2006 in accordance with the priorities and
amounts described in this prospectus supplement under "Description of the
Certificates";
(l) for each loan group, the Administrative Fee Rate is 0.2545% per
annum; and
(m) the one-month LIBOR used to determine the pass-through rates of
the Floating Rate Certificates and the Inverse Floating Rate Certificates
remains constant at 5.32%.
Although the characteristics of the mortgage loans for the decrement tables
have been prepared on the basis of the weighted average characteristics of the
Mortgage Loans which are expected to be in the Mortgage Pool, there is no
assurance that the Modeling Assumptions will reflect the actual characteristics
or performance of the Mortgage Loans or that the performance of the Offered
Certificates will conform to the results set forth in the decrement tables.
Weighted Average Lives of the Offered Certificates
Weighted average life of a class of Offered Certificates (other than the
Interest Only Certificates) refers to the average amount of time that will
elapse from the date of issuance of the Certificate until each dollar in
reduction of its Class Balance is distributed to investors. With respect to the
Class 1-A-1 Certificates, weighted average life refers to the average amount of
time that will elapse from the date of issuance of the Offered Certificates
until each dollar in reduction of the Class Balances of the Class 1-A-2, Class
1-A-3 and Class 1-A-4 Certificates is distributed to investors. With respect to
the Class 1-A-5 Certificates, weighted average life refers to the average amount
of time that will elapse from the date of issuance of the Offered Certificates
until each dollar in reduction of the Class Balances of the Class 1-A-2, Class
1-A-3 and Class 1-A-4 Certificates is distributed to investors. With respect to
the Class X-IO Certificates, weighted average life refers to the average amount
of time that will elapse from the date of issuance of the Offered Certificates
until the date on which the sum of the Stated Principal Balances of the Premium
Mortgage Loans in the related loan groups have been reduced to zero. With
respect to the Class XB-IO Certificates, weighted average life refers to the
average amount of time that will elapse from the date of issuance of the Offered
Certificates until each dollar in reduction of the Class Balances of the Class
M, Class B-1, Class B-2 and Class B-3 Certificates is distributed to investors.
The weighted average lives of classes of Offered Certificates will be influenced
by, among other things, the rate at which principal of the Mortgage Loans in the
related loan group or loan groups, is paid, which may be in the form of
scheduled principal payments or principal prepayments (for this purpose, the
term "prepayments" includes prepayments and liquidations due to default,
casualty, condemnation and the like), the timing of changes in the rate of
principal payments and the priority sequence of distributions of
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principal of the Offered Certificates. The interaction of these factors may have
different effects on each class of Offered Certificates and the effects on any
class may vary at different times during the life of the class. Accordingly, no
assurance can be given as to the weighted average life of any class of Offered
Certificates. For an example of how the weighted average lives of the Offered
Certificates are affected by these factors at various constant percentages of
PPC, see the decrement tables set forth in Appendix B.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment model used in this prospectus
supplement is the Prepayment Curve ("PPC"), which represents an assumed rate of
principal prepayment each month relative to the then-outstanding principal
balance of a pool of mortgage loans for the life of the mortgage loans. A 100%
PPC for loan group 1 assumes a prepayment rate of 8.00% CPR in the first month
of the life of the mortgage loans and an increase of approximately 1.2727272727%
CPR in each month thereafter until 22.00% CPR is reached in the twelfth month.
Beginning in the twelfth month and in each month thereafter during the life of
the mortgage loan, 100% PPC for loan group 1 assumes a constant prepayment rate
of 22.00% CPR each month. A 100% PPC for loan group 2 assumes a prepayment rate
of 8.00% CPR in the first month of the life of the mortgage loans and an
increase of approximately 1.4545454545% CPR in each month thereafter until
24.00% CPR is reached in the twelfth month. Beginning in the twelfth month and
in each month thereafter during the life of the mortgage loan, 100% PPC for loan
group 2 assumes a constant prepayment rate of 24.00% CPR each month. A 100% PPC
for loan group 3 assumes a prepayment rate of 6.00% CPR in the first month of
the life of the mortgage loans and an increase of approximately 1.4545454545%
CPR in each month thereafter until 22.00% CPR is reached in the twelfth month.
Beginning in the twelfth month and in each month thereafter during the life of
the mortgage loan, 100% PPC for loan group 3 assumes a constant prepayment rate
of 22.00% CPR each month. "Constant Prepayment Rate" or "CPR" represents a
constant 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. Neither PPC nor CPR purports 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. The Depositor is not aware of any
existing statistics that provide a reliable basis for investors to predict the
amount or the timing of receipt of prepayments on the Mortgage Loans.
The decrement tables set forth in Appendix B have been prepared on the
basis of the Modeling Assumptions described above under "-- Assumptions Relating
to Tables." There will likely be discrepancies between the characteristics of
the actual Mortgage Loans included in each loan group and the characteristics of
the assumed mortgage loans used in preparing the decrement tables. Any such
discrepancy may have an effect upon the percentages of initial Class Balances
(or initial notional amount, in the case of the Interest Only Certificates)
outstanding set forth in the decrement tables (and the weighted average lives of
the Offered Certificates). In addition, to the extent that the Mortgage Loans
that actually are included in a loan group have characteristics that differ from
those assumed in preparing the decrement tables, the Class Balance or notional
amount of a class of Offered Certificates could be reduced to zero earlier or
later than indicated by the decrement tables.
Furthermore, the weighted average life information contained in the
decrement tables is not necessarily indicative of the weighted average lives of
the Offered Certificates that might be calculated or projected under different
or varying prepayment assumptions.
It is not likely that (i) all of the Mortgage Loans in a loan group will
have the interest rates or remaining terms to maturity assumed or (ii) the
Mortgage Loans in a loan group will prepay at the indicated percentage of PPC
until maturity. In addition, the diverse remaining terms to maturity of the
Mortgage Loans in a loan group (which include many recently originated Mortgage
Loans) could produce slower or faster reductions of the Class Balances or
notional amount than indicated in the decrement tables at the various
percentages of PPC specified.
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Based upon the Modeling Assumptions, the decrement tables in Appendix B
indicate the projected weighted average life of each class of the Offered
Certificates and set forth the percentages of the initial Class Balance or
notional amount of each class that would be outstanding after each of the dates
shown at various constant percentages of PPC.
Yield on the Inverse Floating Rate Certificates
The significance of the effects of prepayment on the applicable Mortgage
Loans and changes in one-month LIBOR on the Class 1-A-1, Class 1-A-5 and Class
2-A-2 Certificates is illustrated in the applicable tables in Appendix D, which
show the pretax yields (on a corporate bond equivalent basis) to the holders of
the Class 1-A-1, Class 1-A-5 and Class 2-A-2 Certificates under different
constant percentages of PPC and rates of one-month LIBOR. The yield of the Class
1-A-1, Class 1-A-5 and Class 2-A-2 Certificates set forth in the applicable
tables in Appendix D were calculated using the Modeling Assumptions (other than
assumption (m) after the initial Interest Accrual Period) and the additional
assumptions that (i) on the first LIBOR Determination Date and on each LIBOR
Determination Date thereafter, one-month LIBOR will be as indicated in the
applicable tables in Appendix D, (ii) the Class 1-A-1, Class 1-A-5 and Class
2-A-2 Certificates are purchased on the Closing Date at assumed purchase prices
equal to 3.15%, 16.625% and 96.675%, respectively, of their initial Class
Balance or initial notional amounts, as the case may be, plus accrued interest
from October 25, 2006 to (but not including) the Closing Date and (iii) the
initial Class Balance or initial notional amounts for the Class 1-A-1, Class
1-A-5 and Class 2-A-2 Certificates, as the case may be, applicable to the
Distribution Date in November 2006 will be approximately $369,106,000,
$3,075,883 and $7,649,000, respectively.
As indicated in the applicable tables in Appendix D, the yield to investors
in the Inverse Floating Rate Certificates will be extremely sensitive to changes
in the rate of one-month LIBOR. Increases in one-month LIBOR may have a negative
effect on the yield to investors in Inverse Floating Rate Certificates. In
addition, investors in the classes of Inverse Floating Rate Certificates which
are also Interest Only Certificates, should consider the risk that a rapid rate
of repayment on the applicable Mortgage Loans or a high level of one-month LIBOR
could result in a failure of such investors to fully recover their initial
investment.
It is not likely that the applicable Mortgage Loans will prepay at a
constant rate until maturity, that all of the applicable Mortgage Loans will
prepay at the same rate or that they will have the characteristics assumed.
There can be no assurance that the applicable Mortgage Loans will prepay at any
of the rates shown in the applicable tables in Appendix D or at any other
particular rate. The timing of changes in the rate of prepayments may affect
significantly the yield realized by a holder of an Inverse Floating Rate
Certificate and there can be no assurance that your pre-tax yield on the Inverse
Floating Rate Certificates will correspond to any of the pre-tax yields shown in
this prospectus supplement. You must make your own decision as to the
appropriate prepayment assumptions to be used in deciding whether to purchase an
Inverse Floating Rate Certificate.
Changes in one-month LIBOR may not correlate with changes in prevailing
mortgage interest rates. Each investor must make its own decision as to the
appropriate interest rate assumptions to be used in deciding whether to purchase
an Inverse Floating Rate Certificate.
The yields set forth in the tables in Appendix D were calculated by (i)
determining the monthly discount rates that, when applied to the assumed streams
of cash flows to be paid on the Inverse Floating Rate Certificates would cause
that discounted present value of such assumed streams of cash flows to equal the
assumed purchase prices of the Inverse Floating Rate Certificates, plus accrued
interest from October 25, 2006 to (but not including) the Closing Date indicated
above and (ii) converting such monthly rates to corporate bond equivalent rates.
Such calculation does not take into account variations that may occur in the
interest rates at which you may be able to reinvest funds received as payments
of
S-68
interest on the Inverse Floating Rate Certificates and consequently does not
purport to reflect the return on any investment in the Inverse Floating Rate
Certificates when such reinvestment rates are considered.
Yield on the Class X-IO and Class XB-IO Certificates
The Class X-IO and Class XB-IO Certificates are Interest Only Certificates
and, as such, will not be entitled to receive distributions of principal in
respect of the Mortgage Loans.
The significance of the effects of prepayments on the applicable Mortgage
Loans is illustrated in the applicable tables in Appendix D, which show the
pre-tax yields (on a corporate bond equivalent basis) to the holders of Class
X-IO and Class XB-IO Certificates under different constant percentages of PPC.
The yields set forth were calculated using the Modeling Assumptions and the
additional assumption that the Class X-IO and Class XB-IO Certificates are
purchased on the Closing Date at assumed purchase prices equal to 16.25% and
47.50%, respectively, of their initial notional amounts, plus accrued interest
from October 1, 2006 to (but not including) the Closing Date and that the
initial notional amounts for the Class X-IO and Class XB-IO Certificates
applicable to the Distribution Date in November 2006 will be approximately
$11,529,057 and $1,509,011, respectively.
The interest accrued on each Distribution Date on the Class X-IO
Certificates is based on the interest accrued on such Distribution Date on two
IO Components: the Class 1-X-IO Component and the Class 2-X-IO Component.
Because the interest accrued on the Class 1-X-IO Component and the Class 2-X-IO
Component is based on the aggregate of the Stated Principal Balances of the
Premium Mortgage Loans in the related loan group multiplied by a fraction, the
numerator of which is equal to the weighted average of the Net Mortgage Interest
Rates of the Premium Mortgage Loans in the related loan group minus 7.000% with
respect to the Class 1-X-IO Component and 6.000% with respect to the Class
2-X-IO Component, and the denominator of which is equal to 6.000%, the yield to
maturity on the Class X-IO Certificates will be extremely sensitive to the rate
and timing of principal payments (including prepayments) on such Premium
Mortgage Loans in the related loan groups.
The Premium Mortgage Loans in a loan group will have higher Mortgage
Interest Rates than the other Mortgage Loans in the loan group. In general,
mortgage loans with higher mortgage interest rates may tend to experience faster
rates of prepayment in respect of principal than mortgage loans with lower
mortgage interest rates in response to changes in market interest rates. As a
result, the Premium Mortgage Loans in each loan group may prepay at a faster
rate than the other Mortgage Loans in the loan group, resulting in a lower yield
on the Class X-IO Certificates than would be the case if the Premium Mortgage
Loans in a loan group prepaid at the same rate as the other Mortgage Loans in
the loan group. An investor in the Class X-IO Certificates should fully consider
the associated risks, including the risk that a rapid rate of principal payments
(including prepayments) could result in the failure of such investor to fully
recover its initial investment.
The Class XB-IO Notional Amount is equal to a percentage of the sum of the
Class Balances of the Class M-1, Class B-1, Class B-2 and Class B-3
Certificates, which are Subordinate Certificates. Any distribution in respect of
principal made to, or losses in respect of principal allocated in reduction of,
the Class Balances of the Class M-1, Class B-1, Class B-2 or Class B-3
Certificates will reduce the notional amount of Class XB-IO Certificates and
affect the yield thereon. See "--Yield on the Subordinate Certificates" below.
It is not likely that the applicable Mortgage Loans in each loan group will
prepay at a constant rate until maturity, that all of the applicable Mortgage
Loans in each loan group will prepay at the same rate or that they will have the
characteristics assumed. There can be no assurance that the applicable Mortgage
Loans in each loan group will prepay at any of the rates shown in the tables in
Appendix D or at any other particular rate. The timing of changes in the rate of
prepayments may affect significantly the yield
S-69
realized by a holder of a Class X-IO or Class XB-IO Certificate and your pre-tax
yield on the Class X-IO and Class XB-IO Certificates will likely not correspond
to any of the pre-tax yields shown in this prospectus supplement. You must make
your own decision as to the appropriate prepayment assumptions to be used in
deciding whether to purchase a Class X-IO or Class XB-IO Certificate.
The yields set forth in the tables in Appendix D were calculated by (i)
determining the monthly discount rates that, when applied to the assumed streams
of cash flows to be paid on the Class X-IO and Class XB-IO Certificates, would
cause the discounted present value of such assumed streams of cash flows to
equal the assumed purchase prices of the Class X-IO and Class XB-IO Certificates
indicated above plus accrued interest from October 1, 2006 to (but not
including) the Closing Date and (ii) converting such monthly rates to corporate
bond equivalent rates. This calculation does not take into account variations
that may occur in the interest rates at which you may be able to reinvest funds
received as payments of interest on the Class X-IO and Class XB-IO Certificates
and consequently does not purport to reflect the return on any investment in the
Class X-IO and Class XB-IO Certificates when such reinvestment rates are
considered.
Yield on the Class X-PO Certificates
The Class X-PO Certificates are Principal Only Certificates and, as such,
will not be entitled to receive distributions of interest in respect of the
Mortgage Loans. As a result, the Class X-PO Certificates will be offered at a
substantial discount to their original Class Balance.
The significance of the effects of prepayments on the Class X-PO
Certificates is illustrated in the applicable table in Appendix D which show the
pre-tax yields (on a corporate bond equivalent basis) to the holders of Class
X-PO Certificates under different constant percentages of PPC. The yields set
forth were calculated using the Modeling Assumptions and the additional
assumption that the Class X-PO Certificates are purchased on the Closing Date at
assumed purchase prices equal to 76.25%, of their initial Class Balance.
As indicated in the applicable table in Appendix D, because the Class X-PO
Certificates represent the right to receive only a portion of the principal
received with respect to the Discount Mortgage Loans in the related loan groups,
the yield to maturity on the Class X-PO Certificates will be extremely sensitive
to the rate and timing of principal payments (including prepayments) on the
Discount Mortgage Loans.
It is not likely that the Discount Mortgage Loans in each loan group will
prepay at a constant rate until maturity, that all of the Discount Mortgage
Loans in each loan group will prepay at the same rate or that they will have the
characteristics assumed. There can be no assurance that the Discount Mortgage
Loans in each loan group will prepay at any of the rates shown in the tables in
Appendix D or at any other particular rate. The timing of changes in the rate of
prepayments may affect significantly the yield realized by holders of the Class
X-PO Certificates and there can be no assurance that your pre-tax yield on your
Class X-PO Certificates will correspond to any of the pre-tax yields shown in
this prospectus supplement. You must make your own decision as to the
appropriate prepayment assumptions to be used in deciding whether to purchase a
Class X-PO Certificate.
The yields set forth in the applicable table in Appendix D were calculated
by (i) determining the monthly discount rates that, when applied to the assumed
streams of cash flows to be paid on the Class X-PO Certificates, would cause the
discounted present values of such assumed streams of cash flows to equal the
assumed purchase prices of the Class X-PO Certificates indicated above and (ii)
converting such monthly rates to corporate bond equivalent rates. This
calculation does not take into account variations that may occur in the interest
rates at which you may be able to reinvest funds received
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as payments of principal of the Class X-PO Certificates and consequently does
not purport to reflect the return on any investment in the Class X-PO
Certificates when such reinvestment rates are considered.
Yield on the Class 1-A-R Certificate
The after-tax rate of return to the holder of the Class 1-A-R Certificate
will reflect its pre-tax rate of return, reduced by the taxes required to be
paid relating to that Certificate. If you hold the Class 1-A-R Certificate, you
may have tax liabilities during the early years of each REMIC's term that
substantially exceed any distributions payable to you during that period. In
addition, the present value of the tax liabilities relating to your Class 1-A-R
Certificate may substantially exceed the present value of expected distributions
on your Class 1-A-R Certificate and of any tax benefits that may arise with
respect to it. Accordingly, the after-tax rate of return on the Class 1-A-R
Certificate may be negative or may be otherwise significantly adversely
affected. The timing and amount of taxable income attributable to the Class
1-A-R Certificate will depend on, among other things, the timing and amounts of
prepayments and losses experienced on the Mortgage Loans.
If you own the Class 1-A-R Certificate, you are encouraged to consult your
tax advisors regarding the effect of taxes and the receipt of any payments made
in connection with the purchase of the Class 1-A-R Certificate on your after-tax
rate of return. See "Federal Income Tax Consequences" in this prospectus
supplement and in the prospectus.
Yield on the Subordinate Certificates
The weighted average life of, and the yield to maturity on, the Subordinate
Certificates, in descending order of their payment priority, will be
progressively more sensitive to the rate and timing of defaults and the severity
of ensuing losses on the Mortgage Loans. If the actual rate and severity of
losses on the Mortgage Loans is higher than those you assumed, the actual yield
to maturity of your Subordinate Certificate may be lower than the yield you
expected. The timing of losses on Mortgage Loans will also affect your actual
yield to maturity, even if the rate of defaults and severity of losses over the
life of the Trust are consistent with your expectations. In general, the earlier
a loss occurs, the greater the effect on an investor's yield to maturity. The
Non-PO Percentage of Realized Losses on the Mortgage Loans will be allocated to
reduce the Class Balance of the applicable class of Subordinate Certificates (as
described in this prospectus supplement under "Description of the Certificates
- -- Allocation of Losses"), without the receipt of cash equal to the reduction.
In addition, shortfalls in cash available for distributions on the Subordinate
Certificates will result in a reduction in the Class Balance of the class of
Subordinate Certificates then outstanding lowest in order of payment priority if
and to the extent that the sum of the Class Balances of all classes of Senior
Non-PO Certificates and Subordinate Certificates, following all distributions
and the allocation of Realized Losses on a Distribution Date, exceeds the
aggregate Adjusted Pool Amount (Non-PO Portion). As a result of these
reductions, less interest will accrue on that class of Subordinate Certificates
than otherwise would be the case. The yield to maturity of the Subordinate
Certificates will also be affected by the disproportionate allocation of
principal prepayments to the Senior Non-PO Certificates, Net Interest
Shortfalls, other cash shortfalls in the Pool Distribution Amounts, distribution
of funds to holders of the Class X-PO Certificates available for distribution of
funds to the Subordinate Certificates to the extent of reimbursement for PO
Deferred Amounts and distribution of funds to the Senior Non-PO Certificates as
a result of cross-collateralization otherwise available for distribution on the
Subordinate Certificates. See "Description of the Certificates -- Allocation of
Losses" in this prospectus supplement.
If on any Distribution Date, the Fractional Interest for any class of
Subordinate Certificates is less than its original Fractional Interest,
principal distributions on the Subordinate Certificates will be allocated solely
to that class and all other classes of Subordinate Certificates higher in order
of payment
S-71
priority, thereby accelerating the amortization thereof relative to that of the
classes junior to that class and reducing the weighted average lives of the
classes of Subordinate Certificates receiving such distributions. Accelerating
the amortization of the classes of Subordinate Certificates higher in order of
payment priority relative to the other classes of Subordinate Certificates is
intended to preserve the availability of the subordination provided by those
other classes.
Yield Considerations with Respect to the Class B-2 and Class B-3 Certificates
Defaults on mortgage loans may be measured relative to a default standard
or model. The model used in this prospectus supplement, the standard default
assumption ("SDA"), represents an assumed rate of default each month relative to
the outstanding performing principal balance of a pool of new mortgage loans. A
default assumption of 100% SDA assumes constant default rates of 0.02% per annum
of the outstanding principal balance of the pool of mortgage loans in the first
month of the life of the mortgage loans and an additional 0.02% per annum in
each subsequent month until the 30th month. Beginning in the 30th month and in
each subsequent month through the 60th month of the life of the mortgage loans,
100% SDA assumes a constant default rate of 0.60% per annum each month.
Beginning in the 61st month and in each subsequent month through the 120th month
of the life of the mortgage loans, 100% SDA assumes that the constant default
rate declines each month by 0.0095% per annum, and that the constant default
rate remains at 0.03% per annum in each month after the 120th month. For the
tables in Appendix D, it is assumed that there is no delay between the default
and liquidation of the mortgage loans. As used in the tables in Appendix D, "0%
SDA" assumes no defaults. SDA is not a historical description of default
experience or a prediction of the rate of default of any pool of mortgage loans.
The tables in Appendix D indicate the sensitivity of the pre-tax yield to
maturity on the Class B-2 and Class B-3 Certificates to various rates of
prepayment and varying levels of Realized Losses. The tables in Appendix D are
based upon, among other things, the Modeling Assumptions (other than the
assumption that the Mortgage Loans experience no defaults) and the additional
assumption that liquidations (other than those scenarios indicated as 0% of SDA
(no defaults)) occur monthly on the last day of the preceding month at the
percentages of SDA set forth in the tables.
In addition, it was assumed that (i) Realized Losses on liquidations of 25%
or 50% of the outstanding principal balance of the Liquidated Mortgage Loans, as
indicated in the tables in Appendix D (referred to as a "Loss Severity
Percentage"), will occur at the time of liquidation and (ii) the Class B-2 and
Class B-3 Certificates are purchased on the Closing Date at assumed purchase
prices equal to 98.4375% and 90.3750%, in each case, of their initial Class
Balance plus accrued interest from October 1, 2006 to (but not including) the
Closing Date.
It is highly unlikely that the Mortgage Loans of a loan group will have the
precise characteristics referred to in this prospectus supplement or that they
will prepay or liquidate at any of the rates specified or that the Realized
Losses will be incurred according to one particular pattern. The assumed
percentages of SDA and PPC and the Loss Severity Percentages shown in the
Appendices are for illustrative purposes only. Those assumptions may not be
correct and the actual rates of prepayment and liquidation and loss severity
experience of the Mortgage Loans of a loan group may not correspond to any of
the assumptions made in this prospectus supplement. For these reasons, and
because the timing of cash flows is critical to determining yield, the pre-tax
yield to maturity of the Class B-2 and Class B-3 Certificates are likely to
differ from the pre-tax yields to maturity shown in the tables in Appendix D.
The pre-tax yields to maturity appearing in the tables in Appendix D were
calculated by determining the monthly discount rates which, when applied to the
assumed streams of cash flows to be paid on the Class B-2 and Class B-3
Certificates, would cause the discounted present value of those assumed streams
of cash flows to equal the sum of the assumed purchase prices of the Class B-2
and Class B-3 Certificates set forth above plus, in each case, accrued interest
from October 1, 2006 to (but not including) the Closing
S-72
Date. In all cases, monthly rates were then converted to the corporate bond
equivalent rates shown in the tables in Appendix D. Implicit in the use of any
discounted present value or internal rate of return calculations such as these
is the assumption that intermediate cash flows are reinvested at the discount
rates at which investors may be able to reinvest funds received by them as
distributions on the Class B-2 and Class B-3 Certificates. Consequently, these
yields do not purport to reflect the total return on any investment in the Class
B-2 and Class B-3 Certificates when reinvestment rates are considered.
You should make your investment decisions based on your determinations of
anticipated rates of prepayment and Realized Losses under a variety of
scenarios. If you are purchasing Class B-2 or Class B-3 Certificates you should
fully consider the risk that Realized Losses on the Mortgage Loans could result
in the failure fully to recover your investments.
- --------------------------------------------------------------------------------
USE OF PROCEEDS
- --------------------------------------------------------------------------------
The Depositor will apply the net proceeds of the sale of the Offered
Certificates to the purchase of the Mortgage Loans from the Sponsor.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSEQUENCES
- --------------------------------------------------------------------------------
Elections will be made to treat the Trust as three separate "real estate
mortgage investment conduits" (the "upper-tier REMIC," the "middle-tier REMIC"
and the "lower-tier REMIC" and each, a "REMIC") for federal income tax purposes
under the Internal Revenue Code of 1986, as amended (the "Code").
o The Certificates (other than the Class X-IO, Class X-PO and Class
1-A-R Certificates) and each Component will be designated as "regular
interests" in the upper-tier REMIC. All the Certificates (other than
the Class 1-A-R Certificate) are "Regular Certificates" for purposes
of the following discussion.
o The Class 1-A-R Certificate will be designated as the sole "residual
interest" in each of the REMICs.
See "Federal Income Tax Consequences -- Federal Income Tax Consequences for
REMIC Certificates" in the prospectus.
In the opinion of Cadwalader, Wickersham & Taft LLP, the following
discussion, together with the discussion under "Federal Income Tax Consequences"
in the prospectus, describes the material federal income tax consequences of the
purchase, ownership and disposition of the Offered Certificates.
Regular Certificates
The Regular Certificates generally will be treated as debt instruments
issued by the upper-tier REMIC for federal income tax purposes. Income on the
Regular Certificates must be reported under an accrual method of accounting.
Although not free from doubt, the Class X-IO and Class X-PO Certificates
should be each treated in the aggregate as one debt instrument having the cash
flows equal to the cash flows of the related Components. The Interest Only
Certificates and Principal Only Certificates will, and the other classes of
Offered Certificates may, depending on their respective issue prices, be treated
for federal income tax purposes as having been issued with original issue
discount. See "Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates -- Taxation of Regular Certificates --
S-73
Original Issue Discount" in the prospectus. Certain other classes of the Regular
Certificates may be treated for federal income tax purposes as having been
issued at a premium. Whether any holder of a class of Certificates will be
treated as holding a Certificate with amortizable bond premium will depend on
the Certificateholder's purchase price and the distributions remaining to be
made on the Certificate at the time of acquisition by the Certificateholder. A
holder of any class of Certificates issued at a premium is encouraged to consult
its tax advisor regarding the possibility of making an election to amortize the
premium. See "Federal Income Tax Consequences -- Federal Income Tax Consequences
for REMIC Certificates -- Taxation of Regular Certificates -- Premium" in the
prospectus. For purposes of determining the amount and the rate of accrual of
original issue discount and market discount, the Depositor intends to assume
that there will be prepayments on the Mortgage Loans at a rate equal to 100%
PPC. No representation is made as to the actual rate at which the Mortgage Loans
will be prepaid.
The Regular Certificates will be treated as regular interests in a REMIC
under Section 860G of the Code. Accordingly, to the extent described in the
prospectus:
o the Regular Certificates will be treated as assets described in
Section 7701(a)(19)(C) of the Code;
o the Regular Certificates will be treated as "real estate assets"
within the meaning of Section 856(c)(5)(B) of the Code; and
o interest on the Regular Certificates will be treated as interest on
obligations secured by mortgages on real property within the meaning
of Section 856(c)(3)(B) of the Code.
See "Federal Income Tax Consequences -- Federal Income Tax Consequences for
REMIC Certificates -- Status of REMIC Certificates" in the prospectus.
Residual Certificate
If you hold the Class 1-A-R Certificate, you must include the taxable
income or loss of each REMIC in determining your federal taxable income. Your
resulting tax liability may exceed cash distributions to you during certain
periods. In addition, all or a portion of the taxable income you recognize from
the Class 1-A-R Certificate may be treated as "excess inclusion" income, which,
among other consequences, will result in your inability to use net operating
losses to offset this income from any REMIC. You also generally must account
separately for your interest in each REMIC and you may not offset income from
one REMIC with losses from another REMIC.
You should consider carefully the tax consequences of any investment in the
Class 1-A-R Certificate discussed in the prospectus and you are encouraged to
consult your tax advisors regarding those consequences. See "Federal Income Tax
Consequences" in the prospectus. Specifically, you are encouraged to consult
your tax advisors regarding whether, at the time of acquisition, the Class 1-A-R
Certificate will be treated as a "noneconomic" residual interest and "tax
avoidance potential" residual interest. See "Federal Income Tax Consequences --
Federal Income Tax Consequences for REMIC Certificates -- Taxation of Residual
Certificates -- Tax-Related Restrictions on Transfer of Residual Certificates --
Noneconomic Residual Interests," "-- Foreign Investors" and "-- Mark to Market
Regulations" in the prospectus. Additionally, for information regarding
Prohibited Transactions, see "Federal Income Tax Consequences -- Federal Income
Tax Consequences for REMIC Certificates -- Taxes That May Be Imposed on the
REMIC Pool -- Prohibited Transactions" in the prospectus.
Backup Withholding and Reporting Requirements
Certain holders or other beneficial owners of Offered Certificates may be
subject to backup withholding at a rate of 28% (increasing to 31% after 2010) on
interest paid on the Offered Certificates if
S-74
those holders or beneficial owners, upon issuance, fail to supply the Trustee or
their broker with their taxpayer identification number, furnish an incorrect
taxpayer identification number, fail to report interest, dividends or other
"reportable payments" (as defined in the Code) properly, or, under certain
circumstances, fail to provide the Trustee or their broker with a certified
statement, under penalty of perjury, that they are not subject to backup
withholding. See "Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates -- Backup Withholding" in the prospectus.
The Trustee will be required to report annually to the IRS and to each
Certificateholder of record, the amount of interest paid (and original issue
discount accrued, if any) on the Regular 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 "Certificateholder" of record of the
Offered Certificates (other than the Class 1-A-R Certificate) is Cede & Co., as
nominee for DTC, beneficial owners of the Offered Certificates and the IRS will
receive tax and other information including the amount of interest paid on the
Offered Certificates from Participants rather than from the Trustee. The
Trustee, however, will respond to requests for necessary information to enable
Participants and certain other persons to complete their reports. See "Federal
Income Tax Consequences -- Federal Income Tax Consequences for REMIC
Certificates -- Reporting Requirements" in the prospectus.
All investors are encouraged to consult their tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Offered Certificates.
- --------------------------------------------------------------------------------
ERISA CONSIDERATIONS
- --------------------------------------------------------------------------------
A fiduciary or other person acting on behalf of any employee benefit plan
or arrangement, including an individual retirement account, subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Code
or any federal, state or local law ("Similar Law") which is similar to ERISA or
the Code (collectively, a "Plan") should carefully review with its legal
advisors whether the purchase or holding of an Offered Certificate could give
rise to a transaction prohibited or not otherwise permissible under ERISA, the
Code or Similar Law. See "ERISA Considerations" in the prospectus.
The U.S. Department of Labor has extended to the Underwriter an
administrative exemption (the "Exemption") from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code for the initial purchase, the holding and the subsequent resale by
certain Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemption.
For a general description of the Exemption and the conditions that must be
satisfied for the Exemption to apply, see "ERISA Considerations --
Administrative Exemptions -- Individual Administrative Exemptions" in the
prospectus.
The Exemption may cover the acquisition and holding of the Senior
Certificates (other than the Class 1-A-3 and 1-A-R Certificates) by the Plans to
which it applies provided that all conditions of the Exemption other than those
within the control of the investors are met. In addition, as of the date hereof,
there is no single mortgagor that is the obligor on 5% of the initial balance of
the Mortgage Pool.
Because (i) the Subordinate Certificates are subordinated to the Senior
Certificates and because some of the Mortgage Loans have Loan-to-Value Ratios in
excess of 100% and (ii) after the Subordinate Certificates are no longer
outstanding, the Class 1-A-3 Certificates are subordinated to the Class 1-A-2
Certificates with respect to principal losses and because some of the Group 1
Mortgage Loans have Loan-to-Value Ratios in excess of 100%, none of the Class
1-A-3 Certificates or the Subordinate
S-75
Certificates may be transferred unless the transferee has delivered (i) a
representation letter to the Trustee stating that either the transferee is not a
Plan and is not acting on behalf of a Plan or using the assets of a Plan to
effect such purchase or, subject to the conditions described in this prospectus
supplement, the source of funds used to purchase the Class 1-A-3 and Subordinate
Certificates is an "insurance company general account" or (ii) an opinion of
counsel and such other documentation as described in this prospectus supplement
under "Description of the Certificates -- Restrictions on Transfer of the Class
1-A-3 Certificates and Subordinate Certificates." Any transferee of a Class
1-A-3 or Subordinate Certificate that does not comply with either clause (i) or
clause (ii) of the preceding sentence will be deemed to have made one of the
representations described in clause (i) of the preceding sentence.
Plan investors are encouraged to consult with their legal advisors
concerning the impact of ERISA, the Code and Similar Law, the applicability of
PTE 83-1 described under "ERISA Considerations" in the prospectus and the
Exemption, 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 governing plan instruments and the
applicable 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 Class 1-A-R Certificate may not be purchased by or transferred to a
Plan or a person acting on behalf of or investing assets of a Plan. See
"Description of the Certificates -- Restrictions on Transfer of the Class 1-A-R
Certificate" in this prospectus supplement.
- --------------------------------------------------------------------------------
REPORTS TO CERTIFICATEHOLDERS
- --------------------------------------------------------------------------------
The Trustee will prepare on a monthly basis a statement containing, among
other things, information relating to principal and interest distributions on
the Certificates, the status of the Mortgage Pool and certain other information,
as set forth in the Pooling Agreement, required under Item 1121 of Regulation AB
(17 CFR 229.1121) as described under "The Pooling Agreement -- Reports to
Certificateholders" in the prospectus. In addition, the Trustee and the Servicer
will furnish to the Depositor and the Trustee the compliance statements,
assessments and attestation reports in accordance with Item 1122 and 1123 of
Regulation AB (17 CFR 229.1122 and 229.1123) detailed under "Servicing of the
Mortgage Loans -- Evidence as to Compliance" in the prospectus.
Copies of these statements and reports will be filed on Forms 10-D and 10-K
with the SEC through its EDGAR system located at "http://www.sec.gov" under the
name of the Issuing Entity for so long as the Issuing Entity is subject to the
reporting requirement of the Securities Exchange Act of 1934, as amended.
The Trustee will make the statement described in the prospectus under "The
Pooling Agreement -- Reports to Certificateholders" available each month to
Certificateholders and the other parties to the Pooling Agreement via the
Trustee's internet website. The Trustee will also make the Periodic Reports
described in the prospectus under "Where You Can Find More Information" relating
to the Issuing Entity available through its website promptly after they are
filed with the SEC (which may not be the same day). The Trustee's internet
website will initially be located at "www.ctslink.com." Assistance in using the
website can be obtained by calling the Trustee's customer service desk at (301)
815-6600. Parties that are unable to use the website are entitled to have a
paper copy mailed to them at no charge via first class mail by calling the
customer service desk.
S-76
- --------------------------------------------------------------------------------
METHOD OF DISTRIBUTION
- --------------------------------------------------------------------------------
Subject to the terms and conditions of the underwriting agreement among the
Depositor, the Underwriter and the Sponsor, the Depositor has agreed to sell to
the Underwriter and the Underwriter has agreed to purchase from the Depositor,
all of the Offered Certificates. Proceeds to the Depositor from the sale of the
Offered Certificates are expected to be approximately 101.707% of the aggregate
initial Class Balance of those Certificates, before deducting expenses estimated
at approximately $480,000 payable by the Depositor.
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 and any dealers that
participate with the Underwriter in the distribution of the Offered Certificates
will be underwriters and the difference between the purchase price for the
Offered Certificates paid to the Depositor and the proceeds from the sale of the
Offered Certificates realized by the Underwriter and any dealers that
participate with the Underwriter in the distribution of the Offered Certificates
will constitute underwriting discounts and commissions.
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 of 1933, as amended.
The Underwriter is an affiliate of the Depositor, the Sponsor, the Servicer
and the Counterparty, and is a registered broker/dealer. Any obligations of the
Underwriter are the sole responsibility of the Underwriter and do not create any
obligation or guarantee on the part of any affiliate of the Underwriter.
- --------------------------------------------------------------------------------
LEGAL MATTERS
- --------------------------------------------------------------------------------
The legality of, and certain federal income tax matters related to the
Offered Certificates, will be passed upon for the Depositor and Underwriter by
Cadwalader, Wickersham & Taft LLP, New York, New York.
- --------------------------------------------------------------------------------
CERTIFICATE RATINGS
- --------------------------------------------------------------------------------
At their issuance, each class of Offered Certificates is required to
receive from Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P") and Fitch Ratings ("Fitch")
at least the rating set forth in the table beginning on page S-6 of this
prospectus supplement.
Moody's, S&P's and Fitch's ratings take into consideration the credit
quality of the Mortgage Pool, including any credit support, structural and legal
aspects associated with the Offered Certificates, and the extent to which the
payment stream of the Mortgage Pool is adequate to make payments required under
the Offered Certificates. Moody's, S&P's and Fitch's ratings on the Offered
Certificates do not, however, constitute a statement regarding frequency of
prepayments on the Mortgage Loans.
S-77
Moody's and Fitch's ratings do not address the possibility that, because
the Interest Only Certificates are extremely sensitive to principal prepayments,
a holder of an Interest Only Certificate may not fully recover its initial
investment. Moody's and Fitch's ratings on the Principal Only Certificates only
address the return of the principal balance of those Certificates and do not
address the possibility that a slower than anticipated rate of prepayments may
adversely affect the yield to investors. Fitch's rating on the Class 1-A-R
Certificate does not address the likelihood of a return to investors other than
to the extent of its Class Balance and interest at its pass-through rate.
The Depositor has not requested a rating of any class of Offered
Certificates by any rating agency other than Moody's, S&P and Fitch. 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. The rating
assigned by any other rating agency to a class of Offered Certificates may be
lower than the ratings assigned by Moody's, S&P and Fitch.
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
agency.
In addition, the rating agencies that assign the initial ratings to the
Offered Certificates will monitor those ratings for so long as the Offered
Certificates remain outstanding.
S-78
- --------------------------------------------------------------------------------
INDEX OF PROSPECTUS SUPPLEMENT DEFINITIONS
- --------------------------------------------------------------------------------
Adjusted Pool Amount........................................................S-57
Adjusted Pool Amount (Non-PO Portion).......................................S-57
Adjusted Pool Amount (PO Portion)...........................................S-57
Administrative Fee Rate.....................................................S-40
Administrative Fees.........................................................S-40
Bank of America.............................................................S-36
Bankruptcy Losses...........................................................S-56
BBA.........................................................................S-47
BPP Mortgage Loans..........................................................S-12
Buy-Down Loans..............................................................S-12
Class 1-A-1 Notional Amount.................................................S-45
Class 1-A-5 Notional Amount.................................................S-46
Class 1-X-IO Notional Amount................................................S-46
Class 2-X-IO Notional Amount................................................S-46
Class Balance...............................................................S-46
Class XB-IO Interest Distribution Amount....................................S-44
Class XB-IO Notional Amount.................................................S-46
Closing Date.................................................................S-9
Code........................................................................S-73
Compensating Interest.......................................................S-39
Constant Prepayment Rate....................................................S-67
Corporate Trust Office......................................................S-38
CPR.........................................................................S-67
Credit Scores...............................................................S-12
Cut-off Date.................................................................S-9
Debt Service Reduction......................................................S-56
Deficient Valuation.........................................................S-56
Depositor....................................................................S-9
Determination Date...........................................................S-9
Discount Mortgage Loans.....................................................S-48
Distribution Date............................................................S-9
ERISA.......................................................................S-75
Exemption...................................................................S-75
Fitch.......................................................................S-77
Fractional Interest.........................................................S-53
FSMA.........................................................................S-5
Group 1 Discount Mortgage Loan..............................................S-48
Group 1 Premium Mortgage Loan...............................................S-48
Group 1 Recovery............................................................S-56
Group 2 Discount Mortgage Loan..............................................S-48
Group 2 Premium Mortgage Loan...............................................S-48
Group 2 Recovery............................................................S-56
Group 3 Recovery............................................................S-56
Group Subordinate Amount....................................................S-48
Interest Accrual Period.....................................................S-45
Interest Distribution Amount................................................S-44
Interest Only Mortgage Loans................................................S-13
Interest Settlement Rate....................................................S-47
Issuing Entity...............................................................S-9
LIBOR Based Interest Accrual Period.........................................S-45
LIBOR Determination Date....................................................S-47
S-79
Liquidated Mortgage Loan....................................................S-57
Liquidation Proceeds........................................................S-42
Loan-to-Value Ratio.........................................................S-12
Loss Severity Percentage....................................................S-72
Modeling Assumptions........................................................S-64
Moody's.....................................................................S-77
Mortgage Loan Purchase Agreement............................................S-35
Mortgage Loans..............................................................S-12
Mortgage Pool...............................................................S-12
Net Interest Shortfall......................................................S-44
Net Mortgage Interest Rate..................................................S-47
Non-PO Percentage...........................................................S-48
Non-PO Principal Amount.....................................................S-48
Non-Supported Interest Shortfall............................................S-44
Original Subordinate Principal Balance......................................S-51
Plan........................................................................S-75
PO Deferred Amount..........................................................S-55
PO Percentage...............................................................S-48
PO Principal Amount.........................................................S-52
PO Principal Distribution Amount............................................S-52
Pool Distribution Amount....................................................S-42
Pool Distribution Amount Allocation.........................................S-43
Pool Principal Balance......................................................S-50
Pool Principal Balance (Non-PO Portion).....................................S-50
Pooling Agreement...........................................................S-39
PPC.........................................................................S-67
Premium Mortgage Loans......................................................S-48
Prepayment Interest Shortfall...............................................S-39
Realized Loss...............................................................S-56
Record Date..................................................................S-9
Recoveries..................................................................S-56
Regular Certificates........................................................S-73
Regular Interest Accrual Period.............................................S-45
Relevant Implementation Date.................................................S-4
Relevant Member State........................................................S-4
Relevant Persons.............................................................S-5
Relief Act Reduction........................................................S-44
REMIC.......................................................................S-73
REMIC Regulations...........................................................S-58
Reserve Interest Rate.......................................................S-47
S&P.........................................................................S-77
Scheduled Principal Payments................................................S-49
SDA.........................................................................S-72
Senior Credit Support Depletion Date........................................S-50
Senior Percentage...........................................................S-50
Senior Prepayment Percentage................................................S-51
Senior Principal Distribution Amount........................................S-50
Servicer.....................................................................S-9
Servicing Fee...............................................................S-40
Servicing Fee Rate..........................................................S-40
Similar Law.................................................................S-75
Sponsor......................................................................S-9
Subordinate Percentage......................................................S-50
Subordinate Prepayment Percentage...........................................S-52
Subordinate Principal Distribution Amount...................................S-53
Telerate page 3750..........................................................S-47
S-80
Total Senior Percentage.....................................................S-51
Total Subordinate Percentage................................................S-52
Trust.......................................................................S-37
Trustee......................................................................S-9
Trustee Fee.................................................................S-40
Trustee Fee Rate............................................................S-40
U.S. Person.................................................................S-59
Undercollateralized Amount..................................................S-54
Undercollateralized Group...................................................S-54
Underwriter.................................................................S-35
Unscheduled Principal Payments..............................................S-49
Wells Fargo Bank............................................................S-37
S-81
Appendix A - Mortgage Loan Data
Group 1 Mortgage Loan Data
The following tables set forth certain characteristics of the group 1
Mortgage Loans as of the Cut-off Date. The balances and percentages may not be
exact due to rounding.
All Group 1 Group 1 Discount Group 1 Premium
Mortgage Loans Mortgage Loans Mortgage Loans
--------------------- --------------------- ----------------------
Number of Mortgage Loans..................... 2,652 2,117 535
Aggregate Stated Principal Balance(1)........ $407,424,097 $321,886,931 $85,537,166
Range of Original Terms to Stated Maturity... 240 to 360 months 240 to 360 months 240 to 360 months
Range of Stated Principal Balances(1)........ $9,991 to $1,694,540 $9,991 to $1,694,540 $13,600 to $1,345,000
Average Stated Principal Balance(1).......... $153,629 $152,049 $159,883
Latest Stated Maturity Date.................. October 1, 2036 October 1, 2036 October 1, 2036
Range of Mortgage Interest Rates............. 5.625% to 8.250% 5.625% to 7.250% 7.375% to 8.250%
Weighted Average Mortgage Interest Rate(1)... 6.986% 6.828% 7.581%
Range of Remaining Terms to Stated
Maturity.................................. 236 to 360 months 236 to 360 months 239 to 360 months
Weighted Average Remaining Term to Stated
Maturity(1)............................... 358 months 358 months 359 months
Range of Original Loan-to-Value Ratios....... 4.29% to 103.00% 4.29% to 103.00% 13.39% to 103.00%
Weighted Average Original Loan-to-Value
Ratio(1).................................. 76.15% 76.26% 75.70%
Geographic Concentration of Mortgaged
Properties Securing Mortgage Loans in
Excess of 5% of the Aggregate Stated
Principal Balance(1)
Florida............................ 15.39% 16.37% 11.71%
California......................... 14.20% 13.53% 16.73%
Texas.............................. 9.41% 11.04% *
North Carolina..................... 6.31% 6.75% *
Georgia............................ * 5.48% *
Illinois........................... * * 11.31%
New York........................... * * 6.05%
- ---------
(1) Approximate.
* Less than 5% of the aggregate Stated Principal Balance.
Occupancy of Mortgaged Properties(1)
Aggregate Stated % of Group 1
Principal Cut-off Date
Number of Group 1 Balance as of Pool Principal
Occupancy Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Primary Residence ...................................................... 1,441 $266,990,180.94 65.53%
Investor Property ...................................................... 1,092 117,919,442.75 28.94
Second Home ............................................................ 119 22,514,473.74 5.53
----------------- ------------------ -------------------
Total: ........................................................ 2,652 $407,424,097.43 100.00%
================= ================== ===================
- ---------
(1) Based solely on representations of the mortgagor at the time of origination
of the related group 1 Mortgage Loan.
A-1
Property Types
Aggregate Stated % of Group 1
Principal Cut-off Date
Number of Group 1 Balance as of Pool Principal
Property Type Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Single Family Residence ................................................ 1,787 $256,804,328.34 63.03%
PUD .................................................................... 312 61,400,639.23 15.07
Condominium ............................................................ 281 38,690,881.95 9.50
2-Family ............................................................... 153 27,749,212.10 6.81
3-Family ............................................................... 22 5,452,305.47 1.34
4-Family ............................................................... 29 7,886,150.85 1.94
Condotel ............................................................... 27 4,948,583.11 1.21
Townhouse .............................................................. 41 4,491,996.38 1.10
----------------- ------------------ -------------------
Total: ........................................................ 2,652 $407,424,097.43 100.00%
================= ================== ===================
Mortgage Loan Purposes
Aggregate Stated % of Group 1
Principal Cut-off Date
Number of Group 1 Balance as of Pool Principal
Purpose Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Purchase ............................................................... 1,764 $245,097,124.41 60.16%
Refinance-Cashout(1) ................................................... 621 107,129,756.04 26.29
Refinance-Rate/Term(2) ................................................. 267 55,197,216.98 13.55
----------------- ------------------ -------------------
Total: ........................................................ 2,652 $407,424,097.43 100.00%
================= ================== ===================
- ---------
(1) "Refinance -- Cashout" means a mortgage loan originated in connection with
a refinancing that has a principal balance in excess of the principal
balance on the old loan plus settlement costs where cash is distributed to
the mortgagor.
(2) "Refinance -- Rate/Term" means a mortgage loan originated in connection
with a refinancing to reduce the mortgage interest rate or reduce or
increase the term.
Documentation Type
Aggregate Stated % of Group 1
Principal Cut-off Date
Number of Group 1 Balance as of Pool Principal
Documentation Type Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Standard ............................................................... 1,154 $156,035,488.89 38.30%
Accelerated -- Stated .................................................. 520 145,574,790.32 35.73
Accelerated -- PaperSaver(R)/Threshold ................................. 902 93,439,613.21 22.93
Accelerated -- No Ratio ................................................ 42 7,614,056.57 1.87
Accelerated -- Rapid ................................................... 20 2,926,909.60 0.72
Accelerated -- Stated Income/Stated Asset .............................. 9 1,316,809.95 0.32
Accelerated -- All Ready Home .......................................... 5 516,428.89 0.13
----------------- ------------------ -------------------
Total: ........................................................ 2,652 $407,424,097.43 100.00%
================= ================== ===================
A-2
Geographical Distribution of the Mortgaged Properties(1)
Aggregate Stated % of Group 1
Principal Cut-off Date
Number of Group 1 Balance as of Pool Principal
Geographical Area Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Alabama ................................................................ 5 $ 610,864.33 0.15%
Arizona ................................................................ 60 8,848,838.92 2.17
Arkansas ............................................................... 30 2,505,050.64 0.61
California ............................................................. 187 57,860,999.53 14.20
Colorado ............................................................... 18 2,777,459.05 0.68
Connecticut ............................................................ 15 3,988,975.84 0.98
District of Columbia ................................................... 5 1,166,469.25 0.29
Florida ................................................................ 373 62,719,388.29 15.39
Georgia ................................................................ 165 20,227,343.10 4.96
Hawaii ................................................................. 15 3,927,315.10 0.96
Idaho .................................................................. 15 2,371,100.93 0.58
Illinois ............................................................... 68 16,269,472.30 3.99
Indiana ................................................................ 22 2,561,896.46 0.63
Iowa ................................................................... 17 1,895,034.80 0.47
Kansas ................................................................. 66 6,155,747.24 1.51
Kentucky ............................................................... 11 1,167,010.32 0.29
Louisiana .............................................................. 5 195,046.03 0.05
Maine .................................................................. 14 2,309,518.99 0.57
Maryland ............................................................... 90 14,797,437.60 3.63
Massachusetts .......................................................... 25 6,631,668.99 1.63
Michigan ............................................................... 21 2,803,674.58 0.69
Minnesota .............................................................. 16 2,812,555.15 0.69
Mississippi ............................................................ 8 749,732.73 0.18
Missouri ............................................................... 114 13,747,009.50 3.37
Montana ................................................................ 3 498,820.03 0.12
Nebraska ............................................................... 7 562,919.60 0.14
Nevada ................................................................. 25 4,354,613.46 1.07
New Hampshire .......................................................... 10 1,586,802.01 0.39
New Jersey ............................................................. 30 7,233,922.42 1.78
New Mexico ............................................................. 20 2,927,418.69 0.72
New York ............................................................... 65 16,901,439.80 4.15
North Carolina ......................................................... 216 25,722,779.92 6.31
Ohio ................................................................... 22 2,150,333.82 0.53
Oklahoma ............................................................... 63 5,343,700.42 1.31
Oregon ................................................................. 21 3,270,993.50 0.80
Pennsylvania ........................................................... 56 6,927,662.89 1.70
Rhode Island ........................................................... 3 601,330.26 0.15
South Carolina ......................................................... 111 13,048,379.81 3.20
South Dakota ........................................................... 2 205,736.70 0.05
Tennessee .............................................................. 66 7,989,427.63 1.96
Texas .................................................................. 357 38,348,609.15 9.41
Utah ................................................................... 10 1,419,201.83 0.35
Vermont ................................................................ 5 1,150,087.99 0.28
Virginia ............................................................... 84 11,650,826.28 2.86
Washington ............................................................. 62 9,211,771.55 2.26
West Virginia .......................................................... 3 222,444.84 0.05
Wisconsin .............................................................. 46 6,995,265.16 1.72
----------------- ------------------ -------------------
Total: ........................................................ 2,652 $407,424,097.43 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, no more than approximately 0.42% of the group 1
Mortgage Loans are expected to be secured by Mortgaged Properties located
in any one five-digit postal zip code.
A-3
Current Mortgage Loan Principal Balances(1)
Aggregate Stated % of Group 1
Principal Cut-off Date
Number of Group 1 Balance as of Pool Principal
Current Mortgage Loan Principal Balances Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
$0.01 to $50,000.00 .................................................... 204 $ 7,569,215.85 1.86%
$50,000.01 to $100,000.00 .............................................. 777 59,989,436.24 14.72
$100,000.01 to $150,000.00 ............................................. 833 103,417,346.11 25.38
$150,000.01 to $200,000.00 ............................................. 334 57,772,635.41 14.18
$200,000.01 to $250,000.00 ............................................. 174 38,906,981.26 9.55
$250,000.01 to $300,000.00 ............................................. 94 25,655,092.70 6.30
$300,000.01 to $350,000.00 ............................................. 59 19,201,213.61 4.71
$350,000.01 to $400,000.00 ............................................. 52 19,565,586.65 4.80
$400,000.01 to $450,000.00 ............................................. 30 12,755,127.15 3.13
$450,000.01 to $500,000.00 ............................................. 24 11,456,091.51 2.81
$500,000.01 to $550,000.00 ............................................. 16 8,324,145.31 2.04
$550,000.01 to $600,000.00 ............................................. 17 9,804,641.69 2.41
$600,000.01 to $650,000.00 ............................................. 14 8,801,770.57 2.16
$650,000.01 to $700,000.00 ............................................. 3 2,053,341.89 0.50
$700,000.01 to $750,000.00 ............................................. 2 1,445,807.78 0.35
$750,000.01 to $800,000.00 ............................................. 2 1,573,674.68 0.39
$800,000.01 to $850,000.00 ............................................. 1 850,000.00 0.21
$850,000.01 to $900,000.00 ............................................. 2 1,780,512.27 0.44
$900,000.01 to $950,000.00 ............................................. 2 1,866,104.49 0.46
$950,000.01 to $1,000,000.00 ........................................... 5 4,931,114.30 1.21
$1,000,000.01 to $1,500,000.00 ......................................... 5 6,369,019.58 1.56
$1,500,000.01 to $2,000,000.00 ......................................... 2 3,335,238.38 0.82
----------------- ------------------ -------------------
Total: ........................................................ 2,652 $407,424,097.43 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the average outstanding principal balance of the
group 1 Mortgage Loans is expected to be approximately $153,629.00.
Original Debt-to-Income Ratios(1)
Aggregate Stated % of Group 1
Principal Cut-off Date
Number of Group 1 Balance as of Pool Principal
Original Debt-to-Income Ratios Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Not Calculated ......................................................... 23 $ 5,473,148.19 1.34%
0.01% to 1.00% ......................................................... 2 123,292.62 0.03
1.01% to 5.00% ......................................................... 11 1,026,676.09 0.25
5.01% to 10.00% ........................................................ 38 3,666,619.46 0.90
10.01% to 15.00% ....................................................... 62 8,192,180.56 2.01
15.01% to 20.00% ....................................................... 133 17,031,833.22 4.18
20.01% to 25.00% ....................................................... 214 28,321,591.89 6.95
25.01% to 30.00% ....................................................... 317 41,787,861.31 10.26
30.01% to 35.00% ....................................................... 400 66,647,924.40 16.36
35.01% to 40.00% ....................................................... 434 76,995,096.30 18.90
40.01% to 45.00% ....................................................... 479 82,851,634.39 20.34
45.01% to 50.00% ....................................................... 255 38,106,798.14 9.35
50.01% to 55.00% ....................................................... 140 17,687,526.16 4.34
55.01% to 60.00% ....................................................... 112 16,404,361.48 4.03
60.01% to 65.00% ....................................................... 24 2,250,160.39 0.55
65.01% to 70.00% ....................................................... 6 585,093.77 0.14
70.01% to 75.00% ....................................................... 2 272,299.06 0.07
----------------- ------------------ -------------------
Total: ........................................................ 2,652 $407,424,097.43 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average Debt-to-Income Ratio at
origination of the group 1 Mortgage Loans (other than the group 1 Mortgage
Loans for which no Debt-to-Income Ratio was calculated) is expected to be
approximately 36.57%.
A-4
Original Loan-to-Value Ratios(1)
Aggregate Stated % of Group 1
Principal Cut-off Date
Number of Group 1 Balance as of Pool Principal
Original Loan-to-Value Ratios Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
0.01% to 5.00% ......................................................... 1 $ 9,990.96 0.00%
5.01% to 10.00% ........................................................ 1 59,953.19 0.01
10.01% to 15.00% ....................................................... 4 383,592.31 0.09
15.01% to 20.00% ....................................................... 6 465,597.30 0.11
20.01% to 25.00% ....................................................... 14 1,323,739.34 0.32
25.01% to 30.00% ....................................................... 11 1,428,057.20 0.35
30.01% to 35.00% ....................................................... 17 2,204,181.68 0.54
35.01% to 40.00% ....................................................... 28 3,209,179.33 0.79
40.01% to 45.00% ....................................................... 22 2,983,603.00 0.73
45.01% to 50.00% ....................................................... 41 8,217,132.47 2.02
50.01% to 55.00% ....................................................... 42 6,086,010.92 1.49
55.01% to 60.00% ....................................................... 57 10,748,094.02 2.64
60.01% to 65.00% ....................................................... 80 11,547,687.54 2.83
65.01% to 70.00% ....................................................... 181 39,425,743.79 9.68
70.01% to 75.00% ....................................................... 225 41,548,085.93 10.20
75.01% to 80.00% ....................................................... 1,445 219,888,534.03 53.97
80.01% to 85.00% ....................................................... 38 5,086,156.81 1.25
85.01% to 90.00% ....................................................... 270 30,903,877.56 7.59
90.01% to 95.00% ....................................................... 150 19,682,859.16 4.83
95.01% to 100.00% ...................................................... 14 1,725,174.53 0.42
100.01% to 103.00% ..................................................... 5 496,846.36 0.12
----------------- ------------------ -------------------
Total: ........................................................ 2,652 $407,424,097.43 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the group 1 Mortgage Loans is expected to be approximately
76.15%.
Mortgage Interest Rates(1)
Aggregate Stated % of Group 1
Principal Cut-off Date
Number of Group 1 Balance as of Pool Principal
Mortgage Interest Rates Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
5.501% to 5.750% ....................................................... 3 $ 371,855.00 0.09%
5.751% to 6.000% ....................................................... 21 4,071,149.67 1.00
6.001% to 6.250% ....................................................... 67 10,386,680.03 2.55
6.251% to 6.500% ....................................................... 280 42,137,965.96 10.34
6.501% to 6.750% ....................................................... 514 82,511,508.08 20.25
6.751% to 7.000% ....................................................... 724 108,930,227.76 26.74
7.001% to 7.250% ....................................................... 508 73,477,544.53 18.03
7.251% to 7.500% ....................................................... 356 51,384,728.40 12.61
7.501% to 7.750% ....................................................... 99 19,859,540.89 4.87
7.751% to 8.000% ....................................................... 76 13,500,368.22 3.31
8.001% to 8.250% ....................................................... 4 792,528.89 0.19
----------------- ------------------ -------------------
Total: ........................................................ 2,652 $407,424,097.43 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average mortgage interest rate of the
group 1 Mortgage Loans is expected to be approximately 6.986% per annum.
A-5
Number of Months Since Origination(1)
Aggregate Stated % of Group 1
Principal Cut-off Date
Number of Group 1 Balance as of Pool Principal
Months Since Origination Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
1 to 2 months .......................................................... 2,599 $394,634,822.36 96.86%
3 to 4 months .......................................................... 28 5,528,955.09 1.36
5 to 6 months .......................................................... 12 3,301,184.45 0.81
7 to 8 months .......................................................... 2 988,389.79 0.24
11 to 12 months ........................................................ 4 1,210,664.52 0.30
13 to 14 months ........................................................ 3 603,900.36 0.15
15 to 16 months ........................................................ 3 796,982.96 0.20
21 to 22 months ........................................................ 1 359,197.90 0.09
----------------- ------------------ -------------------
Total: ........................................................ 2,652 $407,424,097.43 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average number of months since
origination of the group 1 Mortgage Loans is expected to be approximately 2
months.
Remaining Terms(1)
Aggregate Stated % of Group 1
Principal Cut-off Date
Number of Group 1 Balance as of Pool Principal
Remaining Terms Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
221 to 240 months ...................................................... 17 $ 1,937,787.69 0.48%
281 to 300 months ...................................................... 21 2,457,786.73 0.60
341 to 360 months ...................................................... 2,614 403,028,523.01 98.92
----------------- ------------------ -------------------
Total: ........................................................ 2,652 $407,424,097.43 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity of the group 1 Mortgage Loans is expected to be approximately 358
months.
Credit Scores of Mortgagors
Aggregate Stated % of Group 1
Principal Cut-off Date
Number of Group 1 Balance as of Pool Principal
Credit Scores(1) Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
801 to 850 ............................................................. 108 $ 16,557,986.30 4.06%
751 to 800 ............................................................. 728 110,920,313.82 27.22
701 to 750 ............................................................. 826 123,886,925.48 30.41
651 to 700 ............................................................. 764 123,722,134.26 30.37
601 to 650 ............................................................. 217 30,998,519.57 7.61
551 to 600 ............................................................. 1 67,083.20 0.02
Not Scored ............................................................. 8 1,271,134.80 0.31
----------------- ------------------ -------------------
Total: ........................................................ 2,652 $407,424,097.43 100.00%
================= ================== ===================
A-6
Group 2 Mortgage Loan Data
The following tables set forth certain characteristics of the group 2
Mortgage Loans as of the Cut-off Date. The balances and percentages may not be
exact due to rounding.
All Group 2 Group 2 Discount Group 2 Premium
Mortgage Loans Mortgage Loans Mortgage Loans
--------------------- --------------------- ----------------------
Number of Mortgage Loans..................... 159 2 157
Aggregate Stated Principal Balance(1)........ $42,024,831 $180,082 $41,844,749
Range of Original Terms to Stated Maturity... 480 months 480 months 480 months
Range of Stated Principal Balances(1)........ $32,338 to $2,970,000 $84,127 to $95,955 $32,338 to $2,970,000
Average Stated Principal Balance(1).......... $264,307 $90,041 $266,527
Latest Stated Maturity Date.................. October 1, 2046 October 1, 2046 October 1, 2046
Range of Mortgage Interest Rates............. 6.000% to 8.750% 6.000% to 6.250% 6.375% to 8.750%
Weighted Average Mortgage Interest Rate(1)... 7.253% 6.133% 7.258%
Range of Remaining Terms to Stated
Maturity.................................. 474 to 480 months 479 to 480 months 474 to 480 months
Weighted Average Remaining Term to Stated
Maturity(1)............................... 478 months 479 months 478 months
Range of Original Loan-to-Value Ratios....... 22.77% to 95.00% 62.32% to 80.00% 22.77% to 95.00%
Weighted Average Original Loan-to-Value
Ratio(1).................................. 72.46% 71.74% 72.46%
Geographic Concentration of Mortgaged
Properties Securing Mortgage Loans in
Excess of 5% of the Aggregate Stated
Principal Balance(1)
California......................... 33.71% * 33.86%
Florida............................ 12.48% * 12.53%
South Carolina..................... 9.55% * 9.60%
Maryland........................... 7.13% * 7.16%
Texas.............................. * 53.28% *
North Carolina..................... * * *
Virginia........................... * 46.72% *
- ---------
(1) Approximate.
* Less than 5% of the aggregate Stated Principal Balance.
Occupancy of Mortgaged Properties(1)
Aggregate Stated % of Group 2
Principal Cut-off Date
Number of Group 2 Balance as of Pool Principal
Occupancy Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Primary Residence ...................................................... 87 $ 26,208,871.67 62.37%
Investor Property ...................................................... 57 10,046,387.67 23.91
Second Home ............................................................ 15 5,769,571.90 13.73
----------------- ------------------ -------------------
Total: ........................................................ 159 $ 42,024,831.24 100.00%
================= ================== ===================
- ---------
(1) Based solely on representations of the mortgagor at the time of origination
of the related group 2 Mortgage Loan.
A-7
Property Types
Aggregate Stated % of Group 2
Principal Cut-off Date
Number of Group 2 Balance as of Pool Principal
Property Type Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Single Family Residence ................................................ 100 $ 27,863,356.02 66.30%
PUD .................................................................... 19 6,771,198.56 16.11
Condominium ............................................................ 25 3,806,554.05 9.06
2-Family ............................................................... 8 2,252,478.34 5.36
3-Family ............................................................... 2 404,756.18 0.96
4-Family ............................................................... 3 734,371.40 1.75
Townhouse .............................................................. 2 192,116.69 0.46
----------------- ------------------ -------------------
Total: ........................................................ 159 $ 42,024,831.24 100.00%
================= ================== ===================
Mortgage Loan Purposes
Aggregate Stated % of Group 2
Principal Cut-off Date
Number of Group 2 Balance as of Pool Principal
Purpose Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Purchase ............................................................... 88 $ 18,092,969.93 43.05%
Refinance-Cashout (1) .................................................. 41 13,810,513.68 32.86
Refinance-Rate/Term (2) ................................................ 30 10,121,347.63 24.08
----------------- ------------------ -------------------
Total: ........................................................ 159 $ 42,024,831.24 100.00%
================= ================== ===================
- ---------
(1) "Refinance -- Cashout" means a mortgage loan originated in connection with
a refinancing that has a principal balance in excess of the principal
balance on the old loan plus settlement costs where cash is distributed to
the mortgagor.
(2) "Refinance -- Rate/Term" means a mortgage loan originated in connection
with a refinancing to reduce the mortgage interest rate or reduce or
increase the term.
Documentation Type
Aggregate Stated % of Group 2
Principal Cut-off Date
Number of Group 2 Balance as of Pool Principal
Documentation Type Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Accelerated -- Stated .................................................. 54 $ 18,820,181.40 44.78%
Standard ............................................................... 54 12,019,014.42 28.60
Accelerated -- PaperSaver(R)/Threshold ................................. 42 7,358,417.99 17.51
Accelerated -- No Ratio ................................................ 6 2,230,028.87 5.31
Accelerated -- Rapid ................................................... 3 1,597,188.56 3.80
----------------- ------------------ -------------------
Total: ........................................................ 159 $ 42,024,831.24 100.00%
================= ================== ===================
A-8
Geographical Distribution of the Mortgaged Properties(1)
Aggregate Stated % of Group 2
Principal Cut-off Date
Number of Group 2 Balance as of Pool Principal
Geographical Area Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Arizona ................................................................ 7 $ 944,243.99 2.25%
Arkansas ............................................................... 1 114,863.08 0.27
California ............................................................. 34 14,167,533.49 33.71
Colorado ............................................................... 3 249,100.65 0.59
Connecticut ............................................................ 1 218,209.12 0.52
Delaware ............................................................... 2 199,027.24 0.47
District of Columbia ................................................... 2 779,801.57 1.86
Florida ................................................................ 26 5,243,566.63 12.48
Georgia ................................................................ 7 1,031,230.86 2.45
Illinois ............................................................... 4 612,930.58 1.46
Indiana ................................................................ 1 110,224.26 0.26
Iowa ................................................................... 2 569,135.31 1.35
Kansas ................................................................. 1 94,816.92 0.23
Maine .................................................................. 2 327,878.12 0.78
Maryland ............................................................... 13 2,994,812.74 7.13
Massachusetts .......................................................... 6 2,071,817.10 4.93
Michigan ............................................................... 1 303,798.29 0.72
Minnesota .............................................................. 2 645,207.01 1.54
Missouri ............................................................... 2 219,312.39 0.52
Nevada ................................................................. 3 607,594.58 1.45
New Jersey ............................................................. 4 1,005,424.12 2.39
New York ............................................................... 3 1,252,643.54 2.98
North Carolina ......................................................... 2 249,059.50 0.59
Okalahoma .............................................................. 3 260,441.36 0.62
Oregon ................................................................. 3 823,391.92 1.96
Pennsylvania ........................................................... 1 117,756.18 0.28
South Carolina ......................................................... 7 4,015,267.77 9.55
Tennessee .............................................................. 1 93,600.00 0.22
Texas .................................................................. 8 1,722,331.88 4.10
Utah ................................................................... 1 188,409.94 0.45
Virginia ............................................................... 5 620,784.71 1.48
Washington ............................................................. 1 170,616.39 0.41
----------------- ------------------ -------------------
Total: ........................................................ 159 $ 42,024,831.24 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, no more than approximately 7.07% of the group 2
Mortgage Loans are expected to be secured by Mortgaged Properties located
in any one five-digit postal zip code.
A-9
Current Mortgage Loan Principal Balances(1)
Aggregate Stated % of Group 2
Principal Cut-off Date
Number of Group 2 Balance as of Pool Principal
Current Mortgage Loan Principal Balances Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
$0.01 to $50,000.00 .................................................... 4 $ 155,819.80 0.37%
$50,000.01 to $100,000.00 .............................................. 26 2,202,970.03 5.24
$100,000.01 to $150,000.00 ............................................. 33 4,119,786.39 9.80
$150,000.01 to $200,000.00 ............................................. 24 4,161,937.96 9.90
$200,000.01 to $250,000.00 ............................................. 19 4,243,691.36 10.10
$250,000.01 to $300,000.00 ............................................. 8 2,165,291.91 5.15
$300,000.01 to $350,000.00 ............................................. 7 2,222,268.59 5.29
$350,000.01 to $400,000.00 ............................................. 6 2,264,340.74 5.39
$400,000.01 to $450,000.00 ............................................. 6 2,569,253.12 6.11
$450,000.01 to $500,000.00 ............................................. 6 2,850,206.20 6.78
$500,000.01 to $550,000.00 ............................................. 7 3,658,423.55 8.71
$550,000.01 to $600,000.00 ............................................. 5 2,901,811.17 6.90
$650,000.01 to $700,000.00 ............................................. 3 2,005,168.86 4.77
$700,000.01 to $750,000.00 ............................................. 1 719,112.52 1.71
$750,000.01 to $800,000.00 ............................................. 2 1,592,477.85 3.79
$1,000,000.01 to $1,5000,000.00 ........................................ 1 1,222,271.19 2.91
$2,500,000.01 to $3,000,000.00 ......................................... 1 2,970,000.00 7.07
----------------- ------------------ -------------------
Total: ........................................................ 159 $ 42,024,831.24 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the average outstanding principal balance of the
group 2 Mortgage Loans is expected to be approximately $264,307.11.
Original Debt-to-Income Ratios(1)
Aggregate Stated % of Group 2
Principal Cut-off Date
Number of Group 2 Balance as of Pool Principal
Original Debt-to-Income Ratios Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Not Calculated ......................................................... 6 $ 2,230,028.87 5.31%
5.01% to 10.00% ........................................................ 2 194,100.65 0.46
15.01% to 20.00% ....................................................... 3 543,866.67 1.29
20.01% to 25.00% ....................................................... 13 2,289,360.75 5.45
25.01% to 30.00% ....................................................... 19 3,833,473.23 9.12
30.01% to 35.00% ....................................................... 18 4,126,121.62 9.82
35.01% to 40.00% ....................................................... 32 9,077,924.16 21.60
40.01% to 45.00% ....................................................... 33 8,330,417.62 19.82
45.01% to 50.00% ....................................................... 22 6,283,805.07 14.95
50.01% to 55.00% ....................................................... 7 4,463,150.15 10.62
55.01% to 60.00% ....................................................... 4 652,582.45 1.55
----------------- ------------------ -------------------
Total: ........................................................ 159 $ 42,024,831.24 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average Debt-to-Income Ratio at
origination of the group 2 Mortgage Loans (other than the group 2 Mortgage
Loans for which no Debt-to-Income Ratio was calculated) is expected to be
approximately 39.68%.
A-10
Original Loan-to-Value Ratios(1)
Aggregate Stated % of Group 2
Principal Cut-off Date
Number of Group 2 Balance as of Pool Principal
Original Loan-to-Value Ratios Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
20.01% to 25.00% ....................................................... 1 $ 77,940.39 0.19%
30.01% to 35.00% ....................................................... 2 398,724.05 0.95
35.01% to 40.00% ....................................................... 2 330,792.42 0.79
40.01% to 45.00% ....................................................... 5 1,408,513.76 3.35
45.01% to 50.00% ....................................................... 4 645,047.27 1.53
50.01% to 55.00% ....................................................... 3 772,555.88 1.84
55.01% to 60.00% ....................................................... 12 3,806,655.48 9.06
60.01% to 65.00% ....................................................... 6 1,512,354.26 3.60
65.01% to 70.00% ....................................................... 15 7,143,095.37 17.00
70.01% to 75.00% ....................................................... 14 3,577,632.04 8.51
75.01% to 80.00% ....................................................... 78 18,042,685.62 42.93
80.01% to 85.00% ....................................................... 2 978,583.61 2.33
85.01% to 90.00% ....................................................... 12 2,532,911.90 6.03
90.01% to 95.00% ....................................................... 3 797,339.19 1.90
----------------- ------------------ -------------------
Total: ........................................................ 159 $ 42,024,831.24 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the group 2 Mortgage Loans is expected to be approximately
72.46%.
Mortgage Interest Rates(1)
Aggregate Stated % of Group 2
Principal Cut-off Date
Number of Group 2 Balance as of Pool Principal
Mortgage Interest Rates Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
5.751% to 6.000% ....................................................... 1 $ 84,127.00 0.20%
6.001% to 6.250% ....................................................... 1 95,954.96 0.23
6.251% to 6.500% ....................................................... 7 1,970,131.44 4.69
6.501% to 6.750% ....................................................... 26 6,998,094.91 16.65
6.751% to 7.000% ....................................................... 33 9,275,075.62 22.07
7.001% to 7.250% ....................................................... 23 5,447,649.83 12.96
7.251% to 7.500% ....................................................... 37 7,261,944.72 17.28
7.501% to 7.750% ....................................................... 10 2,884,108.95 6.86
7.751% to 8.000% ....................................................... 16 4,126,797.47 9.82
8.001% to 8.250% ....................................................... 4 3,549,177.14 8.45
8.501% to 8.750% ....................................................... 1 331,769.20 0.79
----------------- ------------------ -------------------
Total: ........................................................ 159 $ 42,024,831.24 100.00
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average mortgage interest rate of the
group 2 Mortgage Loans is expected to be approximately 7.253% per annum.
Number of Months Since Origination(1)
Aggregate Stated % of Group 2
Principal Cut-off Date
Number of Group 2 Balance as of Pool Principal
Months Since Origination Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
1 to 2 months .......................................................... 58 $ 13,939,227.35 33.17%
3 to 4 months .......................................................... 50 16,766,112.02 39.90
5 to 6 months .......................................................... 45 8,810,577.89 20.97
7 to 8 months .......................................................... 6 2,508,913.98 5.97
----------------- ------------------ -------------------
Total: ........................................................ 159 $ 42,024,831.24 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average number of months since
origination of the group 2 Mortgage Loans is expected to be approximately 3
months.
A-11
Remaining Terms(1)
Aggregate Stated % of Group 1
Principal Cut-off Date
Number of Group 2 Balance as of Pool Principal
Remaining Terms Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
461 to 480 months ...................................................... 159 $ 42,024,831.24 100.00%
----------------- ------------------ -------------------
Total: ........................................................ 159 $ 42,024,831.24 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity of the group 2 Mortgage Loans is expected to be approximately 478
months.
Credit Scores of Mortgagors
Aggregate Stated % of Group 1
Principal Cut-off Date
Number of Group 2 Balance as of Pool Principal
Credit Scores Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
801 to 850 ............................................................. 6 $ 1,392,093.80 3.31%
751 to 800 ............................................................. 40 10,536,288.31 25.07
701 to 750 ............................................................. 50 15,773,488.36 37.53
651 to 700 ............................................................. 50 11,827,444.32 28.14
601 to 650 ............................................................. 11 2,105,124.90 5.01
Not Scored ............................................................. 2 390,391.55 0.93
----------------- ------------------ -------------------
Total: ........................................................ 159 $ 42,024,831.24 100.00%
================= ================== ===================
A-12
Group 3 Mortgage Loan Data
The following tables set forth certain characteristics of the group 3
Mortgage Loans as of the Cut-off Date. The balances and percentages may not be
exact due to rounding.
All Group 3
Mortgage Loans
-------------------------
Number of Mortgage Loans......................................... 531
Aggregate Stated Principal Balance(1)............................ $60,712,273
Range of Original Terms to Stated Maturity....................... 120 to 180 months
Range of Stated Principal Balances(1)............................ $11,262 to $1,696,513
Average Stated Principal Balance(1).............................. $114,336
Latest Stated Maturity Date...................................... October 1, 2021
Range of Mortgage Interest Rates................................. 5.250% to 8.000%
Weighted Average Mortgage Interest Rate(1)....................... 6.546%
Range of Remaining Terms to Stated Maturity...................... 115 to 180 months
Weighted Average Remaining Term to Stated Maturity(1)............ 176 months
Range of Original Loan-to-Value Ratios........................... 3.46% to 95.00%
Weighted Average Original Loan-to-Value Ratio(1)................. 66.74%
Geographic Concentration of Mortgaged Properties Securing
Mortgage Loans in Excess of 5% of the Aggregate Stated
Principal Balance(1)
California............................................. 19.23%
Florida................................................ 13.45%
Texas.................................................. 12.60%
North Carolina......................................... 7.07%
South Carolina......................................... *
Virginia............................................... *
Tennessee.............................................. *
Georgia................................................ *
- ---------
(1) Approximate.
* Less than 5% of the aggregate Stated Principal Balance.
Occupancy of Mortgaged Properties(1)
Aggregate Stated % of Group 3
Principal Cut-off Date
Number of Group 3 Balance as of Pool Principal
Occupancy Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Investor Property ...................................................... 327 $ 30,766,890.37 50.68%
Primary Residence ...................................................... 182 25,991,686.46 42.81
Second Home ............................................................ 22 3,953,696.37 6.51
----------------- ------------------ -------------------
Total: ........................................................ 531 $ 60,712,273.20 100.00%
================= ================== ===================
- ---------
(1) Based solely on representations of the mortgagor at the time of origination
of the related group 3 Mortgage Loan.
A-13
Property Types
Aggregate Stated % of Group 3
Principal Cut-off Date
Number of Group 3 Balance as of Pool Principal
Property Type Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Single Family Residence ................................................ 372 $ 37,870,147.01 62.38%
PUD .................................................................... 34 6,889,397.14 11.35
Condominium ............................................................ 44 6,729,163.14 11.08
2-Family ............................................................... 59 6,555,291.06 10.80
3-Family ............................................................... 10 1,074,376.01 1.77
4-Family ............................................................... 6 1,182,914.38 1.95
Townhouse .............................................................. 3 230,123.24 0.38
Condotel ............................................................... 3 180,861.22 0.30
----------------- ------------------ -------------------
Total: ........................................................ 531 $ 60,712,273.20 100.00%
================= ================== ===================
Mortgage Loan Purposes
Aggregate Stated % of Group 3
Principal Cut-off Date
Number of Group 3 Balance as of Pool Principal
Purpose Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Purchase ............................................................... 255 $ 29,533,674.67 48.65%
Refinance-Cashout(1) ................................................... 202 23,801,124.41 39.20
Refinance-Rate/Term(2) ................................................. 74 7,377,474.12 12.15
----------------- ------------------ -------------------
Total: ........................................................ 531 $ 60,712,273.20 100.00%
================= ================== ===================
- ---------
(1) "Refinance -- Cashout" means a mortgage loan originated in connection with
a refinancing that has a principal balance in excess of the principal
balance on the old loan plus settlement costs where cash is distributed to
the mortgagor.
(2) "Refinance -- Rate/Term" means a mortgage loan originated in connection
with a refinancing to reduce the mortgage interest rate or reduce or
increase the term.
Documentation Type
Aggregate Stated % of Group 3
Principal Cut-off Date
Number of Group 3 Balance as of Pool Principal
Documentation Type Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Accelerated -- PaperSaver(R)/Threshold ................................. 255 $ 23,159,583.28 38.15%
Standard ............................................................... 175 19,042,606.71 31.37
Accelerated -- Stated .................................................. 76 15,024,616.18 24.75
Accelerated -- Rapid ................................................... 5 1,236,072.31 2.04
Accelerated -- No Ratio ................................................ 7 1,127,832.79 1.86
Accelerated -- Stated Income/Stated Asset .............................. 7 627,209.31 1.03
Accelerated -- All-Ready Home .......................................... 6 494,352.62 0.81
----------------- ------------------ -------------------
Total: ........................................................ 531 $ 60,712,273.20 100.00%
================= ================== ===================
A-14
Geographical Distribution of the Mortgaged Properties(1)
Aggregate Stated % of Group 3
Principal Cut-off Date
Number of Group 3 Balance as of Pool Principal
Geographical Area Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Alabama ................................................................ 2 $ 48,646.02 0.08%
Arizona ................................................................ 9 1,038,886.66 1.71
Arkansas ............................................................... 8 465,538.20 0.77
California ............................................................. 65 11,676,199.59 19.23
Colorado ............................................................... 3 249,963.32 0.41
Connecticut ............................................................ 2 213,082.81 0.35
Delaware ............................................................... 1 83,500.00 0.14
Florida ................................................................ 59 8,164,980.77 13.45
Georgia ................................................................ 25 2,574,525.68 4.24
Hawaii ................................................................. 4 625,167.11 1.03
Idaho .................................................................. 1 191,512.53 0.32
Illinois ............................................................... 9 972,954.60 1.60
Indiana ................................................................ 5 402,978.32 0.66
Iowa ................................................................... 5 326,397.42 0.54
Kansas ................................................................. 26 1,376,402.44 2.27
Kentucky ............................................................... 1 96,805.02 0.16
Maine .................................................................. 2 544,445.63 0.90
Maryland ............................................................... 12 1,260,407.34 2.08
Massachusetts .......................................................... 6 1,454,882.03 2.40
Michigan ............................................................... 3 541,368.04 0.89
Minnesota .............................................................. 1 200,359.85 0.33
Mississippi ............................................................ 3 229,692.48 0.38
Missouri ............................................................... 21 1,214,288.15 2.00
Nevada ................................................................. 5 936,936.49 1.54
New Hampshire .......................................................... 1 128,252.35 0.21
New Jersey ............................................................. 5 1,642,519.21 2.71
New Mexico ............................................................. 4 449,974.37 0.74
New York ............................................................... 14 1,503,228.53 2.48
North Carolina ......................................................... 32 4,290,225.09 7.07
North Dakota ........................................................... 1 39,871.03 0.07
Ohio ................................................................... 1 99,650.26 0.16
Oklahoma ............................................................... 14 825,830.57 1.36
Oregon ................................................................. 9 1,246,079.66 2.05
Pennsylvania ........................................................... 11 679,949.50 1.12
South Carolina ......................................................... 18 1,768,677.69 2.91
Tennessee .............................................................. 21 2,240,402.71 3.69
Texas .................................................................. 93 7,651,551.26 12.60
Utah ................................................................... 2 240,288.37 0.40
Virginia ............................................................... 14 1,800,500.92 2.97
Washington ............................................................. 9 1,023,485.39 1.69
West Virginia .......................................................... 1 35,883.93 0.06
Wisconsin .............................................................. 3 155,981.86 0.26
----------------- ------------------ -------------------
Total: ........................................................ 531 $ 60,712,273.20 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, no more than approximately 2.79% of the group 3
Mortgage Loans are expected to be secured by Mortgaged Properties located
in any one five-digit postal zip code.
A-15
Current Mortgage Loan Principal Balances(1)
Aggregate Stated % of Group 3
Principal Cut-off Date
Number of Group 3 Balance as of Pool Principal
Current Mortgage Loan Principal Balances Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
$0.01 to $50,000.00 .................................................... 128 $ 4,492,219.17 7.40%
$50,000.01 to $100,000.00 .............................................. 193 14,245,816.39 23.46
$100,000.01 to $150,000.00 ............................................. 101 12,207,300.82 20.11
$150,000.01 to $200,000.00 ............................................. 50 8,673,421.35 14.29
$200,000.01 to $250,000.00 ............................................. 15 3,335,236.53 5.49
$250,000.01 to $300,000.00 ............................................. 15 4,062,424.80 6.69
$300,000.01 to $350,000.00 ............................................. 7 2,216,205.32 3.65
$350,000.01 to $400,000.00 ............................................. 10 3,823,829.64 6.30
$400,000.01 to $450,000.00 ............................................. 2 842,301.52 1.39
$450,000.01 to $500,000.00 ............................................. 2 958,952.39 1.58
$500,000.01 to $550,000.00 ............................................. 2 1,006,921.54 1.66
$550,000.01 to $600,000.00 ............................................. 2 1,162,975.89 1.92
$600,000.01 to $650,000.00 ............................................. 2 1,275,655.19 2.10
$700,000.01 to $750,000.00 ............................................. 1 712,500.00 1.17
$1,500,000.01 to $2,000,000.00 ......................................... 1 1,696,512.65 2.79
----------------- ------------------ -------------------
Total: ........................................................ 531 $ 60,712,273.20 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the average outstanding principal balance of the
group 3 Mortgage Loans is expected to be approximately $114,335.73.
Original Debt-to-Income Ratios(1)
Aggregate Stated % of Group 3
Principal Cut-off Date
Number of Group 3 Balance as of Pool Principal
Original Debt-to-Income Ratios Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Not Calculated ......................................................... 2 $ 223,965.41 0.37%
1.01% to 5.00% ......................................................... 5 216,167.77 0.36
5.01% to 10.00% ........................................................ 12 948,016.21 1.56
10.01% to 15.00% ....................................................... 25 2,534,276.99 4.17
15.01% to 20.00% ....................................................... 52 5,857,455.65 9.65
20.01% to 25.00% ....................................................... 54 5,114,802.22 8.42
25.01% to 30.00% ....................................................... 57 6,078,138.19 10.01
30.01% to 35.00% ....................................................... 66 6,697,771.39 11.03
35.01% to 40.00% ....................................................... 56 6,963,934.87 11.47
40.01% to 45.00% ....................................................... 74 10,503,377.43 17.30
45.01% to 50.00% ....................................................... 67 8,971,203.99 14.78
50.01% to 55.00% ....................................................... 28 2,899,606.95 4.78
55.01% to 60.00% ....................................................... 23 2,225,985.04 3.67
60.01% to 65.00% ....................................................... 8 833,110.16 1.37
65.01% to 70.00% ....................................................... 2 644,460.93 1.06
----------------- ------------------ -------------------
Total: ........................................................ 531 $ 60,712,273.20 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average Debt-to-Income Ratio at
origination of the group 3 Mortgage Loans (other than the group 3 Mortgage
Loans for which no Debt-to-Income Ratio was calculated) is expected to be
approximately 35.74%.
A-16
Original Loan-to-Value Ratios(1)
Aggregate Stated % of Group 3
Principal Cut-off Date
Number of Group 3 Balance as of Pool Principal
Original Loan-to-Value Ratios Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
0.01% to 5.00% ......................................................... 1 $ 30,000.00 0.05%
5.01 to 10.00% ......................................................... 2 143,189.51 0.24
10.01% to 15.00% ....................................................... 5 451,250.01 0.74
15.01% to 20.00 % ...................................................... 6 443,140.18 0.73
20.01% to 25.00% ....................................................... 11 1,146,363.64 1.89
25.01% to 30.00% ....................................................... 11 1,117,825.04 1.84
30.01% to 35.00% ....................................................... 15 1,706,451.97 2.81
35.01% to 40.00% ....................................................... 8 848,950.27 1.40
40.01% to 45.00% ....................................................... 16 2,104,769.83 3.47
45.01% to 50.00% ....................................................... 27 2,433,017.26 4.01
50.01% to 55.00% ....................................................... 26 3,826,102.06 6.30
55.01% to 60.00% ....................................................... 32 3,554,277.68 5.85
60.01% to 65.00% ....................................................... 22 4,341,952.75 7.15
65.01% to 70.00% ....................................................... 66 7,656,971.54 12.61
70.01% to 75.00% ....................................................... 52 6,701,507.65 11.04
75.01% to 80.00% ....................................................... 160 18,507,305.61 30.48
80.01% to 85.00% ....................................................... 10 931,374.07 1.53
85.01% to 90.00% ....................................................... 40 2,682,347.90 4.42
90.01% to 95.00% ....................................................... 21 2,085,476.23 3.44
----------------- ------------------ -------------------
Total: ........................................................ 531 $ 60,712,273.20 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the group 3 Mortgage Loans is expected to be approximately
66.74%.
Current Mortgage Interest Rates(1)
Aggregate Stated % of Group 3
Principal Cut-off Date
Number of Group 3 Balance as of Pool Principal
Mortgage Interest Rates Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
5.001% to 5.250% ....................................................... 2 $ 958,540.19 1.58%
5.251% to 5.500% ....................................................... 3 289,789.06 0.48
5.501% to 5.750% ....................................................... 12 1,550,007.99 2.55
5.751% to 6.000% ....................................................... 27 3,671,809.68 6.05
6.001% to 6.250% ....................................................... 66 8,840,767.93 14.56
6.251% to 6.500% ....................................................... 151 16,830,748.27 27.72
6.501% to 6.750% ....................................................... 155 16,630,830.13 27.39
6.751% to 7.000% ....................................................... 81 6,375,896.17 10.50
7.001% to 7.250% ....................................................... 9 2,866,444.98 4.72
7.251% to 7.500% ....................................................... 11 1,456,974.93 2.40
7.501% to 7.750% ....................................................... 9 691,655.18 1.14
7.751% to 8.000% ....................................................... 5 548,808.69 0.90
----------------- ------------------ -------------------
Total: ........................................................ 531 $ 60,712,273.20 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average mortgage interest rate of the
group 3 Mortgage Loans is expected to be approximately 6.546% per annum.
A-17
Number of Months Since Origination(1)
Aggregate Stated % of Group 3
Principal Cut-off Date
Number of Group 3 Balance as of Pool Principal
Months Since Origination Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
1 to 2 months .......................................................... 292 $ 28,612,362.36 47.13%
3 to 4 months .......................................................... 119 14,610,207.53 24.06
5 to 6 months .......................................................... 107 14,303,675.79 23.56
7 to 8 months .......................................................... 3 208,893.35 0.34
9 to 10 months ......................................................... 1 256,492.50 0.42
11 to 12 months ........................................................ 1 213,517.70 0.35
13 to 14 months ........................................................ 2 452,202.53 0.74
15 to 16 months ........................................................ 2 875,894.07 1.44
17 to 18 months ........................................................ 3 791,266.44 1.30
23 to 24 months ........................................................ 1 387,760.93 0.64
----------------- ------------------ -------------------
Total: ........................................................ 531 $ 60,712,273.20 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average number of months since
origination of the group 3 Mortgage Loans is expected to be approximately 4
months.
Remaining Terms(1)
Aggregate Stated % of Group 3
Principal Cut-off Date
Number of Group 3 Balance as of Pool Principal
Remaining Terms Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
101 to 120 months ...................................................... 14 $ 1,651,283.56 2.72%
121 to 140 months ...................................................... 1 86,819.45 0.14
161 to 180 months ...................................................... 516 58,974,170.19 97.14
----------------- ------------------ -------------------
Total: ........................................................ 531 $ 60,712,273.20 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity of the group 3 Mortgage Loans is expected to be approximately 176
months.
Credit Scores of Mortgagors
Aggregate Stated % of Group 3
Principal Cut-off Date
Number of Group 3 Balance as of Pool Principal
Credit Scores Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
801 to 850 ............................................................. 33 $ 3,439,192.95 5.66%
751 to 800 ............................................................. 173 21,634,894.53 35.64
701 to 750 ............................................................. 144 15,425,829.83 25.41
651 to 700 ............................................................. 121 14,283,428.99 23.53
601 to 650 ............................................................. 55 4,491,935.67 7.40
Not Scored ............................................................. 5 1,436,991.23 2.37
----------------- ------------------ -------------------
Total: ........................................................ 531 $ 60,712,273.20 100.00%
================= ================== ===================
A-18
Aggregate Mortgage Loan Data
The following tables set forth certain characteristics of all the Mortgage
Loans in all loan groups as of the Cut-off Date and certain characteristics of
the Discount Loans and Premium Mortgage Loans in the aggregate in loan group 1
and loan group 2. The balances and percentages may not be exact due to rounding.
All Discount All Premium
All Mortgage Loans Mortgage Loans
Mortgage Loans in Loan Groups 1 and 2 in Loan Groups 1 and 2
---------------------- ------------------------ ----------------------
Number of Mortgage Loans..................... 3,342 2,119 692
Aggregate Stated Principal Balance(1)........ $510,161,202 $322,067,013 $127,381,916
Range of Original Terms to Stated Maturity... 120 to 480 months 240 to 480 months 240 to 480 months
Range of Stated Principal Balances(1)........ $9,991 to $2,970,000 $9,991 to $1,694,540 $13,600 to $2,970,000
Average Stated Principal Balance(1).......... $152,651 $151,990 $184,078
Latest Stated Maturity Date.................. October 1, 2046 October 1, 2046 October 1, 2046
Range of Mortgage Interest Rates............. 5.250% to 8.750% 5.625% to 7.250% 6.375% to 8.750%
Weighted Average Mortgage Interest Rate(1)... 6.956% 6.828% 7.475%
Range of Remaining Terms to Stated
Maturity.................................. 115 to 480 months 236 to 480 months 239 to 480 months
Weighted Average Remaining Term to Stated
Maturity(1)............................... 347 months 358 months 398 months
Range of Original Loan-to-Value Ratios....... 3.46% to 103.00% 4.29% to 103.00% 13.39% to 103.00%
Weighted Average Original Loan-to-Value
Ratio(1).................................. 74.72% 76.26% 74.64%
Geographic Concentration of Mortgaged
Properties Securing Mortgage Loans in
Excess of 5% of the Aggregate Stated
Principal Balance(1)
California......................... 16.41% 13.52% 22.35%
Florida............................ 14.92% 16.36% 11.98%
Texas.............................. 9.35% 11.06% *
North Carolina..................... 5.93% 6.75% *
Illinois........................... * * 8.08%
Georgia............................ * 5.48 *
Maryland........................... * * 5.52%
New York........................... * * 5.05%
- ---------
(1) Approximate.
* Less than 5% of the aggregate Stated Principal Balance.
Occupancy of Mortgaged Properties(1)
Aggregate Stated % of Aggregate
Principal Cut-off Date
Number of Group Balance as of Pool Principal
Occupancy Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Primary Residence ...................................................... 1,710 $319,190,739.07 62.57%
Investor Property ...................................................... 1,476 158,732,720.79 31.11
Second Home ............................................................ 156 32,237,742.01 6.32
----------------- ------------------ -------------------
Total: ........................................................ 3,342 $510,161,201.87 100.00%
================= ================== ===================
- ---------
(1) Based solely on representations of the mortgagor at the time of origination
of the related Mortgage Loan.
A-19
Property Types
Aggregate Stated % of Aggregate
Principal Cut-off Date
Number of Group Balance as of Pool Principal
Property Type Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Single Family Residence ................................................ 2,259 $322,537,831.37 63.22%
PUD .................................................................... 365 75,061,234.93 14.71
Condominium ............................................................ 350 49,226,599.14 9.65
2-Family ............................................................... 220 36,556,981.50 7.17
3-Family ............................................................... 34 6,931,437.66 1.36
4-Family ............................................................... 38 9,803,436.63 1.92
Condotel ............................................................... 30 5,129,444.33 1.01
Townhouse .............................................................. 46 4,914,236.31 0.96
----------------- ------------------ -------------------
Total: ........................................................ 3,342 $510,161,201.87 100.00%
================= ================== ===================
Mortgage Loan Purposes
Aggregate Stated % of Aggregate
Principal Cut-off Date
Number of Group Balance as of Pool Principal
Purpose Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Purchase ............................................................... 2,107 $292,723,769.01 57.38%
Refinance-Cashout(1) ................................................... 864 144,741,394.13 28.37
Refinance-Rate/Term(2) ................................................. 371 72,696,038.73 14.25
----------------- ------------------ -------------------
Total: ........................................................ 3,342 $510,161,201.87 100.00%
================= ================== ===================
- ---------
(1) "Refinance -- Cashout" means a mortgage loan originated in connection with
a refinancing that has a principal balance in excess of the principal
balance on the old loan plus settlement costs where cash is distributed to
the mortgagor.
(2) "Refinance -- Rate/Term" means a mortgage loan originated in connection
with a refinancing to reduce the mortgage interest rate or reduce or
increase the term.
Documentation Type
Aggregate Stated % of Aggregate
Principal Cut-off Date
Number of Group Balance as of Pool Principal
Documentation Type Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Standard ............................................................... 1,383 $187,097,110.02 36.67%
Accelerated -- Stated .................................................. 650 179,419,587.90 35.17
Accelerated -- PaperSaver(R)/Threshold ................................. 1,199 123,957,614.48 24.30
Accelerated -- No Ratio ................................................ 55 10,971,918.23 2.15
Accelerated -- Rapid ................................................... 28 5,760,170.47 1.13
Accelerated -- Stated Income/Stated Asset .............................. 16 1,944,019.26 0.38
Accelerated -- All-Ready Home .......................................... 11 1,010,781.51 0.20
----------------- ------------------ -------------------
Total: ........................................................ 3,342 $510,161,201.87 100.00%
================= ================== ===================
A-20
Geographical Distribution of the Mortgaged Properties(1)
Aggregate Stated % of Aggregate
Principal Cut-off Date
Number of Group Balance as of Pool Principal
Geographical Area Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Alabama ................................................................ 7 $ 659,510.35 0.13%
Arizona ................................................................ 76 10,831,969.57 2.12
Arkansas ............................................................... 39 3,085,451.92 0.60
California ............................................................. 286 83,704,732.61 16.41
Colorado ............................................................... 24 3,276,523.02 0.64
Connecticut ............................................................ 18 4,420,267.77 0.87
Delaware ............................................................... 3 282,527.24 0.06
District of Columbia ................................................... 7 1,946,270.82 0.38
Florida ................................................................ 458 76,127,935.69 14.92
Georgia ................................................................ 197 23,833,099.64 4.67
Hawaii ................................................................. 19 4,552,482.21 0.89
Idaho .................................................................. 16 2,562,613.46 0.50
Illinois ............................................................... 81 17,855,357.48 3.50
Indiana ................................................................ 28 3,075,099.04 0.60
Iowa ................................................................... 24 2,790,567.53 0.55
Kansas ................................................................. 93 7,626,966.60 1.50
Kentucky ............................................................... 12 1,263,815.34 0.25
Louisiana .............................................................. 5 195,046.03 0.04
Maine .................................................................. 18 3,181,842.74 0.62
Maryland ............................................................... 115 19,052,657.68 3.73
Massachusetts .......................................................... 37 10,158,368.12 1.99
Michigan ............................................................... 25 3,648,840.91 0.72
Minnesota .............................................................. 19 3,658,122.01 0.72
Mississippi ............................................................ 11 979,425.21 0.19
Missouri ............................................................... 137 15,180,610.04 2.98
Montana ................................................................ 3 498,820.03 0.10
Nebraska ............................................................... 7 562,919.60 0.11
Nevada ................................................................. 33 5,899,144.53 1.16
New Hampshire .......................................................... 11 1,715,054.36 0.34
New Jersey ............................................................. 39 9,881,865.75 1.94
New Mexico ............................................................. 24 3,377,393.06 0.66
New York ............................................................... 82 19,657,311.87 3.85
North Carolina ......................................................... 250 30,262,064.51 5.93
North Dakota ........................................................... 1 39,871.03 0.01
Ohio ................................................................... 23 2,249,984.08 0.44
Oklahoma ............................................................... 80 6,429,972.35 1.26
Oregon ................................................................. 33 5,340,465.08 1.05
Pennsylvania ........................................................... 68 7,725,368.57 1.51
Rhode Island ........................................................... 3 601,330.26 0.12
South Carolina ......................................................... 136 18,832,325.27 3.69
South Dakota ........................................................... 2 205,736.70 0.04
Tennessee .............................................................. 88 10,323,430.34 2.02
Texas .................................................................. 458 47,722,492.29 9.35
Utah ................................................................... 13 1,847,900.14 0.36
Vermont ................................................................ 5 1,150,087.99 0.23
Virginia ............................................................... 103 14,072,111.91 2.76
Washington ............................................................. 72 10,405,873.33 2.04
West Virginia .......................................................... 4 258,328.77 0.05
Wisconsin .............................................................. 49 7,151,247.02 1.40
----------------- ------------------ -------------------
Total: ........................................................ 3,342 $510,161,201.87 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, no more than approximately 0.86% of the Mortgage
Loans are expected to be secured by Mortgaged Properties located in any one
five-digit postal zip code.
A-21
Current Mortgage Loan Principal Balances(1)
Aggregate Stated % of Aggregate
Principal Cut-off Date
Number of Group Balance as of Pool Principal
Current Mortgage Loan Principal Balances Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
$0.01 to $50,000.00 .................................................... 336 $ 12,217,254.82 2.39%
$50,000.01 to $100,000.00 .............................................. 996 76,438,222.66 14.98
$100,000.01 to $150,000.00 ............................................. 967 119,744,433.32 23.47
$150,000.01 to $200,000.00 ............................................. 408 70,607,994.72 13.84
$200,000.01 to $250,000.00 ............................................. 208 46,485,909.15 9.11
$250,000.01 to $300,000.00 ............................................. 117 31,882,809.41 6.25
$300,000.01 to $350,000.00 ............................................. 73 23,639,687.52 4.63
$350,000.01 to $400,000.00 ............................................. 68 25,653,757.03 5.03
$400,000.01 to $450,000.00 ............................................. 38 16,166,681.79 3.17
$450,000.01 to $500,000.00 ............................................. 32 15,265,250.10 2.99
$500,000.01 to $550,000.00 ............................................. 25 12,989,490.40 2.55
$550,000.01 to $600,000.00 ............................................. 24 13,869,428.75 2.72
$600,000.01 to $650,000.00 ............................................. 16 10,077,425.76 1.98
$650,000.01 to $700,000.00 ............................................. 6 4,058,510.75 0.80
$700,000.01 to $750,000.00 ............................................. 4 2,877,420.30 0.56
$750,000.01 to $800,000.00 ............................................. 4 3,166,152.53 0.62
$800,000.01 to $850,000.00 ............................................. 1 850,000.00 0.17
$850,000.01 to $900,000.00 ............................................. 2 1,780,512.27 0.35
$900,000.01 to $950,000.00 ............................................. 2 1,866,104.49 0.37
$950,000.01 to $1,000,000.00 ........................................... 5 4,931,114.30 0.97
$1,000,000.01 to $1,500,000.00 ......................................... 6 7,591,290.77 1.49
$1,500,000.01 to $2,000,000.00 ......................................... 3 5,031,751.03 0.99
$2,500,000.01 to $3,000,000.00 ......................................... 1 2,970,000.00 0.58
----------------- ------------------ -------------------
Total: ........................................................ 3,342 $510,161,201.87 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the average outstanding principal balance of the
Mortgage Loans is expected to be approximately $152,651.47.
Original Debt-to-Income Ratios(1)
Aggregate Stated % of Aggregate
Principal Cut-off Date
Number of Group Balance as of Pool Principal
Original Debt-to-Income Ratios Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
Not Calculated ......................................................... 31 $ 7,927,142.47 1.55%
0.01% to 1.00% ......................................................... 2 123,292.62 0.02
1.01% to 5.00% ......................................................... 16 1,242,843.86 0.24
5.01% to 10.00% ........................................................ 52 4,808,736.32 0.94
10.01% to 15.00% ....................................................... 87 10,726,457.55 2.10
15.01% to 20.00% ....................................................... 188 23,433,155.54 4.59
20.01% to 25.00% ....................................................... 281 35,725,754.86 7.00
25.01% to 30.00% ....................................................... 393 51,699,472.73 10.13
30.01% to 35.00% ....................................................... 484 77,471,817.41 15.19
35.01% to 40.00% ....................................................... 522 93,036,955.33 18.24
40.01% to 45.00% ....................................................... 586 101,685,429.44 19.93
45.01% to 50.00% ....................................................... 344 53,361,807.20 10.46
50.01% to 55.00% ....................................................... 175 25,050,283.26 4.91
55.01% to 60.00% ....................................................... 139 19,282,928.97 3.78
60.01% to 65.00% ....................................................... 32 3,083,270.55 0.60
65.01% to 70.00% ....................................................... 8 1,229,554.70 0.24
70.01% to 75.00% ....................................................... 2 272,299.06 0.05
----------------- ------------------ -------------------
Total: ........................................................ 3,342 $510,161,201.87 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average Debt-to-Income Ratio at
origination of the Mortgage Loans (other than the Mortgage Loans for which
no Debt-to-Income Ratio was calculated) is expected to be approximately
36.71%.
A-22
Original Loan-to-Value Ratios(1)
Aggregate Stated % of Aggregate
Principal Cut-off Date
Number of Group Balance as of Pool Principal
Original Loan-to-Value Ratios Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
0.01% to 5.00% ......................................................... 2 $ 39,990.96 0.01%
5.01% to 10.00% ........................................................ 3 203,142.70 0.04
10.01% to 15.00% ....................................................... 9 834,842.32 0.16
15.01% to 20.00% ....................................................... 12 908,737.48 0.18
20.01% to 25.00% ....................................................... 26 2,548,043.37 0.50
25.01% to 30.00% ....................................................... 22 2,545,882.24 0.50
30.01% to 35.00% ....................................................... 34 4,309,357.70 0.84
35.01% to 40.00% ....................................................... 38 4,388,922.02 0.86
40.01% to 45.00% ....................................................... 43 6,496,886.59 1.27
45.01% to 50.00% ....................................................... 72 11,295,197.00 2.21
50.01% to 55.00% ....................................................... 71 10,684,668.86 2.09
55.01% to 60.00% ....................................................... 101 18,109,027.18 3.55
60.01% to 65.00% ....................................................... 108 17,401,994.55 3.41
65.01% to 70.00% ....................................................... 262 54,225,810.70 10.63
70.01% to 75.00% ....................................................... 291 51,827,225.62 10.16
75.01% to 80.00% ....................................................... 1,683 256,438,525.26 50.27
80.01% to 85.00% ....................................................... 50 6,996,114.49 1.37
85.01% to 90.00% ....................................................... 322 36,119,137.36 7.08
90.01% to 95.00% ....................................................... 174 22,565,674.58 4.42
95.01% to 100.00% ...................................................... 14 1,725,174.53 0.34
100.01% to 103.00% ..................................................... 5 496,846.36 0.10
----------------- ------------------ -------------------
Total: ........................................................ 3,342 $510,161,201.87 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Mortgage Loans is expected to be approximately 74.72%.
Mortgage Interest Rates(1)
Aggregate Stated % of Aggregate
Principal Cut-off Date
Number of Group Balance as of Pool Principal
Mortgage Interest Rates Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
5.001% to 5.250% ....................................................... 2 $ 958,540.19 0.19%
5.251% to 5.500% ....................................................... 3 289,789.06 0.06
5.501% to 5.750% ....................................................... 15 1,921,862.99 0.38
5.751% to 6.000% ....................................................... 49 7,827,086.35 1.53
6.001% to 6.250% ....................................................... 134 19,323,402.92 3.79
6.251% to 6.500% ....................................................... 438 60,938,845.67 11.95
6.501% to 6.750% ....................................................... 695 106,140,433.12 20.81
6.751% to 7.000% ....................................................... 838 124,581,199.55 24.42
7.001% to 7.250% ....................................................... 540 81,791,639.34 16.03
7.251% to 7.500% ....................................................... 404 60,103,648.05 11.78
7.501% to 7.750% ....................................................... 118 23,435,305.02 4.59
7.751% to 8.000% ....................................................... 97 18,175,974.38 3.56
8.001% to 8.250% ....................................................... 8 4,341,706.03 0.85
8.501% to 8.750% ....................................................... 1 331,769.20 0.07
----------------- ------------------ -------------------
Total: ........................................................ 3,342 $510,161,201.87 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average mortgage interest rate of the
Mortgage Loans is expected to be approximately 6.956% per annum.
A-23
Number of Months Since Origination(1)
Aggregate Stated % of Aggregate
Principal Cut-off Date
Number of Group Balance as of Pool Principal
Months Since Origination Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
1 to 2 months .......................................................... 2,949 $437,186,412.07 85.70%
3 to 4 months .......................................................... 197 36,905,274.64 7.23
5 to 6 months .......................................................... 164 26,415,438.13 5.18
7 to 8 months .......................................................... 11 3,706,197.12 0.73
9 to 10 months ......................................................... 1 256,492.50 0.05
11 to 12 months ........................................................ 5 1,424,182.22 0.28
13 to 14 months ........................................................ 5 1,056,102.89 0.21
15 to 16 months ........................................................ 5 1,672,877.03 0.33
17 to 18 months ........................................................ 3 791,266.44 0.16
21 to 22 months ........................................................ 1 359,197.90 0.07
23 to 24 months ........................................................ 1 387,760.93 0.08
----------------- ------------------ -------------------
Total: ........................................................ 3,342 $510,161,201.87 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average number of months since
origination of the Mortgage Loans is expected to be approximately 2 months.
Remaining Terms(1)
Aggregate Stated % of Aggregate
Principal Cut-off Date
Number of Group Balance as of Pool Principal
Remaining Terms Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
101 to 120 months ...................................................... 14 $ 1,651,283.56 0.32%
121 to 140 months ...................................................... 1 86,819.45 0.02
161 to 180 months ...................................................... 516 58,974,170.19 11.56
221 to 240 months ...................................................... 17 1,937,787.69 0.38
281 to 300 months ...................................................... 21 2,457,786.73 0.48
341 to 360 months ...................................................... 2,614 403,028,523.01 79.00
461 to 480 months ...................................................... 159 42,024,831.24 8.24
----------------- ------------------ -------------------
Total: ........................................................ 3,342 $510,161,201.87 100.00%
================= ================== ===================
- ---------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity of the Mortgage Loans is expected to be approximately 347 months.
Credit Scores of Mortgagors
Aggregate Stated % of Aggregate
Principal Cut-off Date
Number of Group Balance as of Pool Principal
Credit Scores Mortgage Loans Cut-off Date Balance
- ------------------------------------------------------------------------ ----------------- ------------------ -------------------
801 to 850 ............................................................. 147 $ 21,389,273.05 4.19%
751 to 800 ............................................................. 941 143,091,496.66 28.05
701 to 750 ............................................................. 1,020 155,086,243.67 30.40
651 to 700 ............................................................. 935 149,833,007.57 29.37
601 to 650 ............................................................. 283 37,595,580.14 7.37
551 to 600 ............................................................. 1 67,083.20 0.01
Not Scored ............................................................. 15 3,098,517.58 0.61
----------------- ------------------ -------------------
Total: ........................................................ 3,342 $510,161,201.87 100.00%
================= ================== ===================
A-24
Appendix B - Decrement Tables
The following tables have been prepared based on the assumptions described
in this prospectus supplement under "Prepayment and Yield Considerations" and
should be read in conjunction with that section.
Percentage of Initial Class Balance(1) Outstanding
at the Respective Percentages of PPC Set Forth Below:
Class 1-A-1, Class 1-A-2, Class 1-A-3,
Class I-A-4 and Class 1-A-5
------------------------------------------------
Distribution Date 0% 50% 100% 150% 200%
- ------------------------------- ------------------------------------------------
Initial Percentage.......... 100 100 100 100 100
October 25, 2007............ 99 91 82 74 65
October 25, 2008............ 98 79 62 47 34
October 25, 2009............ 97 69 47 30 17
October 25, 2010............ 95 60 35 18 7
October 25, 2011............ 94 52 26 10 2
October 25, 2012............ 93 45 19 6 0
October 25, 2013............ 91 39 14 3 0
October 25, 2014............ 89 34 11 2 0
October 25, 2015............ 88 30 8 1 0
October 25, 2016............ 86 26 6 1 0
October 25, 2017............ 84 23 5 * 0
October 25, 2018............ 82 20 4 * 0
October 25, 2019............ 79 17 3 * 0
October 25, 2020............ 77 15 2 * 0
October 25, 2021............ 74 13 2 * 0
October 25, 2022............ 71 11 1 * 0
October 25, 2023............ 68 9 1 * 0
October 25, 2024............ 64 8 1 * 0
October 25, 2025............ 61 6 * * 0
October 25, 2026............ 57 5 * * 0
October 25, 2027............ 53 4 * * 0
October 25, 2028............ 48 4 * * 0
October 25, 2029............ 44 3 * * 0
October 25, 2030............ 38 2 * * 0
October 25, 2031............ 33 2 * * 0
October 25, 2032............ 27 1 * * 0
October 25, 2033............ 21 1 * * 0
October 25, 2034............ 14 1 * * 0
October 25, 2035............ 7 * * * 0
October 25, 2036............ 0 0 0 0 0
Weighted Average
Life (in years)(2).......... 19.84 7.22 3.81 2.43 1.76
- ---------
(1) With respect to the Class 1-A-1 and Class 1-A-5 Certificates, percentages
are expressed as percentages of initial notional amount.
(2) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Balance or notional amount thereof by the number of years from the date of
the issuance of such class to the related Distribution Date, (ii) adding
the results and (iii) dividing the sum by the initial Class Balance or
notional amount of that class.
* Less than 0.5%, but greater than zero.
B-1
Percentage of Initial Class Balance Outstanding at
the Respective Percentages of PPC Set Forth Below:
Class 1-A-R
------------------------------------------
Distribution Date 0% 50% 100% 150% 200%
- -------------------------------- ------------------------------------------
Initial Percentage.............. 100 100 100 100 100
October 25, 2007................ 0 0 0 0 0
October 25, 2008................ 0 0 0 0 0
October 25, 2009................ 0 0 0 0 0
October 25, 2010................ 0 0 0 0 0
October 25, 2011................ 0 0 0 0 0
October 25, 2012................ 0 0 0 0 0
October 25, 2013................ 0 0 0 0 0
October 25, 2014................ 0 0 0 0 0
October 25, 2015................ 0 0 0 0 0
October 25, 2016................ 0 0 0 0 0
October 25, 2017................ 0 0 0 0 0
October 25, 2018................ 0 0 0 0 0
October 25, 2019................ 0 0 0 0 0
October 25, 2020................ 0 0 0 0 0
October 25, 2021................ 0 0 0 0 0
October 25, 2022................ 0 0 0 0 0
October 25, 2023................ 0 0 0 0 0
October 25, 2024................ 0 0 0 0 0
October 25, 2025................ 0 0 0 0 0
October 25, 2026................ 0 0 0 0 0
October 25, 2027................ 0 0 0 0 0
October 25, 2028................ 0 0 0 0 0
October 25, 2029................ 0 0 0 0 0
October 25, 2030................ 0 0 0 0 0
October 25, 2031................ 0 0 0 0 0
October 25, 2032................ 0 0 0 0 0
October 25, 2033................ 0 0 0 0 0
October 25, 2034................ 0 0 0 0 0
October 25, 2035................ 0 0 0 0 0
October 25, 2036................ 0 0 0 0 0
Weighted Average
Life (in years)(1).............. 0.07 0.07 0.07 0.07 0.07
- ---------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Balance thereof by the number of years from the date of the issuance of
such class to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the initial Class Balance of that class.
B-2
Percentage of Initial Class Balance(1) Outstanding
at the Respective Percentages of PPC Set Forth Below:
Class 2-A-1, Class 2-A-2 and Class 2-A-3 Class X-IO
----------------------------------------- -----------------------------------------
Distribution Date 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
----------------------------------------- -----------------------------------------
Initial Percentage... 100 100 100 100 100 100 100 100 100 100
October 25, 2007..... 100 90 80 70 60 99 91 82 73 64
October 25, 2008..... 99 78 59 43 29 99 80 62 47 34
October 25, 2009..... 99 68 44 25 12 98 70 48 31 18
October 25, 2010..... 98 59 32 14 4 97 61 36 20 10
October 25, 2011..... 97 51 23 8 0 96 54 28 13 5
October 25, 2012..... 97 44 17 4 0 96 47 21 8 3
October 25, 2013..... 96 38 12 2 0 95 41 16 5 1
October 25, 2014..... 95 33 9 1 0 94 36 12 3 1
October 25, 2015..... 95 29 6 * 0 93 31 9 2 *
October 25, 2016..... 94 25 5 * 0 91 27 7 1 *
October 25, 2017..... 93 22 4 * 0 90 24 5 1 *
October 25, 2018..... 92 19 3 * 0 89 21 4 1 *
October 25, 2019..... 91 17 2 * 0 87 18 3 * *
October 25, 2020..... 90 14 2 * 0 86 16 2 * *
October 25, 2021..... 88 12 1 * 0 84 14 2 * *
October 25, 2022..... 87 11 1 * 0 82 12 1 * *
October 25, 2023..... 86 9 1 * 0 80 10 1 * *
October 25, 2024..... 84 8 * * 0 78 9 1 * *
October 25, 2025..... 82 7 * * 0 75 7 1 * *
October 25, 2026..... 81 6 * * 0 73 6 * * *
October 25, 2027..... 79 5 * * 0 70 5 * * *
October 25, 2028..... 77 4 * * 0 67 4 * * *
October 25, 2029..... 74 4 * * 0 64 4 * * *
October 25, 2030..... 72 3 * * 0 60 3 * * *
October 25, 2031..... 70 3 * * 0 57 3 * * *
October 25, 2032..... 67 2 * * 0 53 2 * * *
October 25, 2033..... 64 2 * * 0 48 2 * * *
October 25, 2034..... 61 2 * * 0 44 1 * * *
October 25, 2035..... 57 1 * * 0 38 1 * * *
October 25, 2036..... 54 1 * * 0 33 1 * * *
October 25, 2037..... 50 1 * * 0 31 1 * * *
October 25, 2038..... 46 1 * * 0 28 * * * 0
October 25, 2039..... 41 1 * * 0 26 * * * 0
October 25, 2040..... 36 * * * 0 23 * * * 0
October 25, 2041..... 31 * * * 0 19 * * * 0
October 25, 2042..... 25 * * * 0 16 * * * 0
October 25, 2043..... 19 * * * 0 12 * * * 0
October 25, 2044..... 13 * * * 0 8 * * * 0
October 25, 2045..... 6 * * * 0 4 * * * 0
October 25, 2046..... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(2)........ 28.36 7.23 3.52 2.18 1.56 25.34 7.55 3.94 2.58 1.88
- ---------
(1) With respect to the Class X-IO Certificates, percentages are expressed as
percentages of initial notional amount.
(2) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Balance or notional amount thereof by the number of years from the date of
the issuance of such class to the related Distribution Date, (ii) adding
the results and (iii) dividing the sum by the initial Class Balance or
notional amount of that class.
* Less than 0.5%, but greater than zero.
B-3
Percentage of Initial Class Balance Outstanding at
the Respective Percentages of PPC Set Forth Below:
Class X-PO
------------------------------------------
Distribution Date 0% 50% 100% 150% 200%
- -------------------------------- ------------------------------------------
Initial Percentage.............. 100 100 100 100 100
October 25, 2007................ 99 91 83 75 67
October 25, 2008................ 98 80 64 50 37
October 25, 2009................ 97 70 49 33 20
October 25, 2010................ 95 62 38 22 11
October 25, 2011................ 94 54 29 14 6
October 25, 2012................ 92 47 22 9 3
October 25, 2013................ 91 41 17 6 2
October 25, 2014................ 89 36 13 4 1
October 25, 2015................ 87 32 10 3 1
October 25, 2016................ 85 27 8 2 *
October 25, 2017................ 83 24 6 1 *
October 25, 2018................ 81 21 4 1 *
October 25, 2019................ 78 18 3 * *
October 25, 2020................ 76 15 3 * *
October 25, 2021................ 73 13 2 * *
October 25, 2022................ 70 11 1 * *
October 25, 2023................ 67 10 1 * *
October 25, 2024................ 63 8 1 * *
October 25, 2025................ 60 7 1 * *
October 25, 2026................ 56 6 * * *
October 25, 2027................ 52 5 * * *
October 25, 2028................ 47 4 * * *
October 25, 2029................ 43 3 * * *
October 25, 2030................ 38 2 * * *
October 25, 2031................ 32 2 * * *
October 25, 2032................ 26 1 * * *
October 25, 2033................ 20 1 * * *
October 25, 2034................ 14 1 * * *
October 25, 2035................ 7 * * * *
October 25, 2036................ * * * 0 0
October 25, 2037................ * * * 0 0
October 25, 2038................ * * * 0 0
October 25, 2039................ * * * 0 0
October 25, 2040................ * * * 0 0
October 25, 2041................ * * * 0 0
October 25, 2042................ * * * 0 0
October 25, 2043................ * * * 0 0
October 25, 2044................ * * * 0 0
October 25, 2045................ * * 0 0 0
October 25, 2046................ 0 0 0 0 0
Weighted Average
Life (in years)(1).............. 19.66 7.44 4.09 2.73 2.01
- ---------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Balance thereof by the number of years from the date of the issuance of
such class to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the initial Class Balance of that class.
* Less than 0.5%, but greater than zero.
B-4
Percentage of Initial Class Balance Outstanding at
the Respective Percentages of PPC Set Forth Below:
Class 3-A-1
----------------------------------------
Distribution Date 0% 50% 100% 150% 200%
- -------------------------------- ----------------------------------------
Initial Percentage.............. 100 100 100 100 100
October 25, 2007................ 96 87 79 70 61
October 25, 2008................ 91 74 58 43 31
October 25, 2009................ 86 62 42 26 15
October 25, 2010................ 81 51 30 15 6
October 25, 2011................ 76 42 21 8 1
October 25, 2012................ 70 34 14 4 0
October 25, 2013................ 64 28 10 2 0
October 25, 2014................ 57 22 7 1 0
October 25, 2015................ 50 17 5 1 0
October 25, 2016................ 42 13 3 * 0
October 25, 2017................ 35 9 2 * 0
October 25, 2018................ 26 6 1 * 0
October 25, 2019................ 17 4 1 * 0
October 25, 2020................ 8 2 * * 0
October 25, 2021................ 0 0 0 0 0
Weighted Average
Life (in years)(1).............. 8.52 5.02 3.23 2.23 1.65
- ---------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Balance thereof by the number of years from the date of the issuance of
such class to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the initial Class Balance of that class.
* Less than 0.5%, but greater than zero.
B-5
Percentage of Initial Class Balance(1) Outstanding
at the Respective Percentages of PPC Set Forth Below:
Class XB-IO
-----------------------------------------
Distribution Date 0% 50% 100% 150% 200%
- -------------------------------- -----------------------------------------
Initial Percentage.............. 100 100 100 100 100
October 25, 2007................ 99 99 99 99 99
October 25, 2008................ 97 97 97 97 97
October 25, 2009................ 96 96 96 96 96
October 25, 2010................ 94 94 94 94 94
October 25, 2011................ 92 92 92 92 92
October 25, 2012................ 90 87 84 80 67
October 25, 2013................ 88 81 74 67 37
October 25, 2014................ 86 74 62 51 20
October 25, 2015................ 84 65 50 36 11
October 25, 2016................ 81 56 37 23 6
October 25, 2017................ 79 49 28 15 3
October 25, 2018................ 76 42 21 10 2
October 25, 2019................ 73 36 16 6 1
October 25, 2020................ 70 30 12 4 *
October 25, 2021................ 66 26 9 3 *
October 25, 2022................ 64 22 7 2 *
October 25, 2023................ 61 19 5 1 *
October 25, 2024................ 58 16 4 1 *
October 25, 2025................ 55 13 3 * *
October 25, 2026................ 52 11 2 * *
October 25, 2027................ 49 9 1 * *
October 25, 2028................ 45 8 1 * *
October 25, 2029................ 41 6 1 * *
October 25, 2030................ 37 5 * * *
October 25, 2031................ 32 4 * * *
October 25, 2032................ 27 3 * * *
October 25, 2033................ 22 2 * * *
October 25, 2034................ 16 1 * * *
October 25, 2035................ 10 1 * * *
October 25, 2036................ 4 * * * *
October 25, 2037................ 4 * * * 0
October 25, 2038................ 4 * * * 0
October 25, 2039................ 3 * * * 0
October 25, 2040................ 3 * * * 0
October 25, 2041................ 3 * * * 0
October 25, 2042................ 2 * * * 0
October 25, 2043................ 2 * * * 0
October 25, 2044................ 1 * * * 0
October 25, 2045................ * * * 0 0
October 25, 2046................ 0 0 0 0 0
Weighted Average
Life (in years)(2).............. 19.19 11.95 9.46 8.27 6.76
- ---------
(1) With respect to the Class XB-IO Certificates, percentages are expressed as
percentages of initial notional amount.
(2) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Balance or notional amount thereof by the number of years from the date of
the issuance of such class to the related Distribution Date, (ii) adding
the results and (iii) dividing the sum by the initial Class Balance or
notional amount of that class.
* Less than 0.5%, but greater than zero.
B-6
Percentage of Initial Class Balance Outstanding at
the Respective Percentages of PPC Set Forth Below:
Class M Class B-1, Class B-2 and Class B-3
-------------------------------------------- ---------------------------------------------
Distribution Date 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
- --------------------- -------------------------------------------- ---------------------------------------------
Initial Percentage... 100 100 100 100 100 100 100 100 100 100
October 25, 2007..... 99 99 99 99 99 99 99 99 99 99
October 25, 2008..... 97 97 97 97 97 97 97 97 97 97
October 25, 2009..... 96 96 96 96 96 96 96 96 96 96
October 25, 2010..... 94 94 94 94 94 94 94 94 94 94
October 25, 2011..... 92 92 92 92 92 92 92 92 92 92
October 25, 2012..... 90 87 84 80 67 90 87 84 80 67
October 25, 2013..... 88 81 74 67 37 88 81 74 67 37
October 25, 2014..... 86 74 62 51 20 86 74 62 51 20
October 25, 2015..... 84 65 50 36 11 84 65 50 36 11
October 25, 2016..... 81 56 37 23 6 81 56 37 23 6
October 25, 2017..... 79 49 28 15 3 79 49 28 15 3
October 25, 2018..... 76 42 21 10 2 76 42 21 10 2
October 25, 2019..... 73 36 16 6 1 73 36 16 6 1
October 25, 2020..... 70 30 12 4 * 70 30 12 4 *
October 25, 2021..... 66 26 9 3 * 66 26 9 3 *
October 25, 2022..... 64 22 7 2 * 64 22 7 2 *
October 25, 2023..... 61 19 5 1 * 61 19 5 1 *
October 25, 2024..... 58 16 4 1 * 58 16 4 1 *
October 25, 2025..... 55 13 3 * * 55 13 3 * *
October 25, 2026..... 52 11 2 * * 52 11 2 * *
October 25, 2027..... 49 9 1 * * 49 9 1 * *
October 25, 2028..... 45 8 1 * * 45 8 1 * *
October 25, 2029..... 41 6 1 * * 41 6 1 * *
October 25, 2030..... 37 5 * * * 37 5 * * *
October 25, 2031..... 32 4 * * * 32 4 * * *
October 25, 2032..... 27 3 * * * 27 3 * * *
October 25, 2033..... 21 2 * * * 22 2 * * *
October 25, 2034..... 15 1 * * * 17 1 * * *
October 25, 2035..... 10 1 * * * 11 1 * * *
October 25, 2036..... 3 * * * * 5 * * * *
October 25, 2037..... 3 * * * * 4 * * * *
October 25, 2038..... 3 * * * 0 4 * * * 0
October 25, 2039..... 2 * * * 0 4 * * * 0
October 25, 2040..... 2 * * * 0 3 * * * 0
October 25, 2041..... 2 * * * 0 3 * * * 0
October 25, 2042..... 1 * * * 0 2 * * * 0
October 25, 2043..... 1 * * * 0 2 * * * 0
October 25, 2044..... 1 * * * 0 1 * * * 0
October 25, 2045..... * * * * 0 1 * * * 0
October 25, 2046..... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)........ 19.08 11.95 9.46 8.27 6.76 19.23 11.95 9.46 8.27 6.76
- ---------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Balance thereof by the number of years from the date of the issuance of
such class to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the initial Class Balance of that class.
* Less than 0.5%, but greater than zero.
B-7
Appendix C - Hypothetical Mortgage Loans
Net Original
Unpaid Mortgage Remaining Interest
Principal Interest Term Age Only Term
Balance ($) Rate (%) (Months) (Months) (Months)
------------ ------------ --------- --------- ----------
Loan Group 1 66,857.12 5.87050000 239 1 0
118,487.87 5.99550000 236 4 0
246,798.45 6.12050000 239 1 0
271,944.35 6.24550000 239 1 0
255,405.94 6.37050000 239 1 0
209,584.48 6.49550000 239 1 0
90,309.64 6.62050000 239 1 0
452,130.38 6.74550000 239 1 0
90,628.32 6.87050000 239 1 0
82,135.00 7.12050000 240 0 0
53,506.14 7.49550000 239 1 0
349,387.10 7.24550000 287 1 0
229,500.00 5.99550000 300 0 0
76,717.00 6.12050000 300 0 0
64,340.36 6.24550000 299 1 0
34,200.00 6.37050000 300 0 0
234,214.57 6.49550000 299 1 0
262,836.42 6.62050000 299 1 0
432,396.02 6.74550000 299 1 0
132,796.00 6.87050000 300 0 0
389,679.66 6.99550000 299 1 0
55,934.87 7.12050000 299 1 0
111,874.87 7.37050000 299 1 0
83,909.86 7.62050000 299 1 0
276,855.00 5.37050000 360 0 0
95,000.00 5.49550000 360 0 0
772,458.43 5.62050000 360 0 0
1,712,691.24 5.74550000 360 0 0
2,726,195.21 5.87050000 359 1 0
6,511,415.17 5.99550000 359 1 0
11,514,908.04 6.12050000 359 1 0
27,988,979.43 6.24550000 360 0 0
33,025,468.99 6.37050000 359 1 0
49,411,081.41 6.49550000 359 1 0
70,175,607.14 6.62050000 359 1 0
36,092,262.29 6.74550000 359 1 0
34,416,541.24 6.87050000 359 1 0
39,406,005.31 6.99550000 359 1 0
25,030,025.44 7.12050000 359 1 0
24,667,347.92 7.24550000 359 1 0
8,376,009.37 7.37050000 360 0 0
10,400,472.46 7.49550000 359 1 0
8,151,405.21 7.62050000 359 1 0
4,684,753.15 7.74550000 359 1 0
680,600.31 7.87050000 359 1 0
111,928.58 7.99550000 359 1 0
1,370,000.00 5.62050000 356 4 120
996,400.00 6.24550000 358 2 120
465,000.00 6.49550000 359 1 120
620,874.63 6.62050000 359 1 120
318,750.00 6.99550000 359 1 120
110,000.00 7.12050000 356 4 120
184,000.00 7.37050000 359 1 120
579,500.00 7.49550000 359 1 120
C-1
Net Original
Unpaid Mortgage Remaining Interest
Principal Interest Term Age Only Term
Balance ($) Rate (%) (Months) (Months) (Months)
------------ ------------ --------- --------- ----------
1,500,000.00 6.24550000 359 1 180
405,850.00 6.62050000 356 4 180
250,000.00 6.87050000 356 4 180
Loan Group 2 84,127.00 5.74550000 480 0 0
95,954.96 5.99550000 479 1 0
1,464,148.79 6.12050000 476 4 0
505,982.65 6.24550000 476 4 0
960,249.57 6.37050000 476 4 0
6,037,845.34 6.49550000 478 2 0
6,584,429.48 6.62050000 477 3 0
2,690,646.14 6.74550000 477 3 0
2,499,965.67 6.87050000 478 2 0
2,947,684.16 6.99550000 477 3 0
3,130,749.37 7.12050000 478 2 0
4,131,195.35 7.24550000 478 2 0
1,000,101.44 7.37050000 477 3 0
1,884,007.51 7.49550000 477 3 0
3,345,928.54 7.62050000 478 2 0
780,868.93 7.74550000 479 1 0
3,095,875.22 7.87050000 480 0 0
453,301.92 7.99550000 478 2 0
331,769.20 8.49550000 477 3 0
Loan Group 3 26,595.00 5.87050000 120 0 0
32,800.00 5.99550000 120 0 0
57,000.00 6.12050000 120 0 0
618,347.08 6.24550000 117 3 0
69,671.76 6.37050000 119 1 0
176,261.49 6.74550000 119 1 0
83,500.00 6.87050000 120 0 0
452,856.51 7.12050000 115 5 0
134,251.72 7.49550000 119 1 0
86,819.45 5.99550000 127 5 0
958,540.19 4.99550000 174 6 0
289,789.06 5.24550000 178 2 0
120,000.00 5.37050000 180 0 0
1,430,007.99 5.49550000 177 3 0
1,985,394.66 5.62050000 176 4 0
1,686,415.02 5.74550000 178 2 0
4,263,696.60 5.87050000 178 2 0
4,430,856.88 5.99550000 177 3 0
6,609,995.29 6.12050000 178 2 0
9,545,405.90 6.24550000 178 2 0
7,547,340.65 6.37050000 178 2 0
9,013,817.72 6.49550000 178 2 0
1,399,337.09 6.62050000 177 3 0
4,800,297.59 6.74550000 178 2 0
1,948,055.43 6.87050000 178 2 0
834,889.55 6.99550000 179 1 0
328,967.82 7.12050000 177 3 0
675,150.60 7.24550000 177 3 0
186,408.02 7.37050000 177 3 0
370,995.44 7.49550000 179 1 0
354,372.22 7.62050000 178 2 0
194,436.47 7.74550000 179 1 0
C-2
Appendix D - Sensitivity and Aggregate Realized Loss Tables
The following tables have been prepared based on the assumptions described in
this prospectus supplement under "Prepayment and Yield Considerations" and
should be read in conjunction with that section.
Sensitivity of Pre-Tax Yields to Maturity of the Class 1-A-1
Certificates to Changes in One-Month LIBOR
Percentage of PPC
------------------------------------------------------------------
One-Month LIBOR 0% 50% 100% 150% 200%
- ------------------------------ ------------------------------------------------------------------
0.00000%.................. 274.85% 257.16% 238.53% 218.75% 197.57%
1.82000%.................. 183.93 168.22 151.58 133.78 114.48
3.3200%................... 117.18 102.89 87.63 71.06 52.66
4.82000%.................. 57.47 44.41 30.18 13.95 (5.40)
5.32000%.................. 39.03 26.36 12.39 (4.25) (25.30)
6.5000% and above......... ** ** ** ** **
- --------------------
** Pre-tax yield to maturity is less than (99.99)%
Sensitivity of Pre-Tax Yields to Maturity of the Class 1-A-5
Certificates to Changes in One-Month LIBOR
Percentage of PPC
------------------------------------------------------------------
One-Month LIBOR 0% 50% 100% 150% 200%
- ------------------------------ ------------------------------------------------------------------
6.50000%.................. 37.43% 24.79% 10.84% (5.84)% (27.13)%
6.51000%.................. 29.26 16.82 3.00 (14.01) (36.86)
6.52000%.................. 21.15 8.92 (4.73) (22.04) (47.43)
6.53000%.................. 12.87 0.92 (12.46) (29.83) (59.60)
6.54000%.................. 3.64 (7.93) (20.84) (37.67) (75.66)
6.55000% and above........ ** ** ** ** **
- --------------------
** Pre-tax yield to maturity is less than (99.99)%
Sensitivity of Pre-Tax Yields to Maturity of the Class 2-A-2
Certificates to Changes in One-Month LIBOR
Percentage of PPC
------------------------------------------------------------------
One-Month LIBOR 0% 50% 100% 150% 200%
- ------------------------------ ------------------------------------------------------------------
0.00000%.................. 30.76% 31.03% 31.32% 31.65% 32.02%
1.82000%.................. 22.65 22.98 23.35 23.77 24.22
3.32000%.................. 16.09 16.47 16.90 17.39 17.92
4.82000%.................. 9.65 10.07 10.56 11.13 11.73
5.32000%.................. 7.53 7.96 8.47 9.06 9.70
7.10000% and above........ 0.14 0.55 1.13 1.82 2.54
D-1
Sensitivity of Pre-Tax Yields to Maturity of the Class X-IO
Certificates to Prepayments
Percentage of PPC
------------------------------------------------------------------
One-Month LIBOR 0% 50% 100% 150% 200%
- ------------------------------ ------------------------------------------------------------------
Class X-IO Certificates....... 37.97% 25.20% 11.64% (2.89)% (18.60)%
Sensitivity of Pre-Tax Yields to Maturity of the Class X-PO
Certificates to Prepayments
Percentage of PPC
------------------------------------------------------------------
One-Month LIBOR 0% 50% 100% 150% 200%
- ------------------------------ ------------------------------------------------------------------
Class X-PO Certificates...... 1.42% 4.07% 7.57% 11.39% 15.48%
Sensitivity of Pre-Tax Yields to Maturity of the Class XB-IO
Certificates to Prepayments
Percentage of PPC
------------------------------------------------------------------
One-Month LIBOR 0% 50% 100% 150% 200%
- ------------------------------ ------------------------------------------------------------------
Class XB-IO Certificates...... 12.30% 8.99% 6.35% 4.21% (0.34)%
D-2
Sensitivity of Pre-Tax Yields to Maturity of the Class B-2
Certificates to Prepayments and Realized Losses
Loss Percentage of PPC
Severity ----------------------------------------------
Percentage of SDA Percentage 0% 50% 100% 150% 200%
- ----------------------------- -------------------------------------------------------------
0% 0% 6.46% 6.50% 6.52% 6.53% 6.56%
75%................. 25% 6.45 6.50 6.52 6.53 6.56
75%................. 50% 6.44 6.50 6.52 6.53 6.56
100%................ 25% 6.45 6.50 6.52 6.53 6.56
100%................ 50% 5.23 6.50 6.52 6.53 6.56
150%................ 25% 6.44 6.50 6.52 6.53 6.56
150%................ 50% (23.38) 5.94 6.52 6.53 6.56
200%................ 25% 5.46 6.50 6.52 6.53 6.56
200%................ 50% (37.81) (1.33) 6.52 6.53 6.56
Sensitivity of Pre-Tax Yields to Maturity of the Class B-3
Certificates to Prepayments and Realized Losses
Loss Percentage of PPC
Severity ----------------------------------------------
Percentage of SDA Percentage 0% 50% 100% 150% 200%
- ----------------------------- -------------------------------------------------------------
0% 0% 7.34% 7.64% 7.82% 7.95% 8.20%
75%.................. 25% 7.17 7.65 7.83 7.95 8.20
75%.................. 50% 3.40 7.64 7.83 7.95 8.20
100%................. 25% 7.14 7.65 7.82 7.95 8.20
100%................. 50% (22.19) 6.25 7.83 7.95 8.19
150%................. 25% 3.69 7.65 7.83 7.95 8.20
150%................. 50% (42.02) (24.34) 6.89 7.96 8.19
200%................. 25% (21.47) 6.47 7.83 7.96 8.20
200%................. 50% (56.69) (43.04) (2.23) 7.95 8.18
D-3
The following table sets forth the amount of Realized Losses that would be
incurred with respect to the Mortgage Loans, expressed as a percentage of the
aggregate outstanding principal balance of the Mortgage Loans as of the Cut-off
Date.
Aggregate Realized Losses
Loss Percentage of PPC
Severity ----------------------------------------------
Percentage of SDA Percentage 0% 50% 100% 150% 200%
- ----------------------------- -------------------------------------------------------------
75% 25% 0.71% 0.43% 0.28% 0.18% 0.12%
75% 50% 1.43 0.86 0.56 0.37 0.25
100%.................. 25% 0.95 0.57 0.37 0.24 0.16
100%.................. 50% 1.90 1.15 0.74 0.49 0.33
150%.................. 25% 1.41 0.86 0.55 0.36 0.25
150%.................. 50% 2.82 1.71 1.10 0.73 0.49
200%.................. 25% 1.86 1.13 0.73 0.48 0.33
200%.................. 50% 3.72 2.27 1.46 0.97 0.65
D-4
Banc of America Mortgage Securities, Inc.
Depositor
Bank of America, National Association
Sponsor
Mortgage Pass-Through Certificates
(Issuable in Series)
--------------------------------------------
- --------------------------------------------------------------------------------
You should carefully consider the risk factors beginning on page 11 of this
prospectus.
Except as otherwise described in the applicable prospectus supplement, neither
the certificates of any series nor the related underlying mortgage loans will be
insured or guaranteed by any governmental agency or instrumentality.
The certificates of each series will represent interests in the related issuing
entity only and will not represent interests in or obligations of the depositor,
the sponsor or any other entity.
This prospectus may be used to offer and sell any series of certificates only if
accompanied by the prospectus supplement for that series.
- --------------------------------------------------------------------------------
Each Issuing Entity--
o will issue a series of mortgage pass-through certificates, which will
consist of one or more classes of certificates; and
o will own a pool or pools of fixed or adjustable interest rate mortgage
loans, each of which is secured by a first lien on a one- to four-family
residential property.
Each Pool of Mortgage Loans--
o will be sold to the related issuing entity by the depositor, who will have
in turn purchased the mortgage loans from the sponsor;
o will be underwritten to the standards described in this prospectus or the
accompanying prospectus supplement; and
o will be serviced by one or more servicers affiliated or unaffiliated with
the depositor.
Each Series of Certificates--
o will represent interests in the related issuing entity;
o may provide credit support by "subordinating" certain classes to other
classes of certificates; any subordinate classes will be entitled to
payment subject to the payment of more senior classes and will bear losses
before more senior classes;
o may be entitled to the benefit of one or more of the other types of credit
support or derivative instruments described in this prospectus and in more
detail in the accompanying prospectus supplement; and
o will be paid only from the assets of the related issuing entity.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the certificates or determined that this
prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.
--------------------------------------------
The date of this prospectus is September 26, 2006.
TABLE OF CONTENTS
PROSPECTUS
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND
THE PROSPECTUS SUPPLEMENT....................................................5
SUMMARY OF PROSPECTUS..........................................................6
RISK FACTORS..................................................................11
Limited Source of Payments -- No Recourse to Depositor,
Sponsor, Servicer or Trustee..........................................11
Limited Liquidity.........................................................11
Certificates May Not Be Appropriate For Individual Investors..............12
Credit Enhancement is Limited in Amount and Coverage......................12
The Ratings of Your Certificates May Be Lowered or Withdrawn
Which May Adversely Affect the Liquidity or Market Value
of Your Certificates..................................................13
Real Estate Market Conditions Affect Mortgage Loan
Performance...........................................................13
Geographic Concentration May Increase Risk of Loss........................13
General Economic Conditions May Increase Risk of Loss.....................14
Collateral Securing Cooperative Loans May Diminish in Value...............14
Leaseholds May Be Subject to Default Risk on the Underlying
Lease.................................................................14
Yield is Sensitive to Rate of Principal Prepayment........................15
Timing of Prepayments on the Mortgage Loans May Result in
Interest Shortfalls on the Certificates...............................16
Exercise of Rights Under Special Servicing Agreements May Be
Adverse to Other Certificateholders...................................16
Special Powers of the FDIC in the Event of Insolvency of the
Sponsor Could Delay or Reduce Distributions on the
Certificates..........................................................17
Insolvency of the Depositor May Delay or Reduce Collections
on Mortgage Loans.....................................................18
Book-Entry System for Certain Classes of Certificates May
Decrease Liquidity and Delay Payment..................................18
Cash Flow Agreements and External Credit Enhancements are
Subject to Third Party Risk...........................................19
Amounts Received from an Auction and a Related Swap
Agreement May Be Insufficient to Assure Completion of
the Auction...........................................................19
Servicing Transfer Following Event of Default May Result in
Payment Delays or Losses..............................................20
Consumer Protection Laws May Limit Remedies...............................20
THE TRUST ESTATES.............................................................21
General...................................................................21
Mortgage Loans............................................................21
THE SPONSOR...................................................................27
THE DEPOSITOR.................................................................28
THE MORTGAGE LOAN PROGRAMS....................................................28
Mortgage Loan Underwriting................................................28
General...............................................................28
Bank of America General Underwriting Standards........................29
Bank of America Alternative Underwriting Standards....................36
Representations and Warranties............................................37
DESCRIPTION OF THE CERTIFICATES...............................................38
General...................................................................38
Definitive Form...........................................................39
Book-Entry Form...........................................................40
Distributions to Certificateholders.......................................47
Subordination.............................................................49
Other Credit Enhancement..................................................51
Cash Flow Agreements......................................................55
Categories of Classes of Certificates.....................................57
Mandatory Auction of Certificates.........................................61
Exchangeable REMIC Certificates and Exchangeable Certificates.............61
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PREPAYMENT AND YIELD CONSIDERATIONS...........................................64
Pass-Through Rates........................................................64
Scheduled Delays in Distributions.........................................65
Effect of Principal Prepayments...........................................65
Weighted Average Life of Certificates.....................................65
SERVICING OF THE MORTGAGE LOANS...............................................67
The Master Servicer.......................................................68
The Servicers.............................................................68
Servicing Experience and Procedures of Bank of America....................70
General...............................................................70
Delinquencies, Losses, Bankruptcies and Recoveries....................71
Payments on Mortgage Loans; Certificate and Custodial
Accounts..............................................................74
Periodic Advances and Servicing Advances..................................77
Collection and Other Servicing Procedures.................................78
Enforcement of "Due-on-Sale" Clauses; Realization Upon
Defaulted Mortgage Loans..............................................79
Insurance Policies........................................................81
Fixed Retained Yield, Servicing Compensation and Payment of
Expenses..............................................................82
Evidence as to Compliance.................................................83
THE POOLING AGREEMENT.........................................................83
Assignment of Mortgage Loans..............................................83
Repurchases of Mortgage Loans.............................................84
Special Servicing Agreements..............................................85
Reports to Certificateholders.............................................86
List of Certificateholders................................................88
Events of Default.........................................................88
Rights Upon Event of Default..............................................88
Amendment.................................................................89
Termination; Optional Purchase of Mortgage Loans..........................90
The Trustee...............................................................91
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS...................................92
General...................................................................92
Condominiums..............................................................92
Cooperatives..............................................................93
Foreclosure...............................................................93
Foreclosure on Shares of Cooperatives.....................................94
Leaseholds................................................................95
Rights of Redemption......................................................96
Anti-Deficiency Legislation, the Bankruptcy Code and Other
Limitations on Lenders................................................96
Forfeiture for Drug, RICO and Money Laundering Violations.................98
Homeowners Protection Act of 1998.........................................99
Texas Home Equity Loans...................................................99
Servicemembers Civil Relief Act and Similar Laws..........................99
Environmental Considerations.............................................100
"Due-on-Sale" Clauses....................................................102
Applicability of Usury Laws..............................................103
Enforceability of Certain Provisions.....................................104
FEDERAL INCOME TAX CONSEQUENCES..............................................104
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES.......................105
General..................................................................105
Status of REMIC Certificates.............................................105
Qualification as a REMIC.................................................106
Taxation of Regular Certificates.........................................107
General..............................................................107
Original Issue Discount..............................................108
Acquisition Premium..................................................110
Variable Rate Regular Certificates...................................110
Market Discount......................................................112
Premium..............................................................113
Election to Treat All Interest Under the Constant Yield
Method............................................................113
Treatment of Losses..................................................113
Sale or Exchange of Regular Certificates.............................114
Taxation of Residual Certificates........................................115
Taxation of REMIC Income.............................................115
Basis and Losses.....................................................116
Treatment of Certain Items of REMIC Income and Expense...............117
Limitations on Offset or Exemption of REMIC Income...................118
Tax-Related Restrictions on Transfer of Residual
Certificates......................................................118
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Sale or Exchange of a Residual Certificate...........................122
Mark to Market Regulations...........................................122
Taxes That May Be Imposed on the REMIC Pool..............................123
Prohibited Transactions..............................................123
Contributions to the REMIC Pool After the Startup Day................123
Net Income from Foreclosure Property.................................123
Liquidation of the REMIC Pool............................................123
Administrative Matters...................................................124
Limitations on Deduction of Certain Expenses.............................124
Taxation of Certain Foreign Investors....................................125
Regular Certificates.................................................125
Residual Certificates................................................125
Backup Withholding.......................................................126
Reporting Requirements...................................................126
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO WHICH
NO REMIC ELECTION IS MADE................................................127
General..................................................................127
Tax Status...............................................................127
Premium and Discount.....................................................128
Premium..............................................................128
Original Issue Discount..............................................128
Market Discount......................................................129
Recharacterization of Servicing Fees.....................................129
Sale or Exchange of Certificates.........................................130
Stripped Certificates....................................................130
General..............................................................130
Status of Stripped Certificates......................................131
Taxation of Stripped Certificates....................................132
Reporting Requirements and Backup Withholding............................133
Taxation of Certain Foreign Investors....................................134
Reportable Transactions..................................................134
FEDERAL INCOME TAX CONSEQUENCES FOR EXCHANGEABLE CERTIFICATES................134
Tax Status...............................................................134
Exchangeable Certificates Representing Proportionate
Interests in Two or More Exchangeable REMIC Certificates.............134
Exchangeable Certificates Representing Disproportionate
Interests in Exchangeable REMIC Certificates.........................135
Sales, Exchanges and Other Dispositions of Exchangeable
Certificates.........................................................135
ERISA CONSIDERATIONS.........................................................136
General..................................................................136
Certain Requirements Under ERISA and the Code............................136
General..............................................................136
Parties in Interest/Disqualified Persons.............................137
Delegation of Fiduciary Duty.........................................137
Applicability to Non-ERISA Plans.....................................138
Administrative Exemptions................................................138
Individual Administrative Exemptions.................................138
PTE 83-1.............................................................139
Non-ERISA Plans and Exempt Plans.........................................140
Unrelated Business Taxable Income--Residual Certificates.................140
LEGAL INVESTMENT.............................................................141
PLAN OF DISTRIBUTION.........................................................143
USE OF PROCEEDS..............................................................144
LEGAL MATTERS................................................................144
RATING.......................................................................144
REPORTS TO CERTIFICATEHOLDERS................................................144
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................145
WHERE YOU CAN FIND MORE INFORMATION..........................................145
INDEX OF PROSPECTUS DEFINITIONS..............................................147
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Important Notice About Information Presented
in this Prospectus and the Prospectus Supplement
Information is provided to you about the certificates in two separate
documents that progressively provide more detail: (a) this prospectus, which
provides general information, some of which may not apply to a particular series
of certificates, including your series, and (b) the accompanying prospectus
supplement, which will describe the specific terms of your series of
certificates, including:
o the principal balances and/or interest rates of each class;
o the timing and priority of interest and principal payments;
o statistical and other information about the mortgage loans;
o information about credit enhancement, if any, for each class;
o the ratings for each class; and
o the method for selling the certificates.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement including the information incorporated by
reference. No one has been authorized to provide you with different information.
The certificates are not being offered in any state where the offer is not
permitted. The depositor does not claim that the information in this prospectus
or the accompanying prospectus supplement is accurate as of any date other than
the dates stated on their respective covers.
Cross-references are included in this prospectus and in the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The table of contents in this prospectus and the table of
contents in the accompanying prospectus supplement provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Prospectus Definitions"
beginning on page 147 in this prospectus.
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SUMMARY OF PROSPECTUS
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o This summary highlights selected information from this document, but
does not contain all of the information that you should consider in
making your investment decision. To understand all of the terms of a
series of certificates, please read this entire document and the
accompanying prospectus supplement carefully.
o This summary provides an overview of certain calculations, cash flows
and other information to aid your understanding of the terms of the
certificates and is qualified by the full description of these
calculations, cash flows and other information in this prospectus and
the accompanying prospectus supplement.
RELEVANT PARTIES FOR EACH SERIES OF CERTIFICATES
Issuing Entity
Each series of certificates will be issued by a separate common law trust.
Each trust will be established and each series of certificates will be issued
under a separate pooling and servicing agreement among the depositor, one or
more servicers and/or a master servicer and the trustee specified in the
applicable prospectus supplement.
Sponsor
Bank of America, National Association will be the sponsor of each series of
certificates. The mortgage loans will either be originated by the sponsor or
purchased by the sponsor from various entities that either originated the
mortgage loans to the sponsor's underwriting standards or to the underwriting
standards described in the related prospectus supplement. The sponsor will sell
the mortgage loans to the depositor on the closing date specified in the related
prospectus supplement by means of a mortgage loan purchase agreement between the
sponsor and the depositor.
Depositor
Banc of America Mortgage Securities, Inc. will serve as the depositor for
each series of certificates. The depositor will acquire the mortgage loans from
the sponsor, and will transfer them to each trust. The depositor is a direct,
wholly-owned subsidiary of the sponsor. It is not expected that the depositor
will have any business operations other than offering certificates and related
activities.
Servicer(s)
The sponsor or one or more entities affiliated or unaffiliated with the
depositor and named in the applicable prospectus supplement will service the
mortgage loans in each trust. Each servicer will perform certain servicing
functions relating to the mortgage loans serviced by it in accordance with the
related pooling and servicing agreement or underlying servicing agreement.
Master Servicer
To the extent specified in the related prospectus supplement, if there is
more than one servicer of the mortgage loans for a series, a master servicer,
affiliated or unaffiliated with the depositor, may be appointed by the depositor
to supervise the servicers.
Trustee
A trustee for each trust will be named in the applicable prospectus
supplement. The trustee generally will be responsible under each pooling and
servicing agreement for providing general administrative services on behalf of
the trust for a series. To the extent specified in the related prospectus
supplement, a securities administrator may perform certain of the duties of the
trustee.
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THE MORTGAGE LOANS
Each trust will own the related mortgage loans (other than the fixed
retained yield, which is the portion of the mortgage interest rate, if any, not
contained in the trust).
The mortgage loans in each trust estate:
o will be fixed or adjustable interest rate mortgage loans secured by
first liens on some or all of the following types of property, to the
extent set forth in the applicable prospectus supplement: (i) one-family
attached or detached residences, (ii) two- to four-family units, (iii)
row houses, (iv) townhouses, (v) condominium units, including
condominium hotels, (vi) units within planned unit developments, (vii)
long-term leases on any of the foregoing types of property, and (viii)
shares issued by private non-profit housing corporations, known as
cooperatives, and the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specified units in cooperative
buildings;
o will have been acquired by the depositor from the sponsor;
o will have been originated or acquired by the sponsor; and
o will have been underwritten to the standards specified in this
prospectus or in the applicable
prospectus supplement.
See "Servicing of the Mortgage Loans--Fixed Retained Yield, Servicing
Compensation and Payment of Expenses" for a description of fixed retained yield.
See "The Trust Estates" for a description of mortgage loans secured by leases
and "Certain Legal Aspects of the Mortgage Loans--Condominiums,"
"--Cooperatives" and "--Leaseholds" for a description of mortgage loans secured
by condominium units, shares issued by cooperatives and leaseholds. See "The
Mortgage Loan Programs--Mortgage Loan Underwriting" for a description of the
underwriting standards of the Sponsor and "The Sponsor" for a description of the
Sponsor.
You should refer to the applicable prospectus supplement for the precise
characteristics or expected characteristics of the mortgage loans included in a
particular trust estate.
DISTRIBUTIONS ON THE CERTIFICATES
Each series of certificates will include one or more classes. A class of
certificates will be entitled, to the extent of funds available, to receive
distributions from collections on the related mortgage loans and, to the extent
specified in the related prospectus supplement, from any credit enhancements or
cash flow agreements described in this prospectus.
Interest Distributions
For each series of certificates, interest on the related mortgage loans at
the weighted average of their mortgage interest rates (net of servicing fees and
certain other amounts as described in this prospectus or in the applicable
prospectus supplement), will be passed through to holders of the related classes
of certificates in accordance with the particular terms of each class of
certificates. The terms of each class of certificates will be described in the
related prospectus supplement. See "Description of the
Certificates--Distributions to Certificateholders--Distributions of Interest."
Interest will accrue at the pass-through rate for each class indicated in
the applicable prospectus supplement on its outstanding class balance or
notional amount.
Principal Distributions
For a series of certificates, principal payments (including prepayments) on
the related mortgage loans will be passed through to holders of the related
certificates or otherwise applied in accordance with the related pooling and
servicing agreement on each distribution date. Principal distributions will be
allocated among
7
the classes of certificates of a series in the manner specified in the
applicable prospectus supplement. See "Description of the
Certificates--Distributions to Certificateholders--Distributions of Principal."
Distribution Dates
Distributions on the certificates will be made on the dates specified in the
applicable prospectus supplement. The cut-off date for each series will be the
date specified in the applicable prospectus supplement.
Record Dates
Distributions will be made on each distribution date to certificateholders
of record at the close of business on the last business day of the month
preceding the month in which the distribution date occurs (unless a different
date is specified in the applicable prospectus supplement).
CREDIT ENHANCEMENT
Subordination
A series of certificates may include one or more classes of senior
certificates and one or more classes of subordinate certificates. The rights of
the holders of subordinate certificates of a series to receive distributions
will be subordinated to the rights of the holders of the senior certificates of
the same series to the extent and in the manner specified in the applicable
prospectus supplement.
Subordination is intended to enhance the likelihood of the timely receipt by
the senior certificateholders of their monthly principal and interest
distributions and to protect them from losses. This protection may be effected
by:
o the preferential right of the senior certificateholders to receive,
prior to any distribution being made to the related subordinate
certificates on each distribution date, current distributions of
principal and interest due them on each distribution date out of the
funds available for distributions for that date;
o the right of the senior certificateholders to receive future
distributions on the mortgage loans that would otherwise have been
payable to the subordinate certificateholders;
o the prior allocation to the subordinate certificates of all or a portion
of losses realized on the underlying mortgage loans; and
o any other method specified in the related prospectus supplement.
Other Types of Credit Enhancement
If specified in the applicable prospectus supplement, the certificates of
any series, or any one or more classes of a series, may, in addition to or in
lieu of subordination, be entitled to the benefits of one or more of the
following types of credit enhancement:
o limited guarantee
o financial guaranty insurance policy
o surety bond
o letter of credit
o mortgage pool insurance policy
o reserve fund
o cross collateralization
o overcollateralization
o excess interest
See "Description of the Certificates--Other Credit Enhancement." In
addition, if specified in the applicable prospectus supplement, amounts received
under any cash flow agreement described under "Description of the
Certificates--Cash Flow Agreements" may also be used to provide credit
enhancement for one or more classes of certificates.
PERIODIC ADVANCES ON DELINQUENT PAYMENTS
In the event that a principal or interest payment on a mortgage loan is
delinquent, the servicer of the mortgage loan will be obligated
8
to make cash advances to the servicer custodial account if the servicer
determines that it will be able to recover those amounts from future payments
and collections on the mortgage loan. A servicer who makes principal or interest
advances will be reimbursed for those advances as described in this prospectus.
If the servicer fails to make a required principal or interest advance, the
master servicer or trustee will be required to make the advance from its own
funds unless the trustee or master servicer, as the case may be, determines that
it will not be able to recover those amounts from future payments and
collections on the mortgage loan.
See "Servicing of the Mortgage Loans--Periodic Advances and Servicing
Advances."
FORMS OF CERTIFICATES
The certificates will be issued either:
o in book-entry form through the facilities of DTC; or
o in fully-registered, certificated form.
If you own book-entry certificates, you will not receive a physical
certificate representing your ownership interest in the book-entry certificates,
except under extraordinary circumstances which are discussed in "Description of
the Certificates--Book-Entry Form." Instead, DTC will effect payments and
transfers by means of its electronic recordkeeping services, acting through
certain participating organizations, including Clearstream and Euroclear. This
may result in certain delays in your receipt of distributions and may restrict
your ability to pledge your securities. Your rights relating to your book-entry
certificates may generally only be exercised through DTC and its participating
organizations, including Clearstream and Euroclear.
See "Description of the Certificates--Book-Entry Form."
OPTIONAL PURCHASE OF ALL MORTGAGE LOANS
If specified in the prospectus supplement for a series, the depositor or
another party (which may be a certificateholder) specified in the applicable
prospectus supplement may purchase all or a part of the mortgage loans in the
related trust and any property acquired in connection with those mortgage loans.
Any purchase must be made in the manner and at the price specified under "The
Pooling Agreement--Termination; Optional Purchase of Mortgage Loans."
If an election is made to treat the related trust estate (or one or more
segregated pools of assets in the trust estate) as one or more "real estate
mortgage investment conduits," any optional purchase will be permitted only
pursuant to a "qualified liquidation," as defined under Section 860F(a)(4)(A) of
the Internal Revenue Code of 1986, as amended.
Exercise of the right of purchase will cause the early retirement of some or
all of the certificates of that series.
See "Prepayment and Yield Considerations."
ERISA LIMITATIONS
If you are a fiduciary of any employee benefit plan or another type of
retirement plan or arrangement subject to the ERISA, the Internal Revenue Code
or similar law, you should carefully review with your legal advisors whether the
purchase or holding of certificates could give rise to a transaction prohibited
or otherwise impermissible under ERISA or the Internal Revenue Code.
Certain classes of certificates may not be transferred unless the trustee is
furnished with a letter of representation or an opinion of counsel to the effect
that the transfer will not result in a violation of the prohibited transaction
provisions of ERISA or the Internal Revenue Code and will not subject the
trustee, the depositor, any
9
servicers or the master servicer to additional obligations.
See "ERISA Considerations."
TAX STATUS
The treatment of the certificates for federal income tax purposes will
depend on:
o whether one or more REMIC elections are made for a series of
certificates;
o if one or more REMIC elections are made, whether the certificates are
regular interests or residual interests; and
o whether the certificates are interests in a trust fund treated as a
grantor trust.
If one or more REMIC elections are made, certificates that are regular
interests will be treated as newly issued debt instruments of the REMIC and must
be accounted for under an accrual method of accounting. Certificates that are
residual interests are not treated as debt instruments, but rather must be
treated according to the rules prescribed in the Internal Revenue Code for REMIC
residual interests, including restrictions on transfer and the reporting of net
income or loss of the REMIC, including the possibility of a holder of such
certificate having taxable income without a corresponding distribution of cash
to pay taxes currently due.
If the certificates represent interests in a grantor trust, beneficial
owners of certificates generally are treated as owning an undivided beneficial
interest in the mortgage loans that are assets of the trust.
See "Federal Income Tax Consequences."
LEGAL INVESTMENT
The applicable prospectus supplement will specify whether the class or
classes of certificates offered will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended. If your investment authority is subject to legal restrictions you
should consult your own legal advisors to determine whether and to what extent
the certificates constitute legal investments for you.
See "Legal Investment" in this prospectus and "Summary of Terms--Legal
Investment" in the applicable prospectus supplement.
RATING
Certificates of any series will not be offered by this prospectus and a
prospectus supplement unless each offered class is rated in one of the four
highest rating categories by at least one nationally recognized statistical
rating organization.
o A security rating is not a recommendation to buy, sell or hold the
certificates of any series and is subject to revision or withdrawal at
any time by the assigning rating agency.
o Ratings do not address the effect of prepayments on the yield you may
anticipate when you purchase your certificates.
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RISK FACTORS
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Investors should consider, among other things, the following description of
the material risks associated with the purchase of certificates as well as the
specific risks discussed in the applicable prospectus supplement under "Risk
Factors."
Limited Source of Payments - No Recourse to Depositor, Sponsor, Servicer or
Trustee
Except for any related insurance policies and any reserve fund or other
external credit enhancement described in the applicable prospectus supplement:
o mortgage loans included in the related trust estate will be the sole
source of payments on the certificates of a series;
o the certificates of any series will not represent an interest in or
obligation of the depositor, the sponsor, the servicer, the trustee or
any of their affiliates, except for the depositor's limited obligations
relating to certain breaches of its representations and warranties and
limited obligations of the servicer with respect to its servicing
obligations; and
o neither the certificates of any series nor the related mortgage loans
will be guaranteed or insured by any governmental agency or
instrumentality or any other entity.
Consequently, in the event that payments on the mortgage loans underlying
your series of certificates are insufficient or otherwise unavailable to make
all payments required on your certificates, there will be no recourse to the
depositor, the sponsor, the servicer, the trustee or any of their affiliates or,
except as specified in the applicable prospectus supplement, any other entity.
Limited Liquidity
The liquidity of your certificates may be limited. You should consider that:
o a secondary market for the certificates of any series may not develop,
or if it does, it may not provide you with liquidity of investment, or
it may not continue for the life of the certificates of any series;
o the prospectus supplement for any series of certificates may indicate
that an underwriter intends to establish a secondary market in the
certificates of that series, but no underwriter will be obligated to do
so; and
o unless specified in the applicable prospectus supplement, the
certificates will not be listed on any securities exchange.
As a result, you may not be able to sell your certificates, or you may not
be able to sell your certificates at a price sufficient to produce your desired
return on investment.
The secondary market for mortgage-backed securities has experienced periods
of illiquidity and can be expected to do so in the future. Illiquidity can have
a severely adverse effect on the prices of certificates that are especially
sensitive to prepayment, credit, or interest rate risk (such as certificates
that receive only payments of principal or interest or subordinate
certificates), or that have been structured to meet the investment requirements
of limited categories of investors.
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Certificates May Not Be Appropriate For Individual Investors
If you are an individual investor who does not have sufficient resources or
expertise to evaluate the particular characteristics of a class of certificates,
the certificates of a series may not be an appropriate investment for you. This
may be the case because, among other things:
o if you purchase your certificates at a price other than par, your yield
to maturity will be sensitive to the uncertain rate and timing of
principal prepayments on the applicable mortgage loans;
o the rate of principal distributions on, and the weighted average lives
of, the certificates will be sensitive to the uncertain rate and timing
of principal prepayments on the applicable mortgage loans and the
priority of principal distributions among the classes of certificates.
Because of this, the certificates may be inappropriate investments for
you if you require a distribution of a particular amount of principal on
a specific date or an otherwise predictable stream of distributions;
o you may not be able to reinvest amounts distributed relating to
principal on your certificates (which distributions, in general, are
expected to be greater during periods of relatively low interest rates)
at a rate at least as high as the applicable pass-through rate or your
expected yield;
o a secondary market for the certificates may not develop or provide you
with liquidity of investment; and
o you must pay tax on any interest or original issue discount in the year
it accrues, even if the cash is paid to you in a different year.
If you are an individual investor considering the purchase of a certificate
of a series, you should also carefully consider the other risk factors discussed
in this prospectus and in the applicable prospectus supplement.
Credit Enhancement is Limited in Amount and Coverage
Credit enhancement for a series of certificates may be provided in limited
amounts to cover certain types of losses on the underlying mortgage loans.
Credit enhancement will be provided in one or more of the forms referred to in
this prospectus, including, but not limited to: subordination of other classes
of certificates of the same series; a limited guarantee; a financial guaranty
insurance policy; a surety bond; a letter of credit; a mortgage pool insurance
policy; a reserve fund; cross collateralization; overcollateralization; or
excess interest. See "Description of the Certificates--Distributions to
Certificateholders" and "--Other Credit Enhancement."
Regardless of the form of credit enhancement provided:
o the amount of coverage will be limited in amount and in most cases will
be subject to periodic reduction in accordance with a schedule or
formula; and
o may provide only very limited coverage as to certain types of losses,
and may provide no coverage as to certain other types of losses.
If losses exceed the amount of coverage provided by any credit enhancement
or losses of a type not covered by any credit enhancement occur, they will be
borne by the holders of the related certificates (or certain classes).
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None of the depositor, the sponsor, the servicer, the trustee or any of
their affiliates will have any obligation to replace or supplement any credit
enhancement, or to take any other action to maintain any rating of any class of
certificates.
See "Description of the Certificates--Distributions to Certificateholders"
and "--Other Credit Enhancement."
The Ratings of Your Certificates May Be Lowered or Withdrawn Which May Adversely
Affect the Liquidity or Market Value of Your Certificates
It is a condition to the issuance of the certificates that they be rated in
one of the four highest rating categories by at least one nationally recognized
statistical rating organization. A security rating is not a recommendation to
buy, sell or hold securities and may be subject to revision or withdrawal at any
time. No person is obligated to maintain the rating on any certificate, and
accordingly, there can be no assurance to you that the ratings assigned to any
certificate on the date on which the certificate is originally issued will not
be lowered or withdrawn by a rating agency at any time thereafter. The rating(s)
of any series of certificates by any applicable rating agency may be lowered
following the initial issuance of the certificates as a result of the
downgrading of the obligations of any applicable credit support provider, or as
a result of losses on the related mortgage loans in excess of the levels
contemplated by the rating agency at the time of its initial rating analysis.
Neither the depositor nor the sponsor nor any of their respective affiliates
will have any obligation to replace or supplement any credit support, or to take
any other action to maintain any rating(s) of any series of certificates. If any
rating is revised or withdrawn, the liquidity or the market value of your
certificate may be adversely affected.
Real Estate Market Conditions Affect Mortgage Loan Performance
An investment in securities such as the certificates, which generally
represent interests in pools of residential mortgage loans, may be affected by a
decline in real estate values and changes in the mortgagors' financial
condition. There is no assurance that the values of the mortgaged properties
securing the mortgage loans underlying any series of certificates have remained
or will remain at their levels on the dates of origination of the related
mortgage loans.
If the residential real estate market should experience an overall decline
in property values large enough to cause the outstanding balances of the
mortgage loans contained in a particular trust estate and any secondary
financing on the related mortgaged properties to become equal to or greater than
the value of the mortgaged properties, delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry or in the sponsor's prior securitizations involving the depositor and
the depositor's predecessor.
If losses on mortgage loans underlying a series are not covered by credit
enhancement, certificateholders of the series will bear all risk of loss
resulting from default by mortgagors and will have to look primarily to the
value of the mortgaged properties for recovery of the outstanding principal and
unpaid interest on the defaulted mortgage loans. See "The Trusts
Estates--Mortgage Loans" and "The Mortgage Loan Programs--Mortgage Loan
Underwriting."
Geographic Concentration May Increase Risk of Loss
The mortgage loans underlying certain series of certificates may be
concentrated in certain regions. Any concentration may present risk
considerations in addition to those generally present for similar
mortgage-backed securities without a concentration in a particular region.
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing
13
markets or be directly or indirectly affected by natural disasters or civil
disturbances such as earthquakes, hurricanes, floods, eruptions or riots.
Mortgage loans in these areas will experience higher rates of loss and
delinquency than on mortgage loans generally. Although mortgaged properties
located in certain identified flood zones will be required to be covered, to the
maximum extent available, by flood insurance, as described under "Servicing of
the Mortgage Loans--Insurance Policies," no mortgaged properties will otherwise
be required to be insured against earthquake damage or any other loss not
covered by standard hazard insurance policies, as described under "Servicing of
the Mortgage Loans--Insurance Policies."
See "The Mortgage Pool" in the related prospectus supplement for further
information regarding the geographic concentration of the mortgage loans
underlying the certificates of any series. See also "The Mortgage Loan
Programs--Mortgage Loan Underwriting."
General Economic Conditions May Increase Risk of Loss
Adverse economic conditions generally, in particular geographic areas or
industries, or affecting particular segments of the borrowing community (such as
mortgagors relying on commission income and self-employed mortgagors) and other
factors which may or may not affect real property values (including the purposes
for which the mortgage loans were made and the uses of the mortgaged properties)
may affect the timely payment by mortgagors of scheduled payments of principal
and interest on the mortgage loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses on the mortgage loans. If these losses
are not covered by the applicable credit enhancement, holders of certificates of
the series evidencing interests in the related trust estate will bear all risk
of loss resulting from default by mortgagors and will have to look primarily to
the value of the mortgaged properties for recovery of the outstanding principal
and unpaid interest on the defaulted mortgage loans.
Collateral Securing Cooperative Loans May Diminish in Value
If specified in the related prospectus supplement, certain of the mortgage
loans may be cooperative loans. There are certain risks that differentiate
cooperative loans from other types of mortgage loans. Ordinarily, the
cooperative incurs a blanket mortgage in connection with the construction or
purchase of the cooperative's apartment building and the underlying land. The
interests of the occupants 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. 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 the collateral securing the
cooperative loans.
Leaseholds May Be Subject to Default Risk on the Underlying Lease
If specified in the related prospectus supplement, certain of the mortgage
loans may be secured by leasehold mortgages. Leasehold mortgages are subject to
certain risks not associated with mortgage loans secured by a fee estate of the
mortgagor. The most significant of these risks is that the ground lease creating
the leasehold estate could terminate, leaving the leasehold mortgagee without
its security. The ground lease may terminate, if among other reasons, the ground
lessee breaches or defaults in its obligations under the ground lease or there
is a bankruptcy of the ground lessee or the ground lessor. Any
14
leasehold mortgages underlying a series of certificates will contain provisions
protective of the mortgagee as described under "The Trust Estates -- Mortgage
Loans," such as the right of the leasehold mortgagee to receive notices from the
ground lessor of any defaults by the mortgagor and to cure those defaults, with
adequate cure periods; if a default is not susceptible of cure by the leasehold
mortgagee, the right to acquire the leasehold estate through foreclosure or
otherwise; the ability of the ground lease to be assigned to and by the
leasehold mortgagee or purchaser at a foreclosure sale and for the simultaneous
release of the ground lessee's liabilities under the new lease; and the right of
the leasehold mortgagee to enter into a new ground lease with the ground lessor
on the same terms and conditions as the old ground lease upon a termination.
Yield is Sensitive to Rate of Principal Prepayment
The yield on the certificates of each series will depend in part on the rate
of principal payment on the mortgage loans (including prepayments, liquidations
due to defaults and mortgage loan repurchases). Your yield may be adversely
affected, depending upon whether a particular certificate is purchased at a
premium or a discount, by a higher or lower than anticipated rate of prepayments
on the related mortgage loans. In particular:
o the yield on classes of certificates entitling their holders primarily
or exclusively to payments of interest, such as interest only
certificates, or primarily or exclusively to payments of principal, such
as principal only certificates, will be extremely sensitive to the rate
of prepayments on the related mortgage loans; and
o the yield on certain other classes of certificates, such as companion
certificates, may be relatively more sensitive to the rate of prepayment
of specified mortgage loans than other classes of certificates.
The rate of prepayments on mortgage loans is influenced by a number of
factors, including:
o prevailing mortgage market interest rates;
o local and national economic conditions;
o homeowner mobility; and
o the ability of the borrower to obtain refinancing.
If you are purchasing certificates at a discount, and specifically if you
are purchasing principal only certificates, you should consider the risk that if
principal payments on the mortgage loans, or, in the case of any ratio strip
certificates, the related mortgage loans, occur at a rate slower than you
expected, your yield will be lower than you expected. Further information
relating to yield on those certificates will be included in the applicable
prospectus supplement, including a table demonstrating the particular
sensitivity of any class of principal only certificates to the rate of
prepayments.
If you are purchasing certificates at a premium, or are purchasing an
interest only certificate, you should consider the risk that if principal
payments on the mortgage loans or, in the case of any interest only certificates
entitled to a portion of interest paid on certain mortgage loans with higher
mortgage interest rate, those mortgage loans, occur at a rate faster than you
expected, your yield may be lower than you expected. If you are purchasing
interest only certificates, you should consider the risk that a rapid rate of
principal payments on the applicable mortgage loans could result in your failure
to recover your initial investment. Further information relating to yield on
those certificates will be included in the applicable prospectus supplement,
including, in the case of interest only certificates that are extremely
sensitive to
15
principal prepayments, a table demonstrating the particular sensitivity of those
interest only certificates to the rate of prepayments.
If you are purchasing any inverse floating rate certificates, you should
also consider the risk that a high rate of the applicable index may result in a
lower actual yield than you expected or a negative yield. In particular, you
should consider the risk that high constant rates of the applicable index or
high constant prepayment rates on the mortgage loans may result in the failure
to recover your initial investment. Further information relating to yield on
those certificates will be included in the applicable prospectus supplement,
including a table demonstrating the particular sensitivity of those certificates
to the rate of prepayments on the mortgage loans and changes in the applicable
index.
Timing of Prepayments on the Mortgage Loans May Result in Interest Shortfalls on
the Certificates
When a mortgage loan is prepaid in full, the mortgagor pays interest on the
amount prepaid only to the date of prepayment. Liquidation proceeds and amounts
received in settlement of insurance claims are also likely to include interest
only to the time of payment or settlement. When a mortgage loan is prepaid in
full or in part, an interest shortfall may result depending on the timing of the
receipt of the prepayment and the timing of when those prepayments are passed
through to certificateholders. To partially mitigate this reduction in yield,
the pooling agreement and/or underlying servicing agreements relating to a
series may provide, to the extent specified in the applicable prospectus
supplement, that for specified types of principal prepayments received, the
applicable servicer or the master servicer will be obligated, on or before each
distribution date, to pay an amount equal to the lesser of (i) the aggregate
interest shortfall with respect to the distribution date resulting from those
principal prepayments by mortgagors and (ii) all or a portion of the servicer's
or the master servicer's, as applicable, servicing compensation for the
distribution date as specified in the applicable prospectus supplement or other
mechanisms specified in the applicable prospectus supplement. To the extent
these shortfalls from the mortgage loans are not covered by the amount of
compensating interest or other mechanisms specified in the applicable prospectus
supplement, they will be allocated among the classes of interest bearing
certificates as described in the related prospectus supplement under
"Description of the Certificates -- Interest." No comparable interest shortfall
coverage will be provided by the servicer or the master servicer with respect to
liquidations of any mortgage loans. Any interest shortfall arising from
liquidations will be covered by means of the subordination of the rights of
subordinate certificateholders or any other credit support arrangements
described in this prospectus.
Exercise of Rights Under Special Servicing Agreements May Be Adverse to Other
Certificateholders
The pooling agreement for a series will permit a servicer to enter into a
special servicing agreement with an unaffiliated holder of a class of
subordinate certificates or a class of securities backed by a class of
subordinate certificates, pursuant to which the holder may instruct the servicer
to commence or delay foreclosure proceedings with respect to delinquent mortgage
loans. This right is intended to permit the holder of a class of certificates
that is highly sensitive to losses on the mortgage loans to attempt to mitigate
losses by exercising limited power of direction over servicing activities which
accelerate or delay realization of losses on the mortgage loans. Such directions
may, however, be adverse to the interest of those classes of senior certificates
that are more sensitive to prepayments than to losses on the mortgage loans. In
particular, accelerating foreclosure will adversely affect the yield to maturity
on interest only certificates, while delaying foreclosure will adversely affect
the yield to maturity of principal only certificates.
16
Special Powers of the FDIC in the Event of Insolvency of the Sponsor Could Delay
or Reduce Distributions on the Certificates
The mortgage loans will be originated or acquired by the sponsor, a national
bank whose deposits are insured to the applicable limits by the FDIC. If the
sponsor becomes insolvent, is in an unsound condition or engages in violations
of its bylaws or regulations applicable to it or if similar circumstances occur,
the FDIC could act as conservator and, if a receiver were appointed, would act
as a receiver for the sponsor. As receiver, the FDIC would have broad powers to:
o require the trust, as assignee of the depositor, to go through an
administrative claims procedure to establish its rights to payments
collected on the mortgage loans; or
o request a stayof proceedings to liquidate claims or otherwise enforce
contractual and legal remedies against the sponsor, or
o if the sponsor is a servicer for a series of certificates, repudiate
without compensation the sponsor's ongoing servicing obligations under
the pooling agreement, such as its duty to collect and remit payments or
otherwise service the mortgage loans.
If the FDIC were to take any of those actions, distributions on the
certificates could be delayed or reduced.
By statute, the FDIC as conservator or receiver of the sponsor is authorized
to repudiate any "contract" of the sponsor upon payment of "actual direct
compensatory damages." This authority may be interpreted by the FDIC to permit
it to repudiate the transfer of the mortgage loans to the depositor. Under an
FDIC regulation, however, the FDIC as conservator or receiver of a bank has
stated that it will not reclaim, recover or recharacterize a bank's transfer of
financial assets in connection with a securitization or participation, provided
that the transfer meets all conditions for sale accounting treatment under
generally accepted accounting principles, other than the "legal isolation"
condition as it applies to institutions for which the FDIC may be appointed as
conservator or receiver, was made for adequate consideration and was not made
fraudulently, in contemplation of insolvency, or with the intent to hinder,
delay or defraud the bank or its creditors. For purposes of the FDIC regulation,
the term securitization means, as relevant, the issuance by a special purpose
entity of beneficial interests the most senior class of which at time of
issuance is rated in one of the four highest categories assigned to long-term
debt or in an equivalent short-term category (within either of which there may
be sub-categories or gradations indicating relative standing) by one or more
nationally recognized statistical rating organizations. A special purpose
entity, as the term is used in the regulation, means a trust, corporation, or
other entity demonstrably distinct from the insured depository institution that
is primarily engaged in acquiring and holding (or transferring to another
special purpose entity) financial assets, and in activities related or
incidental to these actions, in connection with the issuance by the special
purpose entity (or by another special purpose entity that acquires financial
assets directly or indirectly from the special purpose entity) of beneficial
interests. The transactions contemplated by this prospectus and the related
prospectus supplement will be structured so that this FDIC regulation should
apply to the transfer of the mortgage loans from the sponsor to the depositor.
If a condition required under the FDIC regulation, or other statutory or
regulatory requirement applicable to the transaction, were found not to have
been satisfied, the FDIC as conservator or receiver might refuse to recognize
the sponsor's transfer of the mortgage loans to the depositor. In that event the
depositor could be limited to seeking recovery based upon its security interest
in the mortgage loans. The FDIC's statutory authority has been interpreted by
the FDIC and at least one court to permit the repudiation of a security interest
upon payment of actual direct compensatory damages measured as of the
17
date of conservatorship or receivership. These damages do not include damages
for lost profits or opportunity, and no damages would be paid for the period
between the date of conservatorship or receivership and the date of repudiation.
The FDIC could delay its decision whether to recognize the sponsor's transfer of
the mortgage loans for a reasonable period following its appointment as
conservator or receiver for the sponsor. If the FDIC were to refuse to recognize
the sponsor's transfer of the mortgage loans, distributions on the certificates
could be delayed or reduced.
If specified in the applicable prospectus supplement, the sponsor will also
act as servicer of the mortgage loans. If the FDIC acted as receiver for the
sponsor after the sponsor's insolvency, the FDIC could prevent the termination
of the sponsor as servicer of the mortgage loans, even if a contractual basis
for termination exists. This inability to terminate the sponsor as servicer
could result in a delay or possibly a reduction in distributions on the
certificates to the extent the sponsor received, but did not remit to the
trustee, mortgage loan collections received by the sponsor before the date of
insolvency or if the sponsor failed to make any required advances.
Insolvency of the Depositor May Delay or Reduce Collections on Mortgage Loans
Neither the United States Bankruptcy Code nor similar applicable state laws
prohibit the depositor from filing a voluntary application for relief under
these laws. However, the transactions contemplated by this prospectus and the
related prospectus supplement will be structured so that the voluntary or
involuntary application for relief under the bankruptcy laws by the depositor is
unlikely. The depositor is a separate, limited purpose subsidiary, the
certificate of incorporation of which contains limitations on the nature of the
depositor's business, including the ability to incur debt other than debt
associated with the transactions contemplated by this prospectus, and
restrictions on the ability of the depositor to commence voluntary or
involuntary cases or proceedings under bankruptcy laws without the prior
unanimous affirmative vote of all its directors (who are required to consider
the interests of the depositor's creditors, in addition to the depositor's
stockholders in connection the filing of a voluntary application for relief
under applicable insolvency laws). Further, the transfer of the mortgage loans
to the related trust will be structured so that the trustee has no recourse to
the depositor, other than for breaches of representations and warranties about
the mortgage loans.
If the depositor were to become the subject of a proceeding under the
bankruptcy laws, a court could conclude that the transfer of the mortgage loans
from the depositor to the trust should not be characterized as an absolute
transfer, and accordingly, that the mortgage loans should be included as part of
the depositor's estate. Under these circumstances, the bankruptcy proceeding
could delay or reduce distributions on the certificates. In addition, a
bankruptcy proceeding could result in the temporary disruption of distributions
on the certificates.
Book-Entry System for Certain Classes of Certificates May Decrease Liquidity and
Delay Payment
Because transactions in the classes of book-entry certificates of any series
generally can be effected only through DTC, DTC participants and indirect DTC
participants:
o your ability to pledge book-entry certificates to someone who does not
participate in the DTC system, or to otherwise take action relating to
your book-entry certificates, may be limited due to the lack of a
physical certificate;
o you may experience delays in your receipt of payments on book-entry
certificates because distributions will be made by the trustee, or a
paying agent on behalf of the trustee, to Cede & Co., as nominee for
DTC, rather than directly to you; and
18
o you may experience delays in your receipt of payments on book-entry
certificates in the event of misapplication of payments by DTC, DTC
participants or indirect DTC participants or bankruptcy or insolvency of
those entities and your recourse will be limited to your remedies
against those entities.
See "Description of the Certificates--Book-Entry Form."
Cash Flow Agreements and External Credit Enhancements are Subject to Third Party
Risk
The assets of a trust may, if specified in the related prospectus
supplement, include cash flow agreements, such as swap, cap, floor or similar
agreements, which will require the counterparty to the trust (or the trustee
acting on behalf of the trust) to make payments to the trust under the
circumstances described in the prospectus supplement. If payments on the
certificates of the related series depend in part on payments to be received
under one or these agreements, the ability of the trust to make payments on the
certificates will be subject to the credit risk of the counterparty.
In addition, the ratings assigned to the certificates of a series may depend
in part on the ratings assigned to the provider of certain types of external
credit enhancement, such as a mortgage pool insurance policy, surety bond,
financial guaranty insurance policy or limited guarantee. Any reduction in the
ratings assigned to the provider of one of these types of external credit
enhancement could result in the reduction of the ratings assigned to the
certificates of the series. A reduction in the ratings assigned to the
certificates of a series is likely to affect adversely the liquidity and market
value of the certificates.
Amounts Received from an Auction and a Related Swap Agreement May Be
Insufficient to Assure Completion of the Auction
If specified in the prospectus supplement for a series, one or more classes
of certificates may be subject to a mandatory auction. If you hold a class of
certificates subject to a mandatory auction, on the distribution date specified
in the related prospectus supplement for the auction your certificate will be
transferred to successful auction bidders, thereby ending your investment in
that certificate. If the class balance of your class of auction certificates
plus, if applicable, accrued interest, after application of all distributions
and realized losses on the distribution date of the auction, is greater than the
amount received in the auction, a counterparty will be obligated, pursuant to a
swap agreement, to pay the amount of that difference to the administrator of the
auction for distribution to the holders of the class of auction certificates.
Auction bidders will be permitted to bid for all or a portion of a class of
auction certificates. If the counterparty under the swap agreement defaults on
its obligations, no bids for all or a portion of a class of auction certificates
will be accepted unless the amount of the bids are equal to the class balance of
a class of auction certificates plus, if applicable, accrued interest, after
application of all distributions and realized losses on the distribution date of
the auction (or the pro rata portion of this price). If the counterparty under
the swap agreement defaults and no bids for a class of auction certificates or
portion of a class are accepted or there are no bids for the class or portion of
the class, all or a portion of the certificates of the class will not be
transferred to auction bidders. In the event this happens, you will retain the
non-transferred portion of your certificates after the distribution date for the
auction.
See "Description of the Certificates -- Mandatory Auction of the Auction
Certificates" in this prospectus.
19
Servicing Transfer Following Event of Default May Result in Payment Delays or
Losses
Following the occurrence of an event of default under a pooling agreement,
the trustee for the related series may, in its discretion or pursuant to
direction from certificateholders, remove the defaulting master servicer or
servicer and succeed to its responsibilities, or may petition a court to appoint
a successor master servicer or servicer. The trustee or the successor master
servicer or servicer will be entitled to reimbursement of its costs of effecting
the servicing transfer from the predecessor master servicer or servicer, or from
the assets of the related trust if the predecessor fails to pay. In the event
that reimbursement to the trustee or the successor master servicer or servicer
is made from trust assets, the resulting shortfall will be borne by holders of
the related certificates, to the extent not covered by any applicable credit
support. In addition, during the pendency of a servicing transfer or for some
time thereafter, mortgagors of the related mortgage loans may delay making their
monthly payments or may inadvertently continue making payments to the
predecessor servicer, potentially resulting in delays in distributions on the
related certificates.
Consumer Protection Laws May Limit Remedies
There are various federal, state and local laws, public policies and
principles of equity that protect consumers. Among other things, these laws,
policies and principles:
o regulate interest rates and other charges;
o require certain disclosures;
o require licensing of mortgage loan originators;
o require lenders to provide credit counseling and/or make affirmative
determinations regarding the borrower's ability to repay the mortgage
loan;
o prohibit discriminatory or predatory lending practices;
o limit or prohibit certain mortgage loan features, such as prepayment
penalties or balloon payments;
o regulate the use of consumer credit information; and
o regulate debt collection practices.
Violation of certain provisions of these laws, policies and principles:
o may limit a servicer's ability to collect all or part of the principal
of or interest on the mortgage loans;
o may entitle the borrower to a refund of amounts previously paid; and
o could subject a servicer to damages and administrative sanctions.
The depositor will generally be required to repurchase any mortgage loan
which, at the time of origination, did not comply with federal, state and local
laws and regulations. In addition, the sponsor will be required to pay to the
depositor, and the depositor will be required to pay to the applicable trust,
any costs or damages incurred by the related trust as a result of a violation of
these laws or regulations. See "The Mortgage Loan Programs--Representations and
Warranties."
20
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THE TRUST ESTATES
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General
The assets underlying each series of Certificates (each, a "Trust Estate")
will consist primarily of mortgage loans (the "Mortgage Loans") evidenced by
promissory notes (the "Mortgage Notes") secured by mortgages, deeds of trust or
other instruments creating first liens (the "Mortgages") on some or all of the
following types of property (as so secured, the "Mortgaged Properties"), to the
extent set forth in the applicable prospectus supplement: (i) one-family
attached or detached residences, (ii) two- to four-family units, (iii) row
houses, (iv) townhouses, (v) condominium units, including those where features
of the property may include maid service, a front desk or resident manager,
rental pools and up to 20% of commercial space ("Condominium Hotels"), (vi)
units within planned unit developments, (vii) long-term leases with respect to
any of the foregoing, and (viii) stock, shares or membership certificates issued
by private, nonprofit, cooperative housing corporations, known as
"Cooperatives," and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings. In addition, a Trust Estate will also include (i)
amounts held from time to time in the related Certificate Account, (ii) the
Depositor's interest in any primary mortgage insurance, hazard insurance, title
insurance or other insurance policies relating to a Mortgage Loan, including the
Depositor's right to receive any payments from Mortgage Loans with Borrowers
Protection Plan(R) addendum (a debt-cancellation contract between the borrower
and Bank of America, National Association), (iii) any property which initially
secured a Mortgage Loan and which has been acquired by foreclosure or trustee's
sale or deed in lieu of foreclosure or trustee's sale, (iv) if applicable, and
to the extent set forth in the applicable prospectus supplement, any reserve
fund or funds, and (v) if applicable, and to the extent set forth in the
applicable prospectus supplement, contractual obligations of any person to make
payments in respect of any form of credit enhancement, any cash flow agreement
or any interest subsidy agreement described in this prospectus. See "The
Mortgage Loan Programs--Mortgage Loan Underwriting--Bank of America General
Underwriting Standards" for more information about Mortgage Loans with a
Borrowers Protection Plan(R) addendum. The Trust Estate will not include the
portion of interest on the Mortgage Loans which constitutes the Fixed Retained
Yield, if any. See "Servicing of the Mortgage Loans--Fixed Retained Yield,
Servicing Compensation and Payment of Expenses."
Mortgage Loans
The Mortgage Loans will have been acquired by the Depositor from the
Sponsor. The Mortgage Loans will have been either (i) originated by the Sponsor
or (ii) purchased by the Sponsor from various entities that either originated
the Mortgage Loans or acquired the Mortgage Loans pursuant to mortgage loan
purchase programs operated by these entities. If any originator or group of
affiliated originators, apart from the Sponsor and its affiliates, originated
10% or more of the Mortgage Loans in a Trust Estate, the applicable prospectus
supplement will disclose the identity of the originator and, if such originator
or group of affiliated originators originated 20% or more of the Mortgage Loans,
the applicable prospectus supplement will provide information about the
originator's form of organization and, to the extent material, a description of
the originator's origination program and how long it has been engaged in
originating mortgage loans of the same type. Each Mortgage Loan will have been
underwritten either to the standards set forth in this prospectus or to other
underwriting standards set forth in the applicable prospectus supplement. See
"The Mortgage Loan Programs--Mortgage Loan Underwriting."
Each of the Mortgage Loans will be secured by a Mortgage on a Mortgaged
Property located in any of the 50 states or the District of Columbia.
21
If specified in the applicable prospectus supplement, the Mortgage Loans may
be secured by leases on real property under circumstances that the Sponsor
determines in its discretion are commonly acceptable to institutional mortgage
investors. A Mortgage Loan secured by a lease on real property is secured not by
a fee simple interest in the Mortgaged Property but rather by a lease under
which the mortgagor has the right, for a specified term, to use the related real
estate and the residential dwelling located thereon. Generally, a Mortgage Loan
will be secured by a lease only if the use of leasehold estates as security for
mortgage loans is customary in the area where the Mortgaged Property is located,
the lease is not subject to any prior lien that could result in termination of
the lease and the term of the lease ends at least five years beyond the maturity
date of the related Mortgage Loan. The provisions of each lease securing a
Mortgage Loan will expressly permit (i) mortgaging of the leasehold estate, (ii)
assignment of the lease without the lessor's consent and (iii) acquisition by
the holder of the Mortgage, in its own or its nominee's name, of the rights of
the lessee upon foreclosure or assignment in lieu of foreclosure, unless
alternative arrangements provide the holder of the Mortgage with substantially
similar protections. No lease will contain provisions which (i) provide for
termination upon the lessee's default without the holder of the Mortgage being
entitled to receive written notice of, and opportunity to cure, the default,
(ii) provide for termination in the event of damage or destruction as long as
the Mortgage is in existence or (iii) prohibit the holder of the Mortgage from
being insured under the hazard insurance policy or policies related to the
premises.
The prospectus supplement for a series will contain information, as of the
Cut-off Date or another specified date, to the extent known to the Depositor,
detailing the following information about the Mortgage Loans in the Trust
Estate: (i) occupancy, (ii) property type; (iii) purpose; (iv) documentation
type; (v) geographic distribution; (vi) current principal balance; (vii)
original Loan-to-Value Ratio; (viii) current Mortgage Interest Rate; (ix)
remaining term to maturity; and (x) Credit Scores. If the Mortgage Loans include
adjustable-rate loans, the prospectus supplement will also set forth the
following additional information: (i) Gross Margin; (ii) rate ceiling; and (iii)
first adjustment date.
A Mortgage Loan will generally provide for level monthly installments (other
than Interest Only Mortgage Loans and, in the case of Balloon Loans, the final
payment) consisting of interest equal to one-twelfth of the applicable interest
rate specified in the related Mortgage Note (the "Mortgage Interest Rate") times
the unpaid principal balance, with the remainder of the payment applied to
principal (an "Actuarial Mortgage Loan"). No adjustment is made if payment on an
Actuarial Mortgage Loan is made earlier or later than the Due Date, although the
mortgagor may be subject to a late payment charge. If specified in the
applicable prospectus supplement, some Mortgage Loans may provide for payments
that are allocated to principal and interest according to the daily simple
interest method (each, a "Simple Interest Mortgage Loan"). A Simple Interest
Mortgage Loan provides for the amortization of the amount financed under the
Mortgage Loan over a series of equal monthly payments (except, in the case of a
Balloon Loan, the final payment). Each monthly payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of the Mortgage Loan multiplied by the stated Mortgage
Interest Rate and further multiplied by a fraction, the numerator of which is
the number of days in the period elapsed since the preceding payment of interest
was made and the denominator of which is the number of days in the annual period
for which interest accrues on the Mortgage Loan. As payments are received under
a Simple Interest Mortgage Loan, the amount received is applied first to
interest accrued to the date of payment and the balance is applied to reduce the
unpaid principal balance. Therefore, if a borrower pays a fixed monthly
installment on a Simple Interest Mortgage Loan before its scheduled Due Date,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. The next scheduled
payment, however, will result in an allocation of a greater amount to interest
if the payment is made on its scheduled Due Date. Conversely, if a borrower pays
a fixed monthly installment after its scheduled Due Date, the portion of the
payment allocable to interest for the period since the
22
preceding payment was made will be greater than it would have been had the
payment been made as scheduled, and the remaining portion, if any, of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. Therefore, if the borrower consistently makes scheduled payments after the
scheduled Due Date, the Mortgage Loan will amortize more slowly than scheduled.
If a Mortgage Loan is prepaid, the borrower is required to pay interest only to
the date of prepayment.
The information about the Mortgage Loans and Mortgaged Properties described
in the preceding three paragraphs may be presented in the prospectus supplement
for a series as ranges in which the actual characteristics of the Mortgage Loans
and Mortgaged Properties are expected to fall. In that case, information about
the final characteristics of the Mortgage Loans and Mortgaged Properties will be
available in a Current Report on Form 8-K which will be filed with the
Securities and Exchange Commission ("SEC") within four business days following
the initial issuance of the related series.
The Mortgage Loans in a Trust Estate will generally have monthly
payments due on the first of each month (each, a "Due Date") but may, if
specified in the applicable prospectus supplement, have payments due on a
different day of each month and will be of one of the following types of
mortgage loans:
a. Fixed-Rate Loans. If specified in the applicable prospectus
supplement, a Trust Estate may contain fixed-rate, fully-amortizing
Mortgage Loans providing for level monthly payments of principal and
interest and terms at origination or modification of not more than
40 years. If specified in the applicable prospectus supplement,
fixed rates on certain Mortgage Loans may be converted to adjustable
rates after origination of these Mortgage Loans and upon the
satisfaction of other conditions specified in the applicable
prospectus supplement. If specified in the applicable prospectus
supplement, the Pooling Agreement will require the Depositor or
another party identified in the applicable prospectus supplement to
repurchase each of these converted Mortgage Loans at the price set
forth in the applicable prospectus supplement. A Trust Estate
containing fixed-rate Mortgage Loans may contain convertible
Mortgage Loans which have converted from an adjustable interest rate
prior to the formation of the Trust Estate and which are subject to
no further conversions.
b. Adjustable-Rate Loans. If specified in the applicable
prospectus supplement, a Trust Estate may contain adjustable-rate,
fully-amortizing Mortgage Loans having an original or modified term
to maturity of not more than 40 years with a related Mortgage
Interest Rate which generally adjusts initially either one, three or
six months, one, three, five, seven or ten years subsequent to the
initial Due Date, and thereafter at either one-month, six-month,
one-year or other intervals over the term of the Mortgage Loan to
equal the sum of a fixed margin set forth in the related Mortgage
Note (the "Gross Margin") and an index. The applicable prospectus
supplement will set forth the relevant index and the highest, lowest
and weighted average Gross Margin with respect to the
adjustable-rate Mortgage Loans in the related Trust Estate. The
index will be one of the following: one-month, three-month,
six-month or one-year LIBOR (an average of the interest rate on
one-month, three-month, six-month or one-year dollar-denominated
deposits traded between banks in London), CMT (weekly or monthly
average yields of U.S. treasury short and long-term securities,
adjusted to a constant maturity), COFI (an index of the weighted
average interest rate paid by savings institutions in Nevada,
Arizona and California), MTA (a one-year average of the monthly
average yields of U.S. treasury securities) or the Prime Rate (an
interest rate charged by banks for short-term loans to their most
creditworthy customers). The applicable prospectus supplement will
also indicate any periodic or lifetime limitations on the adjustment
of any Mortgage Interest Rate.
23
If specified in the applicable prospectus supplement, adjustable rates on
certain Mortgage Loans may be converted to fixed rates generally on the first,
second or third Adjustment Date after origination of those Mortgage Loans at the
option of the mortgagor. If specified in the applicable prospectus supplement,
the Depositor or another party specified in the applicable prospectus supplement
will generally be required to repurchase each of these converted Mortgage Loans
at the price set forth in the applicable prospectus supplement. A Trust Estate
containing adjustable-rate Mortgage Loans may contain convertible Mortgage Loans
which have converted from a fixed interest rate prior to the formation of the
Trust Estate.
If specified in the applicable prospectus supplement, a Trust Estate may
contain adjustable-rate Mortgage Loans with original terms to maturity of not
more than 30 years and flexible payment options ("Option ARM Mortgage Loans").
The initial required monthly payment is fully amortizing based on the initial
Mortgage Interest Rate (which may be a rate that is less than the sum of the
applicable index at origination and the Gross Margin specified in the related
Mortgage). After an introductory period of either one or three months, the
borrower may select from up to three payment options each month: (i) a monthly
payment of principal and interest sufficient to fully amortize the mortgage loan
based on the remaining scheduled term of the loan, (ii) an interest only payment
that would cover solely the amount of interest that accrued during the previous
month (this option is only available if it would exceed the minimum payment
option for the month), or (iii) a minimum payment equal to either (a) the
initial monthly payment, (b) the monthly payment as of the most recent annual
adjustment date, or (c) the monthly payment as of the most recent automatic
adjustment, whichever is most recent. The minimum payment adjusts annually after
the first payment date but is subject to a payment cap which limits any increase
or decrease to no more than 7.5% of the previous year's minimum payment amount.
In addition, the minimum payment is subject to an automatic adjustment every
five years or if the outstanding principal balance of the mortgage loan exceeds
115% of the original principal balance (110% for Mortgaged Properties located in
New York), in each case without regard to the 7.5% limitation. On each annual
adjustment date and in the event of an automatic adjustment, the minimum monthly
payment is adjusted to an amount sufficient to fully amortize the mortgage loan
based on the then-current Mortgage Interest Rate and remaining scheduled term of
the loan, unless, in the case of an annual adjustment, the monthly payment is
restricted by the 7.5% limitation, in which case the monthly payment is adjusted
by 7.5%. A minimum payment may not cover the amount of interest accrued during a
month and may not pay down any principal. Any interest not covered by a monthly
payment ("Deferred Interest") will be added to the principal balance of the
Mortgage Loan. This is called "negative amortization" and results in an increase
in the amount of principal the borrower owes. Interest will then accrue on this
new larger principal balance. The index for an Option ARM Mortgage Loan will be
determined monthly or at other less frequent intervals specified in the
applicable prospectus supplement.
c. Interest Only Mortgage Loans. If specified in the applicable
prospectus supplement, a Trust Estate may contain "Interest Only
Mortgage Loans" which are (i) Mortgage Loans having an original term
to maturity of not more than 40 years with a Mortgage Interest Rate
which adjusts initially either one, three or six months, or one,
three, five, seven or ten years subsequent to the initial payment
date, and thereafter at one-month, six-month, one-year or other
intervals (with corresponding adjustments in the amount of monthly
payments) over the term of the mortgage loan to equal the sum of the
related Gross Margin and index, and providing for monthly payments
of interest only prior to the date of the initial Mortgage Interest
Rate adjustment and monthly payments of principal and interest after
the adjustment sufficient to fully-amortize the Mortgage Loans over
their remaining terms to maturity or (ii) fixed-rate,
fully-amortizing Mortgage Loans having an original term to maturity
of not more than 40 years providing for monthly payments of interest
only prior to a date specified in the Mortgage Note and monthly
payments of principal and interest after such date sufficient to
fully-amortize the Mortgage Loans over their remaining terms to
maturity.
24
d. Graduated Payment Loans. If specified in the applicable
prospectus supplement, a Trust Estate may contain fixed-rate,
graduated-payment Mortgage Loans having original or modified terms
to maturity of not more than 30 years with monthly payments during
the first year calculated on the basis of an assumed interest rate
which is a specified percentage below the Mortgage Interest Rate on
the Mortgage Loan. The monthly payments increase at the beginning of
the second year by a specified percentage of the monthly payment
during the preceding year and each year thereafter to the extent
necessary to amortize the Mortgage Loan over the remainder of its
term or other shorter period. Mortgage Loans incorporating these
graduated payment features may include (i) "Graduated Pay Mortgage
Loans," pursuant to which amounts constituting Deferred Interest are
added to the principal balances of these Mortgage Loans, (ii)
"Tiered Payment Mortgage Loans," pursuant to which, if the amount of
interest accrued in any month exceeds the current scheduled payment
for that month, these excess amounts are paid from a subsidy account
(usually funded by a home builder or family member) established at
closing and (iii) "Growing Equity Mortgage Loans," for which the
monthly payments increase at a rate which has the effect of
amortizing the loan over a period shorter than the stated term.
e. Subsidy Loans. If specified in the applicable prospectus
supplement, a Trust Estate may contain Mortgage Loans subject to
temporary interest subsidy agreements ("Subsidy Loans") pursuant to
which the monthly payments made by the related mortgagors will be
less than the scheduled monthly payments on these Mortgage Loans
with the present value of the resulting difference in payment
("Subsidy Payments") being provided by the employer of the
mortgagor, generally on an annual basis. Subsidy Payments will
generally be placed in a custodial account ("Subsidy Account") by
the related Servicer. Despite the existence of a subsidy program, a
mortgagor remains primarily liable for making all scheduled payments
on a Subsidy Loan and for all other obligations provided for in the
related Mortgage Note and Mortgage Loan.
Subsidy Loans are offered by employers generally through either a graduated
or fixed subsidy loan program, or a combination of these programs. The terms of
the subsidy agreements relating to Subsidy Loans generally range from one to ten
years. The subsidy agreements relating to Subsidy Loans made under a graduated
program generally will provide for subsidy payments that result in effective
subsidized interest rates between three percentage points and five percentage
points below the Mortgage Interest Rates specified in the related Mortgage
Notes. Generally, under a graduated program, the subsidized rate for a Mortgage
Loan will increase approximately one percentage point per year until it equals
the full Mortgage Interest Rate. For example, if the initial subsidized interest
rate is five percentage points below the Mortgage Interest Rate in year one, the
subsidized rate will increase to four percentage points below the Mortgage
Interest Rate in year two, and likewise until year six, when the subsidized rate
will equal the Mortgage Interest Rate. Where the subsidy agreements relating to
Subsidy Loans are in effect for longer than five years, the subsidized interest
rates generally increase at smaller percentage increments for each year. The
subsidy agreements relating to Subsidy Loans made under a fixed program
generally will provide for subsidized interest rates at fixed percentages
(generally one percentage point to two percentage points) below the Mortgage
Interest Rates for specified periods, generally not in excess of ten years.
Subsidy Loans are also offered pursuant to combination fixed/graduated programs.
The subsidy agreements relating to these Subsidy Loans generally will provide
for an initial fixed subsidy of up to five percentage points below the related
Mortgage Interest Rate for up to five years, and then a periodic reduction in
the subsidy for up to five years, at an equal fixed percentage per year until
the subsidized rate equals the Mortgage Interest Rate.
Generally, employers may terminate subsidy programs in the event of (i) the
mortgagor's death, retirement, resignation or termination of employment, (ii)
the full prepayment of the Subsidy Loan by the
25
mortgagor, (iii) the sale or transfer by the mortgagor of the related Mortgaged
Property as a result of which the mortgagee is entitled to accelerate the
Subsidy Loan under the "due-on-sale" clause contained in the Mortgage, or (iv)
the commencement of foreclosure proceedings or the acceptance of a deed in lieu
of foreclosure. In addition, some subsidy programs provide that if prevailing
market rates of interest on mortgage loans similar to a Subsidy Loan are less
than the Mortgage Interest Rate of that Subsidy Loan, the employer may request
that the mortgagor refinance its Subsidy Loan and may terminate the related
subsidy agreement if the mortgagor fails to refinance its Subsidy Loan. In the
event the mortgagor refinances its Subsidy Loan, the new loan will not be
included in the Trust Estate. See "Prepayment and Yield Considerations." In the
event a subsidy agreement is terminated, the amount remaining in the Subsidy
Account will be returned to the employer, and the mortgagor will be obligated to
make the full amount of all remaining scheduled payments, if any. The
mortgagor's reduced monthly housing expense as a consequence of payments under a
subsidy agreement may be used by the Sponsor or other originator in determining
certain expense-to-income ratios utilized in underwriting a Subsidy Loan. See
"The Mortgage Loan Programs--Mortgage Loan Underwriting."
f. Buy-Down Loans. If specified in the applicable prospectus
supplement, a Trust Estate may contain Mortgage Loans subject to
temporary buy-down plans ("Buy-Down Loans") under which the monthly
payments made by the mortgagor during the early years of the
Mortgage Loan will be less than the scheduled monthly payments on
the Mortgage Loan. The resulting difference in payment will be
compensated for from an amount contributed by the seller of the
related Mortgaged Property or another source, including the
originator of the Mortgage Loan (generally on a present value basis)
and, if specified in the applicable prospectus supplement, placed in
a custodial account (the "Buy-Down Fund") by the related Servicer.
If the mortgagor on a Buy-Down Loan prepays the Mortgage Loan in its
entirety, or defaults on the Mortgage Loan and the related Servicer
liquidates the related Mortgaged Property, during the period when
the mortgagor is not obligated, by virtue of the buy-down plan, to
pay the full monthly payment otherwise due on the loan, the unpaid
principal balance of the Buy-Down Loan will be reduced by the
amounts remaining in the Buy-Down Fund for the Buy-Down Loan, and
these amounts will be deposited in the Servicer Custodial Account or
the Certificate Account, net of any amounts paid relating to the
Buy-Down Loan by any insurer, guarantor or other person under a
credit enhancement arrangement described in the applicable
prospectus supplement.
g. Balloon Loans. If specified in the applicable prospectus
supplement, a Trust Estate may contain Mortgage Loans which are
amortized over a fixed period not exceeding 30 years but which have
shorter terms to maturity ("Balloon Loans") that causes the
outstanding principal balance of the related Mortgage Loan to be due
and payable at the end of a certain specified period (the "Balloon
Period"). The borrower of a Balloon Loan will be obligated to pay
the entire outstanding principal balance of the Balloon Loan at the
end of the related Balloon Period. In the event the related
mortgagor refinances a Balloon Loan at maturity, the new loan will
not be included in the Trust Estate. See "Prepayment and Yield
Considerations" herein.
If specified in the applicable prospectus supplement, certain Mortgage Loans
originated by the Sponsor may include a BPP addendum to the related Mortgage
Note whereby the Sponsor agrees to cancel (i) certain payments of principal and
interest on the Mortgage Loan for up to twelve months upon the disability or
involuntary unemployment of the mortgagor or (ii) the outstanding principal
balance of the Mortgage Loan upon the accidental death of the mortgagor;
provided that the BPP has not been terminated in accordance with its terms. See
"The Mortgage Loan Programs--Mortgage Loan Underwriting--Bank of America General
Underwriting Standards" for more information about BPP. In each case, the
Sponsor will be required to pay these cancelled amounts to the applicable Trust.
26
- --------------------------------------------------------------------------------
THE SPONSOR
- --------------------------------------------------------------------------------
Bank of America, National Association ("Bank of America") will serve as the
sponsor (the "Sponsor") of each series of Certificates. Bank of America is an
indirect wholly-owned subsidiary of Bank of America Corporation. Bank of America
is engaged in a general consumer banking, commercial banking, and trust
business, offering a wide range of commercial, corporate, international,
financial market, retail and fiduciary banking services. Bank of America is a
national banking association chartered by the Office of the Comptroller of the
Currency (the "OCC") and is subject to the regulation, supervision and
examination of the OCC.
Bank of America and its affiliates have been active in the securitization
market since inception. Bank of America has sponsored publicly offered
securitization transactions since 1977. Bank of America and its affiliates have
been involved with the origination of auto loans, student loans, home equity
loans, credit card receivables, manufactured housing contracts, residential
mortgage loans and commercial mortgage loans, as well as less traditional asset
classes. Bank of America and its affiliates have also participated in a variety
of collateralized loan obligation transactions, synthetic securitizations, and
asset-backed commercial paper programs. Bank of America and its affiliates have
served as sponsors, issuers, dealers, and servicers in a wide array of
securitization transactions.
The Depositor's securitization program principally is used to fund Bank of
America's consumer real estate business unit's self-originated portfolio of
fully amortizing mortgage loans secured by first liens on one- to four-family
residential properties. The Depositor's securitization program may also include
mortgage loans originated through correspondent arrangements. While Bank of
America currently does not rely on securitization as a material funding source,
the Depositor's securitization program is a material funding source for Bank of
America's portfolio of consumer real estate mortgage loans similar to the
Mortgage Loans.
The table below sets forth the number and aggregate principal balance of
mortgage loans of the type which may be included in Trusts formed by the
Depositor, which were originated by Bank of America during the periods
indicated:
Twelve-Months Ended Six Months Ended
December 31, June 30,
------------------------------------------------ ----------------
2001 2002 2003 2004 2005 2006
Number 504,048 522,891 792,496 454,683 394,942 179,081
Aggregate Principal
Balance (inBillions) $76.5 $88.0 $131.1 $87.5 $86.8 $40.6
Bank of America serves as the Sponsor and, if specified in the applicable
prospectus supplement, the Servicer in the Depositor's securitization program,
in addition to owning all of the Depositor's equity. Banc of America Securities
LLC, which may act as an underwriter of Certificates, is an affiliate of Bank of
America and assists Bank of America and the Depositor in connection with the
selection of mortgage loans for various transactions. See "Method of
Distribution" in the applicable prospectus supplement.
Bank of America's headquarters and its executive offices are located at 101
South Tryon Street, Charlotte, North Carolina 28255, and the telephone number is
(704) 386-5478.
See "The Mortgage Loan Programs," "Servicing of the Mortgage Loans" and "The
Pooling Agreement" for more information about the Sponsor's solicitation and
underwriting criteria used to originate mortgage loans similar to the Mortgage
Loans and its material roles and duties in each securitization.
27
- --------------------------------------------------------------------------------
THE DEPOSITOR
- --------------------------------------------------------------------------------
Banc of America Mortgage Securities, Inc. (the "Depositor") was incorporated
in the State of Delaware on November 26, 2002 under the name "BA Residential
Securities, Inc." and filed a Certificate of Amendment of Certificate of
Incorporation changing its name to "Banc of America Mortgage Securities, Inc."
on December 4, 2002. The Depositor is a wholly-owned subsidiary of the Sponsor.
It is not expected that the Depositor will have any business operations other
than offering mortgage pass-through certificates and related activities.
The Depositor will have limited obligations and rights under each Pooling
Agreement after the Closing Date for any series, including, but not limited to,
repurchasing Mortgage Loans due to breaches of representations and warranties,
and repurchasing in the circumstances described under "The Pooling
Agreement--Termination; Optional Purchase of Mortgage Loans," all or a portion
of the Mortgage Loans.
The Depositor will maintain its principal executive office at 214 North
Tryon Street, Mail Code NC1-027-22-02, Charlotte, North Carolina 28255,
Attention: Senior Vice President, telephone number (704) 387 8239.
The Depositor and any director, officer, employee or agent of the Depositor
shall be indemnified by the Trust Estate and held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
the Pooling Agreement or the Certificates, other than any loss, liability or
expense related to any specific Mortgage Loan or Mortgage Loans and any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties under the Pooling Agreement or
by reason of reckless disregard of its obligations and duties under the Pooling
Agreement.
- --------------------------------------------------------------------------------
THE MORTGAGE LOAN PROGRAMS
- --------------------------------------------------------------------------------
Mortgage Loan Underwriting
The Depositor will purchase the Mortgage Loans from Bank of America, as the
Sponsor. The Mortgage Loans will have been either (i) originated by Bank of
America or (ii) purchased by Bank of America from various entities that either
originated the Mortgage Loans or acquired the Mortgage Loans pursuant to
mortgage loan purchase programs operated by these entities. The Mortgage Loans
will have been underwritten materially in accordance with one or more of the
following: (i) Bank of America's general underwriting standards set forth below
under "-- Bank of America General Underwriting Standards," (ii) Bank of
America's alternative underwriting standards set forth below under "--Bank of
America Alternative Underwriting Standards" or (iii) to the extent the Mortgage
Loans were originated by an entity other than Bank of America the underwriting
standards set forth in the applicable prospectus supplement, if material.
General
The underwriting standards used by mortgage loan originators are intended to
evaluate the mortgagor's credit standing and repayment ability and the value and
adequacy of the mortgaged property as collateral. The underwriting standards
used by originators other than Bank of America, unless such other originators
use standards materially similar to Bank of America's underwriting standards,
will be
28
described in the applicable prospectus supplement. The following paragraphs
describe Bank of America's underwriting standards.
Bank of America General Underwriting Standards
Origination Channels
--------------------
Bank of America originates mortgage loans (i) directly to consumers; (ii)
indirectly through brokers; and (iii) through other loan originators. Bank of
America's direct-to-consumer originations include mortgage loans made to:
o customers applying for a mortgage at one of Bank of America's banking
center locations;
o customers applying for a Bank of America mortgage via telephone;
o customers applying for a mortgage utilizing Bank of America's internet
site; and
o customers applying for a mortgage with one of Bank of America's retail
mortgage account executives, who obtain customers by networking with
realtors and builders in their local markets.
Bank of America also originates loans indirectly through its wholesale
channel where:
o the initial application is processed by an independent mortgage broker
approved to sell loans to Bank of America; or
o applications are processed and the mortgage loan is originated by
another entity and subsequently acquired by Bank of America after
closing.
The real estate lending processes for one- to four-family mortgage loans in
all origination channels follow standard procedures, designed to comply with
applicable federal, state and local laws and regulations.
The Application and Use of Credit Scoring
-----------------------------------------
Regardless of the channel in which the loan was originated, a mortgage
application is completed containing information that assists in evaluating the
mortgagor's credit standing, capacity to repay the loan and adequacy of the
mortgaged property as collateral for the loan. During the application process,
the applicant is required to authorize Bank of America to obtain a credit report
that summarizes the applicant's credit history with merchants and lenders and
any record of bankruptcy or prior foreclosure. This credit information may be
obtained from either a single credit repository or from up to three credit
repositories. The credit bureau inquiry also includes a request for the
applicant's Credit Score. "Credit Scores" are statistical credit scores obtained
by many mortgage lenders in connection with the loan application to help assess
a borrower's creditworthiness. Credit Scores are generated by models developed
by a third party and are made available to lenders through three national credit
bureaus, Experian (FICO), Equifax (Beacon) and TransUnion (Empirica). The models
were derived by analyzing data on consumers in order to establish patterns which
are believed to be indicative of the borrower's probability of default. A Credit
Score is based on a borrower's historical credit data, including, among other
things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience. Credit Scores range from approximately 300 to approximately 850,
with higher scores indicating an individual with a more favorable credit history
compared to an individual with a lower score. If the credit bureaus cannot
generate a Credit Score due to
29
insufficient information about an applicant, Bank of America will consider proof
of an applicant's alternative credit history, such as a history of consistent
rent and utility payments.
In addition to a Credit Score, Bank of America may obtain a Custom Mortgage
Score. In order to generate a Custom Mortgage Score, the applicant must have at
least one trade line on his or her credit report and also have a Credit Score.
The "Custom Mortgage Score" was developed on a population of mortgage loans
serviced by Bank of America and is designed to assess the likelihood that a
mortgage loan will become 60 days or more delinquent within two years of
application. The Custom Mortgage Score used by Bank of America will either have
been developed by Bank of America individually or with the assistance of a third
party. The Custom Mortgage Score requires a Credit Score and utilizes
information obtained from one of the three major credit bureaus. The credit
bureau used depends on the geographic location of the applicant's residence at
the time of application. Bank of America may evaluate a prospective borrower's
creditworthiness with either (i) a Credit Score, (ii) a Custom Mortgage Score or
(iii) a combination of a Credit Score and a Custom Mortgage Score.
Underwriting Evaluation by Automated Underwriting Decision Engine or
---------------------------------------------------------------------
Manual Underwriter
------------------
Each mortgage loan underwritten to Bank of America's general underwriting
standards is underwritten in accordance with guidelines established in Bank of
America's Product and Policy Guides (the "Product Guides"). These underwriting
standards applied by Bank of America in originating or acquiring mortgage loans
are intended to evaluate the applicants' repayment ability, credit standing, and
the adequacy of the mortgage property as collateral for the mortgage loan. The
underwriting standards as established in the Product Guides are continuously
updated to reflect prevailing conditions in the residential market, new mortgage
products, and the investment market for residential mortgage loans.
Each mortgage application is evaluated by either an automated underwriting
decision engine and/or a human underwriter to determine the appropriate credit
decision and documentation requirements for the loan transaction. The automated
underwriting decision engine may be an engine developed by an outside company
and updated by Bank of America risk management personnel to facilitate automated
decisions on Bank of America loan transactions. Alternatively, it may be an
external decision engine such as Fannie Mae's Desktop Underwriter(R) or Freddie
Mac's Loan Prospector(R) decision engines. If the loan is not automatically
approved or declined by the automated underwriting decision engine, it is
directed to an underwriter who evaluates the application against a set of
specific criteria. The underwriter may be an employee of the lender or may be an
individual performing underwriting on a contract basis through a third party
firm such as a mortgage insurance company.
Desktop Underwriter(R) is an automated underwriting system developed by
Fannie Mae for conventional conforming loans. Desktop Underwriter(R) indicates
the minimum income and asset verification, credit-related documentation and
other requirements necessary to complete processing of the loan file. These
requirements are based on the specific risk factors present in each loan file.
Bank of America utilizes Fannie Mae's Custom Desktop Underwriter(R) which allows
Bank of America's conditions and policies to display on a customized findings
report specific to it.
Loan Prospector(R) is an automated underwriting system developed by Freddie
Mac for conventional conforming loans. Loan Prospector(R) indicates the minimum
income and asset verification, credit-related documentation and other
requirements necessary to complete processing of the loan file. These
requirements are based on the specific risk factors present in each mortgage
application.
Either the automated underwriting decision engine or the underwriter
evaluates the application information to the guidelines for the product type
under which the applicant has applied. As part of the underwriting evaluation,
the Loan-to-Value Ratio is calculated. The "Loan-to-Value Ratio" is the
30
percentage equal to (i) the principal balance of the mortgage loan at
origination divided by (ii) the lesser of (a) the appraised value of the related
mortgaged property determined in an appraisal obtained at origination of the
mortgage loan or an automated valuation model or tax assessed value (if
permitted by the applicable product type) and (b) except for mortgage loans made
for refinancing purposes, the sales price for the mortgaged property. In
addition to evaluating the Loan-to-Value Ratio, the automated underwriting
decision engine or human underwriter will also evaluate the applicant's credit
history and/or Credit Score and/or Custom Mortgage Score, the amount of the
applicant's debts (including proposed housing payment and related expenses such
as property taxes and hazard insurance) to his or her gross monthly income, the
intended occupancy of the subject property, the property type, and the purpose
of the loan transaction to determine whether the mortgage loan generally meets
the guidelines established for the program under which the applicant is
applying. If there are multiple applicants on a loan transaction, Bank of
America generally utilizes the Credit Score and/or Custom Mortgage Score
associated with the highest wage-earner on the transaction as the representative
score(s) for the transaction. The automated underwriting decision engine and/or
the underwriter may utilize compensating factors to offset one or more features
of the loan transaction that may not specifically comply with the product
guidelines. Therefore, the application of the underwriting guidelines for a
product type by either an underwriter or an automated decision engine does not
imply that each specific standard was satisfied individually. A loan is
considered to be underwritten in accordance with a given set of guidelines if,
based on an overall qualitative evaluation, the loan is in substantial
compliance with such underwriting guidelines.
As part of the underwriting evaluation, the applicant's "Debt-to-Income
Ratio" is calculated as the amount of the monthly debt obligations (including
the proposed new housing payment and related expenses such as property taxes and
hazard insurance) to his or her gross monthly income. Bank of America's
Debt-to-Income Ratio guidelines are based on the loan instrument, loan term,
Credit Score, Loan-to-Value Ratio, property type, and occupancy characteristics
of the subject loan transaction. Bank of America permits ratios to exceed
guidelines when the applicant has documented compensating factors for exceeding
ratio guidelines such as documented excess funds in reserves after closing, a
history of making a similar sized monthly debt payment on a timely basis,
substantial residual income after monthly obligations are met, evidence that
ratios will be reduced shortly after closing when a financed property under
contract for sale is sold, or additional income has been verified for one or
more applicants that is ineligible for consideration as qualifying income.
For certain mortgage loans, underwriting may be based on data obtained by
third parties that are involved at various stages in the mortgage origination or
acquisition process. This typically occurs under circumstances in which loans
are subject to more than one approval process, as when correspondents, certain
mortgage brokers or similar entities that have been approved by Bank of America
to underwrite loans on its behalf, or independent contractors hired by these
parties to perform underwriting services on Bank of America's behalf, make
initial determinations as to the consistency of loans with established
underwriting guidelines. The underwriting of mortgage loans acquired from
another lender generally relies on the representations from the originating
lender that the mortgage loans were underwritten in accordance with agreed upon
underwriting standards that are materially similar to Bank of America's. In the
event these standards differ materially from those set forth in this prospectus,
the related prospectus supplement will describe the applicable standards.
Generally, Bank of America conducts a post-purchase review of a sampling of all
mortgage loans acquired from another lender to determine whether agreed upon
requirements were met. In order to be eligible to sell mortgage loans under a
delegated underwriting arrangement, the lender must meet certain requirements
including, among other things, certain quality, operational and financial
guidelines.
Certain of the mortgage loans may be purchased by Bank of America in
negotiated transactions, and these negotiated transactions may be governed by
contractual agreements. The contractual agreements may provide the commitment by
Bank of America to accept the delivery of a certain dollar amount of
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mortgage loans over a specific period of time; this commitment may allow for the
delivery of mortgage loans one at a time or in multiples as aggregated by the
seller. Many of the contractual agreements allow the delegation of all
underwriting functions to the seller, who will represent that the mortgage loans
have been originated in accordance with underwriting standards agreed to by Bank
of America. In the event these standards differ materially from those set forth
in this prospectus, the related prospectus supplement will describe such
standards.
Loans with Secondary Financing
------------------------------
First lien purchase money mortgage loans may have secondary financing to the
borrower contemporaneously with the origination of the first lien mortgage loan.
First lien refinance transactions may have existing secondary financing with the
applicant that is resubordinated to the new first lien transaction or may have
new secondary financing originated simultaneously with the first lien mortgage.
The secondary financing may or may not be provided by Bank of America. The Total
Loan-to-Value Ratio and Combined Loan-to-Value Ratio are evaluated on each loan
with subordinate financing. The "Total Loan-to-Value Ratio" is the principal
balance of the first lien mortgage loan at origination plus any secondary
financing that was drawn upon at that time divided by the value of the mortgaged
property. The "Combined Loan-to-Value Ratio" is the principal balance of the
first lien mortgage loan at origination plus the total amount of available
secondary financing (including any unused amount on a home equity line of
credit) divided by the value of the mortgaged property. A mortgage loan with
secondary financing is evaluated to determine if the Total Loan-to-Value Ratio
and Combined Loan-to-Value Ratio meet the requirements for the program under
which the application is submitted or if the application contains compensating
factors to warrant an exception to the applicable guidelines. Some applicants
request a first lien mortgage loan with a Loan-to-Value Ratio of 80% with a
simultaneously funded second lien transaction in order to avoid the cost of
primary mortgage insurance associated with first lien mortgage loans with
Loan-to-Value Ratios exceeding 80%.
Documentation
-------------
In assessing an applicant, Bank of America requires supporting documentation
(or other verification) for all material data provided by the applicant, such as
income and source of down payment, unless the applicant qualifies for one of the
Accelerated Processing Programs discussed below.
Under Bank of America's standard documentation process (the "Standard
Documentation Process") the following verifications are required: a salaried
applicant's income is verified by either having the applicant provide copies of
the previous year's federal withholding form (IRS W-2) and a current payroll
earnings statement or by sending a verification of employment form to the
applicant's employer. A verification of employment form asks the employer to
report the applicant's length of employment with the employer, the current
salary and an indication as to whether it is expected that the applicant will
continue to be employed in the future. A self-employed applicant is required to
provide copies of tax returns for the prior two years. Bank of America verifies
down payment funds by (i) obtaining bank or other financial statements covering
the most recent 60-day period confirming the existence of these funds, (ii)
determining electronically that these funds are on deposit with Bank of America,
(iii) obtaining documentation that these funds are to be obtained from a gift or
sale of assets or (iv) asking the applicant's financial institution to complete
a verification of deposit form detailing asset information. Asset verifications
are not required on refinance transactions.
If the applicant lacks a traditional credit history, then the loan approval
may be conditioned upon the documentation of an acceptable alternative credit
history consisting of at least four references showing timely payment of
utilities, insurance premiums or rent, or other alternative credit references in
the prior twelve months.
32
In order to qualify for Bank of America's general underwriting standards,
applicants must be willing to have the income and assets stated on their
application verified. Applicants who have indicated that they do not wish to
have their income and/or assets verified are directed to other Bank of America
programs outlined in "--Bank of America Alternative Underwriting Standards"
below. While the applicants under Bank of America's general underwriting
standards are willing to have income and asset information stated in the
application verified, the level of verifications required (if any) are based on
the applicant's credit profile, requested loan terms, and whether the applicant
has an existing loan serviced by Bank of America that is being refinanced with
the new loan transaction. Bank of America matches documentation requirements on
mortgage loans to the overall risk parameters of the loan file under various
"Accelerated Processing Programs" such as: (i) Rapid; (ii) PaperSaver(R) (also
known as Threshold); (iii) Stated Income, Stated Asset; (iv) All-Ready Home; (v)
Mortgage Rewards; (vi) No Ratio or (vii) Stated Income.
Under Bank of America's "Rapid" documentation program, only the most recent
pay stub (if salaried) or first two pages of the most recent tax return (if
self-employed) of an applicant is required for income verification and only the
most recent bank statement of an applicant is required for asset verification on
purchase transactions if the applicant meets the Total Loan-to-Value Ratio and
Credit Score requirements for that program.
Under Bank of America's "PaperSaver(R)" documentation program, verification
of the applicant's stated income and stated assets is not requested (with the
exception of self-employed applicants who are required to sign the IRS form
4506-T (Request for Transcript of Tax Returns)) if the applicant meets the
designated Credit Score, Custom Mortgage Score, Loan-to-Value Ratios and other
eligibility requirements. An applicant with a designated higher Credit Score and
designated higher Custom Mortgage Score which together indicate a favorable
credit history is eligible for PaperSaver(R) documentation. The PaperSaver(R)
documentation program has certain limitations relating to occupancy, property
type, purpose and principal balance.
Under Bank of America's "Stated Income, Stated Asset" documentation program,
which is only available through the wholesale channel, income or asset
verifications are not requested from applicants if they meet the Total
Loan-to-Value Ratio, Credit Score and other eligibility requirements for the
program. Although the Stated Income, Stated Asset program permits applicants to
simply state their income and assets without verification, all applicants are
required to sign an IRS form 4506 permitting income verification from tax return
data if the file is selected as part of Bank of America's quality assurance
audit.
Bank of America may originate new mortgage loans under its "All-Ready Home"
mortgage refinance program or its "Mortgage Rewards" refinance program. Under
each of these programs, Bank of America will pay certain closing costs normally
paid by the customer. Under these programs, a borrower whose current mortgage
loan is serviced by Bank of America does not need to provide income or asset
verification documentation if the current mortgage loan has had no 30 day or
more delinquent payments in the previous twelve months (or since origination if
less than twelve months). In addition, Bank of America typically requires only a
drive-by appraisal rather than an interior inspection appraisal. Because these
programs involve the refinancing of mortgage loans that Bank of America
originally underwrote, Bank of America will not apply any significant borrower
credit or property underwriting standards (other than a minimum Credit Score).
Mortgage Loans initially included in the Trust Estate for a particular series
may have been the subject of a refinancing described above. To the extent a
borrower becomes eligible for the All-Ready Home or Mortgage Rewards program
after his or her Mortgage Loan has been included in a particular Trust Estate,
his or her Mortgage Loan could be more easily refinanced, resulting in a
prepayment of the Mortgage Loan. See "Prepayment and Yield
Considerations--Weighed Average Life of Certificates."
33
For a description of the No Ratio and Stated Income programs, see "--Bank of
America Alternative Underwriting Standards" below.
In addition, mortgage applications evaluated by Desktop Underwriter(R) or
Loan Prospector(R) follow the Standard Documentation Process unless the
applicant's credit profile indicates a more favorable credit history, in which
case the mortgage loan may be originated with the applicant furnishing only a
recent pay stub showing year-to-date earnings (if salaried) or the first two
pages of the most recent tax return (if self-employed) for income verification
and only the most recent bank statement for asset verification.
Collateral Valuation
--------------------
Bank of America conducts a valuation of the mortgaged property as collateral
for each mortgage loan. This collateral valuation may be determined by (i) an
interior inspection appraisal, (ii) a tax assessed value, (iii) a desktop
appraisal, (iv) a drive-by appraisal, (v) an automated valuation model, or (vi)
reference to the collateral valuation obtained in connection with the
origination of the previous loan if the loan is a refinance of a mortgage loan
that was previously serviced by Bank of America. An interior inspection
appraisal is an appraisal report based on an interior inspection of the subject
property. A tax assessed value is a factor applied to the tax value recorded for
the subject property that reflects the general relationship between the assessed
value and the market value of the property. These factors are established for
each county by a third party vendor. A tax assessed value also does not entail
any physical inspection of the subject property. A desktop appraisal is a report
completed by a certified/licensed appraiser utilizing a sales comparison
analysis from a local multiple listing service without conducting a physical
inspection of the property. A drive-by appraisal report is a limited, summary
appraisal report based on an exterior inspection of the property and comparable
sales by a certified/licensed appraiser. An automated valuation model is an
electronically generated valuation that utilizes real estate information such as
property characteristics, market demographics, sales price data, and regional
trends to calculate a value for a specific property. Bank of America utilizes
the automated valuation models of several vendors. An automated valuation model
does not entail any physical inspection of the subject property. In addition, no
updated appraisal valuation may be performed if the loan is a refinance of a
loan that was previously serviced by Bank of America and the valuation from the
time of origination of the loan being refinanced reflects adequate value for the
mortgaged property.
In certain instances, the interior, desktop or drive-by appraisal reports
may be conducted by an employee of Bank of America or an affiliate. The
appraisal report, however, may be performed by an independent appraiser
contracted by Bank of America or an affiliate of Bank of America on direct
channel originations. Appraisal reports on indirect channel originations are
generally performed by an appraiser selected by the originating lender but
indirect channel appraisers cannot be performed by appraisers that have been
deemed to be ineligible to perform appraisals by Bank of America.
Appraisers may note on their appraisal any environmental hazard the
appraiser becomes aware of while appraising the property. EPA Lead Paint
requirements for notice and an inspection period are standard for properties
built before 1978. Properties containing other hazards may be eligible for
financing if the appraiser can value the property showing the impact of the
hazard, and the borrower executes a "hold harmless" letter to the lender.
Environmental hazards are not noted on collateral valuations where no physical
inspection of the property takes place, such as on loans where the collateral
valuation is conducted by an automated valuation model or tax assessed value.
Appraisers only note environmental hazards on a desktop appraisal if they
generally are known in the area.
Certain states have "anti-deficiency" laws which, in general, require
lenders providing credit on one to four family properties to look solely to the
property for repayment in the event of foreclosure. See "Certain Legal Aspects
of the Mortgage Loans--Anti-Deficiency Legislation, the Bankruptcy Code and
34
Other Limitations on Lenders" in this prospectus. The underwriting guidelines in
all states (including anti deficiency states) require that the value of the
property being financed, as indicated by the collateral valuation, currently
supports and is anticipated to support in the future the outstanding loan
balance and provides sufficient value to mitigate the effects of adverse shifts
in real estate values, although there can be no assurance that the value will
support the outstanding loan balance in the future.
Flood Determinations and Hazard Insurance
-----------------------------------------
Each mortgage loan is evaluated to determine if the subject property is
located in a federal flood zone. If the property is located in a flood zone,
then flood insurance is required on the loan transaction with an amount of
coverage that meets or exceeds federal law requirements. Generally, evidence of
acceptable hazard insurance coverage on the subject property is a requirement
for loan approval. This documentation, however, is not required if the mortgage
loan is a refinance of an existing Bank of America serviced loan transaction and
hazard insurance was documented for the previous loan transaction or the
mortgage loan is originated under a program that does not require the review of
evidence of hazard insurance.
Mortgage Insurance and Title
----------------------------
Mortgage loans originated with Loan-to-Value Ratios in excess of 80% may be
covered by primary mortgage insurance. Except as noted below in connection with
certain refinance transactions, mortgage loans will generally be covered by an
appropriate standard form American Land Title Association ("ALTA") title
insurance policy, or a substantially similar policy or form of insurance
acceptable to Fannie Mae or Freddie Mac, or if the related mortgaged property is
located in a jurisdiction where these policies are generally not available, an
opinion of counsel of the type customarily rendered in these jurisdiction in
lieu of title insurance will be obtained instead. If required, the title
insurance policy may include environmental protection lien endorsement coverage
(ALTA Form 8.1 or its equivalent) excepting only Superliens which may arise
after the loan is made. See "Certain Legal Aspects of the Mortgage
Loans--Environmental Considerations" in this prospectus.
Mortgage loans on refinance transactions generally do not contain title
insurance policies. Title searches are often performed on these refinance
transactions in lieu of obtaining a title insurance policy. A title search is a
limited search of a specified parcel of land summarizing information concerning
current owner(s) and all judgments, mortgages, and tax obligations filed.
Borrowers Protection Plan(R)
----------------------------
Bank of America's Borrowers Protection Plan(R) ("BPP") is a
debt-cancellation contract between the borrower and Bank of America. This
optional plan can cancel a borrower's monthly principal and interest payment for
up to a total of twelve months if the borrower loses his or her job or becomes
disabled. Additionally, the outstanding principal balance of a mortgage loan
with BPP will be cancelled if the borrower dies as a result of an accident.
While Bank of America will cancel payment of the principal, interest and BPP
fees, the borrower will still be responsible for the payment of taxes and
insurance. Bank of America will be obligated to pay to the applicable Trust any
amounts cancelled due to BPP on a Mortgage Loan.
The following three protection options are available in a BPP contract: (i)
disability, involuntary unemployment and accidental death; (ii) involuntary
unemployment and accidental death or (iii) disability and accidental death.
35
The benefit period ranges from six to twelve months. A borrower may elect
single (i.e., one borrower who is named in the mortgage note) or joint coverage
(i.e., any two of the borrowers named in the mortgage note).
BPP is only available on certain first-lien fixed-rate and adjustable-rate
mortgage loan products and programs. The term of protection is the lesser of the
loan term and ten years. Upon expiration, BPP is discontinued and the monthly
BPP fee is no longer assessed. If the borrower has an active BPP claim prior to
the expiration date, however, loan protection can extend beyond the expiration
date. BPP is optional and the borrower's choice regarding BPP is not considered
when evaluating the loan request. The borrower must select the BPP plan prior to
loan closing.
Bank of America Alternative Underwriting Standards
In addition to the general underwriting standards described above under
"--Bank of America General Underwriting Standards," Bank of America provides for
certain alternative underwriting programs for qualified borrowers, some of which
enable the applicant to request reductions in the verification documentation
required for the mortgage loan.
Bank of America's "Stated Income Program" provides applicants the
ability to request that income stated on the loan application not be verified.
The Debt-to-Income Ratio calculation used by the underwriter to evaluate the
applicant's capacity for the loan is based on income the applicant discloses on
the application. Under the Stated Income Program, applicants who have steady
employment and complex sources of income or rapidly expanding incomes may be
eligible. The Stated Income Program is designed to meet the needs of applicants
with a traditional credit history who meet the minimum Credit Score requirement
of the program. A verbal verification of employment confirming the applicant's
date of employment, job status and title is required. While income information
is not provided, the applicant must continue to provide documentation of assets
used for down payment, closing costs, and reserves on purchase transactions.
Bank of America's "No Ratio Loan Program" provides applicants with a
minimum Credit Score and a sufficient asset base the ability to obtain mortgage
loans with no income verification or Debt-to-Income Ratio calculation. Under
this program, the applicant does not state his or her income at the time of loan
application. The applicant must evidence a propensity and capacity to save and
to maintain stable employment, defined as a minimum of two years in the same
line of work. A verbal verification of employment information provided in the
application, without reference to income, takes place under this program. While
income information is not provided, the applicant must continue to provide
documentation of his or her assets used for down payment, closing costs, and
reserves on purchase transactions.
Bank of America's "100% LTV Program" provides applicants the ability to
obtain a mortgage loan with no down payment. The 100% LTV Program is only
available if the primary borrower has a minimum Credit Score. The 100% LTV
Program also permits Loan-to-Value Ratios of up to 103% (including closing costs
and prepaid items in an amount up to 3% of the value of the mortgaged property).
Under this program, Bank of America uses the Standard Documentation Process.
Bank of America's "97% LTV Program" provides applicants with the
opportunity to obtain low down payment mortgage loans. This program allows an
applicant to obtain financing for a mortgage loan by requiring only a 3% cash
down payment from the applicant's own funds. The 97% LTV Program is only
available if the primary borrower has a minimum Credit Score. The 97% LTV
Program is a fully amortizing 30-year fixed-rate mortgage that is available on
owner-occupied principal residences only.
36
This program is available on purchase and rate or term refinance transactions.
Under this program, Bank of America uses the Standard Documentation Process.
Bank of America's "Condominium Hotel Loan Program" provides applicants
the ability to purchase a unit in a Condominium Hotel. The Condominium Hotel
Loan Program offers a fully amortizing 15-year or 30-year fixed-rate mortgage
loan that is available on a primary residence or second home. The Condominium
Hotel Loan Program is only available if the primary borrower has a minimum
Credit Score. Condominium Hotel Mortgage Loans are available on purchase and
rate or term refinance transactions. Under this program, Bank of America uses
the Standard Documentation Process.
Bank of America's "Non-Resident Alien Loan Program" provides financing
to non-resident aliens to purchase or refinance second home properties within
the United States. Applicants without a United States credit history must
document an acceptable credit history within their primary country of origin.
Under this program, Bank of America uses the Standard Documentation Process.
Bank of America's "80/20 Program" provides applicants with an 80%
Loan-to-Value Ratio first lien mortgage that is funded simultaneously with a 20%
Loan-to-Value Ratio second lien mortgage so that the Total Loan-to-Value Ratio
is 100%. By structuring loans in such a manner, the applicant is able to avoid
the cost of primary mortgage insurance on the transaction. The 80/20 Program is
only available if the primary borrower has a minimum Credit Score. Bank of
America may originate both the first and second lien transactions under an 80/20
transaction or the second lien may be originated by another lender. Under this
program, Bank of America uses the Standard Documentation Process.
Representations and Warranties
In connection with the transfer of the Mortgage Loans related to any series
by the Depositor to the applicable Trust, the Depositor will generally make
certain representations and warranties regarding the Mortgage Loans. If so
indicated in the applicable prospectus supplement, the Depositor may, rather
than itself making representations and warranties, cause the representations and
warranties made by an originator to the Sponsor in connection with the purchase
of Mortgage Loans by the Sponsor to be assigned to the Trust Estate. In these
cases, these representations and warranties may have been made as of a date
prior to the date of execution of the Pooling Agreement. The representations and
warranties made or assigned to the Trust (whether made by the Depositor or
another party) will generally include the following with respect to the Mortgage
Loans, or each Mortgage Loan, as the case may be: (i) the schedule of Mortgage
Loans is correct in all material respects at the date or dates on which the
information is furnished as specified in the schedule; (ii) immediately prior to
the transfer and assignment contemplated by the Pooling Agreement, the Depositor
is the sole owner and holder of the Mortgage Loan, free and clear of any and all
liens, pledges, charges or security interests of any nature and has full right
and authority to sell and assign the same; (iii) to the knowledge of the
representing party, no Mortgage Note or Mortgage is subject to any right of
rescission, set-off, counterclaim or defense; (iv) either (a) the Mortgage Loan
is covered by a title insurance policy, (b) a title search has been done showing
no lien, subject to certain limited exceptions, senior to the first lien of the
Mortgage or (c) in the case of any Mortgage Loan secured by a Mortgaged Property
located in a jurisdiction where title insurance policies are generally not
available, an opinion of counsel of the type customarily rendered in these
jurisdictions in lieu of title insurance is instead received; (v) subject to
certain limited exceptions, the Mortgage is a valid, subsisting and enforceable
first lien on the related Mortgaged Property; (vi) the Mortgaged Property is
undamaged by water, fire, earthquake or earth movement, windstorm, flood,
tornado or similar casualty (excluding casualty from the presence of hazardous
wastes or hazardous substances, as to which no representation is made), so as to
affect adversely the value of the Mortgaged Property as security for the
Mortgage Loan or the use for which the premises were intended; (vii) all
payments required to be made up to the Due Date immediately preceding the
Cut-off Date for the
37
Mortgage Loan under the terms of the related Mortgage Note have been made and,
except to the extent specified in the applicable prospectus supplement, no
Mortgage Loan had more than one delinquency in the 12 months preceding the
Cut-off Date; and (viii) any and all requirements of any federal, state or local
law with respect to the origination of the Mortgage Loans including, without
limitation, usury, truth-in-lending, real estate settlement procedures, consumer
credit protection, all applicable predatory and abusive lending laws, equal
credit opportunity or disclosure laws applicable to the Mortgage Loans have been
complied with.
No representations or warranties will be made by the Depositor or any other
party as to the environmental condition of any Mortgaged Property including the
absence, presence or effect of hazardous wastes or hazardous substances on the
Mortgaged Property or any effect from the presence or effect of hazardous wastes
or hazardous substances on, near or emanating from the Mortgaged Property. See
"Certain Legal Aspects of the Mortgage Loans--Environmental Considerations."
See "The Pooling Agreement--Assignment of Mortgage Loans" for a description
of the limited remedies available in connection with breaches of the foregoing
representations and warranties. In addition to those remedies, in the case of a
breach of the representation that a Mortgage Loan at the time of its origination
complied with any applicable federal, state or local predatory or abusive
lending laws, the Depositor (or other party making this representation) will be
required to pay any costs or damages incurred by the Trust as a result of the
violation of these laws.
- --------------------------------------------------------------------------------
DESCRIPTION OF THE CERTIFICATES
- --------------------------------------------------------------------------------
General
A separate common law trust (each, a "Trust") will serve as the "Issuing
Entity" and issue each series of certificates (the "Certificates"). Each series
of Certificates will include one or more classes (each, a "Class"). Any Class of
Certificates may consist of two or more non-severable Components, each of which
may exhibit any of the principal or interest payment characteristics described
in this prospectus for a Class of Certificates. A series may include one or more
Classes of Certificates entitled, to the extent of funds available, to (i)
principal and interest distributions from the related Mortgage Loans, (ii)
principal distributions, with no interest distributions, (iii) interest
distributions, with no principal distributions or (iv) other distributions as
are described in the applicable prospectus supplement.
Each series of Certificates will be issued on the date specified in the
applicable prospectus supplement (the "Closing Date") pursuant to a pooling and
servicing agreement (the "Pooling Agreement") among the Depositor, the
Servicer(s) (or, if applicable, the Master Servicer), the Trustee (and, if
applicable, a securities administrator) named in the applicable prospectus
supplement. An illustrative form of Pooling Agreement has been filed as an
exhibit to the registration statement of which this prospectus is a part. The
following summaries describe material provisions common to the Certificates and
to each Pooling Agreement. The summaries are subject to, and are qualified by
reference to, the further material provisions of the Pooling Agreement for each
specific series of Certificates, as described in the applicable prospectus
supplement.
Beginning with the month following the month in which the Cut-off Date
occurs for a series of Certificates, distributions to the holders of
Certificates (the "Certificateholders") (other than the final distribution in
retirement of the Certificates) will be made on the Distribution Date to the
persons in whose names the Certificates are registered at the close of business
on the dated specified in the related prospectus supplement (the "Record Date")
(which in the case of Book-Entry Certificates will be Cede & Co. as nominee for
DTC) by check mailed to the address of the person in the certificate register,
except
38
that, for any Certificateholder, distributions will be made by wire transfer in
immediately available funds, provided that the Trustee or the Paying Agent
acting on behalf of the Trustee shall have been furnished with appropriate
wiring instructions not less than seven business days prior to the related
Distribution Date. The final distribution in retirement of Certificates will be
made only upon presentation and surrender of the Certificates at the office or
agency maintained by the Trustee or other entity for that purpose, as specified
in the final distribution notice to Certificateholders.
Each series of Certificates will represent ownership interests in the
related Trust Estate. One or more elections may be made to treat the Trust
Estate (or one or more segregated pools of assets of the Trust Estate) for a
series of Certificates as one or more "real estate mortgage investment conduits"
(each, a "REMIC"). If a REMIC election is made, the related series will consist
of one or more Classes of Certificates that will represent "regular interests"
within the meaning of Code Section 860G(a)(1) (these Class or Classes
collectively referred to as the "Regular Certificates") and one Class of
Certificates that will be designated as the "residual interest" within the
meaning of Code Section 860G(a)(2) (the "Residual Certificate") representing the
right to receive distributions as specified in the prospectus supplement for
that series. See "Federal Income Tax Consequences."
The Depositor may sell certain Classes of the Certificates of a series,
including one or more Classes of Subordinate Certificates, in privately
negotiated transactions exempt from registration under the Securities Act of
1933, as amended (the "Securities Act"). Alternatively, if specified in a
prospectus supplement relating to those Subordinate Certificates, the Depositor
may offer one or more Classes of the Subordinate Certificates of a series by
means of this prospectus and that prospectus supplement.
Definitive Form
Certificates of a series that are issued in fully-registered, certificated
form are referred to as "Definitive Certificates." Distributions of principal
of, and interest on, the Definitive Certificates will be made directly to
holders of Definitive Certificates. The Definitive Certificates of a series
offered by this prospectus and by means of the applicable prospectus supplements
will be transferable and exchangeable at the office or agency maintained by the
Trustee or other entity for that purpose set forth in the applicable prospectus
supplement. No service charge will be made for any transfer or exchange of
Definitive Certificates, but the Trustee or another entity may require payment
of a sum sufficient to cover any tax or other governmental charge in connection
with a transfer or exchange.
In the event that an election or multiple elections are made to treat the
Trust Estate (or one or more segregated pools of assets of the Trust Estate) as
one or more REMICs, the Residual Certificate will be issued as a Definitive
Certificate. No legal or beneficial interest in all or any portion of any
"residual interest" may be transferred without the receipt by the transferor and
the Trustee of an affidavit signed by the transferee stating, among other
things, that the transferee (i) is not a disqualified organization within the
meaning of Code Section 860E(e) or an agent (including a broker, nominee or
middleman) of a disqualified organization and (ii) understands that it may incur
tax liabilities in excess of any cash flows generated by the residual interest.
Further, the transferee must state in the affidavit that it (a) historically has
paid its debts as they have come due, (b) intends to pay its debts as they come
due in the future and (c) intends to pay taxes associated with holding the
residual interest as they become due. The transferor must certify to the Trustee
that, as of the time of the transfer, it has no actual knowledge that any of the
statements made in the transferee affidavit are false and no reason to know that
the statements made by the transferee pursuant to clauses (a), (b) and (c) of
the preceding sentence are false. See "Federal Income Tax Consequences--Federal
Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Tax-Related Restrictions on Transfer of Residual Certificates."
39
Book-Entry Form
Persons acquiring beneficial ownership interests ("Beneficial Owners") in
the Certificates issued in book-entry form (the "Book-Entry Certificates") will
hold their Certificates through DTC in the United States, or Clearstream or
Euroclear (in Europe) if they are participants of those systems (the
"Participants"), or indirectly through organizations which are participants in
those systems (the "Indirect Participants"). Each Class of the Book-Entry
Certificates of a series initially will be represented by one or more physical
certificates registered in the name of Cede & Co., as nominee of DTC, which will
be the "holder" or "Certificateholder" of those Certificates, as those terms are
used in this prospectus and the applicable prospectus supplement for a series.
No Beneficial Owner of a Book-Entry Certificate will be entitled to receive a
Definitive Certificate representing that person's interest in the Book-Entry
Certificate, except as set forth below. Unless and until Definitive Certificates
are issued under the limited circumstances described below, all references to
actions taken by Certificateholders or holders shall, in the case of the
Book-Entry Certificates, refer to actions taken by DTC upon instructions from
its DTC Participants, and all references in this prospectus and the applicable
prospectus supplement for a series to distributions, notices, reports and
statements to Certificateholders or holders shall, in the case of the Book-Entry
Certificates, refer to distributions, notices, reports and statements to DTC or
Cede & Co., as the registered holder of the Book-Entry Certificates, as the case
may be, for distribution to Beneficial Owners in accordance with DTC procedures.
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 those positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for Clearstream and
JPMorgan Chase Bank, National Association will act as depositary for Euroclear
(in those capacities, individually the "Relevant Depositary" and collectively
the "European Depositaries"). Investors may hold beneficial interest in the
Book-Entry Certificates in minimum denominations of $1,000.
The 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 (each, a "Financial Intermediary") that maintains the
beneficial owner's account for that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry 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 Book-Entry Certificates from the Trustee through DTC and
Participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and Indirect Participants with whom Beneficial Owners have accounts
for their Book-Entry Certificates are similarly required to make book-entry
transfers and receive and transmit these distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess certificates representing their respective interests in the Book-Entry
Certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interest.
Certificateholders will not receive or be entitled to receive certificates
representing their respective interests in the Book-Entry Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificateholders who are not Participants may
transfer
40
ownership of Book-Entry Certificates only through Participants and Indirect
Participants by instructing Participants and Indirect Participants to transfer
Book-Entry Certificates, by book-entry transfer, through DTC, for the account of
the purchasers of the Book-Entry Certificates, which account is maintained with
their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Book-Entry Certificates will be
executed through DTC and the accounts of the respective 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 Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. These credits or any transactions in
securities settled during this processing will be reported to the relevant
Euroclear or Clearstream Participants on that following 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 "--Certain U.S. Federal Income Tax
Documentation Requirements" below and "Federal Income Tax Consequences--Federal
Income Tax Consequences for REMIC Certificates--Taxation of Certain Foreign
Investors" and "--Backup Withholding."
Transfers between Participants will occur in accordance with the 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
accordance with the Rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, these cross-market
transfers will require delivery of instructions to the relevant European
international clearing system by the counterparty in the system in accordance
with its rules and procedures and within 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 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 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 the Rules, as in effect from time to time.
Clearstream International, a Luxembourg limited liability company, was
formed in January 2000 through the merger of Cedel International and Deutsche
Boerse Clearing.
41
Clearstream is registered as a bank in Luxembourg and is subject to
regulation by the Luxembourg Monetary Authority, which supervises Luxembourg
banks.
Clearstream holds securities for its Participants and facilitates the
clearance and settlement of securities transactions by electronic book-entry
transfers between their accounts. Clearstream provides various services,
including safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream also deals with domestic securities markets in several countries
through established depository and custodial relationships. Clearstream has
established an electronic bridge with Euroclear Bank S.A./N.V. (which operates
Euroclear) as the Euroclear operator in Brussels to facilitate settlement of
trades between systems. Clearstream currently accepts over 200,000 securities
issues on its books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 2,500 customers located in over 80 countries, including all major
European countries, Canada and the United States. Indirect access to Clearstream
is available to other institutions which clear through or maintain custodial
relationship with an account holder of Clearstream.
The Euroclear System was created in 1968 to hold securities for its
Participants and to clear and settle transactions between Euroclear Participants
through simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. Transactions may be
settled in a variety of currencies, including United States dollars. Euroclear
provides various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by Euroclear Bank S.A./N.V. (the "Euroclear Operator"). All operations
are conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator.
Euroclear plc establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
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.
These terms and conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear, and receipts of
payments with respect to securities in Euroclear. All securities in Euroclear
are held on a fungible basis without attribution of specific certificates to
specific securities clearance accounts. The Euroclear Operator acts under the
terms and conditions of Euroclear 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 Cede & Co., as nominee of DTC. DTC will be
responsible for crediting the amount of these distributions to the accounts of
the applicable DTC Participants in accordance with DTC's normal procedures. Each
DTC Participant will be responsible for disbursing these distributions to the
Beneficial Owners of the Book-Entry Certificates that it represents and to each
Financial Intermediary for which it acts as agent. Each Financial Intermediary
will be responsible for disbursing funds to the Beneficial Owners of the
Book-Entry Certificates that it represents.
42
Under a book-entry format, Beneficial Owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since payments will be
forwarded by the Trustee to Cede & Co. Distributions with respect to
Certificates held through Clearstream or Euroclear will be credited to the cash
accounts of Clearstream Participants or Euroclear Participants in accordance
with the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. These distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Federal
Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Certain Foreign Investors" and"--Backup Withholding."
Because DTC can only act on behalf of DTC Participants, the ability of a
Beneficial Owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the depository system, or otherwise take actions regarding
their Book-Entry Certificates, may be limited due to the lack of physical
certificates for their Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of the
Book-Entry Certificates in the secondary market since certain potential
investors may be unwilling to purchase Certificates for which they cannot obtain
physical certificates.
DTC has advised the Depositor that, unless and until Definitive Certificates
are issued, DTC will take any action the holders of the Book-Entry Certificates
are permitted to take under the Pooling Agreement only at the direction of one
or more DTC Participants to whose DTC accounts the Book-Entry Certificates are
credited, to the extent that these actions are taken on behalf of Financial
Intermediaries whose holdings include the Book-Entry Certificates. Clearstream
or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Certificateholder under the Pooling Agreement on
behalf of a Clearstream Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to the ability of the
Relevant Depositary to effect these actions on its behalf through DTC. DTC may
take actions, at the direction of the related Participants, with respect to some
Book-Entry Certificates which conflict with actions taken with respect to other
Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
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 the Depositor or the Trustee is
unable to locate a qualified successor or (b) in the case of Certificates of a
series that receive distributions pursuant to request or random lot, if pro rata
distributions cannot be made through the facilities of DTC.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee will be required to notify the applicable 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 those Definitive Certificates as
Certificateholders under the Pooling Agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among
participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform these procedures and these procedures may be
discontinued at any time.
In the event of the insolvency of DTC, a DTC Participant or an Indirect DTC
Participant in whose name Book-Entry Certificates are registered, the ability of
the Beneficial Owners of the Book-Entry Certificates to obtain timely payment
and, if the limits of applicable insurance coverage by the Securities Investor
Protection Corporation are exceeded or if the coverage is otherwise unavailable,
ultimate payment, of amounts distributable with respect to the Book-Entry
Certificates may be impaired.
43
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
Trading between Clearstream and/or Euroclear Participants. Secondary market
trading between Clearstream Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC seller and Clearstream or Euroclear purchaser. When
Book-Entry Certificates 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 Book-Entry Certificates against
payment. Payment will include interest accrued on the Book-Entry Certificates
from and including the last coupon payment date to and excluding the settlement
date, on the basis of either a 360-day year comprised of 30-day months or the
actual number of days in the accrual period and a year assumed to consist of 360
days, as applicable. 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 Book-Entry Certificates. After
settlement has been completed, the Book-Entry Certificates will be credited to
the respective clearing system and by the clearing system, in accordance with
its usual procedures, to the Clearstream Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the
Book-Entry Certificates 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 Book-Entry Certificates 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 Book-Entry Certificates would incur overdraft charges
for one day, assuming they cleared the overdraft when the Book-Entry
Certificates were credited to their accounts. However, interest on the
Book-Entry Certificates would accrue from the value date. Therefore, in many
cases the investment income on the Book-Entry Certificates earned during that
one-day period may substantially reduce or offset the amount of the overdraft
charges, although this result will depend on each Clearstream Participant's or
Euroclear Participant's particular cost of funds.
44
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Book-Entry
Certificates 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
Book-Entry Certificates 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 Book-Entry Certificates to the DTC Participant's
account against payment. Payment will include interest accrued on the Book-Entry
Certificates from and including the last coupon payment to and excluding the
settlement date on the basis of either a 360-day year comprised of 30-day months
or the actual number of days in the accrual period and a year assumed to consist
of 360 days, as applicable. 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
Book-Entry Certificates 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 Book-Entry Certificates in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give the
Book-Entry Certificates sufficient time to be reflected in their Clearstream
or Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the Clearstream Participant
or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements. A Beneficial
Owner of Book-Entry Certificates that is not a U.S. Person within the meaning of
Section 7701(a)(30) of the Code (a "Non-U.S. Holder") holding a Book-Entry
Certificate through Clearstream, Euroclear or DTC may be subject to U.S.
withholding tax unless it provides certain documentation to the Trustee, a
Paying Agent or any other entity required to withhold tax (any of the foregoing,
a "U.S. Withholding Agent") establishing an exemption from withholding. A
Non-U.S. Holder may be subject to withholding unless each U.S. Withholding Agent
receives:
45
(i) from a Non-U.S. Holder that is classified as a corporation for
U.S. federal income tax purposes or is an individual, and is eligible
for the benefits of the portfolio interest exemption or an exemption (or
reduced rate) based on a treaty, a duly completed and executed IRS Form
W-8BEN (or any successor form);
(ii) from a Non-U.S. Holder that is eligible for an exemption on the
basis that the holder's income from the Book-Entry Certificates is
effectively connected to its U.S. trade or business, a duly completed
and executed IRS Form W-8ECI (or any successor form);
(iii) from a Non-U.S. Holder that is classified as a partnership for
U.S. federal income tax purposes, a duly completed and executed IRS Form
W-8IMY (or any successor form) with all supporting documentation (as
specified in the U.S. Treasury regulations) required to substantiate
exemptions from withholding on behalf of its partners; certain
partnerships may enter into agreements with the IRS providing for
different documentation requirements and it is recommended that those
partnerships consult their tax advisors regarding these certification
rules;
(iv) from a Non-U.S. Holder that is an intermediary (i.e., a person
acting as a custodian, a broker, nominee or otherwise as an agent for
the Beneficial Owner of Book-Entry Certificates):
(a) if the intermediary is a "qualified intermediary" within the
meaning of Section 1.1441-1(e)(5)(ii) of the U.S. Treasury
regulations (a "Qualified Intermediary"), a duly completed and
executed IRS Form W-8IMY (or any successor or substitute form):
(1) stating the name, permanent residence address and
employer identification number of the Qualified Intermediary and
the country under the laws of which the Qualified Intermediary
is created, incorporated or governed,
(2) certifying that the Qualified Intermediary has provided,
or will provide, a withholding statement as required under
Section 1.1441-1(e)(5)(v) of the U.S. Treasury regulations,
(3) certifying that, with respect to accounts it identifies
on its withholding statement, the qualified intermediary is not
acting for its own account but is acting as a qualified
intermediary, and
(4) providing any other information, certifications, or
statements that may be required by the IRS Form W-8IMY or
accompanying instructions in addition to, or in lieu of, the
information and certifications described in Section
1.1441-1(e)(3)(ii) or 1.1441-1(e)(5)(v) of the U.S. Treasury
regulations; or
(b) if the intermediary is not a Qualified Intermediary, a duly
completed and executed IRS Form W-8IMY (or any successor or
substitute form):
(1) stating the name and permanent residence address of the
non-Qualified Intermediary and the country under the laws of
which the non-Qualified Intermediary is created, incorporated or
governed,
(2) certifying that the non-Qualified Intermediary is not
acting for its own account,
(3) certifying that the non-Qualified Intermediary has
provided, or will provide, a withholding statement that is
associated with the appropriate IRS Forms W-8 and W-9
46
required to substantiate exemptions from withholding on behalf
of the non-Qualified Intermediary's beneficial owners, and
(4) providing any other information, certifications or
statements that may be required by the IRS Form W-8IMY or
accompanying instructions in addition to, or in lieu of, the
information, certifications, and statements described in Section
1.1441-1(e)(3)(iii) or (iv) of the U.S. Treasury regulations; or
(v) from a Non-U.S. Holder that is a trust, depending on whether the
trust is classified for U.S. federal income tax purposes as the
beneficial owner of Book-Entry Certificates, either an IRS Form W-8BEN
or W-8IMY; any Non-U.S. Holder that is a trust should consult its tax
advisors to determine which of these forms it should provide.
All Non-U.S. Holders will be required to update the above-listed forms and
any supporting documentation in accordance with the requirements under the U.S.
Treasury regulations. These forms generally remain in effect for a period
starting on the date the form is signed and ending on the last day of the third
succeeding calendar year, unless a change in circumstances makes any information
on the form incorrect. Under certain circumstances, an IRS Form W-8BEN, if
furnished with a taxpayer identification number, remains in effect until the
status of the beneficial owner changes, or a change in circumstances makes any
information on the form incorrect.
In addition, all holders, including holders that are U.S. Persons,
holding Book-Entry Certificates through Clearstream, Euroclear or DTC may be
subject to backup withholding unless the holder:
(a) provides the appropriate IRS Form W-8 (or any successor or
substitute form), duly completed and executed, if the holder is a Non-U.S.
Holder;
(b) provides a duly completed and executed IRS Form W-9, if the Holder
is a U.S. Person; or
(c) can be treated as a "exempt recipient" within the meaning of Section
1.6049-4(c)(1)(ii) of the U.S. Treasury regulations (e.g., a corporation or
a financial institution such as a bank).
This summary does not deal with all of the aspects of U.S. federal income
tax withholding or backup withholding that may be relevant to investors that are
Non-U.S. Holders. Those holders are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of Book-Entry
Certificates.
Distributions to Certificateholders
General. Distributions on the Certificates will be made on a day specified
in the applicable prospectus supplement (or if that day is not a business day,
the first business day following that day) of each month, commencing with the
month stated in the applicable prospectus supplement (each, a "Distribution
Date"). The "Determination Date" for each Distribution Date will be the day of
the month specified in the applicable prospectus supplement in which the
Distribution Date occurs or, if that day is not a business day, the immediately
preceding business day. The "Cut-off Date" for a series of Certificates will be
the date specified in the applicable prospectus supplement. All payments of
principal and interest due after the Cut-off Date will be part of the Trust
Estate. On each Distribution Date, each holder of a Certificate of a Class will
be entitled to receive its Certificate's Percentage Interest of the portion of
the Pool Distribution Amount allocated to its Class. Generally, the undivided
percentage interest (the "Percentage Interest") represented by any Certificate
of a Class in distributions to the Class will be equal to the percentage
obtained by dividing the initial principal balance (or notional amount) of the
Certificate by the aggregate Class Balance (or notional amount) of the Class.
The Percentage Interest
47
for a Certificate of a Class that receives distributions pursuant to request or
random lot or that is an Exchangeable REMIC Certificate or an Exchangeable
Certificate is equal to the percentage obtained by dividing the current
principal balance (or notional amount) of the Certificate by the current Class
Balance (or notional amount) of the Class of which the Certificate is a part.
In general, the funds available for distribution to Certificateholders of a
series of Certificates with respect to each Distribution Date for the series
(the "Pool Distribution Amount") will be the sum of:
(a) all previously undistributed payments or other receipts on account
of principal (including principal prepayments and Liquidation Proceeds, if
any) and interest on or related to the Mortgage Loans received by the
related Servicer after the Cut-off Date (except for amounts due on or prior
to the Cut-off Date), or received by the related Servicer on or prior to the
Cut-off Date but due after the Cut-off Date, in either case received on or
prior to the business day preceding the Determination Date in the month in
which the Distribution Date occurs, other than amounts required to be held
for distribution on future Distribution Dates, plus all Periodic Advances
and amounts received from the Sponsor in connection with amounts cancelled
due to BPP on a Mortgage Loan;
minus
(b) permitted withdrawals from the Servicer Custodial Account, Master
Servicer Custodial Account or Certificate Account by the Servicer, Master
Servicer or the Trustee, as applicable, as described under "Servicing of the
Mortgage Loans -- Payments on the Mortgage Loans," including, among other
things, reimbursements for Advances, liquidation expenses, expenses for
which the Servicer, Master Servicer or Trustee, as applicable, are entitled
to be reimbursed and amounts to which the Depositor, the Servicer, the
Master Servicer and the Trustee are entitled as indemnification and any
other amounts described in the applicable prospectus supplement.
The applicable prospectus supplement for a series will describe any material
variation in the calculation of the Pool Distribution Amount for that series.
"Foreclosure Profits" with respect to a Distribution Date and a liquidated
Mortgage Loan will be the excess of the amount by which net Liquidation Proceeds
on the liquidated Mortgage Loan exceed its unpaid principal balance plus accrued
interest on that balance at the Mortgage Interest Rate.
Distributions of Interest. For each series of Certificates, interest on the
related Mortgage Loans at the weighted average of their applicable Net Mortgage
Interest Rates, will be passed through monthly to holders of the related Classes
of Certificates in the aggregate, in accordance with the particular terms of
each Class of Certificates. The "Net Mortgage Interest Rate" for each Mortgage
Loan in a given period will equal the Mortgage Interest Rate for that Mortgage
Loan in that period, less the portion of the Mortgage Interest Rate, if any, not
contained in the Trust Estate (the "Fixed Retained Yield"), and less amounts
payable to the Servicer for servicing the Mortgage Loan (the "Servicing Fee"),
the fee payable to the Master Servicer, if any (the "Master Servicing Fee"), the
fee payable to the Trustee, if any (the "Trustee Fee") and any related fees and
expenses specified in the applicable prospectus supplement. See "Servicing of
the Mortgage Loans--Fixed Retained Yield, Servicing Compensation and Payment of
Expenses" for a description of Fixed Retained Yield.
Interest will accrue on the Class Balance (or notional amount, as described
below) of each Class of Certificates entitled to interest at the pass-through
rate for each Class (which may be a fixed rate or an adjustable rate) indicated
in the applicable prospectus supplement (each, a "Pass-Through Rate") from the
date and for the periods specified in the prospectus supplement. To the extent
the Pool Distribution Amount is sufficient, interest accrued during each
specified period on each Class of Certificates entitled
48
to interest (other than Accrual Certificates, as discussed below) will be
distributable on the Distribution Dates specified in the applicable prospectus
supplement until the Class Balance (or notional amount) of that Class has been
reduced to zero. Distributions allocable to interest on each Certificate that is
not entitled to distributions of principal will generally be calculated based on
the notional amount of that Certificate. The notional amount of a Certificate
will not evidence an interest in or entitlement to distributions of principal
but will be solely for convenience in expressing the calculation of interest and
for certain other purposes.
With respect to any Class of Accrual Certificates, any interest that has
accrued but is not paid on a given Distribution Date will be added to the Class
Balance of that Class of Certificates on that Distribution Date. Distributions
of interest on each Class of Accrual Certificates will commence only after the
occurrence of the events or the existence of the circumstance specified in the
applicable prospectus supplement and, prior to that time, or in the absence of
those circumstances, the Class Balance of that Class will increase on each
Distribution Date by the amount of interest that accrued on that Class during
the preceding interest accrual period but that was not required to be
distributed to that Class on that Distribution Date. In subsequent accrual
periods, a Class of Accrual Certificates will accrue interest on its increased
Class Balance. For a description of Accrual Certificates, see "-- Categories of
Classes of Certificates."
Distributions of Principal. The "Class Balance" at any time of any Class of
Certificates (other than any Class of Exchangeable REMIC Certificates or
Exchangeable Certificates) entitled to distributions of principal will generally
be the initial Class Balance of the Class specified in the applicable prospectus
supplement or, in the case of a Class of Exchangeable REMIC Certificates or
Exchangeable Certificates entitled to distributions of principal, the portion
then represented by the outstanding Certificates of such Class of the maximum
initial Class Balance specified in the applicable prospectus supplement, reduced
by all distributions reported to the holders of the Certificates of that Class
as allocable to principal and any losses on the related Mortgage Loans allocated
to that Class of Certificates and (i) in the case of Accrual Certificates,
increased by all interest accrued but not then distributable on those Accrual
Certificates and (ii) in the case of a series of Certificates representing
interests in a Trust Estate containing certain types of adjustable-rate Mortgage
Loans, increased by any Deferred Interest allocable to that Class. The Class
Balance of a Class of Certificates generally represents the maximum specified
dollar amount (exclusive of any interest that may accrue on that Class to which
the Certificateholder is entitled from the cash flow on the related Mortgage
Loans at that time) and will decline to the extent of distributions in reduction
of the Class Balance of, and allocations of losses to, that Class. Certificates
with no Class Balance will not receive distributions in respect of principal.
The applicable prospectus supplement will specify the method by which the amount
of principal to be distributed on the Certificates on each Distribution Date
will be calculated and the manner in which that amount will be allocated among
the Classes of Certificates entitled to distributions of principal.
Subordination
If provided in the applicable prospectus supplement, one or more Classes of
Senior Certificates will be entitled to receive all or a disproportionate
percentage of the payments of principal that are received from borrowers in
advance of their scheduled Due Dates and are not accompanied by amounts
representing scheduled interest due after the months of those payments or of
other unscheduled principal receipts or recoveries in the percentages and under
the circumstances or for the periods specified in the applicable prospectus
supplement. This type of allocation of principal prepayments or other
unscheduled receipts or recoveries relating to principal to this Class or these
Classes of Senior Certificates will have the effect of accelerating the
amortization of these Senior Certificates while increasing the interests
evidenced by the Subordinate Certificates in the Trust Estate. Increasing the
interests of the Subordinate
49
Certificates relative to that of the Senior Certificates is intended to preserve
the availability of the subordination provided by the Subordinate Certificates.
If specified in the applicable prospectus supplement, the rights of the
holders of the Subordinate Certificates of a series of Certificates for which
credit enhancement is provided through subordination to receive distributions
with respect to the Mortgage Loans in the related Trust Estate will be
subordinated to the rights of the holders of the Senior Certificates of the same
series. This subordination is intended to enhance the likelihood of regular
receipt by holders of Senior Certificates of the full amount of scheduled
monthly payments of principal and interest due them and to provide limited
protection to the holders of the Senior Certificates against losses due to
mortgagor defaults.
The protection afforded to the holders of Senior Certificates of a series of
Certificates for which credit enhancement is provided by the subordination
feature described above will be effected by (i) the preferential right of these
holders to receive, prior to any distribution being made to the related
Subordinate Certificates on each Distribution Date, current distributions on the
related Mortgage Loans of principal and interest due them on each Distribution
Date out of the funds available for distribution on that date in the related
Certificate Account, (ii) by the right of these holders to receive future
distributions on the Mortgage Loans that would otherwise have been payable to
the holders of Subordinate Certificates and/or (iii) by the prior allocation to
the Subordinate Certificates of all or a portion of losses realized on the
related Mortgage Loans.
Losses realized on liquidated Mortgage Loans (other than, if specified in
the applicable prospectus supplement, Excess Special Hazard Losses, Excess Fraud
Losses and Excess Bankruptcy Losses as described below) will be allocated to the
holders of Subordinate Certificates through a reduction of the amount of
principal payments on the Mortgage Loans to which these holders are entitled
before any corresponding reduction is made in respect of the Senior Certificate.
A "Special Hazard Loss" is a loss on a liquidated Mortgage Loan occurring as
a result of a hazard not insured against under a standard hazard insurance
policy of the type described below under "Servicing of the Mortgage
Loans--Insurance Policies." A "Fraud Loss" is a loss on a liquidated Mortgage
Loan due to fraud in the origination of that Mortgage Loan. A "Bankruptcy Loss"
is a loss on a liquidated Mortgage Loan attributable to certain actions which
may be taken by a bankruptcy court in connection with a Mortgage Loan, including
a reduction by a bankruptcy court of the principal balance of or the interest
rate on a Mortgage Loan or an extension of its maturity. Special Hazard Losses
in excess of the amount specified in the applicable prospectus supplement (the
"Special Hazard Loss Amount"), if any, are "Excess Special Hazard Losses." Fraud
Losses in excess of the amount specified in the applicable prospectus supplement
(the "Fraud Loss Amount"), if any, are "Excess Fraud Losses." Bankruptcy Losses
in excess of the amount specified in the applicable prospectus supplement (the
"Bankruptcy Loss Amount"), if any, are "Excess Bankruptcy Losses." Any Excess
Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy Losses for a
series will be allocated on a pro rata basis among the related Classes of Senior
and Subordinate Certificates. An allocation of a loss on a "pro rata" basis
among two or more Classes of Certificates means an allocation on a pro rata
basis to each of those Classes of Certificates on the basis of their
then-outstanding Class Balances in the case of the principal portion of a loss
or based on accrued interest in the case of an interest portion of a loss.
Since the Special Hazard Loss Amount, Fraud Loss Amount and Bankruptcy Loss
Amount, if any, for a series of Certificates are each expected to be less than
the amount of principal payments on the Mortgage Loans to which the holders of
the Subordinate Certificates of the series are initially entitled (the amount of
principal payments being subject to reduction, as described above, as a result
of allocation of losses on liquidated Mortgage Loans that are not Special Hazard
Losses,
50
Fraud Losses or Bankruptcy Losses), the holders of Subordinate Certificates of
that series will bear the risk of Special Hazard Losses, Fraud Losses and
Bankruptcy Losses to a lesser extent than they will bear other losses on
liquidated Mortgage Loans.
Although the subordination feature described above is intended to enhance
the likelihood of timely payment of principal and interest to the holders of
Senior Certificates, shortfalls could result in certain circumstances. For
example, a shortfall in the payment of principal otherwise due the holders of
Senior Certificates could occur if losses realized on the Mortgage Loans in a
Trust Estate were exceptionally high and were concentrated in a particular
month.
The holders of Subordinate Certificates will not be required to refund any
amounts previously properly distributed to them, regardless of whether there are
sufficient funds on a subsequent Distribution Date to make a full distribution
to holders of each Class of Senior Certificates of the same series.
Other Credit Enhancement
In addition to, or in substitution for, the subordination discussed above,
credit enhancement may be provided with respect to any series of Certificates
only in one or more of the methods described below. The applicable prospectus
supplement will describe the material terms of such credit enhancement,
including any limits on the timing or amount of such credit enhancement or any
conditions that must be met before such credit enhancement may be accessed. If
the provider of the credit enhancement is liable or contingently liable to
provide payments representing 10% or more of the cash flow supporting any
offered Class of Certificates, the applicable prospectus supplement will
disclose the name of the provider, the organizational form of the provider, the
general character of the business of the provider and the financial information
required by Item 1114(b)(2) of Regulation AB (17 CFR 229.1114). Copies of the
limited guarantee, financial guaranty insurance policy, surety bond, letter of
credit, pool insurance policy, mortgagor bankruptcy bond, special hazard
insurance policy or Cash Flow Agreement, if any, relating to a series of
Certificates will be filed with the SEC as an exhibit to a Current Report on
Form 8-K.
Limited Guarantee. If specified in the prospectus supplement for a series of
Certificates, credit enhancement may be provided in the form of a limited
guarantee issued by a guarantor named in that prospectus supplement. The limited
guarantee may cover deficiencies in amounts otherwise payable on some or all of
the Certificates of a series. The limited guarantee may cover timely
distributions of interest or full distributions of principal or both on the
basis of a schedule of principal distributions set forth in or determined in the
manner specified in the related prospectus supplement. The limited guarantee may
provide additional protection against losses on the Mortgage Loans included in a
Trust Estate, provide payment of administrative expenses, or establish a minimum
reinvestment rate on the payments made on the Mortgage Loans or principal
payment rate on the Mortgage Loans. A limited guarantee will be limited in
amount to the dollar amount or percentage of the principal balance of the
Mortgage Loans or Certificates specified in the applicable prospectus
supplement.
Financial Guaranty Insurance Policy or Surety Bond. If specified in the
prospectus supplement for a series of Certificates, credit enhancement may be
provided in the form of a financial guaranty insurance policy or a surety bond
issued by one or more insurers named in that prospectus supplement. The
financial guaranty insurance policy will guarantee, with respect to one or more
Classes of Certificates of the related series, timely distributions of interest
and ultimate distributions of principal at the dates set forth in or determined
in the manner specified in the prospectus supplement. If specified in the
prospectus supplement, the financial guaranty insurance policy will also
guarantee against any payment made to a Certificateholder that is subsequently
recovered as a preferential transfer under the Bankruptcy Code.
51
Letter of Credit. If specified in the prospectus supplement for a series of
Certificates, credit enhancement may be provided by a letter of credit issued by
a bank or other financial institution specified in the applicable prospectus
supplement. Under the letter of credit, the provider will be obligated to pay up
to an aggregate fixed dollar amount, net of previous drawings on the letter,
equal to the percentage specified in the prospectus supplement of the unpaid
principal balance of the Mortgage Loans or of one or more Classes of
Certificates. If specified in the prospectus supplement, the letter of credit
may permit drawings in the event of losses not covered by insurance policies or
other credit support, such as losses arising from damage not covered by standard
hazard insurance policies, losses resulting from the bankruptcy of a borrower
and the application of certain provisions of the Bankruptcy Code, or losses
resulting from denial of insurance coverage due to misrepresentations in
connection with the origination of a Mortgage Loan. The amount available under
the letter of credit will, in all cases, be reduced to the extent of the
unreimbursed payments previously paid. The obligations of the provider under the
letter of credit for each series of Certificates will expire at the earlier of
the date specified in the prospectus supplement or the termination of the Trust.
Pool Insurance Policy. If specified in the prospectus supplement relating to
a series of Certificates, credit enhancement may be provided by a mortgage pool
insurance policy for the Mortgage Loans in the related Trust Estate. Each
mortgage pool insurance policy, in accordance with the limitations described in
this prospectus and in the prospectus supplement, if any, will cover any loss by
reason of default on a Mortgage Loan in an amount equal to a percentage
specified in the applicable prospectus supplement of the unpaid principal
balance of the Mortgage Loans. As described under "Servicing of the Mortgage
Loans--Enforcement of "Due-on-Sale" Clauses; Realization Upon Defaulted Mortgage
Loans," the Servicer or the Master Servicer, as the case may be, generally will
be required to use its best efforts to maintain the mortgage pool insurance
policy and to present claims to the pool insurer. The mortgage pool insurance
policies, however, are not blanket policies against loss, since claims may only
be made respecting particular defaulted Mortgage Loans and only upon
satisfaction of specified conditions precedent described below. The mortgage
pool insurance policies will generally not cover losses due to a failure to pay
or denial of a claim under a primary mortgage insurance policy, regardless of
the reason for nonpayment.
As more specifically provided in the related prospectus supplement, each
mortgage pool insurance policy will provide for conditions under which claims
may be presented and covered under the policy. Upon satisfaction of these
conditions, the pool insurer will have the option either (a) to purchase the
property securing the defaulted Mortgage Loan at a price equal to its unpaid
principal balance plus accrued and unpaid interest at the applicable Mortgage
Interest Rate to the date of purchase plus certain Advances, or (b) to pay the
amount by which the sum of the unpaid principal balance of the defaulted
Mortgage Loan plus accrued and unpaid interest at the Mortgage Interest Rate to
the date of payment of the claim plus certain Advances exceeds the proceeds
received from an approved sale of the Mortgaged Property, in either case net of
certain amounts paid or assumed to have been paid under any related primary
mortgage insurance policy.
Certificateholders may experience a shortfall in the amount of interest
payable on the related Certificates in connection with the payment of claims
under a mortgage pool insurance policy because the pool insurer is only required
to remit unpaid interest through the date a claim is paid rather than through
the end of the month in which the claim is paid. In addition, Certificateholders
may also experience losses with respect to the related Certificates in
connection with payments made under a mortgage pool insurance policy to the
extent that the related Servicer expends funds to cover unpaid real estate taxes
or to repair the related Mortgaged Property in order to make a claim under a
mortgage pool insurance policy, as those amounts will not be covered by payments
under the policy and will be reimbursable to the related Servicer from funds
otherwise payable to the Certificateholders. If any Mortgaged Property securing
a defaulted Mortgage Loan is damaged and proceeds, if any from the related
hazard insurance policy or
52
applicable special hazard insurance policy are insufficient to restore the
damaged property to a condition sufficient to permit recovery under the mortgage
pool insurance policy, a Servicer will generally not be required to expend its
own funds to restore the damaged property unless it determines that (a)
restoration will increase the proceeds to one or more Classes of Certificates on
liquidation of the Mortgage Loan after reimbursement of the related Servicer for
its expenses and (b) the expenses will be recoverable by it through Liquidation
Proceeds or insurance proceeds.
A mortgage pool insurance policy and some primary mortgage insurance
policies will generally not insure against loss sustained by reason of a default
arising from, among other things, fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the mortgagor, the
seller or other persons involved in the origination of the Mortgage Loan,
failure to construct a mortgaged property in accordance with plans and
specifications or bankruptcy, unless as specified in the related prospectus
supplement, an endorsement to the mortgage pool insurance policy provides for
insurance against that type of loss.
The original amount of coverage under each mortgage pool insurance policy
will be reduced over the life of the related series of Certificates by the
aggregate 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 includes some expenses incurred by the related Servicer or Master
Servicer as well as accrued interest on delinquent Mortgage Loans to the date of
payment of the claim. Accordingly, if aggregate net claims paid under any
mortgage pool insurance policy reach the original policy limit, coverage under
that mortgage pool insurance policy will be exhausted and any further losses
will be borne by the related Certificates, to the extent not covered by other
credit enhancements.
Special Hazard Insurance Policy. Any insurance policy covering Special
Hazard Losses obtained for a Trust will be issued by the insurer named in the
related prospectus supplement. Each special hazard insurance policy will be
subject to limitations described in this paragraph and in the related prospectus
supplement, if any, and will protect the related Certificateholders from Special
Hazard Losses. Aggregate claims under a special hazard insurance policy will be
limited to the amount set forth in the related Pooling Agreement and will be
subject to reduction as described in the related Pooling Agreement. A special
hazard insurance policy will provide that no claim may be paid unless hazard
and, if applicable, flood insurance on the Mortgaged Property securing the
Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid by the related Servicer or Master Servicer, as the case
may be.
In accordance with the foregoing limitations, a special hazard insurance
policy will provide that, where there has been damage to the Mortgaged Property
securing a foreclosed Mortgage Loan, title to which has been acquired by the
insured, and to the extent the damage is not covered by the hazard insurance
policy or flood insurance policy, if any, maintained by the mortgagor or the
related Servicer or Master Servicer, as the case may be, the insurer will pay
the lesser of (i) the cost of repair or replacement of the related Mortgaged
Property or (ii) upon transfer of the property to the insurer, the unpaid
principal balance of the Mortgage Loan at the time of acquisition of the related
property by foreclosure or deed in lieu of foreclosure, plus accrued interest at
the Mortgage Interest Rate to the date of claim settlement and certain expenses
incurred by the related Servicer or Master Servicer, as the case may be, with
respect to the related Mortgaged Property.
If the Mortgaged Property is transferred to a third party in a sale approved
by the special hazard insurer, the amount that the special hazard insurer will
pay will be the amount under (ii) above reduced by the net proceeds of the sale
of the Mortgaged Property. If the unpaid principal balance plus accrued interest
and certain Advances is 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
53
sale of the Mortgaged Property. Any amount paid as the cost of repair of the
property will further reduce coverage by that amount. Restoration of the
property with the proceeds described under (i) above will satisfy the condition
under any mortgage pool insurance policy that the property be restored before a
claim under the policy may be validly presented with respect to the defaulted
Mortgage Loan secured by the related Mortgaged Property. The payment described
under (ii) above will render presentation of a claim relating to a Mortgage Loan
under the related mortgage pool insurance policy unnecessary. Therefore, so long
as a mortgage pool insurance policy remains in effect, the payment by the
insurer under a special hazard insurance policy of the cost of repair or of the
unpaid principal balance of the related Mortgage Loan plus accrued interest and
certain Advances will not affect the total insurance proceeds paid to
Certificateholders, but will affect the relative amounts of coverage remaining
under the related special hazard insurance policy and mortgage pool insurance
policy.
Mortgagor Bankruptcy Bond. If specified in the related prospectus
supplement, a bankruptcy bond to cover losses resulting from proceedings under
the federal Bankruptcy Code with respect to a Mortgage Loan will be issued by an
insurer named in the prospectus supplement. Each bankruptcy bond will cover, to
the extent specified in the related prospectus supplement, certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a Mortgage Loan or a reduction by the court of the
unpaid principal balance of a Mortgage Loan and will cover certain unpaid
interest on the amount of a principal reduction from the date of the filing of a
bankruptcy petition. The required amount of coverage under each bankruptcy bond
will be set forth in the related prospectus supplement.
Reserve Fund. If specified in the applicable prospectus supplement, credit
enhancement with respect to a series of Certificates may be provided by the
establishment of one or more reserve funds for the series. Any reserve fund for
a series may be funded (i) by a deposit of cash, U.S. Treasury securities or
instruments evidencing entitlements to principal or interest payments, letters
of credit, demand notes, certificates of deposit or a combination of these in
the aggregate amount specified in the applicable prospectus supplement or (ii)
by the deposit from time to time of certain amounts received on or in respect of
the related Mortgage Loans, as specified in the applicable prospectus
supplement.
If specified in the prospectus supplement, reserve funds may be established
to provide limited protection, in an amount satisfactory to each Rating Agency,
against certain interest shortfalls arising from the timing of principal
prepayments, certain types of losses not covered by insurance policies or other
credit support, such as losses arising from damage not covered by standard
hazard insurance policies, losses resulting from the bankruptcy of a borrower
and the application of certain provisions of the Bankruptcy Code or losses
resulting from denial of insurance coverage due to fraud or misrepresentation in
connection with the origination of a Mortgage Loan. Following each Distribution
Date amounts in a reserve fund in excess of any required reserve fund amount may
be released from the reserve fund under the conditions and to the extent
specified in the prospectus supplement and will not be available for further
application to the related Certificates.
If specified in the prospectus supplement, any reinvestment income or other
gain from investments in Eligible Investments (as described below under
"--Payments on Mortgage Loans; Certificate and Custodial Accounts") will be
credited to the related reserve fund for the series, and any loss resulting from
the investments will be charged to the reserve fund. The reserve fund for a
series will not be a part of the Trust Estate.
Additional information concerning any reserve fund will be set forth in the
prospectus supplement, including the initial balance of the reserve fund, the
required reserve fund balance to be maintained, the purposes for which funds in
the reserve fund may be applied to make distributions to Certificateholders and
use of investment earnings from the reserve fund, if any.
54
Cross Collateralization. If specified in the applicable prospectus
supplement, the beneficial ownership of separate groups of Mortgage Loans
included in a Trust Estate may be evidenced by separate Classes of Certificates.
In this case, credit support may be provided by a cross collateralization
feature which requires that distributions be made to certain Classes from
Mortgage Loan payments that would otherwise be distributed to Subordinate
Certificates evidencing a beneficial ownership interest in other loan groups
within the same Trust Estate. As a result, the amount of credit enhancement
available to a Class of Certificates against future losses on the Mortgage Loans
in which that Class represents an interest may be reduced as the result of
losses on a group of Mortgage Loans in which that Class has no interest. The
applicable prospectus supplement for a series that includes a cross
collateralization feature will describe its specific operation.
Overcollateralization. If specified in the related prospectus supplement,
subordination provisions of a series may be used to accelerate to a limited
extent the amortization of one or more Classes of Certificates relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more Classes of Certificates. This acceleration feature
creates, with respect to the Mortgage Loans or a group of Mortgage Loans,
overcollateralization which results from the excess of the aggregate principal
balance of the related Mortgage Loans, or group of Mortgage Loans, over the
Class Balance of the related Class or Classes of Certificates. This acceleration
may continue for the life of the related Certificates, or may have a shorter
duration. In the case of limited acceleration, once the required level of
overcollateralization is reached, and subject to certain provisions specified in
the related prospectus supplement, this limited acceleration feature may cease,
unless necessary to maintain the required level of overcollateralization.
Excess Interest. If specified in the related prospectus supplement, the
Mortgage Loans in a Trust may generate more interest than is necessary to pay
the interest earned on the Classes of Certificates each month. The excess
interest may be used to maintain overcollateralization, to pay interest that was
previously earned but not paid to certain Classes of Certificates and to
reimburse certain Classes of Certificates for losses and certain shortfalls that
they experienced previously.
If specified in the applicable prospectus supplement, amounts received by
the Trustee under any Cash Flow Agreement described below under "--Cash Flow
Agreements" may also be used to provide credit enhancement for one or more
Classes of Certificates.
Cash Flow Agreements
If specified in the prospectus supplement, the Trust Estate may include cash
flow agreements consisting only of one or more guaranteed investment contracts,
swap agreements or interest rate cap or floor agreements (also called yield
maintenance agreements), each of which agreements is intended to reduce the
effects of interest rate fluctuations on the assets or on one or more Classes of
Certificates (each, a "Cash Flow Agreement"). The applicable prospectus
supplement will describe the name, organizational form and general character of
the business of the counterparty under any Cash Flow Agreement. In addition, the
prospectus supplement for the related series of Certificates will disclose
whether the significance percentage is less than 10%, at least 10% but less than
20%, or more than 20%, calculated in accordance with Item 1115 of Regulation AB
(17 CFR 229.1115). To the extent this percentage is (a) 10% or more but less
than 20%, the related prospectus supplement will provide financial data required
by Item 301 of Regulation S-K (17 CFR 229.301) or (b) greater than 20%, the
related prospectus supplement will provide financial statements required by Item
1115(b)(2) of Regulation AB (17 CFR 229.1115) and, in either case, the related
prospectus supplement will contain a description of the operation and material
terms of the Cash Flow Agreement, including, without limitation, conditions to
payment or limits on the timing or amount of payments and material provisions
relating to the termination of the Cash Flow Agreement or the substitution of
another Cash Flow Agreement for the Cash Flow
55
Agreement. Copies of the Cash Flow Agreement, if any, relating to a series of
Certificates will be filed with the SEC as an exhibit to a Current Report on
Form 8-K.
Guaranteed Investment Contracts. If specified in the related prospectus
supplement, the Trustee on behalf of the Trust may enter into one or more
guaranteed investment contracts. Guaranteed investment contracts are generally
used to maximize the investment income on funds held between Distribution Dates
pending distribution to Certificateholders. Under a guaranteed investment
contract, the issuer of the contract, which is typically a highly rated
financial institution, guarantees a fixed or floating rate of interest over the
life of the contract, as well as the ultimate return of the principal. Any
payments received from the issuer of the contract by the Trust will be
distributed to the related Class or Classes of Certificates as specified in the
applicable prospectus supplement.
Yield Maintenance Agreements. If specified in the related prospectus
supplement, the Trustee on behalf of the Trust will enter into one or more yield
maintenance agreements in order to support the yield of one or more Classes of
Certificates. The counterparty to a yield maintenance agreement will receive an
upfront payment and the Trust will have no ongoing payment obligations.
Generally, if the index specified in the applicable prospectus supplement, which
index will be one-month, three-month, six-month or one-year LIBOR, CMT, COFI,
MTA or the Prime Rate, exceeds a percentage for a particular date specified in
the applicable prospectus supplement, the counterparty to the yield maintenance
agreement will be required to pay to the Trustee an amount equal to that excess
multiplied by a notional amount or the Class Balance or Balances of one or more
Classes of Certificates multiplied by one-twelfth. This amount may be adjusted
to reflect the actual number of days in the Interest Accrual Period for the
related Class or Classes of Certificates and will be paid to the Class or
Classes of Certificates as specified in the related prospectus supplement.
Swap Agreements. If specified in the related prospectus supplement, the
Trustee on behalf of the Trust will enter into a swap agreement to support the
yield on one or more Classes of Certificates. Under the swap agreement, the
Trust will be obligated to pay an amount equal to a certain percentage of a
notional amount set forth in the related prospectus supplement to the
counterparty and the Trust will be entitled to receive an amount equal to
one-month, three-month, six-month or one-year LIBOR, CMT, COFI, MTA or the Prime
Rate on the notional amount from the counterparty, until the swap agreement is
terminated. Only the net amount of the two obligations will be paid by the
appropriate party. In the event that the Trust is required to make a payment to
the counterparty, that payment will be paid on the related Distribution Date
prior to distributions to Certificateholders. Generally, any payments received
from the counterparty by the Trust will be distributed to cover certain
shortfalls as set forth in the applicable prospectus supplement.
If specified in the related prospectus supplement, the Trustee on behalf of
the Trust will enter into one or more swap agreements to cover any shortfalls on
one or more Classes of Certificates in the event those Certificates are
auctioned to third-party investors on a date specified in the related prospectus
supplement and the proceeds from the auction are less than the outstanding Class
Balance of the applicable Class or Classes of Certificates plus any accrued and
unpaid interest. In the event the proceeds from the auction are greater than the
outstanding Class Balance or Class Balances of the applicable Class or Classes
of Certificates plus any accrued and unpaid interest, this excess will be paid
to the counterparty or counterparties under the swap agreement(s). See "Risk
Factors -- Amounts Received from the Auction and the Swap Agreement May Be
Insufficient to Assure Completion of the Auction" and "-- Mandatory Auction of
Certificates" in this prospectus.
56
Categories of Classes of Certificates
The Certificates of any series may be comprised of one or more Classes. The
Classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
prospectus supplement for a series of Certificates may identify the Classes
which comprise that series by reference to the following categories or another
category specified in the prospectus supplement.
PRINCIPAL TYPES
Categories of Classes ............. Definitions
Accretion Directed
Certificates .................... A Class of Certificates that receives
principal payments from amounts that would
otherwise be distributed as interest on
specified Accrual Certificates. These
principal payments may be in lieu of or in
addition to principal payments from
principal receipts on the Mortgage Loans for
the related series.
Companion Certificates (also
sometimes referred to as
"Support Certificates") ......... A Class of Certificates that is entitled to
receive principal payments on any
Distribution Date only if scheduled payments
have been made on specified Planned
Amortization Certificates, Targeted
Amortization Certificates and/or Scheduled
Amortization Certificates.
Component Certificates ............ A Class of Certificates consisting of two or
more specified components (each, a
"Component"), as described in the applicable
prospectus supplement. The Components of a
Class of Component Certificates may have
different principal and/or interest payment
characteristics but together constitute a
single class and do not represent severable
interests. Each Component of a Class of
Component Certificates may be identified as
falling into one or more of the categories
in this chart.
Exchangeable Certificates ......... A Class of Certificates that may be
exchanged for proportionate interests in one
or more specified Classes of Exchangeable
REMIC Certificates in the same series, as
described in the applicable prospectus
supplement. Each Class of Exchangeable
Certificates may be identified as falling
into one or more of the categories in this
chart.
Exchangeable REMIC Certificates ... A Class of Certificates that may be
exchanged for proportionate interests in one
or more specified Classes of Exchangeable
Certificates in the same series, as
described in the applicable prospectus
supplement. Each Class of Exchangeable REMIC
Certificates may be identified as falling
into one or more of the categories in this
chart.
Lockout Certificates .............. A Class of Senior Certificates that is
designed not to participate in or to
participate to a limited extent in (i.e., to
be "locked out"
57
of ), for a specified period, the receipt of
(1) principal prepayments on the Mortgage
Loans that are allocated disproportionately
to the Classes of Senior Certificates of its
series as a group pursuant to a "shifting
interest" structure and/or (2) scheduled
principal payments on the Mortgage Loans
that are allocated to the senior Classes as
a group. A Class of Lockout Certificates
will typically not be entitled to receive,
or will be entitled to receive only a
restricted portion of, distributions of
principal prepayments and/or scheduled
principal prepayments, as applicable, for a
period of several years, during which time
all or a portion of the principal payments
that it would otherwise be entitled to
receive in the absence of a "lockout"
structure will be distributed in reduction
of the Class Balances of other Senior
Certificates. Lockout Certificates are
designed to minimize weighted average life
volatility during the lockout period.
Notional Amount
Certificates..................... A Class of Certificates having no Class
Balance and bearing interest on a notional
amount. The notional amount is a
hypothetical balance used for calculating
interest distributions.
Pass-Through Certificates ......... A Class of Senior Certificates that is
entitled to receive a specified percentage
of the principal payments that are
distributable to the Senior Certificates or
applicable group of Senior Certificates
(other than any Ratio Strip Certificates) in
the aggregate on a Distribution Date and
that is not designated as a Class of
Sequential Pay Certificates.
Planned Amortization
Certificates (also sometimes
referred to as "PAC
Certificates") .................. A Class of Certificates that is designed to
receive principal payments (or has a
notional amount that is based on the Class
Balance(s) of one or more Classes of
Certificates that are designed to receive
principal payments) using a predetermined
principal balance schedule derived by
assuming two constant prepayment rates for
the underlying Mortgage Loans. These two
rates are the endpoints for the "structuring
range" for a Class of Planned Amortization
Certificates. The Classes of Planned
Amortization Certificates in any series may
be subdivided into different categories
(e.g., Planned Amortization I Certificates
or PAC I Certificates, Planned Amortization
II Certificates or PAC II Certificates and
so forth) derived using different
structuring ranges and/or payment
priorities. A Class of PAC Certificates is
designed to provide protection against
prepayments occurring at a constant rate
within the structuring range.
Ratio Strip Certificates .......... A Class of Certificates that is entitled to
receive a constant proportion, or "ratio
strip," of the principal payments on the
underlying Mortgage Loans.
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Scheduled Amortization
Certificates .................... A Class of Certificates that is designed to
receive principal payments (or has a
notional amount that is based on the Class
Balance(s) of one or more Classes of
Certificates that are designed to receive
principal payments) using a predetermined
principal balance schedule but is not
designated as a Class of Planned
Amortization Certificates or Targeted
Amortization Certificates. The schedule is
derived by assuming either two constant
prepayment rates or a single constant
prepayment rate for the underlying Mortgage
Loans. In the former case, the two rates are
the endpoints for the "structuring range"
for a Class of Scheduled Amortization
Certificates and the range generally is
narrower than that for a Class of Planned
Amortization Certificates. Typically, the
Companion Certificates for the applicable
series of Certificates generally will
represent a smaller percentage of a Class of
Scheduled Amortization Certificates than the
Companion Certificates generally would
represent in relation to a Class of Planned
Amortization Certificates or Targeted
Amortization Certificates. A Class of
Scheduled Amortization Certificates is
generally less sensitive to prepayments than
a Class of Companion Certificates, but more
sensitive than a Class of Planned
Amortization Certificates or Targeted
Amortization Certificates.
Senior Certificates ............... A Class of Certificates that is entitled to
receive payments of principal and interest
on each Distribution Date prior to the
Classes of Subordinate Certificates.
Sequential Pay Certificates ....... Classes of Certificates that are entitled to
receive principal payments in a prescribed
sequence, that do not have predetermined
principal balance schedules and that, in
most cases, are entitled to receive payments
of principal continuously from the first
Distribution Date on which they receive
principal until they are retired. A Class of
Sequential Pay Certificates may receive
principal payments concurrently with one or
more other Classes of Sequential Pay
Certificates.
Subordinate Certificates .......... A Class of Certificates that is entitled to
receive payments of principal and interest
on each Distribution Date only after the
Senior Certificates and Classes of
Subordinate Certificates with higher
priority of distributions have received
their full principal and interest
entitlements.
Super Senior Certificates ......... A Class of Senior Certificates that will not
bear its share of certain losses after the
Classes of Subordinate Certificates are no
longer outstanding for so long as one or
more specified Classes of Senior
Certificates are outstanding.
Super Senior Support
Certificates .................... A Class of Senior Certificates that bears
certain losses allocated to one or more
Classes of Super Senior Certificates.
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Targeted Amortization
Certificates (also sometimes
referred to as "TAC
Certificates").................. A Class of Certificates that is designed to
receive principal payments (or has a
notional amount that is based on the Class
Balance(s) of one or more Classes of
Certificates that are designed to receive
principal payments) using a predetermined
principal balance schedule derived by
assuming a single constant prepayment rate
for the underlying Mortgage Loans. A Class
of TAC Certificates is designed to provide
some protection against prepayments at a
rate exceeding the assumed constant
prepayment rate used to derive that Class's
principal balance schedule.
INTEREST TYPES
Categories of Class ............... Definitions
Accrual Certificates .............. A Class of Certificates that accretes the
amount of accrued interest otherwise
distributable on that Class, which amount
will be added as principal to the Class
Balance of that Class on each applicable
Distribution Date. This accretion may
continue until some specified event has
occurred or until the Class of Accrual
Certificates is retired.
Fixed Rate Certificates ........... A Class of Certificates with an interest
rate that is fixed throughout the life of
the Class.
Floating Rate Certificates ........ A Class of Certificates with an interest
rate (or an effective rate as a result of a
yield maintenance agreement) that resets
periodically based upon a designated index
and that varies directly with changes in
that index.
Interest Only Certificates ........ A Class of Certificates that is entitled to
receive some or all of the interest payments
made on the Mortgage Loans and little or no
principal. Interest Only Certificates have
either a nominal Class Balance or a notional
amount. A nominal Class Balance represents
actual principal that will be paid on the
Class. It is referred to as nominal since it
is extremely small compared to other
Classes. A notional amount is the amount
used as a reference to calculate the amount
of interest due on a Class of Interest Only
Certificates that is not entitled to any
distributions in respect of principal.
Inverse Floating Rate
Certificates .................... A Class of Certificates with an interest
rate that resets periodically based upon a
designated index and that varies inversely
with changes in that index and with changes
in the interest rate payable on the related
Class of Floating Rate Certificates.
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Principal Only Certificates ....... A Class of Certificates that does not bear
interest and is entitled to receive only
distributions of principal.
Step Coupon Certificates .......... A Class of Certificates with a fixed
interest rate that is reduced to a lower
fixed rate after a specified period of time.
The difference between the initial interest
rate and the lower interest rate will be
supported by a reserve fund established on
the Closing Date.
Variable Rate Certificates ........ A Class of Certificates with an interest
rate that resets periodically and is
calculated by reference to the rate or rates
of interest applicable to the Mortgage
Loans.
Mandatory Auction of Certificates
If specified in the prospectus supplement for a series, one or more Classes
of Certificates ("Auction Certificates") may be subject to a mandatory auction.
Prior to a Distribution Date specified in the applicable prospectus supplement
(the "Auction Distribution Date"), the Trustee or another party specified in the
prospectus supplement, in its capacity as auction administrator (the "Auction
Administrator"), will solicit bids for the purchase of each Class of Auction
Certificates then outstanding from third-party investors.
On the Auction Distribution Date, the Auction Certificates will be
transferred to third-party investors, and upon this transfer the holders of each
class of Auction Certificates will be entitled to receive an amount (the "Par
Price") equal to the related Class Balance, plus, if applicable, accrued
interest on that Class Balance (following all distributions and the allocation
of Realized Losses on the Auction Distribution Date).
The Auction Administrator will enter into a swap agreement pursuant to which
the counterparty will agree to pay the excess, if any, of the Par Price over the
amounts received for a Class of Auction Certificates in the auction. If all or a
portion of a Class of Auction Certificates is not sold in the auction, the
counterparty will pay the Auction Administrator the Par Price (or portion of the
Par Price) of the unsold Certificates. If the amount received in the auction is
greater than the Par Price, that excess will be paid by the Trust to the
counterparty to the swap agreement and will not be available for distribution to
Certificateholders.
If the counterparty defaults on its obligations under the swap agreement, no
Certificates of a Class of Auction Certificates will be transferred to third
parties unless bids equal to or higher than the applicable Par Price (or pro
rata portion in the case of a bid for less than all of a Class) are received. In
addition, if the counterparty defaults and third-party investors bid an amount
equal to or higher than the pro rata portion of the Par Price for some, but not
all, of a Class of Auction Certificates, only a portion of the Certificates of
such Class will be transferred to the successful bidders on the Auction
Distribution Date. If only a portion of a Class is transferred, each holder of
such Class will transfer only a pro rata portion of its Certificates on the
Auction Distribution Date.
See "Risk Factors -- Amounts Received from the Auction and the Swap
Agreement May Be Insufficient to Assure Completion of the Auction" in this
prospectus.
Exchangeable REMIC Certificates and Exchangeable Certificates
General. If specified in a prospectus supplement for a series, certain
Classes of Certificates may be Exchangeable REMIC Certificates or Exchangeable
Certificates. In any of these series, the holders of one or more of the Classes
of Exchangeable REMIC Certificates will be entitled, after notice and payment
61
to the Trustee of an administrative fee, to exchange all or a portion of those
Classes of Exchangeable REMIC Certificates for proportionate interests in one or
more specified Classes of Exchangeable Certificates in the same series and vice
versa.
If a series includes Exchangeable REMIC Certificates and Exchangeable
Certificates, all of these Classes of Exchangeable REMIC Certificates and
Exchangeable Certificates will be listed in the related prospectus supplement.
The Classes of Certificates that are exchangeable for one another will be
referred to in the related prospectus supplement as "Related" to each other, and
each related grouping of Exchangeable REMIC Certificates and Exchangeable
Certificates will be referred to as a "Combination," with the Classes of
Exchangeable REMIC Certificates in the Combination referred to as a "REMIC
Combination" and the Classes of Exchangeable Certificates in the Combination
referred to as an "Exchangeable Combination." At any time after their initial
issuance, any Class of Exchangeable REMIC Certificates may be exchanged for the
Related Class or Classes of Exchangeable Certificates. In some cases, multiple
Classes of Exchangeable REMIC Certificates may be exchanged for one or more
Classes of Related Exchangeable Certificates.
The descriptions in the related prospectus supplement of the Certificates of
a series that includes Exchangeable REMIC Certificates and Exchangeable
Certificates, including descriptions of principal and interest distributions,
registration and denominations of Certificates, credit enhancement, prepayment
and yield considerations, tax and legal investment considerations and ERISA
considerations, also will apply to each Class of Exchangeable REMIC Certificates
and Exchangeable Certificates. The related prospectus supplement will separately
describe the prepayment and yield considerations applicable to, and the risks of
investment in, each Class of Exchangeable REMIC Certificates and Exchangeable
Certificates. For example, separate decrement tables and yield tables, if
applicable, will be included for each Class of Exchangeable REMIC Certificates
and Exchangeable Certificates.
Exchanges. If a holder of Exchangeable REMIC Certificates elects to exchange
its Exchangeable REMIC Certificates for Related Exchangeable Certificates, then:
o the aggregate principal balance of the Related Exchangeable Certificates
received in the exchange, immediately after the exchange, will equal the
aggregate principal balance, immediately prior to the exchange, of the
Exchangeable REMIC Certificates so exchanged (for purposes of an
exchange, Interest Only Certificates will have a principal balance of
zero);
o the aggregate amount of principal or interest payable on each
Distribution Date with respect to the Related Exchangeable Certificates
received in the exchange will equal the aggregate amount of principal or
interest payable on each Distribution Date with respect to the
Exchangeable REMIC Certificates so exchanged; and
o the Class or Classes of Exchangeable REMIC Certificates and Exchangeable
Certificates will be exchanged in the applicable proportions, if any,
described in the related prospectus supplement.
Different types of combinations may exist. Any individual series of
Certificates may have multiple types of Combinations. Some examples of
Combinations of Exchangeable REMIC Certificates and Exchangeable Certificates
that differ in their interest characteristics include:
o Floating Rate Certificates and Inverse Floating Rate Certificates that
are Exchangeable REMIC Certificates may be exchangeable, together, for
Related Fixed Rate Certificates. In such a Combination, the Floating
Rate Certificates and Inverse Floating Rate Certificates would produce,
in the aggregate, an annual interest amount equal to that generated by
the Related Fixed Rate Certificates. In addition, the aggregate Class
Balance of a Class of Floating Rate
62
Certificates and a Class of Inverse Floating Rate Certificates would
equal the aggregate Class Balance of the Related Fixed Rate
Certificates.
o Interest Only Certificates and Principal Only Certificates that are
Exchangeable REMIC Certificates may be exchangeable, together, for
Related Exchangeable Certificates that are entitled to both principal
and interest payments. In such a Combination, the Class Balance of the
Class of Related Exchangeable Certificates would be equal to the Class
Balance of the Class of Principal Only Certificates, and the interest
rate on the Class of Related Exchangeable Certificates, when applied to
the Class Balance of this Related Class, would generate interest equal
to the annual interest amount of the Interest Only Certificates.
o Two Classes of Fixed Rate Certificates that are Exchangeable REMIC
Certificates with different interest rates may be exchangeable,
together, for a single Class of Related Exchangeable Certificates with a
fixed interest rate. In such a Combination, the Class Balance of the
single Class of Related Exchangeable Certificates would be equal to the
aggregate Class Balance of the two Classes of Exchangeable REMIC
Certificates, and the single Class of Related Exchangeable Certificates
would have a fixed interest rate that, when applied to the aggregate
Class Balance of the two Classes of Exchangeable REMIC Certificates,
would generate interest equal to the aggregate annual interest amount of
the two Classes of Exchangeable REMIC Certificates.
In some series, a Certificateholder may be able to exchange its Exchangeable
REMIC Certificates for other Related Exchangeable Certificates that have
different principal payment characteristics. Some examples of Combinations that
differ in the principal payment characteristics include:
o A Class of Exchangeable REMIC Certificates that is a Class of Accrual
Certificates, and a second Class of Exchangeable REMIC Certificates that
is a Class of Accretion Directed Certificates and receives all of the
interest accrued on the Class of Accrual Certificates for so long as the
Accrual Certificates are accreting, may be exchangeable, together, for a
single Class of Related Exchangeable Certificates that receives payments
of interest continuously from the first Distribution Date on which it
receives interest until it is retired.
o A Class of Exchangeable REMIC Certificates that is a Class of PAC,
Scheduled Amortization or TAC Certificates, and a Class of Exchangeable
REMIC Certificates that is a Class of Companion Certificates, may be
exchangeable, together, for a Class of Related Exchangeable Certificates
that receives principal payments without regard to the amortization
schedule for the Class of PAC, Scheduled Amortization or TAC
Certificates from the first Distribution Date on which it receives
principal until it is retired.
The holder of the Class or Classes of Exchangeable Certificates in any of
the example Combinations described above may also exchange its Exchangeable
Certificates for the Related Exchangeable REMIC Certificates and this process
may occur repeatedly in each direction.
A number of factors may limit the ability of a holder of Exchangeable REMIC
Certificates or Exchangeable Certificates to effect an exchange. For example,
the Certificateholder must own, at the time of the proposed exchange, the Class
or Classes of Exchangeable REMIC Certificates or Exchangeable Certificates
necessary to make the exchange in the necessary proportions. If a
Certificateholder does not own the necessary Classes of Exchangeable REMIC
Certificates or Exchangeable Certificates or does not own the necessary Classes
of Exchangeable REMIC Certificates or Exchangeable Certificates in the proper
proportions, the Certificateholder may not be able to obtain the desired Classes
of Exchangeable REMIC Certificates or Exchangeable Certificates, as the case may
be. The Certificateholder desiring to make the exchange may not be able to
purchase the necessary Class of Exchangeable REMIC Certificates or Exchangeable
Certificates from the then-current owner at a reasonable price, or the necessary
63
proportion of the needed Class of Exchangeable REMIC Certificates or
Exchangeable Certificates may no longer be available due to principal payments
or prepayments that have been applied to that Class of Exchangeable REMIC
Certificates or Exchangeable Certificates.
Procedures. The related prospectus supplement will describe the procedures
that must be followed to make an exchange of Exchangeable REMIC Certificates and
Exchangeable Certificates. A Certificateholder will be required to provide
notice to the Trustee prior to the proposed exchange date within the time period
specified in the related prospectus supplement. The notice must include, among
other things, the outstanding principal balance or notional amount of the
Exchangeable REMIC Certificates or Exchangeable Certificates to be exchanged and
the Related Exchangeable REMIC Certificates or Exchangeable Certificates to be
received, and the proposed exchange date. When the Trustee receives this notice,
it will provide instructions to the Certificateholder regarding delivery of the
Exchangeable REMIC Certificates or Exchangeable Certificates and payment of the
administrative fee. A Certificateholder's notice to the Trustee will become
irrevocable on the second day prior to the proposed exchange date specified in
the related prospectus supplement. Any Exchangeable REMIC Certificates or
Exchangeable Certificates that are Book-Entry Certificates will be subject to
DTC's Rules.
If the related prospectus supplement describes exchange proportions for a
Combination of Classes of Exchangeable REMIC Certificates and Exchangeable
Certificates, these proportions will be based on the original, rather than the
outstanding, principal balances or notional amounts of these Classes.
Distributions on an Exchangeable REMIC Certificate or Exchangeable
Certificate received in an exchange will be made as described in the related
prospectus supplement. Distributions will be made to the applicable
Certificateholder of record as of the applicable Record Date.
- --------------------------------------------------------------------------------
PREPAYMENT AND YIELD CONSIDERATIONS
- --------------------------------------------------------------------------------
Pass-Through Rates
Any Class of Certificates of a series may have a fixed Pass-Through Rate, or
a Pass-Through Rate which varies based on changes in an index or based on
changes in the underlying Mortgage Loans (such as, for example, varying on the
basis of changes in the weighted average Net Mortgage Interest Rates of the
underlying Mortgage Loans).
The prospectus supplement for each series will specify the range and the
weighted average of the Mortgage Interest Rates and, if applicable, Net Mortgage
Interest Rates for the Mortgage Loans underlying the series as of the Cut-off
Date. If the Trust Estate includes adjustable-rate Mortgage Loans or Interest
Only Mortgage Loans or includes Mortgage Loans with different Net Mortgage
Interest Rates, the weighted average Net Mortgage Interest Rate may vary from
time to time as set forth below. See "The Trust Estates." The prospectus
supplement for a series will also specify the initial Pass-Through Rate for each
Class of Certificates of the series and will specify whether each Pass-Through
Rate is fixed or is variable.
The Net Mortgage Interest Rate for any adjustable-rate Mortgage Loan will
change with any changes in the level of the index specified in the applicable
prospectus supplement on which Mortgage Interest Rate adjustments are based,
subject to any applicable periodic or lifetime caps or floors on the related
Mortgage Interest Rate. In addition, the Net Mortgage Interest Rate for any
adjustable-rate Mortgage Loan may change if a different index is substituted for
an index which is no longer available in accordance with the terms of the
related Mortgage Note. The weighted average Net Mortgage Interest Rate for any
series may vary due to changes in the Net Mortgage Interest Rates of
adjustable-rate
64
Mortgage Loans, to the timing of the Mortgage Interest Rate readjustments of
those Mortgage Loans and to different rates of payment of principal of fixed- or
adjustable-rate Mortgage Loans bearing different Mortgage Interest Rates.
Scheduled Delays in Distributions
At the date of initial issuance of the Certificates of each series offered
by this prospectus and the applicable prospectus supplement, the initial
purchasers of a Class of Certificates may be required to pay accrued interest at
the applicable Pass-Through Rate for that Class from the Cut-off Date for the
series to, but not including, the date of issuance. The effective yield to
Certificateholders will be below the yield otherwise produced by the applicable
Pass-Through Rate because the distribution of principal and interest which is
due on each Due Date will not be made until the Distribution Date of the month
in which the Due Date occurs (or until another Distribution Date specified in
the applicable prospectus supplement).
Effect of Principal Prepayments
When a Mortgage Loan is prepaid in full, the mortgagor pays interest on the
amount prepaid only to the date of prepayment. Liquidation Proceeds and amounts
received in settlement of insurance claims are also likely to include interest
only to the time of payment or settlement. When a Mortgage Loan is prepaid in
full or in part, an interest shortfall may result depending on the timing of the
receipt of the prepayment and the timing of when those prepayments are passed
through to Certificateholders. To partially mitigate this reduction in yield,
the Pooling Agreement and/or Underlying Servicing Agreements relating to a
series may provide, to the extent specified in the applicable prospectus
supplement, that for specified types of principal prepayments received, the
applicable Servicer or the Master Servicer will be obligated, on or before each
Distribution Date, to pay an amount equal to the lesser of (i) the aggregate
interest shortfall with respect to the Distribution Date resulting from those
principal prepayments by mortgagors and (ii) all or a portion of the Servicer's
or the Master Servicer's, as applicable, servicing compensation for the
Distribution Date specified in the applicable prospectus supplement. No
comparable interest shortfall coverage will be provided by the Servicer or the
Master Servicer with respect to liquidations of any Mortgage Loans. Any interest
shortfall arising from liquidations will be covered by means of the
subordination of the rights of Subordinate Certificateholders or any other
credit support arrangements.
A lower rate of principal prepayments than anticipated would negatively
affect the total return to investors in any Certificates of a series that are
offered at a discount to their principal amount and a higher rate of principal
prepayments than anticipated would negatively affect the total return to
investors in the Certificates of a series that are offered at a premium to their
principal amount. The yield on Certificates that are entitled solely or
disproportionately to distributions of principal or interest may be particularly
sensitive to prepayment rates, and further information relating to yield on
those Certificates will be included in the applicable prospectus supplement.
Weighted Average Life of Certificates
The Mortgage Loans may be prepaid in full or in part at any time. The
Mortgage Loans generally will not provide for a prepayment penalty but may so
provide if indicated in the related prospectus supplement. Fixed-rate Mortgage
Loans generally will contain due-on-sale clauses permitting the mortgagee to
accelerate the maturities of the Mortgage Loans upon conveyance of the related
Mortgaged Properties, and adjustable-rate Mortgage Loans generally will permit
creditworthy borrowers to assume the then-outstanding indebtedness on the
Mortgage Loans.
Prepayments on Mortgage Loans are commonly measured relative to a prepayment
standard or model. The prospectus supplement for each series of Certificates may
describe one or more prepayment
65
standards or models and contain tables setting forth the weighted average life
of each Class and the percentage of the original total Class Balance of each
Class that would be outstanding on specified Distribution Dates for the series
and the projected yields to maturity on certain Classes, in each case based on
the assumptions stated in the related prospectus supplement, including
assumptions that prepayments on the Mortgage Loans are made at rates
corresponding to various percentages of the prepayment standard or model
specified in the related prospectus supplement.
There is no assurance that prepayment of the Mortgage Loans underlying a
series of Certificates will conform to any level of the prepayment standard or
model specified in the applicable prospectus supplement. A number of factors,
including but not limited to homeowner mobility, economic conditions, natural
disasters, changes in mortgagors' housing needs, job transfers, unemployment or,
in the case of borrowers relying on commission income and self-employed
borrowers, significant fluctuations in income or adverse economic conditions,
mortgagors' net equity in the properties securing the mortgage loans, including
the use of second or "home equity" mortgage loans by mortgagors or the use of
the properties as second or vacation homes, servicing decisions, enforceability
of due-on-sale clauses, mortgage market interest rates, mortgage recording
taxes, competition among mortgage loan originators resulting in reduced
refinancing costs, reduction in documentation requirements and willingness to
accept higher loan-to-value ratios, and the availability of mortgage funds, may
affect prepayment experience. In general, however, if prevailing mortgage
interest rates fall below the Mortgage Interest Rates borne by the Mortgage
Loans underlying a series of Certificates, the prepayment rates of the Mortgage
Loans are likely to be higher than if prevailing rates remain at or above the
rates on the Mortgage Loans. Conversely, if prevailing mortgage interest rates
rise above the Mortgage Interest Rates borne by the Mortgage Loans, the Mortgage
Loans are likely to experience a lower prepayment rate than if prevailing rates
remain at or below those Mortgage Interest Rates. However, because many
different factors affect prepayment behavior, as described above, prepayments
may not rise or fall in direct relation to changes in mortgage interest rates.
It should be noted that Certificates of a series may evidence an interest in a
Trust Estate with different Mortgage Interest Rates. Accordingly, the prepayment
experience of those Certificates will to some extent be a function of the mix of
interest rates of the Mortgage Loans. In addition, the terms of the Underlying
Servicing Agreements may require the related Servicer to enforce any due-on-sale
clause to the extent it has knowledge of the conveyance or the proposed
conveyance of the underlying Mortgaged Property; provided, however, that any
enforcement action that the Servicer determines would jeopardize any recovery
under any related primary mortgage insurance policy will not be required and
provided, further, that the Servicer may permit the assumption of defaulted
Mortgage Loans. See "Servicing of the Mortgage Loans--Enforcement of
"Due-on-Sale" Clauses; Realization Upon Defaulted Mortgage Loans" and "Certain
Legal Aspects of the Mortgage Loans--"Due-On-Sale" Clauses" for a description of
certain provisions of each Pooling Agreement and certain legal developments that
may affect the prepayment experience on the Mortgage Loans.
At the request of a borrower, a Servicer, including the Sponsor, may allow
the refinancing of a Mortgage Loan in any Trust Estate serviced by it by
accepting a prepayment in full and permitting a new mortgage loan secured by a
mortgage on the same property. Upon refinancing, the new mortgage loan will not
be included in the Trust Estate. Any refinancing will have the same effect as a
prepayment in full of the related Mortgage Loan. In this regard a Servicer,
including the Sponsor, may, from time to time, implement programs designed to
encourage refinancing through it, including but not limited to general or
targeted solicitations, or the offering of pre-approved applications, reduced or
nominal origination fees or closing costs, or other financial incentives. See
"The Mortgage Loan Programs--Mortgage Loan Underwriting--Bank of America General
Underwriting Standards" for a description of the Sponsor's mortgage refinance
programs. A Servicer may also encourage refinancing of defaulted Mortgage Loans,
or may encourage the assumption of defaulted Mortgage Loans by creditworthy
borrowers.
66
Provided that a borrower has been current in his or her mortgage loan
payment obligations in the previous twelve months, the Sponsor may agree to
refinance a mortgage loan in order to reduce the borrower's mortgage interest
rate or change the term of the mortgage loan through a reduced documentation
refinancing. In addition, in the case of certain borrowers who have indicated an
interest in refinancing or who have requested payoff information, the Sponsor
may refinance the existing mortgage loan through the extension of a replacement
mortgage loan or the modification of the existing mortgage loan, with minimal
new borrower credit or property underwriting standards or cost to the borrower.
Any refinancing of this type will have the same effect as a prepayment in full
of the related mortgage loan. See "The Mortgage Loan Programs--Mortgage Loan
Underwriting--Bank of America General Underwriting Standards." The streamlined
procedures, minimal borrower cost and minimal underwriting standards associated
with the Sponsor's refinancing programs may result in an increase in the number
of mortgage loans eligible for refinancing and a narrowing of the mortgage
interest rate differential that may otherwise need to exist before a refinancing
is practical and economical for the borrower. These factors, together with
generally increased borrower sophistication regarding the benefits of
refinancing, may also result in a significant increase in the rate of
prepayments on the Mortgage Loans.
The Depositor will be obligated, under the circumstances specified in "The
Pooling Agreement--Assignment of Mortgage Loans," to repurchase certain of the
Mortgage Loans. In addition, the terms of certain insurance policies relating to
the Mortgage Loans may permit the applicable insurer to purchase any Mortgage
Loan which is in default or as to which default is reasonably foreseeable. The
proceeds of any purchase or repurchase under these circumstances will be
deposited in the related Servicer Custodial Account and the purchase or
repurchase will have the same effect as a prepayment in full of the related
Mortgage Loan. See "The Pooling Agreement--Assignment of Mortgage Loans." In
addition, if specified in the applicable prospectus supplement, the Depositor or
another person identified in the prospectus supplement will have the option to
purchase all or a portion (generally an identified group of Mortgage Loans) of
the Mortgage Loans in any Trust under the limited conditions specified under
"The Pooling Agreement -- Termination; Optional Purchase of Mortgage Loans." For
any series of Certificates for which one or more elections has been made to
treat the Trust Estate (or one or more segregated pools of assets therein) as
one or more REMICs, these purchases or repurchases may be effected only pursuant
to a "qualified liquidation," as defined in Code Section 860F(a)(4)(A).
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SERVICING OF THE MORTGAGE LOANS
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The servicing of the Mortgage Loans in the Trust underlying a series of
Certificates will be performed by one or more Servicers, which may include the
Sponsor or its affiliates. If there is more than one Servicer of the Mortgage
Loans related to a series, a master servicer, which may be the Sponsor or an
affiliate (the "Master Servicer"), may be engaged to supervise some or all of
the Servicers. The applicable prospectus supplement will identify (i) any Master
Servicer, (ii) each Servicer affiliated with the Sponsor, (iii) each Servicer
that services 10% or more of the Mortgage Loans and (iv) any other material
servicer that is responsible for performing an aspect of the servicing on which
the performance of the related Mortgage Loans or Certificates are materially
dependent.
The following is a summary of the material servicing provisions of the
Pooling Agreements. A form of Pooling Agreement has been filed as an exhibit to
the registration statement of which this prospectus forms a part. The Pooling
Agreement for each series will be filed with the SEC following the date of
initial issuance of the related Certificates.
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The Master Servicer
The Master Servicer generally will be responsible under each applicable
Pooling Agreement for, among other things, (i) administering and supervising the
performance by the Servicers of their duties and responsibilities under the
Underlying Servicing Agreements, (ii) oversight of payments received on Mortgage
Loans, (iii) preparation of periodic reports to the Trustee regarding the
foregoing matters, (iv) performing certain of the servicing obligations of a
terminated Servicer as described below under "--The Servicers" and (v) making
Periodic Advances of delinquent payments of principal and interest on the
Mortgage Loans to the limited extent described below under the heading
"--Periodic Advances and Servicing Advances," if those amounts are not advanced
by a Servicer. The Master Servicer will also perform additional duties as
described in the applicable prospectus supplement. The Master Servicer will be
entitled to receive a portion of the interest payments on the Mortgage Loans
included in the Trust Estate for a series to cover its fees as Master Servicer
or will be paid in another manner specified in the applicable prospectus
supplement. The Master Servicer may subcontract with any other entity the
obligations of the Master Servicer under any Pooling Agreement. The Master
Servicer will remain primarily liable for the contractor's performance in
accordance with the applicable prospectus supplement. The Master Servicer may be
released from its obligations in certain circumstances. See "--The Servicers."
The Servicers
With respect to any series, one or more Servicers (each, a "Servicer")
specified in the applicable prospectus supplement, including the Sponsor, will
provide certain customary servicing functions for the Mortgage Loans pursuant to
the related Pooling Agreement or separate underlying servicing agreements (each,
an "Underlying Servicing Agreement") with the Depositor or an affiliate of the
Depositor. These Servicers may be the originators of the Mortgage Loans or
affiliates of the applicable originators or third parties identified in the
applicable prospectus supplement. The rights of the Depositor or affiliate of
the Depositor under the applicable Underlying Servicing Agreements relating to
the Mortgage Loans included in the Trust Estate for a series will be assigned
(directly or indirectly) to the Trustee for the benefit of Certificateholders of
that series. The Servicers may be entitled to withhold their Servicing Fees and
certain other fees and charges from remittances of payments received on Mortgage
Loans serviced by them.
Each Servicer generally will be approved by Fannie Mae or Freddie Mac as a
servicer of mortgage loans.
The duties to be performed by each Servicer include collection and
remittance of principal and interest payments on the Mortgage Loans,
administration of mortgage escrow accounts, collection of insurance claims,
foreclosure procedures, and, if necessary, the advance of funds to the extent
certain payments are not made by the mortgagor and have not been determined by
the Servicer to be not recoverable under the applicable insurance policies, from
proceeds of liquidation of those Mortgage Loans or otherwise. Each Servicer also
will provide necessary accounting and reporting services to provide required
information to the Trustee or to enable the Master Servicer to provide required
information to the Trustee for the Mortgage Loans included in the Trust Estate
for a series. Each Servicer is entitled to a periodic Servicing Fee equal to a
specified percentage of the outstanding principal balance of each Mortgage Loan
serviced by it. The obligations of a Servicer may be performed through
subservicers or vendors, provided that the Servicer remains primarily liable for
the servicing of the Mortgage Loans in the applicable Trust. In the event a
Servicer appoints a subservicer that meets the thresholds provided in Item
1108(a)(3) of Regulation AB (17 CFR 229.1108), the applicable prospectus
supplement will provide the disclosure required by Item 1108(b) and (c) of
Regulation AB (17 CFR 229.1108). In the event that such appointment occurs after
the issuance of the related series of
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Certificates, the Depositor will report such appointment on Form 8-K for so long
as the related Issuing Entity is subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended.
The Trustee, or if so provided in the applicable Pooling Agreement, the
Master Servicer, may terminate a Servicer who has failed to comply with its
covenants or breached one of its representations contained in the applicable
Pooling Agreement or Underlying Servicing Agreement or in certain other
circumstances. Upon termination of a Servicer by the Trustee or the Master
Servicer, the Trustee or the Master Servicer, as the case may be, will assume
certain servicing obligations of the terminated Servicer, or, at its option, may
appoint a substitute Servicer acceptable to the Trustee to assume the servicing
obligations of the terminated Servicer. Neither the Master Servicer's nor the
Trustee's obligations to act as substitute Servicer following the termination of
an Underlying Servicing Agreement or termination of the Servicer under the
applicable Pooling Agreement will, however, require the Master Servicer or the
Trustee, as applicable, to purchase a Mortgage Loan from the Trust Estate due to
a breach by the terminated Servicer of a representation or warranty in respect
of the Mortgage Loan.
The Trustee or a successor servicer is entitled to be reimbursed for its
costs in effecting a servicing transfer from the predecessor servicer. In the
event that the predecessor servicer fails to reimburse the Trustee or successor
servicer, the Trustee or successor servicer will be entitled to reimbursement
from the assets of the related Trust.
The Pooling Agreement will provide that a Servicer may not resign from its
obligations and duties under the Pooling Agreement for each series, except upon
its determination that its duties under the Pooling Agreement are no longer
permissible under applicable law. No resignation will become effective until the
Trustee for a series or a successor servicer or Master Servicer has assumed the
Servicer's obligations and duties under the Pooling Agreement. If a Servicer
resigns for the foregoing reason and the Trustee is unable or unwilling to
assume responsibility for its duties under the Pooling Agreement, it may appoint
another institution to so act as described under "The Pooling Agreement --
Rights Upon Event of Default" below.
The Pooling Agreement will provide that no Servicer nor any director,
officer, employee or agent of any Servicer will be under any liability to the
Trust Estate or the Certificateholders, for the taking of any action or for
refraining from the taking of any action in good faith pursuant to the Pooling
Agreement, or for errors in judgment; provided, however, that no Servicer nor
any director, officer, employee or agent of any Servicer will be protected
against any liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of reckless disregard of its obligations and duties under the Pooling
Agreement. Each Servicer and any director, officer, employee or agent of each
Servicer shall be indemnified by the Trust Estate and held harmless against any
loss, liability or expense incurred in connection with any legal action relating
to the Pooling Agreement or Underlying Servicing Agreement or the Certificates,
other than any loss, liability or expense related to any specific Mortgage Loan
or Mortgage Loans and any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of it
duties under the Pooling Agreement or Underlying Servicing Agreement or by
reason of reckless disregard of obligations and duties under the Pooling
Agreement or Underlying Servicing Agreement. In addition, the Pooling Agreement
will provide that no Servicer will be under any obligation to appear in,
prosecute or defend any legal action that is not incidental to its duties under
the Pooling Agreement and that in its opinion may involve it in any expense or
liability. A Servicer may, however, in its discretion, undertake any action
deemed by it necessary or desirable relating to the Pooling Agreement and the
rights and duties of the parties to the Pooling Agreement and the interests of
the Certificateholders. In this event, the legal expenses and costs of the
action and any liability resulting from it will be expenses, costs and
liabilities of the Trust and the Servicer will be entitled to be reimbursed out
of the Servicer Custodial Account, and any loss to the Trust arising from this
right of reimbursement will be allocated first to the Subordinate
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Certificate of a series before being allocated to the related Senior
Certificates, or if the series does not contain Subordinate Certificates, pro
rata among the various Classes of Certificates or in another manner specified in
the applicable prospectus supplement.
Any person into which the Servicer may be merged or consolidated, or any
person resulting from any merger, conversion or consolidation to which the
Servicer is a party, or any person succeeding to the business through the
transfer of substantially all of its assets or all assets relating to the
business, or otherwise, of the Servicer will be the successor of the Servicer
under the terms of the Pooling Agreement for each series provided that the
successor or resulting entity is qualified to service mortgage loans for Fannie
Mae or Freddie Mac.
The Servicer also has the right to assign its rights and delegate its duties
and obligations under the Pooling Agreement for each series; provided that, if
the Servicer desires to be released from its obligations under the Pooling
Agreement, (i) the purchaser or transferee accepting the assignment or
delegation is qualified to service mortgage loans for Fannie Mae or Freddie Mac,
(ii) the purchaser is satisfactory to the Trustee for the series, in the
reasonable exercise of its judgment, and executes and delivers to the Trustee an
agreement, in form and substance reasonably satisfactory to the Trustee, which
contains an assumption by the purchaser or transferee of the due and punctual
performance and observance of each covenant and condition to be performed or
observed by the Servicer under the Pooling Agreement from and after the date of
the agreement, and (iii) each applicable Rating Agency's rating of any
Certificates for the series in effect immediately prior to the assignment, sale
or transfer would not be qualified, downgraded or withdrawn as a result of the
assignment, sale or transfer and the Certificates would not be placed on credit
review status by any Rating Agency. The Servicer will be released from its
obligations under the Pooling Agreement upon the assignment and delegation of
its duties and obligations, except that the Servicer will remain liable for all
liabilities and obligations incurred by it prior to the time that the conditions
contained in clauses (i), (ii) and (iii) above are met.
In the event that there is a Master Servicer for a series, the provisions
described above will apply to the Master Servicer and substantially similar
provisions will apply to each Servicer under the Underlying Servicing
Agreements.
Servicing Experience and Procedures of Bank of America
General
Bank of America has been servicing consumer mortgage loans in excess of 25
years. The table below sets forth information about Bank of America's portfolio
of first-lien, residential mortgage loans (excluding revolving home equity lines
of credit) as of the dates indicated:
As of As of As of As of
December 31, December 31, December 31, June 30,
First Lien Mortgage Loans 2003 2004 2005 2006
- ------------------------- ------------ ------------ ------------ ---------
By Number 2,215,425 2,258,581 2,227,378 2,241,640
By Aggregate Unpaid Principal
Balance (in Billions) $246.5 $273.1 $296.8 $313.0
Within this portfolio, as of June 30, 2006, are 149,216 mortgage loans with
an unpaid principal balance of approximately $42.8 billion related to securities
issued through the Depositor's securitization program.
Bank of America has been approved as a mortgagee and seller/servicer by the
Department of Housing and Urban Development, the Veterans Administration, Ginnie
Mae, Fannie Mae and Freddie
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Mac. In addition to servicing loans for mortgages securitized by the Depositor,
Bank of America also services loans that are held in its portfolio and whole
loans that are sold to a variety of investors.
Bank of America utilizes a mortgage-servicing technology platform with
multiple capabilities and reporting functions that is widely used within the
residential mortgage industry. This platform allows Bank of America to process
mortgage servicing activities including but not limited to: (i) performing
account maintenance; (ii) tracking consumer communications; (iii) facilitating
communication between Bank of America's different internal business units, and
between Bank of America and its third-party vendors; (iv) entering and updating
transaction data; and (v) generating various reports.
Bank of America has implemented and tested a business continuity plan. In
case of a disruption, all functions of the disrupted facility are automatically
transferred to a different undisrupted facility. The facility receiving the
transfer of functionality will have access to all data and tools necessary to
continue servicing all mortgage loans. Bank of America's business continuity
plan is tested and updated annually.
Bank of America's servicing policies and procedures have been generally
consistent for the last three years in all material respects. The only
significant changes in Bank of America's policies and procedures have come in
response to changes in federal or state law or investor requirements, such as
updates issued by Fannie Mae or Freddie Mac.
Bank of America may perform any of its obligations under the Pooling
Agreement through one or more third-party vendors, affiliates or subsidiaries.
Bank of America may engage third-party vendors to provide technology or process
efficiencies. Bank of America monitors its third-party vendors in compliance
with the guidelines reviewed by the OCC. Bank of America has entered into
contracts with third-party vendors for functions related to customer bankruptcy,
certain foreclosure-related activities, hazard insurance, lockbox and document
printing.
Delinquencies, Losses, Bankruptcies and Recoveries
Bank of America monitors Mortgage Loans for a variety of situations that
present the risk of delinquency or loss to a Trust. Those situations include,
without limitation, situations where a mortgagor has sold or transferred the
Mortgaged Property, where there has been damage to the Mortgaged Property, where
the mortgagor is late in making payments for any number of reasons, and where
the mortgagor has declared bankruptcy. The following is a description of Bank of
America's policies and procedures to respond to each of these situations.
Property Damage. When an underlying property is damaged and such damage is
covered by insurance, Bank of America takes certain actions to recover insurance
funds on behalf of the applicable Trust as described below under "-- Enforcement
of "Due-on-Sale" Clauses; Realization Upon Defaulted Mortgage Loans."
More specifically, Bank of America has retained a vendor to address most of
the work related to recovery of proceeds of hazard insurance. This vendor
generally performs the following tasks: (i) insurance customer service, (ii)
flood processing and tracking, (iii) renewal, (iv) lender-placed hazard
insurance tracking and placement and (v) claims processing. The vendor tracks
and reports its activities by directly accessing Bank of America's servicing
system which reports Bank of America employees actively monitor.
Collections and Loss Mitigation. Account status is monitored and efforts are
made to prevent a Mortgage Loan on which a payment is delinquent from going to
foreclosure. Based on account payment history, prior contact with the borrower,
property status, and various other factors, an appropriate course
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of action is employed to make direct mail or phone contact with the borrower(s).
All of the preceding factors are considered when determining the appropriate
timing for the contact efforts.
Initial phone contact is pursued by Bank of America's collections
department, which utilizes a predictive dialer and manual efforts to perform
strategic call campaigns based on selected criteria including stage of
delinquency and industry credit/behavioral risk scoring. Call attempts may begin
within several days of the payment due date and continue throughout the
delinquency in accordance with investor, mortgage insurance and government
agency guidelines. The collection activities of Bank of America are consistent
with fair debt collection practices, including, but not limited to placing calls
to the mortgagor after 8:00 a.m. or before 9:00 p.m. local time at the
customer's location. Each caller in the collection department attempts to: (i)
obtain the reason for default; (ii) obtain information related to the
mortgagor's current financial situation; (iii) verify occupancy; (iv) refer the
mortgagor to counseling agencies if appropriate; and (v) determine the best
possible loss mitigation option. Systemic stops may be used to prevent accounts
from being subject to notices, letters, calls and inspections in certain
situations. Some examples of situations subject to a stop of collection activity
may include the initial period following the transfer of servicing to Bank of
America, certain bankruptcy accounts, and customers who are the victim of fraud
or identity theft.
Bank of America grants a grace period of fifteen days after the Due Date in
which a borrower can make a monthly payment without incurring a penalty or late
charge. In addition, a Mortgage Loan is not considered delinquent unless a full
monthly payment has not been received by the close of business on the last day
of the month of the Due Date. For example, a Mortgage Loan with a Due Date of
May 1 is considered delinquent if a full monthly payment is not received by May
31.
Late charges are generally assessed after the Due Date at the expiration of
a grace period, if applicable. There may be situations, based on the customer or
account circumstances, where a late fee could be waived. Also certain systemic
stops may prevent the assessment of late fees, such as during the initial period
following the transfer of servicing to Bank of America.
Direct mail contact efforts occur during the various stages of delinquency.
Generally a courtesy notice is sent to customers after the Due Date and
expiration of any grace period. General default communications may continue with
a late fee notice, account billing statements, breach letters, loss mitigation
solicitations, occupancy and property status inquiries, and foreclosure notices,
if appropriate. More specifically, customer contact is generally made as
follows: (i) during the first 30 days of delinquency, Bank of America generally
assesses a late fee, sends a late notice and generally calls the customer during
the last week of the 30-day period, (ii) during the next 30 days of delinquency,
Bank of America again calls the customer, sends a loss mitigation letter
(setting forth appropriate options to bring the loan current) within the first
15 days of this period and then, in the third week of this period, sends a
formal notice, known as a "breach letter," that is legally required prior to
commencing formal foreclosure proceedings, (iii) during the next 15 days of
delinquency, Bank of America calls the customer, sends another loss mitigation
letter and performs an inspection of the property, and (iv) during the next 15
days of delinquency, Bank of America sends a final loss mitigation solicitation
letter before referring the matter to its foreclosure vendor.
In recognition of the fact that Mortgage Loans that are delinquent are at
higher risk for abandonment by the borrower, and may also face issues related to
maintenance, Bank of America has developed guidelines for inspecting properties
for which a monthly payment is delinquent. Depending on various factors, such as
the ability to contact the customer, the delinquency status of the account, and
the property occupancy status, Bank of America will hire a vendor to inspect the
related property to determine its condition. If the inspection results indicate
a need for property safeguarding measures, such as securing
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or winterizing, Bank of America will ensure the appropriate safeguards are
implemented in accordance with industry, legal and investor standards.
Bank of America has a dedicated loss mitigation unit that receives case
referrals from its collection, foreclosure, and bankruptcy departments as well
as from the loss mitigation unit's own contact efforts. Delinquent Mortgage
Loans are reviewed for investor eligible loss mitigation options, which can
include a promise to pay, repayment plan, forbearance, moratorium, modification,
short sale, special forbearance, deed-in-lieu of foreclosure, borrower
assistance, partial claim, assumption, sale of property, demand arrears, or
foreclosure. Bank of America will opt for any one or more of these mitigation
options depending on various factors, but will pursue more extensive loss
mitigation solutions when a suitable arrangement for repayment or promise to pay
is not feasible because of the borrowers financial situation or unwillingness to
remain in the property. Payment activities on delinquent Mortgage Loans are
monitored to ensure the appropriate application of partial payments where
specific arrangements have been agreed to allow partial payments and to ensure
an appropriate response to situations in which a customer has paid with a check
that is returned for insufficient funds. Payment plans are monitored according
to the plan due dates.
During the default process, if Bank of America becomes aware that the
borrower cannot continue to make regular scheduled payments and escrow
contributions, the loan will be deemed uncollectible. This may occur due to the
borrower's inability to bear the payment plan or failure to adhere to the
payment plan. Losses may be experienced on a Mortgage Loan during the real
estate owned process if the value of the property at time of liquidation is less
than the sum of the unpaid principal balance and all outstanding advances
(including, but not limited to, the outstanding unpaid principal balance of the
Mortgage Loan, interest advances, escrow advances, uncollected Servicing Fees,
property maintenance fees, attorney fees, and other necessary fees).
Bankruptcy. When a mortgagor files for bankruptcy, Bank of America's options
for recovery are more limited. Bank of America monitors bankruptcy proceedings
and develops appropriate responses based on a variety of factors, including: (i)
the chapter of the Bankruptcy Code under which the mortgagor filed; (ii)
federal, state and local regulations; (iii) determination-of-claim requirements;
(iv) motion requirements; and (v) specific orders issued through the applicable
court. Bank of America utilizes a vendor to receive automated notices on all new
bankruptcy filings. The vendor is either a law firm or retains a law firm from a
pre-approved list of law firms. After validation of the bankruptcy, the loan is
automatically added to the mortgage servicing system's bankruptcy workstation
and the loan is flagged or coded to prevent collection calls and notices. Bank
of America's bankruptcy staff is responsible for the daily monitoring of the
bankruptcy cases, including all customer inquiries, debtor and trustee payment
application, escrow analysis, strict compliance orders, reaffirmation agreements
and compliance with all investor and agency servicing and reporting
requirements.
The vendor is responsible for filing all proof of claims, reviewing plans,
making objections and filing motions for relief. Bank of America aggressively
monitors the performance of the vendor daily, weekly and monthly via control
reports to ensure that investor/agency requirements are met and that service
levels are maintained.
Foreclosure. Bank of America delegates to a vendor initial responsibility
for activities related to foreclosure. Once Bank of America's collections
department approves a foreclosure, it places a stop on the Mortgage Loan and
refers the matter to the foreclosure vendor. The foreclosure vendor performs the
following services: (a) conducting pre-foreclosure monitoring; (b) retaining and
managing counsel to pursue the foreclosure; (c) conducting property inspections
and taking appropriate actions to preserve the value of the Mortgaged Property;
(d) obtaining broker price opinions; and (e) if applicable, filing
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damaged property claims with insurance carriers on foreclosure Mortgage Loans.
Bank of America obtains an inspection of the property for loans that are
delinquent sixty days or more.
Bank of America manages the foreclosure vendor by reviewing monthly
automated performance reports that measure the timeliness and efficiency of the
foreclosure vendor's processing of loans in the foreclosure process.
Payments on Mortgage Loans; Certificate and Custodial Accounts
The Trustee for each series will establish and maintain a separate trust
account in the name of the Trustee (the "Certificate Account"). Each Certificate
Account must be maintained with a depository institution either (i) whose
long-term debt obligations (or, in the case of an institution which is part of a
holding company structure, the long-term debt obligations of the parent holding
company) are, at the time of any deposit, rated in at least one of the two
highest rating categories by the Rating Agency or Rating Agencies rating the
Certificates of the series, or (ii) that is otherwise acceptable to the Rating
Agency or Rating Agencies rating the Certificates of the series and, if one or
more REMIC elections have been made, that would not cause each REMIC to fail to
qualify as a REMIC. To the extent that the portion of funds deposited in the
Certificate Account at any time exceeds the limit of insurance coverage
established by the FDIC, the excess will be subject to loss in the event of the
failure of the depository institution. This insurance coverage will be based on
the number of holders of Certificates, rather than the number of underlying
mortgagors. Holders of the Subordinate Certificates of a series will bear this
loss up to the amount of principal payments on the related Mortgage Loans to
which those holders are entitled.
Pursuant to the applicable Pooling Agreement or the Underlying Servicing
Agreements, if any, for a series, each Servicer will be required to establish
and maintain one or more accounts (collectively, the "Servicer Custodial
Account") into which the Servicer will be required to deposit on a daily basis
amounts received relating to the Mortgage Loans serviced by the Servicer
included in the Trust Estate for a series, as more fully described below. Each
Servicer Custodial Account must be a separate custodial account insured to the
available limits by the FDIC or otherwise acceptable to the applicable Rating
Agencies (an acceptable account, an "Eligible Custodial Account") and other than
in the case of a Servicer Custodial Account established by the Sponsor as
Servicer, will generally be limited to funds held relating to a particular
series. A Servicer Custodial Account established by the Sponsor as Servicer will
serve as a unitary Servicer Custodial Account both for the particular series and
for other series of Certificates as well as other Mortgage Loans serviced by the
Sponsor; provided, however, that commingling of funds will not be permitted at
any time during which the senior long-term unsecured debt rating of the Sponsor
falls below certain levels established by each Rating Agency. Notwithstanding
any commingling of funds, the Sponsor is required to keep records that
accurately reflect the funds on deposit in the Servicer Custodial Account that
have been identified by it as being attributable to funds relating to a
particular series.
Funds credited to a Servicer Custodial Account may be invested for the
benefit and at the risk of the Servicer in certain investments acceptable to the
Rating Agencies ("Eligible Investments") maturing in general not later than the
business day preceding the next Distribution Date. All losses from investments
of funds in a Servicer Custodial Account are required to be deposited by the
applicable Servicer out of its own funds to the Servicer Custodial Account
immediately as realized.
Each Servicer will be required to remit to the Trustee for deposit to
the Certificate Account for each series of Certificates on the date the
Certificates are issued any amounts representing scheduled payments of principal
and interest on the Mortgage Loans serviced by it due after the applicable
Cut-off Date but received on or prior thereto. Each Servicer will be required to
remit to the Master Servicer for deposit in an Eligible Custodial Account
maintained by the Master Servicer in the name of the Trustee (the "Master
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Servicer Custodial Account") or, if there is no Master Servicer, to remit to the
Trustee for deposit in the Certificate Account, the following payments and
collections received or made by it relating to the Mortgage Loans serviced by it
subsequent to the applicable Cut-off Date (other than (a) payments due on or
before the Cut-off Date and (b) amounts held for future distribution):
(i) all payments on account of principal, including prepayments, and
interest;
(ii) all amounts received by the Servicer in connection with the
liquidation of defaulted Mortgage Loans or property acquired relating to
the defaulted Mortgage Loan, whether through foreclosure sale or
otherwise, including payments in connection with defaulted Mortgage
Loans received from the mortgagor other than amounts required to be paid
to the mortgagor pursuant to the terms of the applicable Mortgage Loan
or otherwise pursuant to law ("Liquidation Proceeds") less, to the
extent permitted under the applicable Pooling Agreement or Underlying
Servicing Agreement, the amount of any expenses incurred in connection
with the liquidation of the applicable Mortgage Loans;
(iii) all proceeds received by the Servicer under any title, hazard
or other insurance policy covering any Mortgage Loan, other than
proceeds to be applied to the restoration or repair of the property
subject to the related Mortgage or released to the mortgagor in
accordance with the applicable Pooling Agreement or Underlying Servicing
Agreement;
(iv) all Periodic Advances made by the Servicer;
(v) all amounts withdrawn from Buy-Down Funds or Subsidy Funds, if
any, with respect to the Mortgage Loans, in accordance with the terms of
the applicable agreements;
(vi) all proceeds of any Mortgage Loans or property acquired
relating to the Mortgage Loan purchased or repurchased pursuant to the
Pooling Agreement or the Underlying Servicing Agreement; and
(vii) all other amounts required to be deposited to the Certificate
Account pursuant to the applicable Pooling Agreement or the Underlying
Servicing Agreement.
Notwithstanding the foregoing, each Servicer will be entitled, at its
election, either (a) to withhold and pay itself the applicable Servicing Fee
from any payment or other recovery on account of interest as received and prior
to deposit in the Servicer Custodial Account or (b) to withdraw from the
Servicer Custodial Account the applicable Servicing Fee after the entire payment
or recovery has been deposited.
Each Servicer is also permitted, from time to time, to make withdrawals
from the applicable Servicer Custodial Account for the following purposes, to
the extent permitted in the applicable Pooling Agreement or Underlying Servicing
Agreement:
(i) to pay to itself, to the extent not previously retained, the
servicing compensation to which it is entitled;
(ii) to reimburse itself for Advances, to the extent of amounts
received on the Mortgage Loan(s) relating to which the Advances were
made (including any amounts received from the Sponsor in connection with
amounts cancelled due to BPP on a Mortgage Loan);
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(iii) to reimburse itself for any Nonrecoverable Advance previously
made, to the extent of amounts received on the Mortgage Loans in the
same loan group as the Mortgage Loan(s) relating to which the
Nonrecoverable Advances were made;
(iv) to reimburse itself for expenses covered by insurance policies
from proceeds of those policies;
(v) to pay itself or the Depositor any indemnification payments
described under "The Depositor" and "--The Servicers";
(vi) to pay to the Depositor, itself or the Master Servicer with
respect to each Mortgage Loan or property acquired in respect thereof
that has been repurchased by the Depositor or purchased by it or the
Master Servicer all amounts received after the date of repurchase or
purchase;
(vii) to withdraw from the Servicer Custodial Account any amount
deposited in that account that was not required to be deposited therein;
and
(viii) to clear and terminate the Servicer Custodial Account.
If there is a Master Servicer for a series of Certificates, the Master
Servicer will be permitted by the Pooling Agreement to make withdrawals from the
Master Servicer Custodial Account to the extent described above for a Servicer,
to the extent permitted in the applicable Pooling Agreement. The Master Servicer
or Trustee will be required to deposit in the Certificate Account any Periodic
Advances made by the Master Servicer or Trustee, as applicable, in the event of
a Servicer default not later than the Distribution Date on which the Periodic
Advances are required to be distributed. All other amounts deposited in the
Master Servicer Custodial Account (other than Master Servicing Fees and, to the
extent the Master Servicer is entitled thereto under the applicable Pooling
Agreement, interest on amounts in the Master Servicer Custodial Account) are
required to be remitted by the Master Servicer to the Trustee for deposit in the
Certificate Account not later than the applicable Distribution Date. On each
Distribution Date, the Trustee will withdraw from the Certificate Account and
remit to Certificateholders all amounts constituting the Pool Distribution
Amount for that Distribution Date.
If a Servicer, the Master Servicer or the Trustee deposits in the
Certificate Account for a series any amount not required to be deposited, the
Trustee may at any time withdraw the amount from the Certificate Account for
itself or for remittance to the applicable Servicer or the Master Servicer, as
applicable. Funds on deposit in the Certificate Account may be invested in
Eligible Investments maturing in general not later than the business day
preceding the next Distribution Date (except that if the Eligible Investment is
an obligation of the institution that maintains the Certificate Account, then
the Eligible Investment may mature not later than the next Distribution Date).
In the event that one or more elections has been made to treat the Trust Estate
(or one or more segregated pools of assets therein) with respect to a series as
one or more REMICs, no Eligible Investments will be sold or disposed of at a
gain prior to maturity unless the Trustee has received an opinion of counsel or
other evidence satisfactory to it that the sale or disposition will not cause
the Trust Estate (or segregated pool of assets) to be subject to the tax on
"prohibited transactions" imposed by Code Section 860F(a)(1), otherwise subject
the Trust Estate (or segregated pool of assets) to tax, or cause any REMIC to
fail to qualify as a REMIC while any Certificates of the series are outstanding.
All income and gain realized from any investment of funds in the Certificate
Account will generally be for the account of the Trustee as additional
compensation and all losses from investments of funds in the Certificate Account
will be deposited by the Trustee out of its own funds to the Certificate Account
immediately as realized.
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The Trustee is permitted, from time to time, to make withdrawals from
the Certificate Account for the following purposes, to the extent permitted in
the applicable Pooling Agreement:
(i) to pay itself the applicable Trustee Fee and to pay to the owner
thereof any Fixed Retained Yield;
(ii) to reimburse itself for certain expenses and to pay itself any
amounts representing indemnification, each as described under "The
Pooling Agreement -- The Trustee";
(iii) to pay to itself any interest earned on or investment income
earned with respect to funds in the Certificate Account (all of this
interest or income to be withdrawn not later than the next Distribution
Date);
(iv) to withdraw from the Certificate Account any amount deposited
in that account that was not required to be deposited therein; and
(v) to clear and terminate the Certificate Account.
The Trustee will be authorized to appoint a paying agent (the "Paying
Agent") to make distributions, as agent for the Trustee, to Certificateholders
of a series. If the Paying Agent for a series is not the Trustee for that
series, the Trustee will, on each Distribution Date, deposit in immediately
available funds in an account designated by the Paying Agent the amount required
to be distributed to the Certificateholders on that Distribution Date.
The Trustee will cause any Paying Agent to execute and deliver to the
Trustee an instrument in which the Paying Agent agrees with the Trustee that the
Paying Agent will hold all amounts deposited with it by the Trustee for
distribution to Certificateholders in trust for the benefit of
Certificateholders until the amounts are distributed to Certificateholders or
otherwise disposed of as provided in the applicable Pooling Agreement.
Periodic Advances and Servicing Advances
Generally each Servicer will be required to make (i) an advance prior to
each Distribution Date of an amount equal to the payment of principal and
interest on each Mortgage Loan (net of the related Servicing Fee) which was due
on the related Due Date on the Mortgage Loans and which was delinquent on the
related Determination Date (a "Periodic Advance") and (ii) other advances of
cash ("Servicing Advances" and, collectively with Periodic Advances, "Advances")
to cover (a) delinquent payments of taxes, insurance premiums, and other
escrowed items and (b) rehabilitation expenses and foreclosure costs, including
reasonable attorneys' fees, in either case unless the Servicer has determined
that any subsequent payments on that Mortgage Loan or from the borrower will
ultimately not be available to reimburse it for those amounts.
Advances by each Servicer will be made from its own funds or funds in the
applicable Servicer Custodial Account that do not constitute a portion of the
applicable Pool Distribution Amount for that Distribution Date. The obligation
to make an Advance with respect to any Mortgage Loan will continue until the
ultimate disposition of the REO Property or Mortgaged Property relating to the
Mortgage Loan unless the Servicer determines, based on its estimation of the
value of the Mortgaged Property in relation to the sum of the unpaid principal
balance of the related Mortgage Loan, accrued interest, the amount of previously
unreimbursed Advances and anticipated disposition expenses, that the advance
would not ultimately be recoverable under any applicable insurance policies,
from proceeds of liquidation of the
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Mortgage Loan or otherwise. An "REO Property" is a Mortgaged Property that has
been acquired by a Servicer on behalf of the Trust through foreclosure or grant
of a deed in lieu of foreclosure.
The failure of a Servicer to make any required Periodic Advances or
Servicing Advances under an Underlying Servicing Agreement or a Pooling
Agreement constitutes a default for which the Servicer will be subject to
termination. Upon default by a Servicer, the Master Servicer or the Trustee will
be required to make Periodic Advances to the extent necessary to make required
distributions on certain Certificates or certain Servicing Advances, provided
that the Master Servicer or Trustee, as applicable, determines that funds will
ultimately be available to reimburse it from proceeds of the related Mortgaged
Property. In the case of Certificates of any series for which credit enhancement
is provided in the form of a mortgage pool insurance policy, the Depositor may
obtain an endorsement to the mortgage pool insurance policy which obligates the
pool insurer to advance delinquent payments of principal and interest. The pool
insurer would only be obligated under the endorsement to the extent the
mortgagor fails to make his or her payment and the Master Servicer or Trustee
fails to make a required advance.
Any Periodic Advances made by the Servicers, the Master Servicer or Trustee
must be deposited into the applicable Servicer Custodial Account or the
Certificate Account and will be due no later than the business day before the
Distribution Date to which the delinquent payment relates. Advances by the
Servicers, the Master Servicer or Trustee will be reimbursable out of insurance
proceeds or Liquidation Proceeds of, or, except for Servicing Advances, future
payments on, the Mortgage Loans for which the amounts were advanced. If an
Advance made by a Servicer, the Master Servicer or the Trustee later proves, or
is deemed by the Servicer, the Master Servicer or the Trustee, to be
unrecoverable, the Servicer, the Master Servicer or the Trustee will be entitled
to reimbursement from funds in the applicable Servicer Custodial Account or the
Certificate Account prior to the distribution of payments to the
Certificateholders to the extent provided in the Underlying Servicing Agreement
or Pooling Agreement.
Any Periodic Advances made by a Servicer, the Master Servicer or the Trustee
relating to Mortgage Loans included in the Trust Estate for any series are
intended to enable the Trustee to make timely payment of the scheduled
distributions of principal and interest on the Certificates of the series.
However, none of the Master Servicer, the Trustee or any Servicer will insure or
guarantee the Certificates of any series or the Mortgage Loans included in the
Trust Estate for any Certificates.
Collection and Other Servicing Procedures
Each Servicer will be required by the related Underlying Servicing Agreement
or Pooling Agreement to make reasonable efforts to collect all payments called
for under the Mortgage Loans and, consistent with the applicable Underlying
Servicing Agreement or the Pooling Agreement and any applicable agreement
governing any form of credit enhancement, to follow the collection procedures as
it follows for mortgage loans serviced by it that are comparable to the Mortgage
Loans. Consistent with the above, the Servicer may, in its discretion, (i) waive
any prepayment premiums, assumption fee, late payment charge or any other charge
in connection with the prepayment of a Mortgage Loan and (ii) arrange with a
mortgagor a schedule for the liquidation of deficiencies running for not more
than 120 days (or any longer period to which the Master Servicer and any
applicable pool insurer or primary mortgage insurer have consented) after the
applicable Due Date.
Under each Underlying Servicing Agreement or the Pooling Agreement, each
Servicer, to the extent permitted by law, will establish and maintain one or
more escrow accounts (each account, an "Escrow Account") in which it will be
required to deposit any payments made by mortgagors in advance for taxes,
assessments, primary mortgage (if applicable) and hazard insurance premiums and
other similar items. Withdrawals from the Escrow Account may be made to make
timely payment of taxes, assessments, mortgage and hazard insurance, to refund
to mortgagors amounts determined to be overages, to pay
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interest to mortgagors on balances in the Escrow Account, if required, and to
clear and terminate the Escrow Account. Each Servicer will be responsible for
the administration of its Escrow Account. A Servicer will be obligated to
advance certain tax and insurance amounts which are not timely paid by the
mortgagors, to the extent that it determines, in good faith, that they will be
recoverable out of insurance proceeds, liquidation proceeds, or otherwise.
Alternatively, in lieu of establishing a Escrow Account, a Servicer may procure
a performance bond or other form of insurance coverage, in an amount acceptable
to the Master Servicer and each Rating Agency rating the related series of
Certificates, covering loss occasioned by the failure to escrow amounts.
Enforcement of "Due-on-Sale" Clauses; Realization Upon Defaulted Mortgage Loans
With respect to each Mortgage Loan having a fixed interest rate, the
applicable Underlying Servicing Agreement or Pooling Agreement will generally
provide that, when any Mortgaged Property is about to be conveyed by the
mortgagor, the Servicer will, to the extent it has knowledge of the prospective
conveyance, exercise its rights to accelerate the maturity of the Mortgage Loan
under the "due-on-sale" clause contained in the Mortgage Note or Mortgage, if
any, unless (i) it is not exercisable under applicable law, (ii) the exercise
would result in loss of insurance coverage relating to the Mortgage Loan or
(iii) the person to whom the related Mortgaged Property has been conveyed or is
proposed to be conveyed satisfies the terms and conditions contained in the
Mortgage Note and Mortgage related thereto and the consent of the related
mortgagee is not otherwise required as a condition to such transfer. In any case
where such nonenforcement is permitted by the Underlying Servicing Agreement or
Pooling Agreement, the Servicer is authorized to take or enter into an
assumption and modification agreement from or with the person to whom the
Mortgaged Property has been or is about to be conveyed, pursuant to which the
person becomes liable under the Mortgage Note and, unless prohibited by
applicable state law, the mortgagor also remains liable under the Mortgage Note,
provided that the Mortgage Loan will continue to be covered by any pool
insurance policy and any related primary mortgage insurance policy and the
Mortgage Interest Rate relating to the Mortgage Loan and the payment terms shall
remain unchanged. The Servicer will also be authorized, with the prior approval
of the pool insurer and the primary mortgage insurer, if any, to enter into a
substitution of liability agreement with the person to whom the Mortgaged
Property has been or is about to be conveyed, under which the original mortgagor
is released from liability and the person is substituted as mortgagor and
becomes liable under the Mortgage Note.
Each Underlying Servicing Agreement and Pooling Agreement with respect to a
series will require the Servicer or the Master Servicer, as the case may be, to
present claims to the insurer under any insurance policy applicable to the
Mortgage Loans included in the Trust Estate for the series and to take
reasonable steps as are necessary to permit recovery under the insurance
policies relating to defaulted Mortgage Loans, or losses on the Mortgaged
Property securing the Mortgage Loans.
Each Servicer is obligated to realize upon defaulted Mortgage Loans in
accordance with its normal servicing practices, which will conform generally to
those of prudent mortgage lending institutions which service mortgage loans of
the same type in the same jurisdictions. Notwithstanding the foregoing, each
Servicer is authorized to permit the assumption of a defaulted Mortgage Loan
rather than to foreclose or accept a deed-in-lieu of foreclosure if, in the
Servicer's judgment, the default is unlikely to be cured and the assuming
borrower meets the applicable underwriting guidelines. In connection with any
assumption, the Mortgage Interest Rate and the payment terms of the related
Mortgage Note will not be changed. Each Servicer may also, with the consent of
the Master Servicer, if any, modify the payment terms of Mortgage Loans that are
in default, or as to which default is reasonably foreseeable, that remain in the
Trust Estate rather than foreclose on those Mortgage Loans; provided that no
modification shall forgive principal owing under a Mortgage Loan or permanently
reduce the interest rate on a Mortgage Loan. Further, a
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Servicer may encourage the refinancing of defaulted Mortgage Loans, including
Mortgage Loans that would permit creditworthy borrowers to assume the
outstanding indebtedness.
In the case of foreclosure or of damage to a Mortgaged Property from an
uninsured cause, the Servicer will not be required to expend its own funds to
foreclose or restore any damaged property, unless it reasonably determines (i)
that the foreclosure or restoration will increase the proceeds to
Certificateholders of the series of liquidation of the Mortgage Loan after
reimbursement to the related Servicer for its expenses and (ii) that its
expenses will be recoverable to it through Liquidation Proceeds or any
applicable insurance policy relating to the Mortgage Loan. In the event that a
Servicer has expended its own funds for foreclosure or to restore damaged
property, it will be entitled to be reimbursed from the applicable Servicer
Custodial Account an amount equal to all costs and expenses incurred by it.
No Servicer will be obligated to foreclose on any Mortgaged Property which
it believes may be contaminated with or affected by hazardous wastes or
hazardous substances. See "Certain Legal Aspects of the Mortgage
Loans--Environmental Considerations." If a Servicer does not foreclose on a
Mortgaged Property, the Certificateholders of the related series may experience
a loss on the related Mortgage Loan. A Servicer will not be liable to the
Certificateholders if it fails to foreclose on a Mortgaged Property which it
believes may be so contaminated or affected, even if the Mortgaged Property is,
in fact, not so contaminated or affected. Conversely, a Servicer will not be
liable to the Certificateholders if, based on its belief that no contamination
or effect exists, the Servicer forecloses on a Mortgaged Property and takes
title to the Mortgaged Property, and thereafter the Mortgaged Property is
determined to be so contaminated or affected.
The Servicer may foreclose against property securing a defaulted Mortgage
Loan either by foreclosure, by sale or by strict foreclosure and in the event a
deficiency judgment is available against the mortgagor or other person (see
"Certain Legal Aspects of the Mortgage Loans--Anti-Deficiency Legislation, the
Bankruptcy Code and Other Limitations on Lenders" for a discussion of the
availability of deficiency judgments), may proceed for the deficiency. It is
anticipated that in most cases the Servicer will not seek deficiency judgments,
and will not be required under the applicable Underlying Servicing Agreement or
Pooling Agreement to seek deficiency judgments. In lieu of foreclosure, each
Servicer may arrange for the sale by the borrower of the Mortgaged Property
related to a defaulted Mortgage Loan to a third party, rather than foreclosing
upon and selling the Mortgaged Property.
With respect to a Trust Estate (or any segregated pool of assets within a
Trust Estate) as to which one or more REMIC elections has been made, if the
Trustee acquires ownership of any Mortgaged Property as a result of a default or
reasonably foreseeable default of any Mortgage Loan secured by the Mortgaged
Property, the Trustee or Master Servicer will be required to dispose of the
property prior to the close of the third calendar year following the year the
Trust Estate acquired the property (or any shorter period as is provided in the
applicable Underlying Servicing Agreement or Pooling Agreement) unless the
Trustee (a) receives an opinion of counsel to the effect that the holding of the
Mortgaged Property by the Trust Estate will not cause the Trust Estate to be
subject to the tax on "prohibited transactions" imposed by Code Section
860F(a)(1) or cause any REMIC to fail to qualify as a REMIC or (b) applies for
and is granted an extension of the applicable period in the manner contemplated
by Code Section 856(e)(3). The Servicer also will be required to administer the
Mortgaged Property in a manner which does not cause the Mortgaged Property to
fail to qualify as "foreclosure property" within the meaning of Code Section
860G(a)(8) or result in the receipt by the Trust Estate of any "net income from
foreclosure property" within the meaning of Code Section 860G(c)(2),
respectively. In general, this would preclude the holding of the Mortgaged
Property by a party acting as a dealer in property or the receipt of rental
income based on the profits of the lessee of the property. See "Federal Income
Tax Consequences."
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Insurance Policies
Each Servicer will generally be required to cause to be maintained for each
Mortgage Loan (other than Mortgage Loans secured by cooperative shares and
condominium apartments) a standard hazard insurance policy issued by a generally
acceptable insurer insuring the improvements on the Mortgaged Property
underlying each Mortgage Loan against loss by fire, with extended coverage (a
"Standard Hazard Insurance Policy"). A Standard Hazard Insurance Policy will be
required to be in an amount at least equal to the lesser of 100% of the
insurable value of the improvements on the Mortgaged Property or the principal
balance of the Mortgage Loan; provided, however, that the amount may not be less
than the minimum amount required to avoid the application of any coinsurance
clause. Each Servicer will also generally maintain on property acquired upon
foreclosure, or deed in lieu of foreclosure, of any Mortgage Loan, a Standard
Hazard Insurance Policy in an amount that is at least equal to the lesser of
100% of the insurable value of the improvements which are a part of the property
plus liability insurance and, if applicable, flood insurance as described below.
Any amounts collected under any of these insurance policies (other than amounts
to be applied to the restoration or repair of the Mortgaged Property or released
to the borrower in accordance with normal servicing procedures) will be
deposited in the Servicer Custodial Account for remittance to the Certificate
Account by the applicable Servicer.
The Standard Hazard Insurance Policies covering the Mortgage Loans generally
will cover physical damage to, or destruction of, the improvements on the
Mortgaged Property caused by fire, lightning, explosion, smoke, windstorm, hail,
riot, strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Because the Standard Hazard Insurance Policies
relating to the Mortgage Loans will be underwritten by different insurers and
will cover Mortgaged Properties located in various states, the policies will not
contain identical terms and conditions. The most significant terms of these
policies, however, generally will be determined by state law and generally will
be similar. Most of these policies typically will 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 mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, hazardous wastes or hazardous substances, theft and, in
certain cases, vandalism. The foregoing list is merely indicative of certain
kinds of uninsured risks and is not all-inclusive.
In general, if the improvements on a Mortgaged Property are located in an
area identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards (and flood insurance has been made
available) each Underlying Servicing Agreement or the Pooling Agreement, as
applicable, will require the related Servicer to cause to be maintained a flood
insurance policy meeting the requirements of the current guidelines of the
Federal Insurance Administration and the requirements of Fannie Mae or Freddie
Mac with a generally acceptable insurance carrier.
Each Servicer may maintain a blanket policy insuring against hazard losses
on all of the Mortgaged Properties in lieu of maintaining the required Standard
Hazard Insurance Policies and may maintain a blanket policy insuring against
special hazards in lieu of maintaining any required flood insurance. Each
Servicer will be liable for the amount of any deductible under a blanket policy
if that amount would have been covered by a required Standard Hazard Insurance
Policy or flood insurance, had it been maintained.
Any losses incurred relating to Mortgage Loans due to uninsured risks
(including earthquakes, mudflows, floods and hazardous wastes or hazardous
substances) or insufficient hazard insurance proceeds will adversely affect
distributions to the Certificateholders.
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Fixed Retained Yield, Servicing Compensation and Payment of Expenses
Fixed Retained Yield for any Mortgage Loan is that portion, if any, of
interest at the Mortgage Interest Rate that is not included in the related Trust
Estate and is retained by the Depositor or the Sponsor. The prospectus
supplement for a series will describe the Fixed Retained Yield, if any, relating
to the Mortgage Loans of the series. Any Fixed Retained Yield will be
established on a loan-by-loan basis and will be specified in the schedule of
Mortgage Loans for a series. If the Sponsor or the Depositor retains Fixed
Retained Yield, the Sponsor, if it is the Servicer, may deduct the Fixed
Retained Yield from mortgagor payments as received and retain or remit the Fixed
Retained Yield to the Depositor, as the case may be. Otherwise, the Servicer
will deposit the Fixed Retained Yield in the Master Servicer Custodial Account
or Certificate Account and the Master Servicer or the Trustee will withdraw and
remit the Fixed Retained Yield to the owner thereof. Notwithstanding the
foregoing, with respect to any payment of interest received relating to a
Mortgage Loan (whether paid by the mortgagor or received as Liquidation
Proceeds, insurance proceeds or otherwise) which is less than the full amount of
interest then due with respect to the Mortgage Loan, the owner of the Fixed
Retained Yield for the Mortgage Loan will bear a ratable share of the interest
shortfall.
For each series of Certificates, each Servicer will be entitled to be paid
the Servicing Fee on the related Mortgage Loans serviced by it until termination
of the applicable Underlying Servicing Agreement or the Pooling Agreement. A
Servicer, at its election, will pay itself the Servicing Fee for a series
relating to each Mortgage Loan by (a) withholding the Servicing Fee from any
scheduled payment of interest prior to deposit of the payment in the Servicer
Custodial Account for the series or (b) withdrawing the Servicing Fee from the
Servicer Custodial Account after the entire interest payment has been deposited.
A Servicer may also pay itself out of the Liquidation Proceeds or other
recoveries of a Mortgage Loan, or withdraw from the Servicer Custodial Account.
The Servicing Fee or the range of Servicing Fees relating to the Mortgage Loans
underlying the Certificates of a series will be set forth in an expense table in
the applicable prospectus supplement. Additional servicing compensation in the
form of prepayment premiums, assumption fees, late payment charges, Foreclosure
Profits or otherwise will be retained by the Servicers.
Each Servicer will pay all expenses incurred in connection with the
servicing of the Mortgage Loans serviced by it underlying a series, including,
without limitation, payment of the Standard Hazard Insurance Policy premiums.
The Servicer will be entitled, in certain circumstances, to reimbursement from
the Servicer Custodial Account of Periodic Advances, of Servicing Advances made
by it to pay taxes, insurance premiums and similar items with respect to any
Mortgaged Property or for expenditures incurred by it in connection with the
restoration, foreclosure or liquidation of any Mortgaged Property (to the extent
of Liquidation Proceeds or insurance policy proceeds in respect of the related
Mortgaged Property) and of certain losses against which it is indemnified by the
Trust Estate as described above under "-- The Servicers."
As set forth in the preceding paragraph, a Servicer may be entitled to
reimbursement for certain expenses incurred by it, and payment of additional
fees for certain extraordinary services rendered by it (provided that those fees
do not exceed those which would be charged by third parties for similar
services) in connection with the liquidation of defaulted Mortgage Loans and
related Mortgaged Properties. In the event that claims are either not made or
are not fully paid from any applicable form of credit enhancement, the related
Trust Estate will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the Servicing Fee and the expenses of the Servicer, are less
than the principal balance of the related Mortgage Loan.
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Evidence as to Compliance
Each Servicer and Master Servicer will deliver annually to the Trustee or
Master Servicer, as applicable, on or before the date specified in the
applicable Pooling Agreement or Underlying Servicing Agreement, an officer's
certificate stating that (i) a review of the Servicer's or Master Servicer's
activities during the preceding calendar year and of performance under the
applicable Pooling Agreement or Underlying Servicing Agreement has been made
under the supervision of the officer, and (ii) to the best of the officer's
knowledge, based on the review, the Servicer or Master Servicer has fulfilled
all its obligations under the applicable Pooling Agreement or Underlying
Servicing Agreement in all material respects throughout the year, or, if there
has been a failure to fulfill any of these obligations in any material respect,
specifying each failure known to the officer and the nature and status of the
failure.
In addition, each party that participates in the servicing and
administration of more than 5% of the Mortgage Loans and other assets comprising
a Trust will deliver annually to the Depositor and the Trustee, a report (an
"Assessment of Compliance") that assesses compliance by that party with the
servicing criteria set forth in Item 1122(d) of Regulation AB (17 CFR 229.1122)
and that contains the following:
o a statement of the party's responsibility for assessing compliance with
the servicing criteria applicable to it;
o a statement that the party used the criteria in Item 1122(d) of
Regulation AB to assess compliance with the applicable servicing
criteria;
o the party's assessment of compliance with the applicable servicing
criteria during and as of the end of the prior calendar year, setting
forth any material instance of noncompliance identified by the party;
and
o a statement that a registered public accounting firm has issued an
Attestation Report on the party's Assessment of Compliance with the
applicable servicing criteria during and as of the end of the prior
calendar year.
Each party which is required to deliver an Assessment of Compliance will
also be required to simultaneously deliver a report (an "Attestation Report") of
a registered public accounting firm, prepared in accordance with the standards
for attestation engagements issued or adopted by the Public Company Accounting
Oversight Board, that expresses an opinion, or states that an opinion cannot be
expressed, concerning the party's assessment of compliance with the applicable
servicing criteria.
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THE POOLING AGREEMENT
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Assignment of Mortgage Loans
In connection with the transfer and assignment of the Mortgage Loans to the
Trust, the Depositor will deliver or cause to be delivered to the Trustee, or a
custodian for the Trustee, among other things, with respect to each Mortgage
Loan (collectively, the "Mortgage File"):
o the original Mortgage Note endorsed without recourse in blank or to the
order of the Trustee (or its nominee) or an affidavit signed by an
officer of the Sponsor certifying that the related original Mortgage
Note has been lost;
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o the original or a certified copy of the Mortgage with evidence of
recording indicated thereon (except for any Mortgage not returned from
the public recording office, which will be delivered to the Trustee as
soon as the same is available to the Depositor);
o except as described below, an assignment in recordable form of the
Mortgage (or a copy, if the assignment has been submitted for
recording); and
o if applicable, any riders or modifications to the Mortgage Note and
Mortgage.
Assignments of the Mortgage Loans to the Trustee (or its nominee) will not
be recorded except in states where recordation is required by any Rating Agency
rating the Certificates of a series to obtain the initial ratings on the
Certificates set forth in the applicable prospectus supplement. In addition to
the foregoing, assignments of the Mortgage Loans will not be recorded (i) in
states where, in the opinion of counsel acceptable to the Trustee, recording is
not required to protect the Trustee's interest in the Mortgage Loans against the
claim of any subsequent transferee or any successor to or creditor of the
Depositor or the Sponsor, or (ii) in the case of any Mortgage which has been
recorded in the name of Mortgage Electronic Registration Systems, Inc. ("MERS")
or its designee. If a Mortgage has been recorded in the name of MERS or its
designee, no mortgage assignment in favor of the Trustee will be required to be
prepared or delivered. Instead, the applicable Servicer will be required to take
all actions as are necessary to cause the Trust to be shown as the owner of the
related Mortgage Loan on the records of MERS for purposes of the system of
recording transfers of beneficial ownership of mortgages maintained by MERS. The
Trustee will promptly review each Mortgage File after the Closing Date (or
promptly after the Trustee's receipt of any document permitted to be delivered
after the Closing Date) to determine if any of the foregoing documents is
missing.
Unless another entity is named as custodian in the applicable prospectus
supplement, the Trustee will act as custodian of the Mortgage Files pursuant to
the Pooling Agreement. In that capacity, the Trustee will be responsible to hold
and safeguard the Mortgage Notes and other contents of the Mortgage Files on
behalf of the Certificateholders.
If no separate custodian is initially designated, the Trustee may be
authorized to appoint a custodian to maintain possession of the documents
relating to the Mortgage Loans and to conduct the review of the documents
described above. Any custodian so appointed will keep and review the documents
as the Trustee's agent under a custodial agreement.
Repurchases of Mortgage Loans
If any portion of the Mortgage File is not delivered to the Trustee or if a
Mortgage Loan does not conform to the representations made by the Depositor in
the Pooling Agreement, as described under "The Mortgage Loan Programs --
Representations and Warranties," and the Depositor does not cure this omission
or defect within 90 days, the Depositor will be required on the Distribution
Date in the month following the expiration of the 90-day period either (i) to
repurchase the related Mortgage Loan (or any property acquired relating to the
Mortgage Loan) at a price (the "Purchase Price") equal to 100% of the unpaid
principal balance of the Mortgage Loan plus accrued and unpaid interest on its
principal balance at its Mortgage Interest Rate or (ii) to substitute an
Eligible Substitute Mortgage Loan; provided however, that substitution generally
is only allowed within two years of the Closing Date. Any Mortgage Loan
repurchased or subject to a substitution as described in this paragraph is
referred to as a "Deleted Mortgage Loan." Generally, unless a representation is
breached in a material respect, the Depositor is not required to repurchase,
cure or substitute for the affected Mortgage Loan. In the case of the breach of
the representation made by the Depositor that a Mortgage Loan at the time of its
origination complied
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with any applicable federal, state or local predatory or abusive lending laws,
the Depositor will be required to pay any costs or damages incurred by the Trust
as a result of the violation of those laws.
An "Eligible Substitute Mortgage Loan" generally will:
o have a principal balance, after deduction of all monthly payments due in
the month of substitution, not in excess of, and not more than 10% less
than, the Stated Principal Balance of the Deleted Mortgage Loan;
o have a Net Mortgage Interest Rate equal to that of the Deleted Mortgage
Loan;
o have a Loan-to-Value Ratio not higher than that of the Deleted Mortgage
Loan;
o if an adjustable-rate Mortgage Loan, have a Gross Margin equal to that
of the Deleted Mortgage Loan;
o if an adjustable-rate Mortgage Loan, have a periodic cap and rate
ceiling equal to that of the Deleted Mortgage Loan;
o if an adjustable-rate Mortgage Loan, have the same index and frequency
of mortgage interest rate adjustment as the Deleted Mortgage Loan;
o have a remaining term to maturity not greater than (and not more than
one year less than) that of the Deleted Mortgage Loan; and
o comply with all of the representations and warranties in the Pooling
Agreement as of the date of substitution.
"Stated Principal Balance" means for any Mortgage Loan and Due Date, the
unpaid principal balance of that Mortgage Loan at that Due Date, as specified in
the amortization schedule (before any adjustment to that amortization schedule
due to any moratorium or similar waiver or grace period), after giving effect to
any previous partial principal prepayments and Liquidation Proceeds received, to
the payment of principal due on that Due Date and to any reduction of the
principal balance due to a bankruptcy proceeding but without taking into account
any delinquency in payment by the related mortgagor.
In connection with any substitution of a Deleted Mortgage Loan, the
Depositor will be required to deposit the amount of any shortfall to the
Servicer Custodial Account (any shortfall, a "Substitution Adjustment Amount");
This cure, repurchase or substitution obligation constitutes the sole remedy
available to Certificateholders or the Trustee for omission of, or a material
defect in, a Mortgage Loan document or a material breach of any of the
representations made by the Depositor in the Pooling Agreement.
Special Servicing Agreements
The Pooling Agreement will permit the Servicer to enter into a special
servicing agreement with an unaffiliated holder of a class of Subordinate
Certificates or of a class of securities representing interests in one or more
classes of Subordinate Certificates alone or together with other subordinated
mortgage pass-through certificates. Pursuant to a special servicing agreement,
this holder may instruct the Servicer to commence or delay foreclosure
proceedings with respect to delinquent Mortgage Loans. In the event that there
is a Master Servicer for a series, the Pooling Agreement will permit the Master
Servicer to enter
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into an agreement with those holders which will allow the Master Servicer to
instruct the Servicers, to the extent provided in the applicable Underlying
Servicing Agreements, to commence or delay foreclosure proceedings with respect
to delinquent Mortgage Loans.
Reports to Certificateholders
The Trustee will prepare and include with each distribution to
Certificateholders of record of each series a statement setting forth, among
other things, the following information, if applicable:
(i) the amount of the distribution allocable to principal of the
related Mortgage Loans, separately identifying the aggregate amount
of any principal prepayments and Liquidation Proceeds and the amount
of the distribution allocable to interest on the related Mortgage
Loans;
(ii) if the distribution to Certificateholders is less than the
full amount that would be distributable if there were sufficient
funds available, the amount of the shortfall and the allocation of
the shortfall between principal and interest;
(iii) the Class Balance of each Class of Certificates after
giving effect to the distribution of principal on the Distribution
Date;
(iv) the amount of servicing compensation with respect to the
related Trust Estate and any other customary information as is
required to enable Certificateholders to prepare their tax returns;
(v) the amount by which the Servicing Fee or Master Servicing
Fee, as applicable, for the related Distribution Date has been
reduced by interest shortfalls due to prepayments;
(vi) the amount of Periodic Advances included in the
distribution on the Distribution Date and the aggregate amount of
Periodic Advances outstanding as of the close of business on the
Distribution Date;
(vii) the amount of Servicing Advances made since the previous
Distribution Date, the aggregate amount of Servicing Advances
outstanding as of the close of business on the Distribution Date and
the amount of Servicing Advances reimbursed since the previous
Distribution Date;
(viii) to each holder of a Certificate entitled to the benefits
of payments under any form of credit enhancement:
(a) the amounts so distributed under the form of credit
enhancement on the applicable Distribution Date; and
(b) the amount of coverage remaining under the form of
credit enhancement, after giving effect to any payments
thereunder and other amounts charged thereto on the Distribution
Date;
(ix) any payments made or accrued relating to credit enhancement
provided by a party, identifying the general purpose of the payments
and the party receiving the payments;
(x) the Pass-Through Rate (if any) for each Class of
Certificates;
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(xi) for any Mortgage Loan that became an REO Property during
the preceding calendar month, the loan number and Stated Principal
Balance of the Mortgage Loan as of the close of business on the
Determination Date preceding the Distribution Date and the date of
acquisition thereof;
(xii) the total number and principal balance of any REO
Properties (and market value, if available) as of the close of
business on the Determination Date preceding the Distribution Date;
(xiii) the aggregate amount of Realized Losses incurred during
the preceding calendar month;
(xiv) any expenses or indemnification amounts paid by the
related Trust Estate, the specific purpose of each payment and the
parties to whom these payments are made;
(xv) the number and total principal balance of the Mortgage
Loans, the weighted average mortgage interest rate and weighted
average remaining term to maturity of the Mortgage Loans and
cumulative prepayment amounts;
(xvi) any material modifications, extensions or waivers to
Mortgage Loan terms, fees, penalties or payments since the previous
Distribution Date or cumulatively since the Closing Date;
(xvii) unless such information is set forth in the Form 10-D
relating to such Distribution Date and provided the Trustee is
reasonably able to include such information on the statement, any
material breaches of representations and warranties relating to the
Mortgage Loans or material breaches of transaction covenants;
(xviii) the number and aggregate principal balance of any
Mortgage Loans repurchased by the Depositor from the related Trust
Estate since the previous Distribution Date;
(xix) the number and aggregate principal amounts of Mortgage
Loans (A) delinquent (exclusive of Mortgage Loans in foreclosure or
bankruptcy), (B) in foreclosure, as of the close of business on the
last day of the calendar month preceding the Distribution Date and
(C) in bankruptcy as of the close of business on the last day of the
calendar month preceding the Distribution Date; and
(xx) whether any exchanges of Exchangeable REMIC Certificates
and Exchangeable Certificates have taken place since the preceding
Distribution Date and, if applicable, the class designations, Class
Balances or notional amounts, Pass-Through Rates, and any interest
and/or principal paid, including any shortfalls allocated, with
respect to any Classes of Certificates that were received by
Certificateholders as a result of such exchange.
In addition, the Trustee will include in the statement any information
specific to the Classes of Certificates offered by the applicable prospectus
supplement and, within a reasonable period of time after the end of each
calendar year, the Trustee will furnish a report to each Certificateholder of
record at any time during the calendar year the information as required by the
Code and applicable regulations thereunder to enable Certificateholders to
prepare their tax returns. In the event that one or more elections has been made
to treat the Trust Estate (or one or more segregated pools of assets therein) as
one or more REMICs, the Trustee will be required to prepare and sign the federal
and applicable state and local income tax returns of each REMIC. See "Federal
Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Administrative Matters."
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List of Certificateholders
The Pooling Agreement for each series will require the Trustee to provide
access to the most current list of names and addresses of Certificateholders of
the series to any group of three or more Certificateholders who advise the
Trustee in writing that they desire to communicate with other Certificateholders
with respect to their rights under the Pooling Agreement or under the
Certificates.
Events of Default
Events of Default under the Pooling Agreement for each series include (i)
any failure by the Master Servicer or, if a Servicer has executed the Pooling
Agreement, that Servicer, to deposit amounts in the Master Servicer Custodial
Account or Servicer Custodial Account, as applicable, in the amount and manner
provided in the Pooling Agreement so as to enable the Trustee to distribute to
Certificateholders any payment required to be made under the terms of the
Certificates of a series and the Pooling Agreement (other than Periodic
Advances) which continues unremedied for a period of five days; (ii) any failure
by the Master Servicer or a Servicer that has executed the Pooling Agreement
duly to observe or perform in any material respect any other of its covenants or
agreements in the Pooling Agreement which continues unremedied for 30 days after
the giving of written notice of the failure to the Master Servicer or Servicer
by the Trustee, or to the Master Servicer or the Servicer and the Trustee by the
holders of Certificates of the series having voting rights allocated to the
Certificates ("Voting Rights") aggregating not less than 25% of the Voting
Rights allocated to all Certificates for the series; (iii) certain events of
insolvency, readjustment of debt, marshaling of assets and liabilities or
similar proceedings and certain action by the Master Servicer or a Servicer that
has executed the Pooling Agreement indicating its insolvency, reorganization or
inability to pay its obligations; and (iv) the failure of the Master Servicer or
a Servicer to remit any Periodic Advance required to be remitted by it which
failure continues unremedied at 3:00 p.m. on the related Distribution Date.
Rights Upon Event of Default
So long as an Event of Default remains unremedied under the Pooling
Agreement for a series, the Trustee for the series may, or at the direction of
Certificateholders of the series evidencing not less than 51% of the Voting
Rights of all Certificates of the series affected by the Event of Default, will
terminate all of the rights and obligations of the Master Servicer or a Servicer
executing the Pooling Agreement, under the Pooling Agreement and in and to the
Mortgage Loans (other than the Master Servicer's or the Servicer's right to
recovery of the aggregate Servicing Fees or Master Servicing Fees, as
applicable, due prior to the date of termination, and other expenses and amounts
advanced pursuant to the terms of the Pooling Agreement, which rights the Master
Servicer or the Servicer will retain under all circumstances), whereupon the
Trustee will succeed to all the responsibilities, duties and liabilities of the
Master Servicer or the Servicer under the Pooling Agreement and will be entitled
to monthly compensation not to exceed the aggregate fees together with the other
compensation to which the Master Servicer or the Servicer is entitled under the
Pooling Agreement. In the event that the Trustee is unwilling or unable so to
act, it may select or petition a court of competent jurisdiction to appoint, a
housing and home finance institution, bank or mortgage servicing institution
with a net worth of at least $10,000,000 to act as successor to the Master
Servicer or the Servicer, under the provisions of the Pooling Agreement;
provided however, that the appointment not adversely affect the rating then
assigned to any Class of Certificates and that until a successor Master Servicer
or Servicer is appointed and has assumed the responsibilities, duties and
liabilities of the Master Servicer or the Servicer under the Pooling Agreement,
unless prohibited by law, the Trustee will continue as the successor to the
Master Servicer or the Servicer as described above. The Trustee or the successor
Master Servicer or Servicer will be entitled to be reimbursed from the
predecessor Master Servicer or Servicer (or the Trust if the predecessor Master
Servicer or Servicer is
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unable to fulfill its obligations under the Pooling Agreement) for all costs
associated with the transfer of servicing.
During the continuance of any Event of Default under the Pooling Agreement
for a series, the Trustee for that series will have the right to take action to
enforce its rights and remedies and to protect and enforce the rights and
remedies of the Certificateholders of that series, and holders of Certificates
aggregating not less than 25% of the Voting Rights of each Class of Certificates
affected by the Event of Default may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred upon the Trustee. However, the Trustee will not be
under any obligation to pursue any remedy or to exercise any of these trusts or
powers unless the applicable Certificateholders have offered the Trustee
reasonable security or indemnity against the cost, expenses and liabilities
which may be incurred by the Trustee. Also, the Trustee may decline to follow
any of these directions if the Trustee determines that the action or proceeding
so directed may not lawfully be taken or would involve it in personal liability
or be unjustly prejudicial to the non-assenting Certificateholders.
No Certificateholder of a series, solely by virtue of that holder's status
as a Certificateholder, will have any right under the Pooling Agreement for a
series to institute any proceeding with respect to the Pooling Agreement, unless
(i) the holder previously has given to the Trustee for the series written notice
of default and (ii) the holders of Certificates evidencing not less than 25% of
the Voting Interests for each Class of Certificates affected for the series have
made written request upon the Trustee to institute the proceeding in its own
name as Trustee thereunder and have offered to the Trustee reasonable indemnity
and the Trustee for 60 days has neglected or refused to institute any
proceeding.
Amendment
Each Pooling Agreement may be amended by the Depositor, the Servicer(s) (or
the Master Servicer, if applicable) and the Trustee without the consent of the
Certificateholders, (i) to cure any ambiguity or mistake, (ii) to correct or
supplement any provision in the Pooling Agreement that may be inconsistent with
any other provision of the Pooling Agreement or the related prospectus
supplement, (iii) if one or more REMIC elections has been made, to modify,
eliminate or add to any of its provisions to the extent necessary to maintain
the qualification of the Trust Estate (or one or more segregated pools of assets
therein) as one or more REMICs at all times that any Certificates are
outstanding or to avoid or minimize the risk of the imposition of any tax on the
Trust Estate pursuant to the Code that would be a claim against the Trust
Estate, provided that the Trustee has received an opinion of counsel to the
effect that the action is necessary or desirable to maintain qualification as
one or more REMICs or to avoid or minimize the risk of the imposition of any tax
and the action will not, as evidenced by the opinion of counsel, adversely
affect in any material respect the interests of any Certificateholder, (iv) to
change the timing and/or nature of deposits into the Certificate Account,
provided that the change will not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any Certificateholder
and that the change will not adversely affect the then current rating assigned
to any Certificates, as evidenced by a letter from each Rating Agency to that
effect, (v) to reduce the percentage of the unpaid principal balance of the
Mortgage Loans as of the Cut off Date at which the Depositor or other party
specified in the applicable prospectus supplement will have the option to
purchase all the remaining Mortgage Loans as set forth under "--Termination;
Optional Purchase of Mortgage Loans," provided that the reduction is considered
necessary by the Depositor, as evidenced by an Officer's Certificate delivered
to the Trustee, to preserve the treatment of the transfer of the Mortgage Loans
to the Depositor by the Sponsor or to the Trust by the Depositor as sale for
accounting purposes, or (vi) to make any other provisions with respect to
matters or questions arising under the Pooling Agreement that are not
inconsistent with the provisions of the Pooling Agreement, provided that the
amendment will not, as evidenced by an opinion of counsel, adversely affect in
any material respect the interests of the Certificateholders of the related
series
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provided that the action will not be considered to adversely affect in any
material respect the interests of the Certificateholders and no opinion of
counsel will be required if each Rating Agency rating the Certificates states in
writing that the action will not result in the downgrading or withdrawal of the
ratings then assigned to the Certificates. The Pooling Agreement may also be
amended by the Depositor, the Servicer(s) (or the Master Servicer, if
applicable) and the Trustee with the consent of the holders of Certificates
evidencing interests aggregating not less than 66 2/3% of the Voting Interests
evidenced by the Certificates of each Class affected thereby, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Pooling Agreement or of modifying in any manner the rights of
the Certificateholders; provided, however, that no amendment may (i) reduce in
any manner the amount of, or delay the timing of, any payments received on or
with respect to Mortgage Loans that are required to be distributed on any
Certificate, without the consent of the holder of the Certificate or (ii) reduce
the aforesaid percentage of Certificates of any Class, the holders of which are
required to consent to the amendment, without the consent of the holders of all
Certificates of the affected Class then outstanding. Notwithstanding the
foregoing, the Trustee will not consent to any amendment if it would subject the
Trust Estate (or any segregated pool of assets therein) to tax or, if one or
more REMIC elections has been made, cause each REMIC to fail to qualify as a
REMIC.
Termination; Optional Purchase of Mortgage Loans
The obligations created by the Pooling Agreement for a series of
Certificates will terminate on the Distribution Date following the final payment
or other liquidation of the last Mortgage Loan in the Trust Estate and the
disposition of all property acquired upon foreclosure of any Mortgage Loan. In
no event, however, will the trust created by the Pooling Agreement continue
beyond the expiration of 21 years from the death of the last survivor of certain
persons named in the Pooling Agreement. For each series of Certificates, the
Trustee will give written notice of termination of the Pooling Agreement to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at an office or agency appointed by the
Depositor and specified in the notice of termination. The termination of the
Trust is required to be effected in a manner consistent with applicable federal
income tax regulations and the REMIC status of any REMIC.
In addition, the Depositor or another party specified in the applicable
prospectus supplement (which may be a Certificateholder) will have the option to
purchase all remaining Mortgage Loans and other assets in the Trust Estate (or
one or more groups of Mortgage Loans and other assets, if specified in the
applicable prospectus supplement) when the aggregate Stated Principal Balance of
the Mortgage Loans as of the Distribution Date on which the purchase proceeds
are to be distributed is less than 10% of the aggregate unpaid principal balance
of the Mortgage Loans as of the Cut-off Date or a lower percentage specified in
the applicable prospectus supplement. This percentage may be reduced by amending
to the Pooling Agreement, without Certificateholder consent, if the reduction is
considered necessary by the Depositor, as evidenced by an officer's certificate
delivered to the Trustee, to preserve the treatment of the transfer of the
Mortgage Loans to the Depositor by the Sponsor or to the Trust by the Depositor
as a sale for accounting purposes. The purchase price will generally be equal to
the sum of (a) the unpaid principal balances of the Mortgage Loans in the
applicable loan group or groups and (b) the fair market value of any related REO
Properties held by the Trust together with the amount of any unpaid interest
shortfalls on the related Certificates and one month's interest on the unpaid
principal balance of each related Mortgage Loan. However, for so long as the
Depositor is subject to regulation by the OCC, the FDIC, the Federal Reserve or
the Office of Thrift Supervision ("OTS", the Depositor may exercise its purchase
option only if the aggregate fair market value of the Mortgage Loans and REO
Properties to be purchased is greater than or equal to the purchase price
described in the preceding sentence.
Distributions in respect of an optional purchase described above will be
paid to Certificateholders (or in the case of the optional purchase of one or
more, but less than all, groups of Mortgage Loans, to
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Certificateholders entitled to distributions from that group or groups) in order
of their priority of distribution as described in the applicable prospectus
supplement. The proceeds from an optional purchase may not be sufficient to
distribute the full amount to which each Class of Certificates is entitled if
the purchase price is based in part on the fair market value of the REO Property
and this fair market value is less than the unpaid principal balance of the
related Mortgage Loan.
The Trustee
The trustee under each Pooling Agreement (the "Trustee") will be named in
the applicable prospectus supplement. The commercial bank or trust company
serving as Trustee may have normal banking relationships with the Depositor or
any of its affiliates.
The Trustee generally will be responsible under each Pooling Agreement for
providing general administrative services for the Trust Estate for any series,
including, among other things, (i) establishing and maintaining the Certificate
Account; (ii) calculation of the amounts payable to Certificateholders on each
Distribution Date; (iii) making distributions to Certificateholders; (iv)
preparation of federal and applicable state and local tax and information
returns; (v) preparation of reports, if any, required under the Securities
Exchange Act of 1934, as amended; (vi) maintaining any mortgage pool insurance
policy, mortgagor bankruptcy bond, special hazard insurance policy or other form
of credit enhancement that may be required with respect to any series; and (vii)
making Periodic Advances on the Mortgage Loans to the limited extent described
under "Servicing of the Mortgage Loans--Periodic Advances and Servicing
Advances," if those amounts are not advanced by a Servicer or the Master
Servicer.
The Trustee and any director, officer, employee or agent of the Trustee
shall be entitled to indemnification by the Trust Estate and held harmless
against any loss, liability or expense (including reasonable attorney's fees)
(a) incurred in connection with any claim or legal action relating to (i) the
Pooling Agreement, (ii) the Certificates, or (iii) the performance of any of the
Trustee's duties under the Pooling Agreement, unless the loss, liability or
expense was incurred by reason of willful misfeasance, bad faith or gross
negligence in the performance of any of the Trustee's duties under the Pooling
Agreement, (b) resulting from any tax or information return which was prepared
by, or should have been prepared by, the applicable Servicer or Master Servicer
and (c) arising out of the transfer of any Certificate not in compliance with
ERISA.
The Trustee generally shall not be entitled to payment or reimbursement for
any routine ongoing expenses incurred by it in the ordinary course of its duties
as Trustee under the Pooling Agreement or for any other expenses. If, however,
one or more REMIC elections has been made, the expense is unanticipated and did
not arise from the Trustee's gross negligence, bad faith or willful misconduct,
the Trustee shall be entitled to reimbursement from the Trust Estate for all
reasonable expenses, disbursements and advances incurred or made it in
accordance with any of the provisions of the Pooling Agreement to the extent
permitted by Treasury regulations Section 1.860G-1(b)(3)(ii), which allows
reimbursement for "unanticipated expenses."
The Trustee may resign at any time, in which event the Master Servicer or,
if there is no Master Servicer, the Servicer(s) will be obligated to appoint a
successor trustee. The Master Servicer or, if there is no Master Servicer, the
Servicer(s) may also remove the Trustee if the Trustee ceases to be eligible to
act as Trustee under the Pooling Agreement, is incapable of acting or if the
Trustee becomes insolvent. Upon becoming aware of these circumstances, the
Master Servicer or, if there is no Master Servicer, the Servicer(s) will become
obligated to appoint a successor trustee. The Trustee may also be removed at any
time by the holders of Certificates evidencing not less than 50% of the Voting
Rights in the Trust Estate, except that any Certificate registered in the name
of the Depositor or any affiliate thereof will not be taken into account in
determining whether the requisite Voting Rights in the Trust Estate necessary to
effect this
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removal have been obtained. Any resignation and removal of the Trustee, and the
appointment of a successor trustee, will not become effective until acceptance
of the appointment by the successor trustee. The Trustee, and any successor
trustee, must be (a) an institution the deposits of which are fully insured by
the FDIC and (b) a corporation or banking association organized and doing
business under the laws of the United States of America or of any State,
authorized under such laws to exercise corporate trust powers, having a combined
capital and surplus of not less than $50,000,000 and subject to supervision or
examination by Federal or State authority and (c) with respect to every
successor trustee, either an institution (i) the long term unsecured debt
obligations meet certain minimum ratings of the applicable Rating Agencies or
(ii) whose serving as Trustee would not result in the lowering of the ratings
originally assigned to any Class of Certificates.
Any costs associated with the appointment of a successor trustee are
required to be paid by the predecessor trustee and, if not paid, will be
reimbursed to the person incurring such costs from the assets of the related
Trust. Notwithstanding the foregoing, if the predecessor trustee has been
removed by a vote of the holders of the Certificates as provided in the
paragraph above, any costs associated with the appointment of a successor
trustee will be reimbursed to the party incurring such costs from the assets of
the related Trust.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
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The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because these legal aspects are
governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete, to reflect the laws of any particular
state or to encompass the laws of all states in which the security for the
Mortgage Loans is situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
General
The Mortgage Loans will be secured by either first mortgages, first deeds of
trust or similar security devices creating a first lien, depending upon the
prevailing practice in the state in which the underlying property is located. A
mortgage creates a lien upon the real property described in the mortgage. There
are two parties to a mortgage: the mortgagor, who is the borrower (or, in the
case of a Mortgage Loan secured by a property that has been conveyed to an inter
vivos revocable trust, the settlor of the trust); and the mortgagee, who is the
lender. In a mortgage instrument state, the mortgagor delivers to the mortgagee
a note or bond evidencing the loan and the mortgage. Although a deed of trust is
similar to a mortgage, a deed of trust has three parties: a borrower called the
trustor (similar to a mortgagor), a lender called the beneficiary (similar to a
mortgagee), 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 loan.
The trustee's authority under a deed of trust and the mortgagee's authority
under a mortgage are governed by the express provisions of the deed of trust or
mortgage, applicable law, and, in some cases, with respect to the deed of trust,
the directions of the beneficiary.
Condominiums
Certain of the Mortgage Loans may be loans secured by condominium units. The
condominium building may be a multi-unit building or buildings, or a group of
buildings whether or not attached to each other, located on property subject to
condominium ownership. Condominium ownership is a form of ownership of real
property as to which each owner is entitled to the exclusive ownership and
possession
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of his or her individual condominium unit. The owner also owns a proportionate
undivided interest in all parts of the condominium building (other than the
other individual condominium units) and all areas or facilities, if any, for the
common use of the condominium units. The condominium unit owners appoint or
elect the condominium association to govern the affairs of the condominium.
Cooperatives
Certain of the Mortgage Loans may be cooperative loans. The Cooperative
either owns all the real property that comprises the project, including the land
and the apartment building comprised of separate dwelling units and common areas
or leases the land generally by a long term ground lease and owns the apartment
building. The Cooperative is directly responsible for project management and, in
most cases, payment of real estate taxes and hazard and liability insurance. If
there is a blanket mortgage on the property and/or underlying land, as is
generally the case, the Cooperative, as project mortgagor, is also responsible
for meeting these mortgage obligations. Ordinarily, the Cooperative incurs a
blanket mortgage in connection with the construction or purchase of the
Cooperative's apartment building. The interest of the occupants 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.
The Cooperative is owned by tenant stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant stockholder's pro rata share
of the Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is 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 typically a
financing statement covering the proprietary lease or occupancy agreement and
the cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares.
See Risk Factors--Collateral Securing Cooperative Loans May Diminish in
Value" in this prospectus.
Foreclosure
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right of 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 may issue a judgment of foreclosure and appoint a receiver or other
officer to conduct the sale of the property. In some states, mortgages may also
be foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage. Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by non-judicial power of sale.
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Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property to a third party upon any default by the
borrower under the terms of the note or deed of trust. In certain states,
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other individual
having an interest of record in the real property, including any junior
lienholders. If the deed of trust is not reinstated within any applicable cure
period, a notice of sale must be posted in a public place and, in most states,
published for a specified period of time in one or more newspapers. In addition,
some state laws require that a copy of the notice of sale be posted on the
property and sent to all parties having an interest of record in the property.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
receiver for an amount equal to the unpaid principal amount of the note, accrued
and unpaid interest and the expenses of foreclosure. Thereafter, subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance and making repairs at its own expense as are
necessary to render the property suitable for sale. The lender commonly will
obtain the services of a real estate broker and pay the broker a commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of mortgage
insurance proceeds, if any, or by judicial action against the borrower for the
deficiency, if a deficiency action is permitted by law. See "--Anti-Deficiency
Legislation, the Bankruptcy Code and Other Limitations on Lenders" below.
Foreclosure on Shares of Cooperatives
The cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and by-laws, as well as
in the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by the tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by the
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to terminate the 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.
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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 the lease or
agreement until the lender has been provided an opportunity to cure the default.
The recognition agreement typically provides that if the proprietary lease or
occupancy agreement is terminated, the Cooperative will recognize the lender's
lien against proceeds from a 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
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited by the agreement in any rights it may have to dispossess the
tenant-stockholders.
Foreclosure on the cooperative shares is accomplished by a sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code (the
"UCC") and the security agreement relating to those shares. Article 9 of the UCC
requires that a sale be conducted in a "commercially reasonable" manner. Whether
a foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to the
usual practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "--Anti-Deficiency Legislation,
the Bankruptcy Code and Other Limitations on Lenders" below.
Leaseholds
Mortgage Loans may be secured by a mortgage on a ground lease. Leasehold
mortgages are subject to certain considerations not associated with mortgage
loans secured by the fee estate of the mortgagor. The most significant of these
consideration is that the ground lease creating the leasehold estate could
terminate, leaving the leasehold mortgagee without its security. The ground
lease may terminate, if among other reasons, the ground lessee breaches or
defaults in its obligations under the ground lease or there is a bankruptcy of
the ground lessee or the ground lessor. This possibility may be minimized if the
ground lease contains certain provisions protective of the mortgagee, but the
ground leases that secure Mortgage Loans may not contain all of these protective
provisions, and mortgages may not contain the other protection discussed in the
next paragraph. Protective ground lease provisions include the right of the
leasehold mortgagee to receive notices from the ground lessor of any defaults by
the mortgagor; the right to cure those defaults, with adequate cure periods; if
a default is not susceptible of cure by the leasehold mortgagee, the right to
acquire the leasehold estate through foreclosure or otherwise; the ability of
the ground lease to be assigned to and by the leasehold mortgagee or purchaser
at a foreclosure sale and for the simultaneous release of the ground lessee's
liabilities under the new lease; and the right of the leasehold mortgagee to
enter into a new ground lease with the ground lessor on the same terms and
conditions as the old ground lease upon a termination.
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In addition to the preceding protections, a leasehold mortgagee may require
that the ground lease or leasehold mortgage prohibit the ground lessee from
treating the ground lease as terminated in the event of the ground lessor's
bankruptcy and rejection of the ground lease by the trustee for the
debtor-ground lessor. As further protection, a leasehold mortgage may provide
for the assignment of the debtor-ground lessee's right to reject a lease
pursuant to Section 365 of the Bankruptcy Code, although the enforceability of
that clause has not been established. Without the protections described in the
preceding paragraph, a leasehold mortgagee may lose the collateral securing its
leasehold mortgage. In addition, terms and conditions of a leasehold mortgage
are subject to the terms and conditions of the ground lease. Although certain
rights given to a ground lessee can be limited by the terms of a leasehold
mortgage, the rights of a ground lessee or a leasehold mortgagee with respect
to, among other things, insurance, casualty and condemnation will be governed by
the provisions of the ground lease.
Rights of Redemption
In some states, after sale pursuant to a deed of trust and/or foreclosure of
a mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
most states where the right of redemption is available, statutory redemption may
occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a right of redemption is to delay the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser at a foreclosure sale, or of any purchaser from the
lender subsequent to judicial foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has run.
Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on
Lenders
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement and foreclosure on the
beneficial interest in a land trust. Some courts have interpreted Section 9-504
of the UCC to prohibit a deficiency award unless the creditor establishes that
the sale of the collateral (which, in the case of a Mortgage Loan secured by
shares of a Cooperative, would be the shares and the related proprietary lease
or occupancy agreement) was conducted in a commercially reasonable manner.
A Servicer generally will not be required under the Pooling Agreement or
applicable Underlying Servicing Agreement to pursue deficiency judgments on the
Mortgage Loans even if permitted by law.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the United States Bankruptcy
Code, 11 U.S.C. Sections 101 et seq. (the
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"Bankruptcy Code"), and state laws affording relief to debtors (together with
the Bankruptcy Code (the "Insolvency Laws") may interfere with or affect the
ability of a secured mortgage lender to obtain payment of a mortgage loan, to
realize upon collateral and/or enforce a deficiency judgment. For example, under
the Bankruptcy Code, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and, usually, no interest or principal payments are made
during the course of the bankruptcy case. Foreclosure of an interest in real
property of a debtor in a case under the Bankruptcy Code can typically occur
only if the bankruptcy court vacates the stay, an action, the court may be
reluctant to take, particularly if the debtor has the prospect of restructuring
his or her debts and the mortgage collateral is not deteriorating in value. The
delay and the consequences of the delay caused by an automatic stay can be
significant. Also, under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a junior lienor (a subordinate lender secured by a
mortgage on the property) may stay a senior lender from taking action to
foreclose.
A homeowner may file for relief under the Bankruptcy Code under any of three
different chapters of the Bankruptcy Code. Under Chapter 7, the assets of the
debtor are liquidated and a lender secured by a lien may "bid in" (i.e., bid up
to the amount of the debt) at the sale of the asset. See "--Foreclosure." A
homeowner may also file for relief under Chapter 11 of the Bankruptcy Code and
reorganize his or her debts through his or her reorganization plan.
Alternatively, a homeowner may file for relief under Chapter 13 of the
Bankruptcy Code and address his or her debts in a rehabilitation plan. (Chapter
13 is often referred to as the "wage earner chapter" or "consumer chapter"
because most individuals seeking to restructure their debts file for relief
under Chapter 13 rather than Chapter 11).
The Bankruptcy Code permits a mortgage loan that is secured by property that
does not consist solely of the debtor's principal residence to be modified
without the consent of the lender provided certain substantive and procedural
safeguards are met. Under the Bankruptcy Code, the lender's security interest
may be reduced to the then-current value of the property as determined by the
court if the value is less than the amount due on the loan, thereby leaving the
lender as a general unsecured creditor for the difference between the value of
the collateral and the outstanding balance of the mortgage loan. A borrower's
unsecured indebtedness will typically be discharged in full upon payment of a
substantially reduced amount. Other modifications to a mortgage loan may include
a reduction in the amount of each scheduled payment, which reduction may result
from a reduction in the rate of interest, an alteration of the repayment
schedule, an extension of the final maturity date, and/or a reduction in the
outstanding balance of the secured portion of the loan. In certain
circumstances, subject to the court's approval, a debtor in a case under Chapter
11 of the Bankruptcy Code may have the power to grant liens senior to the lien
of a mortgage.
A reorganization plan under Chapter 11 and a rehabilitation plan under
Chapter 13 of the Bankruptcy Code may each allow a debtor to cure a default
relating to a mortgage loan on its residence by paying arrearages over a period
of time and to deaccelerate and reinstate the original mortgage loan payment
schedule, even though the lender accelerated the loan and a final judgment of
foreclosure had been entered in state court (provided no sale of the property
had yet occurred) prior to the filing of the debtor's petition under the
Bankruptcy Code. Under a Chapter 13 plan, curing of defaults must be
accomplished within the five year maximum term permitted for repayment plans,
the term commencing when repayment plan becomes effective, while defaults may be
cured over a longer period of time under a Chapter 11 plan of reorganization.
Generally, a repayment plan in a case under Chapter 13 and a plan of
reorganization under Chapter 11 may not modify the claim of a mortgage lender if
the borrower elects to retain the property, the property is the borrower's
principal residence and the property is the lender's only collateral. Certain
courts have allowed modifications when the mortgage loan is secured both by the
debtor's principal
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residence and by collateral that is not "inextricably bound" to the real
property, such as appliances, machinery, or furniture.
The general protection for mortgages secured only by the debtor's principal
residence is not applicable in a case under Chapter 13 if the last payment on
the original payment schedule is due before the final date for payment under the
debtor's Chapter 13 plan (which date could be up to five years after the debtor
emerges from bankruptcy). Under several recently decided cases, the terms of
these loans can be modified in the manner described above. While these decisions
are contrary to the holding in a prior case by a senior appellate court, it is
possible that the later decisions will become the accepted interpretation in
view of the language of the applicable statutory provision. If this
interpretation is adopted by a court considering the treatment in a Chapter 13
repayment plan of a Mortgage Loan, it is possible that the Mortgage Loan could
be modified.
State statutes and general principles of equity may also provide a mortgagor
with means to halt a foreclosure proceeding or sale and to force a restructuring
of a mortgage loan on terms a lender would not otherwise accept.
In a bankruptcy or similar proceeding of a mortgagor, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the mortgagor under the related mortgage loan prior to the
bankruptcy or similar proceeding. Payments on long-term debt may be protected
from recovery as preferences if they are payments in the ordinary course of
business made on debts incurred in the ordinary course of business or if the
value of the collateral exceeds the debt at the time of payment. Whether any
particular payment would be protected depends upon the facts specific to a
particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its costs
and expenses in preserving or selling the mortgaged property ahead of a payment
to the lender. Moreover, the laws of certain states also give priority to
certain tax and mechanics liens over the lien of a mortgage. Under the
Bankruptcy Code, if the court finds that actions of the mortgagee have been
unreasonable and inequitable, the lien of the related mortgage may be
subordinated to the claims of unsecured creditors.
The Code provides priority to certain tax liens over the lien of the
mortgage. 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 Trust-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and
related statutes. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the applicable laws. In some cases, this liability may affect assignees of
the Mortgage Loans.
Forfeiture for Drug, RICO and Money Laundering Violations
Federal law provides that property purchased or improved with assets derived
from criminal activity or otherwise tainted, or used in the commission of
certain offenses, can be seized and ordered forfeited to the United States of
America. The offenses which can trigger a seizure and forfeiture include, among
others, violations of the Racketeer Influenced and Corrupt Organizations Act,
the Bank Secrecy Act, the anti-money laundering laws and regulations, including
the USA Patriot Act of 2001 and the regulations issued thereunder, as well as
the narcotic drug laws. In many instances, the United States may seize the
property even before a conviction occurs.
In the event of a forfeiture proceeding, a lender may be able to establish
its interest in the property by proving that (i) its mortgage was executed and
recorded before the commission of the illegal conduct
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from which the assets used to purchase or improve the property were derived or
before any other crime upon which the forfeiture is based, or (2) the lender, at
the time of the execution of the mortgage, "did not know or was reasonably
without cause to believe that the property was subject to forfeiture." However,
there can be no assurance that this defense will be successful.
Homeowners Protection Act of 1998
The Homeowners Protection Act of 1998 ("HOPA") provides for certain
disclosure and termination requirements for primary mortgage insurance ("PMI").
The termination provisions of HOPA apply only to mortgage loans relating to
single-family primary residences originated on or after July 29, 1999. These
termination provisions govern when a mortgagor may cancel the requirement to
maintain PMI and when the requirement to maintain PMI is automatically
terminated. In general, voluntary termination is permitted and automatic
termination occurs when the principal balance of the mortgage loan is reduced to
80% or 78%, respectively, of the original property value. The disclosure
requirements of HOPA vary depending on whether the mortgage loan was originated
before or after July 29, 1999. The disclosure requirements include notification
of the circumstances whereby a mortgagor may cancel PMI, the date when PMI
automatically terminates and servicer contact information. In addition, HOPA
provides that no later than 30 days after cancellation or termination of PMI,
the servicer shall provide written notification that PMI is terminated and no
further payments are due or payable. Any servicer, mortgagee or mortgage insurer
that violates provisions of HOPA is subject to possible liability which
includes, but is not limited to, actual damages, statutory damages and
reasonable attorney's fees.
Texas Home Equity Loans
Generally, any "cash-out" refinance or other non-purchase money transaction
(except for certain rate or term refinance loans and certain other narrow
exceptions) secured by a Texas resident's principal residence is subject to the
provisions set forth in Section 50(a)(6) of Article XVI of the Constitution of
Texas and its implementing statutes and regulations (the "Texas Home Equity
Laws"). The Texas Home Equity Laws provide for certain disclosure requirements,
caps on allowable fees, required loan closing procedures and other restrictions.
Failure, inadvertent or otherwise, to comply with any requirement may render the
Mortgage Loan unenforceable and/or the lien on the Mortgaged Property voidable
unless cured within 60 days after the borrower provides notice of the defect to
the lender. Because mortgage loans which are subject to the Texas Home Equity
Laws can be foreclosed only pursuant to court order, rather than non-judicial
foreclosure as is available for other types of mortgage loans in Texas, delays
and increased losses may result in connection with foreclosures of these loans.
If a court were to find that any requirement of the Texas Home Equity Laws was
not complied with, the court could refuse to allow foreclosure to proceed,
declare the lien on the Mortgaged Property to be void, and/or require the
originating lender or the holder of the note to forfeit some or all principal
and interest of the related Mortgage Loan. Title insurance generally available
on these Mortgage Loans may exclude coverage for some of the risks described in
this paragraph.
Servicemembers Civil Relief Act and Similar Laws
Generally, under the terms of the Servicemembers Civil Relief Act (the
"Relief Act"), a borrower who enters military service after the origination of
his or her Mortgage Loan, including a borrower who is a member of the National
Guard or is in reserve status at the time of the origination of the Mortgage
Loan and is later called to active duty, may not be charged interest, including
fees and charges, in excess of 6% per annum during the period of the borrower's
active duty status. In addition to adjusting the interest, the lender must
forgive this interest in excess of 6% per annum, unless a court or
administrative agency orders otherwise upon application of the lender. It is
possible that the Relief Act could have an effect, for an indeterminate period
of time, on the ability of the Servicer to collect full amounts of interest on
certain
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of the Mortgage Loans in a Trust Estate. Any shortfall in interest collections
resulting from the application of the Relief Act or any amendment thereto could
result in losses to the holders of the Certificates of the related series.
Further, the Relief Act imposes limitations which would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan during the borrower's
period of active duty status. Thus, in the event that an affected Mortgage Loan
goes into default, there may be delays and losses occasioned by the inability to
realize upon the Mortgaged Property in a timely fashion. In addition, the Relief
Act provides broad discretion for a court to modify a mortgage loan upon
application of the mortgagor. Certain states have enacted comparable legislation
which may lead to the modification of a mortgage loan or interfere with or
affect the ability of the Servicer to timely collect payments of principal and
interest on, or to foreclose on, Mortgage Loans of borrowers in these states who
are active or reserve members of the armed services or national guard. For
example, California has extended legislation providing protection substantially
similar to that provided by the Relief Act to California national guard members
called up for active service by the Governor or President and reservists called
to active duty.
Environmental Considerations
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to a security
interest may be subject to federal, state, and local laws and regulations
relating to environmental protection. These laws may regulate, among other
things: emissions of air pollutants; discharges of wastewater or storm water;
generation, transport, storage or disposal of hazardous waste or hazardous
substances; operation, closure and removal of underground storage tanks; removal
and disposal of asbestos-containing materials; management of electrical or other
equipment containing polychlorinated biphenyls. Failure to comply with these
laws and regulations may result in significant penalties, including civil and
criminal fines. Under the laws of certain states, environmental contamination on
a property may give rise to a lien on the property to ensure the availability
and/or reimbursement of Cleanup Costs. Generally all subsequent liens on these
properties are subordinated to these environmental liens and, in some states,
even prior recorded liens are subordinated to such liens ("Superliens"). In the
latter states, the security interest of the Trustee in a property that is
subject to such a Superlien could be adversely affected. Environmental
contamination on a property is likely to have a negative impact on the value of
the property, which may lead to losses on the related series of Certificates.
Under the federal Comprehensive Environmental Response Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
certain types of activities that may constitute management of the mortgaged
property may become liable in certain circumstances for the costs of remedial
action ("Cleanup Costs") if hazardous wastes or hazardous substances have been
released or disposed of on the property. These Cleanup Costs may be substantial.
CERCLA imposes strict, as well as joint and several liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to contamination on
the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may held
strictly, jointly and severally liable for environmental remediation and/or
damages at those off-site locations. Many states also have laws that are similar
to CERCLA. Liability under CERCLA or under similar state law could exceed the
value of the property itself as well as the aggregate assets of the property
owner.
The law is unclear as to whether and under what precise circumstances
Cleanup Costs, or the obligation to take remedial actions, could be imposed on a
secured lender such as the Trust Estate. Under the laws of some states and under
CERCLA, a lender may be liable as an "owner or operator" for costs of addressing
releases or threatened releases of hazardous substances on a mortgaged property
if the lender
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or its agents or employees have "participated in the management" of the
operations of the borrower, even though the environmental damage or threat was
caused by a prior owner or current owner or operator or other third party.
Excluded from CERCLA's definition of "owner or operator," is a person "who
without participating in the management of . . . [the] facility, holds indicia
of ownership primarily to protect his security interest" (the "CERCLA
Secured-Creditor Exemption"). This exemption for holders of a security interest
such as a secured lender applies only to the extent that a lender seeks to
protect its security interest in the contaminated facility or property. Thus, if
a lender's activities begin to encroach on the actual management of the facility
or property, the lender faces potential liability as an "owner or operator"
under CERCLA. Similarly, when a lender forecloses and takes title to a
contaminated facility or property, the lender may incur potential CERCLA
liability in various circumstances, including among others, when it holds the
facility or property as an investment (including leasing the facility or
property to a third party), fails to market the property in a timely fashion or
fails to properly address environmental conditions at the property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"), contains an
exemption similar to the CERCLA Secured-Creditor Exemption (the "RCRA
Secured-Creditor Exemption")for those lenders who hold a security interest in a
petroleum underground storage tank ("UST") or in real estate containing a UST,
or that acquire title to a petroleum UST or facility or property on which a UST
is located. As under CERCLA, a lender may lose its RCRA Secured-Creditor
Exemption and be held liable under RCRA as a UST owner or operator if the lender
or its employees or agents participate in the management of the UST. In
addition, if the lender takes title to or possession of the UST or the real
estate containing the UST, under certain circumstances the RCRA Secured-Creditor
Exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly construed
CERCLA's Secured-Creditor Exemption. The court's opinion suggested that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
management of the facility were broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence these decisions
could be inferred from the extent of its involvement in the facility's financial
management. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in In re Bergsoe Metal Corp., apparently disagreeing with, but not
expressly contradicting, the Fleet Factors court, held that a secured lender had
no liability absent "some actual management of the facility" on the part of the
lender.
Court decisions have taken varying views of the scope of the CERCLA
Secured-Creditor Exemption and the RCRA Secured-Creditor Exemption, leading to
administrative and legislative efforts to provide guidance to lenders on the
scope of activities that would trigger CERCLA and/or RCRA liability. Until
recently, these efforts have failed to provide substantial guidance.
On September 30, 1996 the President signed into law (the Asset Conservation,
Lender Liability and Deposit Insurance Protection Act of 1996 (the "Asset
Conservation Act"). The Asset Conservation Act was intended to clarify the scope
of the secured creditor exemption under both CERCLA and RCRA. The Asset
Conservation Act more clearly defined the kinds of "participation in management"
that would trigger liability under CERCLA and specified certain activities that
would not constitute "participation in management" or otherwise result in a
forfeiture of the CERCLA Secured-Creditor Exemption prior to foreclosure or
during a workout period. The Asset Conservation Act also clarified the extent of
protection against liability under CERCLA in the event of foreclosure and
authorized certain regulatory clarifications of the scope of the RCRA
Secured-Creditor Exemption, similar to the statutory protections under CERCLA.
However, since the courts have not yet had the opportunity to interpret the new
statutory
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provisions, the scope of the additional protections offered by the Asset
Conservation Act is not fully defined. It also is important to note that the
Asset Conservation Act does not offer complete protection to lenders and that
the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the Trust Estate and occasion a loss to the Trust Estate and to
Certificateholders in certain circumstances. The new secured creditor amendments
to CERCLA, also, would not necessarily affect the potential for liability in
actions by either a state or a private party under other federal or state laws
which may impose liability on "owners or operators" but do not incorporate the
CERCLA Secured-Creditor Exemption.
Traditionally, residential mortgage lenders have not taken steps to evaluate
whether hazardous wastes or hazardous substances are present with respect to any
mortgaged property prior to the origination of the mortgage loan or prior to
foreclosure or accepting a deed-in-lieu of foreclosure. Accordingly, at the time
the Mortgage Loans were originated these evaluations were not required, nor are
these evaluations required prior to foreclosure or accepting a deed-in-lieu of
foreclosure. Neither the Depositor nor any other entity makes any
representations or warranties or assumes any liability with respect to: the
environmental condition of a Mortgaged Property; the absence, presence or effect
of hazardous wastes or hazardous substances on any Mortgaged Property; any
casualty resulting from the presence or effect of hazardous wastes or hazardous
substances on, near or emanating from a Mortgaged Property; the impact on
Certificateholders of any environmental condition or presence of any substance
on or near a Mortgaged Property; or the compliance of any Mortgaged Property
with any environmental laws, nor is any agent, person or entity otherwise
affiliated with the Depositor authorized or able to make any representation,
warranty or assumption of liability relative to any Mortgaged Property. See "The
Mortgage Loan Programs--Representations and Warranties" and "Servicing of the
Mortgage Loans--Enforcement of "Due-on-Sale" Clauses; Realization Upon Defaulted
Mortgage Loans" above.
"Due-on-Sale" Clauses
The forms of note, mortgage and deed of trust relating to Mortgage Loans may
contain a "due-on-sale" clause permitting acceleration of the maturity of a loan
if the borrower transfers its interest in the property. In recent years, court
decisions and legislative actions placed substantial restrictions on the right
of lenders to enforce these clauses in many states. However, effective October
15, 1982, Congress enacted the Garn-St Germain Depository Institutions Act of
1982 (the "Garn Act") which purports to preempt state laws which prohibit the
enforcement of "due-on-sale" clauses by providing among other matters, that
"due-on-sale" clauses in certain loans (which loans may include the Mortgage
Loans) made after the effective date of the Garn Act are enforceable, within
certain limitations as set forth in the Garn Act and the regulations promulgated
thereunder. "Due-on-sale" clauses contained in mortgage loans originated by
federal savings and loan associations or federal savings banks are fully
enforceable pursuant to regulations of the OTS, as successor to the Federal Home
Loan Bank Board, which preempt state law restrictions on the enforcement of
these clauses. Similarly, "due-on-sale" clauses in mortgage loans made by
national banks and federal credit unions are now fully enforceable pursuant to
preemptive regulations of the Comptroller of the Currency and the National
Credit Union Administration, respectively.
The Garn Act created a limited exemption from its general rule of
enforceability for "due-on-sale" clauses in certain mortgage loans ("Window
Period Loans") which were originated by non-federal lenders and made or assumed
in certain states ("Window Period States") during the period, prior to October
15, 1982, in which that state prohibited the enforcement of "due-on-sale"
clauses by
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constitutional provision, statute or statewide court decision (the "Window
Period"). Though neither the Garn Act nor the OTS regulations actually names the
Window Period States, Freddie Mac has taken the position, in prescribing
mortgage loan servicing standards with respect to mortgage loans which it has
purchased, that the Window Period States were: Arizona, Arkansas, California,
Colorado, Georgia, Iowa, Michigan, Minnesota, New Mexico, Utah and Washington.
Under the Garn Act, unless a Window Period State took action by October 15,
1985, the end of the Window Period, to further regulate enforcement of
"due-on-sale" clauses in Window Period Loans, "due-on-sale" clauses would become
enforceable even in Window Period Loans. Five of the Window Period States
(Arizona, Minnesota, Michigan, New Mexico and Utah) have taken actions which
restrict the enforceability of "due-on-sale" clauses in Window Period Loans
beyond October 15, 1985. The actions taken vary among these states.
By virtue of the Garn Act, a Servicer may generally be permitted to
accelerate any Mortgage Loan which contains a "due-on-sale" clause upon transfer
of an interest in the property subject to the mortgage or deed of trust. With
respect to any Mortgage Loan secured by a residence occupied or to be occupied
by the borrower, this ability to accelerate will not apply to certain types of
transfers, including (i) the granting of a leasehold interest which has a term
of three years or less and which does not contain an option to purchase; (ii) a
transfer to a relative resulting from the death of a borrower, or a transfer
where the spouse or children become an owner of the property in each case where
the transferee(s) will occupy the property; (iii) a transfer resulting from a
decree of dissolution of marriage, legal separation agreement or from an
incidental property settlement agreement by which the spouse becomes an owner of
the property; (iv) the creation of a lien or other encumbrance subordinate to
the lender's security instrument which does not relate to a transfer of rights
of occupancy in the property (provided that the lien or encumbrance is not
created pursuant to a contract for deed); (v) a transfer by devise, descent or
operation of law on the death of a joint tenant or tenant by the entirety; (vi)
a transfer into an inter vivos trust in which the borrower is the beneficiary
and which does not relate to a transfer of rights of occupancy; and (vii) other
transfers as set forth in the Garn Act and the regulations thereunder.
Regulations promulgated under the Garn Act also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan pursuant to a due-on-sale
clause. The extent of the effect of the Garn Act on the average lives and
delinquency rates of the Mortgage Loans cannot be predicted. See "Prepayment and
Yield Considerations."
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The OTS 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 interest rate limits by adopting before April
1, 1983, a law or constitutional provision which expressly rejects application
of the federal law. Fifteen states have adopted laws reimposing or reserving the
right to reimpose interest rate limits. In addition, even where Title V is not
so rejected, any state is authorized to adopt a provision limiting certain other
loan charges.
The Depositor or other entity specified in the related prospectus supplement
will represent and warrant in the Pooling Agreement to the Trustee for the
benefit of Certificateholders that all Mortgage Loans are originated in full
compliance with applicable state laws, including usury laws. See "The Pooling
Agreement--Assignment of Mortgage Loans."
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Enforceability of Certain Provisions
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under the Pooling Agreement, late charges and prepayment fees (to the
extent permitted by law and not waived by the Servicer) will be retained by the
Servicer as additional servicing compensation.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial remedies
that may be fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes for 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 lenders to reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from temporary financial disability. In
some cases, courts have limited the right of lenders to foreclose if the default
under the mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second mortgage or
deed of trust affecting the property. In other cases, some courts have been
faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
the deeds of trust receive notices in addition to the statutorily-prescribed
minimum requirements. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that the sale by a trustee under a
deed of trust or under a mortgage having a power of sale does not involve
sufficient state action to afford constitutional protections to the borrower.
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FEDERAL INCOME TAX CONSEQUENCES
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The following discussion represents the opinion of Cadwalader, Wickersham &
Taft LLP as to the material federal income tax consequences of the purchase,
ownership and disposition of Certificates. The discussion below does not purport
to address all federal income tax consequences that may be applicable to
particular categories of investors, some of which may be subject to special
rules. The authorities on which this discussion is based are subject to change
or differing interpretations, and any change or interpretation could apply
retroactively. This discussion reflects the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as regulations
(the "REMIC Regulations") promulgated by the U.S. Department of the Treasury.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of Certificates.
If a series of Certificates includes Exchangeable Certificates, each Class
of Exchangeable Certificates will represent beneficial ownership of one or more
interests in one or more REMIC regular interests. The related prospectus
supplement will specify whether each Class of Exchangeable Certificates
represents a proportionate or disproportionate interest in each underlying REMIC
regular interest. The Exchangeable Certificates will be created, sold and
administered pursuant to an arrangement that will be treated as a grantor trust
under subpart E, Part 1 of subchapter J of the Code. The tax treatment of
Exchangeable Certificates is discussed under "--Federal Income Tax Consequences
for Exchangeable Certificates" below.
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For purposes of this discussion, where the applicable prospectus supplement
provides for a Fixed Retained Yield on the Mortgage Loans of a series of
Certificates, references to the Mortgage Loans will be deemed to refer to that
portion of the Mortgage Loans held by the Trust Estate that does not include the
Fixed Retained Yield. References to a "holder" or "Certificateholder" in this
discussion generally mean the Beneficial Owner of a Certificate.
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Federal Income Tax Consequences for REMIC Certificates
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General
With respect to a particular series of Certificates, an election may be made
to treat the Trust Estate or one or more segregated pools of assets in the Trust
Estate as one or more REMICs within the meaning of Code Section 860D. A Trust
Estate or a portion of a Trust Estate as to which a REMIC election will be made
will be referred to as a "REMIC Pool." For purposes of this discussion,
Certificates of a series as to which one or more REMIC elections are made are
referred to as "REMIC Certificates" and will consist of one or more Classes of
"Regular Certificates" and one Class of "Residual Certificates in the case of
each REMIC Pool. Qualification as a REMIC requires ongoing compliance with
certain conditions. For each series of REMIC Certificates, Cadwalader,
Wickersham & Taft LLP, counsel to the Depositor, has advised the Depositor that
in its opinion, assuming (i) the making of an appropriate election, (ii)
compliance with the Pooling Agreement, and (iii) compliance with any changes in
the law, including any amendments to the Code or applicable Treasury regulations
thereunder, each REMIC Pool will qualify as a REMIC. In such case, the Regular
Certificates will be considered to be "regular interests" in the REMIC Pool and
generally will be treated for federal income tax purposes as if they were newly
originated debt instruments, and the Residual Certificates will be considered to
be "residual interests" in the REMIC Pool. The prospectus supplement for each
series of Certificates will indicate whether one or more REMIC elections for the
related Trust Estate will be made, in which event references to "REMIC" or
"REMIC Pool" in this prospectus shall be deemed to refer to each REMIC Pool.
Status of REMIC Certificates
REMIC Certificates held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) in the same proportion that the assets of the
REMIC Pool would be treated as "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning of Code
Section 7701(a)(19)(C)(v) or as other assets described in Code Section
7701(a)(19)(C). REMIC Certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(4)(A),
and interest on the Regular Certificates and income with respect to Residual
Certificates will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Code
Section 856(c)(3)(B) in the same proportion that, for both purposes, the assets
of the REMIC Pool would be so treated. If at all times 95% or more of the assets
of the REMIC Pool qualify for each of the foregoing treatments, the REMIC
Certificates will qualify for the corresponding status in their entirety. For
purposes of Code Section 856(c)(4)(A), payments of principal and interest on the
Mortgage Loans that are reinvested pending distribution to holders of REMIC
Certificates qualify for such treatment.
Where two REMIC Pools are a part of a tiered structure they will be treated
as one REMIC for purposes of the tests described above respecting asset
ownership of more or less than 95%. In addition, if the assets of the REMIC
include Buy-Down Loans, it is possible that the percentage of the assets
constituting "loans . . . secured by an interest in real property which is . . .
residential real property" for purposes of Code Section 7701(a)(19)(C)(v), may
be required to be reduced by the amount of the related
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Buy-Down Funds. REMIC Certificates held by a regulated investment company will
not constitute "Government securities" within the meaning of Code Section
851(b)(3)(A)(i). REMIC Certificates held by certain financial institutions will
constitute an "evidence of indebtedness" within the meaning of Code Section
582(c)(1).
Qualification as a REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Certificates) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor under which
the de minimis requirement will be met if at all times the aggregate adjusted
basis of the nonqualified assets is less than 1% of the aggregate adjusted basis
of all the REMIC Pool's assets. An entity that fails to meet the safe harbor may
nevertheless demonstrate that it holds no more than a de minimis amount of
nonqualified assets. A REMIC Pool also must provide "reasonable arrangements" to
prevent its residual interests from being held by "disqualified organizations"
or agents thereof and must furnish applicable tax information to transferors or
agents that violate this requirement. See "--Taxation of Residual
Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates--Disqualified Organizations."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is either purchased by the REMIC Pool within a three-month
period thereafter or represents an increase in the loan advanced to the obligor
under its original terms, in each case pursuant to a fixed price contract in
effect on the Startup Day. Qualified mortgages include whole mortgage loans,
such as the Mortgage Loans, and, generally, certificates of beneficial interest
in a grantor trust that holds mortgage loans, regular interests in another
REMIC, such as lower-tier regular interests in a tiered REMIC. The REMIC
Regulations specify that loans secured by timeshare interests and shares held by
a tenant stockholder in a cooperative housing corporation can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage, which
is any property that would have been treated as a qualified mortgage if it were
transferred to the REMIC Pool on the Startup Day and that is received either (i)
in exchange for any qualified mortgage within a three-month period thereafter or
(ii) in exchange for a "defective obligation" within a two-year period
thereafter. A "defective obligation" includes (i) a mortgage in default or as to
which default is reasonably foreseeable, (ii) a mortgage as to which a customary
representation or warranty made at the time of transfer to the REMIC Pool has
been breached, (iii) a mortgage that was fraudulently procured by the mortgagor,
and (iv) a mortgage that was not in fact principally secured by real property
(but only if the mortgage is disposed of within 90 days of discovery). A
Mortgage Loan that is "defective" as described in clause (iv) that is not sold
or, if within two years of the Startup Day, exchanged, within 90 days of
discovery, ceases to be a qualified mortgage after that 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies. In addition, a reserve fund
(limited to not more than 50% of the REMIC's initial assets) may be used to
provide a
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source of funds for the purchase of increases in the balances of qualified
mortgages pursuant to their terms. The reserve fund will be disqualified if more
than 30% of the gross income from the assets in the reserve fund for the year is
derived from the sale or other disposition of property held for less than three
months, unless required to prevent a default on the regular interests caused by
a default on one or more qualified mortgages. A reserve fund must be reduced
"promptly and appropriately" to the extent no longer required. Foreclosure
property is real property acquired by the REMIC Pool in connection with the
default or imminent default of a qualified mortgage and generally not held
beyond the close of the third calendar year following the year in which the
property is acquired with an extension that may be granted by the Internal
Revenue Service.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of regular interests or
(ii) a single class of residual interests on which distributions, if any, are
made pro rata. A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate, or consist of a specified, nonvarying portion of
the interest payments on qualified mortgages. A specified portion may consist of
a fixed number of basis points, a fixed percentage of the total interest, or a
qualified variable rate, inverse variable rate or difference between two fixed
or qualified variable rates on some or all of the qualified mortgages. The
specified principal amount of a regular interest that provides for interest
payments consisting of a specified, nonvarying portion of interest payments on
qualified mortgages may be zero. A residual interest is an interest in a REMIC
Pool other than a regular interest that is issued on the Startup Day and that is
designated as a residual interest. An interest in a REMIC Pool may be treated as
a regular interest even if payments of principal on the interest are
subordinated to payments on other regular interests or the residual interest in
the REMIC Pool, and are dependent on the absence of defaults or delinquencies on
qualified mortgages or permitted investments, lower than reasonably expected
returns on permitted investments, unanticipated expenses incurred by the REMIC
Pool or prepayment interest shortfalls. Accordingly, the Regular Certificates of
a series will constitute one or more classes of regular interests, and the
Residual Certificates for that series will constitute a single class of residual
interests on which distributions are made pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable year,
the Code provides that the entity will not be treated as a REMIC for that year
and thereafter. In this event, an entity with multiple classes of ownership
interests may be treated as a separate association taxable as a corporation
under Treasury regulations, and the Regular Certificates may be treated as
equity interests in that corporation. The Code, however, authorizes the Treasury
Department to issue regulations that address situations where failure to meet
one or more of the requirements for REMIC status occurs inadvertently and in
good faith, and disqualification of the REMIC Pool would occur absent regulatory
relief. Investors should be aware, however, that the Conference Committee Report
to the Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
Taxation of Regular Certificates
General
In general, interest, Original Issue Discount, and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "Regular Certificateholder"), and
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principal payments on a Regular Certificate will be treated as a return of
capital to the extent of the Regular Certificateholder's basis in the Regular
Certificate allocable thereto (other than accrued market discount not previously
reported as income). Regular Certificateholders must use the accrual method of
accounting with regard to Regular Certificates, regardless of the method of
accounting they otherwise use.
Original Issue Discount
Compound Interest Certificates will be, and other classes of Regular
Certificates may be, issued with "Original Issue Discount" within the meaning of
Code Section 1273(a). Holders of any Class of Regular Certificates having
Original Issue Discount generally must include Original Issue Discount in
ordinary income for federal income tax purposes as it accrues, in accordance
with a constant interest method that takes into account the compounding of
interest, in advance of receipt of the cash attributable to such income. The
following discussion is based in part on temporary and final Treasury
regulations (the "OID Regulations") under Code Sections 1271 through 1273 and
1275 and in part on the provisions of the 1986 Act. Regular Certificateholders
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Regular
Certificates. To the extent these issues are not addressed in the OID
Regulations, it is anticipated that the Trustee will apply the methodology
described in the Conference Committee Report to the 1986 Act. No assurance can
be provided that the Internal Revenue Service will not take a different position
as to those matters not currently addressed by the OID Regulations. Moreover,
the OID Regulations include an anti-abuse rule allowing the Internal Revenue
Service to apply or depart from the OID Regulations where necessary or
appropriate to ensure a reasonable tax result in light of the applicable
statutory provisions. A tax result will not be considered unreasonable under the
anti-abuse rule in the absence of a substantial effect on the present value of a
taxpayer's tax liability. Investors are advised to consult their own tax
advisors as to the this discussion and the appropriate method for reporting
interest and Original Issue Discount for the Regular Certificates.
Each Regular Certificate (except to the extent described below for a Regular
Certificate on which principal is distributed in a single installment or by lots
of specified principal amounts upon the request of a Certificateholder or by
random lot (a "Non-Pro Rata Certificate")) will be treated as a single
installment obligation for purposes of determining the Original Issue Discount
includible in a Regular Certificateholder's income. The total amount of Original
Issue Discount on a Regular Certificate is the excess of the "stated redemption
price at maturity" of the Regular Certificate over its "issue price." The issue
price of a Class of Regular Certificates offered pursuant to this prospectus
generally is the first price at which a substantial amount of the Class is sold
to the public (excluding bond houses, brokers and underwriters). Although
unclear under the OID Regulations, it is anticipated that the Trustee will treat
the issue price of a Class as to which there is no substantial sale as of the
issue date or that is retained by the Seller as the fair market value of that
Class as of the issue date. The issue price of a Regular Certificate also
includes any amount paid by an initial Regular Certificateholder for accrued
interest that relates to a period prior to the issue date of the Regular
Certificate, unless the Regular Certificateholder elects on its federal income
tax return to exclude that amount from the issue price and to recover it on the
first Distribution Date. The stated redemption price at maturity of a Regular
Certificate always includes the original principal amount of the Regular
Certificate, but generally will not include distributions of interest if such
distributions constitute "qualified stated interest." Under the OID Regulations,
qualified stated interest generally means interest payable at a single fixed
rate or a qualified variable rate (as described below) provided that the
interest payments are unconditionally payable at intervals of one year or less
during the entire term of the Regular Certificate. Because there is no penalty
or default remedy in the case of nonpayment of interest for a Regular
Certificate, it is possible that no interest on any Class of Regular
Certificates will be treated as qualified stated interest. However, except as
provided in the following three sentences or in the applicable prospectus
supplement, because the underlying Mortgage Loans provide for remedies in the
event of default, it is anticipated that the Trustee will treat interest on the
Regular
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Certificates as qualified stated interest. Distributions of interest on a
Compound Interest Certificate, or on other Regular Certificates for which
deferred interest will accrue, will not constitute qualified stated interest, in
which case the stated redemption price at maturity of these Regular Certificates
includes all distributions of interest as well as principal thereon. Likewise,
it is anticipated that the Trustee will treat an interest-only Class or a Class
on which interest is substantially disproportionate to its principal amount (a
so-called "super-premium" Class) as having no qualified stated interest. Where
the interval between the issue date and the first Distribution Date on a Regular
Certificate is shorter than the interval between subsequent Distribution Dates,
the interest attributable to the additional days will be included in the stated
redemption price at maturity.
Under a de minimis rule, Original Issue Discount on a Regular Certificate
will be considered to be zero if the Original Issue Discount is less than 0.25%
of the stated redemption price at maturity of the Regular Certificate multiplied
by the weighted average maturity of the Regular Certificate. For this purpose,
the weighted average maturity of the Regular Certificate is computed as the sum
of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the Regular Certificate and the
denominator of which is the stated redemption price at maturity of the Regular
Certificate. The Conference Committee Report to the 1986 Act provides that the
schedule of such distributions should be determined in accordance with the
assumed rate of prepayment of the Mortgage Loans (the "Prepayment Assumption")
and the anticipated reinvestment rate, if any, relating to the Regular
Certificates. The Prepayment Assumption for a series of Regular Certificates
will be set forth in the applicable prospectus supplement. Holders generally
must report de minimis Original Issue Discount pro rata as principal payments
are received, and this income will be capital gain if the Regular Certificate is
held as a capital asset. Under the OID Regulations, however, Regular
Certificateholders may elect to accrue all de minimis Original Issue Discount as
well as market discount and market premium, under the constant yield method. See
"--Election to Treat All Interest Under the Constant Yield Method."
A Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the Original
Issue Discount on the Regular Certificate accrued during an accrual period for
each day on which it holds the Regular Certificate, including the date of
purchase but excluding the date of disposition. The Trustee will treat the
monthly period ending on the day before each Distribution Date as the accrual
period. For each Regular Certificate, a calculation will be made of the Original
Issue Discount that accrues during each successive full accrual period (or
shorter period from the date of original issue) that ends on the day before the
related Distribution Date on the Regular Certificate. The Conference Committee
Report to the 1986 Act states that the rate of accrual of Original Issue
Discount is intended to be based on the Prepayment Assumption. Other than as
discussed below for a Non-Pro Rata Certificate, the Original Issue Discount
accruing in a full accrual period would be the excess, if any, of (i) the sum of
(a) the present value of all of the remaining distributions to be made on the
Regular Certificate as of the end of that accrual period, and (b) the
distributions made on the Regular Certificate during the accrual period that are
included in the Regular Certificate's stated redemption price at maturity, over
(ii) the adjusted issue price of the Regular Certificate at the beginning of the
accrual period. The present value of the remaining distributions referred to in
the preceding sentence is calculated based on (i) the yield to maturity of the
Regular Certificate at the issue date, (ii) events (including actual
prepayments) that have occurred prior to the end of the accrual period, and
(iii) the Prepayment Assumption. For these purposes, the adjusted issue price of
a Regular Certificate at the beginning of any accrual period equals the issue
price of the Regular Certificate, increased by the aggregate amount of Original
Issue Discount for the Regular Certificate that accrued in all prior accrual
periods and reduced by the amount of distributions included in the Regular
Certificate's stated redemption price at maturity that were made on the Regular
Certificate in prior periods. The Original Issue Discount
109
accruing during any accrual period (as determined in this paragraph) will then
be divided by the number of days in the period to determine the daily portion of
Original Issue Discount for each day in the period. If an initial accrual period
is shorter than a full accrual period, the daily portions of Original Issue
Discount must be determined according to an appropriate allocation under any
reasonable method.
Under the method described above, the daily portions of Original Issue
Discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans for a series of Regular
Certificates can result in both a change in the priority of principal payments
for certain Classes of Regular Certificates and either an increase or decrease
in the daily portions of Original Issue Discount for the Regular Certificates.
In the case of a Non-Pro Rata Certificate, it is anticipated that the
Trustee will determine the yield to maturity of such Certificate based upon the
anticipated payment characteristics of the Class as a whole under the Prepayment
Assumption. In general, the Original Issue Discount accruing on each Non-Pro
Rata Certificate in a full accrual period would be its allocable share of the
Original Issue Discount for the entire Class, as determined in accordance with
the preceding paragraph. However, in the case of a distribution in retirement of
the entire unpaid principal balance of any Non-Pro Rata Certificate (or portion
of this unpaid principal balance), (a) the remaining unaccrued Original Issue
Discount allocable to the Certificate (or to the portion) will accrue at the
time of the distribution, and (b) the accrual of Original Issue Discount
allocable to each remaining Certificate of the Class (or the remaining unpaid
principal balance of a partially redeemed Non-Pro Rata Certificate after a
distribution of principal has been received) will be adjusted by reducing the
present value of the remaining payments on the Class and the adjusted issue
price of the Class to the extent attributable to the portion of the unpaid
principal balance thereof that was distributed. The Depositor believes that the
foregoing treatment is consistent with the "pro rata prepayment" rules of the
OID Regulations, but with the rate of accrual of Original Issue Discount
determined based on the Prepayment Assumption for the Class as a whole.
Investors are advised to consult their tax advisors as to this treatment.
Acquisition Premium
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the Original Issue
Discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over the adjusted issue
price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively, a
subsequent purchaser may elect to treat all acquisition premium under the
constant yield method, as described below under the heading "--Election to Treat
All Interest Under the Constant Yield Method."
Variable Rate Regular Certificates
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate if,
generally, (i) the issue price does not exceed the original principal balance by
more than a specified amount and (ii) the interest compounds or is payable at
least annually at current values of (a) one or more "qualified floating rates,"
(b) a single fixed rate and one or more qualified floating rates, (c) a single
"objective rate," or (d) a single fixed rate and a single objective rate that is
a "qualified inverse floating rate." A floating rate is a qualified floating
rate if variations in the rate can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds, where such rate
is subject to a fixed multiple that is greater than 0.65 but not more than 1.35.
A
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rate may also be increased or decreased by a fixed spread or subject to a fixed
cap or floor, or a cap or floor that is not reasonably expected as of the issue
date to affect the yield of the instrument significantly. An objective rate is
any rate (other than a qualified floating rate) that is determined using a
single fixed formula and that is based on objective financial or economic
information, provided that such information is not (i) within the control of the
issuer or a related party or (ii) unique to the circumstances of the issuer or a
related party. A qualified inverse floating rate is a rate equal to a fixed rate
minus a qualified floating rate that inversely reflects contemporaneous
variations in the cost of newly borrowed funds; an inverse floating rate that is
not a qualified inverse floating rate may nevertheless be an objective rate. A
Class of Regular Certificates may be issued under this prospectus that does not
have a variable rate under the foregoing rules, for example, a Class that bears
different rates at different times during the period it is outstanding such that
it is considered significantly "front-loaded" or "back-loaded" within the
meaning of the OID Regulations. It is possible that a Class like this may be
considered to bear "contingent interest" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to Regular Certificates. However, if
final regulations dealing with contingent interest with respect to Regular
Certificates apply the same principles as the OID Regulations, the final
regulations may lead to different timing of income inclusion than would be the
case under the OID Regulations for non-contingent debt instruments. Furthermore,
application of these principles could lead to the characterization of gain on
the sale of contingent interest Regular Certificates as ordinary income.
Investors should consult their tax advisors regarding the appropriate treatment
of any Regular Certificate that does not pay interest at a fixed rate or
variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Certificate (i) bearing a rate that
qualifies as a variable rate under the OID Regulations that is tied to current
values of a variable rate (or the highest, lowest or average of two or more
variable rates, including a rate based on the average cost of funds of one or
more financial institutions), or a positive or negative multiple of such a rate
(plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such a
rate that is subject to one or more caps or floors, or (ii) bearing one or more
such variable rates for one or more periods, or one or more fixed rates for one
or more periods, and a different variable rate or fixed rate for other periods,
qualifies as a regular interest in a REMIC. Accordingly, it is anticipated that
the Trustee will treat Regular Certificates that qualify as regular interests
under this rule in the same manner as obligations bearing a variable rate for
Original Issue Discount reporting purposes.
The amount of Original Issue Discount for a Regular Certificate bearing a
variable rate of interest will accrue in the manner described above under
"--Original Issue Discount," with the yield to maturity and future payments on
the Regular Certificate generally to be determined by assuming that interest
will be payable for the life of the Regular Certificate based on the initial
rate (or, if different, the value of the applicable variable rate as of the
pricing date) for the relevant Class. Unless required otherwise by applicable
final regulations, it is anticipated that the Trustee will treat this interest
as qualified stated interest, except for variable interest on an interest-only
or super-premium Class, which will be treated as non-qualified stated interest
includible in the stated redemption price at maturity. Ordinary income
reportable for any period will be adjusted based on subsequent changes in the
applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, it is anticipated that the Trustee will treat
Regular Certificates bearing an interest rate that is a weighted average of the
net interest rates on Mortgage Loans as having qualified stated interest, except
to the extent that initial "teaser" rates cause sufficiently "back-loaded"
interest to create more than de minimis Original Issue Discount. The yield on
these Regular Certificates for purposes of accruing Original Issue Discount will
be a hypothetical fixed-rate based on the fixed rates, in the case of fixed rate
Mortgage Loans, and initial "teaser rates" followed by fully indexed rates, in
the case of adjustable-rate Mortgage Loans. In the case of adjustable-rate
Mortgage Loans, the applicable index used to compute
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interest on the Mortgage Loans in effect on the pricing date (or possibly the
issue date) will be deemed to be in effect beginning with the period in which
the first weighted average adjustment date occurring after the issue date
occurs. Adjustments will be made in each accrual period either increasing or
decreasing the amount of ordinary income reportable to reflect the actual
Pass-Through Rate on these Regular Certificates.
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these sections and the
principles applied by the OID Regulations in the context of Original Issue
Discount, "market discount" is the amount by which the purchaser's original
basis in the Regular Certificate (i) is exceeded by the then-current principal
amount of the Regular Certificate, or (ii) in the case of a Regular Certificate
having Original Issue Discount, is exceeded by the adjusted issue price of the
Regular Certificate at the time of purchase. Such purchaser generally will be
required to recognize ordinary income to the extent of accrued market discount
on the Regular Certificate as distributions includible in the stated redemption
price at maturity thereof are received, in an amount not exceeding any such
distribution. Such market discount would accrue in a manner to be provided in
Treasury regulations and should take into account the Prepayment Assumption. The
Conference Committee Report to the 1986 Act provides that until such regulations
are issued, this market discount would accrue either (i) on the basis of a
constant interest rate, or (ii) in the ratio of stated interest allocable to the
relevant period to the sum of the interest for such period plus the remaining
interest as of the end of such period, or in the case of a Regular Certificate
issued with Original Issue Discount, in the ratio of Original Issue Discount
accrued for the relevant period to the sum of the Original Issue Discount
accrued for the period plus the remaining Original Issue Discount as of the end
of the period. A purchaser also generally will be required to treat a portion of
any gain on a sale or exchange of the Regular Certificate as ordinary income to
the extent of the market discount accrued to the date of disposition under one
of the foregoing methods, less any accrued market discount previously reported
as ordinary income as partial distributions in reduction of the stated
redemption price at maturity were received. A purchaser will be required to
defer deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Certificate over the
interest distributable thereon. The deferred portion of the interest expense in
any taxable year generally will not exceed the accrued market discount on the
Regular Certificate for such year. Any deferred interest expense is, in general,
allowed as a deduction not later than the year in which the related market
discount income is recognized or the Regular Certificate is disposed of. As an
alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Certificateholder may elect to include market discount in
income currently as it accrues on all market discount instruments acquired by
the Regular Certificateholder in that taxable year or thereafter, in which case
the interest deferral rule will not apply. See "--Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in which
such election may be deemed to be made.
By analogy to the OID Regulations, market discount on a Regular Certificate
will be considered to be zero if the market discount is less than 0.25% of the
remaining stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate
(determined as described above in the third paragraph under "--Original Issue
Discount") remaining after the date of purchase. It appears that de minimis
market discount would be reported in a manner similar to de minimis Original
Issue Discount. See "--Original Issue Discount" above. Treasury regulations
implementing the market discount rules have not yet been issued, and therefore
investors should consult their own tax advisors regarding the application of
these rules. Investors should also consult Revenue Procedure 92-67 concerning
the elections to include market discount in income currently and to accrue
market discount on the basis of the constant yield method.
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Premium
A Regular Certificate purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Certificateholder holds the Regular Certificate as a
"capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize this premium
under the constant yield method. This election will apply to all debt
obligations acquired by the Regular Certificateholder at a premium held in that
taxable year or thereafter, unless revoked with the permission of the Internal
Revenue Service. Final Treasury regulations issued under Code Section 171 do not
by their terms apply to prepayable debt instruments such as the Regular
Certificates. However, the Conference Committee Report to the 1986 Act indicates
a Congressional intent that the same rules that apply to the accrual of market
discount on installment obligations will also apply to amortizing bond premium
under Code Section 171 on installment obligations such as the Regular
Certificates, although it is unclear whether the alternatives to the constant
interest method described above under "--Market Discount" are available.
Amortizable bond premium will be treated as an offset to interest income on a
Regular Certificate, rather than as a separate deduction item. See "--Election
to Treat All Interest Under the Constant Yield Method" below regarding an
alternative manner in which the Code Section 171 election may be deemed to be
made.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to this election, (i) "interest" includes stated interest, Original Issue
Discount, de minimis Original Issue Discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make this election on an instrument by instrument basis or for a
class or group of debt instruments. However, if the holder makes this election
for a debt instrument with amortizable bond premium or with market discount, the
holder is deemed to have made elections to amortize bond premium or to report
market discount income currently as it accrues under the constant yield method,
respectively, for all premium bonds held or market discount bonds acquired by
the holder in the same taxable year or thereafter. The election is made on the
holder's federal income tax return for the year in which the debt instrument is
acquired and is irrevocable except with the approval of the Internal Revenue
Service. Investors should consult their own tax advisors regarding the
advisability of making this election.
Treatment of Losses
Regular Certificateholders will be required to report income on Regular
Certificates using the accrual method of accounting, without giving effect to
delays or reductions in distributions attributable to defaults or delinquencies
on the Mortgage Loans, except to the extent it can be established that these
amounts are uncollectible. Accordingly, the holder of a Regular Certificate,
particularly a Subordinate Certificate, may have income, or may incur a
diminution in cash flow as a result of a default or delinquency, but may not be
able to take a deduction (subject to the discussion below) for the corresponding
loss until a subsequent taxable year. In this regard, investors are cautioned
that while they may generally cease to accrue interest income if it reasonably
appears that the interest will be uncollectible, the Internal Revenue Service
may take the position that Original Issue Discount must continue to be accrued
in spite of its uncollectibility until the debt instrument is disposed of in a
taxable transaction or becomes worthless in accordance with
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the rules of Code Section 166. To the extent the rules of Code Section 166
regarding bad debts are applicable, it appears that Regular Certificateholders
that are corporations or that otherwise hold the Regular Certificates in
connection with a trade or business should in general be allowed to deduct as an
ordinary loss such loss with respect to principal sustained during the taxable
year on account of any of their Regular Certificates becoming wholly or
partially worthless, and that, in general, Regular Certificateholders that are
not corporations and do not hold the Regular Certificates in connection with a
trade or business should be allowed to deduct as a short-term capital loss any
loss sustained during the taxable year on account of a portion of any of their
Regular Certificates becoming wholly worthless. Although the matter is not free
from doubt, these non-corporate Regular Certificateholders should be allowed a
bad debt deduction at the time the principal balance of the Regular Certificates
is reduced to reflect losses resulting from any liquidated Mortgage Loans. The
Internal Revenue Service, however, could take the position that non-corporate
holders will be allowed a bad debt deduction to reflect such losses only after
all the Mortgage Loans remaining in the Trust Estate have been liquidated or the
applicable Class of Regular Certificates has been otherwise retired. The
Internal Revenue Service could also assert that losses on the Regular
Certificates are deductible based on some other method that may defer such
deductions for all holders, such as reducing future cash flow for purposes of
computing Original Issue Discount. This may have the effect of creating
"negative" Original Issue Discount which would be deductible only against future
positive Original Issue Discount or otherwise upon termination of the Class.
Regular Certificateholders are urged to consult their own tax advisors regarding
the appropriate timing, amount and character of any loss sustained with respect
to the Regular Certificates. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
non-corporate holders, the Internal Revenue Service may take the position that
losses attributable to accrued Original Issue Discount may only be deducted as
capital losses in the case of non-corporate holders who do not hold the Regular
Certificates in connection with a trade or business. 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 Regular Certificates.
Sale or Exchange of Regular Certificates
If a Regular Certificateholder sells or exchanges a Regular Certificate, the
Regular Certificateholder will recognize gain or loss equal to the difference,
if any, between the amount received and its adjusted basis in the Regular
Certificate. The adjusted basis of a Regular Certificate generally will equal
the cost of the Regular Certificate to the seller, increased by any Original
Issue Discount or market discount previously included in the seller's gross
income for the Regular Certificate and reduced by amounts included in the stated
redemption price at maturity of the Regular Certificate that were previously
received by the seller, by any amortized premium and by any recognized losses.
Except as described above relating to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate as
a capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Certificate has been held for the applicable
holding period (as described below). This gain will be treated as ordinary
income (i) if a Regular Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Regular Certificateholder's net investment in the
conversion transaction at 120% of the appropriate applicable federal rate under
Code Section 1274(d) 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,
(ii) in the case of a non-corporate taxpayer, to the extent such taxpayer has
made an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates, or (iii) to the extent that such
gain does not exceed the excess, if any, of (a) the amount that would have been
includible in the gross income of the holder if its
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yield on such Regular Certificate were 110% of the applicable federal rate as of
the date of purchase, over (b) the amount of income actually includible in the
gross income of such holder with respect to such Regular Certificate. In
addition, gain or loss recognized from the sale of a Regular Certificate by
certain banks or thrift institutions will be treated as ordinary income or loss
under Code Section 582(c). Long-term capital gains of certain non-corporate
taxpayers generally are subject to a lower maximum tax rate than ordinary income
or short-term capital gains of such taxpayers for property held for more than
one year. The maximum tax rate for corporations is the same with respect to both
ordinary income and capital gains.
Taxation of Residual Certificates
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Certificates ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in such quarter
and by allocating such daily portion among the Residual Holders in proportion to
their respective holdings of Residual Certificates in the REMIC Pool on such
day. REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting, except,
in addition to certain other adjustments, that (i) the limitations on
deductibility of investment interest expense and expenses for the production of
income do not apply, (ii) all bad loans will be deductible as business bad debts
and (iii) the limitation on the deductibility of interest and expenses related
to tax-exempt income will apply. The REMIC Pool's gross income includes
interest, Original Issue Discount income and market discount income, if any, on
the Mortgage Loans, reduced by amortization of any premium on the Mortgage
Loans, plus income from amortization of issue premium, if any, on the Regular
Certificates, plus income on reinvestment of cash flows and reserve assets, plus
any cancellation of indebtedness income upon allocation of realized losses to
the Regular Certificates. The REMIC Pool's deductions include interest and
Original Issue Discount expense on the Regular Certificates, servicing fees on
the Mortgage Loans, other administrative expenses of the REMIC Pool and realized
losses on the Mortgage Loans. The requirement that Residual Holders report their
pro rata share of taxable income or net loss of the REMIC Pool will continue
until there are no Certificates of any Class of the related series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest and Original Issue Discount or market discount income or
amortization of premium on the Mortgage Loans, on the one hand, and the timing
of deductions for interest (including Original Issue Discount) or income from
amortization of issue premium on the Regular Certificates on the other hand. In
the event that an interest in the Mortgage Loans is acquired by the REMIC Pool
at a discount, and one or more Mortgage Loans is prepaid, the Residual Holder
may recognize taxable income without being entitled to receive a corresponding
amount of cash because (i) the prepayment may be used in whole or in part to
make distributions in reduction of principal on the Regular Certificates and
(ii) the discount on the Mortgage Loans which is includible in income may exceed
the deduction allowed upon these distributions on those Regular Certificates on
account of any unaccrued Original Issue Discount relating to those Regular
Certificates. When there is more than one Class of Regular Certificates that
distribute principal sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Certificates when distributions in reduction of principal are being made
in respect of earlier Classes of Regular Certificates to the extent that such
Classes are not issued with substantial discount or are issued at a premium. If
taxable income attributable to such a mismatching is realized, in general,
losses would be allowed in later years as distributions on the later maturing
Classes of Regular Certificates are made.
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Taxable income may also be greater in earlier years than in later years because
interest expense deductions, expressed as a percentage of the outstanding
principal amount of such a series of Regular Certificates, may increase over
time as distributions in reduction of principal are made on the lower yielding
Classes of Regular Certificates, whereas, to the extent the REMIC Pool consists
of fixed- rate Mortgage Loans, interest income with respect to any given
Mortgage Loan will remain constant over time as a percentage of the outstanding
principal amount of that loan. Consequently, Residual Holders must have
sufficient other sources of cash to pay any federal, state, or local income
taxes due as a result of this mismatching or unrelated deductions against which
to offset this income, subject to the discussion of "excess inclusions" below
under "--Limitations on Offset or Exemption of REMIC Income." The timing of this
mismatching of income and deductions described in this paragraph may have a
significant adverse effect upon a Residual Holder's after-tax rate of return. In
addition, a Residual Holder's taxable income during certain periods may exceed
the income reflected by the Residual Holder for these periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Certificates.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Holder is limited to the adjusted basis of the Residual
Certificate as of the close of the quarter (or time of disposition of the
Residual Certificate if earlier), determined without taking into account the net
loss for the quarter. The initial basis of a purchaser of a Residual Certificate
is the amount paid for the Residual Certificate. This basis will be increased by
the amount of taxable income of the REMIC Pool reportable by the Residual Holder
and will be decreased (but not below zero), first, by a cash distribution from
the REMIC Pool and, second, by the amount of loss of the REMIC Pool reportable
by the Residual Holder. Any loss that is disallowed on account of this
limitation may be carried over indefinitely for a Residual Holder as to whom
such loss was disallowed and may be used by this Residual Holder only to offset
any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of its
Residual Certificate as an offset to its share of the taxable income of the
related REMIC Pool. However, that taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. This recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Certificates over their life.
However, in view of the possible acceleration of the income of Residual Holders
described above under "--Taxation of REMIC Income," the period of time over
which such issue price is effectively amortized may be longer than the economic
life of the Residual Certificates.
A Residual Certificate may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price for this type of residual
interest as zero rather than the negative amount for purposes of determining the
REMIC Pool's basis in its assets. Regulations have been issued addressing the
federal income tax treatment of "inducement fees" received by transferees of
noneconomic residual interests. These regulations require inducement fees to be
included in income over a period reasonably related to the period in which a
Residual Certificate is expected to generate taxable income or net loss to its
holder. Under two safe harbor methods, inducement fees are permitted to be
included in income: (i) in the same amounts and over the same period that the
Residual Holder uses for financial reporting purposes, provided that this period
is not shorter than the period the related 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 related REMIC, determined
based on actual distributions projected as remaining to be made on such
interests under the applicable prepayment assumption. If the Residual Holder
sells or otherwise disposes of the residual interest, any unrecognized portion
of the inducement fee generally is
116
required to be taken into account at the time of the sale or disposition. A
prospective purchaser of a Residual Certificate should consult with its tax
counsel regarding the effect of these regulations.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of its basis until termination of the
REMIC Pool unless future Treasury regulations provide for periodic adjustments
to the REMIC income otherwise reportable by such holder. The REMIC Regulations
currently in effect do not provide for this outcome. See "--Treatment of Certain
Items of REMIC Income and Expense" and "--Market Discount" below regarding the
basis of Mortgage Loans to the REMIC Pool and "--Sale or Exchange of a Residual
Certificate" below regarding possible treatment of a loss upon termination of
the REMIC Pool as a capital loss.
Treatment of Certain Items of REMIC Income and Expense
It is anticipated that the Trustee will compute REMIC income and expense in
accordance with the Code and applicable regulations. However, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The Trustee makes no representation as to the
specific method that it will use for reporting income for the Mortgage Loans and
expenses with respect to the Regular Certificates and different methods could
result in different timing of reporting of taxable income or net loss to
Residual Holders or differences in capital gain versus ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's deductions
for Original Issue Discount and income from amortization of issue premium will
be determined in the same manner as Original Issue Discount income on Regular
Certificates as described above under "--Taxation of Regular
Certificates--Original Issue Discount" and "--Variable Rate Regular
Certificates," without regard to the de minimis rule described therein, and
"--Premium."
Market Discount. The REMIC Pool will have market discount income on the
Mortgage Loans if, in general, the basis of the REMIC Pool in the Mortgage Loans
is exceeded by their unpaid principal balances. The REMIC Pool's basis in the
Mortgage Loans is generally the fair market value of the Mortgage Loans
immediately after their transfer to the REMIC Pool. The REMIC Regulations
provide that this basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool. The accrued portion of this
market discount would be recognized currently as an item of ordinary income in a
manner similar to Original Issue Discount. Market discount income generally
should accrue in the manner described above under "--Taxation of Regular
Certificates--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceed their unpaid principal balances, the REMIC Pool will be considered to
have acquired the Mortgage Loans at a premium equal to the amount of that
excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the fair
market value of the Mortgage Loans, based on the aggregate of the issue prices
of the regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "--Taxation of Regular Certificates--Premium," a person that holds a
Mortgage Loan as a capital asset under Code Section 1221 may elect under Code
Section 171 to amortize premium on Mortgage Loans originated after September 27,
1985 under the constant yield method. Amortizable bond premium will be treated
as an offset to interest income on the Mortgage Loans, rather than as a separate
deduction item. Because substantially all of the mortgagors on the Mortgage
Loans are expected to be individuals, Code Section 171 will not be available for
premium on Mortgage Loans originated on or prior to September 27, 1985. Premium
on these Mortgage Loans may be deductible in accordance with a reasonable method
regularly employed by the holder. The allocation of this premium pro rata among
principal payments should be considered a reasonable method; however,
117
the Internal Revenue Service may argue that this premium should be allocated in
a different manner, such as allocating this premium entirely to the final
payment of principal.
Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in determining the
federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Certificate over the daily accruals for this quarterly period of (i) 120% of the
long-term applicable federal rate that would have applied to the Residual
Certificate (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (ii) the adjusted issue price of the Residual Certificate
at the beginning of such quarterly period. For this purpose, the adjusted issue
price of a Residual Certificate at the beginning of a quarter is the issue price
of the Residual Certificate, plus the amount of daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made on the Residual Certificate prior to the beginning of the
quarterly period. Accordingly, the portion of the REMIC Pool's taxable income
that will be treated as excess inclusions will be a larger portion of the income
as the adjusted issue price of the Residual Certificates diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on the Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of such
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax for certain persons who are not U.S.
Persons (as defined below under "--Tax-Related Restrictions on Transfer of
Residual Certificates--Foreign Investors"), and the portion of that taxable
income attributable to excess inclusions is not eligible for any reduction in
the rate of withholding tax (by treaty or otherwise). See "--Taxation of Certain
Foreign Investors--Residual Certificates" below. Finally, if a real estate
investment trust or a regulated investment company owns a Residual Certificate,
a portion (allocated under Treasury regulations yet to be issued) of dividends
paid by the real estate investment trust or regulated investment company could
not be offset by net operating losses of its shareholders, would constitute
unrelated business taxable income for tax-exempt shareholders, and would be
ineligible for reduction of withholding to certain persons who are not U.S.
Persons.
There are three rules for determining the effect of excess inclusions on the
alternative minimum taxable income of a Residual Holder. First, alternative
minimum taxable income for a Residual Holder is determined without regard to the
special rule, discussed above, that taxable income cannot be less than excess
inclusions. Second, a Residual Holder's alternative minimum taxable income for a
taxable year cannot be less than the excess inclusions for the year. Third, the
amount of any alternative minimum tax net operating loss deduction must be
computed without regard to any excess inclusions.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions for the Residual
Certificate for periods after the transfer and (ii) the highest marginal federal
income tax rate applicable to corporations. The REMIC Regulations provide that
the anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under Code
Section 1274(d) as of the date of the
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transfer for a term ending with the last calendar quarter in which excess
inclusions are expected to accrue. This rate is applied to the anticipated
excess inclusions from the end of the remaining calendar quarters in which they
arise to the date of the transfer. Such a tax generally would be imposed on the
transferor of the Residual Certificate, except that where the transfer is
through an agent (including a broker, nominee or other middleman) for a
Disqualified Organization, the tax would instead be imposed on the agent.
However, a transferor of a Residual Certificate would in no event be liable for
the tax for a transfer if the transferee furnishes to the transferor an
affidavit stating that the transferee is not a Disqualified Organization and, as
of the time of the transfer, the transferor does not have actual knowledge that
the affidavit is false. The tax also may be waived by the Internal Revenue
Service if the Disqualified Organization promptly disposes of the Residual
Certificate and the transferor pays income tax at the highest corporate rate on
the excess inclusion for the period the Residual Certificate is actually held by
the Disqualified Organization.
In addition, if a Pass-Through Entity (as defined below) has excess
inclusion income on a Residual Certificate during a taxable year and a
Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on the Pass-Through Entity equal to the product of
(i) the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period the interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
This tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
this tax if it has received an affidavit from the record holder that it is not a
Disqualified Organization or stating the holder's taxpayer identification number
and, during the period the person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that the
affidavit is false.
If an Electing Large Partnership holds a Residual Certificate, all interests
in the Electing Large Partnership are treated as held by Disqualified
Organizations for purposes of the tax imposed upon a Pass-Through Entity by
Section 860E(c) of the Code. An exception to this tax, otherwise available to a
Pass-Through Entity that is furnished certain affidavits by record holders of
interests in the entity and that does not know the affidavits are false, is not
available to an Electing Large Partnership.
For these purposes, (i) "Disqualified Organization" means the United States,
any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless the organization is subject to the tax on
unrelated business income imposed by Code Section 511, (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis, and (iii) an "Electing Large Partnership"
means any partnership having more than 100 members during the preceding tax year
(other than certain service partnerships and commodity pools), which elect to
apply simplified reporting provisions under the Code. Except as may be provided
in Treasury regulations, any person holding an interest in a Pass-Through Entity
as a nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity.
The Pooling Agreement for a series will provide that no legal or beneficial
interest in a Residual Certificate may be transferred or registered unless (i)
the proposed transferee furnishes to the Trustee an affidavit providing its
taxpayer identification number and stating that the transferee is the beneficial
owner of the Residual Certificate and is not a Disqualified Organization and is
not purchasing such Residual Certificate on behalf of a Disqualified
Organization (i.e., as a broker, nominee or middleman
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thereof) and (ii) the transferor provides a statement in writing to the Trustee
that it has no actual knowledge that the affidavit is false. Moreover, the
Pooling Agreement will provide that any attempted or purported transfer in
violation of these transfer restrictions will be null and void and will vest no
rights in any purported transferee. Each Residual Certificate with respect to a
series will bear a legend referring to such restrictions on transfer, and each
Residual Holder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Pooling Agreement required under the
Code or applicable Treasury regulations to effectuate the foregoing
restrictions. Information necessary to compute an applicable excise tax must be
furnished to the Internal Revenue Service and to the requesting party within 60
days of the request, and the Sponsor or the Trustee may charge a fee for
computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a noneconomic residual
interest (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person, as defined below under "--Foreign Investors") is
disregarded for all federal income tax purposes if a significant purpose of the
transferor is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (x) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest federal corporate income tax rate in effect for the
year in which the transfer occurs, and (y) the transferor reasonably expects
that the transferee will receive distributions from the REMIC at or after the
time at which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes on each excess inclusion. The
anticipated excess inclusions and the present value rate are determined in the
same manner as set forth above under "--Disqualified Organizations." The REMIC
Regulations explain that a significant purpose to impede the assessment or
collection of tax exists if the transferor, at the time of the transfer, either
knew or should have known that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC. A safe harbor is
provided if (i) the transferor conducted, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and found
that the transferee historically had paid its debts as they came due and found
no significant evidence to indicate that the transferee would not continue to
pay its debts as they came due in the future, (ii) the transferee represents to
the transferor that it understands that, as the holder of the non-economic
residual interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the interest and that the transferee intends to pay
taxes associated with holding the residual interest as they become due, (iii)
the transferee represents to the transferor that it will not cause income from
the residual certificate to be attributable to a foreign permanent establishment
or fixed base (within the meaning of an applicable income tax treaty) of the
transferee or of any other person, and (iv) one of the two following tests is
satisfied: either
(a) the present value of the anticipated tax liabilities associated with
holding the noneconomic residual interest will not exceed the sum of:
(1) the present value of any consideration given to the
transferee to acquire the residual interest;
(2) the present value of the expected future distributions
on the residual interest; and
(3) the present value of the anticipated tax savings
associated with holding the residual interest as the REMIC
generates losses; or
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(b) (1) the transferee must be a domestic "C" corporation (other than a
corporation exempt from taxation or a regulated investment
company or real estate investment trust) that meets certain
gross and net asset tests (generally, $100 million of gross
assets and $10 million of net assets for the current year and
the two preceding fiscal years);
(2) the transferee must agree in writing that any subsequent
transfer of the residual interest would be to an eligible "C"
corporation and would meet the requirement for a safe harbor
transfer; and
(3) the facts and circumstances known to the transferor on
or before the date of the transfer must not reasonably indicate
that the taxes associated with ownership of the residual
interest will not be paid by the transferee.
For purposes of the computation in clause (a), the transferee is assumed to
pay tax at the highest corporate rate of tax specified in the Code or, in
certain circumstances, the alternative minimum tax rate. Further, present values
generally are computed using a discount rate equal to the short-term Federal
rate set forth in Section 1274(d) of the Code for the month of the transfer and
the compounding period used by the transferee.
The Pooling Agreement for each series of Certificates will require the
transferee of a Residual Certificate to certify to the matters in requirements
(i) through (iii) above as part of the affidavit described above under
"--Disqualified Organizations." The Pooling Agreement will not require that
transfers of the Residual Certificates meet requirement (iv) above.
Consequently, those transfers may not meet the safe harbor. Persons considering
the purchase of the Residual Certificates of a series should consult their
advisors regarding the advisability of meeting the safe harbor in any transfer
of the Residual Certificates.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a Foreign Person will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a U.S. Person (as defined below), unless the
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Certificate is deemed to have tax
avoidance potential unless, at the time of the transfer, (i) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (ii) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and prior to the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Certificate back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The prospectus supplement relating to the Certificates of a series may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation or
partnership (unless, in the case of a partnership, Treasury regulations are
adopted that provide otherwise) created or organized in or under the laws of the
United States, any state or the District of Columbia, including an entity
treated as a corporation or partnership for federal income tax purposes, an
estate that is subject to United States federal income tax regardless of its
source, or a trust if a court within the United States is able to exercise
primary supervision over the administration of such trust, and one or more such
U.S. Persons have the authority to control all substantial decisions of such
trust (or, to the extent provided in applicable Treasury regulations, certain
trusts in existence on August 20, 1996 which are eligible to elect to be treated
as U.S. Persons).
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Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount realized
over the adjusted basis (as described above under "--Basis and Losses") of such
Residual Holder in such Residual Certificate at the time of the sale or
exchange. In addition to reporting the taxable income of the REMIC Pool, a
Residual Holder will have taxable income to the extent that any cash
distribution to it from the REMIC Pool exceeds such adjusted basis on that
Distribution Date. Such income will be treated as gain from the sale or exchange
of the Residual Certificate. It is possible that the termination of the REMIC
Pool may be treated as a sale or exchange of a Residual Holder's Residual
Certificate, in which case, if the Residual Holder has an adjusted basis in its
Residual Certificate remaining when its interest in the REMIC Pool terminates,
and if it holds its Residual Certificate as a capital asset under Code Section
1221, then it will recognize a capital loss at that time in the amount of such
remaining adjusted basis.
In addition, under temporary Treasury Regulations, effective generally for
partnership interests first acquired on or after August 1, 2006, a U.S.
partnership having a partner who is not a U.S. Person will be required to pay
withholding tax in respect of excess inclusion income allocable to such non-U.S.
partner, even if no cash distributions are made to such partner. Similar rules
apply to excess inclusion income allocable to non-U.S. Persons through certain
other pass-through entities.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. In addition, gain or loss recognized from the sale of a
Residual Certificate or termination of the REMIC Pool by certain banks or thrift
institutions will be treated as ordinary income or loss under Code Section
582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six months
after such sale or disposition, acquires (or enters into any other transaction
that results in the application of Code Section 1091) any residual interest in
any REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC
owner trust) that is economically comparable to a Residual Certificate.
Mark to Market Regulations
The Internal Revenue Service has issued final regulations (the "Mark to
Market Regulations") under Code Section 475 relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities of a dealer, except to the
extent that the dealer has specifically identified a security as held for
investment. The Mark to Market Regulations provide that, for purposes of this
mark-to-market requirement, a Residual Certificate is not treated as a security
and thus may not be marked to market.
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Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include (i) the disposition of a qualified mortgage other than for (a)
substitution within two years of the Startup Day for a defective (including a
defaulted) obligation (or repurchase in lieu of substitution of a defective
(including a defaulted) obligation at any time) or for any qualified mortgage
within three months of the Startup Day, (b) foreclosure, default, or imminent
default of a qualified mortgage, (c) bankruptcy or insolvency of the REMIC Pool,
or (d) a qualified (complete) liquidation, (ii) the receipt of income from
assets that are not the type of mortgages or investments that the REMIC Pool is
permitted to hold, (iii) the receipt of compensation for services, or (iv) the
receipt of gain from disposition of cash flow investments other than pursuant to
a qualified liquidation. Notwithstanding (i) and (iv) of the preceding sentence,
it is not a prohibited transaction to sell REMIC Pool property to prevent a
default on Regular Certificates as a result of a default on qualified mortgages
or to facilitate a clean-up call (generally, an optional prepayment of the
remaining principal balance of a Class of Regular Certificates to save
administrative costs when no more than a small percentage of the Certificates is
outstanding). The REMIC Regulations indicate that the modification of a
qualified mortgage generally will not be treated as a disposition if it is
occasioned by a default or reasonably foreseeable default, an assumption of the
Mortgage Loan, the waiver of a due-on-sale or due-on-encumbrance clause, or the
conversion of an interest rate by a mortgagor pursuant to the terms of a
convertible adjustable-rate Mortgage Loan.
Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during the
three months following the Startup Day, (ii) made to a qualified reserve fund by
a Residual Holder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call, and (v) as otherwise permitted in
Treasury regulations yet to be issued. It is not anticipated that there will be
any contributions to the REMIC Pool after the Startup Day.
Net Income from Foreclosure Property
The REMIC Pool will 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. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period not exceeding the close of the third
calendar year after the year in which the REMIC Pool acquired such property,
with a possible extension. Net income from foreclosure property generally means
gain from the sale of a foreclosure property that is inventory property and
gross income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust. It is not anticipated that
the REMIC Pool will have any taxable net income from foreclosure property.
Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC Pool's final tax return a date on which the 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 Pool will not be subject to the prohibited transaction
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rules on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all of the sale proceeds plus its cash (other than
amounts retained to meet claims) to holders of Regular Certificates and Residual
Holders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for a REMIC Pool's income tax return
is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return.
The Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual Holder for an
entire taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. A Servicer or the Master Servicer will be obligated
to act as "tax matters person," as defined in applicable Treasury regulations,
with respect to the REMIC Pool, in its capacity as either Residual Holder or
agent of the Residual Holders. If the Code or applicable Treasury regulations do
not permit a Servicer or the Master Servicer, as applicable, to act as tax
matters person in its capacity as agent of the Residual Holders, the Residual
Holder chosen by the Residual Holders or such other person specified pursuant to
Treasury regulations will be required to act as tax matters person.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation on certain itemized deductions described in Code Section 67, to the
extent that these itemized deductions, in the aggregate, do not exceed 2% of the
investor's adjusted gross income. In addition, Code Section 68 provides that
itemized deductions otherwise allowable for a taxable year of an individual
taxpayer will be reduced by the lesser of (i) 3% of the excess, if any, of
adjusted gross income over a statutory threshold amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for such year. These
limitations will be phased out and eliminated by 2010. In the case of a REMIC
Pool, these deductions may include deductions under Code Section 212 for the
Servicing Fee and all administrative and other expenses relating to the REMIC
Pool, or any similar expenses allocated to the REMIC Pool for a regular interest
it holds in another REMIC. Investors who hold REMIC Certificates either directly
or indirectly through certain pass-through entities may have their pro rata
share of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, these expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause investors to be subject to significant additional tax liability. Temporary
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to the holders of
Residual Certificates in the case of a REMIC Pool that would not qualify as a
fixed investment trust in the absence of a REMIC election. However, this
additional gross income and limitation on deductions will apply to the allocable
portion of these expenses to holders of Regular Certificates, as well as holders
of Residual Certificates, where the Regular Certificates are issued in a manner
that is similar to pass-through certificates in a fixed investment trust. All of
these expenses generally will be allocable to the Residual Certificates. In
general, the allocable portion will be determined based on the ratio that a
REMIC Certificateholder's income, determined on a daily basis, bears to the
income of all holders of Regular Certificates and Residual Certificates for a
REMIC Pool. As a result, individuals, estates or trusts holding REMIC
Certificates (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC or certain other pass-through entities
described in the foregoing temporary Treasury regulations) may have taxable
income in excess of the interest income at the pass-through rate on Regular
Certificates that are issued in a single class or otherwise consistently
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with fixed investment trust status or in excess of cash distributions for the
related period on Residual Certificates.
Taxation of Certain Foreign Investors
Regular Certificates
Interest, including Original Issue Discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or other
non-U.S. Persons, will be considered "portfolio interest" and, therefore,
generally will not be subject to 30% United States withholding tax, provided
that such non-U.S. Person (i) is not a "10-percent shareholder" (within the
meaning of Code Section 871(h)(3)(B)) of, or a controlled foreign corporation
(described in Code Section 881(c)(3)(C)) related to, the REMIC (or possibly one
or more mortgagors) and (ii) provides the Trustee, or the person who would
otherwise be required to withhold tax from such distributions under Code Section
1441 or 1442 with appropriate documentation, signed under penalties of perjury,
establishing an exemption from withholding. The appropriate documentation
includes IRS Form W-8BEN, if the non-U.S. Person is a corporation or individual
eligible for the benefits of the portfolio interest exemption or an exemption
based on a treaty; IRS Form W-8ECI if the non-U.S. Person is eligible for an
exemption on the basis of its income from the Regular Certificate being
effectively connected to a United States trade or business; IRS Form W-8BEN or
IRS Form W-8IMY if the non-U.S. Person is a trust, depending on whether such
trust is classified as the beneficial owner of the Regular Certificate; and IRS
Form W-8IMY, with supporting documentation as specified in the Treasury
regulations, required to substantiate exemptions from withholding on behalf of
its partners, if the non-U.S. Person is a partnership. An intermediary (other
than a partnership) must provide IRS Form W-8IMY, revealing all required
information, including its name, address, taxpayer identification number, the
country under the laws of which it is created, and certification that it is not
acting for its own account. A "qualified intermediary" must certify that it has
provided, or will provide, a withholding statement as required under Treasury
regulations Section 1.1441-1(e)(5)(v), but need not disclose the identity of its
account holders on its Form W-8IMY, and may certify its account holders' status
without including each beneficial owner's certification. A non-"qualified
intermediary" must additionally certify that it has provided, or will provide, a
withholding statement that is associated with the appropriate IRS Forms W-8 and
W-9 required to substantiate exemptions from withholding on behalf of its
beneficial owners. If any of the foregoing forms, or any other required
documentation is not provided, 30% withholding will apply. The term
"intermediary" means a person acting as a custodian, a broker, nominee or
otherwise as an agent for the beneficial owner of a Regular Certificate. A
"qualified intermediary" is generally a foreign financial institution or
clearing organization or a non-U.S. branch or office of a U.S. financial
institution or clearing organization that is a party to a withholding agreement
with the IRS.
Residual Certificates
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Certificates" above, but only to the extent that (i) the
Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Estate or
segregated pool of assets in the Trust Estate (as to which a separate REMIC
election will be made), to which the Residual Certificate relates, consists of
obligations issued in "registered form" within the meaning of Code Section
163(f)(1). Generally, Mortgage Loans will not be, but regular interests in
another REMIC Pool will be, considered obligations issued in registered form.
Furthermore, a Residual Holder will not be entitled to any exemption from the
30% withholding tax (or lower treaty rate) to the extent of that portion of
REMIC taxable income that constitutes an "excess inclusion." See "--Taxation
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of Residual Certificates--Limitations on Offset or Exemption of REMIC Income."
If the amounts paid to Residual Holders who are non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
these non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to these non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, these amounts generally will be taken into account
for purposes of withholding only when paid or otherwise distributed (or when the
Residual Certificate is disposed of) under rules similar to withholding upon
disposition of debt instruments that have Original Issue Discount. See
"--Taxation of Residual Certificates--Tax-Related Restrictions on Transfer of
Residual Certificates--Foreign Investors" above concerning the disregard of
certain transfers having "tax avoidance potential." Investors who are non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning Residual Certificates.
Backup Withholding
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 at the rate of 28% (increasing
to 31% after 2010) on "reportable payments" (including interest distributions,
Original Issue Discount, and, under certain circumstances, principal
distributions) unless the Regular Certificateholder is a U.S. Person and
provides IRS Form W-9 with the correct taxpayer identification number; is a
non-U.S. Person and provides IRS Form W-8BEN identifying the non-U.S. Person and
stating that the beneficial owner is not a U.S. Person; or can be treated as an
exempt recipient within the meaning of Treasury regulations Section
1.6049-4(c)(l)(ii). Any amounts to be withheld from distribution on the Regular
Certificates would be refunded by the IRS or allowed as a credit against the
Regular Certificateholder's federal income tax liability. Information reporting
requirements may also apply regardless of whether withholding is required.
Prospective investors are encouraged to consult their own tax advisors regarding
the application to them of information reporting.
Reporting Requirements
Reports of accrued interest, Original Issue Discount and information
necessary to compute the accrual of market discount will be made annually to the
Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
Regular Certificates or beneficial owners who own Regular Certificates through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Certificates (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 with respect to a particular series of Regular
Certificates. Holders through nominees must request such information from the
nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual Holders,
furnished annually, if applicable, to holders of Regular Certificates, and filed
annually with the Internal Revenue Service concerning Code Section 67 expenses
(see "Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore,
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under such regulations, information must be furnished quarterly to Residual
Holders, furnished annually to holders of Regular Certificates and filed
annually with the Internal Revenue Service concerning the percentage of the
REMIC Pool's assets meeting the qualified asset tests described above under
"Status of REMIC Certificates."
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Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made
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General
In the event that no election is made to treat a Trust Estate (or a
segregated pool of assets therein) with respect to a series of Certificates as a
REMIC, the Trust Estate will be classified as a grantor trust under subpart E,
Part 1 of subchapter J of the Code and not as an association taxable as a
corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Where there is no Fixed Retained Yield on the Mortgage Loans underlying
the Certificates of a series, and where the Certificates are not designated as
"Stripped Certificates," the holder of each Certificate in the series will be
treated as the owner of a pro rata undivided interest in the ordinary income and
corpus portions of the Trust Estate represented by its Certificate and will be
considered the beneficial owner of a pro rata undivided interest in each of the
Mortgage Loans, subject to the discussion below under "--Recharacterization of
Servicing Fees." Accordingly, the holder of a Certificate of a particular series
will be required to report on its federal income tax return its pro rata share
of the entire income from the Mortgage Loans represented by its Certificate,
including interest at the mortgage interest rate on such Mortgage Loans,
Original Issue Discount (if any), prepayment fees, assumption fees, and late
payment charges received by the Servicer, in accordance with such
Certificateholder's method of accounting. A Certificateholder generally will be
able to deduct its share of the Servicing Fee and all administrative and other
expenses of the Trust Estate in accordance with its method of accounting,
provided that these amounts are reasonable compensation for services rendered to
that Trust Estate. However, investors who are individuals, estates or trusts who
own Certificates, either directly or indirectly through certain pass-through
entities, will be subject to limitation with respect to certain itemized
deductions described in Code Section 67, including deductions under Code Section
212 for the Servicing Fee and all such administrative and other expenses of the
Trust Estate, to the extent that such deductions, in the aggregate, do not
exceed two percent of an investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over a statutory threshold amount or
(ii) 80% of the amount of itemized deductions otherwise allowable for such year.
These limitations will be phased out and eliminated by 2010. As a result,
investors holding Certificates, directly or indirectly through a pass-through
entity, may have aggregate taxable income in excess of the aggregate amount of
cash received on their Certificates relating to interest at the pass-through
rate or as discount income on their Certificates. In addition, these expenses
are not deductible at all for purposes of computing the alternative minimum tax,
and may cause investors to be subject to significant additional tax liability.
Moreover, where there is Fixed Retained Yield on the Mortgage Loans underlying a
series of Certificates or where the servicing fees are in excess of reasonable
servicing compensation, the transaction will be subject to the application of
the "stripped bond" and "stripped coupon" rules of the Code, as described below
under "--Stripped Certificates" and "--Recharacterization of Servicing Fees,"
respectively.
Tax Status
Cadwalader, Wickersham & Taft LLP has advised the Depositor that, except
as described below with respect to Stripped Certificates:
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(i) A Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning of
Code Section 7701(a)(19)(C)(v), provided that the real property securing
the Mortgage Loans represented by that Certificate is of the type
described in such section of the Code.
(ii) A Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A) to the extent that the assets of the related Trust
Estate consist of qualified assets, and interest income on such assets
will be considered "interest on obligations secured by mortgages on real
property" to such extent within the meaning of Code Section
856(c)(3)(B).
(iii) A Certificate owned by a REMIC will be considered to represent
an "obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Trust Estate consist of "qualified
mortgages" within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buy-Down Loans may be characterized in their
entirety under the Code provisions cited in clauses (i) and (ii) of the
immediately preceding paragraph. There is indirect authority supporting
treatment of an investment in a Buy-Down Loan as entirely secured by real
property if the fair market value of the real property securing the loan exceeds
the principal amount of the loan at the time of issuance or acquisition, as the
case may be. There is no assurance that the treatment described above is
correct. Accordingly, Certificateholders are urged to consult their own tax
advisors concerning the effects of such arrangements on the characterization of
such Certificateholder's investment for federal income tax purposes.
Premium and Discount
Certificateholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon initial
acquisition of Certificates or thereafter.
Premium
The treatment of premium incurred upon the purchase of a Certificate will be
determined generally as described above under "--Federal Income Tax Consequences
for REMIC Certificates--Taxation of Residual Certificates--Treatment of Certain
Items of REMIC Income and Expense--Premium."
Original Issue Discount
The Original Issue Discount rules of Code Sections 1271 through 1275 will be
applicable to a 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 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, such
Original Issue Discount could arise by the charging of points by the originator
of the mortgages in an amount greater than the statutory de minimis exception,
including a payment of points that is currently deductible by the borrower under
applicable Code provisions or, under certain circumstances, by the presence of
"teaser" rates on the Mortgage Loans. See "--Stripped Certificates" below
regarding Original Issue Discount on Stripped Certificates.
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Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
Generally no prepayment assumption will be assumed for purposes of this accrual.
However, Code Section 1272 provides for a reduction in the amount of Original
Issue Discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued Original Issue
Discount, 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 Mortgage Loans, no Original Issue Discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Loans (i.e., points) will be includible by the
holder.
Market Discount
Certificateholders also will be subject to the market discount rules to the
extent that the conditions for application of those sections are met. Market
discount on the Mortgage Loans will be determined and will be reported as
ordinary income generally in the manner described above under "--Federal Income
Tax Consequences for REMIC Certificates--Taxation of Regular
Certificates--Market Discount," except that the ratable accrual methods
described therein will not apply. Rather, the holder will accrue market discount
pro rata over the life of the Mortgage Loans, unless the constant yield method
is elected. Generally no prepayment assumption will be assumed for purposes of
this accrual.
Recharacterization of Servicing Fees
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of any excess would represent neither income
nor a deduction to Certificateholders. In this regard, there are no
authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of the
Certificate, the reasonableness of servicing compensation should be determined
on a weighted average or loan-by-loan basis. If a loan-by-loan basis is
appropriate, the likelihood that such amount would exceed reasonable servicing
compensation as to some of the Mortgage Loans would be increased. Internal
Revenue Service guidance indicates that a servicing fee in excess of reasonable
compensation ("excess servicing") will cause the Mortgage Loans to be treated
under the "stripped bond" rules. This guidance provides safe harbors for
servicing deemed to be reasonable and requires taxpayers to demonstrate that the
value of servicing fees in excess of these amounts is not greater than the value
of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
Servicer who receives a servicing fee in excess of such amounts would be viewed
as retaining an ownership interest in a portion of the interest payments on the
Mortgage Loans. Under the rules of Code Section 1286, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of the Mortgage Loans as "stripped
coupons" and "stripped bonds." Subject to the de minimis rule discussed below
under "--Stripped Certificates," each stripped bond or stripped coupon could be
considered for this purpose as a non-interest bearing obligation issued on the
date of issue of the Certificates, and the Original Issue Discount rules of the
Code would apply to the holder thereof. While Certificateholders would still be
treated as owners of beneficial interests in a grantor trust for federal income
tax purposes, the corpus of the grantor trust could be viewed as excluding the
portion of the Mortgage Loans the ownership of which is attributed to the
Servicer, or as including this portion as a second class of equitable interest.
Applicable Treasury regulations treat this arrangement as a fixed investment
trust, since the multiple classes of trust interests should be treated as merely
facilitating direct investments in the trust assets and the existence of
multiple classes of ownership interests is incidental to that purpose. In
general, this recharacterization
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should not have any significant effect upon the timing or amount of income
reported by a Certificateholder, except that the income reported by a cash
method holder may be slightly accelerated. See "--Stripped Certificates" below
for a further description of the federal income tax treatment of stripped bonds
and stripped coupons.
Sale or Exchange of Certificates
Upon sale or exchange of a Certificate, a Certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale and
its aggregate adjusted basis in the Mortgage Loans and other assets represented
by the Certificate. In general, the aggregate adjusted basis will equal the
Certificateholder's cost for the Certificate, increased by the amount of any
income previously reported relating to the Certificate and decreased by the
amount of any losses previously reported for the Certificate and the amount of
any distributions received on the Certificate. Except as provided above relating
to market discount on any Mortgage Loans, and except for certain financial
institutions subject to the provisions of Code Section 582(c), any such gain or
loss generally would be capital gain or loss if the Certificate was held as a
capital asset. However, gain on the sale of a Certificate will be treated as
ordinary income (i) if a Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Certificateholder's net investment in the
conversion transaction at 120% of the appropriate applicable Federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. Long-term capital gains of certain noncorporate taxpayers
generally are subject to a lower maximum tax rate than ordinary income or
short-term capital gains of such taxpayers for property held more than one year.
The maximum tax rate for corporations is the same with respect to both ordinary
income and capital gains.
Stripped Certificates
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership of
the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Certificates that are subject to those rules will be referred to as "Stripped
Certificates." The Certificates will be subject to those rules if (i) the
Depositor or any of its affiliates retains (for its own account or for purposes
of resale), in the form of Fixed Retained Yield or otherwise, an ownership
interest in a portion of the payments on the Mortgage Loans, (ii) the Depositor
or any of its affiliates is treated as having an ownership interest in the
Mortgage Loans to the extent it is paid (or retains) servicing compensation in
an amount greater than reasonable consideration for servicing the Mortgage Loans
(see "--Recharacterization of Servicing Fees" above), and (iii) a Class of
Certificates issued in two or more Classes or subclasses representing the right
to non-pro-rata percentages of the interest and principal payments on the
Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" for its pro rata share of all or a portion of the principal
payments on each Mortgage Loan and/or "stripped coupons" relating to its pro
rata share of all or a portion of the interest payments on each Mortgage Loan,
including the Stripped Certificate's allocable share of the servicing fees paid
to a Servicer, to the extent that these fees represent reasonable compensation
for services rendered. See the discussion above under "--Recharacterization of
Servicing Fees." Although not free from doubt, for purposes of reporting to
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Stripped Certificateholders, the servicing fees will be allocated to the
Stripped Certificates in proportion to the respective entitlements to
distributions of each Class of Stripped Certificates for the related period or
periods. The holder of a Stripped Certificate generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under
"Federal Income Tax Consequences for Certificates as to Which No REMIC Election
Is Made--General," subject to the limitation described in that section.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an Original Issue Discount on the date that such
stripped interest is purchased. Although the treatment of Stripped Certificates
for federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Certificates are issued with respect to a
Mortgage Pool containing variable-rate Mortgage Loans, the Depositor has been
advised by counsel that (i) the Trust Estate will be treated as a grantor trust
under subpart E, Part I of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of Code
Section 7701(i), and (ii) each Stripped Certificate should be treated as a
single installment obligation for purposes of calculating Original Issue
Discount and gain or loss on disposition. This treatment is based on the
interrelationship of Code Section 1286, Code Sections 1272 through 1275, and the
OID Regulations. Although it is possible that computations with respect to
Stripped Certificates could be made in one of the ways described below under
"--Taxation of Stripped Certificates--Possible Alternative Characterizations,"
the OID Regulations state, in general, that two or more debt instruments issued
by a single issuer to a single investor in a single transaction should be
treated as a single debt instrument. Accordingly, for Original Issue Discount
purposes, all payments on any Stripped Certificates should be aggregated and
treated as though they were made on a single debt instrument. The Pooling
Agreement will require that the Trustee make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Certificate as a single debt instrument issued on the date it is purchased for
purposes of calculating any Original Issue Discount. In addition, under these
regulations, a Stripped Certificate that represents a right to payments of both
interest and principal may be viewed either as issued with Original Issue
Discount or market discount (as described below), at a de minimis Original Issue
Discount, or, presumably, at a premium. This treatment indicates that the
interest component of this type of Stripped Certificate would be treated as
qualified stated interest under the OID Regulations, assuming it is not an
interest-only or super-premium Stripped Certificate. Further, these final
regulations provide that the purchaser of this type of Stripped Certificate will
be required to account for any discount as market discount rather than Original
Issue Discount if either (i) the initial discount with respect to the Stripped
Certificate was treated as zero under the de minimis rule, or (ii) no more than
100 basis points in excess of reasonable servicing is stripped off the related
Mortgage Loans. Any such market discount would be reportable as described above
under "Federal Income Tax Consequences for REMIC Certificates--Taxation of
Regular Certificates--Market Discount," without regard to the de minimis rule
therein, assuming that a prepayment assumption is employed in this computation.
Status of Stripped Certificates
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as that
of the Mortgage Loans. Although the issue is not free from doubt, counsel has
advised the Depositor that Stripped Certificates owned by applicable holders
should be considered to represent "real estate assets" within the meaning of
Code Section 856(c)(4)(A), "obligation[s] . . . principally secured by an
interest in real property" within the meaning of Code Section 860G(a)(3)(A), and
"loans . . . secured by an interest in real property" within the meaning of Code
Section 7701(a)(19)(C)(v), and interest (including Original Issue Discount)
income attributable to
131
Stripped Certificates should be considered to represent "interest on obligations
secured by mortgages on real property" within the meaning of Code Section
856(c)(3)(B), provided that in each case the Mortgage Loans and interest on the
Mortgage Loans qualify for such treatment. The application of these Code
provisions to Buy-Down Loans is uncertain. See "--Tax Status" above.
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "--General," each
Stripped Certificate will be considered to have been issued at an Original Issue
Discount for Federal income tax purposes. Original issue discount with respect
to a Stripped Certificate must be included in ordinary income as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, which may be prior to the receipt of the cash
attributable to the related income. Based in part on the OID Regulations and the
amendments to the Original Issue Discount sections of the Code made by the 1986
Act, the amount of Original Issue Discount required to be included in the income
of a holder of a Stripped Certificate (referred to in this discussion as a
"Stripped Certificateholder") in any taxable year likely will be computed
generally as described above under "Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Original Issue Discount" and
"--Variable Rate Regular Certificates." However, with the apparent exception of
a Stripped Certificate qualifying as a market discount obligation as described
above under "--General," the issue price of a Stripped Certificate will be the
purchase price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments to be made on the
Stripped Certificate to the Stripped Certificateholder, presumably under the
Prepayment Assumption, other than qualified stated interest.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
Original Issue Discount will be either accelerated or decelerated and the amount
of such Original Issue Discount will be either increased or decreased depending
on the relative interests in principal and interest on each Mortgage Loan
represented by such Stripped Certificateholder's Stripped Certificate. While the
matter is not free from doubt, the holder of a Stripped Certificate should be
entitled in the year that it becomes certain (assuming no further prepayments)
that the holder will not recover a portion of its adjusted basis in the Stripped
Certificate to recognize a loss (which may be a capital loss) equal to such
portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Certificates will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as the
Stripped Certificates. However, if final regulations dealing with contingent
interest with respect to the Stripped Certificates apply the same principles as
the OID Regulations, these regulations may lead to different timing of income
inclusion than would be the case under the OID Regulations for non-contingent
debt instruments. Furthermore, application of these principles could lead to the
characterization of gain on the sale of contingent interest Stripped
Certificates as ordinary income. Investors should consult their tax advisors
regarding the appropriate tax treatment of Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates--Sale or Exchange of Regular Certificates." To the
extent that a subsequent purchaser's purchase price is exceeded by the remaining
payments on the Stripped Certificates, the subsequent purchaser will be required
for federal income tax purposes to accrue and report the excess as if it were
Original Issue
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Discount in the manner described above. It is not clear for this purpose whether
the assumed prepayment rate that is to be used in the case of a Stripped
Certificateholder other than an original Stripped Certificateholder should be
the Prepayment Assumption or a new rate based on the circumstances at the date
of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. When an investor
purchases more than one Class of Stripped Certificates, it is unclear whether
for federal income tax purposes these Classes of Stripped Certificates should be
treated separately or aggregated for purposes of the rules described above.
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates discussed above are not the only possible interpretations
of the applicable Code provisions. For example, the Stripped Certificateholder
may be treated as the owner of (i) one installment obligation consisting of the
Stripped Certificate's pro rata share of the payments attributable to principal
on each Mortgage Loan and a second installment obligation consisting of the
Stripped Certificate's pro rata share of the payments attributable to interest
on each Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there
are scheduled payments of principal and/or interest on each Mortgage Loan, or
(iii) a separate installment obligation for each Mortgage Loan, representing the
Stripped Certificate's pro rata share of payments of principal and/or interest
to be made on the Mortgage Loan. Alternatively, the holder of one or more
Classes of Stripped Certificates may be treated as the owner of a pro rata
fractional undivided interest in each Mortgage Loan to the extent that the
Stripped Certificate, or Classes of Stripped Certificates in the aggregate,
represent the same pro rata portion of principal and interest on each Mortgage
Loan, and a stripped bond or stripped coupon (as the case may be), treated as an
installment obligation or contingent payment obligation, as to the remainder.
Regulations regarding Original Issue Discount on stripped obligations make the
foregoing interpretations less likely to be applicable. The preamble to those
regulations states that they are premised on the assumption that an aggregation
approach is appropriate for determining whether Original Issue Discount on a
stripped bond or stripped coupon is de minimis, and solicits comments on
appropriate rules for aggregating stripped bonds and stripped coupons under Code
Section 1286.
Because of these possible varying characterizations of Stripped Certificates
and the resultant differing treatment of income recognition, Stripped
Certificateholders are urged to consult their own tax advisors regarding the
proper treatment of Stripped Certificates for federal income tax purposes.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Certificateholder or Stripped Certificateholder at any
time during such year, information (prepared on the basis described above) as is
necessary to enable Certificateholders to prepare their federal income tax
returns. Such information will include the amount of Original Issue Discount
accrued on Certificates held by persons other than Certificateholders exempted
from the reporting requirements. The amount required to be reported by the
Trustee may not be equal to the proper amount of Original Issue Discount
required to be reported as taxable income by a Certificateholder, other than an
original Certificateholder that purchased at the issue price. In particular, in
the case of Stripped Certificates, this reporting will be based upon a
representative initial offering price of each Class of Stripped Certificates.
The Trustee will also file Original Issue Discount information with the Internal
Revenue Service. If a Certificateholder fails to supply an accurate taxpayer
identification number or if the Secretary of the Treasury determines that a
Certificateholder has not reported all interest and dividend income required to
be shown on its federal income tax return, backup withholding may be required in
respect of any reportable payments, as described above under "--Federal Income
Tax Consequences for REMIC Certificates--Backup Withholding."
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Taxation of Certain Foreign Investors
To the extent that a Certificate evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or Original Issue Discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other non-U.S. persons ("Foreign
Persons") generally will be subject to 30% United States withholding tax, or
such lower rate as may be provided for interest by an applicable tax treaty.
Accrued Original Issue Discount recognized by the Certificateholder on the sale
or exchange of such a Certificate also will be subject to federal income tax at
the same rate.
Treasury regulations provide that interest or Original Issue Discount paid
by the Trustee or other withholding agent to a Foreign Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements, described above under "--Federal
Income Tax Consequences for REMIC Certificates--Taxation of Certain Foreign
Investors--Regular Certificates."
Reportable Transactions
Any Certificateholder that reports any item or items of income, gain,
expense, or loss in respect of a Certificate for tax purposes in an amount that
differs from the amount reported for book purposes by more than $10 million, on
a gross basis, in any taxable year may be subject to certain disclosure
requirements for "reportable transactions." Prospective investors should consult
their tax advisors concerning any possible tax return disclosure obligation with
respect to the Certificates.
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Federal Income Tax Consequences for Exchangeable Certificates
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Tax Status
The Exchangeable Certificates should be considered to represent "real estate
assets" within the meaning of Code Section 856(c)(5)(B) and assets described in
Code Section 7701(a)(19)(C). Original Issue Discount and interest accruing on
Exchangeable Certificates should be considered to represent "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B). Exchangeable
Certificates will be "qualified mortgages" under Code Section 860G(a)(3) for a
REMIC. Prospective investors should consult their own tax advisors regarding the
proper treatment of Exchangeable Certificates in respect of the above
discussion.
Exchangeable Certificates Representing Proportionate Interests in Two or More
Exchangeable REMIC Certificates
The related prospectus supplement for a series will specify whether an
Exchangeable Certificate represents beneficial ownership of a proportionate
interest in two or more Exchangeable REMIC Certificates corresponding to that
Exchangeable Certificate. Each beneficial owner of such an Exchangeable
Certificate should account for its ownership interest in each Exchangeable REMIC
Certificate underlying that Exchangeable Certificate as described under
"--Federal Income Tax Consequences for REMIC Certificates." The beneficial owner
must allocate its basis among the underlying Exchangeable REMIC Certificates in
accordance with their relative fair market values as of the time of acquisition.
Similarly, on the sale of such Exchangeable Certificate, the beneficial owner
must allocate the amount received on the sale among the underlying Exchangeable
REMIC Certificates in accordance with their relative fair market values as of
the time of sale.
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Exchangeable Certificates Representing Disproportionate Interests in
Exchangeable REMIC Certificates
The related prospectus supplement for a series will specify whether an
Exchangeable Certificate represents beneficial ownership of a disproportionate
interest in one or more Exchangeable REMIC Certificates corresponding to that
Exchangeable Certificate. The beneficial owner of such an Exchangeable
Certificate will be treated as owning, pursuant to Code Section 1286, "stripped
bonds" to the extent of its share of principal payments and "stripped coupons"
to the extent of its share of interest payments on such Exchangeable REMIC
Certificate. Under Code Section 1286, each beneficial owner of an Exchangeable
Certificate must treat the Exchangeable Certificate as a debt instrument
originally issued on the date the owner acquires it and having Original Issue
Discount equal to the excess, if any, of its "stated redemption price at
maturity" over the price paid by the owner to acquire it. The stated redemption
price at maturity for an Exchangeable Certificate is determined in the same
manner as described with respect to Regular Certificates under "--Federal Income
Tax Consequences for REMIC Certificates--Taxation of Regular
Certificates--Original Issue Discount."
Each beneficial owner of such an Exchangeable Certificate should calculate
Original Issue Discount and include it in ordinary income as it accrues, which
may be prior to the receipt of cash attributable to such income, in accordance
with a method analogous to that described with respect to a Regular Certificate
under "--Federal Income Tax Consequences for REMIC Certificates--Taxation of
Regular Certificates--Original Issue Discount." A beneficial owner should
determine its yield to maturity based on the purchase price for the Exchangeable
Certificate and on a schedule of payments projected using a prepayment
assumption, and then make periodic adjustments to take into account actual
prepayment experience. It is not clear whether the prepayment assumption a
beneficial owner should use to calculate Original Issue Discount would be one
determined at the time the Exchangeable Certificate is acquired or would be the
original prepayment assumption with respect to the underlying Exchangeable REMIC
Certificate.
While the matter is not free from doubt, if a beneficial owner acquires a
combination of Exchangeable Certificates in separate transactions which in the
aggregate represent a single Exchangeable REMIC Certificate, it appears that the
owner should account for each such Exchangeable Certificate separately, even if
it exchanges the Exchangeable Certificates for the underlying Exchangeable REMIC
Certificate. However, if a beneficial owner acquires such a combination in a
single transaction, it is possible that the beneficial owner's interests should
be aggregated, with the beneficial owner treated as owning the underlying
Exchangeable REMIC Certificate (regardless of whether it has exchanged the
Exchangeable Certificates for the underlying Exchangeable REMIC Certificate).
Accounting separately for the Exchangeable Certificates may lead to
significantly different accruals of interest and Original Issue Discount than
would be the case if the owner aggregated such interests. Prospective investors
should consult their own tax advisors as to the proper treatment of an
Exchangeable Certificate in either of these circumstances.
Sales, Exchanges and Other Dispositions of Exchangeable Certificates
If a beneficial owner exchanges one or more underlying Exchangeable REMIC
Certificates for one or more Exchangeable Certificates in the manner described
under "Description of the Certificates--Exchangeable REMIC Certificates and
Exchangeable Certificates" in this prospectus, the exchange will not be taxable.
Likewise, if a beneficial owner exchanges one or more Exchangeable Certificates
for the corresponding Exchangeable REMIC Certificate or Exchangeable REMIC
Certificates, the exchange will not be taxable.
135
Upon the sale, exchange or other disposition of an Exchangeable Certificate
other than an exchange described in the preceding paragraph, a beneficial owner
generally will recognize gain or loss equal to the difference between the amount
realized and the beneficial owner's adjusted basis or bases in the Exchangeable
REMIC Certificate or Exchangeable REMIC Certificates underlying the Exchangeable
Certificate. The adjusted basis of each such Exchangeable REMIC Certificates
will be determined as described above under "--Federal Income Tax Consequences
for REMIC Certificates--Taxation of Regular Certificates--Sale or Exchange of
Regular Certificates."
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ERISA CONSIDERATIONS
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General
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose certain requirements on those employee
benefit plans and arrangements to which they apply and on those persons who are
fiduciaries with respect to those employee benefit plans and arrangements. The
following is a general discussion of these requirements, and certain applicable
exceptions to and administrative exemptions from these requirements. For
purposes of this discussion, employee benefit plans and arrangements to which
both ERISA and the Code apply are referred to as "ERISA Plans." An individual
retirement account established under Code Section 408 (an "IRA") is an ERISA
Plan if the IRA is endorsed by or contributed to by the IRA participant's
employer or employee organization. Other IRAs, as well as certain employee
benefit plans covering only self-employed individuals (collectively, "Non-ERISA
Plans"), are not considered ERISA Plans, but these Non-ERISA Plans are subject
to ERISA-like requirements as well as the prohibited transaction provisions of
the Code. Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) (collectively, "Exempt Plans") are exempt from the provisions of Title I
of ERISA and the prohibited transaction provisions of the Code. Accordingly,
Exempt Plans also are not considered ERISA Plans, but these Exempt Plans may be
subject to the provisions and special requirements of other applicable federal,
state and local law. Exempt Plans, ERISA Plans and Non-ERISA Plans are
collectively referred to as "Benefit Plans."
Before purchasing any Certificates, an ERISA Plan fiduciary should consult
with its counsel and determine whether there exists any prohibition to its
purchase under the requirements of ERISA or the Code, whether prohibited
transaction exemptions such as PTE 83-1 or any individual administrative
exemption (as described below) applies, including whether the appropriate
conditions set forth therein would be met, or whether any statutory prohibited
transaction exemption is applicable, and further should consult the applicable
prospectus supplement relating to such series of Certificates.
Certain Requirements Under ERISA and the Code
General
In accordance with ERISA's general fiduciary standards, before investing in
a Certificate, an ERISA Plan fiduciary should determine whether to do so is
permitted under the governing ERISA Plan instruments and is appropriate for the
ERISA Plan in view of its overall investment policy and the composition and
diversification of its portfolio. An ERISA Plan fiduciary should especially
consider the ERISA requirement of investment prudence and the sensitivity of the
return on the Certificates to the rate of principal repayments (including
prepayments) on the Mortgage Loans, as discussed in "Prepayment and Yield
Considerations."
136
Parties in Interest/Disqualified Persons
Other provisions of ERISA (and corresponding provisions of the Code)
prohibit certain transactions involving the assets of an ERISA Plan and persons
who have certain specified relationships to the ERISA Plan (so-called "parties
in interest" within the meaning of ERISA or "disqualified persons" within the
meaning of the Code). The Depositor, the Master Servicer, any Servicer or the
Trustee or certain of their affiliates might be considered or might become
"parties in interest" or "disqualified persons" with respect to an ERISA Plan.
If so, the acquisition or holding of Certificates by or on behalf of the ERISA
Plan could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless an administrative exemption described below
or some other exemption is available.
Special caution should be exercised before the assets of an ERISA Plan
(including assets that may be held in an insurance company's separate or general
accounts where assets in such accounts may be deemed plan assets for purposes of
ERISA) are used to purchase a Certificate if, with respect to these assets, the
Depositor, any Servicer, the Master Servicer or the Trustee or an affiliate
thereof either: (a) has investment discretion with respect to the investment of
the assets of the ERISA Plan; or (b) has authority or responsibility to give, or
regularly gives, investment advice with respect to the assets for a fee and
pursuant to an agreement or understanding that this advice will serve as a
primary basis for investment decisions with respect to the assets and that the
advice will be based on the particular investment needs of the ERISA Plan.
Delegation of Fiduciary Duty
Further, if the assets included in a Trust Estate were deemed to constitute
assets of an ERISA Plan, it is possible that an ERISA Plan's investment in the
Certificates might be deemed to constitute a delegation, under ERISA, of the
duty to manage plan assets by the fiduciary deciding to invest in the
Certificates, and certain transactions involved in the operation of the Trust
Estate might be deemed to constitute prohibited transactions under ERISA and the
Code. Neither ERISA nor the Code define the term "plan assets."
The U.S. Department of Labor (the "DOL") has issued regulations (the "DOL
Regulations") concerning whether or not an ERISA Plan's assets would be deemed
to include an interest in the underlying assets of an entity (such as a Trust
Estate) for purposes of the reporting and disclosure and general fiduciary
responsibility provisions of ERISA, as well as for the prohibited transaction
provisions of ERISA and the Code, if the ERISA Plan acquires an "equity
interest" (such as a Certificate) in the entity.
Certain exceptions are provided in the DOL Regulations whereby an investing
ERISA Plan's assets would be deemed merely to include its interest in the
Certificates instead of being deemed to include an interest in the assets of a
Trust Estate. However, it cannot be predicted in advance nor can there be any
continuing assurance whether these exceptions may be met, because of the factual
nature of certain of the rules set forth in the DOL Regulations. For example,
one of the exceptions in the DOL Regulations states that the underlying assets
of an entity will not be considered "plan assets" if less than 25% of the value
of all classes of equity interests are held by "benefit plan investors," which
term is defined to include ERISA Plans, Non-ERISA Plans and Exempt Plans and any
entity whose assets include "plan assets" by reason of benefit plan investments
in such entity, but this exception is tested immediately after each acquisition
of an equity interest in the entity whether upon initial issuance or in the
secondary market.
137
Applicability to Non-ERISA Plans
Since Non-ERISA Plans are subject to the prohibited transaction provisions
of the Code, the discussion above with respect to "disqualified persons,"
prohibited transactions, delegation of fiduciary duty and plan assets applies to
Non-ERISA Plans as well as ERISA Plans.
Administrative Exemptions
Individual Administrative Exemptions.
Several underwriters of mortgage-backed securities have applied for and
obtained individual administrative prohibited transaction exemptions (each, an
"Underwriter's Exemption") which are in some respects broader than Prohibited
Transaction Class Exemption 83-1 (described below). These exemptions can only
apply to mortgage-backed securities which, among other conditions, are sold in
an offering with respect to which the underwriter serves as the sole or a
managing underwriter, or as a selling or placement agent. If an Underwriter's
Exemption might be applicable to a series of Certificates, the applicable
prospectus supplement will refer to such possibility.
Among the conditions that must be satisfied for an Underwriter's Exemption
to apply are the following:
(1) The acquisition of Certificates by an ERISA Plan is on terms
(including the price for the Certificates) that are at least as
favorable to the ERISA Plan as they would be in an arm's length
transaction with an unrelated party.
(2) The Certificates acquired by the ERISA Plan have received a
rating at the time of such acquisition that is one of the four highest
generic rating categories from any of Standard & Poor's, a division of
The McGraw-Hill Companies ("S&P"), Moody's Investors Service, Inc.
("Moody's") or Fitch Ratings ("Fitch").
(3) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below) other than an underwriter.
(4) The sum of all payments made to and retained by the underwriter
in connection with the distribution of Certificates represents not more
than reasonable compensation for underwriting the Certificates. The sum
of all payments made to and retained by the Depositor pursuant to the
assignment of the Mortgage Loans to the Trust Estate represents not more
than the fair market value of such Mortgage Loans. The sum of all
payments made to and retained by the Servicer (and any other servicer)
represents not more than reasonable compensation for the person's
services under the Pooling Agreement and reimbursement of the person's
reasonable expenses in connection therewith.
(5) The ERISA 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.
The Trust Estate must also meet the following requirements:
(i) the assets of the Trust Estate must consist solely of assets of the
type that have been included in other investment pools in the marketplace;
138
(ii) certificates in such other investment pools must have been rated in
one of the four highest rating categories of S&P, Moody's, or Fitch for at
least one year prior to the ERISA Plan's acquisition of the Certificates;
and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than ERISA Plans for at least
one year prior to any ERISA Plan's acquisition of the Certificates.
If the conditions to an Underwriter's Exemption are met, whether or not an
ERISA Plan's assets would be deemed to include an ownership interest in the
Mortgage Loans in a mortgage pool, the acquisition, holding and resale of the
Certificates by ERISA Plans would be exempt from certain of the prohibited
transaction provisions of ERISA and the Code.
Moreover, an Underwriter's Exemption can provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur if an
ERISA Plan fiduciary causes an ERISA Plan to acquire and hold Certificates in a
Trust Estate in which the fiduciary (or its affiliate) is an obligor on the
Mortgage Loans held in the Trust Estate provided that, among other requirements:
(i) in the case of an acquisition in connection with the initial issuance of
Certificates, at least fifty percent of each class of Certificates in which
ERISA Plans have invested is acquired by persons independent of the Restricted
Group (as defined below) and at least fifty percent of the aggregate interest in
the Trust Estate is acquired by persons independent of the Restricted Group;
(ii) the fiduciary (or its affiliate) is an obligor with respect to five percent
or less of the fair market value of the Mortgage Loans contained in the Trust
Estate; (iii) the ERISA Plan's investment in Certificates of any Class does not
exceed twenty-five percent of all of the Certificates of that Class outstanding
at the time of the acquisition and (iv) immediately after the acquisition no
more than twenty-five percent of the assets of the ERISA Plan with respect to
which such person is a fiduciary are invested in Certificates representing an
interest in one or more trusts containing assets sold or serviced by the same
entity.
An Underwriter's Exemption does not apply to ERISA Plans sponsored by the
Depositor, the underwriter specified in the applicable prospectus supplement,
the Master Servicer, the Trustee, any Servicer, any insurer with respect to the
Mortgage Loans, any obligor with respect to Mortgage Loans included in the Trust
Estate constituting more than five percent of the aggregate unamortized
principal balance of the assets in the Trust Estate, or any affiliate of any of
these parties (the "Restricted Group").
PTE 83-1
Prohibited Transaction Class Exemption 83-1 for Certain Transactions
Involving Mortgage Pool Investment Trusts ("PTE 83-1") permits certain
transactions involving the creation, maintenance and termination of certain
residential mortgage pools and the acquisition and holding of certain
residential mortgage pool pass-through certificates by ERISA Plans, whether or
not the ERISA Plan's assets would be deemed to include an ownership interest in
the mortgages in the mortgage pools, and whether or not such transactions would
otherwise be prohibited under ERISA or the Code.
The term "mortgage pool pass-through certificate" is defined in PTE 83-1 as
"a certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such a certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor." It appears that, for purposes of PTE 83-1, the
term "mortgage pool pass-through certificate" would include Certificates issued
in a single Class or in multiple Classes that evidence the beneficial ownership
of both a specified percentage of future interest payments (after permitted
deductions) and a specified percentage of future principal payments on a Trust
Estate.
139
However, it appears that PTE 83-1 does or might not apply to the purchase
and holding of (a) Certificates that evidence the beneficial ownership only of a
specified percentage of future interest payments (after permitted deductions) on
a Trust Estate or only of a specified percentage of future principal payments on
a Trust Estate, (b) Residual Certificates, (c) Certificates evidencing ownership
interests in a Trust Estate which includes Mortgage Loans secured by multifamily
residential properties or shares issued by cooperative housing corporations, or
(d) Certificates which are subordinated to other Classes of Certificates of such
series. Accordingly, unless exemptive relief other than PTE 83-1 applies, Plans
should not purchase any of these types of Certificates.
PTE 83-1 sets forth "general conditions" and "specific conditions" to its
applicability. Section II of PTE 83-1 sets forth the following general
conditions to the application of the exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans or the property
securing such loans, and for indemnifying certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments;
(ii) the existence of a pool trustee who is not an affiliate of the pool
sponsor; and (iii) a requirement that the sum of all payments made to and
retained by the pool sponsor, and all funds inuring to the benefit of the pool
sponsor as a result of the administration of the mortgage pool, must represent
not more than adequate consideration for selling the mortgage loans plus
reasonable compensation for services provided by the pool sponsor to the pool.
The system of insurance or protection referred to in clause (i) above must
provide such protection and indemnification up to an amount not less than the
greater of one percent of the aggregate unpaid principal balance of the pooled
mortgages or the unpaid principal balance of the largest mortgage in the pool.
It should be noted that in promulgating PTE 83-1 (and a predecessor exemption),
the DOL did not have under its consideration interests in pools of the exact
nature as some of the Certificates described in this prospectus.
Non-ERISA Plans and Exempt Plans
Although Non-ERISA Plans and Exempt Plans are not considered ERISA Plans for
purposes of the above discussion, Non-ERISA Plans are subject to the prohibited
transaction provisions of the Code, and both Non-ERISA Plans and Exempt Plans
may be subject to certain other ERISA-like requirements of applicable law.
Therefore, before purchasing any Certificates by or on behalf of a Non-ERISA
Plan or any Exempt Plan, the prospective purchaser should exercise special
caution and should consult with its legal counsel concerning the propriety and
implications of such investment under the Code or other applicable law.
Unrelated Business Taxable Income--Residual Certificates
The purchase of a Residual Certificate by an IRA or any employee benefit
plan qualified under Code Section 401(a) and exempt from taxation under Code
Section 501(a), including most varieties of Benefit Plans, may give rise to
"unrelated business taxable income" as described in Code Sections 511 through
515 and 860E. Further, prior to the purchase of Residual Certificates, a
prospective transferee may be required to provide an affidavit to a transferor
that it is not, nor is it purchasing a Residual Certificate on behalf of, a
"Disqualified Organization," which term as defined above includes certain
tax-exempt entities not subject to Code Section 511 such as certain governmental
plans, as discussed above under "Federal Income Tax Consequences--Federal Income
Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates--Disqualified Organizations." In addition, prior to the transfer of
a Residual Certificate, the Trustee may require an opinion of counsel to the
effect that the transferee is not a Disqualified Organization and that the
transfer will not subject the Trustee, the Depositor, the Master Servicer or any
Servicer to additional obligations imposed by ERISA or the Code.
140
Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is particularly important that potential
investors who are acting on behalf of a Benefit Plan or any other employee
benefit plan or arrangement consult with their counsel regarding the
consequences under ERISA, the Code or other applicable law of their acquisition
and ownership of Certificates.
The sale of Certificates to a Benefit Plan or any other employee benefit
plan or arrangement is in no respect a representation by the Depositor or the
applicable underwriter that this investment meets all relevant legal
requirements with respect to investments by employee benefit plans generally or
any particular plan or arrangement, or that this investment is appropriate for
employee benefit plans generally or any particular plan or arrangement.
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LEGAL INVESTMENT
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If specified in the related prospectus supplement, certain Classes of
Certificates will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended ("SMMEA").
Generally, the only Classes of Certificates offered pursuant to this prospectus
and the related prospectus supplement which will qualify as "mortgage related
securities" will be those that (i) are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating organization
and (ii) are part of a series representing interests in a Trust Estate
consisting of Mortgage Loans originated by certain types of originators
specified in SMMEA and secured by first liens on real estate. The appropriate
characterization of those Certificates not qualifying as "mortgage related
securities" for purposes of SMMEA ("Non-SMMEA Certificates") under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase those Certificates, may be subject to significant
interpretive uncertainties. Accordingly, all investors whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the Non-SMMEA
Certificates constitute legal investments for them.
Those Classes of Certificates qualifying as "mortgage related securities"
will constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, insurance companies, trustees and pension funds)
created pursuant to or existing under the laws of the United States or of any
state (including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation, to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any of its agencies or instrumentalities constitute
legal investments for those entities.
Under SMMEA, a number of states enacted legislation, on or before the
October 3, 1991 cut-off for those enactments, limiting to varying extents the
ability of certain entities (in particular, insurance companies) to invest in
"mortgage related securities" secured by liens on residential, or mixed
residential and commercial properties, in most cases by requiring the affected
investors to rely solely upon existing state law, and not SMMEA.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in "mortgage related
securities" without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in those securities, and national
banks may purchase those securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
ss. 24 (Seventh), subject in each case to any regulations as the applicable
federal regulatory authority may prescribe. In this connection, the OCC has
amended 12 C.F.R. Part 1 to
141
authorize national banks to purchase and sell for their own account, without
limitation as to a percentage of the bank's capital and surplus (but subject to
compliance with certain general standards in 12 C.F.R. ss. 1.5 concerning
"safety and soundness" and retention of credit information) certain "Type IV
securities," defined in 12 C.F.R. ss. 1.2(m) to include certain "residential
mortgage-related securities." As so defined, "residential mortgage-related
security" means, in relevant part, "mortgage related security" within the
meaning of SMMEA. The National Credit Union Administration ("NCUA") has adopted
rules, codified at 12 C.F.R. Part 703 which permit federal credit unions to
invest in "mortgage related securities," other than stripped mortgage related
securities (unless the credit union complies with the requirements of 12 C.F.R
ss. 703.16(e) for investing in those securities) and residual interests in
mortgage related securities, subject to compliance with general rules governing
investment policies and practices; however, credit unions approved for the
NCUA's "investment pilot program" under 12 C.F.R. ss. 703.19 may be able to
invest in those prohibited forms of securities. The OTS has issued Thrift
Bulletin 13a (December 1, 1998), "Management of Interest Rate Risk, Investment
Securities, and Derivative Activities" and Thrift Bulletin 73a (December 18,
2001), "Investing in Complex Securities," which thrift institutions subject to
the jurisdiction of the OTS should consider before investing in any
Certificates.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Investment Securities and
End-User Derivatives Activities" of the Federal Financial Institutions
Examination Council, which has been adopted by the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation, the OCC and
the OTS, effective May 26, 1998, and by the NCUA, effective October 1, 1998.
This policy statement sets forth general guidelines which depository
institutions must follow in managing risks (including market, credit, liquidity,
operational (transaction), and legal risks) applicable to all securities
(including mortgage pass-through securities and mortgage-derivative products)
used for investment purposes.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by those authorities before purchasing any of the
Certificates, as certain Classes may be deemed unsuitable investments, or may
otherwise be restricted, under those rules, policies or guidelines (in certain
instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying," and, with regard to any Certificates
issued in book-entry form, provisions which may restrict or prohibit investments
in securities which are issued in book-entry form.
Except as to the status of certain Classes of the Certificates as "mortgage
related securities," no representations are made as to the proper
characterization of the Certificates for legal investment purposes, financial
institution regulatory purposes, or other purposes, or as to the ability of
particular investors to purchase Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Certificates) may adversely affect the liquidity of the
Certificates.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments or are subject to investment, capital or other restrictions and, if
applicable, whether SMMEA has been overridden in any jurisdiction relevant to
that investor.
142
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PLAN OF DISTRIBUTION
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The Certificates are being offered by this prospectus and the applicable
prospectus supplement in series through one or more of the methods described
below. The applicable prospectus supplement for each series will describe the
method of offering being utilized for that series and will state the public
offering or purchase price of each Class of Certificates of the series, or the
method by which the price is to be determined, and the net proceeds to the
Depositor from the sale of the Certificates.
The Certificates will be offered through the following methods from time to
time and offerings may be made concurrently through more than one of these
methods or an offering of a particular series of Certificates may be made
through a combination of two or more of these methods:
1. By negotiated firm commitment underwriting and public re-offering
by underwriters specified in the applicable prospectus supplement;
2. By placements by the Depositor with investors through dealers;
3. By direct placements by the Depositor with investors, in which
event the Depositor will be an underwriter with respect to the Certificates;
and
4. By inclusion as underlying securities backing another series of
mortgage pass-through certificates issued by an entity of which the
Depositor or an affiliate of the Depositor may act as the depositor. In the
event that the Depositor or an affiliate of the Depositor acts as depositor
with respect to the other series of mortgage pass-through certificates, the
Depositor or its affiliate will be an underwriter with respect to the
underlying securities.
If underwriters are used in a sale of any Certificates, those Certificates
will be acquired by the underwriters for their own account and may be resold
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment for sale. Firm
commitment underwriting and public reoffering by underwriters may be done
through underwriting syndicates or through one or more firms acting alone. The
specific managing underwriter or underwriters, if any, for the offer and sale of
a particular series of Certificates will be set forth on the cover of the
prospectus supplement applicable to the series and the members of the
underwriting syndicate, if any, will be named in the prospectus supplement. The
prospectus supplement will describe any discounts and commissions to be allowed
or paid by the Depositor to the underwriters, any other items constituting
underwriting compensation and any discounts and commissions to be allowed or
paid to the dealers. The obligations of the underwriters will be subject to
certain conditions precedent. The underwriters with respect to a sale of any
Class of Certificates will be obligated to purchase all the Certificates of the
Class if any are purchased. The Depositor, and, if specified in the applicable
prospectus supplement, an affiliate of the Depositor, will indemnify the
applicable underwriters against certain civil liabilities, including liabilities
under the Securities Act.
The prospectus supplement relating to any series of Certificates offered
other than through underwriters will contain information regarding the nature of
the offering and any agreements to be entered into between the Depositor and
dealers and/or the Depositor and purchasers of Certificates of the series.
Purchasers of Certificates, including dealers, may, depending on the facts
and circumstances of the purchases, be deemed to be "underwriters" within the
meaning of the Securities Act in connection with
143
reoffers and sales by them of Certificates. Certificateholders should consult
with their legal advisors in this regard prior to any reoffer or sale.
If specified in the prospectus supplement relating to a series of
Certificates, the Depositor or any of its affiliates may purchase some or all of
one or more Classes of Certificates of the series from the underwriter or
underwriters at a price specified or described in the prospectus supplement.
This party may then, from time to time, offer and sell, pursuant to this
prospectus, some or all of the Certificates it purchased directly, through one
or more underwriters to be designated at the time of the offering of the
Certificates or through dealers acting as agent and/or principal. Any of these
offerings may be restricted in the matter specified in the applicable prospectus
supplement. These transactions may be effected at market prices prevailing at
the time of sale, at negotiated prices or at fixed prices. The underwriters and
dealers participating in the purchaser's offering of Certificates may receive
compensation in the form of underwriting discounts or commissions from the
purchaser and these dealers may receive commissions from the investors
purchasing Certificates for whom they may act as agent (which discounts or
commissions will not exceed those customary in those types of transactions). Any
dealer that participates in the distribution of these Certificates will be an
"underwriter" within the meaning of the Securities Act, and any commissions and
discounts received by a dealer and any profit on the resale of these
Certificates by a dealer will be underwriting discounts and commissions under
the Securities Act.
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USE OF PROCEEDS
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The Depositor will apply the net proceeds of the sale of each series of
Certificates to the purchase of the Mortgage Loans represented by the
Certificates of the series from the Sponsor.
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LEGAL MATTERS
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The legality of, and certain federal income tax matters related to the
Certificates of a series, will be passed upon for the Depositor by Cadwalader,
Wickersham & Taft LLP, New York, New York.
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RATING
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It is a condition to the issuance of the Certificates of any series offered
pursuant to this prospectus and a prospectus supplement that they be rated in
one of the four highest categories by at least one nationally recognized
statistical rating organization (each, a "Rating Agency").
A securities 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
Agency.
- --------------------------------------------------------------------------------
REPORTS TO CERTIFICATEHOLDERS
- --------------------------------------------------------------------------------
The Trustee will prepare and forward to the Certificateholders of each
series statements containing information with respect to principal and interest
payments and the related Trust Estate, as described under "The Pooling
Agreement--Reports to Certificateholders." Copies of these statements will be
filed with the SEC through its EDGAR system located at "http://www.sec.gov"
under the name of the Trust as an exhibit to the Trust's monthly distribution
reports on Form 10-D for each series of Certificates for so long as the Trust is
subject to the reporting requirement of the Securities Exchange Act of 1934, as
144
amended. In addition, each party to the servicing function for a series of
Certificates (generally the Trustee and the Servicer (and any Master Servicer))
will furnish to the Trustee or Master Servicer, as applicable, the compliance
statements, Assessments of Compliance and Attestation Reports detailed under
"Servicing of the Mortgage Loans--Evidence as to Compliance." Copies of these
statements and reports will be filed with the SEC under the name of the Trust as
an exhibit to the Trust's annual statement on Form 10-K for each series of
Certificates.
- --------------------------------------------------------------------------------
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
- --------------------------------------------------------------------------------
The SEC allows the Depositor to "incorporate by reference" information it
files with the SEC, which means that the Depositor can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus.
Information that the Depositor files later with the SEC will automatically
update the information in this prospectus. In all cases, you should rely on the
later information rather than on any different information included in this
prospectus or the accompanying prospectus supplement. The Depositor incorporates
by reference any future monthly distribution reports on Form 10-D and any
current reports on Form 8-K filed by or on behalf of the Issuing Entity until
the termination of the offering of the related series of Certificates offered
hereby.
As a recipient of this prospectus, you may request a copy of any document
the Depositor incorporates by reference, except exhibits to the documents
(unless the exhibits are specifically incorporated by reference), at no cost, by
writing or calling the Depositor at 214 North Tryon Street, Mail Code
NC1-027-22-02, Charlotte, North Carolina 28255, Attention: Senior Vice
President, telephone number (704) 387 8239.
- --------------------------------------------------------------------------------
WHERE YOU CAN FIND MORE INFORMATION
- --------------------------------------------------------------------------------
The Depositor filed a registration statement relating to the Certificates
with the SEC. This prospectus is part of the registration statement, but the
registration statement includes additional information.
Copies of the registration statement and any other materials the Depositor
files with the SEC, including distribution reports on Form 10-D, annual reports
on Form 10-K, current reports on Form 8-K and amendments to these reports
(collectively, "Periodic Reports") may be read and copied at the SEC's Public
Reference Room at 100 F Street NE, Washington, D.C. 20549. Information
concerning the operation of the SEC's Public Reference Room may be obtained by
calling the SEC at (800) SEC-0330. The SEC also maintains a site on the World
Wide Web at "http://www.sec.gov" at which you can view and download copies of
reports, proxy and information statements and other information filed
electronically through the EDGAR system. The Depositor has filed the
registration statement, including all exhibits, and will file Periodic Reports
through the EDGAR system and therefore these materials should be available by
logging onto the SEC's Web site. The SEC maintains computer terminals providing
access to the EDGAR system at each of the offices referred to above. Copies of
any documents incorporated to this prospectus by reference will be provided to
each person to whom a prospectus is delivered upon written or oral request
directed to Banc of America Mortgage Securities, Inc. at 214 North Tryon Street,
Mail Code NC1-027-22-02, Charlotte, North Carolina 28255, Attention: Senior Vice
President, telephone number (704) 387 8239.
145
Copies of filed Periodic Reports relating to an Issuing Entity will also be
available on the applicable Trustee's website promptly after they are filed
through the EDGAR system (which many not be the same day) as described under
"Reports to Certificateholders" in the related prospectus supplement.
146
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INDEX OF PROSPECTUS DEFINITIONS
- --------------------------------------------------------------------------------
1
100% LTV Program..........................36
1986 Act.................................107
8
80/20 Program.............................37
9
97% LTV Program...........................36
A
Accelerated Processing Programs...........33
Accretion Directed Certificates...........57
Accrual Certificates......................60
Actuarial Mortgage Loan...................22
Advances..................................77
All-Ready Home............................33
ALTA......................................35
Assessment of Compliance..................83
Asset Conservation Act...................101
Attestation Report........................83
Auction Administrator.....................61
Auction Certificates......................61
Auction Distribution Date.................61
B
Balloon Loans.............................26
Balloon Period............................26
Bank of America...........................27
Bankruptcy Code...........................97
Bankruptcy Loss...........................50
Bankruptcy Loss Amount....................50
Beneficial Owners.........................40
Benefit Plans............................136
Book-Entry Certificates...................40
BPP.......................................35
Buy-Down Fund.............................26
Buy-Down Loans............................26
C
Cash Flow Agreement.......................55
CERCLA...................................100
CERCLA Secured-Creditor Exemption........101
Certificate Account.......................74
Certificateholders........................38
Certificates..............................38
Class.....................................38
Class Balance.............................49
Cleanup Costs............................100
Closing Date..............................38
Code.....................................104
Combination...............................62
Combined Loan-to-Value Ratio..............32
Companion Certificates....................57
Component.................................57
Component Certificates....................57
Condominium Hotel Loan Program............37
Condominium Hotels........................21
Cooperatives..............................21
Credit Scores.............................29
Custom Mortgage Score.....................30
Cut-off Date..............................47
D
Debt-to-Income Ratio......................31
Deferred Interest.........................24
Definitive Certificates...................39
Deleted Mortgage Loan.....................84
Depositor.................................28
Determination Date........................47
Disqualified Organization................119
Distribution Date.........................47
DOL......................................137
DOL Regulations..........................137
Due Date..................................23
E
Electing Large Partnership...............119
Eligible Custodial Account................74
Eligible Investments......................74
Eligible Substitute Mortgage Loan.........85
ERISA....................................136
ERISA Plans..............................136
Escrow Account............................78
Euroclear Operator........................42
European Depositaries.....................40
Excess Bankruptcy Losses..................50
Excess Fraud Losses.......................50
Excess Special Hazard Losses..............50
Exchangeable Certificates.................57
Exchangeable Combination..................62
147
Exchangeable REMIC Certificates...........57
Exempt Plans.............................136
F
Financial Intermediary....................40
Fitch....................................138
Fixed Rate Certificates...................60
Fixed Retained Yield......................48
Floating Rate Certificates................60
Foreclosure Profits.......................48
Foreign Persons..........................134
Fraud Loss................................50
Fraud Loss Amount.........................50
G
Garn Act.................................102
Graduated Pay Mortgage Loans..............25
Gross Margin..............................23
Growing Equity Mortgage Loans.............25
H
HOPA......................................99
I
Indirect Participants.....................40
Insolvency Laws...........................97
Interest Only Certificates................60
Interest Only Mortgage Loans..............24
Inverse Floating Rate Certificates........60
IRA......................................136
Issuing Entity............................38
L
Liquidation Proceeds......................75
Loan-to-Value Ratio.......................30
Lockout Certificates......................57
M
Mark to Market Regulations...............122
Master Servicer...........................67
Master Servicer Custodial Account.........75
Master Servicing Fee......................48
MERS......................................84
Moody's..................................138
Mortgage File.............................83
Mortgage Interest Rate....................22
Mortgage Loans............................21
Mortgage Notes............................21
Mortgage Rewards..........................33
Mortgaged Properties......................21
Mortgages.................................21
N
NCUA.....................................142
Net Mortgage Interest Rate................48
No Ratio Loan Program.....................36
Non-ERISA Plans..........................136
Non-Pro Rata Certificate.................108
Non-Resident Alien Loan Program...........37
Non-SMMEA Certificates...................141
Non-U.S. Holder...........................45
Notional Amount Certificates..............58
O
OCC.......................................27
OID Regulations..........................108
Option ARM Mortgage Loans.................24
Original Issue Discount..................108
OTS.......................................90
P
PAC Certificates..........................58
PaperSaver(R).............................33
Par Price.................................61
Participants..............................40
Pass-Through Certificates.................58
Pass-Through Entity......................119
Pass-Through Rate.........................48
Paying Agent..............................77
Percentage Interest.......................47
Periodic Advance..........................77
Periodic Reports.........................145
Planned Amortization Certificates.........58
PMI.......................................99
Pool Distribution Amount..................48
Pooling Agreement.........................38
Prepayment Assumption....................109
Principal Only Certificates...............61
Product Guides............................30
PTE 83-1.................................139
Purchase Price............................84
Q
Qualified Intermediary....................46
148
R
Rapid.....................................33
Rating Agency............................144
Ratio Strip Certificates..................58
RCRA.....................................101
RCRA Secured Creditor Exemption..........101
Record Date...............................38
Regular Certificateholder................107
Regular Certificates......................39
Related...................................62
Relevant Depositary.......................40
Relief Act................................99
REMIC.....................................39
REMIC Certificates.......................105
REMIC Combination.........................62
REMIC Pool...............................105
REMIC Regulations........................104
REO Property..............................78
Residual Certificate......................39
Residual Holders.........................115
Restricted Group.........................139
Rules.....................................40
S
S&P......................................138
Scheduled Amortization Certificates.......59
SEC.......................................23
Securities Act............................39
Senior Certificates.......................59
Sequential Pay Certificates...............59
Servicer..................................68
Servicer Custodial Account................74
Servicing Advances........................77
Servicing Fee.............................48
Simple Interest Mortgage Loan.............22
SMMEA....................................141
Special Hazard Loss.......................50
Special Hazard Loss Amount................50
Sponsor...................................27
Standard Documentation Process............32
Standard Hazard Insurance Policy..........81
Startup Day..............................106
Stated Income Program.....................36
Stated Income, Stated Asset...............33
Stated Principal Balance..................85
Step Coupon Certificates..................61
Stripped Certificateholder...............132
Stripped Certificates....................130
Subordinate Certificates..................59
Subsidy Account...........................25
Subsidy Loans.............................25
Subsidy Payments..........................25
Substitution Adjustment Amount............85
Super Senior Certificates.................59
Super Senior Support Certificates.........59
Superliens...............................100
Support Certificates......................57
T
TAC Certificates..........................60
Targeted Amortization Certificates........60
Texas Home Equity Laws....................99
Tiered Payment Mortgage Loans.............25
Title V..................................103
Total Loan-to-Value Ratio.................32
Trust.....................................38
Trust Estate..............................21
Trustee...................................91
Trustee Fee...............................48
U
U.S. Person..............................121
U.S. Withholding Agent....................45
UCC.......................................95
Underlying Servicing Agreement............68
Underwriter's Exemption..................138
UST......................................101
V
Variable Rate Certificates................61
Voting Rights.............................88
W
Window Period............................103
Window Period Loans......................102
Window Period States.....................102
149
[LOGO - Bank of America]
Banc of America Mortgage Securities, Inc.
Depositor
Bank of America, National Association
Sponsor and Servicer
Banc of America Alternative Loan Trust 2006-8
Issuing Entity
$504,803,622
(Approximate)
Mortgage Pass-Through
Certificates, Series 2006-8
-----------------------
PROSPECTUS SUPPLEMENT
-----------------------
The offered certificates are not being offered in any state where the
offer is not permitted.
The depositor does not claim the accuracy of the information in this
prospectus supplement and the accompanying prospectus as of any date
other than the dates stated on their respective covers.
Upon request, dealers will deliver a prospectus supplement and
prospectus when acting as underwriters of the offered certificates and
with respect to their unsold allotments or subscriptions. In addition,
upon request, all dealers selling the offered certificates will
deliver a prospectus supplement and prospectus until ninety days
following the date of this prospectus supplement.
Banc of America Securities LLC
October 27, 2006