Filed Pursuant to Rule 424(b)(5)
File No.: 333-130524-04
PROSPECTUS SUPPLEMENT
(To prospectus dated October 3, 2006)
$803,217,000
(Approximate)
Asset Backed Funding Corporation
Depositor
ABFC 2006-OPT3 Trust
Issuing Entity
Bank of America, National Association
Sponsor
Option One Mortgage Corporation
Servicer
Asset Backed Funding Corporation Asset-Backed Certificates,
Series 2006-OPT3 Principal and interest payable monthly,
commencing in November 2006
- --------------------------------------------------------------------------------
Carefully consider the "Risk Factors" beginning on page S-22 of this prospectus
supplement and on page 9 in the accompanying prospectus.
Neither the offered certificates nor the underlying mortgage loans are insured
or guaranteed by any governmental agency or instrumentality.
The offered certificates represent interests in the issuing entity only and will
not be obligations of or represent interests in 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 Five classes of senior certificates.
o Nine classes of subordinated Class M Certificates all of which are
subordinate to, and provide credit enhancement for, the senior certificates.
Each class of Class M Certificates is also subordinated to and provides
credit enhancement for each class of Class M Certificates, if any, with a
lower number.
o One class of subordinated Class B Certificates which are subordinate to, and
provide credit enhancement for, the senior certificates and the Class M
Certificates.
o The Class CE, Class P, Class R and Class R-X Certificates.
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.
The Assets of the Issuing Entity Will Include -
o Three loan groups of first lien residential mortgage loans. The mortgage
loans will consist of fixed-rate and adjustable-rate sub-prime mortgage
loans.
Credit Enhancement Will Consist of -
o Excess Interest - Certain excess interest received from the mortgage loans
will be used to cover losses.
o Overcollateralization - As of the cut off date, the assets of the trust will
exceed the aggregate principal balance of the certificates, resulting in
overcollateralization. Certain excess interest received from the mortgage
loans will also be applied as payments of principal on the certificates to
maintain a required level of overcollateralization.
o Subordination - Each class of subordinated certificates is subordinate to the
senior certificates and to those classes of subordinated certificates higher
in order of payment priority.
o Cross-Collateralization - Under certain circumstances, payments on the
mortgage loans in one loan group may be used to make certain distributions to
holders of senior certificates relating to the other loan groups.
Interest Rate Support Will Consist of -
o Interest Rate Swap Agreement - Net swap payments received by the trust
pursuant to an interest rate swap agreement with Bank of America, National
Association, as swap provider, will be available to make distributions on the
related certificates.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the offered certificates or determined that this
prospectus supplement or the accompanying prospectus is accurate or complete.
Any representation to the contrary is a criminal offense.
The underwriter will purchase the offered certificates from the depositor and
will offer the offered certificates to investors at varying prices to be
determined at the time of sale. The depositor expects that the offered
certificates will be available for delivery to investors in book-entry form
through The Depository Trust Company, Clearstream or Euroclear on or about
November 14, 2006. Total proceeds to the depositor for the offered certificates
will be approximately 99.47% of the initial certificate principal balance of the
offered certificates, before deducting expenses estimated at $700,000 payable by
the depositor.
Banc of America Securities LLC
The date of this prospectus supplement is November 13, 2006
TABLE OF CONTENTS
Page
SUMMARY OF PROSPECTUS SUPPLEMENT...........................................S-8
RISK FACTORS..............................................................S-22
There are risks involving unpredictability of prepayments and
the effect of prepayments on yields.................................S-22
Adjustable rate mortgage loan borrowers may be more likely to
prepay..............................................................S-23
There is a risk that interest payments on the mortgage loans
may be insufficient to maintain overcollateralization...............S-23
Effects of mortgage interest rates and other factors on the
certificate interest rates of the offered certificates..............S-24
There are risks relating to alternatives to foreclosure................S-25
Nature of sub-prime mortgage loans may increase risk of loss...........S-25
High loan-to-value ratios increase risk of loss........................S-25
The interest rate swap agreement is subject to counterparty
risk................................................................S-25
There is no assurance that amounts will be received under the
interest rate swap agreement........................................S-25
The credit rating of the swap provider could affect the rating
of the offered certificates.........................................S-26
Payments due to swap provider may result in losses on
certificates........................................................S-26
Some of the mortgage loans have an initial interest only
period, which may result in increased delinquencies and
losses or rates of prepayment.......................................S-26
The rate of default on mortgage loans that are secured by
investor properties may be higher than on other mortgage
loans...............................................................S-27
Balloon mortgage loans increase the risk of loss.......................S-27
There are risks relating to simultaneous second mortgage loans.........S-27
There are risks relating to geographic concentration of the
mortgage loans......................................................S-28
Residential real estate values may fluctuate and adversely
affect your investment..............................................S-28
Credit scores may not accurately predict the likelihood of
default.............................................................S-28
The recording of the mortgages in the name of MERS may affect
the yield on your certificates......................................S-29
There are risks in holding subordinated certificates...................S-29
Decrement tables are based upon assumptions and models.................S-30
The rights of the NIMS Insurer could adversely affect the
offered certificates................................................S-30
United States military operations may increase risk of
shortfalls in interest..............................................S-31
THE MORTGAGE POOL.........................................................S-31
General................................................................S-32
The Index..............................................................S-34
Terms of the Mortgage Loans............................................S-35
OPTION ONE MORTGAGE CORPORATION...........................................S-35
General................................................................S-35
UNDERWRITING STANDARDS....................................................S-36
THE SERVICER..............................................................S-38
Servicing Background and Portfolio.....................................S-38
Option One Loan Servicing Portfolio--Advances..........................S-39
Business Strategy and Organizational Structure.........................S-39
Default Management.....................................................S-39
Training, Internal Controls and Compliance.............................S-41
Litigation Concerning Option One Mortgage Corporation..................S-42
THE SPONSOR...............................................................S-43
STATIC POOL INFORMATION...................................................S-43
THE DEPOSITOR.............................................................S-44
THE ISSUING ENTITY........................................................S-44
S-2
THE TRUSTEE...............................................................S-44
THE CREDIT RISK MANAGER...................................................S-45
THE POOLING AND SERVICING AGREEMENT.......................................S-46
General................................................................S-46
Assignment of the Mortgage Loans.......................................S-46
Payments on Mortgage Loans; Deposits to Collection Account and
Distribution Account................................................S-48
Advances...............................................................S-49
Compensation and Payment of Expenses of the Servicer, the
Trustee and the Credit Risk Manager.................................S-50
Optional Termination...................................................S-51
Optional Purchase of Defaulted Mortgage Loans..........................S-52
Events of Servicing Termination........................................S-52
Rights upon Event of Servicing Termination.............................S-52
Voting Rights..........................................................S-53
Amendment..............................................................S-53
Rights of the NIMS Insurer under the Pooling and Servicing
Agreement...........................................................S-53
DESCRIPTION OF THE CERTIFICATES...........................................S-54
General................................................................S-54
Allocation of Available Funds..........................................S-54
Interest Distributions.................................................S-55
Principal Distributions................................................S-58
Allocation of Losses...................................................S-67
Application of Monthly Excess Cashflow Amounts.........................S-68
Certificate Interest Rates.............................................S-72
Interest Rate Swap Agreement, the Swap Provider and the Swap
Account.............................................................S-74
The Interest Rate Swap Agreement....................................S-74
The Swap Provider...................................................S-77
The Swap Account....................................................S-77
Calculation of One-Month LIBOR.........................................S-78
Restrictions on Transfer of the Subordinate Certificates...............S-79
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS.............................S-80
Weighted Average Lives.................................................S-81
USE OF PROCEEDS...........................................................S-83
FEDERAL INCOME TAX CONSEQUENCES...........................................S-83
General................................................................S-83
Taxation of Regular Interests..........................................S-83
Taxation of the Basis Risk Arrangements................................S-84
REMIC Taxes and Reporting..............................................S-86
ERISA CONSIDERATIONS......................................................S-86
LEGAL INVESTMENT..........................................................S-88
REPORTS TO CERTIFICATEHOLDERS.............................................S-89
METHOD OF DISTRIBUTION....................................................S-89
LEGAL MATTERS.............................................................S-90
RATINGS...................................................................S-90
INDEX OF DEFINED TERMS....................................................S-91
APPENDIX A: MORTGAGE LOAN DATA.............................................A-1
APPENDIX B: DECREMENT TABLES...............................................B-1
APPENDIX C: ASSUMED MORTGAGE LOAN CHARACTERISTICS..........................C-1
APPENDIX D: INTEREST RATE SWAP AGREEMENT NOTIONAL AMOUNT SCHEDULE..........D-1
S-3
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
The depositor describes the certificates in two separate documents that
progressively provide more detail:
o the accompanying prospectus, which provides general information, some of
which may not apply to your certificates, and
o 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
accompanying prospectus to captions in these materials where you can find
further related discussions. The foregoing table of contents and the table of
contents included in the accompanying prospectus provide the location of these
captions.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement and the accompanying prospectus are defined under the
caption "Index of Prospectus Supplement Definitions" beginning on page S-91 in
this document and under the caption "Index of Prospectus Definitions" beginning
on page 133 in the accompanying prospectus. Any capitalized terms used but not
defined in this prospectus supplement have the meanings assigned in the
accompanying prospectus.
-------------------------------------------------
This prospectus supplement and the accompanying prospectus contain
forward-looking statements relating to future economic performance or
projections and other financial items. Such forward-looking statements, together
with related qualifying language and assumptions, are found in the material,
including each of the tables, set forth under "Risk Factors" and "Yield,
Prepayment and Maturity Considerations" and in the appendices. Forward-looking
statements are also found elsewhere in this prospectus supplement and the
accompanying prospectus, and may be identified by, among other things, the use
of forward-looking words such as "expects," "intends," "anticipates,"
"estimates," "believes," "may" or other comparable words. These statements
involve known and unknown risks, uncertainties and other important factors that
could cause the actual results or performance to differ materially from such
forward-looking statements. Those 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 government 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 update or revise
forward-looking statements to reflect any change in the depositor's expectations
or any change in events, conditions or circumstances on which any
forward-looking statement is based.
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 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:
(1) 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;
(2) 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
S-4
(3) 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:
(1) 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
(2) 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 ABFC 2006-OPT3 TRUST ASSET-BACKED CERTIFICATES
Initial
Certificate Certificate Minimum Incremental
Class Balance(1) Interest Rate Principal Types(2) Interest Types(2) Denomination Denomination
- ------------------ --------------- -------------- --------------------- ----------------- ------------- --------------
Offered
Certificates
- ------------------
Class A-1 $114,273,000 (5) Senior, Pass-Through Floating Rate $25,000 $1
Class A-2 $114,343,000 (5) Senior, Pass-Through Floating Rate $25,000 $1
Class A-3A $236,422,000 (5) Senior, Sequential Floating Rate $25,000 $1
Pay/Pass-Through(6)
Class A-3B $165,145,000 (5) Senior, Sequential Floating Rate $25,000 $1
Pay/Pass-Through(6)
Class A-3C $5,469,000 (5) Senior, Sequential Floating Rate $25,000 $1
Pay/Pass-Through(6)
Class M-1 $35,032,000 (5) Subordinated, Floating Rate $25,000 $1
Sequential Pay
Class M-2 $32,078,000 (5) Subordinated, Floating Rate $25,000 $1
Sequential Pay
Class M-3 $18,572,000 (5) Subordinated, Floating Rate $25,000 $1
Sequential Pay
Class M-4 $16,039,000 (5) Subordinated Floating Rate $25,000 $1
Class M-5 $15,617,000 (5) Subordinated Floating Rate $25,000 $1
Class M-6 $13,928,000 (5) Subordinated Floating Rate $25,000 $1
Class M-7 $13,507,000 (5) Subordinated Floating Rate $25,000 $1
Class M-8 $12,240,000 (5) Subordinated Floating Rate $25,000 $1
Class M-9 $10,552,000 (5) Subordinated Floating Rate $25,000 $1
Non-Offered
Certificates
- ------------------
Class B $10,130,000 (5) Subordinated Floating Rate $25,000 $1
Class CE N/A (7) Subordinated N/A N/A N/A
Class P N/A (7) N/A N/A N/A N/A
Class R N/A (7) Subordinated N/A N/A N/A
Class R-X N/A (7) Subordinated N/A N/A N/A
(TABLE CONTINUED)
Final Scheduled Initial Rating of
Class Certificate Form Distribution Date(3) Certificates(4)
------ ---------
Fitch Moody's
- -------------- ---------------- -------------------- ------ ---------
Offered
Certificates
- --------------
Class A-1 Book-Entry November 25, 2036 AAA Aaa
Class A-2 Book-Entry November 25, 2036 AAA Aaa
Class A-3A Book-Entry November 25, 2036 AAA Aaa
Class A-3B Book-Entry November 25, 2036 AAA Aaa
Class A-3C Book-Entry November 25, 2036 AAA Aaa
Class M-1 Book-Entry November 25, 2036 AA+ Aa1
Class M-2 Book-Entry November 25, 2036 AA Aa2
Class M-3 Book-Entry November 25, 2036 AA- Aa3
Class M-4 Book-Entry November 25, 2036 A+ A1
Class M-5 Book-Entry November 25, 2036 A A2
Class M-6 Book-Entry November 25, 2036 A- A3
Class M-7 Book-Entry November 25, 2036 BBB+ Baa1
Class M-8 Book-Entry November 25, 2036 BBB Baa2
Class M-9 Book-Entry November 25, 2036 BBB- Baa3
Non-Offered
Certificates
- --------------
Class B Book-Entry November 25, 2036 BB+ Ba1
Class CE Definitive N/A None None
Class P Definitive N/A None None
Class R Definitive N/A None None
Class R-X Definitive N/A None None
- ----------------------------
(1) Approximate. The initial certificate balances of the offered
certificates may vary by a total of plus or minus 5%.
(2) See "Description of the Certificates--Categories of Classes of
Securities" in the prospectus for a description of these principal and interest
types and see "Description of the Certificates--Interest Distributions,"
"--Principal 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
mortgage pool. The actual final payment on your certificates could occur earlier
or later than the final scheduled distribution date.
S-6
(4) The offered certificates will not be issued unless they receive at
least the ratings set forth in this table. See "Ratings" in this prospectus
supplement.
(5) Interest will accrue on these certificates during each interest
accrual period at a per annum rate equal to the least of (i) the sum of
one-month LIBOR plus the margin set forth in the table below, (ii) the
applicable maximum rate cap and (iii) the applicable group cap or the pool cap
as described under "Description of the Certificates--Certificate Interest Rates"
in this prospectus supplement. During each interest accrual period relating to
the distribution dates after the optional termination date, the margins will
increase to margins set forth in the table below if the optional termination
right is not exercised. Interest will be calculated based on the methodology in
the table below. One-month LIBOR for the initial interest accrual period will be
5.32%.
Margin after the
Optional Termination Interest
Class Margin Date Calculations
- --------------------- ----------- --------------------- ------------
Offered Certificates
Class A-1 0.140% 0.280% Actual/360
Class A-2 0.140% 0.280% Actual/360
Class A-3A 0.060% 0.120% Actual/360
Class A-3B 0.160% 0.320% Actual/360
Class A-3C 0.250% 0.500% Actual/360
Class M-1 0.260% 0.390% Actual/360
Class M-2 0.330% 0.495% Actual/360
Class M-3 0.360% 0.540% Actual/360
Class M-4 0.420% 0.630% Actual/360
Class M-5 0.730% 1.095% Actual/360
Class M-6 0.980% 1.470% Actual/360
Class M-7 1.500% 2.250% Actual/360
Class M-8 2.500% 3.750% Actual/360
Class M-9 2.500% 3.750% Actual/360
Non-Offered
Certificates
Class B 2.500% 3.750% Actual/360
(6) These certificates have the characteristics of a sequential pay
security; provided, however on any distribution date on or after the
subordination depletion date, these certificates have the characteristics of a
pass-through security.
(7) The Class CE, Class P, Class R and Class R-X Certificates are entitled
to certain distributions as specified in the pooling and servicing agreement.
S-7
SUMMARY OF PROSPECTUS SUPPLEMENT
Because this is a summary, it does not contain all the information that
may be important to you. You should read the entire accompanying prospectus and
this prospectus supplement carefully before you decide to purchase a
certificate. If capitalized terms are not defined in this prospectus supplement,
they are defined in the prospectus.
Issuing Entity
ABFC 2006-OPT3 Trust, a New York common law trust.
Title of Series
Asset Backed Funding Corporation Asset-Backed Certificates, Series 2006-OPT3
Sponsor
Bank of America, National Association
Depositor
Asset Backed Funding Corporation
Servicer
Option One Mortgage Corporation
Originator
Option One Mortgage Corporation originated or acquired all of the mortgage
loans.
Trustee
Wells Fargo Bank, N.A.
Credit Risk Manager
Clayton Fixed Income Services Inc.
Swap Provider
Bank of America, National Association
NIMS Insurer
After the closing date, a separate entity may be established to issue net
interest margin securities secured by all or a portion of the Class CE and Class
P Certificates. Those net interest margin securities may or may not have the
benefit of a financial guaranty insurance policy that guarantees payments on
those securities. The insurer that would issue any financial guaranty insurance
policy, if any, is referred to in this prospectus supplement as the "NIMS
Insurer." The references to the NIMS Insurer in this prospectus supplement are
applicable only if there is a NIMS Insurer.
Closing Date
On or about November 14, 2006
Cut-off Date
October 1, 2006
Distribution Date
The 25th day of each month (or if not a business day, the next business day)
beginning in November, 2006.
Determination Date
The 15th day of each month in which a distribution date occurs (or, if not a
business day, the immediately preceding business day).
Record Date
The business day immediately preceding a distribution date; provided, however,
that if a certificate becomes a definitive certificate, the record date for that
certificate will be the last business day of the month immediately preceding the
month in which the related distribution date occurs.
Collection Period
The period from the second day of the calendar month preceding the month in
which a distribution date occurs through the first day of the calendar month in
which the distribution date occurs.
Prepayment Period
The period commencing on the day after the determination date in the calendar
month preceding the calendar month in which a distribution date occurs (or, in
the case of the first distribution date, on the cut-off date) and ending on the
determination date in the calendar month in which that distribution date occurs.
S-8
The Transaction Parties
Option One Mortgage Corporation originated or acquired all of the mortgage loans
and currently services all of the mortgage loans. Prior to the closing date, the
sponsor purchased all of the mortgage loans from Option One Mortgage
Corporation. On the closing date the sponsor will sell the mortgage loans to the
depositor, who will in turn deposit them into a New York common law trust, which
is the issuing entity. The trust will be formed by a pooling and servicing
agreement, dated as of the cut-off 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.
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 |
| |
----------------
| ^
| |
| |
| |
Mortgage Loans | | Cash
| |
| |
| |
\/ | Offered
---------------- Certificates ----------------
| | --------------------> | |
| Depositor | | Underwriter |
| | | |
---------------- <-------------------- ----------------
| ^ Cash | ^
| | | |
| | Offered| |Cash
| | Certificates| |
Mortgage Loans | | All Certificates | |
| | | |
| | \/ |
| | ----------------
| | | |
\/ | | Investors |
---------------- | |
| | ----------------
| Issuing |
| Entity |
| |
----------------
S-9
The Certificates
A summary chart of the initial certificate principal balances, certificate
interest rates, principal types, 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.
The certificates represent all of the beneficial ownership interest in the
trust.
Classifications of Classes of Certificates
- -----------------------------------------------------------------------------
Offered Certificates: A-1, A-2, A-3A, A-3B, A-3C, M-1, M-2,
M-3, M-4, M-5, M-6, M-7, M-8 and M-9
- -----------------------------------------------------------------------------
Non Offered Certificates B, CE, P, R and R-X
- -----------------------------------------------------------------------------
Senior Certificates or A-1, A-2, A-3A, A-3B and A-3C
Class A Certificates:
- -----------------------------------------------------------------------------
Subordinated Certificates: M-1, M-2, M-3, M-4, M-5, M-6, M-7, M-8,
M-9, B, CE, R and R-X
- -----------------------------------------------------------------------------
Class M Certificates: M-1, M-2, M-3, M-4, M-5, M-6, M-7, M-8
and M-9
- -----------------------------------------------------------------------------
Class B Certificates: B
- -----------------------------------------------------------------------------
Group 1 Certificates: A-1
- -----------------------------------------------------------------------------
Group 2 Certificates: A-2
- -----------------------------------------------------------------------------
Group 3 Certificates: A-3A, A-3B and A-3C
- -----------------------------------------------------------------------------
Sequential Mezzanine M-1, M-2 and M-3
Certificates:
- -----------------------------------------------------------------------------
Residual Certificates: R and R-X
- -----------------------------------------------------------------------------
The Mortgage Pool
On the closing date, the issuing entity will acquire a pool of fixed and
adjustable-rate first lien mortgage loans, designated herein as the "mortgage
loans." All of the mortgage loans were originally originated or acquired by
Option One Mortgage Corporation in accordance with the underwriting guidelines
described under "Underwriting Standards" in this prospectus supplement.
For purposes of calculating principal and interest distributions on the senior
certificates, the mortgage loans have been divided into three groups, designated
as the "group 1 mortgage loans," the "group 2 mortgage loans" and the "group 3
mortgage loans." The group 1 mortgage loans consist only of those mortgage loans
with original principal balances that conform to Fannie Mae guidelines. The
group 2 mortgage loans consist only of those mortgage loans with original
principal balances that conform to Freddie Mac guidelines. The group 3 mortgage
loans consist of all other remaining mortgage loans, which may or may not have
original principal balances conforming to Fannie Mae and/or Freddie Mac
guidelines. Other than certain cross-collateralization payments, the Group 1
Certificates generally represent interests in the group 1 mortgage loans, the
Group 2 Certificates generally represent interests in the group 2 mortgage loans
and the Group 3 Certificates generally represent interests in the group 3
mortgage loans. The remaining classes of certificates represent interests in all
of the group 1 mortgage loans, the group 2 mortgage loans and the group 3
mortgage loans.
S-10
Mortgage Loan Statistics
The mortgage loans will consist of fixed and adjustable-rate mortgage loans with
the following aggregate characteristics as of the cut off date (percentages are
based on the aggregate principal balance of the mortgage loans):
- ------------------------------------------------------------- ------------------------------------ ---------------------------------
Range, Total or Percentage Weighted Average
- ------------------------------------------------------------- ------------------------------------ ---------------------------------
Number of Mortgage Loans 3,398 --
Aggregate Outstanding Principal Balance $844,159,461 --
Outstanding Principal Balance $49,936 to $969,615 $248,428
Current Interest Rate 5.750% to 12.850% 8.788%
Servicing Fee Rate 0.30% months 1 to 10, --
0.40% months 11 to 30 and 0.65%
thereafter
Credit Risk Manager Fee Rate 0.015% --
Remaining Term to Maturity 177 to 360 months 357 months
Original Term to Maturity 180 to 360 months 360 months
Loan Age 0 to 11 months 2 months
Original Loan to Value Ratio 90.00% to 103.00% 98.13%
Original Debt to Income Ratio(1) 2.56% to 59.94% 43.77%
Credit Scores(2) 500 to 813 640
Latest Maturity Date October 1, 2036 --
Percentage of Fixed-Rate Mortgage Loans 8.60% --
Percentage of Adjustable-Rate Mortgage Loans 91.40% --
Percentage of Interest Only Mortgage Loans 19.76% --
Percentage of Second Lien Mortgage Loans 0.00% --
Percentage of Mortgage Loans Secured by Investor --
Properties 4.57%
Percentage of Balloon Loans 38.62% --
Percentage of Mortgage Loans with Prepayment Charges 77.72% --
Percentage of Mortgage Loans with "Simultaneous --
Seconds" 0.14%
Maximum Single Five-Digit Zip Code Concentration 92392 (0.68%) --
- ------------------------------------------------------------------------------------------------------------------------------------
Geographic Concentration of Mortgaged Properties in Excess of 5.00% of the Aggregate Outstanding Principal Balance
- ------------------------------------------------------------------------------------------------------------------------------------
California 28.17% --
Florida 8.14% --
New York 7.18% --
Massachusetts 5.75% --
For the Adjustable-Rate Mortgage Loans Only:
Gross Margin 3.000% to 8.500% 6.106%
Minimum Mortgage Interest Rate 5.750% to 12.850% 8.799%
Maximum Mortgage Interest Rate 9.880% to 18.850% 14.787%
Initial Rate Adjustment Cap 3.000% --
Periodic Rate Adjustment Cap 1.000% --
Months to First or Next Adjustment Date 13 to 177 months 24 months
(1) Excluding the mortgage loans for which no Debt-to-Income Ratio was
calculated.
(2) Where Credit Scores were available.
S-11
Group 1 Mortgage Loan Statistics
The group 1 mortgage loans will consist of fixed and adjustable-rate mortgage
loans with the following characteristics as of the cut off date (percentages are
based on the aggregate principal balance of the group 1 mortgage loans):
- ------------------------------------------------------- ---------------------------------------- -------------------------------
Range, Total or Percentage Weighted Average
- ------------------------------------------------------- ---------------------------------------- -------------------------------
Number of Mortgage Loans 841 --
Aggregate Outstanding Principal Balance $151,756,592 --
Outstanding Principal Balance $68,354 to $508,000 $180,448
Current Interest Rate 6.251% to 11.875% 8.810%
Servicing Fee Rate 0.30% months 1 to 10, --
0.40% months 11 to 30 and 0.65%
thereafter
Credit Risk Manager Fee Rate 0.015% --
Remaining Term to Maturity 177 to 359 months 357 months
Original Term to Maturity 180 to 360 months 360 months
Loan Age 1 to 11 months 2 months
Original Loan to Value Ratio 90.28% to 100.00% 97.68%
Original Debt-to-Income Ratio(1) 20.26% to 58.66% 44.09%
Credit Scores(2) 501 to 813 634
Latest Maturity Date September 1, 2036 --
Percentage of Fixed-Rate Mortgage Loans 10.17% --
Percentage of Adjustable-Rate Mortgage Loans 89.83% --
Percentage of Interest Only Mortgage Loans 9.06% --
Percentage of Second Lien Mortgage Loans 0.00% --
Percentage of Mortgage Loans Secured by Investor --
Properties 6.16%
Percentage of Balloon Loans 38.57% --
Percentage of Mortgage Loans with Prepayment Charges 77.62% --
Percentage of Mortgage Loans with "Simultaneous --
Seconds" 0.11%
Maximum Single Five-Digit Zip Code Concentration 02302 (0.68%) --
- ------------------------------------------------------------------------------------------------------------------------------------
Geographic Concentration of Mortgaged Properties in Excess of 5.00% of the Aggregate Outstanding Principal Balance
- ------------------------------------------------------------------------------------------------------------------------------------
California 12.23% --
Florida 11.62% --
Massachusetts 5.45% --
Michigan 5.43% --
For the Adjustable-Rate Mortgage Loans Only:
Gross Margin 4.500% to 7.500% 6.100%
Minimum Mortgage Interest Rate 6.330% to 11.525% 8.819%
Maximum Mortgage Interest Rate 10.950% to 17.525% 14.799%
Initial Rate Adjustment Cap 3.000% --
Periodic Rate Adjustment Cap 1.000% --
Months to First or Next Adjustment Date 13 to 59 months 24 months
(1) Excluding the mortgage loans for which no Debt-to-Income Ratio was
calculated.
(2) Where Credit Scores were available.
S-12
Group 2 Mortgage Loan Statistics
The group 2 mortgage loans will consist of fixed and adjustable-rate mortgage
loans with the following characteristics as of the cut off date (percentages are
based on the aggregate principal balance of the group 2 mortgage loans):
- ------------------------------------------------------------- ------------------------------------ --------------------------------
Range, Total or Percentage Weighted Average
- ------------------------------------------------------------- ------------------------------------ --------------------------------
Number of Mortgage Loans 640 --
Aggregate Outstanding Principal Balance $151,850,026 --
Outstanding Principal Balance $49,967 to $578,306 $237,266
Current Interest Rate 5.750% to 12.400% 8.807%
Servicing Fee Rate 0.30% months 1 to 10, --
0.40% months 11 to 30 and 0.65%
thereafter
Credit Risk Manager Fee Rate 0.015% --
Remaining Term to Maturity 237 to 359 months 357 months
Original Term to Maturity 240 to 360 months 360 months
Loan Age 1 to 9 months 2 months
Original Loan to Value Ratio 90.14% to 100.00% 97.71%
Original Debt-to-Income Ratio(1) 2.56% to 59.18% 44.54%
Credit Scores(2) 505 to 809 634
Latest Maturity Date September 1, 2036 --
Percentage of Fixed-Rate Mortgage Loans 9.85% --
Percentage of Adjustable-Rate Mortgage Loans 90.15% --
Percentage of Interest Only Mortgage Loans 15.89% --
Percentage of Second Lien Mortgage Loans 0.00% --
Percentage of Mortgage Loans Secured by Investor --
Properties 8.15%
Percentage of Balloon Loans 37.56% --
Percentage of Mortgage Loans with Prepayment Charges 71.65% --
Percentage of Mortgage Loans with "Simultaneous --
Seconds" 0.24%
Maximum Single Five-Digit Zip Code Concentration 02302 (0.85%) --
- -----------------------------------------------------------------------------------------------------------------------------------
Geographic Concentration of Mortgaged Properties in Excess of 5.00% of the Aggregate Outstanding Principal Balance
- -----------------------------------------------------------------------------------------------------------------------------------
California 12.54% --
Massachusetts 9.25% --
Florida 7.64% --
For the Adjustable-Rate Mortgage Loans Only:
Gross Margin 4.500% to 8.500% 6.111%
Minimum Mortgage Interest Rate 5.750% to 12.400% 8.866%
Maximum Mortgage Interest Rate 10.500% to 18.400% 14.843%
Initial Rate Adjustment Cap 3.000% --
Periodic Rate Adjustment Cap 1.000% --
Months to First or Next Adjustment Date 16 to 177 months 25 months
(1) Excluding the mortgage loans for which no Debt-to-Income Ratio was
calculated.
(2) Where Credit Scores were available.
S-13
Group 3 Mortgage Loan Statistics
The group 3 mortgage loans will consist of fixed and adjustable-rate mortgage
loans with the following characteristics as of the cut off date (percentages are
based on the aggregate principal balance of the group 3 mortgage loans):
- ----------------------------------------------- ---------------------------------- -----------------------------
Range, Total or Percentage Weighted Average
- ----------------------------------------------- ---------------------------------- -----------------------------
Number of Mortgage Loans 1,917 --
Aggregate Outstanding Principal Balance $540,552,843 --
Outstanding Principal Balance $49,936 to $969,615 $281,979
Current Interest Rate 5.750% to 12.850% 8.776%
Servicing Fee Rate 0.30% months 1 to 10, --
0.40% months 11 to 30 and
0.65% thereafter
Credit Risk Manager Fee Rate 0.015% --
Remaining Term to Maturity 178 to 360 months 357 months
Original Term to Maturity 180 to 360 months 360 months
Loan Age 0 to 9 months 2 months
Original Loan to Value Ratio 90.00% to 103.00% 98.37%
Original Debt-to-Income Ratio(1) 5.04% to 59.94% 43.46%
Credit Scores(2) 500 to 809 643
Latest Maturity Date October 1, 2036 --
Percentage of Fixed-Rate Mortgage Loans 7.80% --
Percentage of Adjustable-Rate Mortgage Loans 92.20% --
Percentage of Interest Only Mortgage Loans 23.85% --
Percentage of Second Lien Mortgage Loans 0.00% --
Percentage of Mortgage Loans Secured by --
Investor Properties 3.11%
Percentage of Balloon Loans 38.93% --
Percentage of Mortgage Loans with Prepayment --
Charges 79.46%
Percentage of Mortgage Loans with --
"Simultaneous Seconds" 0.12%
Maximum Single Five-Digit Zip Code --
Concentration 92392 (1.06%)
- ------------------------------------------------------------------------------------------------------------------
Geographic Concentration of Mortgaged Properties in Excess of 5.00% of the Aggregate Outstanding Principal Balance
- ------------------------------------------------------------------------------------------------------------------
California 37.03% --
New York 9.05% --
Florida 7.31% --
Texas 5.88% --
For the Adjustable-Rate Mortgage Loans Only:
Gross Margin 3.000% to 7.500% 6.106%
Minimum Mortgage Interest Rate 5.750% to 12.850% 8.776%
Maximum Mortgage Interest Rate 9.880% to 18.850% 14.768%
Initial Rate Adjustment Cap 3.000% --
Periodic Rate Adjustment Cap 1.000% --
Months to First or Next Adjustment Date 15 to 59 months 24 months
(1) Excluding the mortgage loans for which no Debt-to-Income Ratio was
calculated.
(2) Where Credit Scores were available.
The characteristics of the mortgage pool may change because:
o Before the closing date, the depositor may remove mortgage loans from the
mortgage pool. The depositor also may substitute new mortgage loans for
mortgage loans in the mortgage pool prior to the closing date.
S-14
o After the certificates are issued, mortgage loans may be removed from the
trust because of repurchases by the originator or the sponsor for breaches
of representations or failure to deliver required documents. Under certain
circumstances and only during the two-year period following the closing
date, the originator or the sponsor may instead make substitutions for
these mortgage loans.
See "The Pooling and Servicing Agreement--Assignment of Mortgage Loans" in this
prospectus supplement for a discussion of the circumstances under which the
originator or the sponsor is required to repurchase or substitute for mortgage
loans. These removals and/or substitutions may result in changes in the mortgage
loan 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 is set forth under "The Mortgage
Pool" and 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.
Fees and Expenses
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, the credit
risk manager or distributions to certificateholders. The servicing fees accrue
on the mortgage loans at the servicing fee rate or rates set forth in the tables
above. In addition to the servicing fees, the servicer will be entitled to
retain as additional servicing compensation (i) all service-related fees,
including assumption fees, modification fees, extension fees, bad check fees,
late payment charges and interest paid on principal prepayments during the
portion of a prepayment period occurring in the month of a distribution date, to
the extent collected from mortgagors, (ii) any interest or other income earned
on funds held in the collection account and any escrow accounts and (iii) any
profits from the liquidation of mortgage loans.
The credit risk manager is entitled to the credit risk manager fee payable from
the interest portion of collections described below under
"--Distributions--General." The trustee is entitled to all investment income
earned on amounts on deposit in the distribution account.
The depositor, the servicer and the trustee are entitled to indemnification and
reimbursement of certain expenses from the trust under the pooling and servicing
agreement prior to distributions to certificateholders as discussed in the
prospectus under the headings "Description of the Agreements--Material Terms of
the Pooling and Servicing Agreements and Underlying Servicing
Agreements--Certain Matters Regarding Servicers and the Master Servicer" and
"--Certain Matters Regarding the Trustee."
See "The Pooling and Servicing Agreement--Compensation and Payment of Expenses
of the Servicer, the Trustee and the Credit Risk Manager" in this prospectus
supplement for more information about fees and expenses of the servicer, the
trustee and the credit risk manager.
For any distribution date prior to and including the distribution date in
October 2011, the trust will be obligated to make a monthly payment to the swap
provider equal to the product of (x) 5.02375%, (y) the notional amount (as set
forth in Appendix D) for such distribution date and (z) a fraction, the
numerator of which is 30 (or, for the first distribution date, the number of
days elapsed from the closing date to but excluding the first distribution date
on a 30/360 basis), and the denominator of which is 360. The trust will be
entitled to receive from the swap provider for any distribution date prior to
and including the distribution date in October 2011, a floating amount equal to
the product of (x) one-month LIBOR (as determined pursuant to the interest rate
swap agreement), (y) the notional amount for such distribution date, and (z) a
fraction, the numerator of which is the actual number of days elapsed from the
previous distribution date to but excluding the current distribution date (or,
for the first distribution date, the actual number of days elapsed from the
closing date to but excluding the first distribution date), and the denominator
of which is 360. Only a net payment will be required to be made on or before
each distribution date by the applicable party. Any amounts payable by the trust
to the swap provider (other than a swap termination payment resulting from a
swap provider trigger event) will reduce the interest remittance amount for a
distribution date and, to the extent that the interest remittance amount for
such distribution date is insufficient, the principal remittance amount for such
distribution date, prior to any distribution to certificateholders.
S-15
Distributions--General
Interest distributions on the certificates will be made on each distribution
date from the interest portion of collections related to the related loan group,
in the case of the senior certificates, or all loan groups, in the case of the
subordinated certificates, less certain expenses (such as servicing fees,
reimbursements for advances made by the servicer, amounts payable to the swap
provider and payment of other expenses and indemnities described in this
prospectus supplement) and principal distributions on the certificates will be
made on each distribution date from the principal portion of collections (less
certain amounts payable to the swap provider) related to the related loan group,
in the case of the senior certificates, or all loan groups, in the case of the
subordinated certificates, in the following order of priority:
- -----------------------------------------------------------------------------
Interest
- -----------------------------------------------------------------------------
first, to the credit risk manager, the credit risk manager fees
relating to each loan group;
- -----------------------------------------------------------------------------
second, to the senior certificates of the related group to pay interest;
- -----------------------------------------------------------------------------
third, to the senior certificates of the related group to pay any
interest previously earned but not paid;
- -----------------------------------------------------------------------------
fourth, to the senior certificates of the other groups to pay interest
(to the extent not paid in priority second above);
- -----------------------------------------------------------------------------
fifth, to the senior certificates of the other groups to pay any
interest previously earned but not paid (to the extent not paid in
priority third above);
- -----------------------------------------------------------------------------
sixth, from the remaining interest collections for all loan groups, to pay
interest to each class of Class M Certificates in numerical order, beginning
with the Class M-1 Certificates;
- -----------------------------------------------------------------------------
seventh, from the remaining interest collections for all loan groups,
to pay interest to the Class B Certificates; and
- -----------------------------------------------------------------------------
eighth, to be distributed as part of monthly excess cashflow.
- -----------------------------------------------------------------------------
Principal (Before the Stepdown Date or when a Trigger Event is in Effect)
- -----------------------------------------------------------------------------
first, to the senior certificates of the related group to pay
principal;*
- -----------------------------------------------------------------------------
second, to the senior certificates of the other groups to pay principal
(to the extent not paid in priority first above);*
- -----------------------------------------------------------------------------
third, from the remaining principal collections for all loan groups, to pay
principal to each class of Class M Certificates in numerical order, beginning
with the Class M-1 Certificates;
- -----------------------------------------------------------------------------
fourth, from the remaining principal collections for all loan groups,
to pay principal to the Class B Certificates; and
- -----------------------------------------------------------------------------
fifth, to be distributed as part of monthly excess cashflow.
- -----------------------------------------------------------------------------
Principal (After the Stepdown Date and as long as no Trigger Event is in
Effect)
- -----------------------------------------------------------------------------
first, to the senior certificates of the related group to pay
principal, up to their principal distribution amount;*
- -----------------------------------------------------------------------------
second, to the senior certificates of the other groups to pay principal
(to the extent not paid in priority first above), up to their
principal distribution amount;*
- -----------------------------------------------------------------------------
third, from the remaining principal collections for all loan groups, to
pay principal to each class of Class M Certificates in numerical
order, up to their principal distribution amount, beginning with the
Class M-1 Certificates;
- -----------------------------------------------------------------------------
fourth, from the remaining principal collections for all loan groups, to pay
principal to the Class B Certificates, up to its principal distribution
amount; and
- -----------------------------------------------------------------------------
fifth, to be distributed as part of monthly excess cashflow.
- -----------------------------------------------------------------------------
* Principal distributions to the group 3 certificates will be made sequentially
for each distribution date prior to the subordination depletion date and
concurrently, on a pro rata basis, for each distribution date on and after the
subordination depletion date.
S-16
On each distribution date, the sum of excess interest, remaining principal
collections and excess overcollateralization amounts will be distributed in the
following order of priority:
- -----------------------------------------------------------------------------
Excess Cashflow
- -----------------------------------------------------------------------------
first, pro rata, to the senior certificates, to pay any remaining
current interest;
- -----------------------------------------------------------------------------
second, pro rata, to the senior certificates, to pay any interest
previously earned but not paid;
- -----------------------------------------------------------------------------
third, to each class of Class M Certificates, first to pay current interest,
then to pay interest previously earned but not paid and finally to reimburse
for realized losses applied to that class, in numerical order, beginning with
the Class M-1 Certificates;
- -----------------------------------------------------------------------------
fourth, to the Class B Certificates, first to pay current interest, then to pay
interest previously earned but not paid and finally to reimburse for realized
losses applied to that class;
- -----------------------------------------------------------------------------
fifth, to the senior certificates, pro rata, and then to the Class M
Certificates, sequentially in numerical order, and then to the Class B
Certificates, to pay any cap carryover amounts for such classes;
- -----------------------------------------------------------------------------
sixth, to the swap provider, any swap termination payments resulting
from a swap provider trigger event; and
- -----------------------------------------------------------------------------
seventh, to the Class CE, Class R and Class R-X Certificates, in the amounts
specified in the pooling and servicing agreement.
- -----------------------------------------------------------------------------
The Class P Certificates will receive any prepayment charges paid by the
mortgagors during the related prepayment period. The amount of interest and
principal distributions on each class of certificates is more fully described
under "Description of the Certificates--Interest Distributions" and "--Principal
Distributions" in this prospectus supplement.
Interest Distributions
On each distribution date, you will be entitled to receive interest accrued on
your certificate during the related interest accrual period (less the amount of
shortfalls allocated to your certificate due to the Servicemembers Civil Relief
Act or similar state laws) and any interest which you earned previously but
which you did not receive. The interest accrual period for all offered
certificates is the period from the distribution date in the prior month (or the
closing date, in the case of the first distribution date) through the day prior
to the current distribution date. Interest will be calculated for all offered
certificates on the basis of the actual number of days in the interest accrual
period, based on a 360-day year.
There are certain circumstances which could reduce the amount of interest paid
to you. See "Description of the Certificates--Interest Distributions" in this
prospectus supplement.
Principal Distributions
On each distribution date you will receive a distribution of principal if there
are funds available on that date for your class of certificates. As described
above under "--Distributions--General," prior to the stepdown date or in the
event (i) a three-month rolling average of loans two months or more past due or
(ii) cumulative realized losses exceed certain thresholds described under
"Description of the Certificates--Principal Distributions," principal
distributions will be made to the senior certificates until their certificate
principal balances are reduced to zero and no principal will be distributed on
the subordinated certificates or distributed as part of excess cashflow. You
should review the priority of payments described under "Description of the
Certificates--Principal Distributions" in this prospectus supplement.
Credit Enhancement
Credit enhancement is intended to reduce the potential risk of loss to holders
of the certificates as a result of shortfalls in payments received on the
mortgage loans. Credit enhancement can reduce the effect of shortfalls on all
classes, or it can allocate shortfalls so they affect some classes before
others. This transaction employs the following forms of credit enhancement. See
"Description of the Certificates" in this prospectus supplement.
Monthly Excess Interest. Because more interest is expected to be paid by the
mortgagors than is necessary to pay the interest earned on the certificates and
to pay certain fees and expenses of the trust (including any net swap payment
owed to the swap provider and any swap termination payment owed to the swap
provider, other than any swap termination payment resulting from a swap provider
trigger event), it is expected there will be excess interest
S-17
each month. The excess interest will be used to maintain overcollateralization,
to pay interest that was previously accrued but not paid to the certificates, to
reimburse the certificates for losses and certain shortfalls that they
experienced previously and to pay certain cap carryover amounts.
Overcollateralization. If the total assets in the trust exceed the total
certificate principal balance of the certificates, there is
overcollateralization. Overcollateralization will be available to absorb losses
on the mortgage loans before such losses affect the offered certificates and the
Class B Certificates. On the closing date, the total principal balance of the
mortgage loans will exceed the total initial certificate principal balance of
the certificates by approximately $30,812,461. This results in
overcollateralization equal to approximately 3.65% of the aggregate principal
balance of the mortgage loans as of the cut-off date. If the level of
overcollateralization falls below the targeted overcollateralization amount for
a distribution date, the excess interest for that distribution date will be paid
to the offered certificates and the Class B Certificates as principal. This will
have the effect of reducing the aggregate certificate principal balance of the
certificates faster than the principal balance of the mortgage loans until the
required level of overcollateralization is reached.
Subordination. On each distribution date, classes that are lower in order of
payment priority will not receive payments until the classes that are higher in
order of payment priority have been paid. If there are insufficient funds on a
distribution date to pay all classes, the subordinated classes will be the first
to forego payment. The chart below summarizes the relative seniority of the
various classes of certificates and indicates the approximate initial and
expected post-stepdown level of credit support provided to the various classes
of certificates. The initial credit support percentage shown below is the sum of
the aggregate initial class certificate balance of the class or classes of
certificates subordinate to a class or classes plus the initial
overcollateralization amount as a percentage of the initial aggregate principal
balance of the mortgage loans. The expected credit support percentage after
stepdown is the sum of the expected aggregate class certificate balance of the
class or classes of certificates subordinate to a class or classes plus the
targeted overcollateralization amount on the stepdown date as a percentage of
the expected aggregate principal balance of the mortgage loans as of the end of
the related collection period (after giving effect to expected principal
prepayments in the related prepayment period).
Priority of Initial Credit Targeted Credit Support
Payment Class or Classes Support Percentage Percentage after Stepdown Allocation of Losses
------- ---------------- ------------------ ------------------------- --------------------
| Senior Certificates 24.70% 49.40% N/A(1)
| Class M-1 Certificates 20.55% 41.10% ^
| Class M-2 Certificates 16.75% 33.50% |
| Class M-3 Certificates 14.55% 29.10% |
| Class M-4 Certificates 12.65% 25.30% |
| Class M-5 Certificates 10.80% 21.60% |
| Class M-6 Certificates 9.15% 18.30% |
\/ Class M-7 Certificates 7.55% 15.10% |
Class M-8 Certificates 6.10% 12.20% |
Class M-9 Certificates 4.85% 9.70%
Class B Certificates 3.65% 7.30%
(1) The certificate principal balances of the senior certificates will not be
reduced by realized losses; however, under certain loss scenarios, there will
not be enough interest and principal on the mortgage loans to pay the senior
certificates all interest and principal amounts to which they are entitled.
Application of Realized Losses. If, on any distribution date after the
certificate principal balances of the certificates have been reduced by the
amount of cash paid on that date, the total certificate principal balance of the
certificates is greater than the total principal balance of the mortgage loans,
the certificate principal balance of the subordinated certificates that are
lowest in order of payment priority will be reduced by the amount of such
excess. Once the certificate principal balance of a class is reduced by realized
losses allocated to it, this balance will not be reinstated (except in the case
of subsequent recoveries). The certificate principal balances of the senior
certificates will not be reduced by these realized losses, although these
certificates may experience losses if the credit enhancements described in this
prospectus supplement are exhausted.
S-18
Cross-Collateralization. In certain circumstances payments on the mortgage loans
in one loan group may be used to make certain distributions to holders of senior
certificates relating to the other loan groups.
Interest Rate Swap Agreement
The trustee, on behalf of the trust, will enter into an interest rate swap
agreement with Bank of America, National Association, as swap provider. Under
the interest rate swap agreement, for any distribution date prior to and
including the distribution date in October 2011, the trust will be obligated to
make fixed payments to the swap provider equal to the product of (x) 5.02375%,
(y) the notional amount (as set forth in Appendix D) for such distribution date
and (z) a fraction, the numerator of which is 30 (or, for the first distribution
date, the number of days elapsed from the closing date to but excluding the
first distribution date on a 30/360 basis), and the denominator of which is 360.
During the same period, the swap provider will be obligated under the interest
rate swap agreement to make floating payments to the trust prior to each
distribution date equal to the product of (x) one-month LIBOR (as determined
pursuant to the interest rate swap agreement), (y) the notional amount (as set
forth on the table in Appendix D) for that distribution date and (z) a fraction,
the numerator of which is the actual number of days elapsed from the previous
distribution date to but excluding the current distribution date (or, for the
first distribution date, the actual number of days elapsed from the closing date
to but excluding the first distribution date), and the denominator of which is
360. To the extent that the fixed payment exceeds the floating payment with
respect to any distribution date, amounts otherwise available to
certificateholders will be applied to pay that excess to the swap provider, and
to the extent that the floating payment exceeds the fixed payment with respect
to any distribution date, the swap provider will pay that excess to the trustee
for deposit into a segregated trust account held by the trust established on the
closing date.
Upon early termination of the interest rate swap agreement, the trust or the
swap provider may be liable to make a swap termination payment to the other
party (regardless of which party caused the termination). The swap termination
payment will be computed in accordance with the procedures set forth in the
interest rate swap agreement. In the event that the trust is required to make a
swap termination payment, that payment will be paid on the business day prior to
the related distribution date, and, until paid in full, one business day prior
to any subsequent distribution dates, generally prior to any distribution to
certificateholders. See "Description of the Certificates--Interest Rate Swap
Agreement, the Swap Provider and the Swap Account" in this prospectus
supplement.
Net swap payments and swap termination payments payable by the trust (other than
swap termination payments resulting from a swap provider trigger event) will be
deducted first from the interest collections for a month and then from principal
collections for a month before distributions to certificateholders and will be
deposited into the swap account before payment, on a first priority basis, to
the swap provider.
Optional Termination
The NIMS Insurer, if any, will have the option to purchase all the mortgage
loans and any properties that the issuing entity acquired in satisfaction of any
of the mortgage loans, subject to certain conditions described under "The
Pooling and Servicing Agreement--Optional Termination" in this prospectus
supplement. If there is no NIMS Insurer, the majority holder of the Class CE
Certificates will have the option. If the majority holder of the Class CE
Certificates fails to exercise the option on the first possible date or is an
affiliate of the sponsor, the servicer will have the option. This option can be
exercised on any distribution date following the distribution date on which the
total principal balance of the mortgage loans, including the mortgage loans
related to REO properties, is 10% or less of the total principal balance of the
mortgage loans on the cut off date. Any such optional termination will be
permitted only pursuant to a "qualified liquidation" as defined in Section 860F
of the Internal Revenue Code of 1986, as amended. If the option is exercised,
your certificate will be retired earlier than it would be otherwise and you will
be entitled to the following amounts (to the extent that there is enough cash to
make such payments):
o the outstanding certificate principal balance of your certificate;
o one month's interest on this balance at the related certificate interest
rate;
o any interest previously earned but not paid; and
o any "cap carryover amount," as described in this prospectus supplement, from
all previous distribution dates.
S-19
See "The Pooling and Servicing Agreement--Optional Termination" in this
prospectus supplement.
Prepayment and Yield Considerations
The yields to maturity and weighted average lives of the offered certificates
will depend upon, among other things, the price at which such offered
certificates are purchased, the amount and timing of principal payments on the
applicable mortgage loans, the allocation of available funds to various classes
of offered certificates, the amount and timing of mortgagor delinquencies and
defaults on the applicable mortgage loans, the rate of liquidations and realized
losses and the allocation of realized losses to various classes of offered
certificates.
See "Yield, Prepayment and Maturity Considerations" in this prospectus
supplement.
Weighted Average Lives to Maturity (in years)(1)
- -----------------------------------------------------------------------------
Class ARM PPC 0% 50% 75% 100% 125% 150% 175%
----------------------------------------------------------------------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- -----------------------------------------------------------------------------
A-1 22.27 4.35 2.93 2.05 1.34 1.14 1.01
A-2 22.25 4.35 2.93 2.05 1.34 1.14 1.02
A-3A 18.15 1.71 1.24 1.00 0.83 0.71 0.62
A-3B 28.42 7.47 4.87 3.19 2.02 1.74 1.55
A-3C 29.78 23.09 15.81 11.52 2.71 2.03 1.95
M-1 28.04 5.22 3.57 3.93 3.99 3.18 2.58
M-2 29.74 8.91 5.83 4.71 5.54 4.25 3.56
M-3 29.78 16.33 10.85 7.85 8.10 6.30 5.19
M-4 29.05 8.96 5.93 4.72 4.26 3.17 2.78
M-5 29.05 8.94 5.91 4.65 4.10 3.06 2.68
M-6 29.05 8.90 5.89 4.59 3.97 2.97 2.59
M-7 29.05 8.85 5.85 4.54 3.87 2.89 2.53
M-8 29.05 8.79 5.80 4.47 3.77 2.83 2.48
M-9 29.05 8.70 5.73 4.41 3.69 2.77 2.41
(1) Determined as described under "Yield, Prepayment and Maturity
Considerations" in this prospectus supplement.
Weighted Average Lives to Optional Termination (in years)(1)(2)
-----------------------------------------------------------------------------
Class ARM PPC 0% 50% 75% 100% 125% 150% 175%
----------------------------------------------------------------------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
-----------------------------------------------------------------------------
A-1 22.27 4.04 2.71 1.89 1.34 1.14 1.01
A-2 22.25 4.04 2.71 1.89 1.34 1.14 1.02
A-3A 18.15 1.71 1.24 1.00 0.83 0.71 0.62
A-3B 28.42 7.07 4.61 3.00 2.02 1.74 1.55
A-3C 29.78 12.36 8.11 5.86 2.71 2.03 1.95
M-1 28.04 5.22 3.57 3.93 3.96 3.14 2.56
M-2 29.74 8.91 5.83 4.71 4.45 3.36 2.86
M-3 29.78 12.35 8.10 5.85 4.45 3.36 2.86
M-4 29.05 8.15 5.38 4.32 3.95 2.92 2.58
M-5 29.05 8.15 5.38 4.26 3.80 2.82 2.49
M-6 29.05 8.15 5.38 4.22 3.68 2.74 2.41
M-7 29.05 8.15 5.37 4.19 3.60 2.68 2.36
M-8 29.05 8.15 5.37 4.16 3.53 2.63 2.33
M-9 29.05 8.15 5.37 4.14 3.49 2.60 2.28
(1) Determined as described under "Yield, Prepayment and Maturity
Considerations" in this prospectus supplement.
(2) Assumes an optional purchase of the mortgage loans on the earliest
distribution date on which it is permitted.
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Federal Income Tax Consequences
Elections will be made to treat the assets of the trust (exclusive of the
arrangements intended to protect against basis risk for certain of the
certificates, the interest rate swap agreement, the swap account, the cap
carryover reserve account and prepayment charges) as comprised of multiple real
estate mortgage investment conduits in a tiered structure for federal income tax
purposes.
The offered certificates will represent (i) regular interests in a REMIC, which
will be treated as debt instruments of a REMIC, and (ii) interests in certain
cap carryover amounts and the right to receive payments from and the obligation
to make payments to the swap account. Each interest in cap carryover amounts and
the right to receive payments from and the obligation to make payments to the
swap account will be treated as notional principal contracts for federal income
tax purposes.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Federal Income Tax Consequences" in
this prospectus supplement and in the prospectus.
Legal Investment
You are encouraged to consult with counsel to see if you are permitted to buy
the offered certificates, since legal investment rules will vary depending on
the type of entity purchasing the offered certificates, whether that entity is
subject to regulatory authority, and if so, by whom. The senior certificates and
the Class M-1, Class M-2 and Class M-3 certificates will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended, so long as they are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
agency. The Class M-4, Class M-5, Class M-6, Class M-7, Class M-8 and Class M-9
certificates will not constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984, as amended. See "Legal
Investment" in this prospectus supplement and in the prospectus.
ERISA Considerations
If you are a fiduciary of any employee benefit plan or other retirement
arrangement subject to the Employee Retirement Income Security Act of 1974, as
amended, or Section 4975 of the Internal Revenue Code of 1986 or any materially
similar provisions of applicable federal, state or local law, you are encouraged
to consult with counsel as to whether you can buy or hold an offered
certificate.
Subject to the considerations and conditions described under "ERISA
Considerations" in this prospectus supplement, it is expected that the senior
certificates may be purchased by a pension or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended, or
Section 4975 of the Internal Revenue Code of 1986, as amended. Prior to the
termination of the interest rate swap agreement, plans or persons using assets
of a plan may only purchase the senior certificates if the purchase and holding
of such certificates also meets the requirements of an investor-based class
exemption issued by the Department of Labor. A fiduciary of an employee benefit
plan must determine that the purchase of a certificate is consistent with its
fiduciary duties under applicable law and does not result in a prohibited
transaction under applicable law. The 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 swap provider,
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.
S-21
RISK FACTORS
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.
There are risks involving unpredictability of prepayments and the effect of
prepayments on yields
The rate of principal payments, the aggregate amount of distributions and
the yields to maturity of the offered certificates will be related to the rate
and timing of payments of principal on the applicable mortgage loans. The rate
of principal payments on the mortgage loans will in turn be affected by the
amortization schedules of the mortgage loans and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancings,
liquidations of the mortgage loans due to defaults, casualties or condemnations
and repurchases by the sponsor, the originator or the servicer). Mortgagors may
prepay their mortgage loans in whole or in part at any time. We cannot predict
the rate at which mortgagors will repay their mortgage loans. A prepayment of a
mortgage loan generally will result in a prepayment of the certificates.
o If you purchase your certificates at a discount and principal is repaid
more slowly than you anticipate, then your yield may be lower than you
anticipate.
o If you purchase your certificates at a premium and principal is repaid
faster than you anticipate, then your yield may be lower than you
anticipate.
o The rate of prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, if prevailing interest rates decline
significantly below the interest rates on the fixed-rate mortgage loans,
those mortgage loans are more likely to prepay than if prevailing rates
remain above the interest rates on such mortgage loans. Conversely, if
prevailing interest rates rise significantly, the prepayments on
fixed-rate mortgage loans are likely to decrease. The prepayment behavior
of the adjustable-rate mortgage loans and of the fixed-rate mortgage loans
may respond to different factors, or may respond differently to the same
factors. If at the time of their first adjustment, the interest rates on
any of the adjustable-rate mortgage loans would be subject to adjustment
to a rate higher than the then prevailing mortgage interest rates
available to the related borrowers, such borrowers may prepay their
adjustable-rate mortgage loans. Adjustable-rate mortgage loans may also
suffer an increase in defaults and liquidations following upward
adjustments of their interest rates, especially following their initial
adjustments.
o The rate of prepayments on pools of mortgage loans may vary significantly
over time and may be influenced by a variety of economic, geographic and
other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions.
o As of the cut-off date, certain of the mortgage loans required the
mortgagor to pay a charge if the mortgagor prepays the mortgage loan
during periods ranging, in substantially all cases, from one year to three
years after the mortgage loan was originated. See the mortgage loan tables
under "Summary of Prospectus Supplement" in this prospectus supplement for
the percentages of the mortgage loans in each loan group and the mortgage
pool that require the mortgagor to pay a prepayment charge. A prepayment
charge may discourage a mortgagor from prepaying the mortgage loan during
the applicable period. Such prepayment charges will be distributed to
holders of the Class P Certificates and not to holders of the offered
certificates. The servicer is entitled to waive prepayment charges,
subject to certain conditions specified in the prospectus under
"Description of the Agreements--Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements--Collection and
Other Servicing Procedures."
o The originator and the sponsor may be required to purchase mortgage loans
from the trust in the event certain breaches of representations and
warranties have not been cured. In addition, certain parties have the
option to purchase mortgage loans from the trust that are at least 90 days
delinquent under the
S-22
circumstances described under "The Pooling and Servicing
Agreement--Optional Purchase of Defaulted Mortgage Loans" in this
prospectus supplement and the option to purchase all of the mortgage loans
and REO properties in the trust and thereby effect the early retirement of
the certificates under the circumstances set forth under "The Pooling and
Servicing Agreement--Optional Termination" in this prospectus supplement.
In addition, Option One Mortgage Corporation generally will be required to
repurchase from the trust certain mortgage loans for which the first
scheduled monthly payment due after their purchase by the sponsor becomes
45 or more days delinquent. These purchases will have the same effect on
the holders of the offered certificates as a prepayment of the mortgage
loans.
o The servicer will generally enforce due-on-sale clauses contained in the
mortgage notes in connection with transfers of mortgaged properties.
o If the rate of default and the amount of losses on the mortgage loans are
higher than you expect, then your yield may be lower than you expect.
o If the level of overcollateralization falls below the targeted
overcollateralization amount for a distribution date, excess interest and,
in certain situations, net swap payments will be paid to the certificates
as principal. This will have the effect of reducing the total certificate
principal balance of the certificates faster than the principal balance of
the mortgage loans until the required level of overcollateralization is
reached.
Adjustable rate mortgage loan borrowers may be more likely to prepay
Mortgage interest rates on the adjustable-rate mortgage loans at any time
may not equal the prevailing mortgage interest rates for similar adjustable-rate
mortgage loans, and accordingly the prepayment rate may be lower or higher than
would otherwise be anticipated. Moreover, some mortgagors who prefer the
certainty provided by fixed-rate mortgage loans may nevertheless obtain
adjustable-rate mortgage loans at a time when they regard the mortgage interest
rates (and, therefore, the payments) on fixed-rate mortgage loans as
unacceptably high. These mortgagors may be induced to refinance adjustable-rate
mortgage loans when the mortgage interest rates and monthly payments on
comparable fixed-rate mortgage loans decline to levels which these mortgagors
regard as acceptable, even though these mortgage interest rates and monthly
payments may be significantly higher than the current mortgage interest rates
and monthly payments on the mortgagors' adjustable-rate mortgage loans. The
ability to refinance a mortgage loan will depend on a number of factors
prevailing at the time refinancing is desired, such as, among other things, real
estate values, the mortgagor's financial situation, prevailing mortgage interest
rates, the mortgagor's equity in the related mortgaged property, tax laws and
prevailing general economic conditions.
There is a risk that interest payments on the mortgage loans may be insufficient
to maintain overcollateralization
Because the weighted average of the interest rates on the mortgage loans
is expected to be higher than the weighted average of the certificate interest
rates on the certificates, the mortgage loans are expected to generate more
interest than is needed to pay interest owed on the certificates as well as
certain fees and expenses of the trust (including any net swap payment owed to
the swap provider and any swap termination payment owed to the swap provider,
other than a swap termination payment resulting from a swap provider trigger
event). After these financial obligations of the trust are covered, the
available excess interest will be used to maintain overcollateralization. Any
remaining interest will then be used to compensate for losses that occur on the
mortgage loans. We cannot assure you, however, that enough excess interest will
be generated to maintain the overcollateralization level required by the rating
agencies. The factors described below, as well as the factors described in the
next Risk Factor, will affect the amount of excess interest that the mortgage
loans will generate:
o When a mortgage loan is prepaid in full or repurchased, excess interest
will generally be reduced because the mortgage loan will no longer be
outstanding and generating interest or, in the case of a partial
prepayment, will be generating less interest.
S-23
o Every time a mortgage loan is liquidated or written off, excess interest
will be reduced because that mortgage loan will no longer be outstanding
and generating interest.
o If the rates of delinquencies, defaults or losses on the mortgage loans
are higher than expected, excess interest will be reduced by the amount
necessary to compensate for any shortfalls in cash available on a
distribution date to pay certificateholders.
o The certificate interest rates of the offered certificates are based on
one-month LIBOR while the adjustable-rate mortgage loans have rates that
are adjustable based on six-month LIBOR and the fixed-rate mortgage loans
have rates that do not adjust. As a result, the certificate interest rates
on the offered certificates may increase relative to interest rates on the
mortgage loans, thus requiring that more of the interest generated by the
mortgage loans be applied to cover interest on the offered certificates.
Effects of mortgage interest rates and other factors on the certificate interest
rates of the offered certificates
The yields to maturity on the offered certificates may be affected by the
inclusion of fixed-rate mortgage loans and the resetting of the mortgage
interest rates on the adjustable-rate mortgage loans on their related adjustment
dates due to the factors set forth below. The mortgage interest rates on the
fixed-rate mortgage loans are fixed and will not vary with any index and the
mortgage interest rates on the adjustable-rate mortgage loans are based on six
month LIBOR and do not adjust for periods ranging from two to fifteen years
after the dates of their origination, while the certificate interest rates on
the offered certificates are based on one-month LIBOR, are subject to the
applicable maximum rate cap and the applicable cap, and are adjusted monthly.
This mismatch of indices and adjustment frequency may cause the one-month
LIBOR-based certificate interest rates on the offered certificates to increase
relative to the mortgage interest rates on the mortgage loans, which would
require a greater portion of the interest generated by the mortgage loans to be
applied to cover interest accrued on the offered certificates, and could result
in the limitation of the certificate interest rates on some or all of the
offered certificates by the related group cap or the pool cap, as applicable,
and could therefore adversely affect the yield to maturity on such certificates.
The group caps are equal to the weighted average of the interest rates on the
mortgage loans in the related loan group, net of certain expenses of the trust
(including any net swap payment owed to the swap provider and any swap
termination payment owed to the swap provider, other than a swap termination
payment due to a swap termination trigger event). The pool cap is equal to the
weighted average of the group caps, weighted on the basis of the group
subordinate amount for each loan group. In addition, you should note that the
group caps and the pool cap will decrease if the related mortgage loans, in the
case of the group caps, or all the mortgage loans, in the case of the pool cap,
with relatively high mortgage interest rates prepay at a faster rate than the
other mortgage loans in the group or the pool, as applicable, with relatively
low mortgage interest rates, which will increase the likelihood that the group
caps or the pool cap will apply to limit the certificate interest rates on one
or more classes of the offered certificates.
If the certificate interest rate on any class of the offered certificates
is limited by a group cap or the pool cap for any distribution date, the
resulting cap carryover amounts may be recovered by the holders of such classes
of certificates on that same distribution date or on future distribution dates,
to the extent that on that distribution date or future distribution dates there
are any available funds remaining after certain other distributions on the
offered certificates and the Class B Certificates and the payment of certain
fees and expenses of the trust (including any net swap payment owed to the swap
provider and any swap termination payment owed to the swap provider, other than
a swap termination payment due to a swap termination trigger event). You should
note, however, that if the pass-through rate on any class of offered
certificates is based on the applicable maximum rate cap, the amount of cap
carryover will be less during such period on those certificates than if the
pass-through rate were based on one-month LIBOR plus the applicable margin. The
ratings on the offered certificates will not address the likelihood of any such
recovery of cap carryover amounts by holders of such certificates.
Amounts distributed on the offered certificates in respect of such
shortfalls may be supplemented by net payments received from the swap provider
under the interest rate swap agreement, to the extent that the floating payment
payable by the swap provider exceeds the fixed payment payable by the trust on
any distribution date, and such amount is available in the priorities described
in this prospectus supplement. However, the amount received from the swap
provider under the interest rate swap agreement may be insufficient to pay
holders of the applicable certificates the full amount of interest which they
would have received absent the limitations of the related cap.
S-24
There are risks relating to alternatives to foreclosure
Certain mortgage loans may become delinquent after the closing date. The
servicer may either foreclose on any such mortgage loan or work out an agreement
with the mortgagor if the delinquency is not cured, which may involve waiving or
modifying certain terms of the mortgage loan. If the servicer extends the
payment period or accepts a lesser amount than stated in the mortgage note in
satisfaction of the mortgage note, your yield may be reduced.
Nature of sub-prime mortgage loans may increase risk of loss
Substantially all of the mortgage loans are of sub-prime credit quality;
i.e., do not meet the customary credit standards of Fannie Mae and Freddie Mac.
The originator makes sub-prime mortgage loans to borrowers that typically have
limited access to traditional mortgage financing for a variety of reasons,
including impaired or limited past credit history, lower credit scores, high
loan-to-value ratios or high debt-to-income ratios. As a result of these
factors, delinquencies and liquidation proceedings are more likely with these
mortgage loans than with mortgage loans that satisfy customary credit standards.
In the event the mortgage loans in the mortgage pool do become delinquent or
subject to liquidation, you may face delays in receiving payment and may suffer
losses if the credit enhancements are insufficient to cover the delays and
losses.
High loan-to-value ratios increase risk of loss
Mortgage loans with high loan-to-value ratios leave the mortgagor with
little to no equity in the related mortgaged property. Substantially all of the
mortgage loans have loan-to-value ratios greater than 90.00% and approximately
0.29% of the mortgage loans (by aggregate principal balance outstanding as of
the cut-off date) have loan-to-value ratios greater than 100.00%. See the
mortgage loan tables in Appendix A to this prospectus supplement for information
regarding the loan-to-value ratios of the mortgage loans. No mortgage loan had a
loan-to-value ratio exceeding 103.00% as of the cut-off date. An overall decline
in the residential real estate market, a rise in interest rates over a period of
time and the general condition of a mortgaged property, as well as other
factors, may have the effect of reducing the value of such mortgaged property
from the appraised value at the time the mortgage loan was originated. If there
is a reduction in value of the mortgaged property, the loan-to-value ratio may
increase over what it was at the time of origination. Such an increase may
reduce the likelihood that liquidation proceeds or other proceeds will be
sufficient to pay off the mortgage loan fully. There can be no assurance that
the loan-to-value ratio of any mortgage loan determined at any time after
origination is less than or equal to its original loan-to-value ratio.
Additionally, the originator's determination of the value of a mortgaged
property used in the calculation of the loan-to-value ratios of the mortgage
loans may differ from the appraised value of such mortgaged property or the
actual value of such mortgaged property.
The interest rate swap agreement is subject to counterparty risk
The assets of the trust include the interest rate swap agreement which
will require the swap provider to make certain payments in the circumstances set
forth herein under "Description of the Certificates--Interest Rate Swap
Agreement, the Swap Provider and the Swap Account." To the extent that payments
on the certificates depend in part on payments to be received by the trustee
under the interest rate swap agreement, the ability of the issuing entity to
make payments on the certificates will be subject to the credit risk of the swap
provider.
There is no assurance that amounts will be received under the interest rate swap
agreement
Any amounts received from the swap provider under the interest rate swap
agreement will be applied as described in this prospectus supplement to pay
interest and basis risk shortfalls, to maintain overcollateralization and to pay
unpaid realized loss amounts. However, no amounts will be payable by the swap
provider unless the floating amount owed by the swap provider with respect to a
distribution date exceeds the fixed amount owed to the swap provider with
respect to that distribution date. This will only occur in periods when
one-month LIBOR (as determined pursuant to the interest rate swap agreement)
exceeds 5.02375%. No assurance can be made that any amounts will be received
under the interest rate swap agreement, or that any such amounts that are
received will be sufficient to cover interest shortfalls arising from the
operation of the group caps or the pool cap, to maintain required
overcollateralization or to pay realized losses.
S-25
In addition, to the extent that distributions on the offered certificates
depend in part on payments to be received by the trust under the interest rate
swap agreement, the ability of the trustee to make such distributions will be
subject to the credit risk of the swap provider under the interest rate swap
agreement. The credit ratings of the swap provider are lower than the ratings
assigned to the senior certificates. There can also be no assurance that in the
event of an early termination of the interest rate swap agreement, the depositor
will be able to obtain a replacement interest rate swap agreement. See
"Description of the Certificates--Interest Rate Swap Agreement, the Swap
Provider and the Swap Account" in this prospectus supplement.
The credit rating of the swap provider could affect the rating of the offered
certificates
The swap provider has, as of the date of this prospectus supplement, a
long-term debt rating of "Aa1" from Moody's Investors Service, Inc. and "AA-"
from Fitch Ratings. The ratings on the offered certificates are dependent in
part on the credit ratings of the swap provider. If a credit rating of the swap
provider is qualified, reduced or withdrawn and an arrangement satisfactory to
rating agencies is not obtained in accordance with the terms of the interest
rate swap agreement, the ratings on the offered certificates may be qualified,
reduced or withdrawn. As a result, the value and marketability of the offered
certificates may be adversely affected. See "Description of the
Certificates--Interest Rate Swap Agreement, the Swap Provider and the Swap
Account" in this prospectus supplement.
Payments due to swap provider may result in losses on certificates
Any net payment payable to the swap provider under the terms of the
interest rate swap agreement will reduce amounts available for distribution to
certificateholders, and may reduce the certificate interest rates of the
certificates. If the rate of prepayment on the mortgage loans is faster than
anticipated, the schedule on which payments due under the interest rate swap
agreement are calculated may exceed the aggregate principal balance of the
mortgage loans, thereby increasing the relative proportion of interest
collections on the mortgage loans that must be applied to make net payments to
the swap provider. The combination of a rapid rate of prepayment and low
prevailing interest rates could adversely affect the yields on the offered
certificates. In addition, any termination payment payable to the swap provider
(other than a termination payment resulting from a swap provider trigger event)
in the event of early termination of the interest rate swap agreement will
reduce amounts available for distribution to certificateholders.
Upon early termination of the interest rate swap agreement, the trust or
the swap provider may be liable to make a swap termination payment to the other
party (regardless of which party caused the termination). The swap termination
payment will be computed in accordance with the procedures set forth in the
interest rate swap agreement. In the event that the trust is required to make a
swap termination payment, that payment will be paid prior to the related
distribution date, and, until paid in full, prior to any subsequent distribution
dates, generally prior to any distribution to certificateholders. This feature
may result in losses on the certificates. Due to the priority of distributions,
the subordinated certificates will bear the effects of any shortfalls resulting
from a net swap payment or swap termination payment by the trust before such
effects are borne by the senior certificates and one or more classes of
subordinated certificates may suffer a loss as a result of such payment.
Some of the mortgage loans have an initial interest only period, which may
result in increased delinquencies and losses or rates of prepayment
Some of the mortgage loans do not require any scheduled payments of
principal during their initial interest only period, but require scheduled
payments of interest only during this time. See the mortgage loan tables under
"Summary of Prospectus Supplement" in this prospectus supplement for the
percentages of the mortgage loans in each loan group and the mortgage pool that
are interest only mortgage loans. During this 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 an interest only
mortgage loan will be recalculated to amortize fully its unpaid principal
balance over its remaining life and the mortgagor will be required to make
S-26
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 under the related mortgage loan. This increase in the mortgagor's
scheduled monthly payment will occur when the mortgagor's monthly interest
payment may also be increasing as a result of an increase in the mortgage
interest rate on an adjustment date. In underwriting interest only mortgage
loans, the originator 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. Losses, to the extent not covered by
credit enhancement, will be allocated to the certificates.
The performance of mortgage loans with an initial 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.
The rate of default on mortgage loans that are secured by investor properties
may be higher than on other mortgage loans.
Certain of the mortgage loans are expected to be secured by investor
properties. See the mortgage loan tables under "Summary of Prospectus
Supplement" in this prospectus supplement for the percentages of the mortgage
loans in each loan group and the mortgage pool that are secured by investor
properties. 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.
Balloon mortgage loans increase the risk of loss
Certain of the mortgage loans are expected to be balloon mortgage loans.
See the mortgage loan tables under "Summary of Prospectus Supplement" in this
prospectus supplement for the percentages of the mortgage loans in each loan
group and the mortgage pool that are balloon mortgage loans. Balloon mortgage
loans require a mortgagor to make a large scheduled lump sum payment of
principal at the end of the loan term. If the mortgagor is unable to pay the
lump sum or refinance such amount, you may suffer a loss. In addition, the
servicer will not advance the unpaid principal balance remaining at maturity of
a balloon mortgage loan.
There are risks relating to simultaneous second mortgage loans
Certain of the mortgage loans may have been originated by the originator
simultaneously with a second lien mortgage loan. See the mortgage loan tables
under "Summary of Prospectus Supplement" in this prospectus supplement for the
percentages of the mortgage loans in each loan group and the mortgage pool that
have been originated by the originator simultaneously with a second lien
mortgage loan. These second lien mortgage loans may or may not be included in
the trust. With respect to mortgage loans that have junior lien mortgage loans
encumbering the same mortgaged property, foreclosure frequency may be increased
relative to mortgage loans that do not have subordinate financing behind them
because mortgagors have less equity in the mortgaged property. Further, the
servicer may declare a default on the junior lien loan even though the first
lien loan is current, which would constitute a default on the first lien loan.
In addition to the mortgage loans discussed above that have simultaneous
subordinate financing provided by the originator, with respect to certain other
mortgage loans, at the time of origination of the first lien mortgage loan, the
related mortgaged property was also encumbered by a second lien mortgage to a
mortgagee other than the originator. Investors should also note that any
mortgagor may obtain subordinate financing at any time subsequent to the date of
origination of their mortgage loan from the originator or from any other lender.
S-27
There are risks relating to geographic concentration of the mortgage loans
The following chart lists the states with the highest concentrations of
mortgage loans for each loan group and in the mortgage pool, based on the
aggregate principal balance of the mortgage loans in each loan group and the
mortgage pool as of the cut off date.
Loan Group 1 Loan Group 2 Loan Group 3 Mortgage Pool
- ----------------------------- ---------------------------- --------------------------- ------------------------------
California 12.23% California 12.54% California 37.03% California 28.17%
Florida 11.62% Massachusetts 9.25% New York 9.05% Florida 8.14%
Massachusetts 5.45% Florida 7.64% Florida 7.31% New York 7.18%
Michigan 5.43% Texas 5.88% Massachusetts 5.75%
California, Florida and several other states have experienced natural
disasters, such as earthquakes, fires, floods and hurricanes, which may not be
fully insured against and which may result in property damage and losses on the
mortgage loans.
In addition, the conditions below will have a disproportionate impact on
the mortgage loans in general:
o Economic conditions in states listed above which may or may not affect
real property values may affect the ability of mortgagors to repay their
loans on time.
o Declines in the residential real estate markets in the states listed above
may reduce the values of properties located in those states, which would
result in an increase in the loan-to-value ratios.
o Any increase in the market value of properties located in the states
listed above would reduce the loan-to-value ratios and could, therefore,
make alternative sources of financing available to the mortgagors at lower
interest rates, which could result in an increased rate of prepayment of
the mortgage loans.
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 of the mortgage loans 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 any 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.
Credit scores may not accurately predict the likelihood of default
The originator generally uses credit scores as part of its underwriting
process. The tables in Appendix A show credit scores for the mortgagors of the
mortgage loans 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
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consumer loans in general. Therefore, credit scores do not address particular
mortgage loan characteristics that influence the probability of repayment by the
borrower. None of the depositor, the sponsor or the originator 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.
The recording of the mortgages in the name of MERS may affect the yield on your
certificates
The mortgages or assignments of mortgage for some of the mortgage loans
have been recorded in the name of Mortgage Electronic Registration Systems,
Inc., or MERS, solely as nominee for the originator and its successors and
assigns, including the trust. Subsequent assignments of those mortgages are
registered electronically through the MERS system. However, if MERS discontinues
the MERS system and it becomes necessary to record an assignment of mortgage to
the trustee, any related expenses will be paid by the trust and will reduce the
amount available to make distributions on the certificates.
The recording of mortgages in the name of MERS is a relatively new
practice in the mortgage lending industry. Public recording officers and others
may have limited, if any, experience with lenders seeking to foreclose
mortgages, assignments of which are registered with MERS. Accordingly, delays
and additional costs in commencing, prosecuting and completing foreclosure
proceedings and conducting foreclosure sales of the mortgaged properties could
result. Those delays and the additional costs could in turn delay the
distribution of liquidation proceeds to certificateholders and increase the
amount of losses on the mortgage loans. In that regard, a Florida court recently
ruled that MERS lacked standing to pursue foreclosure proceedings on behalf of
the beneficial owners of several mortgage notes who were not named parties to
the proceedings.
There are risks in holding subordinated certificates
The protections afforded the senior certificates in this transaction
create risks for the subordinated certificates. Prior to any purchase of any
subordinated certificates, consider the following factors that may adversely
impact your yield:
o Because the subordinated certificates receive interest and principal
distributions after the senior certificates receive such distributions,
there is a greater likelihood that the subordinated certificates will not
receive the distributions to which they are entitled on any distribution
date.
o If the servicer determines not to advance a delinquent payment on a
mortgage loan because such amount is not recoverable from a mortgagor,
there may be a shortfall in distributions on the certificates which will
impact the subordinated certificates.
o The portion of the shortfalls in the amount of interest collections on
mortgage loans that are attributable to prepayments in full and are not
covered by the servicer and shortfalls in interest collections arising
from the timing of partial principal prepayments may result in a shortfall
in distributions on the certificates, which will disproportionately impact
the subordinated certificates.
o The subordinated certificates are not expected to receive principal
distributions until, at the earliest, November 2009 (unless the senior
certificates are reduced to zero prior to such date) or such later date as
provided in this prospectus supplement. As a result, the weighted average
lives of such certificates will be longer than would be the case if
distributions of principal were allocated among all of the certificates at
the same time. As a result of the longer weighted average lives of the
subordinated certificates, the holders of such certificates have a greater
risk of suffering losses on their investments.
o Because the sequential mezzanine certificates receive principal
distributions sequentially after the stepdown date, the weighted average
lives of the more subordinate sequential mezzanine certificates will be
longer than if these principal distributions were made to the sequential
mezzanine certificates in a pro rata fashion. As a result of the longer
weighted average lives of the more subordinate sequential mezzanine
certificates, the holders of such certificates have a greater risk of
suffering losses on their investments.
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o Losses resulting from the liquidation of defaulted mortgage loans will
first reduce monthly excess cashflow and then reduce the level of
overcollateralization, if any, for the certificates. Realized losses on
the mortgage loans, to the extent they exceed the amount of excess
interest and overcollateralization following distributions of principal on
the related distribution date and any net swap payments received under the
interest rate swap agreement will be allocated to the subordinated
certificates in reverse order of payment priority. No principal or
interest will be distributable on the amount by which the certificate
principal balance of a class has been reduced by a realized loss allocated
to a subordinated certificate (except where a certificate principal
balance has been increased by a subsequent recovery). A loss allocation
results in a reduction in a certificate balance without a corresponding
distribution of cash to the holder. A lower certificate balance will
result in less interest accruing on the certificate.
o The earlier in the transaction that a loss on a mortgage loan occurs, the
greater the impact on yield.
See "Description of the Certificates" and "Yield, Prepayment and Maturity
Considerations" in this prospectus supplement for more detail.
Decrement tables are based upon assumptions and models
The decrement tables set forth in Appendix B have been prepared on the
basis of the modeling assumptions described under "Yield, Prepayment and
Maturity Considerations--Weighted Average Lives." 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 original certificate principal balances 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 certificate principal balance of a class
of offered certificates could be reduced to zero earlier or later than indicated
by the decrement tables.
The rights of the NIMS Insurer could adversely affect the offered certificates
After the closing date, a separate entity may be established to issue net
interest margin securities secured by all or a portion of the Class CE and Class
P Certificates. A NIMS Insurer may issue a financial guaranty insurance policy
that guarantees payments on those securities. If the net interest margin
securities are so insured, the NIMS Insurer will have a number of rights under
the pooling and servicing agreement that could adversely affect
certificateholders. Pursuant to the pooling and servicing agreement, unless the
NIMS Insurer fails to make a required payment under the policy insuring the net
interest margin securities or the NIMS Insurer is the subject of a bankruptcy
proceeding, the NIMS Insurer will be entitled to exercise, among others, the
following rights of the holders of the offered certificates, without their
consent, and the holders of the offered certificates will be able to exercise
such rights only with the prior written consent of the NIMS Insurer. Rights of
the NIMS Insurer under the pooling and servicing agreement may include, but are
not limited to, the following:
o the right to direct the trustee to terminate the rights and obligations of
the servicer under the pooling and servicing agreement upon a default by
the servicer;
o the right to remove the trustee or any co-trustee pursuant to the pooling
and servicing agreement for failure of such party to perform its
obligations thereunder;
o the right to direct the trustee to make investigations and take actions
pursuant to the pooling and servicing agreement;
o the right to purchase all of the mortgage loans and REO properties in the
trust fund and thereby effect the early retirement of the certificates
under the circumstances set forth under "The Pooling and Servicing
Agreement--Optional Termination" in this prospectus supplement; and
o the right to purchase mortgage loans delinquent in payment 90 days or more
under the circumstances set forth under "The Pooling and Servicing
Agreement--Optional Purchase of Defaulted Mortgage Loans."
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In addition, unless the NIMS Insurer fails to make a required payment
under the policy insuring the net interest margin securities or the NIMS Insurer
is the subject of a bankruptcy proceeding, the NIMS Insurer's consent will be
required before, among other things,
o the appointment of any co-trustee;
o any otherwise permissible waivers of prepayment charges or extensions of
due dates for payment granted by the servicer with respect to more than 5%
of the number of mortgage loans; or
o any amendment to the pooling and servicing agreement.
Investors in the offered certificates should note that:
o any insurance policy issued by the NIMS Insurer will not cover, and will
not benefit in any manner whatsoever the offered certificates;
o the rights granted to the NIMS Insurer are extensive;
o the interests of the NIMS Insurer may be inconsistent with, and adverse to
the interests of the holders of the offered certificates and the NIMS
Insurer has no obligation or duty to consider the interests of the offered
certificates in connection with the exercise or nonexercise of the NIMS
Insurer's rights; and
o the NIMS Insurer's exercise of its rights and consents may negatively
affect the offered certificates and the existence of the NIMS Insurer's
rights, whether or not exercised, may adversely affect the liquidity of
the offered certificates, relative to other asset-backed certificates
backed by comparable mortgage loans and with comparable payment priorities
and ratings.
United States military operations may increase risk of shortfalls in interest
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. Substantially all of the mortgage loans have
mortgage interest rates which exceed such limitation, if applicable. This may
result in interest shortfalls on the mortgage loans, which, in turn, will be
allocated ratably in reduction of accrued interest on all classes of
interest-bearing certificates, irrespective of the availability of excess cash
flow or other credit enhancement. None of the originator, the depositor, the
underwriter, the sponsor, the servicer or any other party has taken any action
to determine whether any of the mortgage loans would be affected by such
interest rate limitation. See "Description of the Certificates--Interest
Distributions" in this prospectus supplement and "Certain Legal Aspects of the
Mortgage Loans--Servicemembers Civil Relief Act" in the prospectus.
THE MORTGAGE POOL
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 included in the Mortgage Pool as of the close of business on the Cut-off
Date. The Principal Balances of the Mortgage Loans shown have been adjusted for
the scheduled principal payments due on or before the Cut-off Date (each, a "Cut
off Date Principal Balance").
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 Principal Balance of the
Mortgage Loans in the loan
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group as of the Cut-off Date and references below to percentages of all Mortgage
Loans are approximate percentages of the aggregate Principal Balance of the
Mortgage Loans in all loan groups as of the Cut-off Date.
General
The assets included in the Trust will consist primarily of a pool (the
"Mortgage Pool") of closed-end, fixed-rate and adjustable-rate sub-prime
mortgage loans (the "Mortgage Loans"). The "Principal Balance" of a Mortgage
Loan, as of any date, is equal to the principal balance of such Mortgage Loan as
of the related Cut-off Date, less the sum of (i) all collections and other
amounts credited against the principal balance of any such Mortgage Loan, (ii)
the principal portion of Advances, (iii) any Deficient Valuation and (iv) any
principal reduction resulting from a Servicer Modification. The "Pool Balance"
is equal to the aggregate of the Principal Balances of the Mortgage Loans in all
loan groups as of any date of determination.
The Mortgage Pool will consist of fixed-rate Mortgage-Loans (the
"Fixed-Rate Mortgage Loans") and adjustable-rate Mortgage Loans (the
"Adjustable-Rate Mortgage Loans"). All of the Mortgage Loans that are
Adjustable-Rate Mortgage Loans have an initial fixed mortgage interest rate for
two years, three years, five years or fifteen years.
The Mortgage Loans are secured by mortgages, deeds of trust or other
similar security instruments (each, a "Mortgage") which create a first lien on
one- to four-family residential properties consisting of one- to four-family
dwelling units and individual condominium units (each, a "Mortgaged Property").
Substantially all of the Mortgage Loans have scheduled Monthly Payments due on
the first day of the month (the day such Monthly Payments are due with respect
to each Mortgage Loan, a "Due Date"). Each Mortgage Loan accrues interest at a
per annum rate (the "Mortgage Interest Rate") specified in the related mortgage
note.
Certain of the Mortgage Loans will provide for interest only Monthly
Payments for the first 60 months of the term of such Mortgage Loans (each, an
"Interest Only Mortgage Loan"). See "Summary of Prospectus Supplement --The
Mortgage Pool" for the percentages of the Mortgage Loans that are Interest Only
Mortgage Loans in each loan group and the Mortgage Pool. The Monthly Payments
for the Mortgage Loans that are Interest Only Mortgage Loans will include
accrued interest and principal on these Mortgage Loans beginning in the 61st
month of the term of these Mortgage Loans. As a result of this payment
structure, Monthly Payments beginning in the 61st month of the term of such
Mortgage Loans may be significantly larger than the first 60 Monthly Payments
required under the related mortgage notes.
Certain of the Mortgage Loans provide for payment by the mortgagor of a
prepayment charge in limited circumstances on certain prepayments. See "Summary
of Prospectus Supplement --The Mortgage Pool" for the percentages of the
Mortgage Loans in each loan group and the Mortgage Pool that provide for the
payment of a prepayment charge. No such prepayment charge will be distributed to
the holders of the Offered Certificates.
The Mortgage Pool has been divided into three loan groups as described
under "Summary of Prospectus Supplement --The Mortgage Pool."
All of the Adjustable-Rate Mortgage Loans provide for semi-annual
adjustment to the Mortgage Interest Rate thereon and for corresponding
adjustments to the Monthly Payment amount due thereon, in each case on each
adjustment date applicable thereto (each such date, an "Adjustment Date"). On
each Adjustment Date for each Adjustable-Rate Mortgage Loan, the Mortgage
Interest Rate thereon will be adjusted to equal the sum of Six-Month LIBOR (the
"Index") and a fixed percentage amount (the "Gross Margin"). The Mortgage
Interest Rate on each such Adjustable-Rate Mortgage Loan will not increase or
decrease by more than a percentage specified in the related mortgage note on the
first related Adjustment Date (the "Initial Periodic Rate Cap") and a percentage
on any Adjustment Date thereafter (the "Periodic Rate Cap"). Each Mortgage
Interest Rate on each Adjustable-Rate Mortgage Loan will not exceed a specified
maximum Mortgage Interest Rate over the life of such Mortgage Loan (the "Maximum
Mortgage Interest Rate") or be less than a specified minimum Mortgage Interest
Rate over the life of such Mortgage Loan (the "Minimum Mortgage Interest Rate").
Effective with the first Monthly Payment due on each Adjustable-Rate
Mortgage Loan after each related Adjustment Date, the Monthly Payment amount
will be adjusted to an amount that will amortize fully the outstanding Principal
Balance of the related Mortgage Loan over its remaining term, and pay interest
at the
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Mortgage Interest Rate as so adjusted. Due to the application of the Periodic
Rate Caps and the Maximum Mortgage Interest Rates, the Mortgage Interest Rate on
each such Mortgage Loan, as adjusted on any related Adjustment Date, may be less
than the sum of the Index and the related Gross Margin. See "--The Index" in
this prospectus supplement.
None of the Adjustable-Rate Mortgage Loans have Mortgage Interest Rates
that may be converted to fixed Mortgage Interest Rates at the option of the
related mortgagor. None of the Mortgage Loans provide for negative amortization.
Certain of the Mortgage Loans will not fully amortize by their respective
maturity dates (each, a "Balloon Loan"). See "Summary of Prospectus Supplement
- --The Mortgage Pool" for the percentages of the Mortgage Loans in each loan
group and the Mortgage Pool that are Balloon Loans. The Monthly Payment for each
Balloon Loan is based on an amortization schedule of 480 months, except for the
final payment (the "Balloon Payment") which is due and payable on 360th month
following origination of such Mortgage Loan, depending on the terms of the
related mortgage note. The amount of the Balloon Payment on each Balloon Loan is
substantially in excess of the amount of the scheduled Monthly Payment for such
Balloon Loan.
None of the Mortgage Loans were Delinquent as of the Cut-off Date or any
time since origination. A Mortgage Loan is "Delinquent" if the scheduled monthly
payment of principal and interest on such Mortgage Loan which is payable by the
related mortgagor under the related mortgage note (the "Monthly Payment") due on
a Due Date is not paid by the close of business on the next scheduled Due Date
for such Mortgage Loan. Thus, a Mortgage Loan for which the mortgagor failed to
make the Monthly Payment due on October 1, 2006 will be reported as Delinquent
on November 2, 2006 if the payment is not made by the close of business on
November 1, 2006.
The Servicer will be required to make servicing advances on Delinquent
Mortgage Loans and make advances of delinquent payments of principal and
interest on Delinquent Mortgage Loans, each to the extent such advances are
deemed recoverable, until the earlier of such time that the Trust acquires title
to the Mortgage Loan, the Mortgage Loan is paid in full by the mortgagor, until
the Mortgage Loan (or the related Mortgaged Property) is disposed of by the
Trust or until recovery of all Liquidation Proceeds thereon.
The "Loan-to-Value Ratio" of a Mortgage Loan generally means the ratio,
expressed as a percentage of (i) the principal amount of the Mortgage Loan at
origination over (ii) the Value of the related Mortgaged Property. "Value" means
with respect to any Mortgaged Property, the lesser of: (i) an amount determined
by an appraisal done at origination of the Mortgage Loan; provided, however, the
amount may be reduced to reflect the results of a review of such appraisal in
accordance with the Originator's underwriting guidelines and (ii) the purchase
price paid for the related Mortgaged Property by the Mortgagor with the proceeds
of the Mortgage Loan; provided, however, that in the case of a refinanced
Mortgage Loan, the value of the Mortgaged Property is based solely upon clause
(i) above.
"Credit Scores" are statistical credit scores obtained by many mortgage
lenders in connection with the loan application to help assess a borrower's
credit-worthiness. Credit Scores are generated by models developed by a third
party and are made available to lenders through three national credit bureaus.
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. The 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 generally 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. The
Credit Scores set forth in the table in Appendix A were obtained at either the
time of origination of the Mortgage Loan or more recently. The Depositor makes
no representations or warranties as to the actual performance of any Mortgage
Loan or that a particular Credit Score should be relied upon as a basis for an
expectation that the borrower will repay the Mortgage Loan according to its
terms.
The Depositor will purchase the Mortgage Loans from the Sponsor pursuant
to the Mortgage Loan Purchase Agreement (the "Mortgage Loan Purchase
Agreement"), dated as of the Cut-off Date, between the Sponsor and the
Depositor. Pursuant to the Pooling and Servicing Agreement, the Depositor will
cause the
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Mortgage Loans to be assigned to the Trustee for the benefit of the
Certificateholders. See "The Pooling and Servicing Agreement" in this prospectus
supplement.
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 mortgage loans purchased from the Originator under the
Option One Mortgage Loan Purchase Agreement, and were chosen to meet the
requirements imposed by the rating agencies to achieve the credit support
percentages listed under "Summary of Prospectus Supplement --Credit Support."
Based on the representations made by Option One, the Depositor believes
that all of the Mortgage Loans in the Mortgage Pool were originated by Option
One and one or more of its affiliates generally in accordance with the
underwriting standards described under "Underwriting Standards" in this
prospectus supplement.
The Originator made certain representations and warranties regarding the
Mortgage Loans, as of September 27, 2006, in the Flow Sale and Servicing
Agreement, dated as of July 28, 2006 (the "Option One Mortgage Loan Purchase
Agreement"), pursuant to which Option One and one or more of its affiliates sold
such Mortgage Loans to the Sponsor. These representations and warranties will be
assigned by the Sponsor to the Depositor and by the Depositor to the Trustee,
for the benefit of the Certificateholders. The Originator, subject to certain
limitations, will be obligated under the Option One Mortgage Loan Purchase
Agreement to repurchase or substitute a similar mortgage loan for any Mortgage
Loan as to which there exists deficient documentation or an uncured breach of
any such representation or warranty, if such breach of any such representation
or warranty materially and adversely affects the Certificateholders' interests
in such Mortgage Loan.
Pursuant to the terms of the Mortgage Loan Purchase Agreement, the Sponsor
will make to the Depositor (and the Depositor will assign to the Trustee for the
benefit of Certificateholders) only certain limited representations and
warranties as of the Closing Date with respect to the Mortgage Loans, generally
intended to address the accuracy of the Mortgage Loan Schedule and the payment
and delinquency status of each Mortgage Loan. In the event of a breach of any
such representation or warranty that does not constitute a breach of any
representation or warranty made by the Originator as described above, the
Sponsor will be obligated in the same manner as the Originator to cure such
breach or purchase or substitute the affected Mortgage Loans, as described
above.
To the extent that any fact, condition or event with respect to a Mortgage
Loan constitutes a breach of both a representation and warranty of the
Originator under the Option One Mortgage Loan Purchase Agreement with the
Sponsor and a breach of a representation and warranty of the Sponsor under the
Mortgage Loan Purchase Agreement, then the only right or remedy of the Trustee
or any Certificateholder will be the Trustee's right to enforce the obligations
of the Originator under the Option One Mortgage Loan Purchase Agreement, and
there will be no remedy against the Sponsor for such breaches (other than the
Sponsor's obligation to reimburse the Trust, if the Originator fails to do so,
for any damages or costs incurred by the Trust as a result of a breach of the
representation as to compliance with federal, state or local laws with respect
to the origination of the Mortgage Loans).
The Sponsor is selling the Mortgage Loans without recourse and will have
no obligation with respect to the Certificates in its capacity as seller other
than the cure, repurchase or substitution obligations with respect to its
limited representations and warranties described above and its reimbursement
obligation described under "The Pooling and Servicing Agreement--Assignment of
the Mortgage Loans" in this prospectus supplement.
See "Description of the Agreements--Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements--Representations and
Warranties; Repurchases" in the prospectus.
The Index
The Index for all the Adjustable Rate Mortgage Loans is the average of
interbank offered rates for six month U.S. dollar deposits in the London market
calculated as provided in the related note ("Six Month LIBOR"). If Six Month
LIBOR becomes unpublished or is otherwise unavailable, the Servicer will select
an alternative index which is based upon comparable information.
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Terms of the Mortgage Loans
The Mortgage Loans accrue interest on an actuarial basis over the original
terms thereof, calculated based on a 360-day year of twelve 30-day months. When
a full prepayment of principal is made on a Mortgage Loan during a month, the
mortgagor is charged interest only on the days of the month actually elapsed up
to the date of such prepayment, at a daily interest rate that is applied to the
principal amount of the loan so prepaid. When a partial prepayment of principal
is made on a Mortgage Loan during a month, the mortgagor generally is not
charged interest on the amount of the partial prepayment during the month in
which such prepayment is made.
OPTION ONE MORTGAGE CORPORATION
The information set forth in the following paragraphs has been provided by
Option One Mortgage Corporation ("Option One").
General
Option One, a California corporation headquartered in Irvine, California,
originated or acquired all of the Mortgage Loans.
Option One was incorporated in 1992, commenced receiving applications for
mortgage loans under its regular lending program in February 1993 and began
funding such mortgage loans indirectly in the same month. The principal business
of Option One is the origination, sale and servicing of non-prime mortgage
loans. Option One is a wholly-owned subsidiary of Block Financial, which is in
turn a wholly-owned subsidiary of H&R Block, Inc. ("H&R Block"). Borrowers who
qualify under Option One's underwriting guidelines generally have equity in
their property and repayment ability but may have a record of major derogatory
credit items such as outstanding judgments or prior bankruptcies. Option One
originates mortgage loans based on its underwriting guidelines and does not
determine whether such mortgage loans would be acceptable for purchase by Fannie
Mae or Freddie Mac.
The following table details Option One's consolidated originations for the
fiscal years ended April 30, 2004, 2005 and 2006 and the three months ended July
31, 2006:
Years Ended April 30, Three Months Ended July 31,
---------------------------------------------------------------------- ------------------------------
2004 2005 2006 2006
------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
------------------------------------------------------------------------------------------------------
Total $23,256,013 $31,001,724 $40,779,763 $8,051,945
=========== =========== =========== ==========
Information regarding Option One's non-prime originations is as follows:
Years Ended April 30, Three Months Ended July 31,
------------------------------------------------------------------------------------------------------
2004 2005 2006 2006
------------------------------------------------------------------------------------------------------
Mortgage Loan type: (Dollars in Thousands)
------------------------------------------------------------------------------------------------------
2-year ARM 63.4% 61.6% 43.8% 39.9%
3-year ARM 5.2% 4.0% 1.9% 3.1%
Fixed 1st 28.7% 17.7% 12.7% 9.1%
Fixed 2nd 1.6% 3.8% 4.9% 1.0%
Interest only 0.7% 12.6% 21.1% 11.7%
40-Year 0.0% 0.0% 13.4% 33.0%
Other 0.4% 0.3% 2.2% 2.1%
Loan purpose:
Cash-out refinance 67.1% 63.5% 58.8% 57.0%
Purchase 26.0% 30.8% 35.0% 36.6%
Rate or term refinance 6.9% 5.7% 6.3% 6.4%
Loan characteristics:
Average loan size $151 $160 $217 $205
Weighted-average loan-to-value 78.1% 78.9% 80.6% 82.5%
Weighted-average FICO score 608 614 622 614
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UNDERWRITING STANDARDS
The Mortgage Loans originated by Option One will have been originated
generally in accordance with Option One's Non-Prime Guidelines (the "Option One
Underwriting Guidelines"). The Option One Underwriting Guidelines are primarily
intended to assess the value of the mortgaged property, to evaluate the adequacy
of such property as collateral for the mortgage loan and to assess the
applicant's ability to repay the mortgage loan. The Mortgage Loans were also
generally underwritten with a view toward resale in the secondary market. The
Mortgage Loans generally bear higher rates of interest than mortgage loans that
are originated in accordance with customary Fannie Mae and Freddie Mac
standards.
On a case-by-case basis, exceptions to the Option One Underwriting
Guidelines are made where compensating factors exist. Except as specifically
stated herein, the Option One Underwriting Guidelines are the same for first
lien mortgage loans and second lien mortgage loans.
Each mortgage loan applicant completes an application that includes
information with respect to the applicant's liabilities, income, credit history,
employment history and personal information. The Option One Underwriting
Guidelines require a credit report and, if available, a credit score on each
applicant from a credit-reporting agency. The credit report typically contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcies, repossessions or judgments. A credit score is a statistical
ranking of likely future credit performance developed by Fair, Isaac and Co.,
Inc. and made available through the three national credit data
repositories--Equifax, TransUnion and Experian.
Mortgaged properties that are to secure mortgage loans generally are
appraised by qualified independent appraisers. Such appraisers inspect and
appraise the subject property and verify that such property is in acceptable
condition. Following each appraisal, the appraiser prepares a report which
includes a market value analysis based on recent sales of comparable homes in
the area and, when deemed appropriate, replacement cost analysis based on the
current cost of constructing a similar home. All appraisals are required to
conform to the Uniform Standards of Professional Appraisal Practice adopted by
the Appraisal Standards Board of the Appraisal Foundation and are generally on
forms acceptable to Fannie Mae and Freddie Mac.
The Option One Underwriting Guidelines require that mortgage loans be
underwritten in a standardized procedure which complies with applicable federal
and state laws and regulations and require Option One's underwriters to be
satisfied that the value of the property being financed, as indicated by an
appraisal supports the loan balance. The maximum loan amount for mortgage loans
originated under the origination programs varies by state and may be originated
up to $1,400,000. Option One recognizes that an appraised value is an opinion
and thus, allows for variances to the appraisal based on a review of such
appraisal, the loan-to-value ratio ("LTV") and other risk factors. The maximum
variance between the appraisal and a review of the appraisal is limited to (i)
10% for LTVs that are less than or equal to 85%, (ii) 5% for LTVs between 85.01%
and 95%, and (iii) 3% for LTVs over 95%. References to LTV's in this section are
based on loan balance (including the principal balance of the senior lien when
referring to a second lien mortgage loan) relative to (a) in the case of a
purchase money mortgage loan, the lesser of the appraised value or the sales
price of the related mortgaged property and (b) in the case of a refinance
mortgage loan, the appraised value. There can be no assurance that the value of
a mortgaged property estimated in any appraisal or review is equal to the actual
value of such mortgaged property at the time of such appraisal or review.
Furthermore, there can be no assurance that the actual value of a mortgaged
property has not declined subsequent to the time of such appraisal or review.
Option One Underwriting Guidelines require a reasonable determination of
an applicant's ability to repay the loan. Such determination is based on a
review of the applicant's source of income, calculation of a debt
service-to-income ratio based on the amount of income from sources indicated on
the loan application or similar documentation, a review of the applicant's
credit history and the type and intended use of the property being financed.
Except with respect to the No Documentation program that is described
below, the Option One Underwriting Guidelines require verification or evaluation
of the income of each applicant and, for purchase transactions, verification of
the seasoning or source of funds (in excess of $2,500) required for closing. The
income verification required under Option One's various mortgage loan programs
is as follows:
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Full documentation, the highest level of income documentation, generally
requires applicants to submit one written form of verification from the employer
of stable income for at least 12 months. A wage-earner may document income by a
current pay stub reflecting year to date income and applicant's most recent W-2
or IRS Form 1040. A self-employed applicant may document income with either the
most recent federal tax returns or bank statements.
Lite Documentation is for applicants who otherwise cannot meet the
requirements of the full documentation program and requires applicants to submit
3 to 6 months' bank statements or a pay stub as verification of income.
Stated Income Documentation applicants are qualified based upon monthly
income as stated on the mortgage loan application.
No Documentation, which is only available under the AA+ credit grade, does
not require any statement or proof of income, employment or assets. The credit
decision is based on the borrower's credit score and credit trade lines.
For wage earning borrowers, all documentation types require a verbal
verification of employment to be conducted within 48 hours prior to funding.
Latitude Advantage Program. The majority of Option One's loan originations
are underwritten using its "Latitude Advantage" program guidelines. Under the
Latitude Advantage program, the maximum LTV is based on an applicant's credit
score, risk grade, income documentation and use and type of property. Maximum
LTV for full documentation loans are generally higher than the maximum LTV for
corresponding Lite Documentation or Stated Income loans. The maximum LTV for
loans secured by owner-occupied properties are generally higher than for loans
secured by properties that are not owner-occupied. The credit report of the
applicant whose credit score is being used for qualifying purposes must reflect
three or more tradelines. A minimum credit score of 500 is required, although a
credit score greater than 580 is often required to qualify for the maximum LTV
(100%) under the program. The debt-to-income ratio is generally less than 55%.
Latitude Advantage guidelines generally require bankruptcies be discharged,
dismissed or paid off at or prior to funding. Collections and judgments which
are less than 12 months old and greater than $5,000 must be paid down or paid
off at or prior to closing. Collections and judgments which are 12 or more
months old are disregarded. Under the Latitude Advantage program, Option One has
established six risk grades, "AA+" to "CC", based on the applicant's previous
mortgage payment history. Under the AA+ risk category, the applicant must have
no 30-day late mortgage payments within the last 12 months. Under the AA risk
category, the applicant must have no more than one 30 day late mortgage payment
within the past 12 months or no prior mortgage payment history. Under the A risk
grade, the applicant must have no more than two 30-day late mortgage payments
within the past 12 months. Under the B risk grade, the applicant must have no
more than four 30-day late mortgage payments or two 30-day and one 60-day late
mortgage payment within the past 12 months. Under the C risk grade, the
applicant must have no more than six 30-day late mortgage payments, one 60-day
late mortgage payment and one 90-day late mortgage payment within the past 12
months, or six 30-day late mortgage payments, two 60-day late mortgage payments
and no 90-day late payments within the last 12 months. CC risk mortgage
delinquencies are considered on a case-by-case basis.
Within the Latitude Advantage program, the Score Advantage feature allows
the use of the co-applicant's credit score for qualifying purposes; provided,
however, to the extent the co-applicant's credit score exceeds the primary
applicant's credit score by more than 100 points, then the qualifying credit
score will be the primary applicant's credit score plus 100 points. Score
Advantage mortgage loans must be owner occupied, full documentation, and have a
maximum LTV of 95%. Score Advantage requires the co-applicant's contribution to
qualifying income to be equal to or greater than 30% of the total qualifying
income. The maximum debt-to-income ratio for this program is 5% less than the
maximum debt-to-income ratio allowed under the corresponding non-Score Advantage
program.
Legacy Program. In addition to its credit score based origination program,
Latitude Advantage, Option One offers first lien mortgage loans under the
"Legacy" program. Under the Legacy program, LTV limitations are determined based
on the applicant's risk grade, income documentation and use and type of
property. In general, the maximum LTV increases with credit quality and are
typically higher for full documentation loans and owner-occupied properties. The
maximum debt-to-income ratio is generally less than 55% for AA, A, and B risk
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grades, and less than 60% for C and CC risk grades. If a credit score is
available, the minimum credit score required is 500.
Option One has established five credit grades under the Legacy program,
"AA" to "CC", and considers an applicant's prior mortgage payment history, if
applicable, consumer credit payment history, bankruptcy and foreclosure history,
and debt-to-income ratios when determining a loan's risk grade. The Legacy risk
grades correspond directly with the Latitude Advantage risk grades with respect
to previous mortgage payment history requirements. In addition, under the Legacy
program no foreclosures may have occurred during the preceding three years for
AA credit grade, two years for A grade and B grade with a LTV greater than
80%,18 months for B grade with a LTV less than or equal to 80%, or one year for
C grade applicants. Chapter 7 and Chapter 11 bankruptcies may have occurred
during the preceding two years for AA and A credit grades and B grade with a LTV
greater than 80%, 18 months for B grade with a LTV less than or equal to 80%,
and one year for C grade. CC risk bankruptcies are permitted if paid in full,
discharged or dismissed at or prior to closing. If an applicant's Chapter 13
bankruptcy has been discharged and the applicant has a credit history otherwise
complying with the credit parameters of a credit grade and the mortgage loan LTV
is equal to or less than 80%, then the applicant may qualify for such credit
grade.
Exceptions. As described above, the foregoing risk categories and criteria
are underwriting guidelines only. On a case-by-case basis, it may be determined
that an applicant warrants a debt-to-income ratio exception, a pricing
exception, a loan-to-value exception, a credit score exception or an exception
from certain requirements of a particular risk category. An upgrade will be
granted if the application reflects certain compensating factors, among others:
a relatively lower LTV; a maximum of one 30-day late payment on all mortgage
loans during the last 12 months; stable employment; a fixed source of income
that is greater than 50% of all income; ownership of current residence of four
or more years; or cash reserves equal to or in excess of three monthly payments
of principal, interest, taxes and insurance. Upgrade points may also be earned
if the applicant places a down payment through escrow of at least 10% of the
purchase price of the mortgaged property, or if the new loan reduces the
applicant's monthly aggregate mortgage payment by 20% or more. Accordingly,
certain mortgagors may qualify for a more favorable risk category or for a
higher maximum LTV that, in the absence of such compensating factors, would
satisfy only the criteria of a less favorable risk category or maximum LTV.
THE SERVICER
Servicing Background and Portfolio
Option One began servicing mortgage loans in February 1993, originally
operating as a wholly owned subsidiary of Plaza Home Mortgage Corp. The company
was acquired by Fleet Financial Group and began full servicing operations in May
1995. Block Financial subsequently purchased Option One in June 1997.
Option One services primarily sub-prime first-lien residential mortgage
loans. Over 70% of the mortgage loans serviced by Option One were originated by
Option One and over 65% of the mortgage loans serviced by Option One are in
private residential mortgage asset-backed securities.
Option One has experienced substantial growth in its servicing portfolio
in the past few years, both as a result of its growth in origination and
third-party servicing. The following table summarizes Option One's servicing
portfolio by origin at April 30, 2004, 2005 and 2006 and at July 31, 2006:
At April 30, 2004 At April 30, 2005 At April 30, 2006 At July 31, 2006
------------------------ ---------------------- ------------------------ --------------------
Portfolio Balance (Dollars in Thousands)
------------------------------------------------------------------------------------------------
Option One Serviced $36,485,328 $47,554,510 $62,910,568 $64,272,445
Sub-Serviced $8,782,775 $20,439,954 $10,471,509 $10,248,022
------------------------ ---------------------- ------------------------ --------------------
Total Portfolio $45,268,103 $67,994,464 $73,382,077 $74,520,467
======================== ====================== ======================== ====================
Loan Count
------------------------------------------------------------------------------------------------
Option One Serviced 274,045 332,652 388,976 388,912
Sub-Serviced 50,319 102,638 53,005 50,795
======================== ====================== ======================== ====================
Total Portfolio 324,364 435,290 441,981 439,707
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Option One Loan Servicing Portfolio--Advances
Option One has complied with and fulfilled its obligation to advance
principal and interest for mortgage loans serviced by Option One in connection
with securitizations serviced by Option One for the past three fiscal years
where its advancing obligations are substantially identical to those obligations
for this transaction.
Business Strategy and Organizational Structure
Option One's business strategy includes incremental growth of its
servicing portfolio through origination volume, leveraging and expanding
selective third-party servicing strategic partnerships for both interim and
long-term sub-servicing.
Option One has a scalable technology platform and expansion capacity to
support its business strategy. Option One's loan administration functions are
performed in U.S. servicing sites in Irvine, California and Jacksonville,
Florida, as well as offshore outsource provider's sites. Option One is one of a
number of servicers who outsource certain loan administration functions to
Equinox (based in Gurgaon, Noida and Bangalore, India), iGATE (based in Delhi
and Bangalore, India), and Hispanic Teleservices Corp. (based in Guadalajara,
Mexico). In addition Option One outsources certain loan administrative functions
to its wholly owned subsidiary, Option One Mortgage Corporation India Private
Limited (based in Pune, India). The two U.S. offices operate in parallel,
handling many of the same processes for loans across the entire portfolio. The
use of an offshore outsource provider has increased Option One's ability to
perform customer service, welcome calls, new loan audits, early stage
collections, and other loan administration functions. By allocating staff to
multiple sites, Option One has the ability to extend its service hours and
improve customer satisfaction.
Option One's organizational structure is aligned to best serve its
customers, maximize loan performance and minimize risk exposure. Management
continually refines and improves its technology to enhance automated workflow
processes and boost productivity throughout the operation. Option One utilizes
the Fidelity Mortgage Servicing Package (MSP) as its main servicing system,
along with a number of ancillary vendor and proprietary systems. Option One has
also developed its own data warehouse and REO and loss mitigation management
system.
In order to improve servicing efficiency and effectiveness, Option One
outsources certain servicing tasks to a variety of third-party vendors. Such
servicing tasks may include: property tax processing and tracking, hazard
insurance tracking and related forced placed insurance coverage tasks, certain
field services, foreclosure, bankruptcy and loss mitigation and real estate
owned related tasks, lien release services and customer service functions. Three
material components of Option One's outsourcing model include redundancy,
oversight and audit. In some instances, more than one outsource vendor is used
to perform the same function on different segments of the servicing portfolio
which encourages competitive pricing and performance and provides additional
back-up capabilities. Option One's outsource vendor agreements provide that each
vendor strictly comply with Option One's guidelines, policies and procedures and
that any significant or material decisions are not made by the outsource vendor
but are elevated to Option One associates. Option One maintains quality control
and review processes to assure that the outsource vendors are performing their
functions in accordance with investor requirements and are in compliance with
applicable federal and state law. Option One also retains the right to perform
audits of outsource vendor's operations at Option One's sole discretion.
Option One's mortgage loan document custodial responsibilities are
performed by an independent custodian, or if applicable, a trustee in accordance
with the related servicing agreement.
Default Management
Option One defines and measures delinquencies in accordance with
applicable investor guidelines and agreements. The company employs a proactive
approach to resolving delinquencies with an emphasis on expedient timeline
management. Option One pursues a dual track loss mitigation and foreclosure
policy. Initial contact is based on the borrower's previous payment patterns in
tandem with the application of Freddie Mac's EarlyIndicator (EI) scoring model,
which seeks to identify those accounts posing a greater risk of default.
Collectors work extensive evening and weekend shifts to effectively manage the
nationwide portfolio and are trained to identify loss mitigation opportunities
and solicit workout opportunities during the collection process. Workout
specialists maintain contact with borrowers while an account is in foreclosure
in an attempt to arrange an alternate resolution to
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the delinquency and mitigate future losses. Option One's borrower assistance
department offers borrowers alternatives, all within specific investor
guidelines, to foreclosure that may include reinstatement, repayment and
forbearance plans, modifications, short-sales, and deed in lieu of foreclosure.
A loan will remain in the borrower assistance area until a resolution has been
reached or until a foreclosure has been completed. Option One's proprietary
system, DARES, is a real estate and loss mitigation web-based database that
provides the borrower assistance team with an automated decision tree and
gain/loss analysis, centralization of the repayment plan process, efficient
autodialer utilization by outbound solicitation, and web-based applications
designed to provide customers with optimal contact avenues. Through DARES, loss
mitigation specialists complete an on-line rules-based net present value
analysis form, which documents the presumed loss exposure on the property and
compares it to different alternatives. DARES is also used for monitoring,
tracking, maintaining and communicating all REO department needs. When
properties become REO, Option One obtains property valuations and analyzes each
property individually to determine what sales decisions will result in the
highest net return while limiting the marketing time. Option One's REO assets
are marketed and listed with local real estate agents and published on local
multiple listing services. Option One uses the internet for additional listing
exposure.
The following tables set forth, at or for the years ended December 31,
2003, 2004 and 2005, and at or for the six months ended June 30, 2006, certain
information relating to the delinquency experience (including foreclosures) of
one- to four-family residential mortgage loans included in Option One's entire
servicing portfolio (which portfolio includes mortgage loans originated under
the Option One Guidelines and mortgage loans that are subserviced for others) at
the end of the indicated periods. The indicated periods of delinquency are based
on the number of days past due on a contractual basis (based on the OTS method).
No mortgage loan is considered delinquent for these purposes until it has not
been paid by the next scheduled due date for such mortgage loan.
Delinquencies and Foreclosures
(Dollars in Thousands)
At December 31, 2003 At December 31, 2004
--------------------------------------------------- ----------------------------------------------------
Percent Percent
Percent by By No. Percent by
By No. By Dollar by No. of Dollar of By Dollar by No. of Dollar
of Loans Amount Loans Amount Loans Amount Loans Amount
------------ ------------ ----------- ---------- --------- --------------- ------------ ----------
Total Portfolio 301,778 $41,364,855 N/A N/A 386,770 $59,156,057 N/A N/A
Period of Delinquency
30-59 days 5,207 $604,945 1.73% 1.46% 6,495 $819,245 1.68% 1.38%
60-89 days 2,564 $293,412 0.85% 0.71% 2,989 $359,917 0.77% 0.61%
90 days or more 15,387 $1,597,177 5.10% 3.86% 15,940 $1,722,996 4.12% 2.91%
------------ ------------ ----------- ---------- --------- --------------- ------------ ----------
Total Delinquent Loans 23,158 $2,495,534 7.68% 6.03% 25,424 $2,902,158 6.57% 4.91%
Loans in Foreclosure(1) 10,764 $1,161,361 3.57% 2.81% 9,361 $1,044,624 2.42% 1.77%
At December 31, 2005 At June 30, 2006
--------------------------------------------------- ----------------------------------------------------
Percent Percent
Percent by By No. Percent by
By No. By Dollar by No. of Dollar of By Dollar by No. of Dollar
of Loans Amount Loans Amount Loans Amount Loans Amount
------------ ------------ ----------- ---------- --------- --------------- ------------ ----------
Total Portfolio 479,216 $79,494,367 N/A N/A 441,332 $74,383,282 N/A N/A
Period of Delinquency
30-59 days 10,875 $1,537,798 2.27% 1.93% 10,780 $1,610,826 2.44% 2.17%
60-89 days 5,103 $679,858 1.06% 0.86% 5,734 $828,221 1.30% 1.11%
90 days or more 22,544 $1,838,816 4.70% 2.31% 26,523 $621,678 6.01% 0.84%
------------ ------------ ----------- ---------- --------- --------------- ------------ ----------
Total Delinquent Loans 38,522 $4,056,472 8.04% 5.10% 43,037 $3,060,725 9.75% 4.11%
Loans in Foreclosure(1) 9,916 $1,157,550 2.07% 1.46% 15,400 $2,139,832 3.49% 2.88%
- -----------
(1) Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
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Real Estate Owned
(Dollars in Thousands)
At December 31, 2003 At December 31, 2004 At December 31, 2005 At June 30, 2006
------------------------ ------------------------- -------------------------- ------------------------
By No. of By Dollar By No. of By Dollar By No. of By Dollar By No. of By Dollar
Loans Amount Loans Amount Loans Amount Loans Amount
------------------------ ------------------------- -------------------------- ------------------------
Total Portfolio 301,778 $41,364,855 386,770 $59,156,057 479,216 $79,494,367 441,332 $74,383,282
Foreclosed Loans(1) 3,361 $293,629 2,536 $225,362 3,382 $316,665 3,704 $375,946
Foreclosure Ratio(2) 1.11% 0.71% 0.66% 0.38% 0.71% 0.40% 0.84% 0.51%
- --------------------------
(1) For the purpose of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to which has
been acquired by Option One, by investors or by an insurer following foreclosure
or delivery of a deed in lieu of foreclosure.
(2) The Foreclosure Ratio is equal to the aggregate principal balance or number
of Foreclosed Loans divided by the aggregate principal balance or number, as
applicable, of mortgage loans in the Total Portfolio at the end of the indicated
period.
Loan Loss Experience on Option One's Servicing Portfolio of Mortgage Loans
(Dollars in Thousands)
For the Year Ended December 31,
-------------------------------------
For the
Six Months Ended
2003 2004 2005 June 30, 2006
------------ ---------- --------- ----------------
Net Losses(1)(2) $238,634 $239,008 $172,102 $146,096
- --------------------------
(1) "Net Losses" means "Gross Losses" minus "Recoveries." "Gross Losses" are
actual losses incurred on liquidated properties for each respective period.
Losses are calculated after repayment of all principal, foreclosure costs,
servicing fees and accrued interest to the date of liquidation. "Recoveries" are
recoveries from liquidation proceeds, deficiency judgments and MI proceeds.
(2) "Net Losses" are computed on a loan-by-loan basis and are reported with
respect to the period in which the loan is liquidated. If additional costs are
incurred or recoveries are received after the end of the period, the amounts are
adjusted with respect to the period in which the related loan was liquidated.
Accordingly, the Net Losses reported in the table may change in future periods.
The information in this table reflects loan liquidations through June 2006 and
claims, refunds or the collection of MI proceeds related to such liquidations
through August 2006.
It is unlikely that the delinquency experience of the Mortgage Loans will
correspond to the delinquency experience of Option One's mortgage portfolio set
forth in the foregoing tables. The statistics shown above represent the
delinquency experience for Option One's mortgage servicing portfolio only for
the periods presented, whereas the aggregate delinquency experience on the
Mortgage Loans will depend on the results obtained over the life of the Mortgage
Pool. In particular, investors should note that newly originated mortgage loans
will not be added to the Mortgage Pool, and the Mortgage Pool will therefore
consist of a static pool of Mortgage Loans, whereas new mortgage loans are
continually being originated and added to the pool for which such statistics
above are compiled. Accordingly, the actual loss and delinquency percentages
with respect to the Mortgage Pool are likely to be substantially higher than
those indicated in the tables above. In addition, if the residential real estate
market should experience an overall decline in property values, the actual rates
of delinquencies and foreclosures could be higher than those previously
experienced by Option One. Furthermore, adverse economic conditions may affect
the timely payment by mortgagors of scheduled payments of principal and interest
on such Mortgage Loans and, accordingly, the actual rates of delinquencies and
foreclosures with respect to the Mortgage Pool.
Training, Internal Controls and Compliance
Option One has a training program established for its servicing
associates, offering a wide range of core job specific and non-job-specific
training (corporate, soft skills, and mortgage fundamentals). Training
curriculums are tailored for both new and seasoned associates. Seasoned
employees receive job-specific training annually. The training program includes
new hire orientation, process improvement methodology, computer-based training,
system usage techniques, leadership development, and soft skills, all conducted
by dedicated business unit trainers. The training is structured to ensure that
new representatives are sufficiently knowledgeable of the subject matter and
applicable regulations. Training can take the form of classroom instruction, a
simulated work environment exercise,
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and side-by-side monitoring and mentoring. Option One also has ongoing
leadership development, mentoring programs, and policy and procedure manuals
citing applicable statutes that are widely available to employees.
Option One has controls in place which are intended to protect the company
and its investors against risk of loss. An internal audit program is utilized to
evaluate the company's internal controls and safeguard against risk of loss due
to noncompliance with regulatory, investor, company, and prudent servicing
practices. In addition to oversight from the audit function, Option One also has
dedicated compliance and legal teams for servicing-related issues, regulations,
and laws. A quality assurance team performs call monitoring and helps to ensure
Federal Debt Collections Practice Act (FDCPA) and Real Estate Settlement
Procedures Act (RESPA) compliance. A quality control team benchmarks and
measures adherence to best practices, identifies risk areas in servicing
operations, centralizes communication for regulatory, investor, and industry
updates, and ensures that associates are being properly trained on topics
related to best practices and servicing risk. Risk management policies in place
that assist in ensuring prompt, accurate reporting to its investor base include
automated reporting and remitting processes, segregation of duties among
reporting, remitting, and reconciling tasks, web portal access for investors to
view and download securitization data, online access to bank statements, and an
account liquidation database to more closely track historical losses on the
portfolio and assist in trend analysis. Option One uses its own proprietary
lock-box, which provides increased cash management controls resulting from
direct oversight over the payment posting process. Option One maintains separate
bank accounts for each investor relationship in accordance with the related
servicing agreement requirements.
Option One is not aware and has not received notice that any default,
early amortization or other performance-triggered event has occurred as to any
other securitization due to any servicing act or servicing failure to act. There
have been no previous disclosures of material noncompliance by Option One with
servicing criteria relating to any other portfolio serviced by Option One.
Litigation Concerning Option One Mortgage Corporation
In July 2004, Option One was named as defendant and served with a class
action complaint filed by Larry and Brandi Freitag, as plaintiffs, in the Third
Judicial Circuit Court in Madison County, Illinois. The complaint alleges breach
of contract, or in the alternative unjust enrichment, and violation of the
Illinois Consumer Fraud and Deceptive Business Practices Act. Specifically, the
plaintiffs allege that Option One improperly retained an extra day of per diem
interest on residential mortgage loans by charging per diem interest up to and
including the date of payoff. The class is defined as all persons in the United
States who paid interest on or after the day of payoff and who did not receive a
refund from Option One of the interest charged on or after the day of payoff.
This action is one of several actions filed earlier against other lenders by the
same attorneys on a similar basis in the same court. In one such action, the
court granted the defendant's motion to dismiss the plaintiff's claims of
defendant's violation of the Illinois Consumer Fraud and Deceptive Business
Practices Act. Plaintiffs have agreed to settle their individual claims;
plaintiffs' counsel has a motion pending to continue prosecution of the class
action. Plaintiff's counsel filed a motion to substitute Larry and Pamela Smith
as plaintiffs, which was granted. Option One filed a motion to compel
arbitration. In a similar action before the same judge in the Third Judicial
Circuit Court in Madison County, Illinois, the Court ruled in favor of the
defendants on the underlying per diem interest claim.
On January 31, 2006, the Circuit Court of Cook County, Illinois County
Department, Chancery Division, certified a nationwide class action against
Option One on a complaint brought by Erin and Earl Austria, in which the
Austrias allege that Option One impermissibly assessed them a reconveyance fee
and authorized the assessment of a title indemnity fee on certain mortgage loans
that have been paid-in-full. The Court has granted Option One's motion for an
interlocutory appeal of the order of class certification.
On February 28, 2006, Option One was named as a defendant and served with
a class action complaint filed by Jeffrey Wright, et al., as plaintiffs, in the
United States District Court for the Central District of California, Southern
Division. The complaint alleges that Option One's affiliate H&R Block Mortgage
Corporation failed to pay overtime wages to its loan officers in accordance with
the Fair Labor Standards Act and that such alleged failure constitutes an unfair
business practice under California's Business and Professions Code. Option One
is named as a defendant under the theory that it and H&R Block Mortgage operate
as a single employer. On May 1, 2006, the Court granted Option One and H&R Block
Mortgage's motion to transfer the action to the District Court in Boston,
Massachusetts. Option One and H&R Block Mortgage intend to file a motion to
compel arbitration after the case
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has been formally transferred to the Massachusetts District Court. Option One
and H&R Block Mortgage have answered the complaint denying the plaintiffs'
allegation and have filed a motion for summary judgment on the issue of
misclassification.
On July 28, 2006, Option One Mortgage Corporation was named as a defendant
and served with a class action complaint filed by Chadwick Thompson,
individually and on behalf of all persons similarly situated who worked for the
defendants in California, in the United States District Court for the Southern
District of California. The complaint alleges that Option One Mortgage
Corporation's affiliate H&R Block Mortgage Corporation failed to properly
classify and pay loan officers for overtime worked in violation of the Fair
Labor Standards Act, California law, and California's Unfair Competition Law.
The complaint further alleges that Option One and H&R Block Mortgage failed to
provide meal and rest periods and seeks restitution and waiting time penalties.
Option One filed an answer on August 17, 2006 denying the allegations in the
complaint. The plaintiff has voluntarily dismissed his class allegations and
will proceed on his claims solely on an individual basis.
THE SPONSOR
The Sponsor, Bank of America, National Association ("Bank of America") is
an indirect wholly-owned subsidiary of Bank of America Corporation.
See "The Pooling and Servicing Agreement" in this prospectus supplement
for more information regarding the Sponsor's material roles and duties in this
transaction and "The Sponsor" in the prospectus for more information about the
Sponsor and its securitization programs.
STATIC POOL INFORMATION
Information concerning the Sponsor's prior residential mortgage loan
securitizations involving sub-prime mortgage loans issued by the Depositor is
available on the internet at http://www.bofa.com/abfc. The website will also
provide information about certain prior securitized pools of sub-prime mortgage
loans originated and serviced by Option One.
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, with respect to the Sponsor's prior
securitized pools of sub-prime mortgage loans, and for five years
preceding the date of first use of this prospectus supplement with respect
to certain of Option One's prior securitized pools of sub-prime mortgage
loans serviced by Option One.
In the event any changes or updates are made to the information regarding
these securitizations 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 at 214 North Tryon Street, Charlotte, North Carolina
28255, (704) 683-4190, Attention: Luna Nguyen.
The static pool data available on the Sponsor's website relating to any of
the Sponsor's or Option One'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
Asset Backed Funding Corporation is a direct wholly-owned subsidiary of
Banc of America Mortgage Capital Corporation and was incorporated in the State
of Delaware on July 23, 1997. 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 and Servicing Agreement after the Closing Date.
The Depositor maintains its principal executive office at 214 North Tryon
Street, Charlotte, North Carolina 28255. Its telephone number is (704) 386-2400.
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 and Servicing Agreement. The
Mortgage Loans will be deposited by the Depositor into the Trust under the
Pooling and Servicing Agreement as described under "The Pooling and Servicing
Agreement--Assignment of the Mortgage Loans" in this prospectus supplement. 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 and Servicing Agreement as described under "The Trustee" and "The
Pooling and Servicing Agreement" in this prospectus supplement and under
"Description of the Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements" in the prospectus. The Trustee,
on behalf of the Trust, is only permitted to take the actions specifically
provided in the Pooling and Servicing Agreement prior to an Event of Default.
After an Event of Default, the Trustee will take such actions as a prudent
person would be required to take under the same circumstances. Under the Pooling
and Servicing 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, may not be eligible to be a
debtor in a bankruptcy proceeding, unless it can be characterized as a "business
trust" for purposes of the federal bankruptcy laws. Bankruptcy courts consider
various factors in making a determination as to whether an entity is a business
trust, therefore it is not possible to predict with any certainty whether or not
the Issuing Entity would be considered a "business trust." In the event of the
insolvency or bankruptcy of the Sponsor, the Depositor or any other party to the
transaction, it is not anticipated that the trust fund would become a part of
the bankruptcy estate or subject to the bankruptcy control of a third party. 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.
THE TRUSTEE
Wells Fargo Bank, National Association ("Wells Fargo Bank") will act as
Trustee under the Pooling and Servicing 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 Sponsor and the Servicer may maintain
banking and other commercial relationships with Wells Fargo Bank and its
affiliates. Wells Fargo Bank maintains 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.
Wells Fargo Bank has provided corporate trust services since 1934. As of
June 30, 2006, Wells Fargo Bank acts as a trustee for a variety of transactions
and asset types, including corporate and municipal bonds,
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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
approximately 1230 series of residential mortgage-backed securities with an
aggregate principal balance of approximately $282,142,062,265.
Under the terms of the Pooling and Servicing Agreement, the Trustee also
is responsible for securities administration, which includes pool performance
calculations, distribution calculations and the preparation of monthly
distribution reports. As securities administrator, the Trustee is responsible
for the preparation and filing of all REMIC tax returns on behalf of the Issuing
Entity and the preparation of monthly reports on Form 10-D, certain current
reports on Form 8-K and annual reports on Form 10-K that are required to be
filed with the Securities and Exchange Commission on behalf of the Issuing
Entity and the Depositor will be required to sign any such monthly or annual
reports. 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 $894,733,136,436 of
outstanding residential mortgage-backed securities.
Wells Fargo Bank is acting as custodian of the mortgage loan files
pursuant to the Pooling and Servicing 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 Trustee and the Certificateholders. Wells
Fargo Bank maintains each mortgage loan 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 may have 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.
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 and Servicing 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.
See "Description of the Agreements--Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements" 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
and Servicing Agreement.
THE CREDIT RISK MANAGER
Clayton Fixed Income Services Inc. (formerly known as The Murrayhill
Company), a Colorado corporation, will act as the Credit Risk Manager. In 1997,
the Credit Risk Manager created the business of independent, third-party
transaction oversight for the fixed income industry. The Credit Risk Manager's
credit risk management portfolio consists of more than $1 trillion in original
principal balance across more than 400 MBS transactions of various collateral
types, including prime, Alt-A, subprime, scratch and dent, manufactured housing,
and HELOCs. The Credit Risk Manager's credit risk management process enhances
transaction performance through loan-level exception management and transaction
oversight.
The Credit Risk Manager will not be responsible for performing any
servicing or administrative functions with respect to the Mortgage Loans, but
rather will perform certain advisory functions in accordance with the provisions
of the credit risk management agreement with the Servicer. These oversight
functions are provided on an
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exception management basis and aim to identify and monitor problems in the areas
of underwriting, collateral, reporting, and servicing of the Mortgage Loans, and
may include the monitoring and/or making of recommendations to the Servicer
regarding certain Mortgage Loans. The Credit Risk Manager's advice is made in
the form of recommendation only, and the Credit Risk Manager does not have the
right to direct the Servicer to take any specific course of action. The Servicer
may accept or reject a recommendation of the Credit Risk Manager, in its sole
discretion.
The Credit Risk Manager will enter into a consulting agreement, dated as
of the Closing Date, with the Depositor to provide such consulting and advisory
services, including monthly prepayment analysis, mortgage insurance claims
analysis, realized loss analysis, delinquency review, bankruptcy, repayment, REO
and foreclosure analysis, delinquency trends, and periodic servicer reviews.
The Credit Risk Manager will enter into a credit risk management
agreement, dated as of the Closing Date, with the Servicer. The credit risk
management agreement requires the Servicer to provide the Credit Risk Manager
certain information on the Mortgage Loans and/or access to its servicing
personnel.
The Credit Risk Manager will be entitled to receive the Credit Risk
Manager Fee until the termination of the Trust or until its removal by a vote of
at least 66-2/3% of the Certificateholders by Voting Rights.
THE POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of October 1, 2006 (the "Pooling and Servicing Agreement"),
among the Depositor, the Servicer and the Trustee. The "Trust Fund" created
under the Pooling and Servicing Agreement will consist of (i) all of the
Depositor's right, title and interest in the Mortgage Loans, the related
mortgage notes, mortgages and other related documents, (ii) all payments on or
collections in respect of the Mortgage Loans due after the Cut-off Date,
together with any proceeds thereof, (iii) any Mortgaged Properties acquired on
behalf of Certificateholders by foreclosure or by deed in lieu of foreclosure,
and any revenues received thereon, (iv) the Cap Carryover Reserve Account, (v)
the Swap Account, (vi) the right to any Net Swap Payment and any Swap
Termination Payment made by the Swap Provider and deposited into the Swap
Account, (vii) the rights of the Trustee under all insurance policies required
to be maintained pursuant to the Pooling and Servicing Agreement, (viii) the
rights of the Trustee under the Interest Rate Swap Agreement and (ix`) the
rights of the Depositor under the Option One Mortgage Loan Purchase Agreement
and the Mortgage Loan Purchase Agreement. The Offered Certificates will be
transferable and exchangeable at the corporate trust office of the Trustee. The
prospectus contains important additional information regarding the terms and
conditions of the Pooling and Servicing Agreement.
Assignment of the Mortgage Loans
On the Closing Date the Depositor will transfer to the Trust Fund all of
its right, title and interest in and to each Mortgage Loan, the related mortgage
notes, mortgages and other related documents (to the extent required to be
delivered to the Sponsor under the Option One Mortgage Loan Purchase Agreement,
collectively, the "Related Documents"), including all scheduled payments with
respect to each such Mortgage Loan due after the Cut-off Date. The Trustee,
concurrently with such transfers, will deliver the Certificates to the
Depositor. Each Mortgage Loan transferred to the Trust Fund will be identified
on a schedule (the "Mortgage Loan Schedule") delivered to the Trustee pursuant
to the Pooling and Servicing Agreement. The Mortgage Loan Schedule will include
information such as the Principal Balance of each Mortgage Loan as of the
Cut-off Date, its Mortgage Interest Rate as well as other information.
The Pooling and Servicing Agreement will require that the Depositor
deliver or cause to be delivered to the Trustee on behalf of the
Certificateholders (or a custodian, as the Trustee's agent for such purpose) the
mortgage notes endorsed in blank and the Related Documents. In lieu of delivery
of original mortgages or mortgage notes, if such original is not available or
lost, the Depositor may deliver or cause to be delivered true and correct copies
thereof, or, with respect to a lost mortgage note, a lost note affidavit
executed by the Sponsor or the Originator.
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Unless otherwise required by a Rating Agency, assignments of the Mortgage
Loans to the Trustee (or its nominee) will not be recorded in any jurisdiction,
but will be delivered to the Trustee in recordable form, so that they can be
recorded in the event recordation is necessary in connection with the servicing
of a Mortgage Loan. In addition, assignments of the Mortgage Loans will not be
recorded with respect to any Mortgage which has been recorded in the name of
Mortgage Electronic Registration Systems, Inc. ("MERS") or its designee. With
respect to any Mortgage which 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 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 ownerships of mortgages maintained by MERS.
Within 60 days following the Closing Date the Trustee will review (or
cause a custodian to review) the Mortgage Loans and the Related Documents
pursuant to the Pooling and Servicing Agreement to determine if the Related
Documents are in its possession, have not been mutilated, damaged or torn,
relate to such Mortgage Loans and that certain information set forth in the
Mortgage Loan Schedule (such as balance and loan identification number)
accurately reflects information set forth in the Mortgage File, and if any
Mortgage Loan or Related Document is found not to conform to this review
criteria and such defect has a material and adverse effect on the
Certificateholders and is not cured within 120 days following notification
thereof to the Sponsor (or within 90 days of the earlier of the Sponsor's
discovery or receipt of notification if such defect would cause the Mortgage
Loan not to be a "qualified mortgage" for REMIC purposes), the Sponsor will be
obligated to either (i) substitute for that Mortgage Loan an Eligible Substitute
Mortgage Loan; provided, however, such substitution is permitted only within two
years of the Closing Date and may not be made unless an opinion of counsel is
provided to the effect that such substitution will not disqualify any of the
REMICs comprising the Trust Fund as a REMIC or result in a prohibited
transaction tax under the Code or (ii) purchase such Mortgage Loan at a price
(the "Purchase Price") equal to the outstanding Principal Balance of such
Mortgage Loan as of the date of purchase, plus all accrued and unpaid interest
thereon, computed at the Mortgage Interest Rate through the end of the calendar
month in which the purchase is effected, plus the amount of any unpaid servicing
fees (without duplication) and unreimbursed Advances and Servicing Advances made
by the Servicer. If, however, a Mortgage Loan is discovered to be defective in a
manner that would cause it to be a "defective obligation" within the meaning of
Treasury regulations relating to REMICs, the Sponsor will be obligated to cure
the defect or make the required purchase or substitution no later than 90 days
after the earlier of its discovery or receipt of notification of the defect. The
Purchase Price will be deposited in the Collection Account on or prior to the
next succeeding Determination Date after such obligation arises. The obligation
of the Sponsor to repurchase or substitute for a Defective Mortgage Loan is the
sole remedy regarding any defects in the Mortgage Loans and Related Documents
available to the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Originator or the Sponsor, as the case may be, will be required to
deposit in the Collection Account on or prior to the next succeeding
Determination Date after such obligation arises an amount (the "Substitution
Adjustment") equal to the excess of the Purchase Price of the related Defective
Mortgage Loan over the Principal Balance (plus one month's interest on such
balance) of such Eligible Substitute Mortgage Loan.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the Originator or the Sponsor, as applicable, for a Defective Mortgage Loan
which must, on the date of such substitution, (i) have an outstanding Principal
Balance (or in the case of a substitution of more than one Mortgage Loan for a
Defective Mortgage Loan, an aggregate Principal Balance) not in excess of the
Principal Balance of the Defective Mortgage Loan; (ii) be of the same type
(fixed-rate or adjustable-rate) and have a Mortgage Interest Rate not less than
the Mortgage Interest Rate of the Defective Mortgage Loan and not more than 2%
in excess of the Mortgage Interest Rate of such Defective Mortgage Loan and,
with respect to an Adjustable-Rate Mortgage Loan, have the same Index as the
Defective Mortgage Loan and have a Gross Margin equal to or greater than the
Defective Mortgage Loan; (iii) have a Credit Score not less than the Defective
Mortgage Loan; (iv) have a remaining term to maturity not more than one year
earlier and not later than the remaining term to maturity of the Defective
Mortgage Loan; (v) comply with each representation and warranty as to the
Mortgage Loans set forth in the Option One Mortgage Loan Purchase Agreement and
the Mortgage Loan Purchase Agreement (deemed to be made as of the date of
substitution); (vi) have a prepayment charge at least equal to that prepayment
charge, if any, on the Defective Mortgage Loan; and (vii) have a Loan-to-Value
Ratio not greater than that of the Defective Mortgage Loan.
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Under the terms of the Option One Mortgage Loan Purchase Agreement, the
Originator made certain representations and warranties regarding the Mortgage
Loans, which will be assigned by the Sponsor to the Depositor, and by the
Depositor to the Trustee for the benefit of the Certificateholders. Within 90
days following its discovery of a breach of any representation or warranty that
materially or adversely affects the interests of Certificateholders in a
Mortgage Loan, or receipt of notice of such breach, the Originator will be
obligated to cure such breach or purchase the affected Mortgage Loan from the
Trust for the Purchase Price (or, in certain circumstances, to substitute an
Eligible Substitute Mortgage Loan). In addition to the foregoing, if the breach
involves the Originator's representation that the Mortgage Loan complies with
any and all requirements of federal, state or local law with respect to the
origination of such Mortgage Loan, including, without limitation, usury, truth
in lending, real estate settlement procedures, consumer credit protection, equal
credit opportunity, predatory and abusive lending laws or disclosure laws
applicable to the Mortgage Loans, the Originator will be obligated to reimburse
the Trust for all costs or damages incurred by the Trust as a result of the
violation of such representation (such amount, the "Reimbursement Amount").
Pursuant to the terms of the Mortgage Loan Purchase Agreement, the Sponsor
will make to the Depositor (and the Depositor will assign to the Trustee for the
benefit of the Certificateholders) only certain limited representations and
warranties as of the Closing Date with respect to the Mortgage Loans such as:
(i) the accuracy of the Mortgage Loan Schedule; (ii) the payment and delinquency
status of each Mortgage Loan; (iii) at the time of transfer to the Depositor,
the Sponsor has transferred or assigned all of its right, title and interest in
each Mortgage Loan and the Related Documents, free of any lien; (iv) each
Mortgage Loan complies with any and all requirements of any federal, state or
local law with respect to the origination of such Mortgage Loan including,
without limitation, usury, truth in lending, real estate settlement procedures,
consumer credit protection, equal credit opportunity, predatory and abusive
lending laws or disclosure laws applicable to the Mortgage Loans; and (v) each
Mortgaged Property securing the Mortgage Loans is in good repair and is
undamaged so as not to affect adversely the value of the Mortgaged Property as
security for the Mortgage Loan or the use for which the premises was intended.
In the event of a breach of any such representation or warranty that does not
constitute a breach of any representation or warranty made by the Originator as
described above, the Sponsor will be obligated in the same matter as the
Originator to cure such breach or purchase the affected Mortgage Loans, as
described above. In addition to the foregoing, if a breach of the representation
set forth in clause (iv) occurs, the Sponsor will be obligated to remit to the
Trust any Reimbursement Amount which the Originator fails to pay.
To the extent that any fact, condition or event with respect to a Mortgage
Loan constitutes a breach of both a representation and warranty of the
Originator under the Option One Mortgage Loan Purchase Agreement, and a breach
of a representation and warranty of the Sponsor under the Mortgage Loan Purchase
Agreement, then the only right or remedy of the Trustee or any Certificateholder
will be the Trustee's right to enforce the obligations of the Originator under
the Option One Mortgage Loan Purchase Agreement, and there will be no remedy
against the Sponsor for such breaches (other than the Sponsor's obligation to
remit to the Trust any Reimbursement Amount which the Originator fails to pay).
Mortgage Loans required to be transferred to the Originator or the Sponsor
as described in the preceding paragraphs are referred to as "Defective Mortgage
Loans."
Payments on Mortgage Loans; Deposits to Collection Account and Distribution
Account
The Servicer will establish and maintain or cause to be maintained a
separate trust account (the "Collection Account") for the benefit of the holders
of the Certificates. The Collection Account will be an Eligible Account (as
defined below). Upon receipt by the Servicer of amounts in respect of the
Mortgage Loans (excluding amounts representing the Servicing Fee or other
servicing compensation, reimbursement for Advances and Servicing Advances,
insurance proceeds to be applied to the restoration or repair of a Mortgaged
Property or similar items), the Servicer will be required to deposit such
amounts in the Collection Account. Amounts so deposited may be invested in
certain investments acceptable to the Rating Agencies maturing no later than one
business day prior to the date on which the amount on deposit therein is
required to be deposited in the Distribution Account. The Trustee will establish
an account (the "Distribution Account") into which the Trustee will deposit,
upon receipt on the Servicer Remittance Date preceding each Distribution Date,
amounts withdrawn from the Collection Account and remitted to it by the Servicer
for distribution to Certificateholders on such Distribution Date and remitted to
it by the Servicer. The Distribution Account will be an Eligible Account.
Amounts on deposit in the Distribution Account
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may be invested in eligible investments maturing on or before the business day
prior to the related Distribution Date unless invested in investments managed or
advised by the Trustee or an affiliate, in which case the eligible investments
may mature on the related Distribution Date. The "Servicer Remittance Date" with
respect to each Distribution Date will be the 20th day of the month of such
Distribution Date (or if such day is not a business day, the preceding business
day).
An "Eligible Account" is a segregated account that is (i) an account or
accounts maintained with a federal or state chartered depository institution or
trust company (a) the short-term unsecured debt obligations of which are rated
at least P-1 by Moody's and, in the case of a depository institution or trust
company that is the principal subsidiary of a holding company, the short-term
unsecured debt obligations of such holding company are rated at least F-1 by
Fitch (together with Moody's, the "Rating Agencies"), if the amounts on deposit
are to be held in the account for generally no more than 30 days and are not
intended to be used as credit enhancement or (b) the short-term unsecured debt
obligations of which are rated at least P-1 by Moody's and, in the case of a
depository institution or trust company that is the principal subsidiary of a
holding company, the short-term unsecured debt obligations of such holding
company are rated at least F-1 by Fitch and the long-term unsecured debt
obligations of which are rated at least A1 by Moody's, if the deposits are to be
held more than 30 days but less than 365 days, (ii) an account or accounts the
deposits in which are fully insured by the Federal Deposit Insurance Corporation
(to the limits established by such corporation), the uninsured deposits in which
account are otherwise secured such that, as evidenced by an opinion of counsel
delivered to the Trustee and to each Rating Agency, the Certificateholders will
have a claim with respect to the funds in such account or a perfected first
priority security interest against such collateral (which shall be limited to
eligible investments) securing such funds that is superior to claims of any
other depositors or creditors of the depository institution with which such
account is maintained and such uninsured amount would not cause withdraw or
downgrade of the then current ratings of the Certificates, (iii) a trust account
or accounts maintained with the trust department of a federal or state chartered
depository institution, national banking association or trust company acting in
its fiduciary capacity or (iv) otherwise acceptable to each Rating Agency
without reduction or withdrawal of their then current ratings of the
Certificates as evidenced by a letter from each Rating Agency to the Trustee.
Eligible investments are specified in the Pooling and Servicing Agreement and
are limited to investments which meet the criteria of the Rating Agencies from
time to time as being consistent with their then current ratings of the Offered
Certificates.
Advances
Subject to the following limitations, the Servicer will be obligated to
advance or cause to be advanced on each Servicer Remittance Date from its own
funds, or funds in the Collection Account that are not included in the Available
Funds for such Distribution Date, or a combination of both, an amount equal to
the aggregate of all payments of principal and interest, net of the Servicing
Fee, that were due during the related Collection Period on the Mortgage Loans
(other than a Balloon Payment) and that were not received by the related
Determination Date and, with respect to Balloon Loans, with respect to which the
Balloon Payment is not made when due, an assumed monthly payment that would have
been due on the related Due Date based on the original principal amortization
schedule for such Balloon Loan (any such advance, an "Advance").
Advances with respect to Mortgage Loans are required to be made only to
the extent the Servicer deems them to be recoverable from related late
collections, insurance proceeds, condemnation proceeds or liquidation proceeds.
The purpose of making such Advances is to maintain a regular cash flow to the
Certificateholders, rather than to guarantee or insure against losses. The
Servicer will not be required, however, to make any Advances with respect to
reductions in the amount of the Monthly Payments on the Mortgage Loans due to
bankruptcy proceedings or the application of the Servicemembers Civil Relief Act
(the "Relief Act") or similar state laws. Subject to the recoverability standard
above, the Servicer's obligation to make Advances as to any Mortgage Loan will
continue until such Mortgage Loan is paid in full by the mortgagor or disposed
of by the Trust.
All Advances will be reimbursable to the Servicer from late collections,
insurance proceeds, condemnation proceeds and liquidation proceeds from the
Mortgage Loan as to which such unreimbursed Advance was made. In addition, any
Advances previously made in respect of any Mortgage Loan that the Servicer deems
to be nonrecoverable from related late collections, insurance proceeds,
condemnation proceeds or liquidation proceeds may be reimbursed to the Servicer
out of general funds in the Collection Account prior to the distributions on the
Certificates. In addition, the Servicer may withdraw from the Collection Account
funds that were not included in
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Available Funds for the preceding Distribution Date to reimburse itself for
Advances previously made. In the event the Servicer fails in its obligation to
make any such Advance, the Trustee, in its capacity as successor servicer, or a
successor servicer appointed by the Trustee, will be obligated to make any such
Advance, to the extent required in the Pooling and Servicing Agreement.
In the course of performing its servicing obligations, the Servicer will
pay all reasonable and customary "out-of-pocket" costs and expenses incurred in
the performance of its servicing obligations, including, but not limited to, the
cost of (i) the preservation, restoration, inspection and protection of the
Mortgaged Properties, (ii) any enforcement or judicial proceedings, including
foreclosures and (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related mortgage. Each such expenditure will
constitute a "Servicing Advance."
The Servicer's right to reimbursement for Servicing Advances is limited to
late collections on the related Mortgage Loan, including liquidation proceeds,
released mortgaged property proceeds, insurance proceeds, condemnation proceeds
and such other amounts the Servicer may collect from the related mortgagor or
otherwise relating to the Mortgage Loan in respect of which such unreimbursed
amounts are owed, unless such amounts are deemed to be nonrecoverable by the
Servicer, in which event reimbursement will be made to the Servicer from general
funds in the Collection Account.
The Pooling and Servicing Agreement may provide that the Servicer, with
the consent of the parties to the Pooling and Servicing Agreement, may enter
into a facility with any person which provides that such person (an "Advancing
Person") may fund Advances and/or Servicing Advances, although no facility may
reduce or otherwise affect the Servicer's obligation to fund such Advances
and/or Servicing Advances. Any Advances and/or Servicing Advances made by an
Advancing Person will be reimbursed to the Advancing Person in the same manner
as reimbursements would be made to the Servicer.
Compensation and Payment of Expenses of the Servicer, the Trustee and the
Credit Risk Manager
The principal compensation to the Servicer will be the "Servicing Fee"
payable monthly by the Trust equal to 1/12th of the servicing fee rate set forth
in the table below (the "Servicing Fee Rate") in respect of its servicing
activities for the Certificates. The Servicing Fee will accrue on the aggregate
Principal Balance of the Mortgage Loans as of the first day of each month.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Pooling and Servicing Agreement will be earnings on
eligible investments of funds on deposit in the Distribution Account.
The Credit Risk Manager will be entitled to receive a fee (the "Credit
Risk Manager Fee") until the termination of the Trust Fund or until its removal
by a vote of at least 66-2/3% of the Certificateholders by Voting Rights. This
fee will be paid monthly by the Trust equal to 1/12th of the credit risk manager
fee rate (the "Credit Risk Manager Fee Rate"). The Credit Risk Manager Fee will
accrue on the aggregate Principal Balance of the Mortgage Loans as of the first
day of each month.
Distribution Dates Servicing Fee Rate Credit Risk Manager Fee Rate
- ------------------------------------ ------------------------- --------------------------------------
November 2006 through August 2007 0.30% 0.015%
September 2007 through April 2009 0.40% 0.015%
May 2009 and thereafter 0.65% 0.015%
Any co-trustee, if applicable, will be paid out of Available Funds prior
to any distributions to Certificateholders.
The Servicing Fee for the Mortgage Loans will be retained by the Servicer
out of the interest payments on the Mortgage Loans, prior to remittance to the
Trustee or distributions to Certificateholders. The Credit Risk Manager Fee will
be paid from the Interest Remittance Amount (as described under "Description of
the Certificates--Interest Distributions") to the Credit Risk Manager for its
services prior to any distributions to Certificateholders.
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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 and Servicing 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. As
additional servicing compensation, the Servicer is entitled to retain all
service-related fees, including assumption fees, modification fees, extension
fees, bad check fees, late payment charges and Prepayment Interest Excess, to
the extent collected from mortgagors, together with any interest or other income
earned on funds held in the Collection Account and any escrow accounts. The
Servicer is obligated to offset any Prepayment Interest Shortfall resulting from
a principal prepayment in full on the Mortgage Loans on any Distribution Date
(payments made by the Servicer in satisfaction of such obligation, "Compensating
Interest") by an amount not in excess of the sum of its Servicing Fee and any
Prepayment Interest Excess for such Distribution Date. The Servicer is generally
obligated to pay expenses incurred by it in connection with its responsibilities
under the Pooling and Servicing Agreement, unless these expenses constitute
Servicing Advances as described above under "--Advances." These expenses,
including the fees of any subservicer hired by the Servicer, will be paid by the
Servicer out of its own funds, without reimbursement.
"Prepayment Interest Excess" with respect to any Distribution Date will be
for each Mortgage Loan that was the subject of a principal prepayment in full
during the portion of the related Prepayment Period beginning on the first day
of the calendar month in which such Distribution Date occurs through the
Determination Date of the calendar month in which such Distribution Date occurs,
an amount equal to interest (to the extent received) at the applicable Mortgage
Interest Rate (net of the Servicing Fee Rate) on the amount of such principal
prepayment for the number of days commencing on the first day of the calendar
month in which such Distribution Date occurs and ending on the date on which
such prepayment is so applied.
With respect to any Determination Date and each Mortgage Loan as to which
a principal prepayment in full was applied during the portion of the related
Prepayment Period occurring in the prior calendar month or as to which a partial
prepayment received during the portion of the related Prepayment Period
occurring in the prior calendar month is applied during such prior calendar
month, the "Prepayment Interest Shortfall" is an amount equal to the interest at
the Mortgage Interest Rate for such Mortgage Loan (net of the Servicing Fee
Rate) on the amount of such principal prepayment for the number of days
commencing on the date on which the principal prepayment is applied and ending
on the last day of the calendar month in which applied.
The Trustee is obligated to pay routine ongoing expenses incurred by it in
connection with its responsibilities under the Pooling and Servicing Agreement.
Those amounts will be paid by the Trustee out of its own funds, without
reimbursement.
The Depositor, the Servicer and the Trustee are entitled to
indemnification and reimbursement of certain expenses from the Trust under the
Pooling and Servicing Agreement as discussed in the prospectus under the
headings "The Depositor," "Description of the Agreements--Material Terms of the
Pooling and Servicing Agreements and Underlying Servicing Agreements--Certain
Matters Regarding Servicers and the Master Servicer" and "--Certain Matters
Regarding the Trustee."
Optional Termination
The NIMS Insurer, if there is a NIMS Insurer, or if there is no NIMS
Insurer, the majority holder of the Class CE Certificates or, if (i) such holder
is the Sponsor or is affiliated with the Sponsor or (ii) there is no majority
holder of the Class CE Certificates, the Servicer, will have the right to
purchase all of the Mortgage Loans and REO Properties in the Trust Fund and
thereby effect the early retirement of the Certificates, on any Distribution
Date following the Distribution Date on which the aggregate Principal Balance of
such Mortgage Loans and REO Properties is 10% or less of the sum of the
aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date. The
first Distribution Date on which such option could be exercised is referred to
herein as the "Optional Termination Date." In the event that the option is
exercised, the purchase will be made at a price (the "Termination Price")
generally equal to the sum of (x) par plus accrued interest for each Mortgage
Loan at the related Mortgage Interest Rate to but not including the first day of
the month in which such purchase price is distributed plus the amount of any
unpaid Servicing Fees and unreimbursed Advances and Servicing Advances, and (y)
any Swap Termination Payment owed to the Swap Provider pursuant to the Interest
Rate Swap Agreement. If
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any of the parties listed above is subject to regulation by the OCC, the FDIC,
the Federal Reserve or the Office of Thrift Supervision, however, such entity
may not exercise this option unless the aggregate fair market value of the
Mortgage Loans and REO Properties is greater than or equal to the Termination
Price. In addition, no option may be exercised until any due and unpaid
Reimbursement Amounts have been paid to the Trust. Proceeds from such purchase
will be included in Available Funds and will be distributed to the holders of
the Certificates in accordance with the Pooling and Servicing Agreement. Any
such purchase of Mortgage Loans and REO Properties will result in the early
retirement of the Certificates. Any such optional termination will be permitted
only pursuant to a "qualified liquidation" as defined in Section 860F of the
Code.
In connection with the issuance of any net interest margin securities
secured by all or a portion of the Class CE and Class P Certificates, a party
may agree to refrain from exercising this option while those securities are
outstanding.
Optional Purchase of Defaulted Mortgage Loans
As to any Mortgage Loan which is Delinquent in payment by 90 days or more,
the NIMS Insurer, if there is a NIMS Insurer, or if there is no NIMS Insurer,
the majority holder of the Class CE Certificates or, if (i) such holder is the
Sponsor or is affiliated with the Sponsor or (ii) there is no majority holder of
the Class CE Certificates, the Servicer may, at its option and in accordance
with the terms of the Pooling and Servicing Agreement, purchase such Mortgage
Loan from the Trust Fund at the Purchase Price for such Mortgage Loan. In
addition, the Servicer may only exercise such right if delinquencies on the
Mortgage Loans exceed a specified level set forth in the Pooling and Servicing
Agreement until such delinquencies are reduced to or below such specified level,
subject to certain other conditions set forth in the Pooling and Servicing
Agreement, including but not limited to the condition that the Servicer must
first purchase the Mortgage Loan that, as of the time of such purchase, has been
Delinquent for the greatest period before purchasing Mortgage Loans that have
been Delinquent for lesser periods.
Events of Servicing Termination
Events of servicing termination will consist, among other things, of: (i)
any failure by the Servicer to deposit in the Collection Account the required
amounts or remit to the Trustee for deposit in the Distribution Account any
payment which continues unremedied for one business day after the first date on
which (x) the Servicer has knowledge of such failure or (y) written notice of
such failure is given to the Servicer; (ii) any failure of the Servicer to make
any Advance with respect to a Mortgage Loan or to cover any Prepayment Interest
Shortfalls on Mortgage Loans, as described herein, which failure continues
unremedied for one business day after the first date on which (x) the Servicer
has knowledge of such failure or (y) written notice of such failure is given to
the Servicer; (iii) any failure by the Servicer to observe or perform in any
material respect any other of its covenants or agreements in the Pooling and
Servicing Agreement, which continues unremedied for 30 days after the first date
on which (x) the Servicer has knowledge of such failure or (y) written notice of
such failure is given to the Servicer (or a lesser number of days set forth in
the Pooling and Servicing Agreement in the case of failure to perform any
covenants or agreements relating to the requirements of Regulation AB); or (iv)
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings, and certain actions by or on behalf of the Servicer
indicating its insolvency or inability to pay its obligations.
Rights upon Event of Servicing Termination
So long as an event of servicing termination (as defined in the Pooling
and Servicing Agreement) remains unremedied, the Trustee may, and at the
direction of the holders of the Certificates evidencing not less than 51% of the
Voting Rights is required to, terminate all of the rights and obligations of the
Servicer in its capacity as servicer with respect to the Mortgage Loans, as
provided in the Pooling and Servicing Agreement, whereupon the Trustee will
succeed to (or appoint a successor servicer to assume) all of the
responsibilities and duties of the Servicer pursuant to the Pooling and
Servicing Agreement, including the obligation to make any required Advances and
Servicing Advances. No assurance can be given that termination of the rights and
obligations of the Servicer under the Pooling and Servicing Agreement would not
adversely affect the servicing of the related Mortgage Loans, including the
delinquency experience of such Mortgage Loans.
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Voting Rights
With respect to any date of determination, the percentage of all the
Voting Rights allocated among holders of the Certificates (other than the Class
CE, Class P, Class R and Class R-X Certificates) will be 98% and will be
allocated among the classes of such Certificates in the proportion that the
aggregate Certificate Principal Balance of all the Certificates of such class
then outstanding bear to the aggregate Certificate Principal Balance of all
Certificates then outstanding. With respect to any date of determination, 1% of
all the Voting Rights will be allocated to the holders of each of the Class CE
and Class P Certificates. The Voting Rights allocated to a class of Certificates
will be allocated among all holders of each such class in proportion to the
outstanding certificate balances (or percentage interest) of such Certificates.
The Class R and Class R-X Certificates will not have any Voting Rights.
No holder of an Offered Certificate, solely by virtue of such holder's
status as a holder of an Offered Certificate, will have any right under the
Pooling and Servicing Agreement to institute any proceeding with respect
thereto, unless such holder previously has given to the Trustee written notice
of default and unless the holders of Certificates having not less than 51% of
the Voting Rights evidenced by the Certificates so agree and have offered
indemnity satisfactory to the Trustee.
Amendment
The Pooling and Servicing Agreement may be amended by the Depositor, the
Servicer and the Trustee, with the consent of the NIMS insurer and without the
consent of the holders of the Certificates, for any of the purposes set forth
under "Description of the Agreements--Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements--Amendment" in the
prospectus or to provide for the rights of a NIMS Insurer, if any, as described
under "--Rights of the NIMS Insurer under the Pooling and Servicing Agreement."
In addition, the Pooling and Servicing Agreement may be amended by the
Depositor, the Servicer and the Trustee and the holders of a majority in
interest of any class of Certificates affected thereby for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of the Pooling and Servicing Agreement or of modifying in any manner the rights
of the holders of any class of Certificates; provided, however, that no such
amendment may (i) reduce in any manner the amount of, or delay the timing of,
distributions required to be made on any class of Certificates without the
consent of the holders of such Certificates; (ii) adversely affect in any
material respect the interests of the Swap Provider or the holders of any class
of Certificates in a manner other than as described in clause (i) above, without
the consent of the holders of such class evidencing percentage interests
aggregating not less than 51% of the Voting Rights represented by such class; or
(iii) reduce the aforesaid percentage of aggregate outstanding principal amounts
of Certificates, the holders of which are required to consent to any such
amendment, without the consent of the holders of all such Certificates.
Notwithstanding the foregoing, the Trustee will not consent to any amendment
that would result in the imposition of a tax on any REMIC constituting part of
the Trust Fund or cause any such REMIC to fail to qualify as a REMIC at any time
that the Certificates (other than the Class P Certificates) are outstanding.
Rights of the NIMS Insurer under the Pooling and Servicing Agreement
After the Closing Date, a separate trust may be established to issue net
interest margin securities secured by all or a portion of the Class CE and Class
P Certificates. Those net interest margin securities may or may not have the
benefit of a financial guaranty insurance policy. If a policy is obtained, the
NIMS Insurer that issues that policy will be a third party beneficiary of the
Pooling and Servicing Agreement and will have a number of rights under the
Pooling and Servicing Agreement, including the following:
o the right to consent to the Servicer's exercise of its discretion to waive
assumption fees, late payment or other charges in connection with a
Mortgage Loan or to arrange for the extension of Due Dates for payments
due on a mortgage note for no more than 125 days, if the waivers or
extensions relate to more than 5% of the Mortgage Loans as of the Cut-off
Date;
o the right to direct the Trustee to terminate all of the rights and
obligations of the Servicer under the Pooling and Servicing Agreement
relating to the Trust Fund and the assets of the Trust Fund following the
occurrence of an event of servicing termination under the Pooling and
Servicing Agreement;
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o the right to approve or reject the appointment of any successor servicer
other than the Trustee, if the Servicer is required to be replaced and the
Trustee is unwilling or unable to act as successor servicer;
o the right to remove the Trustee or any co-trustee pursuant to the Pooling
and Servicing Agreement;
o the right to direct the Trustee to make investigations and take actions
pursuant to the Pooling and Servicing Agreement;
o the right to consent to any amendment to the Pooling and Servicing
Agreement;
o the right to purchase all of the Mortgage Loans and REO Properties in the
Trust Fund and thereby effect the early retirement of the Certificates
under the circumstances set forth under "The Pooling and Servicing
Agreement--Optional Termination" in this prospectus supplement; and
o the right to purchase Mortgage Loans Delinquent in payment 90 days or
more.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will consist of (i) the fourteen classes of Offered
Certificates listed in the table beginning on page S-6 of this prospectus
supplement and (ii) the Class B, Class CE, Class P, Class R and Class R-X
Certificates.
The Offered Certificates will be issuable in the forms and denominations
set forth in the table beginning on page S-6. 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 on the Offered Certificates will be made by wire transfer if a
Certificateholder notifies the Trustee in writing at least five business days
prior to the related Record Date.
Allocation of Available Funds
Distributions to holders of each class of Offered Certificates will be
made on each Distribution Date from Available Funds. "Available Funds" will be
equal to the sum of the following amounts with respect to the Mortgage Loans,
net of amounts reimbursable or payable to the Servicer, including amounts in
respect of indemnification of the Servicer, the Servicing Fee and any accrued
and unpaid Servicing Fee, amounts payable to the Trustee and the Credit Risk
Manager in respect of certain expenses and indemnification and any amounts
payable to the Swap Provider (including any Net Swap Payment owed to the Swap
Provider and any Swap Termination Payment owed to the Swap Provider but
excluding any Swap Termination Payment owed to the Swap Provider resulting from
a Swap Provider Trigger Event): (i) the aggregate amount of Monthly Payments on
the Mortgage Loans due during the related Collection Period and received by the
Servicer on or prior to the related Determination Date, (ii) certain unscheduled
payments in respect of the Mortgage Loans, including prepayments (but excluding
any prepayment charges and Prepayment Interest Excess), insurance proceeds,
Subsequent Recoveries, condemnation proceeds and liquidation proceeds, net of
certain expenses, received during the related Prepayment Period, (iii) payments
from the Servicer in connection with Advances and Compensating Interest for such
Distribution Date, (iv) the Purchase Price for any repurchased Mortgage Loan
deposited to the Collection Account during the related Prepayment Period, (v)
any Substitution Adjustments deposited in the Collection Account during the
related Prepayment Period, (vi) any Reimbursement Amount deposited to the
Collection Account during the related Prepayment Period and (vii) on the
Distribution Date on which the Trust is to be terminated in accordance with the
Pooling and Servicing Agreement, the Termination Price.
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Interest Distributions
On each Distribution Date, based upon the information provided to it in a
remittance report prepared by the Servicer, the Trustee will distribute the
Interest Remittance Amount in the following order of priority to the extent
available:
first, to the Credit Risk Manager, the Credit Risk Manager Fee;
second, concurrently, as follows:
(1) from the Group 1 Interest Remittance Amount to the Class A-1
Certificates, the Accrued Certificate Interest thereon for such
Distribution Date;
(2) from the Group 2 Interest Remittance Amount to the Class A-2
Certificates, the Accrued Certificate Interest thereon for such
Distribution Date; and
(3) concurrently, from the Group 3 Interest Remittance Amount to the
Class A-3A, Class A-3B and Class A-3C Certificates, pro rata, the
applicable Accrued Certificate Interest thereon for such Distribution
Date;
third, concurrently, as follows:
(1) from the Group 1 Interest Remittance Amount to the Class A-1
Certificates, the Interest Carry Forward Amount thereon for such
Distribution Date;
(2) from the Group 2 Interest Remittance Amount to the Class A-2
Certificates, the Interest Carry Forward Amount thereon for such
Distribution Date; and
(3) concurrently, from the Group 3 Interest Remittance Amount to the
Class A-3A, Class A-3B and Class A-3C Certificates, pro rata, the
applicable Interest Carry Forward Amount thereon for such Distribution
Date;
fourth, concurrently, as follows:
(1) if the Group 1 Interest Remittance Amount is insufficient to pay
the Class A-1 Certificates' Accrued Certificate Interest for such
Distribution Date in priority second above, from the remaining Group 2
Interest Remittance Amount and Group 3 Interest Remittance Amount, to the
Class A-1 Certificates, to cover such shortfall for such Distribution
Date;
(2) if the Group 2 Interest Remittance Amount is insufficient to pay
the Class A-2 Certificates' Accrued Certificate Interest for such
Distribution Date in priority second above, from the remaining Group 1
Interest Remittance Amount and Group 3 Interest Remittance Amount, to the
Class A-2 Certificates, to cover such shortfall for such Distribution
Date; and
(3) if the Group 3 Interest Remittance Amount is insufficient to pay
the Class A-3A, Class A-3B and Class A-3C Certificates' applicable Accrued
Certificate Interest for such Distribution Date in priority second above,
concurrently, from the remaining Group 1 Interest Remittance Amount and
Group 2 Interest Remittance Amount, to the Class A-3A, Class A-3B and
Class A-3C Certificates, pro rata, to cover such shortfall for such
Distribution Date;
fifth, concurrently, as follows:
(1) if the Group 1 Interest Remittance Amount is insufficient to pay
the Class A-1 Certificates' Interest Carry Forward Amount for such
Distribution Date in priority third above, from the remaining Group 2
Interest Remittance Amount and Group 3 Interest Remittance Amount, to the
Class A-1 Certificates, to cover such shortfall for such Distribution
Date;
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(2) if the Group 2 Interest Remittance Amount is insufficient to pay
the Class A-2 Certificates' Interest Carry Forward Amount for such
Distribution Date in priority third above, from the remaining Group 1
Interest Remittance Amount and Group 3 Interest Remittance Amount, to the
Class A-2 Certificates, to cover such shortfall for such Distribution
Date; and
(3) if the Group 3 Interest Remittance Amount is insufficient to pay
the Class A-3A, Class A-3B and Class A-3C Certificates' applicable
Interest Carry Forward Amount for such Distribution Date in priority third
above, concurrently, from the remaining Group 1 Interest Remittance Amount
and Group 2 Interest Remittance Amount, to the Class A-3A, Class A-3B and
Class A-3C Certificates, pro rata, to cover such shortfall for such
Distribution Date;
sixth, to the Class M-1 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
seventh, to the Class M-2 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
eighth, to the Class M-3 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
ninth, to the Class M-4 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
tenth, to the Class M-5 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
eleventh, to the Class M-6 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
twelfth, to the Class M-7 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
thirteenth, to the Class M-8 Certificates, the Accrued Certificate
Interest thereon for such Distribution Date;
fourteenth, to the Class M-9 Certificates, the Accrued Certificate
Interest thereon for such Distribution Date;
fifteenth, to the Class B Certificates, the Accrued Certificate Interest
thereon for such Distribution Date; and
sixteenth, the amount, if any, of the Interest Remittance Amount remaining
after application with respect to the priorities set forth above which is
defined below as the "Monthly Excess Interest Amount" for such Distribution
Date, will be applied as described below under "--Application of Monthly Excess
Cashflow Amounts."
"Accrued Certificate Interest" for each Class of Offered Certificates and
the Class B Certificates and each Distribution Date means an amount equal to the
interest accrued during the related Interest Accrual Period at the applicable
Certificate Interest Rate on the Certificate Principal Balance of such class of
Certificates, minus each class's Interest Percentage of shortfalls caused by the
Relief Act or similar state laws for such Distribution Date.
The "Group 1 Interest Remittance Amount" means as of any Distribution
Date, the excess of:
(A) the sum, without duplication, of:
(i) all interest collected or advanced with respect to the related
Collection Period on the group 1 Mortgage Loans received by the Servicer on or
prior to the Determination Date for such Distribution Date (less the Servicing
Fee for such Mortgage Loans, certain amounts available for reimbursement of
Advances and Servicing Advances with respect to such Mortgage Loans as described
above under "The Pooling and Servicing Agreement--Advances" and certain other
reimbursable expenses or indemnification payments pursuant to the Pooling and
Servicing Agreement);
(ii) all Compensating Interest paid by the Servicer on such
Distribution Date with respect to the group 1 Mortgage Loans;
S-56
(iii) the portion of any payment in connection with any principal
prepayment (other than any Prepayment Interest Excess), substitution, Purchase
Price, Termination Price, liquidation proceeds (net of certain expenses) or
insurance proceeds relating to interest with respect to the group 1 Mortgage
Loans received during the related Prepayment Period; and
(iv) the portion of any Reimbursement Amount relating to interest on
the group 1 Mortgage Loans received during the related Prepayment Period;
over (B) the product of (x) any amounts payable to the Swap Provider
(including any Net Swap Payment and any Swap Termination Payment owed to the
Swap Provider but excluding any Swap Termination Payment owed to the Swap
Provider resulting from a Swap Provider Trigger Event) multiplied by (y) a
fraction, the numerator of which is the aggregate Principal Balance of the group
1 Mortgage Loans as of the first day of the related Collection Period and the
denominator of which is the Pool Balance as of the first day of the related
Collection Period.
The "Group 2 Interest Remittance Amount" means as of any Distribution
Date, the excess of
(A) the sum, without duplication, of:
(i) all interest collected or advanced with respect to the related
Collection Period on the group 2 Mortgage Loans received by the Servicer on or
prior to the Determination Date for such Distribution Date (less the Servicing
Fee for such Mortgage Loans, certain amounts available for reimbursement of
Advances and Servicing Advances with respect to such Mortgage Loans as described
above under "The Pooling and Servicing Agreement--Advances" and certain other
reimbursable expenses or indemnification payments pursuant to the Pooling and
Servicing Agreement);
(ii) all Compensating Interest paid by the Servicer on such
Distribution Date with respect to the group 2 Mortgage Loans,
(iii) the portion of any payment in connection with any principal
prepayment (other than any Prepayment Interest Excess), substitution, Purchase
Price, Termination Price, liquidation proceeds (net of certain expenses) or
insurance proceeds relating to interest with respect to the group 2 Mortgage
Loans received during the related Prepayment Period; and
(iv) the portion of any Reimbursement Amount relating to interest on
the group 2 Mortgage Loans received during the related Prepayment Period;
over (B) the product of (x) any amounts payable to the Swap Provider
(including any Net Swap Payment and any Swap Termination Payment owed to the
Swap Provider but excluding any Swap Termination Payment owed to the Swap
Provider resulting from a Swap Provider Trigger Event) multiplied by (y) a
fraction, the numerator of which is the aggregate Principal Balance of the group
2 Mortgage Loans as of the first day of the related Collection Period and the
denominator of which is the Pool Balance as of the first day of the related
Collection Period.
The "Group 3 Interest Remittance Amount" means as of any Distribution
Date, the excess of
(A) the sum, without duplication, of:
(i) all interest collected or advanced with respect to the related
Collection Period on the group 3 Mortgage Loans received by the Servicer on or
prior to the Determination Date for such Distribution Date (less the Servicing
Fee for such Mortgage Loans, certain amounts available for reimbursement of
Advances and Servicing Advances with respect to such Mortgage Loans as described
above under "The Pooling and Servicing Agreement--Advances" and certain other
reimbursable expenses or indemnification payments pursuant to the Pooling and
Servicing Agreement);
(ii) all Compensating Interest paid by the Servicer on such
Distribution Date with respect to the group 3 Mortgage Loans,
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(iii) the portion of any payment in connection with any principal
prepayment (other than any Prepayment Interest Excess), substitution, Purchase
Price, Termination Price, liquidation proceeds (net of certain expenses) or
insurance proceeds relating to interest with respect to the group 3 Mortgage
Loans received during the related Prepayment Period; and
(iv) the portion of any Reimbursement Amount relating to interest on
the group 3 Mortgage Loans received during the related Prepayment Period;
over (B) the product of (x) any amounts payable to the Swap Provider
(including any Net Swap Payment and any Swap Termination Payment owed to the
Swap Provider but excluding any Swap Termination Payment owed to the Swap
Provider resulting from a Swap Provider Trigger Event) multiplied by (y) a
fraction, the numerator of which is the aggregate Principal Balance of the group
3 Mortgage Loans as of the first day of the related Collection Period and the
denominator of which is the Pool Balance as of the first day of the related
Collection Period.
The "Interest Accrual Period" for any Distribution Date and each class of
Offered Certificates and the Class B Certificates will be the period from and
including the preceding Distribution Date, or in the case of the first
Distribution Date, from the Closing Date, through and including the day prior to
the current Distribution Date, and calculations of interest will be made on the
basis of the actual number of days in the Interest Accrual Period and on a
360-day year.
The "Interest Carry Forward Amount" means for any class of Offered
Certificates and the Class B Certificates and any Distribution Date, the sum of
(a) the excess, if any, of the Accrued Certificate Interest for such
Distribution Date over the amount in respect of interest actually distributed on
such class for such Distribution Date, (b) any remaining unpaid Interest Carry
Forward Amount from prior Distribution Dates and (c) interest on such remaining
Interest Carryforward Amount referred to in clause (b) at the applicable
Certificate Interest Rate on the basis of the actual number of days elapsed
since the prior Distribution Date.
The "Interest Percentage" is, with respect to any class of Offered
Certificates and the Class B Certificates and any Distribution Date, the ratio
(expressed as a decimal carried to six places) of the Accrued Certificate
Interest for such class to the Accrued Certificate Interest for all classes of
Offered Certificates and the Class B Certificates, in each case for that
Distribution Date and without regard to shortfalls caused by the Relief Act or
similar state laws.
The "Interest Remittance Amount" means as of any Distribution Date, the
sum of the Group 1 Interest Remittance Amount, the Group 2 Interest Remittance
Amount and the Group 3 Interest Remittance Amount.
Principal Distributions
For any Distribution Date (a) before the Stepdown Date or (b) as to which
a Trigger Event is in effect, the Principal Distribution Amount will be
allocated among and distributed in reduction of the Certificate Principal
Balances of the Certificates in the following order of priority:
first, concurrently, as follows:
(i) the Group 1 Senior Principal Distribution Amount to the Class
A-1 Certificates, until the Certificate Principal Balance thereof has been
reduced to zero;
(ii) the Group 2 Senior Principal Distribution Amount to the Class
A-2 Certificates, until the Certificate Principal Balance thereof has been
reduced to zero; and
(iii) (a) with respect to any Distribution Date prior to the
Subordination Depletion Date, sequentially, the Group 3 Senior Principal
Distribution Amount to the Class A-3A, Class A-3B and Class A-3C
Certificates, in that order, until the Certificate Principal Balances
thereof have been reduced to zero; and
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(b) with respect to any Distribution Date on or after the
Subordination Depletion Date, concurrently, the Group 3 Senior Principal
Distribution Amount to the Class A-3A, Class A-3B and Class A-3C Certificates,
pro rata, until the Certificate Principal Balances thereof have been reduced to
zero;
second, concurrently, as follows:
(i) concurrently, the Group 1 Senior Principal Distribution Amount
remaining after priority first above, pro rata, as follows:
(a) to the Class A-2 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero; and
(b) (1) with respect to any Distribution Date prior to the
Subordination Depletion Date, sequentially, to the Class A-3A, Class
A-3B and Class A-3C Certificates, in that order, until the
Certificate Principal Balances thereof have been reduced to zero;
and
(2) with respect to any Distribution Date on or after the
Subordination Depletion Date, concurrently, to the Class A-3A, Class
A-3B and Class A-3C Certificates, pro rata, until the Certificate
Principal Balances thereof have been reduced to zero; and
(ii) concurrently, the Group 2 Senior Principal Distribution Amount
remaining after priority first above, pro rata, as follows:
(a) to the Class A-1 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero; and
(b) (1) with respect to any Distribution Date prior to the
Subordination Depletion Date, sequentially, to the Class A-3A, Class
A-3B and Class A-3C Certificates, in that order, until the
Certificate Principal Balances thereof have been reduced to zero;
and
(2) with respect to any Distribution Date on or after the
Subordination Depletion Date, concurrently, to the Class A-3A, Class
A-3B and Class A-3C Certificates, pro rata, until the Certificate
Principal Balances thereof have been reduced to zero; and
(iii) the Group 3 Senior Principal Distribution Amount remaining
after priority first above, concurrently, to the Class A-1 and Class A-2
Certificates, pro rata, until the Certificate Principal Balances thereof
have been reduced to zero;
third, to the Class M-1 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
fourth, to the Class M-2 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
fifth, to the Class M-3 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
sixth, to the Class M-4 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
seventh, to the Class M-5 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
eighth, to the Class M-6 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
ninth, to the Class M-7 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
tenth, to the Class M-8 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
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eleventh, to the Class M-9 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
twelfth, to the Class B Certificates, until the Certificate Principal
Balance thereof has been reduced to zero; and
thirteenth, any remaining Principal Distribution Amount will be
distributed as part of the Monthly Excess Cashflow Amount as described below
under "--Application of Monthly Excess Cashflow Amounts."
For any Distribution Date (a) on or after the Stepdown Date and (b) as
long as a Trigger Event is not in effect, the Principal Distribution Amount will
be allocated among and distributed in reduction of the Certificate Principal
Balances of the Certificates in the following order of priority:
first, concurrently, as follows:
(i) the Group 1 Senior Principal Distribution Amount to the Class
A-1 Certificates, until the Certificate Principal Balance thereof has been
reduced to zero;
(ii) the Group 2 Senior Principal Distribution Amount to the Class
A-2 Certificates, until the Certificate Principal Balance thereof has been
reduced to zero; and
(iii) (a) with respect to any Distribution Date prior to the
Subordination Depletion Date, sequentially, the Group 3 Senior Principal
Distribution Amount to the Class A-3A, Class A-3B and Class A-3C
Certificates, in that order, until the Certificate Principal Balances
thereof have been reduced to zero; and
(b) with respect to any Distribution Date on or after the
Subordination Depletion Date, concurrently, the Group 3 Senior Principal
Distribution Amount to the Class A-3A, Class A-3B and Class A-3C
Certificates, pro rata, until the Certificate Principal Balances thereof
have been reduced to zero;
second, concurrently, as follows:
(i) concurrently, the Group 1 Senior Principal Distribution Amount
remaining after priority first above, pro rata, as follows:
(a) to the Class A-2 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero, up to an amount
equal to the Group 2 Senior Principal Distribution Amount not paid
pursuant to priority first above; and
(b) (1) with respect to any Distribution Date prior to the
Subordination Depletion Date, sequentially, up to an amount equal to
the Group 3 Senior Principal Distribution Amount not paid pursuant
to priority first above, to the Class A-3A, Class A-3B and Class
A-3C Certificates, in that order, until the Certificate Principal
Balances thereof have been reduced to zero; and
(2) with respect to any Distribution Date on or after the
Subordination Depletion Date, concurrently, up to an amount equal to
the Group 3 Senior Principal Distribution Amount not paid pursuant
to priority first above, to the Class A-3A, Class A-3B and Class
A-3C Certificates, pro rata, until the Certificate Principal
Balances thereof have been reduced to zero; and
(ii) concurrently, the Group 2 Senior Principal Distribution Amount
remaining after priority first above, pro rata, as follows:
(a) to the Class A-1 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero, up to an amount
equal to the Group 1 Senior Principal Distribution Amount not paid
pursuant to priority first above;
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(b) (1) with respect to any Distribution Date prior to the
Subordination Depletion Date, sequentially, up to an amount equal to
the Group 3 Senior Principal Distribution Amount not paid pursuant
to priority first above, to the Class A-3A, Class A-3B and Class
A-3C Certificates, in that order, until the Certificate Principal
Balances thereof have been reduced to zero; and
(2) with respect to any Distribution Date on or after the
Subordination Depletion Date, concurrently, up to an amount equal to
the Group 3 Senior Principal Distribution Amount not paid pursuant
to priority first above, to the Class A-3A, Class A-3B and Class
A-3C Certificates, pro rata, until the Certificate Principal
Balances thereof have been reduced to zero; and
(iii) concurrently, the Group 3 Senior Principal Distribution Amount
remaining after priority first above, pro rata, as follows:
(a) to the Class A-1 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero, up to an amount
equal to the Group 1 Senior Principal Distribution Amount not paid
pursuant to priority first above; and
(b) to the Class A-2 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero, up to an amount
equal to the Group 2 Senior Principal Distribution Amount not paid
pursuant to priority first above;
third, sequentially, to the Class M-1, Class M-2 and Class M-3
Certificates, in that order, up to the Sequential Mezzanine Principal
Distribution Amount, until the Certificate Principal Balances thereof have been
reduced to zero;
fourth, to the Class M-4 Certificates, up to the Class M-4 Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
fifth, to the Class M-5 Certificates, up to the Class M-5 Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
sixth, to the Class M-6 Certificates, up to the Class M-6 Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
seventh, to the Class M-7 Certificates, up to the Class M-7 Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
eighth, to the Class M-8 Certificates, up to the Class M-8 Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
ninth, to the Class M-9 Certificates, up to the Class M-9 Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
tenth, to the Class B Certificates, up to the Class B Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero; and
eleventh, any remaining Principal Distribution Amount will be distributed
as part of the Monthly Excess Cashflow Amount as described below under
"--Application of Monthly Excess Cashflow Amounts."
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
The "Certificate Principal Balance" with respect to any class of
Certificates (other than the Class CE, Class R and Class R-X Certificates, which
have no Certificate Principal Balance) and any Distribution Date, will equal the
principal balance of that class on the date of the initial issuance of the
Certificates as reduced, but not below zero, by:
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o all amounts distributed on previous Distribution Dates on that class
on account of principal; and
o any Applied Realized Loss Amounts allocated to that class for
previous Distribution Dates;
and increased by:
o any Subsequent Recoveries allocated to that class for previous
Distribution Dates.
"Sequential Mezzanine Principal Distribution Amount" means as of any
Distribution Date on or after the Stepdown Date and as long as a Trigger Event
is not in effect, the excess of (x) the sum of (i) the sum of the Certificate
Principal Balances of the Senior Certificates (after taking into account the
payment of the Senior Principal Distribution Amount on such Distribution Date)
and (ii) the sum of the Certificate Principal Balances of the Sequential
Mezzanine Certificates immediately prior to such Distribution Date over (y) the
lesser of (a) the product of (i) approximately 70.90% and (ii) the Pool Balance
as of the last day of the related Collection Period after giving effect to
principal prepayments in the related Prepayment Period and (b) the amount by
which the Pool Balance as of the last day of the related Collection Period after
giving effect to principal prepayments in the related Prepayment Period exceeds
the product of (i) 0.50% and (ii) the Pool Balance on the Cut-off Date.
"Class M-4 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Senior Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date), (ii) the
sum of the Certificate Principal Balances of the Sequential Mezzanine
Certificates (after taking into account the payment of the Sequential Mezzanine
Principal Distribution Amount on such Distribution Date) and (iii) the
Certificate Principal Balance of the Class M-4 Certificates immediately prior to
such Distribution Date over (y) the lesser of (a) the product of (i)
approximately 74.70% and (ii) the Pool Balance as of the last day of the related
Collection Period after giving effect to principal prepayments in the related
Prepayment Period and (b) the amount by which the Pool Balance as of the last
day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period exceeds the product of (i) 0.50%
and (ii) the Pool Balance on the Cut-off Date.
"Class M-5 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Senior Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date), (ii) the
sum of the Certificate Principal Balances of the Sequential Mezzanine
Certificates (after taking into account the payment of the Sequential Mezzanine
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-4 Certificates (after taking into account the
payment of the Class M-4 Principal Distribution Amount on such Distribution
Date)and (iv) the Certificate Principal Balance of the Class M-5 Certificates
immediately prior to such Distribution Date over (y) the lesser of (a) the
product of (i) approximately 78.40% and (ii) the Pool Balance as of the last day
of the related Collection Period after giving effect to principal prepayments in
the related Prepayment Period and (b) the amount by which the Pool Balance as of
the last day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period exceeds the product of (i) 0.50%
and (ii) the Pool Balance on the Cut-off Date.
"Class M-6 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Senior Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date), (ii) the
sum of the Certificate Principal Balances of the Sequential Mezzanine
Certificates (after taking into account the payment of the Sequential Mezzanine
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-4 Certificates (after taking into account the
payment of the Class M-4 Principal Distribution Amount on such Distribution
Date), (iv) the Certificate Principal Balance of the Class M-5 Certificates
(after taking into account the payment of the Class M-5 Principal Distribution
Amount on such Distribution Date) and (v) the Certificate Principal Balance of
the Class M-6 Certificates immediately prior to such Distribution Date over (y)
the lesser of (a) the product of (i) approximately 81.70% and (ii) the Pool
Balance as of the last day of the related Collection Period after giving effect
to principal prepayments in the related Prepayment Period and (b) the amount by
which the Pool Balance as of the last day of the
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related Collection Period after giving effect to principal prepayments in the
related Prepayment Period exceeds the product of (i) 0.50% and (ii) the Pool
Balance on the Cut-off Date.
"Class M-7 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Senior Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date), (ii) the
sum of the Certificate Principal Balances of the Sequential Mezzanine
Certificates (after taking into account the payment of the Sequential Mezzanine
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-4 Certificates (after taking into account the
payment of the Class M-4 Principal Distribution Amount on such Distribution
Date), (iv) the Certificate Principal Balance of the Class M-5 Certificates
(after taking into account the payment of the Class M-5 Principal Distribution
Amount on such Distribution Date), (v) the Certificate Principal Balance of the
Class M-6 Certificates (after taking into account the payment of the Class M-6
Principal Distribution Amount on such Distribution Date) and (vi) the
Certificate Principal Balance of the Class M-7 Certificates immediately prior to
such Distribution Date over (y) the lesser of (a) the product of (i)
approximately 84.90% and (ii) the Pool Balance as of the last day of the related
Collection Period after giving effect to principal prepayments in the related
Prepayment Period and (b) the amount by which the Pool Balance as of the last
day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period exceeds the product of (i) 0.50%
and (ii) the Pool Balance on the Cut-off Date.
"Class M-8 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Senior Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date), (ii) the
sum of the Certificate Principal Balances of the Sequential Mezzanine
Certificates (after taking into account the payment of the Sequential Mezzanine
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-4 Certificates (after taking into account the
payment of the Class M-4 Principal Distribution Amount on such Distribution
Date), (iv) the Certificate Principal Balance of the Class M-5 Certificates
(after taking into account the payment of the Class M-5 Principal Distribution
Amount on such Distribution Date), (v) the Certificate Principal Balance of the
Class M-6 Certificates (after taking into account the payment of the Class M-6
Principal Distribution Amount on such Distribution Date), (vi) the Certificate
Principal Balance of the Class M-7 Certificates (after taking into account the
payment of the Class M-7 Principal Distribution Amount on such Distribution
Date) and (vii) the Certificate Principal Balance of the Class M-8 Certificates
immediately prior to such Distribution Date over (y) the lesser of (a) the
product of (i) approximately 87.80% and (ii) the Pool Balance as of the last day
of the related Collection Period after giving effect to principal prepayments in
the related Prepayment Period and (b) the amount by which the Pool Balance as of
the last day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period exceeds the product of (i) 0.50%
and (ii) the Pool Balance on the Cut-off Date.
"Class M-9 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Senior Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date), (ii) the
sum of the Certificate Principal Balances of the Sequential Mezzanine
Certificates (after taking into account the payment of the Sequential Mezzanine
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-4 Certificates (after taking into account the
payment of the Class M-4 Principal Distribution Amount on such Distribution
Date), (iv) the Certificate Principal Balance of the Class M-5 Certificates
(after taking into account the payment of the Class M-5 Principal Distribution
Amount on such Distribution Date), (v) the Certificate Principal Balance of the
Class M-6 Certificates (after taking into account the payment of the Class M-6
Principal Distribution Amount on such Distribution Date), (vi) the Certificate
Principal Balance of the Class M-7 Certificates (after taking into account the
payment of the Class M-7 Principal Distribution Amount on such Distribution
Date), (vii) the Certificate Principal Balance of the Class M-8 Certificates
(after taking into account the payment of the Class M-8 Principal Distribution
Amount on such Distribution Date) and (viii) the Certificate Principal Balance
of the Class M-9 Certificates immediately prior to such Distribution Date over
(y) the lesser of (a) the product of (i) approximately 90.30% and (ii) the Pool
Balance as of the last day of the related Collection Period after giving effect
to principal prepayments in the related Prepayment Period and (b) the amount by
which the Pool Balance as of the last day of the related
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Collection Period after giving effect to principal prepayments in the related
Prepayment Period exceeds the product of (i) 0.50% and (ii) the Pool Balance on
the Cut-off Date.
"Class B Principal Distribution Amount" means as of any Distribution Date
on or after the Stepdown Date and as long as a Trigger Event is not in effect,
the excess of (x) the sum of (i) the sum of the Certificate Principal Balances
of the Senior Certificates (after taking into account the payment of the Senior
Principal Distribution Amount on such Distribution Date), (ii) the sum of the
Certificate Principal Balances of the Sequential Mezzanine Certificates (after
taking into account the payment of the Sequential Mezzanine Principal
Distribution Amount on such Distribution Date), (iii) the Certificate Principal
Balance of the Class M-4 Certificates (after taking into account the payment of
the Class M-4 Principal Distribution Amount on such Distribution Date), (iv) the
Certificate Principal Balance of the Class M-5 Certificates (after taking into
account the payment of the Class M-5 Principal Distribution Amount on such
Distribution Date), (v) the Certificate Principal Balance of the Class M-6
Certificates (after taking into account the payment of the Class M-6 Principal
Distribution Amount on such Distribution Date), (vi) the Certificate Principal
Balance of the Class M-7 Certificates (after taking into account the payment of
the Class M-7 Principal Distribution Amount on such Distribution Date), (vii)
the Certificate Principal Balance of the Class M-8 Certificates (after taking
into account the payment of the Class M-8 Principal Distribution Amount on such
Distribution Date), (viii) the Certificate Principal Balance of the Class M-9
Certificates (after taking into account the payment of the Class M-9 Principal
Distribution Amount on such Distribution Date) and (ix) the Certificate
Principal Balance of the Class B Certificates immediately prior to such
Distribution Date over (y) the lesser of (a) the product of (i) approximately
92.70% and (ii) the Pool Balance as of the last day of the related Collection
Period after giving effect to principal prepayments in the related Prepayment
Period and (b) the amount by which the Pool Balance as of the last day of the
related Collection Period after giving effect to principal prepayments in the
related Prepayment Period exceeds the product of (i) 0.50% and (ii) the Pool
Balance on the Cut-off Date.
"Credit Enhancement Percentage" for any class of Certificates and any
Distribution Date is the percentage obtained by dividing (x) the sum of (i) the
aggregate Certificate Principal Balance of the class or classes of Certificates
with a lower distribution priority than such class before taking into account
the distribution of the Principal Distribution Amount on such Distribution Date
and (ii) the Overcollateralization Amount after taking into account the
distribution of the Principal Distribution Amount as of the prior Distribution
Date by (y) the Pool Balance as of the last day of the related Collection Period
after giving effect to principal prepayments in the related Prepayment Period.
"Extra Principal Distribution Amount" means as of any Distribution Date,
the lesser of (x) the Monthly Excess Interest Amount for that Distribution Date
and (y) the Overcollateralization Deficiency for that Distribution Date.
"Group 1 Principal Percentage" means for any Distribution Date and the
Group 1 Certificates, the percentage equivalent to a fraction, the numerator of
which is the Principal Remittance Amount allocable to the group 1 Mortgage Loans
for such Distribution Date, and the denominator of which is equal to the
Principal Remittance Amount for such Distribution Date.
"Group 1 Senior Principal Distribution Amount" means as of any
Distribution Date (i) before the Stepdown Date or as to which a Trigger Event is
in effect, the Group 1 Principal Percentage of the Principal Distribution Amount
and (ii) on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (a) the Certificate Principal Balance of the Group 1
Certificates immediately prior to that Distribution Date over (b) the lesser of
(x) the product of (1) approximately 50.60% and (2) the aggregate Principal
Balance of the group 1 Mortgage Loans as of the last day of the related
Collection Period after giving effect to principal prepayments in the related
Prepayment Period and (y) the amount by which the aggregate Principal Balance of
the group 1 Mortgage Loans as of the last day of the related Collection Period
after giving effect to principal prepayments in the related Prepayment Period
exceeds the product of (1) 0.50% and (2) the aggregate Principal Balance of the
group 1 Mortgage Loans on the Cut-off Date.
"Group 2 Principal Percentage" means for any Distribution Date and the
Group 2 Certificates, the percentage equivalent to a fraction, the numerator of
which is the Principal Remittance Amount allocable to the group 2 Mortgage Loans
for that Distribution Date, and the denominator of which is equal to the
Principal Remittance Amount for that Distribution Date.
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"Group 2 Senior Principal Distribution Amount" means as of any
Distribution Date (i) before the Stepdown Date or as to which a Trigger Event is
in effect, the Group 2 Principal Percentage of the Principal Distribution Amount
and (ii) on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (a) the aggregate Certificate Principal Balance of the
Group 2 Certificates immediately prior to that Distribution Date over (b) the
lesser of (x) the product of (1) approximately 50.60% and (2) the aggregate
Principal Balance of the group 2 Mortgage Loans as of the last day of the
related Collection Period after giving effect to principal prepayments in the
related Prepayment Period and (y) the amount by which the aggregate Principal
Balance of the group 2 Mortgage Loans as of the last day of the related
Collection Period after giving effect to principal prepayments in the related
Prepayment Period exceeds the product of (1) 0.50% and (2) the aggregate
Principal Balance of the group 2 Mortgage Loans on the Cut-off Date.
"Group 3 Principal Percentage" means for any Distribution Date and the
Group 3 Certificates, the percentage equivalent to a fraction, the numerator of
which is the Principal Remittance Amount allocable to the group 3 Mortgage Loans
for that Distribution Date, and the denominator of which is equal to the
Principal Remittance Amount for that Distribution Date.
"Group 3 Senior Principal Distribution Amount" means as of any
Distribution Date (i) before the Stepdown Date or as to which a Trigger Event is
in effect, the Group 3 Principal Percentage of the Principal Distribution Amount
and (ii) on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (a) the aggregate Certificate Principal Balance of the
Group 3 Certificates immediately prior to that Distribution Date over (b) the
lesser of (x) the product of (1) approximately 50.60% and (2) the aggregate
Principal Balance of the group 3 Mortgage Loans as of the last day of the
related Collection Period after giving effect to principal prepayments in the
related Prepayment Period and (y) the amount by which the aggregate Principal
Balance of the group 3 Mortgage Loans as of the last day of the related
Collection Period after giving effect to principal prepayments in the related
Prepayment Period exceeds the product of (1) 0.50% and (2) the aggregate
Principal Balance of the group 3 Mortgage Loans on the Cut-off Date.
"Overcollateralization Amount" means as of any Distribution Date the
excess, if any, of (x) the Pool Balance as of the last day of the related
Collection Period after giving effect to principal prepayments in the related
Prepayment Period over (y) the aggregate Certificate Principal Balance of all
classes of Certificates (after taking into account all distributions of
principal on that Distribution Date and the increase of any Certificate
Principal Balance as a result of Subsequent Recoveries).
"Overcollateralization Deficiency" means as of any Distribution Date, the
excess, if any, of (x) the Targeted Overcollateralization Amount over (y) the
Overcollateralization Amount for that Distribution Date, calculated for this
purpose after taking into account the reduction on that Distribution Date of the
Certificate Principal Balances of all classes of Certificates resulting from the
distribution of the Principal Distribution Amount (but not the Extra Principal
Distribution Amount) on that Distribution Date, but prior to taking into account
any Applied Realized Loss Amounts on that Distribution Date.
"Overcollateralization Release Amount" means with respect to any
Distribution Date on or after the Stepdown Date on which a Trigger Event is not
in effect, the lesser of (x) the Principal Remittance Amount for that
Distribution Date and (y) the excess, if any, of (i) the Overcollateralization
Amount for that Distribution Date, assuming that 100% of the Principal
Remittance Amount is applied as a principal payment on the Certificates on that
Distribution Date over (ii) the Targeted Overcollateralization Amount. With
respect to any Distribution Date on which a Trigger Event is in effect, the
Overcollateralization Release Amount will be zero.
"Principal Distribution Amount" means as of any Distribution Date, the sum
of (i) the Principal Remittance Amount (minus the Overcollateralization Release
Amount, if any) and (ii) the Extra Principal Distribution Amount, if any.
"Principal Remittance Amount" means with respect to any Distribution Date,
the amount equal to the excess of:
(A) the sum (less certain amounts available for reimbursement of Advances
and Servicing Advances as described above under "The Pooling and Servicing
Agreement--Advances" and certain other reimbursable expenses
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or indemnification payments pursuant to the Pooling and Servicing Agreement) of
the following amounts (without duplication) with respect to the Mortgage Loans:
(i) each payment of principal on a Mortgage Loan due during the
immediately preceding Collection Period and received by the Servicer on or
prior to the Determination Date for that Distribution Date, including any
Advances with respect thereto;
(ii) all full and partial principal prepayments received by the
Servicer during the related Prepayment Period;
(iii) the insurance proceeds, Subsequent Recoveries and liquidation
proceeds (net of certain expenses) allocable to principal actually
collected by the Servicer during the related Prepayment Period;
(iv) the portion of the Purchase Price allocable to principal of all
repurchased Defective Mortgage Loans with respect to that Prepayment
Period;
(v) any Substitution Adjustments received during the related
Prepayment Period; and
(vi) on the Distribution Date on which the Trust is to be terminated
in accordance with the Pooling and Servicing Agreement, that portion of
the Termination Price in respect of principal;
over (B) to the extent any amounts payable to the Swap Provider (including
any Net Swap Payment and any Swap Termination Payment owed to the Swap Provider
but excluding any Swap Termination Payment owed to the Swap Provider resulting
from a Swap Provider Trigger Event) exceed the Interest Remittance Amount for
such Distribution Date (without giving effect to clause (B) of the definitions
of "Group 1 Interest Remittance Amount," "Group 2 Interest Remittance Amount"
and "Group 3 Interest Remittance Amount"), the amount of such excess.
"Senior Principal Distribution Amount" means as of any Distribution Date,
the sum of the Group 1 Senior Principal Distribution Amount, the Group 2 Senior
Principal Distribution Amount and the Group 3 Senior Principal Distribution
Amount.
"60+ Day Delinquent Loan" means each Mortgage Loan (including each
Mortgage Loan in foreclosure and each Mortgage Loan for which the mortgagor has
filed for bankruptcy after the Closing Date) with respect to which any portion
of a Monthly Payment is, as of the last day of the prior Collection Period, two
months or more past due and each Mortgage Loan relating to an REO Property.
"Stepdown Date" means the earlier to occur of (i) the Distribution Date
following the Distribution Date on which the aggregate Certificate Principal
Balance of the Senior Certificates is reduced to zero and (ii) the later to
occur of (x) the Distribution Date in November 2009 and (y) the Distribution
Date on which the Credit Enhancement Percentage for the Senior Certificates is
greater than or equal to 49.40%.
"Subordination Depletion Date" means the Distribution Date on which (i)
the Certificate Principal Balances of the Class M Certificates and the
Certificate Principal Balance of the Class B Certificates is reduced to zero and
(ii) the Overcollateralization Amount is reduced to zero.
"Subsequent Recovery" means any amount (net of reimbursable expenses)
received on a Mortgage Loan subsequent to such Mortgage Loan being determined to
be a Liquidated Mortgage Loan that resulted in a Realized Loss in a prior month.
If Subsequent Recoveries are received, they will be included as part of the
Principal Remittance Amount for the following Distribution Date relating to the
Prepayment Period in which received and distributed in accordance with the
priorities described above. In addition, after giving effect to all
distributions on a Distribution Date, the Unpaid Realized Loss Amount for the
class of Subordinated Certificates then outstanding with the highest
distribution priority will be decreased by the amount of Subsequent Recoveries
until reduced to zero (with any remaining Subsequent Recoveries applied to
reduce the Unpaid Realized Loss Amount of the class with the next highest
distribution priority), and the Certificate Principal Balance of such class or
classes of Subordinated Certificates will be increased by the same amount.
"Targeted Overcollateralization Amount" means as of any Distribution Date,
(x) prior to the Stepdown Date, approximately 3.65% of the Pool Balance of the
Mortgage Loans on the Cut-off Date and (y) on and after the
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Stepdown Date, (i) if a Trigger Event has not occurred, the greater of (a)
approximately 7.30% of the Pool Balance as of the last day of the related
Collection Period after giving effect to principal prepayments in the related
Prepayment Period and (b) 0.50% of the Pool Balance of the Mortgage Loans on the
Cut-off Date and (ii) if a Trigger Event has occurred, the Targeted
Overcollateralization Amount for the immediately preceding Distribution Date.
A "Trigger Event" has occurred on a Distribution Date if:
(i) the three-month rolling average of 60+ Day Delinquent Loans (as a
percentage of the Pool Balance as of the last day of the related Collection
Period) equals or exceeds the applicable percentages of the Credit Enhancement
Percentage as set forth below for the most senior class of Class A, Class M and
Class B Certificates then outstanding;
Class Percentage
------------------------- ----------------------
Class A Certificates 40.85%
Class M-1 Certificates 49.10%
Class M-2 Certificates 60.25%
Class M-3 Certificates 69.35%
Class M-4 Certificates 79.75%
Class M-5 Certificates 93.45%
Class M-6 Certificates 110.30%
Class M-7 Certificates 133.65%
Class M-8 Certificates 165.45%
Class M-9 Certificates 208.10%
Class B Certificates 276.50%
or (ii) the aggregate amount of Realized Losses incurred since the Cut-off
Date through the last day of the related Collection Period (reduced by the
aggregate amount of Subsequent Recoveries received since the Cut-off Date
through the last day of the related Collection Period) divided by the Pool
Balance of the Mortgage Loans on the Cut-off Date exceeds the applicable
percentages set forth below with respect to that Distribution Date:
Distribution Date Occurring In Percentage
- ----------------------------------- ------------------------------------------
November 2008 through October 2009 1.85% for the first month, plus an
additional 1/12th of 2.30% for each
month thereafter
November 2009 through October 2010 4.15% for the first month, plus an
additional 1/12th of 2.30% for each
month thereafter
November 2010 through October 2011 6.45% for the first month, plus an
additional 1/12th of 1.85% for each
month thereafter
November 2011 through October 2012 8.30% for the first month, plus an
additional 1/12th of 1.00% for each
month thereafter
November 2012 and thereafter 9.30%
Allocation of Losses
A "Realized Loss" is:
o as to any Liquidated Mortgage Loan, its unpaid Principal Balance
less the net proceeds from the liquidation of, and any insurance proceeds
from, that Mortgage Loan and the related Mortgaged Property which are
applied to the Principal Balance of that Mortgage Loan.
o as to any Mortgage Loan, a Deficient Valuation.
o as to any Mortgage Loan, a reduction in its Principal Balance
resulting from a Servicer Modification.
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A "Liquidated Mortgage Loan" is any defaulted Mortgage Loan as to which
the Servicer has determined that all amounts which it expects to recover from or
on account of the Mortgage Loan have been recovered.
A Realized Loss may result from the personal bankruptcy of a mortgagor if
the bankruptcy court establishes the value of the Mortgaged Property at an
amount less than the then outstanding Principal Balance of the Mortgage Loan
secured by that Mortgaged Property and reduces the secured debt to such value.
In such case, the Trust, as the holder of the Mortgage Loan, would become an
unsecured creditor to the extent of the difference between the outstanding
Principal Balance of the Mortgage Loan and the reduced secured debt (the
difference, a "Deficient Valuation").
If a Mortgage Loan is in default, or if default is reasonably foreseeable,
the Servicer may permit a modification of the Mortgage Loan to reduce its
Principal Balance and/or extend its term to a term not longer than the latest
maturity date of any other Mortgage Loan (any such modification, a "Servicer
Modification"). Any such principal reduction will constitute a Realized Loss at
the time of the reduction. An extension of the term will not result in a
Realized Loss unless coupled with a principal reduction.
Realized Losses will, in effect, be absorbed first by the Class CE
Certificates through the application of the Monthly Excess Cashflow Amount to
fund the deficiency, as well as through a reduction in the Overcollateralization
Amount. In addition, Net Swap Payments from the Swap Provider may be used to pay
Realized Losses as described under "--Interest Rate Swap Agreement, the Swap
Provider and the Swap Account" below.
If, after giving effect to the distribution of the Principal Distribution
Amount and any Net Swap Payment from the Swap Provider on any Distribution Date
and the increase of any Certificate Principal Balances as a result of Subsequent
Recoveries, the aggregate Certificate Principal Balance of the Certificates
exceeds the Pool Balance as of the end of the related Collection Period after
giving effect to principal prepayments in the related Prepayment Period, the
resulting excess (the "Applied Realized Loss Amount") will be allocated
sequentially to the Class B, Class M-9, Class M-8, Class M-7, Class M-6, Class
M-5, Class M-4, Class M-3, Class M-2 and Class M-1 Certificates, until their
respective Certificate Principal Balances are reduced to zero. The Certificate
Principal Balances of the Senior Certificates will not be reduced by any Applied
Realized Loss Amounts; however, under certain loss scenarios, there will not be
enough interest and principal on the Mortgage Loans to pay the Senior
Certificates all interest and principal amounts to which they are entitled. Any
reduction of a Certificate Principal Balance will not be reversed or reinstated
(except in the case of Subsequent Recoveries). However, on future Distribution
Dates, Certificateholders of the related class may receive payments up to the
Unpaid Realized Loss Amount for such class as described under "--Application of
Monthly Excess Cashflow Amounts" or from the Swap Account, according to the
priorities set forth under "--Interest Rate Swap Agreement, the Swap Provider
and the Swap Account" below. These subsequent payments will be applied
sequentially to the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5, Class
M-6, Class M-7, Class M-8, Class M-9 and Class B Certificates.
Application of Monthly Excess Cashflow Amounts
The weighted average Net Mortgage Interest Rate for the Mortgage Loans is
generally expected to be higher than the weighted average of the Certificate
Interest Rates on the Certificates, thus generating certain excess interest
collections which, in the absence of losses, will not be necessary to fund
interest distributions on the Certificates. This excess interest for a
Collection Period less any Net Swap Payment payable to the Swap Provider and any
Swap Termination Payment (not resulting from a Swap Provider Trigger Event)
payable to the Swap Provider, together with interest on the
Overcollateralization Amount itself, is the "Monthly Excess Interest Amount."
The "Net Mortgage Interest Rate" for each Mortgage Loan is the applicable
Mortgage Interest Rate less the sum of (i) the Servicing Fee Rate and (ii) the
Credit Risk Manager Fee Rate.
If Realized Losses occur that are not covered by the Monthly Excess
Cashflow Amount and any Net Swap Payment from the Swap Provider, these Realized
Losses will result in an Overcollateralization Deficiency (since they will
reduce the Pool Balance without giving rise to a corresponding reduction of the
aggregate Certificate Principal Balance of the Certificates). The cashflow
priorities in this situation increase the Extra Principal Distribution Amount
(subject to the availability of any Monthly Excess Cashflow Amount in subsequent
months) for
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the purpose of re-establishing the Overcollateralization Amount at the
then-required Targeted Overcollateralization Amount.
On and after the Stepdown Date and assuming that a Trigger Event is not in
effect, the Targeted Overcollateralization Amount may be permitted to decrease
or "stepdown." If the Targeted Overcollateralization Amount is permitted to
stepdown on a Distribution Date, the cashflow priorities of this transaction
permit a portion of the Principal Remittance Amount for that Distribution Date
not to be passed through as a distribution of principal on the Certificates on
that Distribution Date. This has the effect of decelerating the amortization of
the Certificates relative to the Pool Balance, thereby reducing the actual level
of the Overcollateralization Amount to the new, lower Targeted
Overcollateralization Amount. This portion of the Principal Remittance Amount
not distributed as principal on the Certificates therefore releases a limited
portion of the overcollateralization from the Trust Fund.
On any Distribution Date, the sum of the Monthly Excess Interest Amount,
the Overcollateralization Release Amount and any portion of the Principal
Distribution Amount (without duplication) remaining after principal
distributions on the Certificates is the "Monthly Excess Cashflow Amount," which
is required to be applied in the following order of priority (the "Monthly
Excess Cashflow Allocation") on that Distribution Date:
(i) to the Senior Certificates, pro rata, any remaining Accrued
Certificate Interest for such classes for that Distribution Date;
(ii) to the Senior Certificates, pro rata, any Interest Carry
Forward Amounts for such classes for that Distribution Date;
(iii) to the Class M-1 Certificates, any remaining Accrued
Certificate Interest thereon for that Distribution Date;
(iv) to the Class M-1 Certificates, any Interest Carry Forward
Amount thereon for that Distribution Date;
(v) to the Class M-1 Certificates, any Class M-1 Realized Loss
Amortization Amount for that Distribution Date;
(vi) to the Class M-2 Certificates, any remaining Accrued
Certificate Interest thereon for that Distribution Date;
(vii) to the Class M-2 Certificates, any Interest Carry Forward
Amount thereon for that Distribution Date;
(viii) to the Class M-2 Certificates, any Class M-2 Realized Loss
Amortization Amount for that Distribution Date;
(ix) to the Class M-3 Certificates, any remaining Accrued
Certificate Interest thereon for that Distribution Date;
(x) to the Class M-3 Certificates, any Interest Carry Forward Amount
thereon for that Distribution Date;
(xi) to the Class M-3 Certificates, any Class M-3 Realized Loss
Amortization Amount for that Distribution Date;
(xii) to the Class M-4 Certificates, any remaining Accrued
Certificate Interest thereon for that Distribution Date;
(xiii) to the Class M-4 Certificates, any Interest Carry Forward
Amount thereon for that Distribution Date;
(xiv) to the Class M-4 Certificates, any Class M-4 Realized Loss
Amortization Amount for that Distribution Date;
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(xv) to the Class M-5 Certificates, any remaining Accrued
Certificate Interest thereon for that Distribution Date;
(xvi) to the Class M-5 Certificates, any Interest Carry Forward
Amount thereon for that Distribution Date;
(xvii) to the Class M-5 Certificates, any Class M-5 Realized Loss
Amortization Amount for that Distribution Date;
(xviii) to the Class M-6 Certificates, any remaining Accrued
Certificate Interest thereon for that Distribution Date;
(xix) to the Class M-6 Certificates, any Interest Carry Forward
Amount thereon for that Distribution Date;
(xx) to the Class M-6 Certificates, any Class M-6 Realized Loss
Amortization Amount for that Distribution Date;
(xxi) to the Class M-7 Certificates, any remaining Accrued
Certificate Interest thereon for that Distribution Date;
(xxii) to the Class M-7 Certificates, any Interest Carry Forward
Amount thereon for that Distribution Date;
(xxiii) to the Class M-7 Certificates, any Class M-7 Realized Loss
Amortization Amount for that Distribution Date;
(xxiv) to the Class M-8 Certificates, any remaining Accrued
Certificate Interest thereon for that Distribution Date;
(xxv) to the Class M-8 Certificates, any Interest Carry Forward
Amount thereon for that Distribution Date;
(xxvi) to the Class M-8 Certificates, any Class M-8 Realized Loss
Amortization Amount for that Distribution Date;
(xxvii) to the Class M-9 Certificates, any remaining Accrued
Certificate Interest thereon for that Distribution Date;
(xxviii) to the Class M-9 Certificates, any Interest Carry Forward
Amount thereon for that Distribution Date;
(xxix) to the Class M-9 Certificates, any Class M-9 Realized Loss
Amortization Amount for that Distribution Date;
(xxx) to the Class B Certificates, any remaining Accrued Certificate
Interest thereon for that Distribution Date;
(xxxi) to the Class B Certificates, any Interest Carry Forward
Amount thereon for that Distribution Date;
(xxxii) to the Class B Certificates, any Class B Realized Loss
Amortization Amount for that Distribution Date;
(xxxiii) to the Cap Carryover Reserve Account, in respect of amounts
otherwise distributable to the Class CE Certificates, an amount up to the
aggregate of any Cap Carryover Amounts for such Distribution Date;
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(xxxiv) to the Swap Account, any Swap Termination Payments resulting
from a Swap Provider Trigger Event; and
(xxxv) to the Class CE Certificates, in the amounts specified in the
Pooling and Servicing Agreement.
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
"Class M-1 Realized Loss Amortization Amount" means as to the Class M-1
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-1 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (iv) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"Class M-2 Realized Loss Amortization Amount" means as to the Class M-2
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-2 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (vii) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"Class M-3 Realized Loss Amortization Amount" means as to the Class M-3
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-3 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (x) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"Class M-4 Realized Loss Amortization Amount" means as to the Class M-4
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-4 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xiii) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"Class M-5 Realized Loss Amortization Amount" means as to the Class M-5
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-5 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xvi) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"Class M-6 Realized Loss Amortization Amount" means as to the Class M-6
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-6 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xix) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"Class M-7 Realized Loss Amortization Amount" means as to the Class M-7
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-7 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xxii) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"Class M-8 Realized Loss Amortization Amount" means as to the Class M-8
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-8 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xxv) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"Class M-9 Realized Loss Amortization Amount" means as to the Class M-9
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-9 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xxviii) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"Class B Realized Loss Amortization Amount" means as to the Class B
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class B Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xxxi) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
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"Realized Loss Amortization Amount" means each of the Class M-1 Realized
Loss Amortization Amount, the Class M-2 Realized Loss Amortization Amount, the
Class M-3 Realized Loss Amortization Amount, the Class M-4 Realized Loss
Amortization Amount, the Class M-5 Realized Loss Amortization Amount, the Class
M-6 Realized Loss Amortization Amount, the Class M-7 Realized Loss Amortization
Amount, the Class M-8 Realized Loss Amortization Amount, the Class M-9 Realized
Loss Amortization Amount and the Class B Realized Loss Amortization Amount.
"Unpaid Realized Loss Amount" means for any class of Subordinated
Certificates and as to any Distribution Date, the excess of (x) the cumulative
amount of related Applied Realized Loss Amounts allocated to that class for all
prior Distribution Dates, as described under "--Allocation of Losses" above,
over (y) the sum of (a) the cumulative amount of any Subsequent Recoveries
allocated to that class, (b) the cumulative amount of related Realized Loss
Amortization Amounts for that class for all prior Distribution Dates and (c) the
cumulative amount of Unpaid Realized Loss Amounts reimbursed to such class for
all prior Distribution Dates out of funds in the Swap Account.
Certificate Interest Rates
Interest for each Distribution Date will accrue on the Offered
Certificates and the Class B Certificates during the related Interest Accrual
Period at a per annum rate (the "Certificate Interest Rate") equal to the least
of (i) One-Month LIBOR plus the applicable certificate margin set forth in the
table beginning on page S-6, (ii) the applicable Maximum Rate Cap (the lesser of
(i) and (ii) for each such class, the "Pass-Through Rate") and (iii) the
applicable Cap for such Distribution Date. During each Interest Accrual Period
relating to the Distribution Dates after the Optional Termination Date, each of
the certificate margins will be "stepped-up" to the applicable margin set forth
in the table beginning on page S-6 if the optional termination right is not
exercised.
The "Group 1 Cap" for any Distribution Date and for the Group 1
Certificates will be (a) a per annum rate (subject to adjustment based on the
actual number of days elapsed in the related Interest Accrual Period) equal to
the weighted average of the Net Mortgage Interest Rates for the group 1 Mortgage
Loans, weighted on the basis of the Principal Balances of the group 1 Mortgage
Loans as of the first day of the related Collection Period minus (b) a
percentage, expressed as a per annum rate (subject to an adjustment based on the
actual number of days elapsed in the related Interest Accrual Period),
calculated as a fraction, the numerator of which is the sum of (i) any Net Swap
Payment owed to the Swap Provider and (ii) any Swap Termination Payment owed to
the Swap Provider (other than any Swap Termination Payment resulting from a Swap
Provider Trigger Event) and the denominator of which is the Pool Balance as of
the first day of the related Collection Period.
The "Group 1 Maximum Rate Cap" for any Distribution Date and for the Group
1 Certificates will be a (a) per annum rate (subject to adjustment based on the
actual number of days elapsed in the related Interest Accrual Period) equal to
the weighted average of the Net Maximum Mortgage Interest Rates for the group 1
Mortgage Loans, weighted on the basis of the Principal Balances of the group 1
Mortgage Loans as of the first day of the related Collection Period minus (b) a
percentage, expressed as a per annum rate (subject to an adjustment based on the
actual number of days elapsed in the related Interest Accrual Period),
calculated as a fraction, the numerator of which is the sum of (i) any Net Swap
Payment owed to the Swap Provider and (ii) any Swap Termination Payment owed to
the Swap Provider (other than any Swap Termination Payment resulting from a Swap
Provider Trigger Event), and the denominator of which is equal to the Pool
Balance as of the first day of the related Collection Period plus (c) a
percentage, expressed as a per annum rate (subject to adjustment based on the
actual number of days elapsed in the related Interest Accrual Period),
calculated as a fraction, the numerator of which is equal to any Net Swap
Payment made by the Swap Provider and the denominator of which is equal to the
Pool Balance as of the first day of the related Collection Period.
The "Group 2 Cap" for any Distribution Date and for the Group 2
Certificates will be (a) a per annum rate (subject to adjustment based on the
actual number of days elapsed in the related Interest Accrual Period) equal to
the weighted average of the Net Mortgage Interest Rates for the group 2 Mortgage
Loans, weighted on the basis of the Principal Balances of the group 2 Mortgage
Loans as of the first day of the related Collection Period minus (b) a
percentage, expressed as a per annum rate (subject to an adjustment based on the
actual number of days elapsed in the related Interest Accrual Period),
calculated as a fraction, the numerator of which is the sum of (i) any Net Swap
Payment owed to the Swap Provider and (ii) any Swap Termination Payment owed to
the Swap Provider (other than
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any Swap Termination Payment resulting from a Swap Provider Trigger Event) and
the denominator of which is the Pool Balance as of the first day of the related
Collection Period.
The "Group 2 Maximum Rate Cap" for any Distribution Date and for the Group
2 Certificates will be a (a) per annum rate (subject to adjustment based on the
actual number of days elapsed in the related Interest Accrual Period) equal to
the weighted average of the Net Maximum Mortgage Interest Rates for the group 2
Mortgage Loans, weighted on the basis of the Principal Balances of the group 2
Mortgage Loans as of the first day of the related Collection Period minus (b) a
percentage, expressed as a per annum rate (subject to an adjustment based on the
actual number of days elapsed in the related Interest Accrual Period),
calculated as a fraction, the numerator of which is the sum of (i) any Net Swap
Payment owed to the Swap Provider and (ii) any Swap Termination Payment owed to
the Swap Provider (other than any Swap Termination Payment resulting from a Swap
Provider Trigger Event), and the denominator of which is equal to the Pool
Balance as of the first day of the related Collection Period plus (c) a
percentage, expressed as a per annum rate (subject to adjustment based on the
actual number of days elapsed in the related Interest Accrual Period),
calculated as a fraction, the numerator of which is equal to any Net Swap
Payment made by the Swap Provider and the denominator of which is equal to the
Pool Balance as of the first day of the related Collection Period.
The "Group 3 Cap" for any Distribution Date and for the Group 3
Certificates will be (a) a per annum rate (subject to adjustment based on the
actual number of days elapsed in the related Interest Accrual Period) equal to
the weighted average of the Net Mortgage Interest Rates for the group 3 Mortgage
Loans, weighted on the basis of the Principal Balances of the group 3 Mortgage
Loans as of the first day of the related Collection Period minus (b) a
percentage, expressed as a per annum rate (subject to an adjustment based on the
actual number of days elapsed in the related Interest Accrual Period),
calculated as a fraction, the numerator of which is the sum of (i) the Net Swap
Payment owed to the Swap Provider and (ii) any Swap Termination Payment owed to
the Swap Provider (other than any Swap Termination Payment resulting from a Swap
Provider Trigger Event) and the denominator of which is the Pool Balance as of
the first day of the related Collection Period.
The "Group 3 Maximum Rate Cap" for any Distribution Date and for the Group
3 Certificates will be a (a) per annum rate (subject to adjustment based on the
actual number of days elapsed in the related Interest Accrual Period) equal to
the weighted average of the Net Maximum Mortgage Interest Rates for the group 3
Mortgage Loans, weighted on the basis of the Principal Balances of the group 3
Mortgage Loans as of the first day of the related Collection Period minus (b) a
percentage, expressed as a per annum rate (subject to an adjustment based on the
actual number of days elapsed in the related Interest Accrual Period),
calculated as a fraction, the numerator of which is the sum of (i) any Net Swap
Payment owed to the Swap Provider and (ii) any Swap Termination Payment owed to
the Swap Provider (other than any Swap Termination Payment resulting from a Swap
Provider Trigger Event), and the denominator of which is equal to the Pool
Balance as of the first day of the related Collection Period plus (c) a
percentage, expressed as a per annum rate (subject to adjustment based on the
actual number of days elapsed in the related Interest Accrual Period),
calculated as a fraction, the numerator of which is equal to any Net Swap
Payment made by the Swap Provider and the denominator of which is equal to the
Pool Balance as of the first day of the related Collection Period.
The "Pool Cap" for any Distribution Date and for the Class M and Class B
Certificates will be a per annum rate equal to the weighted average of the Group
1 Cap, the Group 2 Cap and the Group 3 Cap, weighted on the basis of the related
Group Subordinate Amount.
The "Pool Maximum Rate Cap" for any Distribution Date and for the Class M
and Class B Certificates will be a per annum rate equal to the weighted average
of the Group 1 Maximum Rate Cap, the Group 2 Maximum Rate Cap and the Group 3
Maximum Rate Cap, weighted on the basis of the related Group Subordinate Amount.
Each of the Group 1 Cap, the Group 2 Cap, the Group 3 Cap and the Pool Cap
are sometimes referred to in this prospectus supplement as a "Cap" and each of
the Group 1 Maximum Rate Cap, the Group 2 Maximum Rate Cap, the Group 3 Maximum
Rate Cap and the Pool Maximum Rate Cap are sometimes referred to in this
prospectus supplement as a "Maximum Rate Cap."
The "Net Maximum Mortgage Interest Rate" for each Adjustable-Rate Mortgage
Loan is the applicable Maximum Mortgage Interest Rate and for each Fixed-Rate
Mortgage Loan is the Mortgage Interest Rate for such Mortgage Loan, in each case
less the sum of (i) the Servicing Fee Rate and (ii) the Credit Risk Manager Fee
Rate.
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The "Group Subordinate Amount" for any Distribution Date and (i) the group
1 Mortgage Loans, will be equal to the excess of the aggregate Principal Balance
of the group 1 Mortgage Loans as of the first day of the related Collection
Period over the Certificate Principal Balance of the Group 1 Certificates
immediately prior to that Distribution Date, (ii) the group 2 Mortgage Loans,
will be equal to the excess of the aggregate Principal Balance of the group 2
Mortgage Loans as of the first day of the related Collection Period over the
Certificate Principal Balance of the Group 2 Certificates immediately prior to
that Distribution Date and (iii) the group 3 Mortgage Loans, will be equal to
the excess of the aggregate Principal Balance of the group 3 Mortgage Loans as
of the first day of the related Collection Period over the aggregate Certificate
Principal Balance of the Group 3 Certificates immediately prior to that
Distribution Date.
If on any Distribution Date, the Accrued Certificate Interest for any
Certificate is based on the applicable Cap, the excess of (i) the amount of
interest such Certificate would have been entitled to receive on that
Distribution Date based on its Pass-Through Rate over (ii) the amount of
interest such Certificate received on that Distribution Date based on the Cap,
together with the unpaid portion of any such excess from prior Distribution
Dates (and interest accrued thereon at the then applicable Pass-Through Rate on
such Certificate) will be the "Cap Carryover Amount." Any Cap Carryover Amount
may be paid on the same or future Distribution Dates from amounts that would
otherwise be distributed on the Class CE Certificates, and then, to the extent
remaining unpaid, from amounts in the Swap Account, as set forth herein under
"--Interest Rate Swap Agreement, the Swap Provider and the Swap Account." On the
Closing Date, the Trustee will establish the Cap Carryover Reserve Account ("Cap
Carryover Reserve Account") pursuant to the Pooling and Servicing Agreement from
which distributions of Monthly Excess Cashflow Amount in respect of Cap
Carryover Amounts on the Offered Certificates and the Class B Certificates will
be made. The Cap Carryover Reserve Account will be an asset of the Trust but not
of any REMIC.
The Cap Carryover Reserve Account will be funded from amounts otherwise
distributable to the Class CE Certificates under clause (xxxiii) of the Monthly
Excess Cashflow Allocation. On each Distribution Date, amounts on deposit in the
Cap Carryover Reserve Account will be distributed, sequentially, as follows:
first, concurrently, to the Class A-1, Class A-2, Class A-3A, Class A-3B
and Class A-3C Certificates, pro rata (based on the Cap Carryover Amount for
each such class), any Cap Carryover Amount for such class; and
second, sequentially, to the Class M-1, Class M-2, Class M-3, Class M-4,
Class M-5, Class M-6, Class M-7, Class M-8, Class M-9 and Class B Certificates,
any Cap Carryover Amount for such class.
Interest Rate Swap Agreement, the Swap Provider and the Swap Account
The Interest Rate Swap Agreement
On or before the Closing Date, the Trustee on behalf of the Trust will
enter into an Interest Rate Swap Agreement with the Swap Provider. With respect
to any Distribution Date prior to and including the Distribution Date in October
2011, the Trustee will deposit into the Swap Account certain amounts, if any,
received from the Swap Provider and such amounts will be distributed as
described under "--The Swap Account." The Swap Account will be an asset of the
Trust Fund but not of any REMIC.
Under the Interest Rate Swap Agreement, with respect to any Distribution
Date occurring prior to and including the Distribution Date in October 2011, the
Trust will be obligated to pay to the Swap Provider from Available Funds a fixed
amount equal to the product of (x) 5.02375%, (y) the notional amount for that
Distribution Date set forth on the table in Appendix D and (z) a fraction, the
numerator of which is 30 (or, for the first Distribution Date, the number of
days elapsed from the Closing Date to but excluding the first Distribution Date
on a 30/360 basis), and the denominator of which is 360, and the Swap Provider
will be obligated to pay to the Trustee a floating amount equal to the product
of (x) one-month LIBOR (as determined pursuant to the Interest Rate Swap
Agreement), (y) the notional amount for that Distribution Date set forth on the
table in Appendix D and (z) a fraction, the numerator of which is the actual
number of days elapsed from the previous Distribution Date to but excluding the
current Distribution Date (or, for the first Distribution Date, the actual
number of days elapsed from the Closing Date to but excluding the first
Distribution Date), and the denominator of which is 360. A net payment will be
required to be made on or before the business day prior to each Distribution
Date (each such net payment, a "Net Swap Payment") (a) by the Trust, to the Swap
Provider, to the extent that the fixed amount exceeds the
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corresponding floating amount, or (b) by the Swap Provider, to the Trust, to the
extent that the floating amount exceeds the corresponding fixed amount.
The initial notional amount for the Interest Rate Swap Agreement will be
approximately $836,173,837. The Interest Rate Swap Agreement will terminate
immediately after the Distribution Date in October 2011 unless terminated
earlier upon the occurrence of a Swap Default, a Swap Early Termination or an
Additional Termination Event.
The respective obligations of the Swap Provider and the Trustee to pay
specified amounts due under the Interest Rate Swap Agreement will be subject to
the following conditions precedent: (1) no Swap Default or event that with the
giving of notice or lapse of time or both would become a Swap Default, in each
case, in respect of the other party, shall have occurred and be continuing with
respect to the Interest Rate Swap Agreement and (2) no "Early Termination Date"
(as defined in the ISDA Master Agreement) has occurred or been effectively
designated by the Swap Provider or the Trustee under the Interest Rate Swap
Agreement.
Upon the occurrence of any Swap Default under the Interest Rate Swap
Agreement, the non-defaulting party will have the right to designate an Early
Termination Date. With respect to Termination Events (including Additional
Termination Events), an Early Termination Date may be designated by one of the
parties (as specified in the Interest Rate Swap Agreement) and will occur only
after notice has been given of the Termination Event, all as set forth in the
Interest Rate Swap Agreement.
Upon any Swap Early Termination, the Trust or the Swap Provider may be
liable to make a Swap Termination Payment to the other (regardless, if
applicable, of which of the parties has caused the termination). The Swap
Termination Payment will be based on the value of the Interest Rate Swap
Agreement computed in accordance with the procedures set forth in the Interest
Rate Swap Agreement taking into account the present value of the unpaid amounts
that would have been owed to and by the Swap Provider under the remaining
scheduled term of the Interest Rate Swap Agreement. In the event that the Trust
is required to make a Swap Termination Payment (other than a Swap Termination
Payment resulting from a Swap Provider Trigger Event), that payment will be paid
from the Trust prior to the related Distribution Date, and, until paid in full,
prior to any subsequent Distribution Dates, prior to distributions to
Certificateholders.
Upon a Swap Early Termination, the Trustee, at the direction of the
Depositor and with the consent of the NIMS Insurer, if any, will seek a
replacement swap provider to enter into a replacement interest rate swap
agreement or similar agreement. To the extent the Trust receives a Swap
Termination Payment from the Swap Provider, the Trustee will apply, as set forth
in the Pooling and Servicing Agreement, all or such portion of such Swap
Termination Payment as may be required to the payment of amounts due to a
replacement swap provider under a replacement interest rate swap agreement or
similar agreement. Furthermore, to the extent the Trust is required to pay a
Swap Termination Payment to the Swap Provider, the Trust will apply all or a
portion of such amount received from a replacement swap provider upon entering
into a replacement interest rate swap agreement or similar agreement to the Swap
Termination Payment owing to the Swap Provider.
Upon the occurrence of a Downgrade Provision, the Swap Provider will be
required to (1) post collateral securing its obligations under the Interest Rate
Swap Agreement or (2) obtain a substitute Swap Provider acceptable to the Rating
Agencies, that will assume the obligations of the Swap Provider under the
Interest Rate Swap Agreement or (3) obtain a guaranty of its obligations from a
third party satisfactory to the Rating Agencies or (4) establish any other
arrangement satisfactory to the applicable Rating Agency or Rating Agencies.
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
The "Downgrade Provisions" of the Interest Rate Swap Agreement will be
triggered if the Swap Provider's short-term or long-term credit ratings fall
below the levels specified in the Interest Rate Swap Agreement.
"Events of Default" under the Interest Rate Swap Agreement (each, a "Swap
Default") include the following standard events of default under the 2002 ISDA
Master Agreement published by the International Swaps and Derivatives
Association, Inc. (the "ISDA Master Agreement"), as modified by the Interest
Rate Swap Agreement:
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o failure to pay or deliver,
o bankruptcy and insolvency events, and
o a merger by the Swap Provider or the Trust without an assumption of its
obligations under the Interest Rate Swap Agreement,
as described in the ISDA Master Agreement.
The "Swap Account" means a segregated trust account in which payments owed
to or received from the Swap Provider will be deposited.
A "Swap Early Termination" means the occurrence of an Early Termination
Date under the Interest Rate Swap Agreement.
The "Swap Provider" means Bank of America, National Association.
A "Swap Provider Trigger Event" means a Swap Termination Payment that is
triggered upon: (i) an Event of Default under the Interest Rate Swap Agreement
with respect to which the Swap Provider is a Defaulting Party (as defined in the
Interest Rate Swap Agreement) or (ii) a Termination Event under the Interest
Rate Swap Agreement with respect to which the Swap Provider is the sole Affected
Party (as defined in the Interest Rate Swap Agreement).
The "Swap Termination Payment" means the amount, if any, owed by the Trust
or the Swap Provider upon a Swap Early Termination.
A "Termination Event" under the Interest Rate Swap Agreement consists of
the following standard events under the ISDA Master Agreement:
o illegality (which generally relates to changes in law causing it to become
unlawful for either party to perform its obligations under the Interest
Rate Swap Agreement),
o a tax event (which generally relates to either party to the Interest Rate
Swap Agreement receiving a payment under the Interest Rate Swap Agreement
from which an amount has been deducted or withheld for or on account of
taxes or paying an additional amount on account of an indemnifiable tax),
and
o a tax event upon merger (which generally relates to the Swap Provider's
receiving a payment under the Interest Rate Swap Agreement from which an
amount has been deducted or withheld for or on account of taxes or paying
an additional amount on account of an indemnifiable tax, in each case,
resulting from a merger),
as described in the ISDA Master Agreement.
In addition, there are "Additional Termination Events" under the Interest
Rate Swap Agreement consisting of the following events:
o upon the irrevocable direction to dissolve or otherwise terminate the
Trust following which all assets of the Trust will be liquidated and the
proceeds of such liquidation will be distributed to certificateholders,
o upon the exercise of an optional termination,
o if the Pooling and Servicing Agreement is amended or modified without the
prior written consent of the Swap Provider where written consent is
required, and
o solely with respect to the Swap Provider, if the Swap Provider fails to
comply with the Downgrade Provisions.
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It may also be an "Additional Termination Event" under the Interest Rate
Swap Agreement if the Depositor determines at any time that it is required for
purpose of compliance with Item 1115(b)(1) or (b)(2) of the Asset Backed
Securities Regulation, 17 CFR ss.229 ("Regulation AB"), to disclose any
financial data relating to the Swap Provider. If such determination is made, the
Swap Provider will be required, at its own expense, to (a) provide to the
Depositor the required financial data, (b) subject to rating agency
requirements, select a successor swap provider who will provide the required
financial data or (c) subject to rating agency requirements, obtain a guarantee
from an affiliate, who will provide the required financial data. If the Swap
Provider does not comply with the immediately preceding sentence, then it will
be an Additional Termination Event and the Swap Provider or the Trust may be
required to make a termination payment under the Interest Rate Swap Agreement.
The Trust will not be required to make any gross-up payments to the Swap
Provider on account of any tax withholding.
As of the date of this prospectus supplement, the maximum probable
exposure to the Swap Provider under the Interest Rate Swap Agreement is less
than 10% of the Pool Balance as of the Cut-off Date.
The Swap Provider
The Swap Provider is a national banking association organized under the
laws of the United States, with its principal executive offices located in
Charlotte, North Carolina. The Swap Provider is a wholly-owned indirect
subsidiary of Bank of America Corporation and 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. As of June 30, 2006, the Swap Provider had consolidated assets
of $1,160 billion, consolidated deposits of $564 billion and stockholder's
equity of $102 billion based on regulatory accounting principles.
Bank of America Corporation is a bank holding company and a financial
holding company, with its principal executive offices located in Charlotte,
North Carolina. Additional information regarding Bank of America Corporation is
set forth in its Annual Report on Form 10-K for the fiscal year ended December
31, 2005, together with any subsequent documents it filed with the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934, as
amended.
Moody's currently rates the Swap Provider's long-term debt as "Aa1" and
short-term debt as "P-1." Fitch rates the long-term debt of the Swap Provider as
"AA-" and short-term debt as "F1+." Further information with respect to such
ratings may be obtained from each of the Rating Agencies. No assurances can be
given that the current ratings of the Swap Provider's instruments will be
maintained.
The Swap Provider is an affiliate of the Depositor, the Sponsor and the
Underwriter which arrangement may create certain conflicts of interest.
The Swap Account
The Interest Rate Swap Agreement will be administered by the Trustee
pursuant to the Pooling and Servicing Agreement. For any Distribution Date on
which the Interest Rate Swap Agreement is in effect, the Trustee will be
required to deposit into the Swap Account established by the Trustee, any Swap
Termination Payment (including a Swap Termination Payment resulting from a Swap
Provider Trigger Event) and any Net Swap Payment. Any Net Swap Payments and Swap
Termination Payments (other than any Swap Termination Payment resulting from a
Swap Provider Trigger Event) payable by the Trust on a Distribution Date, will
be deducted from interest collections on the Mortgage Loans and, to the extent
interest collections on the Mortgage Loans for such Distribution Date are
insufficient to pay such amounts, from principal collections on the Mortgage
Loans for such Distribution Date before any distributions on the Certificates
for such Distribution Date.
On each Distribution Date, to the extent required, following the
distribution of the Monthly Excess Cashflow Amount as described under
"--Application of Monthly Excess Cashflow Amounts" in this prospectus supplement
and withdrawals from the Cap Carryover Reserve Account as described under
"--Certificate Interest Rates," the Trustee will distribute amounts on deposit
in the Swap Account in the following order of priority:
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first, to the Swap Provider, any Net Swap Payment owed to the Swap
Provider pursuant to the Interest Rate Swap Agreement for such Distribution
Date;
second, to the Swap Provider, any Swap Termination Payment (other than a
Swap Termination Payment resulting from a Swap Provider Trigger Event) owed to
the Swap Provider pursuant to the Interest Rate Swap Agreement for such
Distribution Date;
third, concurrently, to each class of Class A Certificates, the related
Accrued Certificate Interest and Interest Carry Forward Amount remaining
undistributed after the distributions of the Group 1 Interest Remittance Amount,
the Group 2 Interest Remittance Amount, the Group 3 Interest Remittance Amount
and the Monthly Excess Cashflow Amount, on a pro rata basis, based on such
respective remaining Accrued Certificate Interest and Interest Carry Forward
Amount;
fourth, sequentially, to the Class M-1, Class M-2, Class M-3, Class M-4,
Class M-5, Class M-6, Class M-7, Class M-8, Class M-9 and Class B Certificates,
in that order, the related Accrued Certificate Interest and Interest Carry
Forward Amount, to the extent remaining undistributed after the distributions of
the Group 1 Interest Remittance Amount, the Group 2 Interest Remittance Amount,
the Group 3 Interest Remittance Amount and the Monthly Excess Cashflow Amount;
fifth, to the holders of the class or classes of Certificates then
entitled to receive distributions in respect of principal in the priority
described under "--Principal Distributions" for such Distribution Date, but only
to the extent necessary to restore the Overcollateralization Amount to the
Targeted Overcollateralization Amount;
sixth, to the Offered Certificates and Class B Certificates, to pay Cap
Carryover Amounts in the following order of priority, to the extent remaining
undistributed after distributions are made from the Cap Carryover Reserve
Account;
(i) concurrently, to the Class A Certificates, pro rata (based on the
remaining Cap Carryover Amount of each such Class) any remaining Cap
Carryover Amount for such Class; and
(ii) sequentially, to the Class M-1, Class M-2, Class M-3, Class M-4,
Class M-5, Class M-6, Class M-7, Class M-8, Class M-9 and Class B
Certificates, in that order, any remaining Cap Carryover Amount for such
Class;
seventh, sequentially, to the Class M-1, Class M-2, Class M-3, Class M-4,
Class M-5, Class M-6, Class M-7, Class M-8, Class M-9 and Class B Certificates,
in that order, to the extent of any remaining Unpaid Realized Loss Amounts for
each such class;
eighth, to the Trust, to fund any Swap Termination Payment resulting from
a Swap Provider Trigger Event; and
ninth, to the Class CE Certificates, any remaining amounts.
Amounts distributed in respect of priorities fifth and seventh above will
not exceed the aggregate of current or prior Realized Losses not previously
reimbursed by Subsequent Recoveries or the Monthly Excess Cashflow Amount.
Calculation of One-Month LIBOR
One-Month LIBOR for the first Distribution Date will be determined on the
second business day preceding the Closing Date and for each subsequent
Distribution Date will be determined on the second business day prior to the
immediately preceding Distribution Date (each such date, a "LIBOR Determination
Date"). With respect to each Distribution Date, "One-Month LIBOR" will equal the
interbank offered rate for one-month United States dollar deposits in the London
market as quoted on Telerate Page 3750 as of 11:00 A.M., London time, on the
related LIBOR Determination Date. "Telerate Page 3750" means the display
designated as page 3750 on the Reuters Telerate (or such other page as may
replace page 3750 on that service for the purpose of displaying London interbank
offered rates of major banks). If such rate does not appear on that page (or
such other page as may replace
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that page on that service, or if such service is no longer offered, another
service for displaying One-Month LIBOR or comparable rates as may be selected by
the Trustee), the rate will be the Reference Bank Rate. The "Reference Bank
Rate" will be determined on the basis of the rates at which deposits in U.S.
Dollars are offered by the reference banks (which shall be three major banks
that are engaged in transactions in the London interbank market, selected by the
Trustee) as of 11:00 A.M., London time, on the related LIBOR Determination Date
to prime banks in the London interbank market for a period of one month in
amounts approximately equal to the aggregate Certificate Principal Balance of
the Offered Certificates and the Class B Certificates. The Trustee will request
the principal London office of each of the reference banks to provide a
quotation of its rate. If at least two quotations are provided, the rate will be
the arithmetic mean of the quotations. If on such date fewer than two quotations
are provided as requested, the rate will be the arithmetic mean of the rates
quoted by one or more major banks in New York City, selected by the Trustee, as
of 11:00 A.M., New York City time, on such date for loans in United States
dollars to leading European banks for a period of one month in amounts
approximately equal to the aggregate Certificate Principal Balance of the
Offered Certificates and the Class B Certificates. If no quotations can be
obtained, the rate will be One-Month LIBOR for the prior Distribution Date.
The establishment of One-Month LIBOR on each LIBOR Determination Date by
the Trustee and the Trustee's calculation of the rate of interest applicable to
the Offered Certificates and the Class B Certificates for the related Interest
Accrual Period shall (in the absence of manifest error) be final and binding.
Restrictions on Transfer of the Subordinate Certificates
Under current law the purchase and holding of the 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
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 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 Depositor, to the effect that the purchase or holding of the
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 and Servicing Agreement.
The Subordinate Certificates will contain a legend describing these
restrictions on transfer. Any transferee of a 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.
The Pooling and Servicing Agreement will provide that any attempted or
purported transfer in violation of these transfer restrictions will be null and
void and will vest no rights in any purported transferee.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
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YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yields to maturity and weighted average lives of the Offered
Certificates will depend upon, among other things, the price at which such
Offered Certificates are purchased, the amount and timing of principal payments
on the applicable Mortgage Loans, the allocation of Available Funds to various
classes of Offered Certificates, the amount and timing of mortgagor
delinquencies and defaults on the applicable Mortgage Loans, the rate of
liquidations and Realized Losses and the allocation of Realized Losses to
various classes of Offered Certificates and the relationship between payments
made by the Trust (if any) and payments made by the Swap Provider (if any) under
the Interest Rate Swap Agreement.
The rate of payment of principal, the aggregate amount of distributions
and the yield to maturity of the Offered Certificates will be affected by the
rate of defaults resulting in Realized Losses and by the severity and timing of
these losses. If a purchaser of an Offered Certificate calculates its
anticipated yield based on an assumed rate of default and amount of Realized
Losses that is lower than the default rate and amount of losses actually
incurred, its actual yield to maturity will be lower than the yield calculated.
The timing of Realized Losses will also affect an investor's actual yield to
maturity, even if the average rate of defaults and severity of losses are
consistent with an investor's expectations. In general, the earlier a loss
occurs, the greater the effect on an investor's yield to maturity. There can be
no assurance as to the delinquency, foreclosure or loss experience of the
Mortgage Loans. The Mortgage Loans may have a greater than normal risk of future
defaults and delinquencies, as compared to newly originated, high quality one-
to four-family residential mortgage loans of comparable size and geographic
concentration because the Mortgage Loans are of sub-prime credit quality. See
"Risk Factors--Nature of sub-prime mortgage loans may increase risk of loss" in
this prospectus supplement and "Risk Factors--Risks Associated with the
Assets--Sub-Prime Mortgage Loans May Experience Greater Rates of Delinquency and
Foreclosure" in the prospectus.
The rate of principal payments, the aggregate amount of distributions and
the yields to maturity of the Offered Certificates will be related to the rate
and timing of payments of principal on the applicable Mortgage Loans. The rate
of principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancing,
liquidations of the Mortgage Loans due to defaults, casualties or condemnations
and repurchases by the Sponsor, the Originator or the Servicer). Because certain
of the Mortgage Loans contain prepayment charges, the rate of principal payments
may be less than the rate of principal payments for mortgage loans which did not
have prepayment charges. The Mortgage Loans are subject to the "due-on-sale"
provisions in the related mortgage notes. See "Yield Considerations" in the
prospectus.
Unscheduled payments of principal (whether resulting from prepayments,
liquidations, casualties, condemnations, repurchases due to breaches of
representations and warranties, or purchase in connection with optional
termination) will result in distributions on the related Offered Certificates of
principal amounts which would otherwise be distributed over the remaining terms
of the Mortgage Loans. Since the rate of payment of principal on the Mortgage
Loans will depend on future events and a variety of other factors, no assurance
can be given as to such rate or the rate of principal prepayments. The extent to
which the yield to maturity of a class of Offered Certificates may vary from the
anticipated yield will depend upon the degree to which such class of Offered
Certificates is purchased at a discount or premium, and the degree to which the
timing of payments thereon is sensitive to prepayments, liquidations and
purchases of the applicable Mortgage Loans. Further, an investor should consider
the risk that, in the case of any Offered Certificate purchased at a discount, a
slower than anticipated rate of principal payments (including prepayments) on
the applicable Mortgage Loans could result in an actual yield to such investor
that is lower than the anticipated yield and, in the case of any Offered
Certificate purchased at a premium, a faster than anticipated rate of principal
payments on the applicable Mortgage Loans could result in an actual yield to
such investor that is lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the Mortgage Interest Rates on
the Mortgage Loans, such Mortgage Loans could be subject to higher prepayment
rates than if prevailing interest rates were to remain at or above the Mortgage
Interest Rates on such Mortgage Loans. Conversely, if prevailing interest rates
were to rise significantly, the rate of prepayments on such Mortgage Loans would
generally
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be expected to decrease. As is the case with the Fixed-Rate Mortgage Loans, the
Adjustable-Rate Mortgage Loans may be subject to a greater rate of principal
prepayments in a low interest rate environment. For example, if prevailing
interest rates were to fall, mortgagors with adjustable-rate mortgage loans may
be inclined to refinance their adjustable-rate mortgage loans with a fixed-rate
loan to "lock in" a lower interest rate. The existence of the applicable
Periodic Rate Cap and Maximum Mortgage Interest Rate also may affect the
likelihood of prepayments resulting from refinancings. No assurances can be
given as to the rate of prepayments on the Mortgage Loans in stable or changing
interest rate environments. In addition, the delinquency and loss experience of
the Adjustable-Rate Mortgage Loans may differ from that on the Fixed-Rate
Mortgage Loans because the amount of the Monthly Payments on each
Adjustable-Rate Mortgage Loan is subject to adjustment on each Adjustment Date.
Further, a majority of the Adjustable-Rate Mortgage Loans will not have their
initial Adjustment Date for two to five years after their origination. The
Adjustable-Rate Mortgage Loans may be subject to greater rates of prepayments as
they approach their initial Adjustment Dates even if market interest rates are
only slightly higher or lower than the Mortgage Interest Rates on such
Adjustable-Rate Mortgage Loans as borrowers seek to avoid changes in their
Monthly Payments.
The weighted average life and yield to maturity of each class of
Certificates will also be influenced by the amount of Monthly Excess Cashflow
Amounts generated by the Mortgage Loans and applied in reduction of the
Certificate Principal Balances of such Certificates. The level of Monthly Excess
Cashflow Amounts available on any Distribution Date to be applied in reduction
of the Certificate Principal Balances of the Certificates will be influenced by,
among other factors, (i) the overcollateralization level of the Mortgage Loans
at such time (i.e., the extent to which interest on the Mortgage Loans is
accruing on a higher Principal Balance than the aggregate Certificate Principal
Balance of the Certificates); (ii) the delinquency and default experience of the
Mortgage Loans; and (iii) the level of the Index for the Adjustable-Rate
Mortgage Loans. To the extent that greater amounts of Monthly Excess Cashflow
Amounts are distributed in reduction of the Certificate Principal Balance of a
class of Certificates, the weighted average life thereof can be expected to
shorten. No assurance can be given as to the amount of Monthly Excess Cashflow
Amounts distributed at any time or in the aggregate.
The Class M and Class B Certificates are not expected to receive any
principal distributions until at least the Distribution Date in November 2009
(unless the aggregate Certificate Principal Balance of the Senior Certificates
is reduced to zero prior thereto). As a result, the weighted average lives of
the Class M and Class B Certificates will be longer than would have been the
case if principal distributions were to be made on a pro rata basis. The longer
weighted average lives may increase the risk that an Applied Realized Loss
Amount will be allocated to one or more classes of Class M and Class B
Certificates.
Option One generally will be required to repurchase from the Trust certain
Mortgage Loans for which the first scheduled monthly payment due after their
purchase by the Sponsor becomes 45 or more days Delinquent. Such repurchase
obligation will have the same effect on the holders of the Offered Certificates
as a prepayment on the Mortgage Loans. See "Risk Factors--There are risks
involving unpredictability of prepayments and the effect of prepayments on
yields" in this prospectus supplement.
Weighted Average Lives
The timing of changes in the rate of principal prepayments on the Mortgage
Loans may significantly affect an investor's actual yield to maturity, even if
the average rate of principal prepayments is consistent with such investor's
expectation. In general, the earlier a principal prepayment on the Mortgage
Loans occurs, the greater the effect of such principal prepayment on an
investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Offered
Certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal prepayments.
The projected weighted average life of any class of Offered Certificates
is the average amount of time that will elapse from the Closing Date, until each
dollar of principal is scheduled to be repaid to the investors in such class of
Offered Certificates. Because it is expected that there will be prepayments and
defaults on the Mortgage Loans, the actual weighted average lives of the classes
of Offered Certificates are expected to vary substantially from the weighted
average remaining terms to stated maturity of the Mortgage Loans as set forth in
the tables in this prospectus supplement under "Summary of Prospectus
Supplement."
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Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The prepayment models used in this prospectus
supplement (the "Prepayment Assumptions") are based on an assumed rate of
prepayment each month of the then unpaid principal balance of three hypothetical
pools of mortgage loans similar to the Mortgage Loans.
For the Fixed-Rate Mortgage Loans, the Prepayment Assumption is the
"Fixed-Rate Prepayment Curve" or "FRM PPC," which assumes a prepayment rate of
2.30% CPR per annum of the then-outstanding principal balance of a hypothetical
pool of fixed-rate mortgage loans in the first month of the life of such
mortgage loans and an additional 2.30% per annum in each month thereafter until
23% CPR is reached in the tenth month. Beginning in the tenth month and in each
month thereafter during the life of such mortgage loans, FRM PPC assumes a
constant prepayment rate of 23.00% CPR per annum each month.
For the Adjustable-Rate Mortgage Loans, the Prepayment Assumption is the
"Adjustable-Rate Prepayment Curve" or "ARM PPC," which assumes a prepayment rate
of 5% CPR per annum of the then-outstanding principal balance of a hypothetical
pool of adjustable rate mortgage loans in the first month of the life of such
mortgage loans and an additional approximate 2.273% per annum in each month
thereafter until 30% CPR is reached in the twelfth month. Beginning in the
twelfth month, ARM PPC assumes a constant prepayment rate of 30% CPR per annum
each month until the twenty-fifth month is reached. Beginning in the
twenty-fifth month, ARM PPC assumes a constant prepayment rate of 60% CPR per
annum each month until the twenty-eighth month is reached. Beginning in the
twenty-eighth month and in each month thereafter during the life of such
mortgage loans, ARM PPC assumes a constant prepayment rate of 35% CPR per annum
each month. Notwithstanding the foregoing, CPR is capped at 90% with respect to
all of the decrement tables.
"CPR" represents a constant assumed rate of principal prepayment each
month relative to the then-outstanding principal balance of a pool of mortgage
loans for the life of such mortgage loans. No Prepayment Assumption 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 decrement tables set forth in Appendix B were prepared on the basis of
the Structuring Assumptions in the following paragraph. There may be certain
differences between the loan characteristics included in such assumptions and
the characteristics of the actual Mortgage Loans. Any such discrepancy may have
an effect upon the percentages of original Certificate Principal Balances
outstanding and weighted average lives of the Offered Certificates set forth in
the decrement tables. In addition, since the actual Mortgage Loans in the Trust
Fund will have characteristics that differ from those assumed in preparing the
table in Appendix C, the distributions of principal of the Offered Certificates
may be made earlier or later than indicated in the tables.
The percentages and weighted average lives in the decrement tables were
determined using the following assumptions collectively (the "Structuring
Assumptions"): (i) the Mortgage Loans have the characteristics set forth in the
table in Appendix C, (ii) the closing date for the Offered Certificates occurs
on November 14, 2006 and the Offered Certificates are sold to investors on such
date, (iii) distributions on the Certificates are made on the 25th day of each
month regardless of the day on which the Distribution Date actually occurs,
commencing in November 2006, in accordance with the allocation of Available
Funds set forth above under "Description of the Certificates," (iv) the Mortgage
Loans prepay in accordance with the Prepayment Assumptions indicated, (v) there
are no Prepayment Interest Shortfalls, (vi) neither the Sponsor nor the
Originator is required to substitute or repurchase any of the Mortgage Loans
pursuant to the Option One Mortgage Loan Purchase Agreement, the Mortgage Loan
Purchase Agreement or the Pooling and Servicing Agreement and no optional
termination is exercised (except with respect to the entries identified by the
row heading "Weighted Avg. Life to Optional Termination Date" in the tables in
Appendix B), (vii) the Targeted Overcollateralization Amount is set initially as
specified herein and thereafter decreases as described in the definition
thereof, (viii) scheduled payments for all Mortgage Loans are received on the
Due Date commencing in November 2006, the principal portion of such payments is
computed prior to giving effect to prepayments received in such month and there
are no losses or delinquencies with respect to such Mortgage Loans, (ix) such
prepayments are received on the last day of each month commencing in October
2006, (x) the Servicing Fee Rate is 0.30% per annum for the first 10 calendar
months, 0.40% per annum for the 11th through 30th calendar months and 0.65% per
annum for all calendar months thereafter, and the Credit Risk Manager Fee Rate
is 0.015% per annum, (xi) One-Month LIBOR is at all times equal to 5.32%, (xii)
the Certificate Interest Rates for the Offered Certificates are calculated as
described above under "Description of the Certificates--Certificate Interest
Rates," (xiii) the Mortgage Interest Rate for each Adjustable-Rate Mortgage Loan
(which are
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indicated as such in Appendix C with the designation ARM under the column
Interest Type) adjusts semi-annually on its next Adjustment Date (and on
subsequent Adjustment Dates, if necessary) to equal the sum of (a) the assumed
level of the Index and (b) the respective Gross Margin (this sum subject to the
applicable Periodic Rate Caps, Minimum Mortgage Interest Rates and Maximum
Mortgage Interest Rates), (xiv) the Index with respect to each of the
Adjustable-Rate Mortgage Loans is Six-Month LIBOR and Six-Month LIBOR is equal
to 5.4163% and (xv) the Net Swap Payment is calculated as described under
"Description of the Certificates--Interest Rate Swap Agreement, the Swap
Provider and the Swap Account" and no Swap Termination Payment is made. Nothing
contained in the foregoing assumptions should be construed as a representation
that the Mortgage Loans will not experience delinquencies or losses.
Based on the foregoing Structuring Assumptions, the decrement tables
indicate the projected weighted average lives of each class of Offered
Certificates and set forth the percentages of the original Certificate Principal
Balance of each such class that would be outstanding after each of the dates
shown at the indicated percentages of the applicable Prepayment Assumption.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates to the purchase price of the Mortgage Loans transferred to the
Trust. See "Method of Distribution" in this prospectus supplement.
FEDERAL INCOME TAX CONSEQUENCES
General
The Pooling and Servicing Agreement provides that designated portions of the
Trust Fund will comprise multiple real estate mortgage investment conduits
(each, a "REMIC") organized in a tiered REMIC structure consisting of one or
more lower-tier REMICs and one or more upper-tier REMICs (each, a "Trust
REMIC"). The lower-tier REMICs will issue uncertificated regular interests and
those interests will be held by the Trust REMIC above it in the tiered
structure. Each of the Trust REMICs will designate a single class of interests
as the residual interest in that REMIC. Elections will be made to treat each of
the Trust REMICs as a REMIC for federal income tax purposes. Each class of
Offered Certificates (exclusive of the right to receive payments from the Swap
Account or the obligation to make payments to the Swap Account) will represent
beneficial ownership of the corresponding class of regular interests issued by
the related Trust REMIC. The Trust Fund will also include a grantor trust that
will hold the uncertificated interests in the related Trust REMIC and the Basis
Risk Arrangements, as defined below.
The Offered Certificates will represent beneficial ownership of the
corresponding class of regular interests issued by the related Trust REMIC and
of the right to receive Cap Carryover Amounts from amounts otherwise
distributable to the Class CE Certificates as part of the Monthly Excess
Cashflow Amount or from the Swap Account. Holders of the Offered Certificates
must allocate their basis between their regular interest and their right to
receive such Cap Carryover Amounts as set forth below under "--Taxation of Basis
Risk Arrangements."
Upon the issuance of the Offered Certificates, Cadwalader, Wickersham & Taft
LLP will deliver its opinion to the effect that, assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, each of the
Trust REMICs will qualify as a REMIC within the meaning of Section 860D of the
Internal Revenue Code of 1986, as amended (the "Code") and the portion of the
Trust Fund exclusive of the Trust REMICs will qualify as a grantor trust under
subpart E, Part 1 of subchapter J of the Code.
Taxation of Regular Interests
For federal income tax reporting purposes, the regular interest portion of
the classes of Offered Certificates may be treated as having been issued with
original issue discount ("OID"). The Prepayment Assumption that will be used in
determining the rate of accrual of original issue discount, premium and market
discount, if any, for federal income tax purposes will be based on the
assumption that subsequent to the date of any determination the Mortgage Loans
will prepay at a constant rate of 100% ARM PPC with respect to the
Adjustable-Rate Mortgage Loans and 100% FRM PPC with respect to the Fixed-Rate
Mortgage Loans. No representation is made that the Mortgage
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Loans will prepay at such rate or at any other rate. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of Regular Securities--Original Issue
Discount" in the prospectus.
The IRS has issued regulations (the "OID Regulations") under Sections 1271
to 1275 of the Code generally addressing the treatment of debt instruments
issued with original issue discount. Purchasers of the Offered Certificates
should be aware that the OID Regulations do not adequately address certain
issues relevant to, or are not applicable to, securities such as the Offered
Certificates. Because of the uncertainty concerning the application of Section
1272(a)(6) of the Code to such Certificates, and because the rules of the OID
Regulations are limited in their application in ways that could preclude their
application to such Certificates even in the absence of Section 1272(a)(6) of
the Code, the IRS could assert that the Offered Certificates should be treated
as issued with original issue discount or should be governed by the rules
applicable to debt instruments having contingent payments or by some other
manner not yet set forth in regulations. Prospective purchasers of the Offered
Certificates are advised to consult their tax advisors concerning the tax
treatment of such Certificates.
Each holder of an Offered Certificate is deemed to own an undivided
beneficial ownership interest in a REMIC regular interest (the "Regular Interest
component") and the right to receive payments from the Cap Carryover Reserve
Account and the Swap Account in respect of the related Cap Carryover Amount or
the obligation to make payments to the Swap Account (the "Basis Risk
component"). Holders of the Offered Certificates must allocate their basis
between their Regular Interest component and their Basis Risk component as set
forth below under "--Taxation of the Basis Risk Arrangements." The Cap Carryover
Reserve Account, the Interest Rate Swap Agreement and the Swap Account are not
assets of any Trust REMIC. The Regular Interest component corresponding to an
Offered Certificate generally will be entitled to receive interest and principal
payments at the times and in the amounts equal to those made on the certificate
to which it corresponds, except that (i) the maximum interest rate of that
Regular Interest component will equal the lesser of the applicable Cap or
Maximum Rate Cap computed without regard to any Swap Termination Payment and
(ii) any Swap Termination Payment will be treated as being payable first from
Monthly Excess Cashflow Amounts and second from amounts distributed on the
Regular Interests. As a result of the foregoing, the amount of distributions on
the Regular Interest component corresponding to an Offered Certificate may
exceed the actual amount of distributions on the Offered Certificate.
The Regular Interest components of the Offered Certificates (but not the
Basis Risk components) generally will be treated as assets described in Section
7701(a)(19)(C) of the Code for a domestic building and loan association and
"real estate assets" under Section 856(c)(5)(B) of the Code for a real estate
investment trust (a "REIT"), in the same proportion that the assets in the Trust
Fund would be so treated. In addition, interest on the Offered Certificates
generally will be treated as "interest on obligations secured by mortgages on
real property" under Section 856(c)(3)(B) of the Code for a REIT, to the extent
that the Offered Certificates are treated as "real estate assets" under Section
856(c)(5)(B) of the Code. See "Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Securities" in
the prospectus. If more than 95% of the Regular Interest components and income
qualify for these treatments, the Regular Interest components generally will
qualify for such treatments in their entirety. However, no portion of an offered
certificateholder's basis or income allocable to a Basis Risk component will
qualify for such treatment. As a result, the Offered Certificates are not
suitable investments for inclusion in another REMIC.
Taxation of the Basis Risk Arrangements
General. Each holder of an Offered Certificate will be treated for federal
income tax purposes as having entered into a notional principal contract
pursuant to its rights to receive payment with respect to Cap Carryover Amounts
from the Cap Carryover Reserve Account and the obligation to make certain
payments to the Swap Account on the date it purchases its Certificates. The
rights to receive or the obligation to make such payments (referred to as the
"Basis Risk Arrangements") are beneficially owned by holders of Offered
Certificates in the portion of the Trust Fund, exclusive of the Trust REMICs,
which is treated as a grantor trust for federal income tax purposes. The
Internal Revenue Service (the "IRS") has issued final regulations under Section
446 of the Code relating to notional principal contracts (the "Swap
Regulations").
In general, the holders of the Offered Certificates must allocate the
price they pay for the Offered Certificates between the Regular Interest
component and the applicable Basis Risk component based on their relative fair
market values. To the extent rights to receive payments are determined to have a
value on the Closing Date that is greater
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than zero, a portion of such purchase price will be allocable to such rights,
and such portion will be treated as a cap premium (the "Cap Premium") paid by
the holders of the applicable Offered Certificates. A holder of an Offered
Certificate will be required to amortize the Cap Premium under a level payment
method as if the Cap Premium represented the present value of a series of equal
payments made over the life of the applicable Basis Risk Arrangement (adjusted
to take into account decreases in notional principal amount), discounted at a
rate equal to the rate used to determine the amount of the Cap Premium (or some
other reasonable rate). Prospective purchasers of Offered Certificates are
encouraged to consult their own tax advisors regarding the appropriate method of
amortizing any Cap Premium. The Swap Regulations treat a nonperiodic payment
made under a notional principal contract as a loan for federal income tax
purposes if the payment is "significant." It is not known whether any Cap
Premium would be treated in part as a loan under the Swap Regulations.
Under the Swap Regulations (i) all taxpayers must recognize periodic
payments with respect to a notional principal contract under the accrual method
of accounting, and (ii) any periodic payments received under the applicable
Basis Risk components must be netted against payments, if any, deemed made as a
result of the Cap Premiums or periodic payments made by the related Offered
Certificates over the recipient's taxable year, rather than accounted for on a
gross basis. Net income or deduction with respect to net payments under a
notional principal contract for a taxable year should constitute ordinary income
or ordinary deduction. The IRS could contend the amount is capital gain or loss,
but such treatment is unlikely, at least in the absence of further regulations.
Any regulations requiring capital gain or loss treatment presumably would apply
only prospectively. Individuals may be limited in their ability to deduct any
such net deduction and are encouraged to consult their tax advisors prior to
investing in the Offered Certificates.
Any payments made to a beneficial owner of an Offered Certificate in
excess of the amounts payable on the corresponding Regular Interest component
will be treated as having been received as a payment on a notional principal
contract. To the extent the sum of such periodic payments for any year exceeds
that year's amortized cost of any Cap Carryover Amounts, such excess represents
net income for that year. Conversely, to the extent that the amount of that
year's amortized cost exceeds the sum of the periodic payments, such excess
shall represent a net deduction for that year. In addition, any amounts payable
on such Regular Interest component in excess of the amount of payments on the
Offered Certificate to which it relates will be treated as having been received
by the beneficial owners of such Certificates and then paid by such owners to
the Class CE Certificates for payment to the Swap Provider pursuant to the
Interest Rate Swap Agreement, and such excess should be treated as a periodic
payment on a notional principal contract that is made by the beneficial owner
during the applicable taxable year and that is taken into account in determining
the beneficial owner's net income or net deduction with respect to any Cap
Carryover Amounts for such taxable year.
A beneficial owner's ability to recognize a net deduction with respect to
the Basis Risk component is limited under Sections 67 and 68 of the Code in the
case of (i) estates and trusts and (ii) individuals owning an interest in such
component directly or through a "pass-through entity" (other than in connection
with such individual's trade or business). Pass-through entities include
partnerships, S corporations, grantor trusts and non-publicly offered regulated
investment companies, but do not include estates, nongrantor trusts,
cooperatives, real estate investment trusts and publicly offered regulated
investment companies. Further, such a beneficial owner will not be able to
recognize a net deduction with respect to the Basis Risk component in computing
the beneficial owner's alternative minimum tax liability.
Any amount of proceeds from the sale, redemption or retirement of an
Offered Certificate that is considered to be allocated to rights under a Basis
Risk Arrangement would be considered a "termination payment" under the Swap
Regulations. It is anticipated that the Trustee will account for any termination
payments for reporting purposes in accordance with the Swap Regulations, as
described below.
Termination Payments. Any amount of sales proceeds that is considered to
be allocated to the selling beneficial owner's rights under the applicable Basis
Risk Arrangement in connection with the sale or exchange of an Offered
Certificate would be considered a "termination payment" under the Swap
Regulations allocable to that Offered Certificate. A holder of an Offered
Certificate will have gain or loss from such a termination of a Basis Risk
Arrangement equal to (i) any termination payment it received or is deemed to
have received minus (ii) the unamortized portion of any Cap Premium paid (or
deemed paid) by the beneficial owner upon entering into or acquiring its
interest in a Basis Risk Arrangement.
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Gain or loss realized upon the termination of a Basis Risk Arrangement
will generally be treated as capital gain or loss. Moreover, in the case of a
bank or thrift institution, Code Section 582(c) would likely not apply to treat
such gain or loss as ordinary.
REMIC Taxes and Reporting
It is not anticipated that the Trust Fund will engage in any transactions
that would subject it to the prohibited transactions tax as defined in Section
860F(a)(2) of the Code, the contributions tax as defined in Section 860G(d) of
the Code or the tax on net income from foreclosure property as defined in
Section 860G(c) of the Code. However, in the event that any such tax is imposed
on the Trust Fund, such tax will be borne (i) by the Trustee, if the Trustee has
breached its obligations with respect to REMIC compliance under the Agreement,
(ii) the Servicer, if the Servicer has breached its obligations with respect to
REMIC compliance under the Agreement, and (iii) otherwise by the Trust Fund,
with a resulting reduction in amounts otherwise distributable to Holders of the
Offered Certificates. See "Description of the Securities--General" and "Federal
Income Tax Consequences--REMICs--Taxes That May Be Imposed on the REMIC
Pool--Prohibited Transactions" in the prospectus.
The responsibility for filing annual federal information returns and other
reports will be borne by the Trustee. See "Federal Income Tax
Consequences--REMICs--Taxes That May Be Imposed on the REMIC
Pool--Administrative Matters" in the prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Federal Income Tax
Consequences--REMICs" in the prospectus.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an employee
benefit plan subject to ERISA and/or a plan or other arrangement subject to the
excise tax provisions set forth under Section 4975 of the Code (each of the
foregoing, an "ERISA Plan") from engaging in certain transactions involving such
ERISA Plan and its assets unless a statutory, regulatory or administrative
exemption applies to the transaction. Section 4975 of the Code imposes certain
excise taxes on prohibited transactions involving plans described under that
Section; ERISA authorizes the imposition of civil penalties for prohibited
transactions involving plans not covered under Section 4975 of the Code. Any
ERISA Plan fiduciary which proposes to cause an ERISA Plan to acquire any of the
Offered Certificates is encouraged to consult with its counsel with respect to
the potential consequences under ERISA and the Code of the ERISA Plan's
acquisition and ownership of such Certificates. See "ERISA Considerations" in
the prospectus.
Certain employee benefit plans, including governmental plans and certain
church plans (collectively with ERISA Plans, "Plans"), are not subject to
ERISA's requirements. However, such plans may be subject to the provisions of
other applicable federal, state or local law ("Similar Law") materially similar
to the foregoing provisions of ERISA and the Code. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
may nonetheless be subject to the prohibited transaction rules set forth in
Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary which decides to
invest the assets of a Plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor has 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 with respect to the initial purchase, the holding and the subsequent
resale by 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. The Exemption can apply to certificates in a
pass-through trust holding mortgage loans secured by residential real properties
with loan-to-value ratios in excess of 100% but not exceeding 125%, and the
Exemption may apply to the Senior Certificates.
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Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable
to the Plan as they would be in an arm's length transaction with an
unrelated party;
(2) the certificates acquired by the Plan are not subordinated to
any other class of certificates issued by the trust and have received a
rating at the time of such acquisition that is one of the two highest
generic rating categories from Standard & Poor's, a division of The
McGraw-Hill Companies, Inc., Moody's or Fitch (collectively, the
"Exemption Rating Agencies");
(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 an underwriter
in connection with the distribution of the certificates represents not
more than reasonable compensation for underwriting the certificates; the
sum of all payments made to and retained by the seller pursuant to the
assignment of the loans to the trust represents not more than the fair
market value of such loans; the sum of all payments made to and retained
by the servicer represents not more than reasonable compensation for such
person's services under the agreement pursuant to which the loans are
pooled and reimbursements of such person's reasonable expenses in
connection therewith; and
(5) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Act").
The trust must also meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type
that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated
in one of the two highest generic rating categories by an Exemption Rating
Agency for at least one year prior to the Plan's acquisition of
certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of the certificates.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire certificates in a trust holding receivables as to which
the fiduciary (or its affiliate) is an obligor provided that, among other
requirements, (i) in the case of an acquisition in connection with the initial
issuance of certificates, at least fifty percent (50%) of each class of
certificates in which Plans have invested is acquired by persons independent of
the Restricted Group; (ii) such fiduciary (or its affiliate) is an obligor with
respect to five percent (5%) or less of the fair market value of the obligations
contained in the trust; (iii) a Plan's investment in certificates of any class
does not exceed twenty-five percent (25%) of all of the certificates of that
class outstanding at the time of the acquisition; and (iv) immediately after the
acquisition, no more than twenty-five percent (25%) of the assets of any Plan
with respect to which such person is a fiduciary are invested in certificates
representing an interest in one or more trusts containing assets sold or
serviced by the same entity. The Exemption does not apply to Plans sponsored by
any Underwriter, the Trustee, the Servicer, the Swap Provider, any obligor with
respect to Mortgage Loans included in the Trust constituting more than five
percent of the aggregate unamortized principal balance of the assets in the
Trust, or any affiliate of such parties (the "Restricted Group").
For so long as the holder of a Senior Certificate also holds an interest
in the Interest Rate Swap Agreement, the holder will be deemed to have acquired
and be holding the Senior Certificate without the right to receive payments from
the Interest Rate Swap Agreement and, separately, the right to receive payments
from the Interest Rate Swap Agreement. A holder's rights with respect to the
Interest Rate Swap Agreement are not covered by the Exemption. However, certain
other exemptions may apply. Accordingly, no Plan or other person using assets of
a Plan may acquire or hold a Senior Certificate while the Interest Rate Swap
Agreement is in existence, unless (1)
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such Plan is an accredited investor within the meaning of the Exemption and (2)
such acquisition or holding is eligible for the exemptive relief available under
Department of Labor Prohibited Transaction Class Exemption 84-14 (for
transactions by independent "qualified professional asset managers"), 91-38 (for
transactions by bank collective investment funds), 90-1 (for transactions by
insurance company pooled separate accounts), 95-60 (for transactions by
insurance company general accounts) or 96-23 (for transactions effected by
"in-house asset managers"). For so long as the Interest Rate Swap Agreement is
in existence, each beneficial owner of a Senior Certificate or any interest
therein, shall be deemed to have represented, by virtue of its acquisition or
holding of the Senior Certificate, or interest therein, that either (i) it is
not a Plan or (ii) (A) it is an accredited investor within the meaning of the
Exemption and (B) the holder's rights under the Interest Rate Swap Agreement are
eligible for the exemptive relief available under one of the five prohibited
transaction class exemptions enumerated above.
If any Senior Certificate or any interest therein is acquired or held in
violation of the conditions described herein, the next preceding permitted
beneficial owner will be treated as the beneficial owner of that Senior
Certificate, retroactive to the date of transfer to the purported beneficial
owner. Any purported beneficial owner whose acquisition or holding of any such
certificate or interest therein was effected in violation of the conditions
described in the preceding paragraph will indemnify and hold harmless the
Depositor, the Trustee, the Servicer, any subservicer, any NIMS Insurer and the
Trust from and against any and all liabilities, claims, costs or expenses
incurred by those parties as a result of that acquisition or holding.
The Exemption will apply to the acquisition and holding by Plans of the
Senior Certificates if all conditions of the Exemption are met. Prospective Plan
investors are encouraged to consult with their legal advisors concerning the
impact of ERISA, Section 4975 of the Code and Similar Law, the applicability of
PTCE 83-1 described in the prospectus and the Exemption, and the potential
consequences in their specific circumstances, prior to making an investment in
the Senior Certificates. Moreover, each Plan fiduciary should determine whether
under the general fiduciary standards of investment prudence and
diversification, an investment in the Senior 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.
Because 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%, the Subordinate Certificates may not 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 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 Subordinate Certificates." Any transferee of a 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.
For more information about ERISA considerations, see the information under
the heading "ERISA Considerations" in the prospectus.
LEGAL INVESTMENT
The Senior Certificates and the Class M-1, Class M-2 and Class M-3
Certificates will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended ("SMMEA"), so long
as they are rated in one of the two highest rating categories by at least one
nationally recognized statistical rating agency. The Class M-4, Class M-5, Class
M-6, Class M-7, Class M-8 and Class M-9 Certificates will not constitute
"mortgage related securities" for purposes of SMMEA.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Offered Certificates or to
purchase Offered Certificates representing more than a specified percentage of
the investor's assets. Investors are encouraged to consult their own legal
advisors in determining whether and to what extent the Offered Certificates
constitute legal investments for such investors. See "Legal Investment" in the
prospectus.
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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 and the status of the Mortgage Pool and certain other
information, as set forth in the Pooling and Servicing Agreement, required under
Item 1121 of Regulation AB as described under "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Reports to Securityholders" in the prospectus.
In addition, the Trustee and the Servicer, and potentially certain other parties
as described in the Pooling and Servicing Agreement, will furnish to the
Depositor and the Trustee, as applicable, the compliance statements, assessments
and attestation reports in accordance with Item 1122 and Item 1123 of Regulation
AB detailed under "Description of the Agreements--Material Terms of the Pooling
and Servicing Agreements and Underlying Servicing Agreements--Evidence as to
Compliance" in the prospectus.
Copies of these statements and reports will be filed on Form 10-D and Form
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
"Description of the Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements--Reports to Securityholders"
available each month to Certificateholders and the other parties to the Pooling
and Servicing Agreement via the Trustee's internet website. To the extent set
forth in the Pooling and Servicing Agreement, 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. 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.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement,
between the Depositor and the Underwriter, the Underwriter has agreed to
purchase and the Depositor has agreed to sell to the Underwriter the Offered
Certificates. Proceeds to the Depositor from the sale of the Offered
Certificates are expected to be approximately 99.47% of the aggregate initial
Certificate Principal Balance of those Certificates, before deducting expenses
estimated at approximately $700,000 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 Act.
The Underwriter is an affiliate of the Depositor, the Sponsor and the Swap
Provider, 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.
S-89
LEGAL MATTERS
The legality of the Offered Certificates and certain tax matters will be
passed upon for the Depositor and the Underwriter by Cadwalader, Wickersham &
Taft LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Certificates receive at least the rating set forth in the table beginning on
page S-6 of this prospectus supplement from Moody's Investors Service, Inc.
("Moody's") or Fitch Ratings ("Fitch").
A securities rating addresses the likelihood of the receipt by a
Certificateholder of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the certificates. The ratings on the
Offered Certificates do not, however, constitute statements regarding the
likelihood of the payment of any Cap Carryover Amount, the frequency of
prepayments on the Mortgage Loans, or the possibility that a holder of an
Offered Certificate might realize a lower than anticipated yield.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. In the event that the ratings initially assigned to any of the
Offered Certificates by the Rating Agencies are subsequently lowered for any
reason, no person or entity is obligated to provide any additional support or
credit enhancement with respect to such Offered Certificates.
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-90
INDEX OF DEFINED TERMS
6
60+ Day Delinquent Loan..................................................S-66
A
Accrued Certificate Interest.............................................S-56
Act......................................................................S-87
Additional Termination Events............................................S-76
Adjustable-Rate Mortgage Loans...........................................S-32
Adjustable-Rate Prepayment Curve.........................................S-82
Adjustment Date..........................................................S-32
Advance..................................................................S-49
Advancing Person.........................................................S-50
Applied Realized Loss Amount.............................................S-68
ARM PPC..................................................................S-82
Available Funds..........................................................S-54
B
Balloon Loan.............................................................S-33
Balloon Payment..........................................................S-33
Bank of America..........................................................S-43
Basis Risk Arrangements..................................................S-84
Basis Risk component.....................................................S-84
C
Cap......................................................................S-73
Cap Carryover Amount.....................................................S-74
Cap Carryover Reserve Account............................................S-74
Cap Premium..............................................................S-85
Certificate Interest Rate................................................S-72
Certificate Principal Balance............................................S-61
Class B Principal Distribution Amount....................................S-64
Class B Realized Loss Amortization Amount................................S-71
Class M-1 Realized Loss Amortization Amount..............................S-71
Class M-2 Realized Loss Amortization Amount..............................S-71
Class M-3 Realized Loss Amortization Amount..............................S-71
Class M-4 Principal Distribution Amount..................................S-62
Class M-4 Realized Loss Amortization Amount..............................S-71
Class M-5 Principal Distribution Amount..................................S-62
Class M-5 Realized Loss Amortization Amount..............................S-71
Class M-6 Principal Distribution Amount..................................S-62
Class M-6 Realized Loss Amortization Amount..............................S-71
Class M-7 Principal Distribution Amount..................................S-63
Class M-7 Realized Loss Amortization Amount..............................S-71
Class M-8 Principal Distribution Amount..................................S-63
Class M-8 Realized Loss Amortization Amount..............................S-71
Class M-9 Principal Distribution Amount..................................S-63
Class M-9 Realized Loss Amortization Amount..............................S-71
Code.....................................................................S-83
Collection Account.......................................................S-48
Compensating Interest....................................................S-51
CPR......................................................................S-82
Credit Enhancement Percentage............................................S-64
Credit Risk Manager Fee..................................................S-50
Credit Risk Manager Fee Rate.............................................S-50
Credit Scores............................................................S-33
Cut off Date Principal Balance...........................................S-31
D
Defective Mortgage Loans.................................................S-48
Deficient Valuation......................................................S-68
Delinquent...............................................................S-33
Distribution Account.....................................................S-48
Downgrade Provisions.....................................................S-75
Due Date.................................................................S-32
E
Early Termination Date...................................................S-75
Eligible Account.........................................................S-49
Eligible Substitute Mortgage Loan........................................S-47
ERISA....................................................................S-86
ERISA Plan...............................................................S-86
Events of Default........................................................S-75
Exemption................................................................S-86
Exemption Rating Agencies................................................S-87
Extra Principal Distribution Amount......................................S-64
F
Fitch....................................................................S-90
Fixed-Rate Mortgage Loans................................................S-32
Fixed-Rate Prepayment Curve..............................................S-82
FRM PPC..................................................................S-82
FSMA......................................................................S-5
G
Gross Margin.............................................................S-32
Group 1 Cap..............................................................S-72
Group 1 Interest Remittance Amount.......................................S-56
S-91
Group 1 Maximum Rate Cap.................................................S-72
Group 1 Principal Percentage.............................................S-64
Group 1 Senior Principal Distribution Amount.............................S-64
Group 2 Cap..............................................................S-72
Group 2 Interest Remittance Amount.......................................S-57
Group 2 Maximum Rate Cap.................................................S-73
Group 2 Principal Percentage.............................................S-64
Group 2 Senior Principal Distribution Amount.............................S-65
Group 3 Cap..............................................................S-73
Group 3 Interest Remittance Amount.......................................S-57
Group 3 Maximum Rate Cap.................................................S-73
Group 3 Principal Percentage.............................................S-65
Group 3 Senior Principal Distribution Amount.............................S-65
Group Subordinate Amount.................................................S-74
H
H&R Block................................................................S-35
I
Index....................................................................S-32
Initial Periodic Rate Cap................................................S-32
Interest Accrual Period..................................................S-58
Interest Carry Forward Amount............................................S-58
Interest Only Mortgage Loan..............................................S-32
Interest Percentage......................................................S-58
Interest Remittance Amount...............................................S-58
IRS......................................................................S-84
ISDA Master Agreement....................................................S-75
L
LIBOR Determination Date.................................................S-78
Liquidated Mortgage Loan.................................................S-68
Loan-to-Value Ratio......................................................S-33
LTV......................................................................S-36
M
Maximum Mortgage Interest Rate...........................................S-32
Maximum Rate Cap.........................................................S-73
MERS.....................................................................S-47
Minimum Mortgage Interest Rate...........................................S-32
Monthly Excess Cashflow Allocation.......................................S-69
Monthly Excess Cashflow Amount...........................................S-69
Monthly Excess Interest Amount...........................................S-56
Monthly Excess Interest Amount...........................................S-68
Monthly Payment..........................................................S-33
Moody's..................................................................S-90
Mortgage.................................................................S-32
Mortgage Interest Rate...................................................S-32
Mortgage Loan Purchase Agreement.........................................S-33
Mortgage Loan Schedule...................................................S-46
Mortgage Loans...........................................................S-32
Mortgage Pool............................................................S-32
Mortgaged Property.......................................................S-32
N
Net Maximum Mortgage Interest Rate.......................................S-73
Net Mortgage Interest Rate...............................................S-68
Net Swap Payment.........................................................S-74
NIMS Insurer..............................................................S-8
O
OID......................................................................S-83
OID Regulations..........................................................S-84
One-Month LIBOR..........................................................S-78
Option One...............................................................S-35
Option One Mortgage Loan Purchase Agreement..............................S-34
Option One Underwriting Guidelines.......................................S-36
Optional Termination Date................................................S-51
Overcollateralization Amount.............................................S-65
Overcollateralization Deficiency.........................................S-65
Overcollateralization Release Amount.....................................S-65
P
Pass-Through Rate........................................................S-72
Periodic Rate Cap........................................................S-32
Plans....................................................................S-86
Pool Balance.............................................................S-32
Pool Cap.................................................................S-73
Pool Maximum Rate Cap....................................................S-73
Pooling and Servicing Agreement..........................................S-46
Prepayment Assumptions...................................................S-82
Prepayment Interest Excess...............................................S-51
Prepayment Interest Shortfall............................................S-51
Principal Balance........................................................S-32
Principal Distribution Amount............................................S-65
Principal Remittance Amount..............................................S-65
PTE 95-60................................................................S-79
Purchase Price...........................................................S-47
Q
qualified liquidation....................................................S-52
R
Rating Agencies..........................................................S-49
Realized Loss............................................................S-67
Realized Loss Amortization Amount........................................S-72
Reference Bank Rate......................................................S-79
Regular Interest component...............................................S-84
Regulation AB............................................................S-77
Reimbursement Amount.....................................................S-48
REIT.....................................................................S-84
S-92
Related Documents........................................................S-46
Relevant Implementation Date..............................................S-4
Relevant Member State.....................................................S-4
Relevant Persons..........................................................S-5
Relief Act...............................................................S-49
REMIC....................................................................S-83
Restricted Group.........................................................S-87
S
Senior Principal Distribution Amount.....................................S-66
Sequential Mezzanine Principal Distribution Amount.......................S-62
Servicer Modification....................................................S-68
Servicer Remittance Date.................................................S-49
Servicing Advance........................................................S-50
Servicing Fee............................................................S-50
Servicing Fee Rate.......................................................S-50
Similar Law..............................................................S-86
Six Month LIBOR..........................................................S-34
SMMEA....................................................................S-88
Stepdown Date............................................................S-66
Structuring Assumptions..................................................S-82
Subordination Depletion Date.............................................S-66
Subsequent Recovery......................................................S-66
Substitution Adjustment..................................................S-47
Swap Account.............................................................S-76
Swap Default.............................................................S-75
Swap Early Termination...................................................S-76
Swap Provider............................................................S-76
Swap Provider Trigger Event..............................................S-76
Swap Regulations.........................................................S-84
Swap Termination Payment.................................................S-76
T
Targeted Overcollateralization Amount....................................S-66
Telerate Page 3750.......................................................S-78
Termination Event........................................................S-76
Termination Price........................................................S-51
Trigger Event............................................................S-67
Trust....................................................................S-44
Trust Fund...............................................................S-46
Trust REMIC..............................................................S-83
U
Underwriter..............................................................S-34
Unpaid Realized Loss Amount..............................................S-72
V
Value....................................................................S-33
W
Weighted Avg. Life to Optional Termination Date..........................S-82
Wells Fargo Bank.........................................................S-44
S-93
APPENDIX A
MORTGAGE LOAN DATA
The Mortgage Loans are expected to have the following characteristics as of
the Cut-off Date (the sum in any column may not equal the total indicated due to
rounding):
Cut-off Date Principal Balances of the Mortgage Loans(1)
Number of
Mortgage Loans
-----------------------------------
Range of Principal Balance Group 1 Group 2 Group 3 Total
- ----------------------------- -----------------------------------
$0.01 to $50,000.00.......... 0 1 8 9
$50,000.01 to $100,000.00.... 80 86 307 473
$100,000.01 to $150,000.00... 273 113 271 657
$150,000.01 to $200,000.00... 204 73 214 491
$200,000.01 to $250,000.00... 127 80 188 395
$250,000.01 to $300,000.00... 97 53 186 336
$300,000.01 to $350,000.00... 47 110 141 298
$350,000.01 to $400,000.00... 12 91 109 212
$400,000.01 to $450,000.00... 0 19 121 140
$450,000.01 to $500,000.00... 0 7 103 110
$500,000.01 to $550,000.00... 1 5 91 97
$550,000.01 to $600,000.00... 0 2 69 71
$600,000.01 to $650,000.00... 0 0 49 49
$650,000.01 to $700,000.00... 0 0 20 20
$700,000.01 to $750,000.00... 0 0 7 7
$750,000.01 to $800,000.00... 0 0 13 13
$800,000.01 and above........ 0 0 20 20
--- --- ----- -----
Total: 841 640 1,917 3,398
=== === ===== =====
Principal Balance
Outstanding as of the Cut-off Date
---------------------------------------------------------------------
Range of Principal Balance Group 1 Group 2 Group 3 Total
- ---------------------------- ---------------------------------------------------------------------
$0.01 to $50,000.00.......... $0.00 $49,966.82 $399,714.48 $449,681.30
$50,000.01 to $100,000.00.... 7,213,981.45 6,869,811.77 22,549,626.93 36,633,420.15
$100,000.01 to $150,000.00... 34,290,111.05 14,541,667.77 34,140,297.58 82,972,076.40
$150,000.01 to $200,000.00... 35,327,791.50 12,668,648.34 37,197,532.84 85,193,972.68
$200,000.01 to $250,000.00... 28,446,998.15 18,303,667.58 42,455,977.13 89,206,642.86
$250,000.01 to $300,000.00... 26,449,469.00 14,593,595.86 51,680,374.52 92,723,439.38
$300,000.01 to $350,000.00... 15,042,626.80 35,790,178.15 45,699,777.15 96,532,582.10
$350,000.01 to $400,000.00... 4,477,613.83 34,182,740.22 40,758,179.46 79,418,533.51
$400,000.01 to $450,000.00... 0.00 7,823,847.28 51,849,575.15 59,673,422.43
$450,000.01 to $500,000.00... 0.00 3,307,201.99 49,224,491.39 52,531,693.38
$500,000.01 to $550,000.00... 508,000.00 2,590,063.93 47,800,788.92 50,898,852.85
$550,000.01 to $600,000.00... 0.00 1,128,635.89 39,766,446.77 40,895,082.66
$600,000.01 to $650,000.00... 0.00 0.00 30,660,416.11 30,660,416.11
$650,000.01 to $700,000.00... 0.00 0.00 13,645,165.08 13,645,165.08
$700,000.01 to $750,000.00... 0.00 0.00 5,154,588.44 5,154,588.44
$750,000.01 to $800,000.00... 0.00 0.00 10,199,310.08 10,199,310.08
$800,000.01 and above........ 0.00 0.00 17,370,581.32 17,370,581.32
--------------- --------------- --------------- ---------------
Total: $151,756,591.78 $151,850,025.60 $540,552,843.35 $844,159,460.73
=============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
----------------------------------------
Range of Principal Balance Group 1 Group 2 Group 3 Total
- ---------------------------- ----------------------------------------
$0.01 to $50,000.00.......... 0.00% 0.03% 0.07% 0.05%
$50,000.01 to $100,000.00.... 4.75 4.52 4.17 4.34
$100,000.01 to $150,000.00... 22.60 9.58 6.32 9.83
$150,000.01 to $200,000.00... 23.28 8.34 6.88 10.09
$200,000.01 to $250,000.00... 18.75 12.05 7.85 10.57
$250,000.01 to $300,000.00... 17.43 9.61 9.56 10.98
$300,000.01 to $350,000.00... 9.91 23.57 8.45 11.44
$350,000.01 to $400,000.00... 2.95 22.51 7.54 9.41
$400,000.01 to $450,000.00... 0.00 5.15 9.59 7.07
$450,000.01 to $500,000.00... 0.00 2.18 9.11 6.22
$500,000.01 to $550,000.00... 0.33 1.71 8.84 6.03
$550,000.01 to $600,000.00... 0.00 0.74 7.36 4.84
$600,000.01 to $650,000.00... 0.00 0.00 5.67 3.63
$650,000.01 to $700,000.00... 0.00 0.00 2.52 1.62
$700,000.01 to $750,000.00... 0.00 0.00 0.95 0.61
$750,000.01 to $800,000.00... 0.00 0.00 1.89 1.21
$800,000.01 and above........ 0.00 0.00 3.21 2.06
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== =======
- ---------------------------------------
(1) The average Cut-off Date Principal Balance of all the Mortgage Loans was
$248,428.33, of the group 1 Mortgage Loans was $180,447.79, of the group 2
Mortgage Loans was $237,265.67 and of the group 3 Mortgage Loans was
$281,978.53.
A-1
Mortgage Interest Rates of the Mortgage Loans as of the Cut-off Date(1)
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
---------------------------------- ---------------------------------------------------------------------
Range of Mortgage
Interest Rates Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- ----------------------------------------------------------- ---------------------------------------------------------------------
5.501% to 6.000%...... 0 1 6 7 $0.00 $227,500.00 $2,716,755.98 $2,944,255.98
6.001% to 6.500%...... 4 7 24 35 1,220,443.84 2,423,629.64 10,866,444.03 14,510,517.51
6.501% to 7.000%...... 20 16 58 94 5,651,772.57 5,681,892.22 28,576,556.21 39,910,221.00
7.001% to 7.500%...... 38 27 90 155 9,779,980.49 8,870,540.47 42,705,705.68 61,356,226.64
7.501% to 8.000%...... 76 62 203 341 19,520,197.79 19,849,788.44 90,361,775.11 129,731,761.34
8.001% to 8.500%...... 99 77 189 365 21,867,266.26 25,392,183.27 73,616,911.67 120,876,361.20
8.501% to 9.000%...... 159 93 267 519 28,964,630.30 25,242,543.95 91,463,367.30 145,670,541.55
9.001% to 9.500%...... 146 106 190 442 24,260,587.64 24,624,857.65 56,990,648.92 105,876,094.21
9.501% to 10.000%..... 171 108 215 494 24,384,921.72 20,629,385.82 55,568,675.16 100,582,982.70
10.001% to 10.500%.... 79 65 170 314 10,539,025.03 10,141,338.95 29,567,203.13 50,247,567.11
10.501% to 11.000%.... 36 58 165 259 4,296,684.23 6,766,796.23 22,916,477.87 33,979,958.33
11.001% to 11.500%.... 11 14 114 139 1,079,318.74 1,622,366.30 13,295,918.71 15,997,603.75
11.501% to 12.000%.... 2 3 128 133 191,763.17 193,803.90 13,058,007.54 13,443,574.61
12.001% to 12.500%.... 0 3 67 70 0.00 183,398.76 5,798,740.99 5,982,139.75
12.501% to 13.000%.... 0 0 31 31 0.00 0.00 3,049,655.05 3,049,655.05
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 841 640 1,917 3,398 $151,756,591.78 $151,850,025.60 $540,552,843.35 $844,159,460.73
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
----------------------------------------
Range of Mortgage
Interest Rates Group 1 Group 2 Group 3 Total
- ---------------------- ----------------------------------------
5.501% to 6.000%...... 0.00% 0.15% 0.50% 0.35%
6.001% to 6.500%...... 0.80 1.60 2.01 1.72
6.501% to 7.000%...... 3.72 3.74 5.29 4.73
7.001% to 7.500%...... 6.44 5.84 7.90 7.27
7.501% to 8.000%...... 12.86 13.07 16.72 15.37
8.001% to 8.500%...... 14.41 16.72 13.62 14.32
8.501% to 9.000%...... 19.09 16.62 16.92 17.26
9.001% to 9.500%...... 15.99 16.22 10.54 12.54
9.501% to 10.000%..... 16.07 13.59 10.28 11.92
10.001% to 10.500%.... 6.94 6.68 5.47 5.95
10.501% to 11.000%.... 2.83 4.46 4.24 4.03
11.001% to 11.500%.... 0.71 1.07 2.46 1.90
11.501% to 12.000%.... 0.13 0.13 2.42 1.59
12.001% to 12.500%.... 0.00 0.12 1.07 0.71
12.501% to 13.000%.... 0.00 0.00 0.56 0.36
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
- ---------------------------------------
(1) As of the Cut-off Date, the weighted average Mortgage Interest Rate of all
the Mortgage Loans was approximately 8.788%, of the group 1 Mortgage Loans
was approximately 8.810%, of the group 2 Mortgage Loans was approximately
8.807% and of the group 3 Mortgage Loans was approximately 8.776%.
A-2
Original Debt-to-Income Ratios of the Mortgage Loans(1)
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
--------------------------------- ----------------------------------------------------------------------
Range of Original
Debt-to-Income Ratios Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- --------------------- --------------------------------- ----------------------------------------------------------------------
0.01 to 20.00........ 0 21 40 61 $0.00 $4,491,512.74 $11,372,453.68 $15,863,966.42
20.01 to 25.00....... 19 9 57 85 2,907,988.43 1,543,555.40 9,165,275.32 13,616,819.15
25.01 to 30.00....... 43 28 120 191 7,418,671.49 4,976,269.55 23,149,390.70 35,544,331.74
30.01 to 35.00....... 68 50 188 306 10,882,719.64 10,018,776.38 43,905,598.83 64,807,094.85
35.01 to 40.00....... 124 93 269 486 21,276,858.10 19,884,080.76 69,572,021.22 110,732,960.08
40.01 to 45.00....... 177 117 406 700 32,305,311.17 27,503,907.29 114,466,102.57 174,275,321.03
45.01 to 50.00....... 209 131 429 769 39,016,368.06 31,038,842.33 140,056,840.19 210,112,050.58
50.01 to 55.00....... 167 155 332 654 31,343,230.20 42,274,979.10 100,851,486.30 174,469,695.60
55.01 and above ..... 34 36 76 146 6,605,444.69 10,118,102.05 28,013,674.54 44,737,221.28
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 841 640 1,917 3,398 $151,756,591.78 $151,850,025.60 $540,552,843.35 $844,159,460.73
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
----------------------------------------
Range of Original
Debt-to-Income Ratios Group 1 Group 2 Group 3 Total
- ---------------------- ----------------------------------------
0.01 to 20.00......... 0.00% 2.96% 2.10% 1.88%
20.01 to 25.00........ 1.92 1.02 1.70 1.61
25.01 to 30.00........ 4.89 3.28 4.28 4.21
30.01 to 35.00........ 7.17 6.60 8.12 7.68
35.01 to 40.00........ 14.02 13.09 12.87 13.12
40.01 to 45.00........ 21.29 18.11 21.18 20.64
45.01 to 50.00........ 25.71 20.44 25.91 24.89
50.01 to 55.00........ 20.65 27.84 18.66 20.67
55.01 and above ...... 4.35 6.66 5.18 5.30
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
- ---------------------------------------
(1) As of the Cut-off Date, the weighted average Debt-to-Income Ratio of all
the Mortgage Loans was approximately 43.77%, of the group 1 Mortgage Loans
was approximately 44.09%, of the group 2 Mortgage Loans was approximately
44.54% and of the group 3 Mortgage Loans was approximately 43.46%.
Loan-to-Value Ratios of the Mortgage Loans(1)
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
----------------------------------- --------------------------------------------------------------------
Range of Loan-to-
Value Ratios Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- --------------------- ------------------------------------- --------------------------------------------------------------------
85.01% to 90.00%..... 0 0 1 1 $0.00 $0.00 $179,157.18 $179,157.18
90.01% to 95.00%..... 354 228 778 1,360 66,522,498.52 63,677,464.47 168,181,616.74 298,381,579.73
95.01% to 100.00%.... 487 412 1,127 2,026 85,234,093.26 88,172,561.13 369,726,751.82 543,133,406.21
100.01% to 103.00% .. 0 0 11 11 0.00 0.00 2,465,317.61 2,465,317.61
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 841 640 1,917 3,398 $151,756,591.78 $151,850,025.60 $540,552,843.35 $844,159,460.73
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
--------------------------------------------
Range of Loan-to-
Value Ratios Group 1 Group 2 Group 3 Total
- ------------------------- --------------------------------------------
85.01% to 90.00%......... 0.00% 0.00% 0.03% 0.02%
90.01% to 95.00%......... 43.83 41.93 31.11 35.35
95.01% to 100.00%........ 56.17 58.07 68.40 64.34
100.01% to 103.00% ...... 0.00 0.00 0.46 0.29
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
- ---------------------------------------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio of all the
Mortgage Loans was approximately 98.13%, of the group 1 Mortgage Loans was
approximately 97.68%, of the group 2 Mortgage Loans was approximately
97.71% and of the group 3 Mortgage Loans was approximately 98.37%.
A-3
Original Terms to Maturity of the Mortgage Loans(1)
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
----------------------------------- ----------------------------------------------------------------------
Original Term
(months) Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- --------------------- ----------------------------------- ----------------------------------------------------------------------
121 to 180........... 2 0 3 5 $222,321.39 $0.00 $486,810.25 $709,131.64
181 to 240........... 0 1 1 2 0.00 368,244.73 97,396.71 465,641.44
301 to 360........... 839 639 1,913 3,391 151,534,270.39 151,481,780.87 539,968,636.39 842,984,687.65
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 841 640 1,917 3,398 $151,756,591.78 $151,850,025.60 $540,552,843.35 $844,159,460.73
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
-------------------------------------------
Original Term
(months) Group 1 Group 2 Group 3 Total
- ---------------------- -------------------------------------------
121 to 180............ 0.15% 0.00% 0.09% 0.08%
181 to 240............ 0.00 0.24 0.02 0.06
301 to 360............ 99.85 99.76 99.89 99.86
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
- ---------------------------------------
(1) As of the Cut-off Date, the weighted average original term to maturity of
all the Mortgage Loans was approximately 360 months, of the group 1
Mortgage Loans was approximately 360 months, of the group 2 Mortgage Loans
was approximately 360 months and of the group 3 Mortgage Loans was
approximately 360 months.
Remaining Terms to Maturity of the Mortgage Loans(1)
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
----------------------------------- -------------------------------------------------------------------
Remaining Term (months) Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- ------------------------ ----------------------------------- -------------------------------------------------------------------
121 to 180.............. 2 0 3 5 $222,321.39 $0.00 $486,810.25 $709,131.64
181 to 240.............. 0 1 1 2 0.00 368,244.73 97,396.71 465,641.44
301 to 360.............. 839 639 1,913 3,391 151,534,270.39 151,481,780.87 539,968,636.39 842,984,687.65
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 841 640 1,917 3,398 $151,756,591.78 $151,850,025.60 $540,552,843.35 $844,159,460.73
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
---------------------------------------------
Remaining Term (months) Group 1 Group 2 Group 3 Total
- ------------------------ ---------------------------------------------
121 to 180.............. 0.15% 0.00% 0.09% 0.08%
181 to 240.............. 0.00 0.24 0.02 0.06
301 to 360.............. 99.85 99.76 99.89 99.86
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
- ---------------------------------------
(1) As of the Cut-off Date, the weighted average remaining term to maturity of
all the Mortgage Loans was approximately 357 months, of the group 1
Mortgage Loans was approximately 357 months, of the group 2 Mortgage Loans
was approximately 357 months and of the group 3 Mortgage Loans was
approximately 357 months.
A-4
Property Types of the Mortgage Loans
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
----------------------------------- ------------------------------------------------------------------
Property Type Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- ------------------------- ----------------------------------- ------------------------------------------------------------------
Single Family............ 692 516 1,487 2,695 $123,186,117.98 $113,516,713.18 $408,012,001.26 $644,714,832.42
Planned Unit Development. 85 69 235 389 15,611,758.89 20,287,222.75 69,535,292.71 105,434,274.35
Two- to Four-Family...... 28 36 89 153 5,324,150.48 13,266,552.82 32,595,085.26 51,185,788.56
Low Rise Condominium..... 36 18 98 152 7,634,564.43 4,454,956.58 28,264,069.07 40,353,590.08
High Rise Condominium.... 0 1 8 9 0.00 324,580.27 2,146,395.05 2,470,975.32
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 841 640 1,917 3,398 $151,756,591.78 $151,850,025.60 $540,552,843.35 $844,159,460.73
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
----------------------------------------
Property Type Group 1 Group 2 Group 3 Total
- ------------------------- ----------------------------------------
Single Family............ 81.17% 74.76% 75.48% 76.37%
Planned Unit Development. 10.29 13.36 12.86 12.49
Two- to Four-Family...... 3.51 8.74 6.03 6.06
Low Rise Condominium..... 5.03 2.93 5.23 4.78
High Rise Condominium.... 0.00 0.21 0.40 0.29
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
Credit Score(1)
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
------------------------------------- ----------------------------------------------------------------------
Range of Credit
Scores Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- --------------- ------------------------------------- ----------------------------------------------------------------------
801 to 850..... 1 1 2 4 $249,850.15 $170,820.15 $478,388.84 $899,059.14
751 to 800..... 5 12 39 56 889,959.18 2,732,604.75 15,867,034.75 19,489,598.68
701 to 750..... 56 36 151 243 12,181,516.48 9,929,572.78 64,226,192.20 86,337,281.46
651 to 700..... 161 123 391 675 32,765,920.43 31,418,262.94 141,752,394.59 205,936,577.96
601 to 650..... 471 359 800 1,630 79,838,612.24 80,479,873.30 221,251,813.32 381,570,298.86
551 to 600..... 118 99 333 550 20,194,417.77 24,277,110.37 64,767,733.08 109,239,261.22
501 to 550..... 29 10 193 232 5,636,315.53 2,841,781.31 30,859,950.94 39,338,047.78
500............ 0 0 2 2 0.00 0.00 390,225.34 390,225.34
Not Available.. 0 0 6 6 0.00 0.00 959,110.29 959,110.29
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 841 640 1,917 3,398 $151,756,591.78 $151,850,025.60 $540,552,843.35 $844,159,460.73
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
-----------------------------------------
Range of Credit
Scores Group 1 Group 2 Group 3 Total
- --------------- -----------------------------------------
801 to 850..... 0.16% 0.11% 0.09% 0.11%
751 to 800..... 0.59 1.80 2.94 2.31
701 to 750..... 8.03 6.54 11.88 10.23
651 to 700..... 21.59 20.69 26.22 24.40
601 to 650..... 52.61 53.00 40.93 45.20
551 to 600..... 13.31 15.99 11.98 12.94
501 to 550..... 3.71 1.87 5.71 4.66
500............ 0.00 0.00 0.07 0.05
Not Available.. 0.00 0.00 0.18 0.11
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
- ---------------------------------------
(1) As of the Cut-off Date, the weighted average Credit Scores (where Credit
Scores were available) of all the Mortgage Loans was approximately 640, of
the group 1 Mortgage Loans was approximately 634, of the group 2 Mortgage
Loans was approximately 634 and of the group 3 Mortgage Loans was
approximately 643.
A-5
Credit Grades(1)
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
------------------------------------ -------------------------------------------------------------------
Credit Grade Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- ------------ ------------------------------------ -------------------------------------------------------------------
AA+......... 740 567 1,583 2,890 132,775,352.12 $131,958,862.36 $474,803,803.56 739,538,018.04
AA.......... 90 55 292 437 16,992,470.49 14,973,262.73 56,373,580.04 88,339,313.26
A........... 10 17 33 60 $1,854,078.39 4,593,044.92 8,078,301.09 $14,525,424.40
B........... 1 1 6 8 134,690.78 324,855.59 905,980.76 1,365,527.13
C........... 0 0 3 3 0.00 0.00 391,177.90 391,177.90
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 841 640 1,917 3,398 $151,756,591.78 $151,850,025.60 $540,552,843.35 $844,159,460.73
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
----------------------------------------
Credit Grade Group 1 Group 2 Group 3 Total
- ------------ ----------------------------------------
AA+......... 87.49% 86.90% 87.84% 87.61%
AA.......... 11.20 9.86 10.43 10.46
A........... 1.22 3.02 1.49 1.72
B........... 0.09 0.21 0.17 0.16
C........... 0.00 0.00 0.07 0.05
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
- ---------------------------------------
(1) See "Underwriting Standards" in this prospectus supplement for an
explanation of the credit grades presented in this table.
Original Prepayment Charge Term(1)
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
------------------------------------ ----------------------------------------------------------------------
Original Prepayment
Charge Term (months) Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- -------------------- ------------------------------------ ----------------------------------------------------------------------
0................... 195 176 438 809 $33,969,539.32 $43,049,608.33 $111,045,751.23 $188,064,898.88
12.................. 26 32 143 201 5,468,393.15 10,999,023.97 59,828,920.50 76,296,337.62
24.................. 532 376 1,152 2,060 94,436,079.18 80,510,448.66 315,042,442.42 489,988,970.26
30.................. 2 1 5 8 370,484.71 334,645.82 1,219,083.23 1,924,213.76
36.................. 86 55 179 320 17,512,095.42 16,956,298.82 53,416,645.97 87,885,040.21
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 841 640 1,917 3,398 $151,756,591.78 $151,850,025.60 $540,552,843.35 $844,159,460.73
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
----------------------------------------------
Original Prepayment
Charge Term (months) Group 1 Group 2 Group 3 Total
- -------------------- ----------------------------------------------
0................... 22.38% 28.35% 20.54% 22.28%
12.................. 3.60 7.24 11.07 9.04
24.................. 62.23 53.02 58.28 58.04
30.................. 0.24 0.22 0.23 0.23
36.................. 11.54 11.17 9.88 10.41
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
- ---------------------------------------
(1) As of the Cut-off Date, the weighted average original prepayment charge
term of all the Mortgage Loans was approximately 24 months, of the group 1
Mortgage Loans was approximately 25 months, of the group 2 Mortgage Loans
was approximately 25 months and of the group 3 Mortgage Loans was
approximately 24 months.
A-6
Occupancy Status of the Mortgage Loans(1)
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
------------------------------------ -----------------------------------------------------------------------
Occupancy Status Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- ---------------- ------------------------------------ -----------------------------------------------------------------------
Owner Occupied.... 769 585 1,799 3,153 $139,318,532.90 $137,715,258.84 $520,823,752.56 $797,857,544.30
Investor.......... 55 49 107 211 9,353,562.46 12,380,125.13 16,830,412.78 38,564,100.37
Secondary......... 17 6 11 34 3,084,496.42 1,754,641.63 2,898,678.01 7,737,816.06
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 841 640 1,917 3,398 $151,756,591.78 $151,850,025.60 $540,552,843.35 $844,159,460.73
=== === ===== ===== =============== =============== =============== ===============
Principal Balance Outstanding
as of the Cut-off Date
-------------------------------------------
Occupancy Status Group 1 Group 2 Group 3 Total
- ---------------- -------------------------------------------
Owner Occupied.... 91.80% 90.69% 96.35% 94.52%
Investor.......... 6.16 8.15 3.11 4.57
Secondary......... 2.03 1.16 0.54 0.92
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
- ---------------------------------------
(1) Based on a representation made by the borrower at the time of origination.
Purpose of the Mortgage Loans
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
------------------------------------ ---------------------------------------------------------------------
Purpose Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- ------------------- ------------------------------------ ---------------------------------------------------------------------
Purchase............ 404 355 1,517 2,276 $61,771,925.44 $61,724,878.15 $407,427,040.32 $530,923,843.91
Cash-Out Refinance.. 360 232 314 906 74,985,719.39 75,035,552.11 110,444,577.60 260,465,849.10
Rate-Term Refinance. 77 53 86 216 14,998,946.95 15,089,595.34 22,681,225.43 52,769,767.72
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 841 640 1,917 3,398 $151,756,591.78 $151,850,025.60 $540,552,843.35 $844,159,460.73
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
-------------------------------------------
Purpose Group 1 Group 2 Group 3 Total
- ------------------- -------------------------------------------
Purchase............ 40.70% 40.65% 75.37% 62.89%
Cash-Out Refinance.. 49.41 49.41 20.43 30.86
Rate-Term Refinance. 9.88 9.94 4.20 6.25
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
A-7
Product Type of the Mortgage Loans
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
----------------------------------- ------------------------------------------------------------------
Product Type Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- ------------------------- ----------------------------------- ------------------------------------------------------------------
15 YR FIXED.............. 1 0 2 3 $140,935.00 $0.00 $418,936.20 $559,871.20
15/15 6ML with 5 yr IO... 0 1 0 1 0.00 118,500.00 0.00 118,500.00
20 YR FIXED.............. 0 1 1 2 0.00 368,244.73 97,396.71 465,641.44
2/13 6ML................. 1 0 1 2 81,386.39 0.00 67,874.05 149,260.44
2/28 6ML................. 418 321 890 1,629 64,114,922.10 61,347,855.29 163,898,128.75 289,360,906.14
2/28 6ML with 5 yr IO.... 41 79 264 384 11,900,849.10 20,808,437.40 115,796,637.19 148,505,923.69
2/28 6ML 30/40 BALLOON... 250 152 484 886 50,214,104.33 42,764,966.67 180,058,152.47 273,037,223.47
30 YR FIXED.............. 62 20 114 196 11,891,897.72 6,306,276.88 25,925,541.27 44,123,715.87
30 YR FIXED with 5 yr IO. 0 2 2 4 0.00 507,300.00 960,963.69 1,468,263.69
30/40 BALLOON............ 15 22 41 78 3,407,445.41 7,779,278.23 14,761,815.36 25,948,539.00
3/27 6ML................. 3 3 24 30 411,013.87 330,143.79 3,907,478.06 4,648,635.72
3/27 6ML with 5 yr IO.... 3 1 10 14 609,000.00 215,000.00 4,328,393.76 5,152,393.76
3/27 6ML 30/40 BALLOON... 10 5 15 30 1,715,278.94 1,329,773.32 4,623,072.82 7,668,125.08
5/25 6ML................. 16 9 29 54 2,837,156.37 2,322,982.12 6,837,654.69 11,997,793.18
5/25 6ML with 5 yr IO.... 5 8 15 28 1,243,405.07 2,486,539.56 7,862,763.00 11,592,707.63
5/25 6ML 30/40 BALLOON... 16 16 25 57 3,189,197.48 5,164,727.61 11,008,035.33 19,361,960.42
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 841 640 1,917 3,398 $151,756,591.78 $151,850,025.60 $540,552,843.35 $844,159,460.73
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
-----------------------------------------
Product Type Group 1 Group 2 Group 3 Total
- ------------------------- -----------------------------------------
15 YR FIXED.............. 0.09% 0.00% 0.08% 0.07%
15/15 6ML with 5 yr IO... 0.00 0.08 0.00 0.01
20 YR FIXED.............. 0.00 0.24 0.02 0.06
2/13 6ML................. 0.05 0.00 0.01 0.02
2/28 6ML................. 42.25 40.40 30.32 34.28
2/28 6ML with 5 yr IO.... 7.84 13.70 21.42 17.59
2/28 6ML 30/40 BALLOON... 33.09 28.16 33.31 32.34
30 YR FIXED.............. 7.84 4.15 4.80 5.23
30 YR FIXED with 5 yr IO. 0.00 0.33 0.18 0.17
30/40 BALLOON............ 2.25 5.12 2.73 3.07
3/27 6ML................. 0.27 0.22 0.72 0.55
3/27 6ML with 5 yr IO.... 0.40 0.14 0.80 0.61
3/27 6ML 30/40 BALLOON... 1.13 0.88 0.86 0.91
5/25 6ML................. 1.87 1.53 1.26 1.42
5/25 6ML with 5 yr IO.... 0.82 1.64 1.45 1.37
5/25 6ML 30/40 BALLOON... 2.10 3.40 2.04 2.29
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
Lien Position of the Mortgage Loans
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
------------------------------------- -------------------------------------------------------------------------
Lien Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- -------- ------------------------------------- -------------------------------------------------------------------------
First... 841 640 1,917 3,398 $151,756,591.78 $151,850,025.60 $540,552,843.35 $844,159,460.73
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 841 640 1,917 3,398 $151,756,591.78 $151,850,025.60 $540,552,843.35 $844,159,460.73
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
--------------------------------------------
Lien Group 1 Group 2 Group 3 Total
- -------- --------------------------------------------
First... 100.00% 100.00% 100.00% 100.00%
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
A-8
Geographic Distribution of the Mortgage Loans(1)
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
----------------------------------- -------------------------------------------------------------------
Location Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- --------------------- ----------------------------------- -------------------------------------------------------------------
Alabama.............. 12 6 27 45 $1,501,055.57 $1,375,222.39 $2,722,703.41 $5,598,981.37
Alaska............... 1 1 0 2 134,955.54 214,790.99 0.00 349,746.53
Arizona.............. 10 14 21 45 2,384,388.34 3,883,210.54 4,998,549.86 11,266,148.74
Arkansas............. 3 4 9 16 346,199.09 531,542.06 908,936.37 1,786,677.52
California........... 61 54 410 525 18,567,243.21 19,034,942.77 200,157,912.65 237,760,098.63
Colorado............. 34 23 43 100 6,466,779.09 5,440,602.26 12,509,136.57 24,416,517.92
Connecticut.......... 17 14 14 45 3,406,236.22 3,736,474.91 3,613,542.34 10,756,253.47
Delaware............. 1 1 1 3 124,902.35 394,493.76 239,790.38 759,186.49
District of Columbia. 0 1 2 3 0.00 334,827.98 570,663.54 905,491.52
Florida.............. 86 47 146 279 17,639,051.54 11,606,453.47 39,492,330.79 68,737,835.80
Georgia.............. 38 21 61 120 5,455,834.98 4,376,906.38 10,522,212.50 20,354,953.86
Hawaii............... 1 5 11 17 508,000.00 2,392,404.79 6,702,635.83 9,603,040.62
Idaho................ 4 8 10 22 512,513.49 1,649,805.73 3,098,916.86 5,261,236.08
Illinois............. 12 13 60 85 2,159,019.52 2,165,555.26 11,062,743.46 15,387,318.24
Indiana.............. 26 18 28 72 3,641,930.59 2,392,630.60 3,618,277.98 9,652,839.17
Iowa................. 12 2 14 28 1,567,336.88 389,879.13 1,459,147.70 3,416,363.71
Kansas............... 3 6 10 19 363,171.83 857,532.24 2,104,410.84 3,325,114.91
Kentucky............. 6 4 12 22 906,668.15 332,804.40 1,605,239.58 2,844,712.13
Louisiana............ 1 4 22 27 135,751.29 547,760.43 4,481,308.96 5,164,820.68
Maine................ 14 12 11 37 2,760,316.13 2,012,944.28 1,691,864.21 6,465,124.62
Maryland............. 12 21 27 60 2,460,909.46 6,336,570.61 8,488,861.19 17,286,341.26
Massachusetts........ 37 42 73 152 8,265,267.71 14,041,440.76 26,254,711.22 48,561,419.69
Michigan............. 57 34 57 148 8,247,237.83 5,841,126.65 7,597,971.47 21,686,335.95
Minnesota............ 9 8 8 25 1,252,009.45 1,347,543.45 1,082,682.89 3,682,235.79
Mississippi.......... 1 2 5 8 80,723.37 461,985.40 312,338.94 855,047.71
Missouri............. 12 11 23 46 1,670,753.54 1,600,386.92 4,015,345.45 7,286,485.91
Montana.............. 0 2 1 3 0.00 481,500.00 68,820.98 550,320.98
Nebraska............. 1 0 3 4 76,935.83 0.00 233,331.13 310,266.96
Nevada............... 10 15 31 56 2,485,831.47 4,693,390.24 10,518,731.03 17,697,952.74
New Hampshire........ 10 12 11 33 2,269,253.62 2,903,370.39 2,913,495.52 8,086,119.53
New Jersey........... 15 21 55 91 2,860,533.54 6,788,067.15 19,428,297.02 29,076,897.71
New York............. 26 21 127 174 4,707,309.77 6,983,093.76 48,939,271.34 60,629,674.87
North Carolina....... 30 9 45 84 4,967,999.59 1,380,650.34 7,413,884.64 13,762,534.57
North Dakota......... 3 1 0 4 320,418.49 160,877.45 0.00 481,295.94
Ohio................. 57 25 74 156 7,408,864.23 3,143,029.90 10,484,405.26 21,036,299.39
Oklahoma............. 5 13 12 30 624,730.07 1,712,440.04 1,534,870.08 3,872,040.19
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
---------------------------------------------
Location Group 1 Group 2 Group 3 Total
- --------------------- ---------------------------------------------
Alabama.............. 0.99% 0.91% 0.50% 0.66%
Alaska............... 0.09 0.14 0.00 0.04
Arizona.............. 1.57 2.56 0.92 1.33
Arkansas............. 0.23 0.35 0.17 0.21
California........... 12.23 12.54 37.03 28.17
Colorado............. 4.26 3.58 2.31 2.89
Connecticut.......... 2.24 2.46 0.67 1.27
Delaware............. 0.08 0.26 0.04 0.09
District of Columbia. 0.00 0.22 0.11 0.11
Florida.............. 11.62 7.64 7.31 8.14
Georgia.............. 3.60 2.88 1.95 2.41
Hawaii............... 0.33 1.58 1.24 1.14
Idaho................ 0.34 1.09 0.57 0.62
Illinois............. 1.42 1.43 2.05 1.82
Indiana.............. 2.40 1.58 0.67 1.14
Iowa................. 1.03 0.26 0.27 0.40
Kansas............... 0.24 0.56 0.39 0.39
Kentucky............. 0.60 0.22 0.30 0.34
Louisiana............ 0.09 0.36 0.83 0.61
Maine................ 1.82 1.33 0.31 0.77
Maryland............. 1.62 4.17 1.57 2.05
Massachusetts........ 5.45 9.25 4.86 5.75
Michigan............. 5.43 3.85 1.41 2.57
Minnesota............ 0.83 0.89 0.20 0.44
Mississippi.......... 0.05 0.30 0.06 0.10
Missouri............. 1.10 1.05 0.74 0.86
Montana.............. 0.00 0.32 0.01 0.07
Nebraska............. 0.05 0.00 0.04 0.04
Nevada............... 1.64 3.09 1.95 2.10
New Hampshire........ 1.50 1.91 0.54 0.96
New Jersey........... 1.88 4.47 3.59 3.44
New York............. 3.10 4.60 9.05 7.18
North Carolina....... 3.27 0.91 1.37 1.63
North Dakota......... 0.21 0.11 0.00 0.06
Ohio................. 4.88 2.07 1.94 2.49
Oklahoma............. 0.41 1.13 0.28 0.46
A-9
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
----------------------------------- -------------------------------------------------------------------
Location Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- --------------------- ----------------------------------- -------------------------------------------------------------------
Oregon............... 11 3 11 25 2,423,516.34 949,291.32 3,275,588.23 6,648,395.89
Pennsylvania......... 37 19 52 108 5,922,851.33 4,065,240.42 9,193,443.92 19,181,535.67
Rhode Island......... 6 10 12 28 1,407,899.66 3,018,319.56 3,306,309.19 7,732,528.41
South Carolina....... 21 9 26 56 3,496,649.02 1,762,939.48 4,444,067.26 9,703,655.76
South Dakota......... 1 2 2 5 103,428.96 375,266.85 352,269.45 830,965.26
Tennessee............ 11 8 23 42 1,395,112.10 850,977.32 2,868,973.89 5,115,063.31
Texas................ 47 26 220 293 5,942,931.88 3,384,617.48 31,806,017.37 41,133,566.73
Utah................. 12 1 11 24 2,082,319.04 327,383.07 2,581,254.81 4,990,956.92
Vermont.............. 2 11 3 16 353,293.87 2,336,850.71 584,891.24 3,275,035.82
Virginia............. 24 23 35 82 4,021,612.28 6,027,602.27 8,834,603.53 18,883,818.08
Washington........... 22 17 30 69 4,747,209.36 4,519,329.25 9,017,302.27 18,283,840.88
Wisconsin............ 19 13 25 57 3,303,234.03 1,911,594.95 2,935,787.46 8,150,616.44
Wyoming.............. 1 3 3 7 276,402.13 774,355.49 504,992.74 1,555,750.36
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 841 640 1,917 3,398 $151,756,591.78 $151,850,025.60 $540,552,843.35 $844,159,460.73
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
---------------------------------------------
Location Group 1 Group 2 Group 3 Total
- --------------------- ---------------------------------------------
Oregon............... 1.60 0.63 0.61 0.79
Pennsylvania......... 3.90 2.68 1.70 2.27
Rhode Island......... 0.93 1.99 0.61 0.92
South Carolina....... 2.30 1.16 0.82 1.15
South Dakota......... 0.07 0.25 0.07 0.10
Tennessee............ 0.92 0.56 0.53 0.61
Texas................ 3.92 2.23 5.88 4.87
Utah................. 1.37 0.22 0.48 0.59
Vermont.............. 0.23 1.54 0.11 0.39
Virginia............. 2.65 3.97 1.63 2.24
Washington........... 3.13 2.98 1.67 2.17
Wisconsin............ 2.18 1.26 0.54 0.97
Wyoming.............. 0.18 0.51 0.09 0.18
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
- -------------------------------------
(1) The greatest ZIP Code geographic concentration of the group 1 Mortgage
Loans by Cut-off Date Principal Balance was approximately 0.68% in the
02302 ZIP Code, located in Massachusetts, for the group 2 Mortgage Loans
was approximately 0.85% in the 02302 ZIP Code, located in Massachusetts,
for the group 3 Mortgage Loans was approximately 1.06% in the 92392 ZIP
Code, located in California and for all of the Mortgage Loans was 0.68% in
the 92392 ZIP Code, located in California.
Documentation Levels of the Mortgage Loans(1)
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
------------------------------------ -------------------------------------------------------------------
Documentation Level Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- ---------------------- ------------------------------------ -------------------------------------------------------------------
Full Documentation.... 725 543 1,512 2,780 $128,239,897.35 $126,420,216.01 $373,197,144.23 $627,857,257.59
Stated Income 112
Documentation......... 95 391 598 22,868,718.40 25,309,247.60 162,569,344.30 210,747,310.30
Limited Documentation. 1 1 9 11 243,363.95 60,758.75 3,481,272.71 3,785,395.41
Business Bank
Statements.......... 3 1 5 9 404,612.08 59,803.24 1,305,082.11 1,769,497.43
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 841 640 1,917 3,398 $151,756,591.78 $151,850,025.60 $540,552,843.35 $844,159,460.73
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
-------------------------------------------
Documentation Level Group 1 Group 2 Group 3 Total
- ---------------------- -------------------------------------------
Full Documentation.... 84.50% 83.25% 69.04% 74.38%
Stated Income
Documentation......... 15.07 16.67 30.07 24.97
Limited Documentation. 0.16 0.04 0.64 0.45
Business Bank
Statements.......... 0.27 0.04 0.24 0.21
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
- ---------------------------------------
(1) For a description of each documentation level, see "Underwriting Standards"
in this prospectus supplement.
A-10
The following tables present certain statistical information relevant only
to the Adjustable-Rate Mortgage Loans:
Maximum Mortgage Interest Rate of the Adjustable-Rate Mortgage Loans(1)
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
----------------------------------- --------------------------------------------------------------------
Range of Maximum
Mortgage Interest Rates Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- ----------------------- ----------------------------------- --------------------------------------------------------------------
9.501% to 10.000%...... 0 0 1 1 $0.00 $0.00 $265,789.80 $265,789.80
10.001% to 10.500%..... 0 1 0 1 0.00 397,735.94 0.00 397,735.94
10.501% to 11.000%..... 1 0 0 1 289,605.56 0.00 0.00 289,605.56
11.001% to 11.500%..... 1 0 0 1 179,953.84 0.00 0.00 179,953.84
11.501% to 12.000%..... 0 1 9 10 0.00 227,500.00 3,299,276.68 3,526,776.68
12.001% to 12.500%..... 3 7 22 32 582,039.30 2,017,684.58 9,588,033.67 12,187,757.55
12.501% to 13.000%..... 18 14 46 78 4,808,196.01 4,916,414.36 22,778,047.30 32,502,657.67
13.001% to 13.500%..... 31 24 83 138 8,099,613.17 7,455,649.22 38,700,524.69 54,255,787.08
13.501% to 14.000%..... 72 52 194 318 18,629,306.71 15,985,173.58 85,805,325.75 120,419,806.04
14.001% to 14.500%..... 92 69 184 345 20,337,455.31 22,474,738.97 71,227,777.50 114,039,971.78
14.501% to 15.000%..... 146 86 247 479 26,438,047.32 22,689,933.27 84,776,344.09 133,904,324.68
15.001% to 15.500%..... 133 99 181 413 21,839,989.92 23,068,458.05 54,889,191.00 99,797,638.97
15.501% to 16.000%..... 149 105 184 438 20,475,953.21 19,823,158.54 47,167,582.48 87,466,694.23
16.001% to 16.500%..... 73 61 152 286 9,605,742.99 9,339,081.84 26,822,861.09 45,767,685.92
16.501% to 17.000%..... 33 56 154 243 3,954,541.86 6,493,828.45 21,446,254.74 31,894,625.05
17.001% to 17.500%..... 10 14 96 120 995,346.03 1,622,366.30 11,257,182.66 13,874,894.99
17.501% to 18.000%..... 1 3 119 123 80,522.42 193,803.90 12,373,833.69 12,648,160.01
18.001% to 18.500%..... 0 3 59 62 0.00 183,398.76 5,295,935.83 5,479,334.59
18.501% to 19.000%..... 0 0 26 26 0.00 0.00 2,694,229.15 2,694,229.15
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 763 595 1,757 3,115 $136,316,313.65 $136,888,925.76 $498,388,190.12 $771,593,429.53
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
-----------------------------------------
Range of Maximum
Mortgage Interest Rates Group 1 Group 2 Group 3 Total
- ----------------------- ------------------------------------------
9.501% to 10.000%...... 0.00% 0.00% 0.05% 0.03%
10.001% to 10.500%..... 0.00 0.29 0.00 0.05
10.501% to 11.000%..... 0.21 0.00 0.00 0.04
11.001% to 11.500%..... 0.13 0.00 0.00 0.02
11.501% to 12.000%..... 0.00 0.17 0.66 0.46
12.001% to 12.500%..... 0.43 1.47 1.92 1.58
12.501% to 13.000%..... 3.53 3.59 4.57 4.21
13.001% to 13.500%..... 5.94 5.45 7.77 7.03
13.501% to 14.000%..... 13.67 11.68 17.22 15.61
14.001% to 14.500%..... 14.92 16.42 14.29 14.78
14.501% to 15.000%..... 19.39 16.58 17.01 17.35
15.001% to 15.500%..... 16.02 16.85 11.01 12.93
15.501% to 16.000%..... 15.02 14.48 9.46 11.34
16.001% to 16.500%..... 7.05 6.82 5.38 5.93
16.501% to 17.000%..... 2.90 4.74 4.30 4.13
17.001% to 17.500%..... 0.73 1.19 2.26 1.80
17.501% to 18.000%..... 0.06 0.14 2.48 1.64
18.001% to 18.500%..... 0.00 0.13 1.06 0.71
18.501% to 19.000%..... 0.00 0.00 0.54 0.35
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
- ---------------------------------------
(1) As of the Cut-off Date, the weighted average Maximum Mortgage Interest Rate
of all the Adjustable-Rate Mortgage Loans was approximately 14.787%, of the
group 1 Adjustable-Rate Mortgage Loans was approximately 14.799%, of the
group 2 Adjustable-Rate Mortgage Loans was approximately 14.843% and of the
group 3 Adjustable-Rate Mortgage Loans as of the Cut-off Date was
approximately 14.768%.
A-11
Minimum Mortgage Interest Rate of the Adjustable-Rate Mortgage Loans(1)
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
------------------------------------- ---------------------------------------------------------------------
Range of
Minimum
Mortgage
Interest Rates Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- -------------------- ------------------------------------- ----------------------------------------------------------------------
5.501% to 6.000%.... 0 1 6 7 $0.00 $227,500.00 $2,716,755.98 $2,944,255.98
6.001% to 6.500%.... 1 5 21 27 332,500.00 1,693,900.65 9,487,439.59 11,513,840.24
6.501% to 7.000%.... 17 14 47 78 4,698,799.70 4,916,414.36 23,043,837.10 32,659,051.16
7.001% to 7.500%.... 32 24 82 138 8,341,613.17 7,765,423.68 38,523,119.23 54,630,156.08
7.501% to 8.000%.... 72 50 194 316 18,794,009.92 15,553,734.44 85,805,325.75 120,153,070.11
8.001% to 8.500%.... 92 69 183 344 20,275,409.15 22,474,738.97 71,124,263.62 113,874,411.74
8.501% to 9.000%.... 146 86 250 482 26,438,047.32 22,689,933.27 85,358,864.79 134,486,845.38
9.001% to 9.500%.... 135 102 181 418 22,089,529.22 23,743,740.59 54,928,542.32 100,761,812.13
9.501% to 10.000%... 150 105 184 439 20,585,349.52 19,823,158.54 47,167,582.48 87,576,090.54
10.001% to 10.500%.. 73 62 153 288 9,605,742.99 9,427,043.32 27,000,266.55 46,033,052.86
10.501% to 11.000%.. 34 57 154 245 4,079,444.21 6,573,768.98 21,446,254.74 32,099,467.93
11.001% to 11.500%.. 10 14 97 121 995,346.03 1,622,366.30 11,360,696.54 13,978,408.87
11.501% to 12.000%.. 1 3 119 123 80,522.42 193,803.90 12,373,833.69 12,648,160.01
12.001% to 12.500%.. 0 3 60 63 0.00 183,398.76 5,357,178.59 5,540,577.35
12.501% to 13.000%.. 0 0 26 26 0.00 0.00 2,694,229.15 2,694,229.15
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 763 595 1,757 3,115 $136,316,313.65 $136,888,925.76 $498,388,190.12 $771,593,429.53
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
------------------------------------------
Range of
Minimum
Mortgage
Interest Rates Group 1 Group 2 Group 3 Total
- -------------------- -------------------------------------------
5.501% to 6.000%.... 0.00% 0.17% 0.55% 0.38%
6.001% to 6.500%.... 0.24 1.24 1.90 1.49
6.501% to 7.000%.... 3.45 3.59 4.62 4.23
7.001% to 7.500%.... 6.12 5.67 7.73 7.08
7.501% to 8.000%.... 13.79 11.36 17.22 15.57
8.001% to 8.500%.... 14.87 16.42 14.27 14.76
8.501% to 9.000%.... 19.39 16.58 17.13 17.43
9.001% to 9.500%.... 16.20 17.35 11.02 13.06
9.501% to 10.000%... 15.10 14.48 9.46 11.35
10.001% to 10.500%.. 7.05 6.89 5.42 5.97
10.501% to 11.000%.. 2.99 4.80 4.30 4.16
11.001% to 11.500%.. 0.73 1.19 2.28 1.81
11.501% to 12.000%.. 0.06 0.14 2.48 1.64
12.001% to 12.500%.. 0.00 0.13 1.07 0.72
12.501% to 13.000%.. 0.00 0.00 0.54 0.35
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
- ---------------------------------------
(1) As of the Cut-off Date, the weighted average Minimum Mortgage Interest Rate
of all the Adjustable-Rate Mortgage Loans was approximately 8.799%, of the
group 1 Adjustable-Rate Mortgage Loans was approximately 8.819%, of the
group 2 Adjustable-Rate Mortgage Loans was approximately 8.866% and of the
group 3 Adjustable-Rate Mortgage Loans was approximately 8.776%.
A-12
Initial Periodic Cap of the Adjustable-Rate Mortgage Loans(1)
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
----------------------------------- --------------------------------------------------------------------
Initial
Periodic Cap Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- ---------------- ------------------------------------ ---------------------------------------------------------------------
3.000%.......... 763 595 1,757 3,115 $136,316,313.65 $136,888,925.76 $498,388,190.12 $771,593,429.53
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 763 595 1,757 3,115 $136,316,313.65 $136,888,925.76 $498,388,190.12 $771,593,429.53
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
-------------------------------------------
Initial
Periodic Cap Group 1 Group 2 Group 3 Total
- ---------------- -------------------------------------------
3.000%.......... 100.00% 100.00% 100.00% 100.00%
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
- ---------------------------------------
(1) As of the Cut-off Date, the weighted average Initial Periodic Cap for all
the Adjustable-Rate Mortgage Loans was approximately 3.000%, for the group
1 Adjustable-Rate Mortgage Loans was approximately 3.000%, for the group 2
Adjustable-Rate Mortgage Loans was approximately 3.000% and for the group 3
Adjustable-Rate Mortgage Loans was approximately 3.000%.
Periodic Cap of the Adjustable-Rate Mortgage Loans(1)
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
------------------------------------ ---------------------------------------------------------------------
Periodic Cap Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- ----------------- ------------------------------------ ---------------------------------------------------------------------
1.000%.......... 763 595 1,757 3,115 $136,316,313.65 $136,888,925.76 $498,388,190.12 $771,593,429.53
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 763 595 1,757 3,115 $136,316,313.65 $136,888,925.76 $498,388,190.12 $771,593,429.53
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
------------------------------------------
Periodic Cap Group 1 Group 2 Group 3 Total
- ----------------- -------------------------------------------
1.000%.......... 100.00% 100.00% 100.00% 100.00%
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
- ---------------------------------------
(1) As of the Cut-off Date, the weighted average Periodic Cap for all the
Adjustable-Rate Mortgage Loans was approximately 1.000%, for the group 1
Adjustable-Rate Mortgage Loans was approximately 1.000%, for the group 2
Adjustable-Rate Mortgage Loans was approximately 1.000% and for the group 3
Adjustable-Rate Mortgage Loans was approximately 1.000%.
A-13
Gross Margins of the Adjustable-Rate Mortgage Loans(1)
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
Gross Margin Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- ------------------ ------------------------------------ -----------------------------------------------------------------------
2.501% to 3.000%.. 0 0 2 2 $0.00 $0.00 $129,309.78 $129,309.78
3.501% to 4.000%.. 0 0 4 4 0.00 0.00 389,196.31 389,196.31
4.001% to 4.500%.. 1 1 1 3 229,785.76 81,904.51 83,969.46 395,659.73
4.501% to 5.000%.. 2 2 10 14 293,132.37 311,999.50 1,841,414.06 2,446,545.93
5.001% to 5.500%.. 4 2 6 12 779,104.80 481,352.34 1,474,302.96 2,734,760.10
5.501% to 6.000%.. 39 37 99 175 6,365,943.49 8,420,414.55 26,468,690.12 41,255,048.16
6.001% to 6.500%.. 713 545 1,617 2,875 128,062,379.35 126,198,342.53 464,546,661.82 718,807,383.70
6.501% to 7.000%.. 2 5 8 15 324,913.24 1,006,053.37 1,703,296.40 3,034,263.01
7.001% to 7.500%.. 2 1 10 13 261,054.64 59,821.32 1,751,349.21 2,072,225.17
7.501% to 8.000%.. 0 1 0 1 0.00 116,731.52 0.00 116,731.52
8.001% to 8.500%.. 0 1 0 1 0.00 212,306.12 0.00 212,306.12
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 763 595 1,757 3,115 $136,316,313.65 $136,888,925.76 $498,388,190.12 $771,593,429.53
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
Gross Margin Group 1 Group 2 Group 3 Total
- ------------------ -------------------------------------------
2.501% to 3.000%.. 0.00% 0.00% 0.03% 0.02%
3.501% to 4.000%.. 0.00 0.00 0.08 0.05
4.001% to 4.500%.. 0.17 0.06 0.02 0.05
4.501% to 5.000%.. 0.22 0.23 0.37 0.32
5.001% to 5.500%.. 0.57 0.35 0.30 0.35
5.501% to 6.000%.. 4.67 6.15 5.31 5.35
6.001% to 6.500%.. 93.95 92.19 93.21 93.16
6.501% to 7.000%.. 0.24 0.73 0.34 0.39
7.001% to 7.500%.. 0.19 0.04 0.35 0.27
7.501% to 8.000%.. 0.00 0.09 0.00 0.02
8.001% to 8.500%.. 0.00 0.16 0.00 0.03
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
- ---------------------------------------
(1) As of the Cut-off Date, the weighted average Gross Margin of all the
Mortgage Loans was approximately 6.106%, of the group 1 Mortgage Loans was
approximately 6.100%, of the group 2 Mortgage Loans was approximately
6.111% and of the group 3 Mortgage Loans was approximately 6.106%.
A-14
Next Adjustment Date for the Adjustable-Rate Mortgage Loans(1)
Number of Principal Balance
Mortgage Loans Outstanding as of the Cut-off Date
----------------------------------- ---------------------------------------------------------------------
Month of Next Mortgage
Interest Rate Change Group 1 Group 2 Group 3 Total Group 1 Group 2 Group 3 Total
- ---------------------- ----------------------------------- ---------------------------------------------------------------------
November 2007......... 1 0 0 1 $142,084.86 $0.00 $0.00 $142,084.86
January 2008.......... 0 0 1 1 0.00 0.00 77,598.93 77,598.93
February 2008......... 0 1 3 4 0.00 59,821.32 352,808.98 412,630.30
March 2008............ 0 0 1 1 0.00 0.00 51,150.34 51,150.34
April 2008............ 1 0 2 3 120,815.29 0.00 181,440.53 302,255.82
May 2008.............. 2 1 16 19 315,809.76 126,044.05 2,976,475.97 3,418,329.78
June 2008............. 4 3 10 17 622,502.06 369,728.90 3,937,973.76 4,930,204.72
July 2008............. 271 184 539 994 51,458,333.39 42,309,671.42 158,392,567.75 252,160,572.56
August 2008........... 371 322 949 1,642 63,307,006.01 72,255,745.05 266,441,149.04 402,003,900.10
September 2008........ 60 41 117 218 10,344,710.55 9,800,248.62 27,204,627.16 47,349,586.33
October 2008.......... 0 0 1 1 0.00 0.00 205,000.00 205,000.00
March 2009............ 1 0 0 1 83,491.02 0.00 0.00 83,491.02
July 2009............. 6 4 17 27 1,147,966.52 1,033,910.27 3,628,448.55 5,810,325.34
August 2009........... 6 5 27 38 947,598.29 841,006.84 7,726,586.34 9,515,191.47
September 2009........ 3 0 5 8 556,236.98 0.00 1,503,909.75 2,060,146.73
June 2011............. 0 0 1 1 0.00 0.00 94,871.28 94,871.28
July 2011............. 15 13 22 50 3,060,735.36 4,027,617.81 8,876,454.70 15,964,807.87
August 2011........... 21 20 36 77 4,134,052.41 5,946,631.48 14,127,153.69 24,207,837.58
September 2011........ 1 0 10 11 74,971.15 0.00 2,609,973.35 2,684,944.50
July 2021............. 0 1 0 1 0.00 118,500.00 0.00 118,500.00
--- --- ----- ----- --------------- --------------- --------------- ---------------
Total: 763 595 1,757 3,115 $136,316,313.65 $136,888,925.76 $498,388,190.12 $771,593,429.53
=== === ===== ===== =============== =============== =============== ===============
% of Aggregate
Principal Balance Outstanding
as of the Cut-off Date
------------------------------------------
Month of Next Mortgage
Interest Rate Change Group 1 Group 2 Group 3 Total
- ---------------------- ------------------------------------------
November 2007......... 0.10% 0.00% 0.00% 0.02%
January 2008.......... 0.00 0.00 0.02 0.01
February 2008......... 0.00 0.04 0.07 0.05
March 2008............ 0.00 0.00 0.01 0.01
April 2008............ 0.09 0.00 0.04 0.04
May 2008.............. 0.23 0.09 0.60 0.44
June 2008............. 0.46 0.27 0.79 0.64
July 2008............. 37.75 30.91 31.78 32.68
August 2008........... 46.44 52.78 53.46 52.10
September 2008........ 7.59 7.16 5.46 6.14
October 2008.......... 0.00 0.00 0.04 0.03
March 2009............ 0.06 0.00 0.00 0.01
July 2009............. 0.84 0.76 0.73 0.75
August 2009........... 0.70 0.61 1.55 1.23
September 2009........ 0.41 0.00 0.30 0.27
June 2011............. 0.00 0.00 0.02 0.01
July 2011............. 2.25 2.94 1.78 2.07
August 2011........... 3.03 4.34 2.83 3.14
September 2011........ 0.05 0.00 0.52 0.35
July 2021............. 0.00 0.09 0.00 0.02
------ ------ ------ ------
Total: 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
- ---------------------------------------
(1) As of the Cut-off Date, the weighted average months to the next Adjustment
Date for all the Adjustable-Rate Mortgage Loans was approximately 24
months, for the group 1 Adjustable-Rate Mortgage Loans was approximately 24
months, for the group 2 Adjustable-Rate Mortgage Loans was approximately 25
months and for the group 3 Adjustable-Rate Mortgage Loans was approximately
24 months.
A-15
APPENDIX B
DECREMENT TABLES
The following tables have been prepared based on the assumptions described
in this prospectus supplement under "Yield, Prepayment and Maturity
Considerations" and should be read in conjunction with that section.
Percentage of Original Principal Balance Outstanding(1) at the
Specified Percentages of the Applicable Prepayment Assumption
Class A-1
- -------------------------------------------------------------------------------
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- -------------------------------------------------------------------------------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- -------------------------------------------------------------------------------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
October 25, 2007 99 85 78 71 64 56 49
October 25, 2008 99 64 49 34 20 6 0
October 25, 2009 98 47 27 10 0 0 0
October 25, 2010 98 33 23 10 0 0 0
October 25, 2011 97 28 17 10 0 0 0
October 25, 2012 96 23 13 6 0 0 0
October 25, 2013 95 19 9 4 0 0 0
October 25, 2014 94 16 7 3 0 0 0
October 25, 2015 93 13 5 2 0 0 0
October 25, 2016 92 11 4 1 0 0 0
October 25, 2017 91 9 3 1 0 0 0
October 25, 2018 89 7 2 1 0 0 0
October 25, 2019 88 6 2 0 0 0 0
October 25, 2020 86 5 1 0 0 0 0
October 25, 2021 84 4 1 0 0 0 0
October 25, 2022 81 3 1 0 0 0 0
October 25, 2023 79 3 0 0 0 0 0
October 25, 2024 76 2 0 0 0 0 0
October 25, 2025 73 2 0 0 0 0 0
October 25, 2026 69 1 0 0 0 0 0
October 25, 2027 65 1 0 0 0 0 0
October 25, 2028 61 1 0 0 0 0 0
October 25, 2029 56 1 0 0 0 0 0
October 25, 2030 50 1 0 0 0 0 0
October 25, 2031 44 0 0 0 0 0 0
October 25, 2032 37 0 0 0 0 0 0
October 25, 2033 31 0 0 0 0 0 0
October 25, 2034 27 0 0 0 0 0 0
October 25, 2035 22 0 0 0 0 0 0
October 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 22.27 4.35 2.93 2.05 1.34 1.14 1.01
Weighted Avg. Life to
Optional Termination
Date (in years)(3) 22.27 4.04 2.71 1.89 1.34 1.14 1.01
- ---------------------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by
the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Calculated pursuant to footnote two but assumes that the optional right to
purchase the Mortgage Loans is exercised on the earliest possible
Distribution Date on which such right is permitted.
B-1
Percentage of Original Principal Balance Outstanding(1) at the
Specified Percentages of the Applicable Prepayment Assumption
Class A-2
- --------------------------------------------------------------------------------
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
October 25, 2007 99 85 78 71 64 56 49
October 25, 2008 99 65 49 34 20 6 0
October 25, 2009 98 47 27 10 0 0 0
October 25, 2010 98 33 23 10 0 0 0
October 25, 2011 97 28 17 10 0 0 0
October 25, 2012 96 23 13 6 0 0 0
October 25, 2013 96 19 9 4 0 0 0
October 25, 2014 95 16 7 3 0 0 0
October 25, 2015 94 13 5 2 0 0 0
October 25, 2016 92 11 4 1 0 0 0
October 25, 2017 91 9 3 1 0 0 0
October 25, 2018 90 7 2 1 0 0 0
October 25, 2019 88 6 2 0 0 0 0
October 25, 2020 86 5 1 0 0 0 0
October 25, 2021 84 4 1 0 0 0 0
October 25, 2022 82 3 1 0 0 0 0
October 25, 2023 79 3 0 0 0 0 0
October 25, 2024 76 2 0 0 0 0 0
October 25, 2025 73 2 0 0 0 0 0
October 25, 2026 69 1 0 0 0 0 0
October 25, 2027 65 1 0 0 0 0 0
October 25, 2028 61 1 0 0 0 0 0
October 25, 2029 55 1 0 0 0 0 0
October 25, 2030 50 1 0 0 0 0 0
October 25, 2031 43 0 0 0 0 0 0
October 25, 2032 36 0 0 0 0 0 0
October 25, 2033 31 0 0 0 0 0 0
October 25, 2034 27 0 0 0 0 0 0
October 25, 2035 22 0 0 0 0 0 0
October 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 22.25 4.35 2.93 2.05 1.34 1.14 1.02
Weighted Avg. Life to
Optional Termination
Date (in years)(3) 22.25 4.04 2.71 1.89 1.34 1.14 1.02
- ---------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by
the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Calculated pursuant to footnote two but assumes that the optional right to
purchase the Mortgage Loans is exercised on the earliest possible
Distribution Date on which such right is permitted.
B-2
Percentage of Original Principal Balance Outstanding(1) at the
Specified Percentages of the Applicable Prepayment Assumption
Class A-3A
- --------------------------------------------------------------------------------
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
October 25, 2007 99 75 62 50 37 25 12
October 25, 2008 98 39 12 0 0 0 0
October 25, 2009 98 8 0 0 0 0 0
October 25, 2010 97 0 0 0 0 0 0
October 25, 2011 96 0 0 0 0 0 0
October 25, 2012 95 0 0 0 0 0 0
October 25, 2013 93 0 0 0 0 0 0
October 25, 2014 92 0 0 0 0 0 0
October 25, 2015 90 0 0 0 0 0 0
October 25, 2016 88 0 0 0 0 0 0
October 25, 2017 86 0 0 0 0 0 0
October 25, 2018 83 0 0 0 0 0 0
October 25, 2019 80 0 0 0 0 0 0
October 25, 2020 77 0 0 0 0 0 0
October 25, 2021 74 0 0 0 0 0 0
October 25, 2022 70 0 0 0 0 0 0
October 25, 2023 65 0 0 0 0 0 0
October 25, 2024 60 0 0 0 0 0 0
October 25, 2025 55 0 0 0 0 0 0
October 25, 2026 49 0 0 0 0 0 0
October 25, 2027 42 0 0 0 0 0 0
October 25, 2028 34 0 0 0 0 0 0
October 25, 2029 25 0 0 0 0 0 0
October 25, 2030 16 0 0 0 0 0 0
October 25, 2031 5 0 0 0 0 0 0
October 25, 2032 0 0 0 0 0 0 0
October 25, 2033 0 0 0 0 0 0 0
October 25, 2034 0 0 0 0 0 0 0
October 25, 2035 0 0 0 0 0 0 0
October 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in
years)(2) 18.15 1.71 1.24 1.00 0.83 0.71 0.62
Weighted Avg. Life to
Optional Termination
Date (in years)(3) 18.15 1.71 1.24 1.00 0.83 0.71 0.62
- ---------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by
the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Calculated pursuant to footnote two but assumes that the optional right to
purchase the Mortgage Loans is exercised on the earliest possible
Distribution Date on which such right is permitted.
B-3
Percentage of Original Principal Balance Outstanding(1) at the
Specified Percentages of the Applicable Prepayment Assumption
Class A-3B
- --------------------------------------------------------------------------------
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
October 25, 2007 100 100 100 100 100 100 100
October 25, 2008 100 100 100 81 46 11 0
October 25, 2009 100 100 62 21 0 0 0
October 25, 2010 100 79 52 21 0 0 0
October 25, 2011 100 65 38 20 0 0 0
October 25, 2012 100 53 27 12 0 0 0
October 25, 2013 100 43 19 7 0 0 0
October 25, 2014 100 35 14 4 0 0 0
October 25, 2015 100 28 9 1 0 0 0
October 25, 2016 100 23 6 0 0 0 0
October 25, 2017 100 18 4 0 0 0 0
October 25, 2018 100 14 2 0 0 0 0
October 25, 2019 100 11 1 0 0 0 0
October 25, 2020 100 9 0 0 0 0 0
October 25, 2021 100 6 0 0 0 0 0
October 25, 2022 100 5 0 0 0 0 0
October 25, 2023 100 3 0 0 0 0 0
October 25, 2024 100 2 0 0 0 0 0
October 25, 2025 100 1 0 0 0 0 0
October 25, 2026 100 0 0 0 0 0 0
October 25, 2027 100 0 0 0 0 0 0
October 25, 2028 100 0 0 0 0 0 0
October 25, 2029 100 0 0 0 0 0 0
October 25, 2030 100 0 0 0 0 0 0
October 25, 2031 100 0 0 0 0 0 0
October 25, 2032 90 0 0 0 0 0 0
October 25, 2033 75 0 0 0 0 0 0
October 25, 2034 64 0 0 0 0 0 0
October 25, 2035 52 0 0 0 0 0 0
October 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in
years)(2) 28.42 7.47 4.87 3.19 2.02 1.74 1.55
Weighted Avg. Life to
Optional Termination
Date (in years)(3) 28.42 7.07 4.61 3.00 2.02 1.74 1.55
- --------------------------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by
the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Calculated pursuant to footnote two but assumes that the optional right to
purchase the Mortgage Loans is exercised on the earliest possible
Distribution Date on which such right is permitted.
B-4
Percentage of Original Principal Balance Outstanding(1) at the
Specified Percentages of the Applicable Prepayment Assumption
Class A-3C
- --------------------------------------------------------------------------------
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
October 25, 2007 100 100 100 100 100 100 100
October 25, 2008 100 100 100 100 100 100 0
October 25, 2009 100 100 100 100 0 0 0
October 25, 2010 100 100 100 100 0 0 0
October 25, 2011 100 100 100 100 0 0 0
October 25, 2012 100 100 100 100 0 0 0
October 25, 2013 100 100 100 100 0 0 0
October 25, 2014 100 100 100 100 0 0 0
October 25, 2015 100 100 100 100 0 0 0
October 25, 2016 100 100 100 94 0 0 0
October 25, 2017 100 100 100 64 0 0 0
October 25, 2018 100 100 100 36 0 0 0
October 25, 2019 100 100 100 9 0 0 0
October 25, 2020 100 100 89 0 0 0 0
October 25, 2021 100 100 66 0 0 0 0
October 25, 2022 100 100 49 0 0 0 0
October 25, 2023 100 100 24 0 0 0 0
October 25, 2024 100 100 5 0 0 0 0
October 25, 2025 100 100 0 0 0 0 0
October 25, 2026 100 100 0 0 0 0 0
October 25, 2027 100 85 0 0 0 0 0
October 25, 2028 100 68 0 0 0 0 0
October 25, 2029 100 54 0 0 0 0 0
October 25, 2030 100 35 0 0 0 0 0
October 25, 2031 100 16 0 0 0 0 0
October 25, 2032 100 0 0 0 0 0 0
October 25, 2033 100 0 0 0 0 0 0
October 25, 2034 100 0 0 0 0 0 0
October 25, 2035 100 0 0 0 0 0 0
October 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in
years)(2) 29.78 23.09 15.81 11.52 2.71 2.03 1.95
Weighted Avg. Life to
Optional Termination
Date (in years)(3) 29.78 12.36 8.11 5.86 2.71 2.03 1.95
- -------------------------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by
the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Calculated pursuant to footnote two but assumes that the optional right to
purchase the Mortgage Loans is exercised on the earliest possible
Distribution Date on which such right is permitted.
B-5
Percentage of Original Principal Balance Outstanding(1) at the
Specified Percentages of the Applicable Prepayment Assumption
Class M-1
- --------------------------------------------------------------------------------
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
October 25, 2007 100 100 100 100 100 100 100
October 25, 2008 100 100 100 100 100 100 74
October 25, 2009 100 100 100 100 79 78 10
October 25, 2010 100 98 19 39 72 0 0
October 25, 2011 100 57 0 0 0 0 0
October 25, 2012 100 22 0 0 0 0 0
October 25, 2013 100 0 0 0 0 0 0
October 25, 2014 100 0 0 0 0 0 0
October 25, 2015 100 0 0 0 0 0 0
October 25, 2016 100 0 0 0 0 0 0
October 25, 2017 100 0 0 0 0 0 0
October 25, 2018 100 0 0 0 0 0 0
October 25, 2019 100 0 0 0 0 0 0
October 25, 2020 100 0 0 0 0 0 0
October 25, 2021 100 0 0 0 0 0 0
October 25, 2022 100 0 0 0 0 0 0
October 25, 2023 100 0 0 0 0 0 0
October 25, 2024 100 0 0 0 0 0 0
October 25, 2025 100 0 0 0 0 0 0
October 25, 2026 100 0 0 0 0 0 0
October 25, 2027 100 0 0 0 0 0 0
October 25, 2028 100 0 0 0 0 0 0
October 25, 2029 100 0 0 0 0 0 0
October 25, 2030 100 0 0 0 0 0 0
October 25, 2031 100 0 0 0 0 0 0
October 25, 2032 100 0 0 0 0 0 0
October 25, 2033 85 0 0 0 0 0 0
October 25, 2034 53 0 0 0 0 0 0
October 25, 2035 17 0 0 0 0 0 0
October 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in
years)(2) 28.04 5.22 3.57 3.93 3.99 3.18 2.58
Weighted Avg. Life to
Optional Termination
Date (in years)(3) 28.04 5.22 3.57 3.93 3.96 3.14 2.56
- --------------------------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by
the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Calculated pursuant to footnote two but assumes that the optional right to
purchase the Mortgage Loans is exercised on the earliest possible
Distribution Date on which such right is permitted.
B-6
Percentage of Original Principal Balance Outstanding(1) at the
Specified Percentages of the Applicable Prepayment Assumption
Class M-2
- --------------------------------------------------------------------------------
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
October 25, 2007 100 100 100 100 100 100 100
October 25, 2008 100 100 100 100 100 100 100
October 25, 2009 100 100 100 100 100 100 100
October 25, 2010 100 100 100 100 100 66 15
October 25, 2011 100 100 75 18 81 6 0
October 25, 2012 100 100 41 0 24 0 0
October 25, 2013 100 92 16 0 0 0 0
October 25, 2014 100 66 0 0 0 0 0
October 25, 2015 100 45 0 0 0 0 0
October 25, 2016 100 27 0 0 0 0 0
October 25, 2017 100 12 0 0 0 0 0
October 25, 2018 100 0 0 0 0 0 0
October 25, 2019 100 0 0 0 0 0 0
October 25, 2020 100 0 0 0 0 0 0
October 25, 2021 100 0 0 0 0 0 0
October 25, 2022 100 0 0 0 0 0 0
October 25, 2023 100 0 0 0 0 0 0
October 25, 2024 100 0 0 0 0 0 0
October 25, 2025 100 0 0 0 0 0 0
October 25, 2026 100 0 0 0 0 0 0
October 25, 2027 100 0 0 0 0 0 0
October 25, 2028 100 0 0 0 0 0 0
October 25, 2029 100 0 0 0 0 0 0
October 25, 2030 100 0 0 0 0 0 0
October 25, 2031 100 0 0 0 0 0 0
October 25, 2032 100 0 0 0 0 0 0
October 25, 2033 100 0 0 0 0 0 0
October 25, 2034 100 0 0 0 0 0 0
October 25, 2035 100 0 0 0 0 0 0
October 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in
years)(2) 29.74 8.91 5.83 4.71 5.54 4.25 3.56
Weighted Avg. Life to
Optional Termination
Date (in years)(3) 29.74 8.91 5.83 4.71 4.45 3.36 2.86
- ---------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by
the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Calculated pursuant to footnote two but assumes that the optional right to
purchase the Mortgage Loans is exercised on the earliest possible
Distribution Date on which such right is permitted.
B-7
Percentage of Original Principal Balance Outstanding(1) at the
Specified Percentages of the Applicable Prepayment Assumption
Class M-3
- --------------------------------------------------------------------------------
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
October 25, 2007 100 100 100 100 100 100 100
October 25, 2008 100 100 100 100 100 100 100
October 25, 2009 100 100 100 100 100 100 100
October 25, 2010 100 100 100 100 100 100 100
October 25, 2011 100 100 100 100 100 100 56
October 25, 2012 100 100 100 87 100 58 15
October 25, 2013 100 100 100 58 85 22 0
October 25, 2014 100 100 95 39 49 2 0
October 25, 2015 100 100 71 26 21 0 0
October 25, 2016 100 100 53 18 4 0 0
October 25, 2017 100 100 40 7 0 0 0
October 25, 2018 100 99 30 0 0 0 0
October 25, 2019 100 82 22 0 0 0 0
October 25, 2020 100 67 17 0 0 0 0
October 25, 2021 100 55 8 0 0 0 0
October 25, 2022 100 45 0 0 0 0 0
October 25, 2023 100 37 0 0 0 0 0
October 25, 2024 100 30 0 0 0 0 0
October 25, 2025 100 24 0 0 0 0 0
October 25, 2026 100 20 0 0 0 0 0
October 25, 2027 100 16 0 0 0 0 0
October 25, 2028 100 8 0 0 0 0 0
October 25, 2029 100 2 0 0 0 0 0
October 25, 2030 100 0 0 0 0 0 0
October 25, 2031 100 0 0 0 0 0 0
October 25, 2032 100 0 0 0 0 0 0
October 25, 2033 100 0 0 0 0 0 0
October 25, 2034 100 0 0 0 0 0 0
October 25, 2035 100 0 0 0 0 0 0
October 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in
years)(2) 29.78 16.33 10.85 7.85 8.10 6.30 5.19
Weighted Avg. Life to
Optional Termination
Date (in years)(3) 29.78 12.35 8.10 5.85 4.45 3.36 2.86
- --------------------------------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by
the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Calculated pursuant to footnote two but assumes that the optional right to
purchase the Mortgage Loans is exercised on the earliest possible
Distribution Date on which such right is permitted.
B-8
Percentage of Original Principal Balance Outstanding(1) at the
Specified Percentages of the Applicable Prepayment Assumption
Class M-4
- --------------------------------------------------------------------------------
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
October 25, 2007 100 100 100 100 100 100 100
October 25, 2008 100 100 100 100 100 100 100
October 25, 2009 100 100 100 100 100 26 18
October 25, 2010 100 99 67 43 25 13 8
October 25, 2011 100 82 50 28 15 7 1
October 25, 2012 100 68 37 19 9 1 0
October 25, 2013 100 56 28 13 5 0 0
October 25, 2014 100 46 21 8 0 0 0
October 25, 2015 100 38 15 6 0 0 0
October 25, 2016 100 32 12 3 0 0 0
October 25, 2017 100 26 9 0 0 0 0
October 25, 2018 100 22 6 0 0 0 0
October 25, 2019 100 18 5 0 0 0 0
October 25, 2020 100 15 1 0 0 0 0
October 25, 2021 100 12 0 0 0 0 0
October 25, 2022 100 10 0 0 0 0 0
October 25, 2023 100 8 0 0 0 0 0
October 25, 2024 100 7 0 0 0 0 0
October 25, 2025 100 5 0 0 0 0 0
October 25, 2026 100 4 0 0 0 0 0
October 25, 2027 100 0 0 0 0 0 0
October 25, 2028 100 0 0 0 0 0 0
October 25, 2029 100 0 0 0 0 0 0
October 25, 2030 100 0 0 0 0 0 0
October 25, 2031 100 0 0 0 0 0 0
October 25, 2032 100 0 0 0 0 0 0
October 25, 2033 94 0 0 0 0 0 0
October 25, 2034 81 0 0 0 0 0 0
October 25, 2035 66 0 0 0 0 0 0
October 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in
years)(2) 29.05 8.96 5.93 4.72 4.26 3.17 2.78
Weighted Avg. Life to
Optional Termination
Date (in years)(3) 29.05 8.15 5.38 4.32 3.95 2.92 2.58
- ---------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by
the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Calculated pursuant to footnote two but assumes that the optional right to
purchase the Mortgage Loans is exercised on the earliest possible
Distribution Date on which such right is permitted.
B-9
Percentage of Original Principal Balance Outstanding(1) at the
Specified Percentages of the Applicable Prepayment Assumption
Class M-5
- --------------------------------------------------------------------------------
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
October 25, 2007 100 100 100 100 100 100 100
October 25, 2008 100 100 100 100 100 100 100
October 25, 2009 100 100 100 100 100 26 18
October 25, 2010 100 99 67 43 25 13 8
October 25, 2011 100 82 50 28 15 7 0
October 25, 2012 100 68 37 19 9 0 0
October 25, 2013 100 56 28 13 5 0 0
October 25, 2014 100 46 21 8 0 0 0
October 25, 2015 100 38 15 6 0 0 0
October 25, 2016 100 32 12 0 0 0 0
October 25, 2017 100 26 9 0 0 0 0
October 25, 2018 100 22 6 0 0 0 0
October 25, 2019 100 18 5 0 0 0 0
October 25, 2020 100 15 0 0 0 0 0
October 25, 2021 100 12 0 0 0 0 0
October 25, 2022 100 10 0 0 0 0 0
October 25, 2023 100 8 0 0 0 0 0
October 25, 2024 100 7 0 0 0 0 0
October 25, 2025 100 5 0 0 0 0 0
October 25, 2026 100 2 0 0 0 0 0
October 25, 2027 100 0 0 0 0 0 0
October 25, 2028 100 0 0 0 0 0 0
October 25, 2029 100 0 0 0 0 0 0
October 25, 2030 100 0 0 0 0 0 0
October 25, 2031 100 0 0 0 0 0 0
October 25, 2032 100 0 0 0 0 0 0
October 25, 2033 94 0 0 0 0 0 0
October 25, 2034 81 0 0 0 0 0 0
October 25, 2035 66 0 0 0 0 0 0
October 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in
years)(2) 29.05 8.94 5.91 4.65 4.10 3.06 2.68
Weighted Avg. Life to
Optional Termination
Date (in years)(3) 29.05 8.15 5.38 4.26 3.80 2.82 2.49
- ---------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by
the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Calculated pursuant to footnote two but assumes that the optional right to
purchase the Mortgage Loans is exercised on the earliest possible
Distribution Date on which such right is permitted.
B-10
Percentage of Original Principal Balance Outstanding(1) at the
Specified Percentages of the Applicable Prepayment Assumption
Class M-6
- --------------------------------------------------------------------------------
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
October 25, 2007 100 100 100 100 100 100 100
October 25, 2008 100 100 100 100 100 100 100
October 25, 2009 100 100 100 100 100 26 18
October 25, 2010 100 99 67 43 25 13 8
October 25, 2011 100 82 50 28 15 7 0
October 25, 2012 100 68 37 19 9 0 0
October 25, 2013 100 56 28 13 4 0 0
October 25, 2014 100 46 21 8 0 0 0
October 25, 2015 100 38 15 6 0 0 0
October 25, 2016 100 32 12 0 0 0 0
October 25, 2017 100 26 9 0 0 0 0
October 25, 2018 100 22 6 0 0 0 0
October 25, 2019 100 18 1 0 0 0 0
October 25, 2020 100 15 0 0 0 0 0
October 25, 2021 100 12 0 0 0 0 0
October 25, 2022 100 10 0 0 0 0 0
October 25, 2023 100 8 0 0 0 0 0
October 25, 2024 100 7 0 0 0 0 0
October 25, 2025 100 4 0 0 0 0 0
October 25, 2026 100 0 0 0 0 0 0
October 25, 2027 100 0 0 0 0 0 0
October 25, 2028 100 0 0 0 0 0 0
October 25, 2029 100 0 0 0 0 0 0
October 25, 2030 100 0 0 0 0 0 0
October 25, 2031 100 0 0 0 0 0 0
October 25, 2032 100 0 0 0 0 0 0
October 25, 2033 94 0 0 0 0 0 0
October 25, 2034 81 0 0 0 0 0 0
October 25, 2035 66 0 0 0 0 0 0
October 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in
years)(2) 29.05 8.90 5.89 4.59 3.97 2.97 2.59
Weighted Avg. Life to
Optional Termination
Date (in years)(3) 29.05 8.15 5.38 4.22 3.68 2.74 2.41
- ---------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by
the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Calculated pursuant to footnote two but assumes that the optional right to
purchase the Mortgage Loans is exercised on the earliest possible
Distribution Date on which such right is permitted.
B-11
Percentage of Original Principal Balance Outstanding(1) at the
Specified Percentages of the Applicable Prepayment Assumption
Class M-7
- --------------------------------------------------------------------------------
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
October 25, 2007 100 100 100 100 100 100 100
October 25, 2008 100 100 100 100 100 100 100
October 25, 2009 100 100 100 100 100 26 18
October 25, 2010 100 99 67 43 25 13 8
October 25, 2011 100 82 50 28 15 7 0
October 25, 2012 100 68 37 19 9 0 0
October 25, 2013 100 56 28 13 0 0 0
October 25, 2014 100 46 21 8 0 0 0
October 25, 2015 100 38 15 1 0 0 0
October 25, 2016 100 32 12 0 0 0 0
October 25, 2017 100 26 9 0 0 0 0
October 25, 2018 100 22 6 0 0 0 0
October 25, 2019 100 18 0 0 0 0 0
October 25, 2020 100 15 0 0 0 0 0
October 25, 2021 100 12 0 0 0 0 0
October 25, 2022 100 10 0 0 0 0 0
October 25, 2023 100 8 0 0 0 0 0
October 25, 2024 100 6 0 0 0 0 0
October 25, 2025 100 0 0 0 0 0 0
October 25, 2026 100 0 0 0 0 0 0
October 25, 2027 100 0 0 0 0 0 0
October 25, 2028 100 0 0 0 0 0 0
October 25, 2029 100 0 0 0 0 0 0
October 25, 2030 100 0 0 0 0 0 0
October 25, 2031 100 0 0 0 0 0 0
October 25, 2032 100 0 0 0 0 0 0
October 25, 2033 94 0 0 0 0 0 0
October 25, 2034 81 0 0 0 0 0 0
October 25, 2035 66 0 0 0 0 0 0
October 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in
years)(2) 29.05 8.85 5.85 4.54 3.87 2.89 2.53
Weighted Avg. Life to
Optional Termination
Date (in years)(3) 29.05 8.15 5.37 4.19 3.60 2.68 2.36
- ---------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by
the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Calculated pursuant to footnote two but assumes that the optional right to
purchase the Mortgage Loans is exercised on the earliest possible
Distribution Date on which such right is permitted.
B-12
Percentage of Original Principal Balance Outstanding(1) at the
Specified Percentages of the Applicable Prepayment Assumption
Class M-8
- --------------------------------------------------------------------------------
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
October 25, 2007 100 100 100 100 100 100 100
October 25, 2008 100 100 100 100 100 100 100
October 25, 2009 100 100 100 100 100 26 18
October 25, 2010 100 99 67 43 25 13 6
October 25, 2011 100 82 50 28 15 1 0
October 25, 2012 100 68 37 19 9 0 0
October 25, 2013 100 56 28 13 0 0 0
October 25, 2014 100 46 21 8 0 0 0
October 25, 2015 100 38 15 0 0 0 0
October 25, 2016 100 32 12 0 0 0 0
October 25, 2017 100 26 9 0 0 0 0
October 25, 2018 100 22 0 0 0 0 0
October 25, 2019 100 18 0 0 0 0 0
October 25, 2020 100 15 0 0 0 0 0
October 25, 2021 100 12 0 0 0 0 0
October 25, 2022 100 10 0 0 0 0 0
October 25, 2023 100 7 0 0 0 0 0
October 25, 2024 100 0 0 0 0 0 0
October 25, 2025 100 0 0 0 0 0 0
October 25, 2026 100 0 0 0 0 0 0
October 25, 2027 100 0 0 0 0 0 0
October 25, 2028 100 0 0 0 0 0 0
October 25, 2029 100 0 0 0 0 0 0
October 25, 2030 100 0 0 0 0 0 0
October 25, 2031 100 0 0 0 0 0 0
October 25, 2032 100 0 0 0 0 0 0
October 25, 2033 94 0 0 0 0 0 0
October 25, 2034 81 0 0 0 0 0 0
October 25, 2035 66 0 0 0 0 0 0
October 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in
years)(2) 29.05 8.79 5.80 4.47 3.77 2.83 2.48
Weighted Avg. Life to
Optional Termination
Date (in years)(3) 29.05 8.15 5.37 4.16 3.53 2.63 2.33
- ---------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by
the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Calculated pursuant to footnote two but assumes that the optional right to
purchase the Mortgage Loans is exercised on the earliest possible
Distribution Date on which such right is permitted.
B-13
Percentage of Original Principal Balance Outstanding(1) at the
Specified Percentages of the Applicable Prepayment Assumption
Class M-9
- --------------------------------------------------------------------------------
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- --------------------------------------------------------------------------------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
October 25, 2007 100 100 100 100 100 100 100
October 25, 2008 100 100 100 100 100 100 100
October 25, 2009 100 100 100 100 100 26 18
October 25, 2010 100 99 67 43 25 13 0
October 25, 2011 100 82 50 28 15 0 0
October 25, 2012 100 68 37 19 3 0 0
October 25, 2013 100 56 28 13 0 0 0
October 25, 2014 100 46 21 1 0 0 0
October 25, 2015 100 38 15 0 0 0 0
October 25, 2016 100 32 12 0 0 0 0
October 25, 2017 100 26 2 0 0 0 0
October 25, 2018 100 22 0 0 0 0 0
October 25, 2019 100 18 0 0 0 0 0
October 25, 2020 100 15 0 0 0 0 0
October 25, 2021 100 12 0 0 0 0 0
October 25, 2022 100 8 0 0 0 0 0
October 25, 2023 100 0 0 0 0 0 0
October 25, 2024 100 0 0 0 0 0 0
October 25, 2025 100 0 0 0 0 0 0
October 25, 2026 100 0 0 0 0 0 0
October 25, 2027 100 0 0 0 0 0 0
October 25, 2028 100 0 0 0 0 0 0
October 25, 2029 100 0 0 0 0 0 0
October 25, 2030 100 0 0 0 0 0 0
October 25, 2031 100 0 0 0 0 0 0
October 25, 2032 100 0 0 0 0 0 0
October 25, 2033 94 0 0 0 0 0 0
October 25, 2034 81 0 0 0 0 0 0
October 25, 2035 66 0 0 0 0 0 0
October 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in
years)(2) 29.05 8.70 5.73 4.41 3.69 2.77 2.41
Weighted Avg. Life to
Optional Termination
Date (in years)(3) 29.05 8.15 5.37 4.14 3.49 2.60 2.28
- ---------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by
the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Calculated pursuant to footnote two but assumes that the optional right to
purchase the Mortgage Loans is exercised on the earliest possible
Distribution Date on which such right is permitted.
B-14
APPENDIX C
Assumed Mortgage Loan Characteristics
Original
Gross Original Interest Months to
Cut-off Date Mortgage Original Amortization Loan Only Gross Next Initial
Loan Interest Principal Interest Term Term Age Term Margin Adjustment Periodic
Group Type Balance ($) Rate (%) (months) (months) (months) (months) (%) Date Rate Cap (%)
- ------------------------------------------------------------------------------------------------------------------------------------
1 FIX 140,935.00 9.7000 180 180 3 0 N/A N/A N/A
1 FIX 1,691,254.60 8.6350 360 360 3 0 N/A N/A N/A
1 FIX 1,526,944.44 9.2558 360 360 3 0 N/A N/A N/A
1 FIX 674,296.57 9.6489 360 360 2 0 N/A N/A N/A
1 FIX 196,703.91 9.4500 360 360 3 0 N/A N/A N/A
1 FIX 7,802,698.20 8.7178 360 360 2 0 N/A N/A N/A
1 FIX 609,498.85 8.3493 360 480 3 0 N/A N/A N/A
1 FIX 249,855.89 7.9900 360 480 2 0 N/A N/A N/A
1 FIX 2,548,090.67 8.3769 360 480 3 0 N/A N/A N/A
1 ARM 81,386.39 9.7250 180 180 3 0 6.1000 21 3.0000
1 ARM 17,685,776.33 9.2582 360 360 2 0 6.0641 22 3.0000
1 ARM 2,153,033.65 8.2822 360 360 2 0 6.1427 22 3.0000
1 ARM 44,025,921.59 9.3189 360 360 2 0 6.1195 22 3.0000
1 ARM 250,190.53 9.9571 360 360 2 0 6.1000 22 3.0000
1 ARM 2,340,830.36 8.6869 360 360 2 60 6.0142 22 3.0000
1 ARM 370,000.00 7.9900 360 360 2 60 6.1000 22 3.0000
1 ARM 9,190,018.74 7.7771 360 360 2 60 6.0934 22 3.0000
1 ARM 8,822,829.80 8.7067 360 480 3 0 6.0439 21 3.0000
1 ARM 1,168,559.17 9.0222 360 480 3 0 6.1857 21 3.0000
1 ARM 39,834,038.93 8.4611 360 480 2 0 6.1102 22 3.0000
1 ARM 173,780.80 9.2500 360 480 2 0 6.1000 22 3.0000
1 ARM 214,895.63 8.5800 360 480 2 0 6.1000 22 3.0000
1 ARM 243,267.43 9.6635 360 360 2 0 6.1000 34 3.0000
1 ARM 167,746.44 9.4300 360 360 3 0 6.1000 33 3.0000
1 ARM 609,000.00 7.8939 360 360 2 60 6.0470 34 3.0000
1 ARM 815,904.91 8.7523 360 480 3 0 6.1206 33 3.0000
1 ARM 306,417.83 9.4013 360 480 1 0 5.8500 35 3.0000
1 ARM 592,956.20 8.4972 360 480 2 0 6.1506 34 3.0000
1 ARM 1,195,379.68 9.1099 360 360 2 0 6.1001 58 3.0000
1 ARM 109,142.11 9.5000 360 360 2 0 5.8500 58 3.0000
1 ARM 1,532,634.58 8.4737 360 360 2 0 6.0745 58 3.0000
1 ARM 1,243,405.07 7.4134 360 360 3 60 6.1000 57 3.0000
1 ARM 423,862.36 7.6375 360 480 3 0 6.1000 57 3.0000
1 ARM 214,857.02 8.9000 360 480 3 0 6.3000 57 3.0000
Maximum Minimum
Periodic Mortgage Mortgage
Loan Rate Cap Interest Interest
Group (%) Rate (%) Rate (%)
- -------------------------------------------------
1 N/A N/A N/A
1 N/A N/A N/A
1 N/A N/A N/A
1 N/A N/A N/A
1 N/A N/A N/A
1 N/A N/A N/A
1 N/A N/A N/A
1 N/A N/A N/A
1 N/A N/A N/A
1 1.0000 15.7250 9.7250
1 1.0000 15.2201 9.2582
1 1.0000 13.8787 8.2822
1 1.0000 15.3114 9.3189
1 1.0000 15.9571 9.9571
1 1.0000 14.6869 8.6869
1 1.0000 13.9900 7.9900
1 1.0000 13.8034 7.7771
1 1.0000 14.7067 8.7067
1 1.0000 15.0222 9.0222
1 1.0000 14.4362 8.4611
1 1.0000 15.2500 9.2500
1 1.0000 14.5800 8.5800
1 1.0000 15.6635 9.6635
1 1.0000 15.4300 9.4300
1 1.0000 13.8939 7.8939
1 1.0000 14.7523 8.7523
1 1.0000 15.4013 9.4013
1 1.0000 14.4972 8.4972
1 1.0000 15.1099 9.1099
1 1.0000 15.5000 9.5000
1 1.0000 14.4737 8.4737
1 1.0000 13.4134 7.4134
1 1.0000 13.6375 7.6375
1 1.0000 14.9000 8.9000
C-1
Original
Gross Original Interest Months to
Cut-off Date Mortgage Original Amortization Loan Only Gross Next Initial
Loan Interest Principal Interest Term Term Age Term Margin Adjustment Periodic
Group Type Balance ($) Rate (%) (months) (months) (months) (months) (%) Date Rate Cap (%)
- ------------------------------------------------------------------------------------------------------------------------------------
1 ARM 2,550,478.10 8.3522 360 480 2 0 6.1161 58 3.0000
2 FIX 368,244.73 8.6250 240 240 3 0 N/A N/A N/A
2 FIX 1,171,261.21 8.7513 360 360 3 0 N/A N/A N/A
2 FIX 1,351,020.00 8.1710 360 360 3 0 N/A N/A N/A
2 FIX 202,929.74 10.3000 360 360 2 0 N/A N/A N/A
2 FIX 3,581,065.93 8.7114 360 360 3 0 N/A N/A N/A
2 FIX 141,300.00 8.2000 360 360 2 60 N/A N/A N/A
2 FIX 366,000.00 7.3500 360 360 2 60 N/A N/A N/A
2 FIX 1,743,222.03 8.6606 360 480 3 0 N/A N/A N/A
2 FIX 713,681.24 7.5790 360 480 1 0 N/A N/A N/A
2 FIX 5,322,374.96 7.6876 360 480 3 0 N/A N/A N/A
2 ARM 17,631,036.28 9.3556 360 360 2 0 6.0925 22 3.0000
2 ARM 4,637,071.06 9.2448 360 360 2 0 6.1303 22 3.0000
2 ARM 38,745,102.13 9.4481 360 360 2 0 6.1212 22 3.0000
2 ARM 334,645.82 9.1750 360 360 2 0 6.1000 22 3.0000
2 ARM 5,041,034.64 9.0269 360 360 2 60 6.0649 22 3.0000
2 ARM 703,250.00 7.9764 360 360 2 60 6.1000 22 3.0000
2 ARM 14,770,552.76 8.2019 360 360 2 60 6.0995 22 3.0000
2 ARM 293,600.00 8.0433 360 360 3 60 6.1000 21 3.0000
2 ARM 12,104,395.15 8.5563 360 480 2 0 6.1135 22 3.0000
2 ARM 3,244,316.00 8.8483 360 480 2 0 6.1000 22 3.0000
2 ARM 26,791,864.03 8.3975 360 480 2 0 6.1176 22 3.0000
2 ARM 624,391.49 8.6198 360 480 3 0 6.1000 21 3.0000
2 ARM 249,704.67 10.0631 360 360 2 0 6.1000 34 3.0000
2 ARM 80,439.12 10.7500 360 360 2 0 6.1000 34 3.0000
2 ARM 215,000.00 8.9750 360 360 2 60 6.1000 34 3.0000
2 ARM 324,182.33 10.5123 360 480 2 0 6.1000 34 3.0000
2 ARM 349,685.67 7.8700 360 480 3 0 6.1000 33 3.0000
2 ARM 655,905.32 8.7953 360 480 3 0 6.1000 33 3.0000
2 ARM 1,822,177.00 8.9714 360 360 3 0 6.3796 57 3.0000
2 ARM 500,805.12 8.0295 360 360 2 0 6.1000 58 3.0000
2 ARM 598,200.00 7.7077 360 360 2 60 6.1000 58 3.0000
2 ARM 1,888,339.56 7.9132 360 360 2 60 6.0945 58 3.0000
2 ARM 2,223,095.02 8.4900 360 480 2 0 5.9405 58 3.0000
2 ARM 2,941,632.59 7.8052 360 480 3 0 6.1000 57 3.0000
2 ARM 118,500.00 8.8000 360 360 3 60 6.3000 177 3.0000
3 FIX 59,758.60 12.0000 180 180 2 0 N/A N/A N/A
3 FIX 359,177.60 9.5500 180 180 2 0 N/A N/A N/A
3 FIX 97,396.71 10.1500 240 240 2 0 N/A N/A N/A
Maximum Minimum
Periodic Mortgage Mortgage
Loan Rate Cap Interest Interest
Group (%) Rate (%) Rate (%)
- -------------------------------------------------
1 1.0000 14.3522 8.3522
2 N/A N/A N/A
2 N/A N/A N/A
2 N/A N/A N/A
2 N/A N/A N/A
2 N/A N/A N/A
2 N/A N/A N/A
2 N/A N/A N/A
2 N/A N/A N/A
2 N/A N/A N/A
2 N/A N/A N/A
2 1.0000 15.3556 9.3556
2 1.0000 15.2448 9.2448
2 1.0000 15.4065 9.4481
2 1.0000 15.1750 9.1750
2 1.0000 15.0269 9.0269
2 1.0000 13.9764 7.9764
2 1.0000 14.2019 8.1569
2 1.0000 14.0433 8.0433
2 1.0000 14.5563 8.5563
2 1.0000 14.8483 8.8483
2 1.0000 14.3632 8.3975
2 1.0000 14.6198 8.6198
2 1.0000 16.0631 10.0631
2 1.0000 16.7500 10.7500
2 1.0000 14.9750 8.9750
2 1.0000 16.5123 10.5123
2 1.0000 13.8700 7.8700
2 1.0000 14.7953 8.7953
2 1.0000 14.9714 8.9714
2 1.0000 14.0295 8.0295
2 1.0000 13.7077 7.7077
2 1.0000 13.9132 7.9132
2 1.0000 14.4900 8.4900
2 1.0000 13.3996 7.8052
2 1.0000 14.8000 8.8000
3 N/A N/A N/A
3 N/A N/A N/A
3 N/A N/A N/A
C-2
Original
Gross Original Interest Months to
Cut-off Date Mortgage Original Amortization Loan Only Gross Next Initial
Loan Interest Principal Interest Term Term Age Term Margin Adjustment Periodic
Group Type Balance ($) Rate (%) (months) (months) (months) (months) (%) Date Rate Cap (%)
- ------------------------------------------------------------------------------------------------------------------------------------
3 FIX 4,744,144.34 9.2904 360 360 2 0 N/A N/A N/A
3 FIX 4,802,466.46 8.9783 360 360 3 0 N/A N/A N/A
3 FIX 364,537.85 10.6143 360 360 3 0 N/A N/A N/A
3 FIX 634,873.53 11.0223 360 360 2 0 N/A N/A N/A
3 FIX 15,379,519.09 8.8272 360 360 3 0 N/A N/A N/A
3 FIX 960,963.69 9.3537 360 360 3 60 N/A N/A N/A
3 FIX 1,771,596.50 10.1327 360 480 2 0 N/A N/A N/A
3 FIX 1,603,145.20 8.7547 360 480 2 0 N/A N/A N/A
3 FIX 81,976.32 10.3300 360 480 2 0 N/A N/A N/A
3 FIX 11,305,097.34 7.9155 360 480 3 0 N/A N/A N/A
3 ARM 67,874.05 10.1500 180 180 2 0 5.8500 22 3.0000
3 ARM 53,093,783.55 9.7903 360 360 2 0 6.0806 22 3.0000
3 ARM 8,398,854.57 8.7718 360 360 2 0 6.1588 22 3.0000
3 ARM 101,833,006.25 9.8517 360 360 2 0 6.1269 22 3.0000
3 ARM 572,484.38 9.8941 360 360 3 0 6.1398 21 3.0000
3 ARM 16,211,037.21 8.7294 360 360 2 60 6.1314 22 3.0000
3 ARM 9,323,462.41 8.4087 360 360 2 60 6.0679 22 3.0000
3 ARM 89,810,137.57 7.8230 360 360 2 60 6.1128 22 3.0000
3 ARM 452,000.00 7.0250 360 360 3 60 6.1000 21 3.0000
3 ARM 29,643,459.01 9.0115 360 480 2 0 6.0687 22 3.0000
3 ARM 27,729,171.95 8.3591 360 480 2 0 6.0971 22 3.0000
3 ARM 121,775,016.52 8.3117 360 480 2 0 6.1100 22 3.0000
3 ARM 910,504.99 9.1591 360 480 3 0 5.9853 21 3.0000
3 ARM 1,335,552.96 10.0510 360 360 3 0 6.1000 33 3.0000
3 ARM 287,537.63 9.0500 360 360 2 0 6.1000 34 3.0000
3 ARM 236,827.48 10.3000 360 360 2 0 6.1000 34 3.0000
3 ARM 354,869.34 9.7800 360 360 2 0 6.1000 34 3.0000
3 ARM 1,692,690.65 10.0036 360 360 3 0 6.1155 33 3.0000
3 ARM 622,500.00 9.0855 360 360 2 60 6.1000 34 3.0000
3 ARM 570,000.00 7.7300 360 360 1 60 6.1000 35 3.0000
3 ARM 3,135,893.76 7.9914 360 360 2 60 6.1000 34 3.0000
3 ARM 1,667,393.96 9.4582 360 480 2 0 6.1019 34 3.0000
3 ARM 1,844,016.74 8.5525 360 480 2 0 6.0187 34 3.0000
3 ARM 1,111,662.12 8.5898 360 480 2 0 6.1000 34 3.0000
3 ARM 658,153.82 10.9400 360 360 2 0 6.1732 58 3.0000
3 ARM 1,790,571.73 9.0709 360 360 2 0 6.1000 58 3.0000
3 ARM 360,413.65 8.4798 360 360 3 0 6.1000 57 3.0000
3 ARM 229,340.36 9.6500 360 360 1 0 6.1000 59 3.0000
3 ARM 3,799,175.13 8.9650 360 360 2 0 6.0795 58 3.0000
Maximum Minimum
Periodic Mortgage Mortgage
Loan Rate Cap Interest Interest
Group (%) Rate (%) Rate (%)
- -------------------------------------------------
3 N/A N/A N/A
3 N/A N/A N/A
3 N/A N/A N/A
3 N/A N/A N/A
3 N/A N/A N/A
3 N/A N/A N/A
3 N/A N/A N/A
3 N/A N/A N/A
3 N/A N/A N/A
3 N/A N/A N/A
3 1.0000 16.1500 10.1500
3 1.0000 15.7903 9.7903
3 1.0000 14.7718 8.7718
3 1.0000 15.8367 9.8517
3 1.0000 15.8941 9.8941
3 1.0000 14.7294 8.7294
3 1.0000 14.4087 8.4087
3 1.0000 13.8230 7.8230
3 1.0000 13.0250 7.0250
3 1.0000 15.0115 9.0115
3 1.0000 14.3591 8.3591
3 1.0000 14.2925 8.3117
3 1.0000 15.1591 9.1591
3 1.0000 16.0510 10.0510
3 1.0000 15.0500 9.0500
3 1.0000 16.3000 10.3000
3 1.0000 15.7800 9.7800
3 1.0000 16.0036 10.0036
3 1.0000 15.0855 9.0855
3 1.0000 13.7300 7.7300
3 1.0000 13.9914 7.9914
3 1.0000 15.4582 9.4582
3 1.0000 14.5525 8.5525
3 1.0000 14.5898 8.5898
3 1.0000 16.9400 10.9400
3 1.0000 15.0709 9.0709
3 1.0000 14.4798 8.4798
3 1.0000 15.6500 9.6500
3 1.0000 14.9650 8.9650
C-3
Original
Gross Original Interest Months to
Cut-off Date Mortgage Original Amortization Loan Only Gross Next Initial
Loan Interest Principal Interest Term Term Age Term Margin Adjustment Periodic
Group Type Balance ($) Rate (%) (months) (months) (months) (months) (%) Date Rate Cap (%)
- ------------------------------------------------------------------------------------------------------------------------------------
3 ARM 327,000.00 8.2500 360 360 2 60 6.1000 58 3.0000
3 ARM 7,535,763.00 7.4225 360 360 2 60 6.0549 58 3.0000
3 ARM 911,371.28 8.7823 360 480 3 0 6.1000 57 3.0000
3 ARM 3,479,693.81 8.0868 360 480 2 0 6.0556 58 3.0000
3 ARM 415,256.02 9.4750 360 480 1 0 5.8500 59 3.0000
3 ARM 6,201,714.22 7.8870 360 480 2 0 6.1022 58 3.0000
Maximum Minimum
Periodic Mortgage Mortgage
Loan Rate Cap Interest Interest
Group (%) Rate (%) Rate (%)
- -------------------------------------------------
3 1.0000 14.2500 8.2500
3 1.0000 13.4225 7.4225
3 1.0000 14.7823 8.7823
3 1.0000 14.0868 8.0868
3 1.0000 15.4750 9.4750
3 1.0000 13.8870 7.8870
C-4
APPENDIX D
INTEREST RATE SWAP AGREEMENT NOTIONAL AMOUNT SCHEDULE
Distribution Date Notional Amount ($)
------------------ -------------------
November 25, 2006 836,173,837
December 25, 2006 826,307,936
January 25, 2007 814,574,131
February 25, 2007 800,997,057
March 25, 2007 785,613,894
April 25, 2007 768,474,526
May 25, 2007 749,641,590
June 25, 2007 729,325,017
July 25, 2007 707,651,518
August 25, 2007 684,741,318
September 25, 2007 662,572,532
October 25, 2007 641,123,821
November 25, 2007 620,371,731
December 25, 2007 600,293,578
January 25, 2008 580,867,414
February 25, 2008 562,072,009
March 25, 2008 543,886,827
April 25, 2008 526,292,001
May 25, 2008 509,268,311
June 25, 2008 492,797,166
July 25, 2008 474,970,432
August 25, 2008 77,025,785
September 25, 2008 73,167,123
October 25, 2008 69,540,723
November 25, 2008 66,323,214
December 25, 2008 64,285,757
January 25, 2009 62,336,872
February 25, 2009 60,450,412
March 25, 2009 58,624,263
April 25, 2009 56,856,388
May 25, 2009 55,144,822
June 25, 2009 53,487,669
July 25, 2009 50,515,708
August 25, 2009 45,625,022
September 25, 2009 44,058,010
October 25, 2009 42,791,442
November 25, 2009 41,563,155
December 25, 2009 40,371,926
January 25, 2010 39,216,569
February 25, 2010 38,095,942
March 25, 2010 37,008,939
April 25, 2010 35,954,492
May 25, 2010 34,931,569
June 25, 2010 33,939,174
July 25, 2010 32,976,340
August 25, 2010 32,042,138
September 25, 2010 31,135,667
October 25, 2010 30,256,055
November 25, 2010 29,402,461
December 25, 2010 28,574,071
D-1
Distribution Date Notional Amount ($)
------------------ -------------------
January 25, 2011 27,770,099
February 25, 2011 26,989,784
March 25, 2011 26,232,389
April 25, 2011 25,497,205
May 25, 2011 24,783,542
June 25, 2011 24,090,735
July 25, 2011 23,033,122
August 25, 2011 18,207,076
September 25, 2011 17,731,594
October 25, 2011 17,292,144
November 25, 2011 -
D-2
PROSPECTUS
ASSET BACKED FUNDING CORPORATION
Depositor
Asset-Backed Certificates
Asset-Backed Notes
(Issuable in Series)
----------------------------------
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You should carefully consider the risk factors beginning on page 9 of this
prospectus.
The securities of any series and the underlying assets will not be insured or
guaranteed by any governmental agency or instrumentality or any other entity
other than as expressly described in the prospectus supplement for that series.
The securities of each series will represent interests in, or will represent
debt obligations of, 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 securities only if
accompanied by the prospectus supplement for that series. The securities of each
series are not deposits or other obligations of a bank and are not insured by
the FDIC.
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Each Issuing Entity--
o will issue a series of asset-backed certificates or asset-backed
notes that will consist of one or more classes; and
o may own--
o a pool or pools of single family and/or multifamily mortgage
loans, which may include sub-prime mortgage loans, and are
secured by either first or junior liens on one- to four-family
residential properties or primarily residential properties
consisting of five or more residential dwelling units and
which may include limited retail, office or other commercial
space;
o a pool or pools of home improvement installment sales
contracts or installment loans that are unsecured; and
o a pool or pools of manufactured housing installment sales
contracts and installment loan agreements secured by a
security interest in a new or used manufactured home, and if
indicated in the accompanying prospectus supplement, by real
property.
Each Series of Securities--
o will represent ownership interest in the related issuing entity or
will represent debt obligations of the related issuing entity;
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 securities or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is October 3, 2006.
TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT..........................................4
SUMMARY OF PROSPECTUS..........................................................5
RISK FACTORS...................................................................9
Risks Associated with the Securities........................................9
Risks Associated with the Assets...........................................14
DESCRIPTION OF THE TRUST FUNDS................................................20
Assets.....................................................................20
Mortgage Loans.............................................................21
Unsecured Home Improvement Loans...........................................23
Contracts..................................................................24
Pre-Funding Account........................................................25
Accounts...................................................................25
USE OF PROCEEDS...............................................................25
YIELD CONSIDERATIONS..........................................................26
General....................................................................26
Pass-Through Rate and Interest Rate........................................26
Timing of Payment of Interest..............................................26
Payments of Principal; Prepayments.........................................26
Prepayments--Maturity and Weighted Average Life............................27
Other Factors Affecting Weighted Average Life..............................28
THE DEPOSITOR.................................................................31
THE SPONSOR...................................................................31
DESCRIPTION OF THE SECURITIES.................................................32
General....................................................................32
Distributions..............................................................33
Available Distribution Amount..............................................33
Distributions of Interest on the Securities................................34
Distributions of Principal of the Securities...............................35
Categories of Classes of Securities........................................35
Components.................................................................38
Distributions on the Securities of Prepayment Charges......................38
Allocation of Losses and Shortfalls........................................38
Advances in Respect of Delinquencies.......................................39
Reports to Securityholders.................................................39
Termination................................................................41
Definitive Form............................................................42
Book-Entry Registration and Definitive Securities..........................42
Mandatory Auction of Certificates..........................................49
DESCRIPTION OF THE AGREEMENTS.................................................49
Agreements Applicable to a Series..........................................49
Material Terms of the Pooling and Servicing Agreements and Underlying
Servicing Agreements.....................................................50
Material Terms of the Indenture............................................65
DESCRIPTION OF CREDIT SUPPORT.................................................67
Subordination..............................................................67
Limited Guarantee..........................................................68
Financial Guaranty Insurance Policy or Surety Bond.........................68
Letter of Credit...........................................................69
Pool Insurance Policy......................................................69
Special Hazard Insurance Policy............................................70
Mortgagor Bankruptcy Bond..................................................71
Reserve Fund...............................................................71
Cross Collateralization....................................................71
Overcollateralization......................................................71
Excess Interest............................................................72
CASH FLOW AGREEMENTS..........................................................72
Guaranteed Investment Contracts............................................72
Yield Maintenance Agreements...............................................72
Swap Agreements............................................................73
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.......................................73
General....................................................................73
Types of Mortgage Instruments..............................................73
Interest in Real Property..................................................74
Condominiums...............................................................74
Cooperatives...............................................................74
Leaseholds.................................................................75
Land Sale Contracts........................................................75
Foreclosure................................................................76
Junior Mortgages...........................................................79
Rights of Redemption.......................................................80
Anti-Deficiency Legislation, the Bankruptcy Code and Other
Limitations on Lenders...................................................80
Enforceability of Certain Provisions.......................................82
Environmental Considerations...............................................82
Due-on-Sale Clauses........................................................84
Prepayment Charges.........................................................84
Subordinate Financing......................................................85
Applicability of Usury Laws................................................85
Alternative Mortgage Instruments...........................................86
Homeowners Protection Act of 1998..........................................86
Texas Home Equity Loans....................................................86
Servicemembers Civil Relief Act............................................87
Forfeiture for Drug, RICO and Money Laundering Violations..................87
CERTAIN LEGAL ASPECTS OF THE CONTRACTS........................................87
General....................................................................87
Security Interests in the Manufactured Homes...............................88
Enforcement of Security Interests in Manufactured Homes....................89
Servicemembers Civil Relief Act............................................90
Consumer Protection Laws...................................................90
Transfers of Manufactured Homes; Enforceability of Due-on-Sale Clauses.....90
Applicability of Usury Laws................................................90
FEDERAL INCOME TAX CONSEQUENCES...............................................91
General....................................................................91
2
REMICS.....................................................................92
Grantor Trust Funds.......................................................112
Standard Securities.......................................................112
Stripped Securities.......................................................115
Partnership Trust Funds...................................................119
STATE AND OTHER TAX CONSEQUENCES.............................................124
ERISA CONSIDERATIONS.........................................................124
LEGAL INVESTMENT.............................................................128
METHODS OF DISTRIBUTION......................................................129
LEGAL MATTERS................................................................130
FINANCIAL INFORMATION........................................................131
RATING.......................................................................131
Reports to Securityholders...................................................131
WHERE YOU CAN FIND MORE INFORMATION..........................................131
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................132
INDEX OF PROSPECTUS DEFINITIONS..............................................133
3
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
Information is provided to you about the securities 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 securities, including your series, and (b) the accompanying prospectus
supplement, which will describe the specific terms of your series of securities,
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 securities.
The securities 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 included 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 133 in this prospectus.
The depositor's principal executive office is located at 214 North Tryon
Street, Charlotte, North Carolina 28255 and the depositor's telephone number is
(704) 386-2400.
4
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SUMMARY OF PROSPECTUS
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making an
investment decision. Please read this entire prospectus and the accompanying
prospectus supplement carefully to understand all of the terms of a series of
securities.
This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding of the terms of the securities and
is qualified by the full description of these calculations, cash flows and other
information in the prospectus and the prospectus supplement.
RELEVANT PARTIES FOR EACH SERIES OF SECURITIES
Title of Securities
Asset-backed certificates and asset-backed notes issuable in series.
Depositor
Asset Backed Funding Corporation, a wholly-owned indirect subsidiary of Bank of
America Corporation. The depositor will acquire the underlying assets from the
sponsor, and will transfer them to each trust. It is not expected that the
depositor will have any business operations other than offering asset-backed
certificates and asset-backed notes and related activities.
Issuing Entity
With respect to each series of certificates and/or notes, the trust to be formed
pursuant to either a pooling and servicing agreement or a deposit trust
agreement.
Sponsor
Bank of America, National Association or another entity named in the related
prospectus supplement. The sponsor will sell the underlying assets to the
depositor on the closing date specified in the related prospectus supplement by
means of a purchase agreement between the sponsor and the depositor. The sponsor
may be an affiliate of the depositor.
Servicer
The entity or entities named as servicer in the related prospectus supplement.
Each servicer will perform certain servicing functions related to the underlying
assets serviced by it in accordance with the related pooling and servicing
agreement or underlying servicing agreement. A servicer may be an affiliate of
the depositor.
Master Servicer
The entity, if any, named as master servicer in the related prospectus
supplement that will perform certain administration, calculation and reporting
functions with respect to the trust and will supervise the servicers. The master
servicer may be an affiliate of the depositor.
Trustee / Indenture Trustee
The entity named as trustee or indenture trustee in the related prospectus
supplement. The trustee or indenture trustee generally will be responsible under
each pooling and servicing agreement or indenture for providing 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.
RELEVANT DATES
Cut-off Date
The date specified in the related prospectus supplement which generally
represents the first date after which payments on or collection related to the
underlying assets, together with any proceeds thereof, will begin to be paid to
the issuing entity.
Closing Date
The date when the certificates and/or notes of any series are initially issued
as specified in the related prospectus supplement.
Distribution Date
The monthly, quarterly or other periodic date specified in the related
prospectus supplement on which distributions will be made to holders of the
certificates and/or notes.
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5
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DESCRIPTION OF SECURITIES
Each series of certificates will be issued pursuant to a pooling and
servicing agreement and will include one or more classes representing an
ownership interest in a segregated pool of mortgage loans, unsecured home
improvement loans and/or manufactured housing installment sales contracts and
other assets of the trust. If a series of securities includes notes, such notes
will represent debt obligations of the related trust fund formed pursuant to a
deposit trust agreement and will be secured by the assets of the trust pursuant
to an indenture. A class of securities 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.
See "Description of the Securities" in this prospectus.
Interest Distributions
For each series of securities, interest on each class of securities (other
than a class of securities entitled to receive only principal) will accrue
during each period specified in the prospectus supplement and will be
distributed to the holders of the related classes of securities on each
distribution date in accordance with the particular terms of each class of
securities. The terms of each class of securities will be described in the
related prospectus supplement.
See "Description of the Securities--Distributions of Interest on the
Securities" in this prospectus.
Principal Distributions
For each series of securities, principal payments (including prepayments)
on the related mortgage loans, unsecured home improvement loans and/or
manufactured housing installment sales contracts will be distributed to holders
of the related securities or otherwise applied as described in the related
prospectus supplement on each distribution date. Distributions in reduction of
principal balance will be allocated among the classes of securities of a series
in the manner specified in the applicable prospectus supplement.
See "Description of the Securities--Distribution of Principal of the
Securities" in this prospectus.
Denominations
Each class of securities of a series will be issued in the minimum
denominations set forth in the related prospectus supplement.
Registration of the Securities
The securities will be issued either:
o in book-entry form initially held through The Depository Trust
Company in the United States, or Clearstream or Euroclear in Europe;
or
o in fully registered, certificated form.
See "Description of the Securities--General" and "--Book-Entry
Registration and Definitive Securities" in this prospectus.
ASSETS OF THE TRUST
The trust related to each series will consist primarily of any of the
following assets:
o a segregated pool of single family and/or multifamily mortgage loans
which may include sub-prime mortgage loans;
o home improvement installment sales contracts or installment loans
that are unsecured;
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6
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o manufactured housing installment sales contracts and installment
loan agreements; and
o certain other property.
You should refer to the applicable prospectus supplement for the precise
characteristics or expected characteristics of the assets and a description of
the other property, such as cash flow agreements or derivative instruments, if
any, included in a particular trust.
See "Description of the Trust Funds" in this prospectus.
OPTIONAL TERMINATION OF THE TRUST
The related prospectus supplement may provide that the party specified in
the related prospectus supplement (which may be a securityholder) may
o repurchase all or part of the assets in the trust fund and thereby
cause early retirement of some or all of the securities under the
circumstances and in the manner specified in the related prospectus
supplement; or
o auction all or part of the assets in the trust fund and thereby
cause early retirement of the some or all of securities under the
circumstances and in the manner specified in the related prospectus
supplement.
If an election is made to treat the issuing entity (or one or more
segregated pools of assets of such issuing entity) as one or more "real estate
mortgage investment conduits," any optional termination or redemption will be
permitted only pursuant to a "qualified liquidation," as defined under Section
860F of the Internal Revenue Code of 1986, as amended.
See "Description of the Securities--Termination" and "Yield
Considerations" in this prospectus.
PREFUNDING ACCOUNT
The related prospectus supplement may provide that the depositor deposit a
specified amount in a pre-funding account on the date the securities are issued.
In this case, the deposited funds may only be used to acquire the additional
assets for the trust during a set period after the initial issuance of the
securities. Any amounts remaining in the account at the end of the period will
be distributed as a prepayment of principal to the holders of the related
securities.
See "Description of the Trust Funds--Prefunding Account" in this
prospectus.
CREDIT ENHANCEMENT
If so specified in the applicable prospectus supplement, the securities 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 overcollateralization o excess interest
o surety bond o cross-collateralization
o financial guaranty insurance o reserve fund policy
o spread account o mortgage pool insurance policy
o letter of credit o limited guarantee
Any credit support will be described in detail in the applicable
prospectus supplement.
See "Description of Credit Support" in this prospectus.
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7
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In addition, if specified in the applicable prospectus supplement, amounts
received under one or more guaranteed investment contracts, swap agreements or
interest rate cap or floor agreements (also called yield maintenance agreements)
may also be used to provide credit enhancement for one or more classes of a
series. See "Cash Flow Agreements" in this prospectus.
RATING OF SECURITIES
The securities of any series will not be offered pursuant to this
prospectus and a prospectus supplement unless each offered security is rated in
one of the four highest rating categories by at least one nationally recognized
statistical rating agency.
o A security rating is not a recommendation to buy, sell or hold the
securities on 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 securities.
See "Risk Factors--Risks Associated with the Securities--Ratings Assigned
to the Securities Will Have Limitations" and "Ratings" in this prospectus.
TAX STATUS OF THE SECURITIES
The securities of each series offered will be:
o regular interests and residual interests in a trust fund treated as
a REMIC;
o interests in a trust fund treated as a grantor trust;
o interests in a trust fund treated as a partnership; or
o debt obligations secured by assets of a trust.
For additional information see "Federal Income Tax Consequences" in this
prospectus and in the prospectus supplement.
ERISA CONSIDERATIONS
If you are a fiduciary of any employee benefit plan or arrangement,
including an individual retirement account, subject to the Employee Retirement
Income Security Act of 1974, as amended, the Internal Revenue Code of 1986, as
amended, 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 securities could give rise to a transaction that is prohibited or
not otherwise permissible under ERISA, the Code or similar law.
For additional information see "ERISA Considerations" in this prospectus
and in the prospectus supplement.
LEGAL INVESTMENT
The applicable prospectus supplement will specify whether the class or
classes of securities offered will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended.
If your 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
securities. You should consult your own legal advisors for assistance in
determining the suitability of the securities for you and the consequences of
the purchase, ownership and sale of the securities.
For additional information see "Legal Investment" in this prospectus and
in the prospectus supplement.
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8
RISK FACTORS
You should consider, among other things, the following factors in
connection with the purchase of securities as well as the specific risk
discussed in the applicable prospectus supplement under "Risk Factors."
Risks Associated with the Securities
Securities May Not be Liquid. The liquidity of your securities may be
limited. You should consider that:
o a secondary market for the securities 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 securities of any series;
o the prospectus supplement for any series of securities may indicate
that an underwriter intends to establish a secondary market in the
securities of that series, but no underwriter will be obligated to
do so; and
o the securities generally will not be listed on any securities
exchange.
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 securities that are
especially sensitive to prepayment, credit, or interest rate risk (such as
securities that receive only payments of principal or interest or subordinated
securities), or that have been structured to meet the investment requirements of
limited categories of investors. Consequently, you may not be able to sell your
securities readily or at prices that will enable you to realize your desired
yield. The market values of the securities are likely to fluctuate; these
fluctuations may be significant and could result in significant losses to you.
Limited Source of Payments - No Recourse to Depositor, Sponsor, Master
Servicer, 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 the assets included in the related trust fund will be the sole
source of payments on the securities of a series;
o the securities of any series will not represent an interest in or
obligation of the depositor, the sponsor, the master servicer, the
servicer, the trustee or any of their affiliates, except for any
representing parties' 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 securities of any series nor the related underlying
assets will be guaranteed or insured by any governmental agency or
instrumentality or any other entity.
Consequently, in the event that payments on the assets underlying your
series of securities are insufficient or otherwise unavailable to make all
payments required on your securities, there will be no recourse to the
depositor, the sponsor, the master servicer, the servicer, the trustee or any of
their affiliates or, except as specified in the applicable prospectus
supplement, any other entity.
Credit Enhancement is Limited in Amount and Coverage. With respect to each
series of securities, credit enhancement may be provided in limited amounts to
cover certain types of losses on the underlying assets. 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 securities of
the same series; excess interest; overcollateralization;
cross-collateralization; a financial guaranty insurance policy; a reserve fund;
a surety bond; a spread account; a mortgage pool insurance policy; a letter of
credit; a limited guarantee; or any combination of the preceding types of credit
enhancement. See "Description of Credit Support" in this prospectus. In
addition, if specified in the applicable prospectus supplement, amounts received
under any cash flow agreement described under "Description of the
9
Certificates--Cash Flow Agreements" may also be used to provide credit
enhancement for one or more classes of certificates.
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 the credit enhancement may provide only very limited coverage as to
certain types of losses, and may provide no coverage as to certain
types of losses.
None of the depositor, the sponsor, the master servicer, 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 securities.
Rate of Prepayment on Assets May Adversely Affect Average Lives and Yields
on the Securities. The yield on the securities of each series will depend in
part on the rate of principal payment on the assets (including prepayments,
liquidations due to defaults and asset repurchases). Such yield may be adversely
affected, depending upon whether a particular security is purchased at a premium
or a discount, by a higher or lower than anticipated rate of prepayments on the
related assets. In particular:
o the yield on principal-only or interest-only securities will be
extremely sensitive to the rate of prepayments on the related
assets; and
o the yield on certain classes of securities, such as companion
securities, may be relatively more sensitive to the rate of
prepayments of specified assets than other classes of securities.
The rate of prepayments on assets is influenced by a number of factors,
including:
o the prevailing mortgage market interest rates;
o local and national economic conditions;
o homeowner mobility; and
o the ability of the borrower to obtain financing.
If you are purchasing securities at a discount, and specifically if you
are purchasing principal-only securities, you should consider the risk that if
principal payments on the mortgage loans, or, in the case of any ratio strip
securities, the related mortgage loans, occur at a rate slower than you
expected, your yield will be lower than you expected.
If you are purchasing securities at a premium, or are purchasing an
interest-only security, you should consider the risk that if principal payments
on the mortgage loans or, in the case of any interest-only securities 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
securities, 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.
If you are purchasing any inverse floating rate securities, 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.
10
Timing of Prepayments on the Mortgage Loans May Result in Interest
Shortfalls on the Securities. 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 securityholders. To partially mitigate
this reduction in yield, the pooling agreement, indenture 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 securities as described in the related 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 subordinated securityholders or any other
credit support arrangements described in this prospectus.
Ratings Assigned to the Securities Will Have Limitations. The ratings
assigned to your securities will not:
o assess the likelihood that principal prepayments (including those
caused by defaults) on the related assets will be made, the degree
to which the rate of such prepayments might differ from that
originally anticipated or the likelihood of early optional
termination or redemption of the series of securities; and
o address the possibility that prepayments at higher or lower rates
than anticipated by an investor may cause such investor to
experience a lower than anticipated yield or that an investor
purchasing a security at a significant premium might fail to recoup
its initial investment under certain prepayment scenarios.
In addition, the ratings of any series of securities by any applicable
rating agency may be lowered following the initial issuance of the securities.
The lowering of a rating on a series or class of securities may adversely affect
the market value of such securities and the liquidity of such securities. None
of the depositor, the sponsor or any of their affiliates will have any
obligation to maintain any rating of any series of securities.
Book-Entry System for Certain Classes of Securities May Decrease Liquidity
and Delay Payment. Since transactions in the classes of securities of a Series
issued in book-entry form can be effected only through The Depository Trust
Company, Clearstream, Euroclear, participating organizations, indirect
participants and certain banks:
o you may experience delays in your receipt of payments on book entry
securities because distributions will be made by the trustee, or a
paying agent on behalf of the trustee, to Cede & Co., as nominee for
The Depository Trust Company, rather than directly to you;
o your ability to pledge such securities to persons or entities that
do not participate in The Depository Trust Company, Clearstream or
Euroclear may be limited due to the lack of a physical certificate;
and
o you may experience delays in your receipt of payments on book-entry
securities 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 Securities--Book-Entry Registration and Definitive
Securities" in this prospectus.
Risk of Loss May Be Greater on Subordinated Securities. The rights of
holders of subordinated securities will be subordinate:
11
o to the rights of the servicer and any master servicer (to the extent
of their servicing fees, including any unpaid servicing fees, and
reimbursement for certain unreimbursed advances and unreimbursed
liquidation expenses); and
o the holders of senior securities to the extent described in the
related prospectus supplement.
As a result of the foregoing, investors must be prepared to bear the risk
that they may be subject to delays in payment and may not recover their initial
investments in the subordinated securities. See "Description of Credit Support"
in this prospectus.
The yields on the subordinated securities may be extremely sensitive to
the loss experience of the related assets and the timing of any such losses. If
the actual rate and amount of losses experienced by the assets exceed the rate
and amount of such losses assumed by an investor, the yield to maturity on the
subordinated securities may be lower than anticipated.
Special Powers of the FDIC in the Event of Insolvency of the Bank of
America, National Association, as Sponsor, Could Delay or Reduce Distributions
on the Securities. If specified in the related prospectus supplement, the assets
may be acquired by Bank of America, National Association, as sponsor. Bank of
America, National Association is a national bank whose deposits are insured to
the applicable limits by the FDIC. If Bank of America, National Association
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 it. 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 assets; or
o request a stay of proceedings to liquidate claims or otherwise
enforce contractual and legal remedies against Bank of America,
National Association.
If the FDIC were to take any of those actions, distributions on the
securities could be delayed or reduced.
By statute, the FDIC as conservator or receiver of Bank of America,
National Association is authorized to repudiate any "contract" of Bank of
America, National Association upon payment of "actual direct compensatory
damages." This authority may be interpreted by the FDIC to permit it to
repudiate a transfer of mortgage loans by Bank of America, National Association
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. Any transactions involving Bank of
America, National Association as sponsor contemplated by this prospectus and the
related prospectus supplement will be structured so that this FDIC regulation
should apply to the transfer of the assets from Bank of America, National
Association 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
12
Bank of America, National Association's transfer of the assets to the depositor.
In that event the depositor could be limited to seeking recovery based upon its
security interest in the assets. 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 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 Bank of
America, National Association's transfer of the assets for a reasonable period
following its appointment as conservator or receiver for Bank of America,
National Association. If the FDIC were to refuse to recognize Bank of America,
National Association's transfer of the assets, distributions on the related
securities could be delayed or reduced.
Insolvency of the Depositor May Delay or Reduce Collections on Assets.
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 assets to the
related trust will be structured so that the trustee has no recourse to the
depositor.
If the depositor were to become the subject of a proceeding under the
bankruptcy laws, a court could conclude that the transfer of the assets from the
depositor to the trust should not be characterized as an absolute transfer, and
accordingly, that the assets should be included as part of the depositor's
estate. Under these circumstances, the bankruptcy proceeding could delay or
reduce distributions on the securities. In addition, a bankruptcy proceeding
could result in the temporary disruption of distributions on the securities.
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
securities 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
securities will be subject to the credit risk of the counterparty.
In addition, the ratings assigned to the securities 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
securities of the series. A reduction in the ratings assigned to the securities
of a series is likely to affect adversely the liquidity and market value of the
securities.
See "Description of Credit Support" and "Cash Flow Agreements" in this
prospectus.
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 securities may be subject to a
mandatory auction. If you hold a class of securities subject to a mandatory
auction, on the distribution date specified in the related prospectus supplement
for the auction your security will be transferred to successful auction bidders,
thereby ending your investment in that security. If the security balance of your
class of auction securities 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 securities. Auction bidders will be permitted to bid for
all or a portion of a class of auction securities. If the counterparty under the
swap agreement defaults on its obligations, no
13
bids for all or a portion of a class of auction securities will be accepted
unless the amount of the bids are equal to the security balance of a class of
auction securities 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 securities 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 securities of the class will not be transferred to
auction bidders. In the event this happens, you will retain the non-transferred
portion of your securities after the distribution date for the auction.
See "Description of the Securities--Mandatory Auction of the Auction
Securities" in this prospectus.
Servicing Transfer Following Event of Default May Result in Payment Delays
or Losses. Following the occurrence of an event of default under a pooling and
servicing agreement, indenture or underlying servicing agreement, the trustee
for the related series may, in its discretion or pursuant to direction from
securityholders, 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 securities, 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 securities.
Risks Associated with the Assets
Sub-Prime Mortgage Loans May Experience Greater Rates of Delinquency and
Foreclosure. All or a portion of the mortgage loans underlying a series of
securities may consist of mortgage loans underwritten in accordance with the
underwriting for sub-prime mortgage loans. A sub-prime mortgage loan is a
mortgage loan that is ineligible for purchase by Fannie Mae or the Freddie Mac
due to borrower credit characteristics, high loan-to-value ratios, high
debt-to-income ratios, property characteristics, loan documentation guidelines
or other credit characteristics that do not meet Fannie Mae or Freddie Mac
underwriting guidelines. As a consequence:
o delinquencies and foreclosures may be expected to be more likely
with respect to sub-prime mortgage loans than with respect to
mortgage loans originated in accordance with Fannie Mae or Freddie
Mac underwriting guidelines; and
o changes in the values of the mortgaged properties may have a greater
effect on the loss experience of sub-prime mortgage loans than on
mortgage loans originated in accordance with Fannie Mae or Freddie
Mac underwriting guidelines.
In the event these mortgage loans do become delinquent or subject to
liquidation, you may face delays in receiving payment and may suffer losses if
the credit enhancements for the series are insufficient to cover the delays and
losses.
Mortgage Loans Secured by Multifamily Properties May Experience Greater
Rates of Delinquency and Foreclosure. The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an
income-producing property typically is directly related to the net operating
income derived from such property. If the net operating income of the property
is reduced (for example, if rental or occupancy rates decline or real estate tax
rates or other operating expenses increase), the borrower's ability to repay the
loan may be impaired. In addition, the concentration of default, foreclosure and
loss risk for a pool of mortgage loans secured by multifamily properties may be
greater than for a pool of mortgage loans secured by single family properties of
comparable aggregate unpaid principal balance because the pool of mortgage loans
secured by multifamily properties is likely to consist of a smaller number of
higher balance loans.
14
General Economic Conditions Affect Mortgage Loan Performance. General
economic conditions have an impact on the ability of borrowers to repay mortgage
loans. Loss of earnings, illness and other similar factors may lead to an
increase in delinquencies and bankruptcy filings by borrowers. In the event of
personal bankruptcy of a borrower under a mortgage loan, it is possible that the
holders of the related securities could experience a loss with respect to such
mortgagor's mortgage loan. In conjunction with a mortgagor's bankruptcy, a
bankruptcy court may suspend or reduce the payments of principal and interest to
be paid with respect to such mortgage loan, thus delaying the amount received by
the holders of the related securities with respect to such mortgage loan.
Moreover, if a bankruptcy court prevents the transfer of the related mortgaged
property to the related trust, any remaining balance on such mortgage loan may
not be recoverable.
Real Estate Market Conditions Affect Mortgage Loan Performance. An
investment in the securities which are secured by or represent interests in
mortgage loans may be affected by, among other things, a decline in real estate
values. There is no assurance that the values of the mortgaged properties will
remain at the levels existing on the dates of origination of the related
mortgage loans.
If the residential real estate market should experience an overall decline
in property values such that the outstanding balances of the mortgage loans
contained in a particular trust and any secondary financing on the mortgaged
properties, 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.
Geographic Concentration May Increase Rates of Loss and Delinquency. The
assets underlying certain series of securities may be concentrated in certain
regions. Any concentration may present risk considerations in addition to those
generally present for similar asset-backed securities without a concentration in
a particular region. 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 not be fully
insured against and may adversely affect property values. See the applicable
table or tables in Appendix A to the related prospectus supplement detailing the
geographic concentration of assets for listings of the locations and
concentrations of assets underlying the securities of a series.
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 assets, may result in losses on the assets.
Any losses may adversely affect the yield to maturity of the related securities.
Any increase in the market value of properties located in a state or region
would reduce the combined loan-to-value ratios of the related assets and could,
therefore, make alternative sources of financing available to the borrowers at
lower interest rates, which could result in an increased rate of prepayment of
these assets.
See "The Mortgage Pool" and Appendix A in the related prospectus
supplement for further information regarding the geographic concentration of the
assets underlying the securities of any series.
Risk of Loss May Be Greater on Junior Mortgage Loans. Certain of the
mortgage loans underlying the securities of a series may be secured by mortgages
junior or subordinate to one or more other mortgages, and the related more
senior mortgages may not be included in the trust fund. Although little data is
available, the rate of default of second or more junior mortgage loans may be
greater than that of mortgage loans secured by senior liens on comparable
properties. A primary risk to holders of mortgage loans secured by junior
mortgages is the possibility that adequate funds will not be received in
connection with a foreclosure of the related senior mortgage to satisfy fully
both the senior mortgage and the mortgage that is junior or subordinate. In such
case, holders of the securities would bear:
o the risk of delay in distributions while a deficiency judgment
against the borrower is obtained; and
o the risk of loss if the deficiency judgment is not realized upon.
15
Moreover, deficiency judgments may not be available in certain
jurisdictions. In addition, a junior mortgagee may not foreclose on the property
securing a junior mortgage unless it forecloses subject to the more senior
mortgage.
In servicing junior mortgages, many servicers advance funds to keep the
senior mortgage current if the mortgagor is in default thereunder, but only to
the extent that they determine such advances will be recoverable from future
payments and collections on that mortgage loan or otherwise. Such practice may
not be followed in servicing loans more junior than second mortgages or may be
modified at any time. The related trust will have no source of funds to satisfy
any senior mortgage or make payments due to any senior mortgagee. The junior
mortgages securing the mortgage loans are subject and subordinate to any senior
mortgage affecting the related mortgaged property, including limitations and
prohibitions which may be contained in such senior mortgage upon subordinate
financing.
Special Risks of Certain Assets. Certain assets that may be included in
the Trust may involve additional uncertainties not present in other types of
assets. Certain of the assets may provide for escalating or variable payments
that may be larger than the initial payment amount; however, the borrowers under
such assets are generally approved on the basis of the initial payment amount
and the borrower's income may not be sufficient to enable them to pay the
increased payment amounts. Therefore, in such cases the likelihood of default
may increase.
Certain of the assets underlying a series of securities may be delinquent
in respect of the payment of principal and interest. In addition, certain of the
mortgagors under the mortgage loans underlying a series of securities may be
subject to personal bankruptcy proceedings. Credit enhancement provided with
respect to a particular series of securities may not cover all losses related to
such mortgage loans. Prospective investors should consider the risk that the
inclusion in a trust of delinquent assets and mortgage loans with respect to
which the mortgagor is the subject of bankruptcy proceedings may cause the rate
of the defaults and prepayments on such assets to increase and, in turn, may
cause losses to exceed the available credit enhancement for such series and
affect the yield on the securities of such series. See "The Mortgage Pool" in
the related prospectus supplement.
Alternatives to Foreclosure May Adversely Affect Yield. Certain assets
underlying a series of securities may become delinquent after the closing date.
A servicer may either foreclose on any such asset or work out an agreement with
the borrower if the delinquency is not cured, which may involve waiving or
modifying certain terms of the asset. If a servicer extends the payment period
or accepts a lesser amount than stated in the note or contract in satisfaction
of the note or contract, the yield on the related securities may be reduced.
Defaulted Assets May Experience Delays in Liquidation and Liquidation
Proceeds May Be Less than the Outstanding Principal Balance of the Asset. Even
assuming the applicable collateral provide adequate security for the assets
underlying a series of securities, substantial delays could result in connection
with the liquidation of defaulted assets. This could result in corresponding
delays in the receipt of the related proceeds by the related trust. Further,
liquidation expenses such as legal fees, real estate taxes and maintenance and
preservation expenses will reduce the portion of liquidation proceeds payable to
you. If the applicable collateral fails to provide adequate security for the
asset, you will incur a loss on your investment if the credit enhancements are
insufficient to cover the loss.
Liquidation Expenses May be Disproportionate. Liquidation expenses with
respect to defaulted assets do not vary directly with the outstanding principal
balance of the assets at the time of default. Therefore, assuming that the
servicer and master servicer took the same steps in realizing upon a defaulted
asset having a small remaining principal balance as they would in the case of a
defaulted asset having a large remaining principal balance, the amount realized
after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the small asset than would be the case with the
defaulted asset having a large remaining principal balance. Because the average
outstanding principal balance of the assets is small relative to the size of the
average outstanding principal balance of the loans in a typical pool consisting
only of conventional purchase-money mortgage loans, net liquidation proceeds on
liquidated assets may also be smaller as a percentage of the principal balance
of the assets than would be the case in a typical pool consisting only of
conventional purchase-money mortgage loans.
16
Balloon Payment Assets May Have a Greater Default Risk at Maturity.
Certain of the underlying a series of securities may provide for a lump-sum
payment of the unamortized principal balance of the mortgage loan at the
maturity of the asset. See "The Mortgage Pool" in the related prospectus
supplement.
Because borrowers under this type of asset are required to make a
relatively large single payment upon maturity, it is possible that the default
risk associated with such assets is greater than that associated with
fully-amortizing mortgage loans. The ability of a mortgagor on this type of
asset to repay the mortgage loan upon maturity frequently depends upon the
mortgagor's ability:
o to refinance the asset, which will be affected by a number of
factors, including, without limitation, the level of mortgage
interest rates available in the primary mortgage market at the time,
the mortgagor's equity in the related mortgaged property, the
financial condition of the mortgagor, the condition of the mortgaged
property, tax law, general economic conditions and the general
willingness of financial institutions and primary mortgage bankers
to extend credit; or
o to sell the related mortgaged property at a price sufficient to
permit the mortgagor to make the lump-sum payment.
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 leasehold
mortgages underlying a series of securities will contain provisions protective
of the mortgagee, to the extent described in the applicable prospectus
supplement.
Increased Risk of Loss if Assets are Delinquent. A portion of the assets
may be delinquent upon the issuance of the related securities. Credit
enhancement provided with respect to a particular series of securities may not
cover all losses related thereto. You should consider the risk that the
inclusion of such assets in the trust fund for a series may cause the rate of
defaults and prepayments on the assets to increase and, in turn, may cause
losses to exceed the available credit enhancement for such series and affect the
yield on the securities of such series.
Violations of Federal, State and Local Laws May Adversely Affect Ability
to Collect on Loans. The mortgage loans may also be subject to federal, state
and local laws, including:
o the Federal Truth in Lending Act and Regulation Z promulgated under
that act, which require certain disclosures to the borrowers
regarding the terms of the residential loans;
o the Equal Credit Opportunity Act and Regulation B promulgated under
that act, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of
17
public assistance or the exercise of any right under the Consumer
Credit Protection Act, in the extension of credit;
o the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience; and
o for mortgage loans that were originated or closed after November 7,
1989, the Home Equity Loan Consumer Protection Act of 1988, which
requires additional disclosures, limits changes that may be made to
the loan documents without the borrower's consent. This act also
restricts a lender's ability to declare a default or to suspend or
reduce a borrower's credit limit to certain enumerated events.
Certain mortgage loans are subject to the Riegle Community Development and
Regulatory Improvement Act of 1994 which incorporates the Home Ownership and
Equity Protection Act of 1994. These provisions may:
o impose additional disclosure and other requirements on creditors
with respect to non-purchase money mortgage loans with high interest
rates or high up-front fees and charges;
o apply on a mandatory basis to all mortgage loans originated on or
after October 1, 1995;
o impose specific statutory liabilities on creditors who fail to
comply with their provisions; and
o affect the enforceability of the related loans.
In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
Violations of certain provisions of these laws may limit the ability of the
servicer to collect all or part of the principal of or interest on the mortgage
loans, may entitle the mortgagor to a refund of amounts previously paid and may
subject the depositor, the servicer, the master servicer or the trust to damages
and administrative enforcement. As a result, these violations or alleged
violations could result in shortfalls in the distributions due on your
securities.
In the past few years, a number of legislative proposals have been
introduced at both the federal, state and local level that are designed to
discourage predatory lending practices. Some states have enacted, or may enact,
laws or regulations that prohibit inclusion of some provisions in mortgage loans
that have mortgage interest rates or origination costs in excess of prescribed
levels, and require that borrowers be given certain disclosures prior to the
consummation of such mortgage loans. In some cases, state and local laws may
impose requirements and restrictions greater than those in the Home Ownership
and Equity Protection Act of 1994. Lawsuits have been brought in various states
making claims against assignees of high cost loans for violations of state law.
Named defendants in these cases include numerous participants within the
secondary mortgage market, including some securitization trusts. The seller of
the assets, either directly or indirectly, to the depositor will make
representations and warranties with respect to each asset relating to compliance
with federal, state and local laws at the time of origination, that none of the
mortgage loans are subject to the Home Ownership and Equity Protection Act of
1994 and that none of the mortgage loans are "high cost" loans within the
meaning of such federal, state and local laws. In the event of a breach of any
such representations, the party specified in the related prospectus supplement
will be required to cure such breach or repurchase or replace the affected
mortgage loan. In addition, such party will be required to reimburse the related
trust fund for any damages or costs incurred by such trust fund as a result of a
breach of the representation as to compliance with federal, state and local
laws. To the extent Bank of America, National Association is the sponsor of a
series, it will be also make the representations and warranties above and cure
or repurchase the affected mortgage loan and reimburse the trust fund for any
costs and damages to the extent the seller of the assets fails to do so. To the
extent no party fulfills this reimbursement obligation for financial or other
reasons, shortfalls in the distributions due on your securities could occur. See
"Description of the Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements--Representations and Warranties;
Repurchases" in this prospectus.
18
The home improvement contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations. These laws:
o protect the homeowner from defective craftsmanship or incomplete
work by a contractor;
o permit the obligated party to withhold payment if the work does not
meet the quality and durability standards agreed to by the homeowner
and the contractor; and
o subject any person to whom the seller of the goods assigns its
consumer credit transaction to all claims and defenses which the
obligated party in a credit sale transaction could assert against
such seller.
Market Values of Manufactured Homes May Increase the Risk of Loss.
Manufactured homes generally depreciate in value. Thus investors should expect
that, as a general matter, the market value of any manufactured home will be
lower than the outstanding principal balance of the related installment
contract. As a result, investors must be prepared to bear the risk of loss
resulting from any delinquency or liquidation loss on the contracts in a trust
fund, to the extent not covered by the applicable credit support.
Risk of Loss May Be Greater on Unsecured Home Improvement Loans. The
obligations of the borrower under any unsecured home improvement loan included
in a trust fund will not be secured by an interest in the related real estate or
any other property. In the event of a default, the trust fund will have recourse
only against the borrower's assets generally, along with all other general
unsecured creditors of the borrower. In a bankruptcy or insolvency proceeding,
the obligations of the borrower under an unsecured home improvement loan may be
discharged in their entirety. As a result, the trust fund may suffer losses. In
addition, a borrower on an unsecured home improvement loan may not demonstrate
the same degree of concern over performance of the borrower's obligations as if
such obligations were secured by the real estate or other assets owned by such
borrower.
Risks of Loss May Increase Due to Defective Security Interest and Effects
of Certain Other Legal Aspects of the Contracts. The seller of the assets,
either directly or indirectly, to the depositor will represent that a contract
is secured by a security interest in a manufactured home. Perfection of such
security interests and the right to realize upon the value of the manufactured
homes as collateral for the contracts are subject to a number of federal and
state laws, including the Uniform Commercial Code. The steps necessary to
perfect the security interest in a manufactured home will vary from state to
state. Because of the expense and administrative inconvenience involved, the
servicer or the master servicer will not amend any certificates of title to
change the lienholder specified therein from the seller of the assets to the
trustee and will not deliver any certificate of title to the trustee or note
thereon the trustee's interest. Consequently, in some states, in the absence of
such an amendment, the assignment to the trustee of the security interest in the
manufactured home may not be effective or such security interest may not be
perfected and, may not be effective against creditors of the seller of the
assets or a trustee in bankruptcy of such seller.
In addition, numerous federal and state consumer protection laws impose
requirements on lending under installment sales contracts and installment loan
agreements such as the contracts, and the failure by the lender or seller of
goods to comply with such requirements could give rise to liabilities of
assignees for amounts due under such agreements and claims by such assignees may
be subject to set-off as a result of such lender's or seller's noncompliance.
These laws would apply to the trustee as assignee of the contracts. The seller
of the assets of the contracts will warrant that each contract complies with all
requirements of law and will make certain warranties relating to the validity,
subsistence, perfection and priority of the security interest in each
manufactured home securing a contract. A breach of any such warranty that
materially adversely affects any contract would create an obligation of the
seller of the assets to repurchase, or if permitted by the applicable agreement,
substitute for, such contract unless such breach is cured. If the credit support
is exhausted and recovery of amounts due on the contracts is dependent on
repossession and resale of manufactured homes securing contracts that are in
default, certain other factors may limit the ability to realize upon the
manufactured home or may limit the amount realized by securityholders to less
than the amount due.
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DESCRIPTION OF THE TRUST FUNDS
Assets
The primary assets of each Trust Fund (the "Assets" ) will include (i) a
segregated pool of single family and/or multifamily mortgage loans which may
include sub-prime mortgage loans (the "Mortgage Loans" ), including without
limitation, Home Equity Loans, Home Improvement Contracts and Land Sale
Contracts, (ii) home improvement installment sales contracts or installment
loans that are unsecured (the "Unsecured Home Improvement Loans" ), (iii)
manufactured housing installment sales contracts and installment loan agreements
(the "Contracts" ) or (iv) a combination of Mortgage Loans, Unsecured Home
Improvement Loans and/or Contracts. The Mortgage Loans will not be guaranteed or
insured by the Depositor or any of its affiliates. The Mortgage Loans will be
guaranteed or insured by a governmental agency or instrumentality or other
person only if and to the extent expressly provided in the related prospectus
supplement. If specified in the related prospectus supplement, the sponsor of a
Series may have purchased the Assets from a prior holder (an "Asset Seller"),
which prior holder may or may not be the originator of such Mortgage Loan,
Unsecured Home Improvement Loan or Contract.
The Assets included in the Trust Fund for a Series may be subject to
various types of payment provisions. Such Assets may consist of (1) "Level
Payment Assets," which may provide for the payment of interest and full
repayment of principal in level monthly payments with a fixed rate of interest
computed on their declining principal balances; (2) "Adjustable Rate Assets,"
which may provide for periodic adjustments to their rates of interest to equal
the sum (which may be rounded) of a fixed margin and an index; (3) "Buy Down
Assets," which are Assets for which funds have been provided by someone other
than the related obligors to reduce the obligors' monthly payments during the
early period after origination of such Assets; (4) "Increasing Payment Assets,"
as described below; (5) "Interest Reduction Assets," which provide for the
one-time reduction of the interest rate payable thereon; (6) "GEM Assets," which
provide for (a) monthly payments during the first year after origination that
are at least sufficient to pay interest due thereon, and (b) an increase in such
monthly payments in subsequent years at a predetermined rate resulting in full
repayment over a shorter term than the initial amortization terms of such
Assets; (7) "GPM Assets," which allow for payments during a portion of their
terms which are or may be less than the amount of interest due on the unpaid
principal balances thereof, and which unpaid interest will be added to the
principal balances of such Assets and will be paid, together with interest
thereon, in later years; (8) "Step-up Rate Assets" which provide for interest
rates that increase over time; (9) "Balloon Payment Assets" which are mortgage
loans that are not fully amortizing over their terms and, thus, will require a
lump-sum payment at their stated maturity; (10) "Convertible Assets" which are
Adjustable Rate Assets subject to provisions pursuant to which, subject to
certain limitations, the related obligors may exercise an option to convert the
adjustable interest rate to a fixed interest rate; and (11) "Bi-weekly Assets,"
which provide for obligor payments to be made on a bi-weekly basis.
The applicable prospectus supplement will set forth the relevant index or
indices with respect to the Adjustable Rate Assets in the related Trust Fund.
The indices will be one or more 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).
An Increasing Payment Asset is an Asset that provides for monthly payments
that are fixed for an initial period to be specified in the related prospectus
supplement and which increase thereafter (at a predetermined rate expressed as a
percentage of the monthly payment during the preceding payment period, subject
to any caps on the amount of any single monthly payment increase) for a period
to be specified in the related prospectus supplement from the date of
origination, after which the monthly payment is fixed at a level-payment amount
so as to fully amortize the Asset over its remaining term to maturity. The
scheduled monthly payment with respect to an Increasing Payment Asset is the
total amount required to be paid each month in accordance with its terms and
equals the sum of (1) the obligor's monthly payments referred to in the
preceding sentence and (2) in the case of certain Increasing Payment Assets,
payments made by the respective Servicers pursuant to buy-down or subsidy
agreements. The obligor's initial monthly payments for each Increasing Payment
Asset are set at the level-payment
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amount that would apply to an otherwise identical Level Payment Asset having an
interest rate a certain number of percentage points below the Asset Rate of such
Increasing Payment Asset. The obligor's monthly payments on each Increasing
Payment Asset, together with any payments made thereon by the related Servicers
pursuant to buy-down or subsidy agreements, will in all cases be sufficient to
allow payment of accrued interest on such Increasing Payment Asset at the
related interest rate, without negative amortization. An obligor's monthly
payments on such an Asset may, however, not be sufficient to result in any
reduction of the principal balance of such Asset until after the period when
such payments may be increased.
The Securities will be entitled to payment only from the assets of the
related Trust Fund and will not be entitled to payments in respect of the assets
of any other trust fund established by the Depositor. If specified in the
related prospectus supplement, the assets of a Trust Fund will consist of
securities representing beneficial ownership interests in, or indebtedness of,
another trust fund that contains the Assets.
Mortgage Loans
General
Each Mortgage Loan will generally be secured by a lien on (i) a one-to
four-family residential property or a security interest in shares issued by a
cooperative housing corporation (a "Single Family Property" and the related
Mortgage Loan a "Single Family Mortgage Loan") or (ii) a primarily residential
property which consists of five or more residential dwelling units, and which
may include limited retail, office or other commercial space (a "Multifamily
Property" and the related Mortgage Loan a "Multifamily Mortgage Loan"). Single
Family Properties and Multifamily Properties are sometimes referred to herein
collectively as "Mortgaged Properties." To the extent specified in the related
prospectus supplement, the Mortgage Loans will be secured by first and/or junior
mortgages or deeds of trust or other similar security instruments creating a
first or junior lien on Mortgaged Property. The Mortgaged Properties may include
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. The Mortgaged
Properties may include leasehold interests in properties, the title to which is
held by third party lessors. The term of any such leasehold shall exceed the
term of the related mortgage note by at least five years or such other time
period specified in the related prospectus supplement. The Mortgage Loans may
include (i) closed-end and/or revolving home equity loans or certain balances
thereof ("Home Equity Loans") and/or (ii) secured home improvement installment
sales contracts and secured installment loan agreements ("Home Improvement
Contracts"). In addition, the Mortgage Loans may include certain Mortgage Loans
evidenced by contracts ("Land Sale Contracts") for the sale of properties
pursuant to which the mortgagor promises to pay the amount due thereon to the
holder thereof with fee title to the related property held by such holder until
the mortgagor has made all of the payments required pursuant to such Land Sale
Contract, at which time fee title is conveyed to the mortgagor. The Originator
of each Mortgage Loan will have been a person other than the Depositor. The
related prospectus supplement will indicate if any person who originated the
Mortgage Loans (each an "Originator") is an affiliate of the Depositor. If any
Originator or group of affiliated Originators originated 10% or more of the
Mortgage Loans in a Trust Fund, 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. The Mortgage Loans will be evidenced by
promissory notes (the "Mortgage Notes") secured by mortgages, deeds of trust or
other security instruments (the "Mortgages") creating a lien on the Mortgaged
Properties.
Combined Loan-to-Value Ratio
The "Combined Loan-to-Value Ratio" of a Mortgage Loan at any given time is
the ratio (expressed as a percentage) of (i) the sum of (a) the outstanding
principal balance of the Mortgage Loan at origination plus (b) in the case of a
second lien Mortgage Loan, the outstanding principal balance of the first lien
on the related Mortgaged Property at the date of origination of the Mortgage
Loan over (ii) the Value of the related Mortgaged Property. The "Value" of a
Mortgaged Property is generally the lesser of: (i) an amount determined by an
appraisal done at origination of the Mortgage Loan and (ii) other than in the
case of a refinanced Mortgage Loan, the purchase price
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paid for the related Mortgaged Property by the Mortgagor with the proceeds of
the Mortgage Loan. The value of a Mortgaged Property as of the date of initial
issuance of the related Series of Securities may be less than the Value at
origination and will fluctuate from time to time based upon changes in economic
conditions and the real estate market.
Mortgage Loan Information in Prospectus Supplements
Each prospectus supplement will contain information, as of the dates
specified in such prospectus supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Mortgage Loans as of
the applicable cut-off date (the "Cut-off Date") specified in the prospectus
supplement, (ii) the type of property securing the Mortgage Loans, (iii) the
occupancy status, (iv) the purpose, (v) the documentation type, (vi) the
weighted average (by principal balance) of the original and remaining terms to
maturity of the Mortgage Loans, (vii) the earliest and latest origination date
and maturity date of the Mortgage Loans, (viii) the range of the Loan-to-Value
Ratios at origination of the Mortgage Loans, (ix) the credit scores of the
Mortgagors, (x) the Mortgage Interest Rates or range of Mortgage Interest Rates
and the weighted average Mortgage Interest Rate borne by the Mortgage Loans,
(xi) the geographic distribution of the Mortgaged Properties, (xii) information
with respect to the prepayment provisions, if any, of the Mortgage Loans, (xiii)
with respect to Mortgage Loans with adjustable Mortgage Interest Rates ("ARM
Loans"), the index, the frequency of the adjustment dates, the range of margins
added to the index, and the maximum Mortgage Interest Rate or monthly payment
variation at the time of any adjustment thereof and over the life of the ARM
Loan, (xiv) information regarding the payment characteristics of the Mortgage
Loans, including without limitation balloon payment and other amortization
provisions, (xv) the number of Mortgage Loans that are delinquent and the number
of days or ranges of the number of days such Mortgage Loans are delinquent and
(xvi) the material underwriting standards used for the Mortgage Loans. If
specific information respecting the Mortgage Loans is not known to the Depositor
at the time Securities are initially offered, more general information of the
nature described above will be provided in the prospectus supplement, and
specific information will be set forth in a report which will be available to
purchasers of the related Securities at or before the initial issuance thereof
and will be filed as part of a Current Report on Form 8-K with the Commission
after such initial issuance. Notwithstanding the foregoing, the characteristics
of the Mortgage Loans included in a Trust Fund will not vary by more than five
percent (by aggregate principal balance as of the Cut-off Date) from the
characteristics thereof that are described in the related prospectus supplement.
The related prospectus supplement will specify whether the Mortgage Loans
include (i) Home Equity Loans, which may be secured by Mortgages that are junior
to other liens on the related Mortgaged Property and/or (ii) Home Improvement
Contracts originated by a home improvement contractor and secured by a Mortgage
on the related Mortgaged Property that is junior to other liens on the Mortgaged
Property. The home improvements purchased with the Home Improvement Contracts
typically include replacement windows, house siding, roofs, swimming pools,
kitchen and bathroom remodeling goods, solar heating panels, patios, decks, room
additions and garages. The related prospectus supplement will specify whether
the Home Improvement Contracts are partially insured under Title I of the
National Housing Act of 1934 (the "National Housing Act") and, if so, the
limitations on such insurance. In addition, the related prospectus supplement
will specify whether the Mortgage Loans contain certain Mortgage Loans evidenced
by Land Sale Contracts.
Payment Provisions of the Mortgage Loans
All of the Mortgage Loans will provide for payments of principal, interest
or both, on due dates that occur monthly, quarterly or semi-annually or at such
other interval as is specified in the related prospectus supplement or for
payments in another manner described in the related prospectus supplement. Each
Mortgage Loan may provide for no accrual of interest or for accrual of interest
thereon at an interest rate (a "Mortgage Interest Rate") that is fixed over its
term or that adjusts from time to time, or that may be converted from an
adjustable to a fixed Mortgage Interest Rate or a different adjustable Mortgage
Interest Rate, or from a fixed to an adjustable Mortgage Interest Rate, from
time to time pursuant to an election or as otherwise specified on the related
Mortgage Note, in each case as described in the related prospectus supplement.
Each Mortgage Loan may provide for scheduled payments to maturity or payments
that adjust from time to time to accommodate changes in the Mortgage Interest
Rate or to reflect the occurrence of certain events or that adjust on the basis
of other methodologies, and may provide for
22
negative amortization or accelerated amortization, in each case as described in
the related prospectus supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each case as
described in the related prospectus supplement. Each Mortgage Loan may contain
prohibitions on prepayment (a "Lock-out Period" and, the date of expiration
thereof, a "Lock-out Date") or require payment of a premium or a yield
maintenance penalty (a "Prepayment Charge") in connection with a prepayment, in
each case as described in the related prospectus supplement. In the event that
holders of any Class or Classes of Offered Securities will be entitled to all or
a portion of any Prepayment Charges collected in respect of Mortgage Loans, the
related prospectus supplement will specify the method or methods by which any
such amounts will be allocated. See "--Assets" above.
Revolving Credit Line Loans
As more fully described in the related prospectus supplement, the Mortgage
Loans may consist, in whole or in part, of revolving Home Equity Loans or
certain balances thereof ("Revolving Credit Line Loans"). Interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of such loan. From time to time
prior to the expiration of the related draw period specified in a Revolving
Credit Line Loan, principal amounts on such Revolving Credit Line Loan may be
drawn down (up to a maximum amount as set forth in the related prospectus
supplement) or repaid. If specified in the related prospectus supplement, new
draws by borrowers under the Revolving Credit Line Loans will automatically
become part of the Trust Fund described in such prospectus supplement. As a
result, the aggregate balance of the Revolving Credit Line Loans will fluctuate
from day to day as new draws by borrowers are added to the Trust Fund and
principal payments are applied to such balances and such amounts will usually
differ each day, as more specifically described in the related prospectus
supplement. Under certain circumstances, under a Revolving Credit Line Loan, a
borrower may, during the related draw period, choose an interest only payment
option, during which the borrower is obligated to pay only the amount of
interest which accrues on the loan during the billing cycle, and may also elect
to pay all or a portion of the principal. An interest only payment option may
terminate at the end of the related draw period, after which the borrower must
begin paying at least a minimum monthly portion of the average outstanding
principal balance of the loan.
Unsecured Home Improvement Loans
The Unsecured Home Improvement Loans may consist of conventional unsecured
home improvement loans and FHA insured unsecured home improvement loans. The
Unsecured Home Improvement Loans will bear interest at a fixed or variable
annual percentage rate.
Unsecured Home Improvement Loan Information in Prospectus Supplements
Each prospectus supplement will contain information, as of the dates
specified in such prospectus supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Unsecured Home
Improvement Loans, including (i) the aggregate outstanding principal balance and
the largest, smallest and average outstanding principal balance of the Unsecured
Home Improvement Loans as of the applicable Cut-Off Date, (ii) the weighted
average (by principal balance) of the original and remaining terms to maturity
of the Unsecured Home Improvement Loans, (iii) the earliest and latest
origination date and maturity date of the Unsecured Home Improvements Loans,
(iv) the interest rates or range of interest rates and the weighted average
interest rates borne by the Unsecured Home Improvement Loans, (v) the geographic
distributions of the Unsecured Home Improvement Loans, (vi) information with
respect to the prepayment provisions, if any, of the Unsecured Home Improvement
Loans, (vii) with respect to the Unsecured Home Improvement Loans with
adjustable interest rates ("ARM Unsecured Home Improvement Loans"), the index,
the frequency of the adjustment dates, the range of margins added to the index,
and the maximum interest rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM Unsecured Home Improvement Loan,
(viii) information regarding the payment characteristics of the Unsecured Home
Improvement Loan, (ix) the number of Unsecured Home Improvement Loans that are
delinquent and the number of days or ranges of the number of days such Unsecured
Home Improvement Loans are delinquent, (x) the material underwriting standards
used for the Unsecured Home Improvement Loans and (xi) the credit scores of the
borrowers of the Unsecured Home Improvement Loans. If specific information
respecting the Unsecured Home Improvement Loans is not known to the Depositor at
the time
23
Securities are initially offered, more general information of the nature
described above will be provided in the prospectus supplement, and specific
information will be set forth in a report which will be available to purchasers
of the related Securities at or before the initial issuance thereof and will be
filed as part of a Current Report on Form 8-K with the Commission after such
initial issuance. Notwithstanding the foregoing, the characteristics of the
Unsecured Home Improvement Loans included in a Trust Fund will not vary by more
than five percent (by aggregate principal balance as of the Cut-off Date) from
the characteristics thereof that are described in the related prospectus
supplement.
Contracts
General
To the extent provided in the related prospectus supplement, each Contract
will be secured by a security interest in a new or used manufactured home (each,
a "Manufactured Home"). Such prospectus supplement will specify the states or
other jurisdictions in which the Manufactured Homes are located as of the
related Cut-off Date. The method of computing the Loan-to-Value Ratio of a
Contract will be described in the related prospectus supplement.
Contract Information in Prospectus Supplements
Each prospectus supplement will contain certain information, as of the
dates specified in such prospectus supplement and to the extent then applicable
and specifically known to the Depositor, with respect to the Contracts,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Contracts as of the
applicable Cut-off Date, (ii) whether the Manufactured Homes were new or used as
of the origination of the related Contracts, (iii) the weighted average (by
principal balance) of the original and remaining terms to maturity of the
Contracts, (iv) the earliest and latest origination date and maturity date of
the Contracts, (v) the range of the Loan-to-Value Ratios at origination of the
Contracts, (vi) the Contract Rates or range of Contract Rates and the weighted
average Contract Rate borne by the Contracts, (vii) the state or states in which
most of the Manufactured Homes are located at origination, (viii) information
with respect to the prepayment provisions, if any, of the Contracts, (ix) with
respect to Contracts with adjustable Contract Rates ("ARM Contracts"), the
index, the frequency of the adjustment dates, and the maximum Contract Rate or
monthly payment variation at the time of any adjustment thereof and over the
life of the ARM Contract, (x) the number of Contracts that are delinquent and
the number of days or ranges of the number of days such Contracts are
delinquent, (xi) information regarding the payment characteristics of the
Contracts, (xii) the material underwriting standards used for the Contracts, and
(xiii) the credit scores of the borrowers under the Contracts. If specific
information respecting the Contracts is not known to the Depositor at the time
Securities are initially offered, more general information of the nature
described above will be provided in the prospectus supplement, and specific
information will be set forth in a report which will be available to purchasers
of the related Securities at or before the initial issuance thereof and will be
filed as part of a Current Report on Form 8-K with the Commission after such
initial issuance. Notwithstanding the foregoing, the characteristics of the
Contracts included in a Trust Fund will not vary by more than five percent (by
aggregate principal balance as of the Cut-off Date) from the characteristics
thereof that are described in the related prospectus supplement.
Payment Provisions of the Contracts
All of the Contracts will provide for payments of principal, interest or
both, on due dates that occur monthly or at such other interval as is specified
in the related prospectus supplement or for payments in another manner described
in the prospectus supplement. Each Contract may provide for no accrual of
interest or for accrual of interest thereon at an annual percentage rate (a
"Contract Rate") that is fixed over its term or that adjusts from time to time.
Each Contract may provide for scheduled payments to maturity or payments that
adjust from time to time to accommodate changes in the Contract Rate as
otherwise described in the related prospectus supplement. See "--Assets" above.
24
Pre-Funding Account
To the extent provided in a prospectus supplement, a portion of the
proceeds of the issuance of Securities may be deposited into an account
maintained with the Trustee (a "Pre-Funding Account"). In such event, the
Depositor will be obligated (subject only to the availability thereof) to sell
at a predetermined price, and the Trust Fund for the related Series of
Securities will be obligated to purchase (subject to the availability thereof),
additional Assets (the "Subsequent Assets") from time to time (as frequently as
daily) within the period (not to exceed three months if a REMIC election has
been made or one year in all other cases) specified in the related prospectus
supplement (the "Pre-Funding Period") after the issuance of such Series of
Securities having an aggregate principal balance approximately equal to the
amount on deposit in the Pre-Funding Account (the "Pre-Funded Amount") for such
Series on the date of such issuance. The Pre-Funded Amount with respect to a
Series will not exceed 50% of the aggregate initial Security Balance of the
related Securities. Any Subsequent Assets will be required to satisfy certain
eligibility criteria more fully set forth in the applicable Agreement, which
eligibility criteria will be consistent with the eligibility criteria of the
Assets initially included in the Trust Fund, subject to such exceptions as are
expressly stated in the prospectus supplement. For example, the Subsequent
Assets will be subject to the same underwriting standards, representations and
warranties as the Assets initially included in the Trust Fund. In addition,
certain conditions must be satisfied before the Subsequent Assets are
transferred into the Trust Fund such as the delivery to the Rating Agencies and
the Trustee of certain opinions of counsel.
Any portion of the Pre-Funded Amount remaining in the Pre-Funding Account
at the end of the Pre-Funding Period will be used to prepay one or more Classes
of Securities in the amounts and in the manner specified in the related
prospectus supplement. In addition, if specified in the related prospectus
supplement, the Depositor may be required to deposit cash into an account
maintained by the Trustee (the "Capitalized Interest Account") for the purpose
of assuring the availability of funds to pay interest with respect to the
Securities during the Pre-Funding Period. Any amount remaining in the
Capitalized Interest Account at the end of the Pre-Funding Period will be
remitted as specified in the related prospectus supplement.
Accounts
Each Trust Fund will include one or more accounts, established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related prospectus supplement will, to the extent described
herein and in such prospectus supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as described in
the related prospectus supplement. See "Description of the Agreements--Material
Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements--Collection Account and Related Accounts."
USE OF PROCEEDS
The Depositor will apply the net proceeds received from the sale of the
Securities to the purchase of Assets, or the repayment of the financing incurred
in such purchase. The Depositor expects to sell the Securities from time to
time, but the timing and amount of offerings of Securities will depend on a
number of factors, including the volume of Assets acquired by the Depositor,
prevailing interest rates, availability of funds and general market conditions.
25
YIELD CONSIDERATIONS
General
The yield on any Offered Security will depend on the price paid by the
holder of the Security (the "Securityholder"), the Pass-Through Rate of the
Security, the receipt and timing of receipt of distributions on the Security and
the weighted average life of the Assets in the related Trust Fund (which may be
affected by prepayments, defaults, liquidations or repurchases). See "Risk
Factors--Risks Associated with the Securities--Rate of Prepayment on Assets May
Adversely Affect Average Lives and Yields on the Securities."
Pass-Through Rate and Interest Rate
Securities of any Class within a Series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
prospectus supplement with respect to any Series of Securities will specify the
Pass-Through Rate or interest rate for each Class of such Securities or, in the
case of a variable or adjustable Pass-Through Rate or interest rate, the method
of determining the Pass-Through Rate or interest rate; the effect, if any, of
the prepayment of any Asset on the Pass-Through Rate or interest rate of one or
more Classes of Securities; and whether the distributions of interest on the
Securities of any Class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
If so specified in the related prospectus supplement, the effective yield
to maturity to each holder of Securities entitled to payments of interest will
be below that otherwise produced by the applicable Pass-Through Rate or interest
rate and purchase price of such Security because, while interest may accrue on
each Asset during a certain period (each, an "Interest Accrual Period"), the
distribution of such interest will be made on a day which may be several days,
weeks or months following the period of accrual.
Timing of Payment of Interest
Each payment of interest on the Securities (or addition to the Security
Balance of a Class of Accrual Securities) on the monthly, quarterly or other
periodic date specified in the related prospectus supplement on which
distributions will be made to holders of Securities (a "Distribution Date") will
include interest accrued during the Interest Accrual Period for such
Distribution Date. As indicated above under "--Pass-Through Rate and Interest
Rate," if the Interest Accrual Period ends on a date other than the day before a
Distribution Date for the related Series, the yield realized by the holders of
such Securities may be lower than the yield that would result if the Interest
Accrual Period ended on such day before the Distribution Date.
Payments of Principal; Prepayments
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (including principal prepayments on Mortgage
Loans and Contracts resulting from both voluntary prepayments by the borrowers
and involuntary liquidations). The rate at which principal prepayments occur on
the Mortgage Loans and Contracts will be affected by a variety of factors,
including, without limitation, the terms of the Mortgage Loans and Contracts,
the level of prevailing interest rates, the availability of mortgage credit and
economic, demographic, geographic, tax, legal and other factors. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Interest Rates on the Mortgage Loans comprising or underlying the Assets in a
particular Trust Fund, such Mortgage Loans are likely to be the subject of
higher principal prepayments than if prevailing rates remain at or above the
rates borne by such Mortgage Loans. In this regard, it should be noted that
certain Assets may consist of Mortgage Loans with different Mortgage Interest
Rates. The rate of principal payments on some or all of the Classes of
Securities of a Series will correspond to the rate of principal payments on the
Assets in the related Trust Fund and is likely to be affected by the existence
of Lock-out Periods and Prepayment Charge provisions of the Mortgage Loans
underlying or comprising such Assets, and by the extent to which the Servicer of
any such Mortgage Loan is able to enforce such provisions. Mortgage Loans with a
Lock-out Period or a Prepayment Charge provision, to the extent enforceable,
generally would be expected to experience a lower rate of principal prepayments
than otherwise identical Mortgage Loans without such provisions, with shorter
Lock-out Periods or
26
with lower Prepayment Charges. Because of the depreciating nature of
manufactured housing, which limits the possibilities for refinancing, and
because the terms and principal amounts of manufactured housing contracts are
generally shorter and smaller than the terms and principal amounts of mortgage
loans secured by site-built homes, changes in interest rates have a
correspondingly smaller effect on the amount of the monthly payments on
manufactured housing contracts than on the amount of the monthly payments on
mortgage loans secured by site-built homes. Consequently, changes in interest
rates may play a smaller role in prepayment behavior of manufactured housing
contracts than they do in the prepayment behavior of loans secured by mortgage
on site-built homes. Conversely, local economic conditions and certain of the
other factors mentioned above may play a larger role in the prepayment behavior
of manufactured housing contracts than they do in the prepayment behavior of
loans secured by mortgages on site-built homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that is
slower than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. In either case, if so provided
in the prospectus supplement for a Series of Securities, the effect on yield on
one or more Classes of the Securities of such Series of prepayments of the
Assets in the related Trust Fund may be mitigated or exacerbated by any
provisions for sequential or selective distribution of principal to such
Classes.
When a full prepayment is made on a Mortgage Loan or a Contract, the
obligor generally is charged interest on the principal amount of the Mortgage
Loan or Contract so prepaid for the number of days in the month actually elapsed
up to the date of the prepayment. Generally, the effect of prepayments in full
will be to reduce the amount of interest paid in the following month to holders
of Securities entitled to payments of interest because interest on the principal
amount of any Mortgage Loan or Contract so prepaid will be paid only to the date
of prepayment rather than for a full month. A partial prepayment of principal is
generally applied so as to reduce the outstanding principal balance of the
related Mortgage Loan or Contract as of the Due Date in the month in which such
partial prepayment is received.
The timing of changes in the rate of principal payments on the Assets may
significantly affect an investor's actual yield to maturity, even if the average
rate of distributions of principal is consistent with an investor's expectation.
In general, the earlier a principal payment is received on the Mortgage Loans
and distributed on a Security, the greater the effect on such investor's yield
to maturity. The effect on an investor's yield of principal payments occurring
at a rate higher (or lower) than the rate anticipated by the investor during a
given period may not be offset by a subsequent like decrease (or increase) in
the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest principal
received in respect of a Security at a yield at least equal to the yield on such
Security.
Prepayments--Maturity and Weighted Average Life
The rates at which principal payments are received on the Assets included
in or comprising a Trust Fund and the rate at which payments are made from any
credit support or Cash Flow Agreement for the related Series of Securities may
affect the ultimate maturity and the weighted average life of each Class of such
Series. Prepayments on the Mortgage Loans or Contracts comprising or underlying
the Assets in a particular Trust Fund will generally accelerate the rate at
which principal is paid on some or all of the Classes of the Securities of the
related Series.
If so provided in the prospectus supplement for a Series of Securities,
one or more Classes of Securities may have a final scheduled Distribution Date,
which is the date on or prior to which the stated principal amount (the
"Security Balance") thereof is scheduled to be reduced to zero, calculated on
the basis of the assumptions applicable to such Series set forth therein.
Weighted average life refers to the average amount of time that will elapse from
the date of issue of a security until each dollar of principal of such security
will be repaid to the investor. The weighted average life of a Class of
Securities of a Series will be influenced by the rate at which principal on the
Assets is paid to such Class, which may be in the form of scheduled amortization
or prepayments (for this purpose, the term "prepayment" includes prepayments, in
whole or in part, and liquidations due to default).
27
In addition, the weighted average life of the Securities may be affected
by the varying maturities of the Assets in a Trust Fund. If any Assets in a
particular Trust Fund have actual terms to maturity less than those assumed in
calculating final scheduled Distribution Dates for the Classes of Securities of
the related Series, one or more Classes of such Securities may be fully paid
prior to their respective final scheduled Distribution Dates, even in the
absence of prepayments. Accordingly, the prepayment experience of the Assets
will, to some extent, be a function of the mix of Mortgage Interest Rates or
Contract Rates and maturities of the Mortgage Loans or Contracts comprising or
underlying such Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment
model. CPR represents a constant assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of loans for the life of
such loans.
Neither CPR nor any other prepayment model or assumption purports to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans or Contracts underlying or comprising the Assets.
The prospectus supplement with respect to each Series of Securities may
contain tables, if applicable, setting forth the projected weighted average life
of each Class of Offered Securities of such Series and the percentage of the
initial Security Balance of each such Class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such prospectus
supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR or such other standard specified in such prospectus
supplement. Such tables and assumptions are intended to illustrate the
sensitivity of the weighted average life of the Securities to various prepayment
rates and will not be intended to predict or to provide information that will
enable investors to predict the actual weighted average life of the Securities.
It is unlikely that prepayment of any Mortgage Loans or Contracts comprising or
underlying the Assets for any Series will conform to any particular level of CPR
or any other rate specified in the related prospectus supplement.
Other Factors Affecting Weighted Average Life
Type of Asset
If so specified in the related prospectus supplement, a number of Mortgage
Loans may have balloon payments due at maturity (which, based on the
amortization schedule of such Mortgage Loans, may be a substantial amount), and
because the ability of a mortgagor to make a balloon payment typically will
depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property, there is a risk that a number of Balloon Payment Assets may
default at maturity. The ability to obtain refinancing will depend on a number
of factors prevailing at the time refinancing or sale is required, including,
without limitation, real estate values, the mortgagor's financial situation,
prevailing mortgage loan interest rates, the mortgagor's equity in the related
Mortgaged Property, tax laws and prevailing general economic conditions. The
applicable prospectus supplement will specify if the Depositor, the Servicer,
the Master Servicer, or any of their affiliates will be obligated to refinance
or repurchase any Mortgage Loan or to sell the Mortgaged Property. In the case
of defaults, recovery of proceeds may be delayed by, among other things,
bankruptcy of the mortgagor or adverse conditions in the market where the
property is located. In order to minimize losses on defaulted Mortgage Loans,
the Servicer may, to the extent and under the circumstances set forth in the
related prospectus supplement, be permitted to modify Mortgage Loans that are in
default or as to which a payment default is reasonably foreseeable. Any
defaulted balloon payment or modification that extends the maturity of a
Mortgage Loan will tend to extend the weighted average life of the Securities
and may thereby lengthen the period of time elapsed from the date of issuance of
a Security until it is retired.
With respect to certain Mortgage Loans, including ARM Loans, the Mortgage
Interest Rate at origination may be below the rate that would result if the
index and margin relating thereto were applied at origination. With respect to
certain Contracts, the Contract Rate may be "stepped up" during its term or may
otherwise vary or be adjusted. Under the applicable underwriting standards, the
mortgagor or obligor under each Mortgage Loan or Contract generally will be
qualified on the basis of the Mortgage Interest Rate or Contract Rate in effect
at origination. The repayment of any such Mortgage Loan or Contract may thus be
dependent on the ability of the
28
mortgagor or obligor to make larger level monthly payments following the
adjustment of the Mortgage Interest Rate or Contract Rate. In addition, certain
Mortgage Loans may be subject to temporary buydown plans ("Buydown Mortgage
Loans") pursuant to which the monthly payments made by the mortgagor during the
early years of the Mortgage Loan will be less than the scheduled monthly
payments thereon (the "Buydown Period"). The periodic increase in the amount
paid by the mortgagor of a Buydown Mortgage Loan during or at the end of the
applicable Buydown Period may create a greater financial burden for the
mortgagor, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default with respect to the related Mortgage
Loan.
The Mortgage Interest Rates on certain ARM Loans subject to negative
amortization generally adjust monthly and their amortization schedules adjust
less frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Interest Rates are generally lower than the
sum of the applicable index at origination and the related margin over such
index at which interest accrues), the amount of interest accruing on the
principal balance of such Mortgage Loans may exceed the amount of the minimum
scheduled monthly payment thereon. As a result, a portion of the accrued
interest on negatively amortizing Mortgage Loans may be added to the principal
balance thereof and will bear interest at the applicable Mortgage Interest Rate.
The addition of any such deferred interest to the principal balance of any
related Class or Classes of Securities will lengthen the weighted average life
thereof and may adversely affect yield to holders thereof, depending upon the
price at which such Securities were purchased. In addition, with respect to
certain ARM Loans subject to negative amortization, during a period of declining
interest rates, it might be expected that each minimum scheduled monthly payment
on such a Mortgage Loan would exceed the amount of scheduled principal and
accrued interest on the principal balance thereof, and since such excess will be
applied to reduce the principal balance of the related Class or Classes of
Securities, the weighted average life of such Securities will be reduced and may
adversely affect yield to holders thereof, depending upon the price at which
such Securities were purchased.
As may be described in the related prospectus supplement, the applicable
Agreement may provide that all or a portion of the principal collected on or
with respect to the related Mortgage Loans may be applied by the related Trustee
to the acquisition of additional Mortgage Loans during a specified period
(rather than used to fund payments of principal to Securityholders during such
period) with the result that the related securities possess an interest-only
period, also commonly referred to as a revolving period, which will be followed
by an amortization period. Any such interest-only or revolving period may, upon
the occurrence of certain events to be described in the related prospectus
supplement, terminate prior to the end of the specified period and result in the
earlier than expected amortization of the related Securities.
In addition, and as may be described in the related prospectus supplement,
the related Agreement may provide that all or a portion of such collected
principal may be retained by the Trustee (and held in certain temporary
investments, including Mortgage Loans) for a specified period prior to being
used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related prospectus supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Termination
If so specified in the related prospectus supplement, a Series of
Securities may be subject to optional early termination through the auction or
repurchase of some or all of the Assets in the related Trust Fund by the party
specified therein (which may be a Securityholder), on any date on which the
aggregate principal balance of the Assets or the aggregate Security Balance of
the Securities of such Series declines to a percentage specified in the related
prospectus supplement (not to exceed 10%) of the aggregate initial principal
balance of such Assets or initial Security Balance of such Securities, as the
case may be, under the circumstances and in the manner set forth therein;
however, any such optional termination or redemption will be permitted only
pursuant to a "qualified liquidation," as defined under Section 860F of the
Internal Revenue Code of 1986, as amended. In addition, if so provided in the
29
related prospectus supplement, certain Classes of Securities may be purchased or
redeemed in the manner set forth therein. See "Description of the
Securities--Termination."
Defaults
The rate of defaults on the Assets will also affect the rate, timing and
amount of principal payments on the Assets and thus the yield on the Securities.
In general, defaults on mortgage loans or contracts are expected to occur with
greater frequency in their early years. The rate of default on Mortgage Loans
which are refinance or limited documentation mortgage loans, and on Mortgage
Loans with high Loan-to-Value Ratios, may be higher than for other types of
Mortgage Loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Mortgage Loans and Contracts will be affected by the general
economic condition of the region of the country in which the related Mortgage
Properties or Manufactured Homes are located. The risk of delinquencies and loss
is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values.
Foreclosures
The number of foreclosures or repossessions and the principal amount of
the Mortgage Loans or Contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the number and principal amount of
Mortgage Loans or Contracts that are repaid in accordance with their terms will
affect the weighted average life of the Mortgage Loans or Contracts comprising
or underlying the Assets and that of the related Series of Securities.
Refinancing
At the request of a mortgagor, the Servicer may allow the refinancing of a
Mortgage Loan or Contract in any Trust Fund by accepting a prepayment in full
and permitting a new loan secured by a mortgage on the same property. In the
event of such a refinancing, the new loan would not be included in the related
Trust Fund and, therefore, such refinancing would have the same effect as a
prepayment in full of the related Mortgage Loan or Contract. A Servicer may,
from time to time, implement programs designed to encourage refinancing. Such
programs may include, without limitation, modifications of existing loans,
general or targeted solicitations, the offering of pre-approved applications,
reduced origination fees or closing costs, or other financial incentives. In
addition, Servicers may encourage the refinancing of Mortgage Loans or
Contracts, including defaulted Mortgage Loans or Contracts, that would permit
creditworthy borrowers to assume the outstanding indebtedness of such Mortgage
Loans or Contracts.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
prospectus supplement. A number of the Mortgage Loans comprising or underlying
the Assets may include "due-on-sale clauses" that allow the holder of the
Mortgage Loans to demand payment in full of the remaining principal balance of
the Mortgage Loans upon sale, transfer or conveyance of the related Mortgaged
Property. With respect to any Mortgage Loans, the Servicer will generally
enforce any due-on-sale clause to the extent it has knowledge of the conveyance
or proposed conveyance of the underlying Mortgaged Property and it is entitled
to do so under applicable law; provided, however, that the Servicer will not
take any action in relation to the enforcement of any due-on-sale provision
which would adversely affect or jeopardize coverage under any applicable
insurance policy. See "Certain Legal Aspects of Mortgage Loans--Due-on-Sale
Clauses" and "Description of the Agreements--Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements--Due-on-Sale
Provisions." The Contracts, in general, prohibit the sale or transfer of the
related Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer that is not consented to. It is expected that the Servicer will
permit most transfers of Manufactured Homes and not accelerate the maturity of
the related Contracts. In certain cases, the transfer may be made by a
delinquent obligor in order to avoid a repossession of the Manufactured Home. In
the case of a transfer of a Manufactured Home after which the Servicer desires
to accelerate the maturity of the related Contract, the Servicer's ability to do
so will depend on the enforceability under state law of the "due-on-sale
clause." See
30
"Certain Legal Aspects of the Contracts--Transfers of Manufactured Homes;
Enforceability of Due-on-Sale Clauses."
THE DEPOSITOR
The Depositor is a direct wholly-owned subsidiary of Banc of America
Mortgage Capital Corporation and was incorporated in the State of Delaware on
July 23, 1997. The principal executive offices of the Depositor are located at
214 North Tryon Street, Charlotte, North Carolina 28255. Its telephone number is
(704) 386-2400.
The Depositor will have limited obligations and rights under each
Agreement after the Closing Date for any Series.
The Depositor and any director, officer, employee or agent of the
Depositor shall be indemnified by the Trust Fund and held harmless against any
loss, liability or expense incurred in connection with any legal action relating
to the applicable Agreement or the Securities, other than any loss, liability or
expense related to any specific Asset or Assets and any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or negligence in
the performance of its duties under the applicable Agreement or by reason of
reckless disregard of its obligations and duties under such Agreement.
To the extent Bank of America is not the Sponsor of a Series, information
regarding the Depositor's securitization program will be provided in the related
prospectus supplement.
The Depositor does not have, nor is it expected in the future to have, any
significant assets.
THE SPONSOR
Bank of America, National Association ("Bank of America") or another
entity which will be named in the applicable prospectus supplement will act as
the Sponsor of a particular Series of Securities.
The Depositor's securitization program principally is used to finance
portfolios of sub-prime mortgage loans secured by first or junior liens on one-
to four-family residential properties acquired by Bank of America or its
affiliates from third parties. The Depositor's securitization program may also
be used by third parties that are not Bank of America affiliates to securitize
mortgage loans on a "rent-a-shelf" basis, whereby a third party transfers the
mortgage loans to the Depositor simultaneously with the transfer by the
Depositor of the mortgage loans to the applicable Trust and issuance of the
related Series of Securities. In that event, the unaffiliated third party,
rather than Bank of America, will be the Sponsor of the transaction.
The table below sets forth the aggregate Security Balance of Securities
issued in Trusts formed by the Depositor during the periods indicated:
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
$232,345,000 $2,024,400,000 $1,863,910,000 $7,125,266,000 $7,281,256,000
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
31
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.
Bank of America currently does not rely on securitization as a material funding
source.
An affiliate of Bank of America owns all of the Depositor's equity. Banc
of America Securities LLC, which may act as an underwriter of the Securities, 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.
More information about the Sponsor's material roles and duties for a
Series of Securities will be described in the applicable prospectus supplement.
DESCRIPTION OF THE SECURITIES
General
A separate common law trust will serve as the Issuing Entity and will
issue the asset-backed certificates (the "Certificates") of a series (each, a
"Series") (including any Class of Certificates not offered hereby). The
Certificates will represent the entire beneficial ownership interest in the
trust fund (the "Trust" or the "Trust Fund") created pursuant to the applicable
Agreement. If a Series of Securities includes asset-backed notes (the "Notes"
and, together with the Certificates, the "Securities"), such Notes will
represent indebtedness of the related Trust Fund and will be issued and secured
pursuant to an Indenture. Each Series of Securities will consist of one or more
classes (each, a "Class") of Securities that may (i) provide for the accrual of
interest thereon based on fixed, variable or adjustable rates; (ii) be senior
(the "Senior Certificates" or the "Senior Notes" and, collectively, "Senior
Securities") or subordinate (the "Subordinated Certificates" or the
"Subordinated Notes" and, collectively, "Subordinated Securities") to one or
more other Classes of Securities in respect of certain distributions on the
Securities; (iii) be entitled either to (A) principal distributions, with
disproportionately low, nominal or no interest distributions or (B) interest
distributions, with disproportionately low, nominal or no principal
distributions (collectively, "Strip Securities"); (iv) provide for distributions
of accrued interest thereon commencing only following the occurrence of certain
events, such as the retirement of one or more other Classes of Securities of
such Series (collectively, "Accrual Securities"); (v) provide for payments of
principal as described in the related prospectus supplement, from all or only a
portion of the Assets in such Trust Fund, to the extent of available funds, in
each case as described in the related prospectus supplement; and/or (vi) provide
for distributions based on a combination of two or more components thereof with
one or more of the characteristics described in this paragraph including a Strip
Security component. If so specified in the related prospectus supplement,
distributions on one or more Classes of a Series of Securities may be limited to
collections from a designated portion of the Assets in the related Trust Fund
(each such portion of Assets, an "Asset Group"). Any such Classes may include
Classes of Securities of a Series offered pursuant to this prospectus and a
related prospectus supplement (the "Offered Securities" ).
Each Class of Offered Securities of a Series will be issued in minimum
denominations corresponding to the Security Balances or, in the case of certain
Classes of Strip Securities, notional amounts or percentage interests specified
in the related prospectus supplement. The transfer of any Offered Securities may
be registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more Classes of Securities of a Series may be issued in fully registered,
certificated form ("Definitive Securities") or in book-entry form ("Book-Entry
Securities"), as provided in the related prospectus supplement. See "Risk
Factors--Risks Associated with the Securities-- Book-Entry System for Certain
Classes of Securities May Decrease Liquidity and Delay Payment" and "Description
of the Securities--Book-Entry Registration and Definitive Securities."
Definitive Securities will be exchangeable for other Securities of the same
Class and Series of a like aggregate Security Balance, notional amount or
percentage interest but of different authorized denominations. See "Risk
Factors--Risks Associated with the Securities--Securities May Not be Liquid."
32
Distributions
Distributions on the Securities of each Series will be made by or on
behalf of the Trustee on each Distribution Date as specified in the related
prospectus supplement from the Available Distribution Amount for such Series and
such Distribution Date. Distributions (other than the final distribution) will
be made to the persons in whose names the Securities are registered at the close
of business on the date specified in the related prospectus supplement (the
"Record Date"), and the amount of each distribution will be determined as of the
close of business on the date specified in the related prospectus supplement
(the "Determination Date"). All distributions with respect to each Class of
Securities on each Distribution Date will be allocated pro rata among the
outstanding Securityholders in such Class or by random selection or as described
in the related prospectus supplement. Payments will be made either by wire
transfer in immediately available funds to the account of a Securityholder at a
bank or other entity having appropriate facilities therefor, if such
Securityholder has so notified the Trustee or other person required to make such
payments no later than the date specified in the related prospectus supplement
(and, if so provided in the related prospectus supplement, holds Securities in
the requisite amount specified therein), or by check mailed to the address of
the person entitled thereto as it appears on the security register; provided,
however, that the final distribution in retirement of the Securities will be
made only upon presentation and surrender of the Securities at the location
specified in the notice to Securityholders of such final distribution.
Available Distribution Amount
All distributions on the Securities of each Series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related prospectus supplement.
Generally, the "Available Distribution Amount" for each Distribution Date equals
the sum of the following amounts:
(i) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected but
due on a date subsequent to the related Collection Period (a "Collection
Period" with respect to any Distribution Date generally will commence on
the second day of the month in which the immediately preceding
Distribution Date occurs, or the day after the Cut-off Date in the case of
the first Collection Period, and will end on the first day of the month of
the related Distribution Date),
(b) all prepayments, together with related payments of the interest
thereon and related Prepayment Charges, all proceeds of any insurance
policies to be maintained in respect of each Asset (to the extent such
proceeds are not applied to the restoration of the Asset or released in
accordance with the normal servicing procedures of a Servicer, subject to
the terms and conditions applicable to the related Asset) (collectively,
"Insurance Proceeds"), all other amounts received and retained in
connection with the liquidation of Assets in default in the Trust Fund
("Liquidation Proceeds"), and other unscheduled recoveries received
subsequent to the related Collection Period,
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a Servicer,
the Master Servicer or any other entity as specified in the related
prospectus supplement or that are payable in respect of certain expenses
of the related Trust Fund, and
(d) all amounts received for a repurchase of an Asset from the Trust
Fund for defective documentation or a breach of representation or warranty
received subsequent to the related Collection Period;
(ii) if the related prospectus supplement so provides, interest or
investment income on amounts on deposit in the Collection Account, including any
net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Servicer or the Master Servicer or any other
entity as specified in the related prospectus supplement with respect to such
Distribution Date;
33
(iv) if and to the extent the related prospectus supplement so provides,
amounts paid by a Servicer or any other entity as specified in the related
prospectus supplement with respect to interest shortfalls resulting from
prepayments during the related Prepayment Period; and
(v) to the extent not on deposit in the related Collection Account as of
the corresponding Determination Date, any amounts collected under, from or in
respect of any credit support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
The related prospectus supplement for a Series of Securities will describe
any variation in the calculation of the Available Distribution Amount for such
Series.
Distributions of Interest on the Securities
Each Class of Securities (other than Classes of Strip Securities that have
no Pass-Through Rate or interest rate) may have a different Pass-Through Rate or
interest rate, which will be a fixed, variable or adjustable rate at which
interest will accrue on such Class or a Component thereof (the "Pass-Through
Rate"). The related prospectus supplement will specify the Pass-Through Rate or
interest rate for each Class or component or, in the case of a variable or
adjustable Pass-Through Rate or interest rate, the method for determining the
Pass-Through Rate or interest rate. The related prospectus supplement will
specify whether interest on any Class of Securities will be calculated either on
the basis of a 360-day year consisting of twelve 30-day months or on the basis
of the actual number of days in the Interest Accrual Period and on a 360-day
year or another method specified in the such prospectus supplement.
Distributions of interest in respect of the Securities of any Class will
be made on each Distribution Date (other than any Class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
prospectus supplement, and any Class of Strip Securities that are not entitled
to any distributions of interest) based on the Accrued Security Interest for
such Class and such Distribution Date, subject to the sufficiency of the portion
of the Available Distribution Amount allocable to such Class on such
Distribution Date. Prior to the time interest is distributable on any Class of
Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such Class will be added to the Security Balance thereof on
each Distribution Date. With respect to each Class of Securities and each
Distribution Date (other than certain Classes of Strip Securities), "Accrued
Security Interest" will be equal to interest accrued during the related Interest
Accrual Period on the outstanding Security Balance thereof immediately prior to
the Distribution Date, at the applicable Pass-Through Rate or interest rate,
reduced as described below. Accrued Security Interest on certain Classes of
Strip Securities will be equal to interest accrued during the related Interest
Accrual Period on the outstanding notional amount thereof immediately prior to
each Distribution Date, at the applicable Pass-Through Rate or interest rate,
reduced as described below, or interest accrual in the manner described in the
related prospectus supplement. The method of determining the notional amount for
a certain Class of Strip Securities will be described in the related prospectus
supplement. Reference to notional amount is solely for convenience in certain
calculations and does not represent the right to receive any distributions of
principal. Accrued Security Interest on a Series of Securities generally will be
reduced in the event of prepayment interest shortfalls, which are shortfalls in
collections of interest for a full Interest Accrual Period resulting from
prepayments prior to the due date in such Interest Accrual Period on the
Mortgage Loans or Contracts comprising or underlying the Assets in the Trust
Fund for such Series. The particular manner in which such shortfalls are to be
allocated among some or all of the Classes of Securities of that Series will be
specified in the related prospectus supplement. The related prospectus
supplement will also describe the extent to which the amount of Accrued Security
Interest that is otherwise distributable on (or, in the case of Accrual
Securities, that may otherwise be added to the Security Balance of) a Class of
Offered Securities may be reduced as a result of any other contingencies,
including delinquencies, losses and deferred interest on or in respect of the
Mortgage Loans or Contracts comprising or underlying the Assets in the related
Trust Fund. Any reduction in the amount of Accrued Security Interest otherwise
distributable on a Class of Securities by reason of the allocation to such Class
of a portion of any deferred interest on the Mortgage Loans or Contracts
comprising or underlying the Assets in the related Trust Fund will generally
result
34
in a corresponding increase in the Security Balance of such Class. See "Risk
Factors--Risk Associated with the Securities--Rate of Prepayment on Mortgage
Loans May Adversely Affect Average Lives and Yields on the Securities" and
"Yield Considerations."
Distributions of Principal of the Securities
The Securities of each Series, other than certain Classes of Strip
Securities, will have a Security Balance which, at any time, will equal the then
maximum amount that the holder will be entitled to receive in respect of
principal out of the future cash flow on the Assets and other assets included in
the related Trust Fund. The outstanding Security Balance of a Security will be
reduced to the extent of distributions of principal thereon from time to time
and, if and to the extent so provided in the related prospectus supplement, by
the amount of losses incurred in respect of the related Assets, may be increased
in respect of deferred interest on the related Mortgage Loans to the extent
provided in the related prospectus supplement and, in the case of Accrual
Securities prior to the Distribution Date on which distributions of interest are
required to commence, will be increased by any related Accrued Security
Interest. If so specified in the related prospectus supplement, the initial
aggregate Security Balance of all Classes of Securities of a Series will be
greater than the outstanding aggregate principal balance of the related Assets
as of the applicable Cut-off Date. The initial aggregate Security Balance of a
Series and each Class thereof will be specified in the related prospectus
supplement. Distributions of principal will be made on each Distribution Date to
the Class or Classes of Securities in the amounts and in accordance with the
priorities specified in the related prospectus supplement. Certain Classes of
Strip Securities with no Security Balance are not entitled to any distributions
of principal.
Categories of Classes of Securities
The Securities of any Series may be comprised of one or more Classes. Such
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 Securities may identify the Classes which
comprise such Series by reference to the following categories or another
category specified in the applicable prospectus supplement.
Categories of Classes Definition
PRINCIPAL TYPES
Accretion Directed Class A Class that receives principal payments
from the accreted interest from specified
Accrual Classes. An Accretion Directed Class
also may receive principal payments from
principal paid on the Assets for the related
Series.
Component Class A Class consisting of two or more specified
components (each, a "Component") as
described in the applicable prospectus
supplement. The Components of a Class may
have different principal and/or interest
payment characteristics but together
constitute a single Class and do not
represent severable interests. Each
Component may be identified as falling into
one or more of the categories in this chart.
Lockout Class A senior Class that is designed not to
participate in or to participate to a
limited extent in (i.e., to be "locked out"
of), for a specified period, the receipt of
(1) principal prepayments on the Assets that
are allocated disproportionately to the
senior Classes of such Series as a group
pursuant to a "shifting interest" structure
and/or (2) scheduled principal payments on
the Assets that are allocated to the senior
Classes as a group. A Lockout Class will
typically not be entitled
35
to receive, or will be entitled to receive
only a restricted portion of, distributions
or principal prepayments and/or scheduled
principal payments, as applicable, for a
period of several years, during which time
all or a portion of such principal payments
that it would otherwise be entitled to
receive in the absence of a "lockout"
structure will be distributed in reduction of
the principal balances of other senior
Classes. Lockout Classes are designed to
minimize weighted average life volatility
during the lockout period.
Notional Amount Class A Class having no principal balance and
bearing interest on the related notional
amount. The notional amount is used for
purposes of the determination of interest
distributions.
Pass-Through Class A Class of Senior Securities that is
entitled to receive all or a specified
percentage of the principal payments that
are distributable to the Senior Securities
or applicable group of Senior Securities
(other than any Ratio Strip Class) in the
aggregate on each Distribution Date until
the Security Balances of all the Senior
Securities or applicable group of Senior
Securities are reduced to zero and that is
not designated as a Sequential Pay Class.
Planned Amortization Class A Class that is designed to receive a
(also sometimes referred to principal payments using a predetermined
as a "PAC") principal balance schedule derived by
assuming two constant prepayment rates for
the underlying Assets. These two rates are
the endpoints for the "structuring range" for
the Planned Amortization Class. The Planned
Amortization Classes in any Series of
Securities may be subdivided into different
categories (e.g., Planned Amortization Class
I ("PAC I"), Planned Amortization Class II
("PAC II") and so forth) derived using
different structuring ranges and/or payment
priorities. A PAC is designed to provide
protection against volatility of weighted
average life if prepayments occur at a
constant rate within the structuring range.
Ratio Strip Class A Class that is entitled to receive a
constant proportion, or "ratio strip," of the
principal payments on the underlying Assets.
Scheduled Amortization Class A Class that is designed to receive
principal payments using a predetermined
principal balance schedule but is not
designated as a Planned Amortization Class
or Targeted Amortization Class. The schedule
is derived by assuming either two constant
prepayment rates or a single constant
prepayment rate for the underlying Assets.
In the former case, the two rates are the
endpoints for the "structuring range" for
the Scheduled Amortization Class and such
range generally is narrower than that for a
Planned Amortization Class. Typically, the
Support Class(es) for the applicable Series
of Securities generally will represent a
smaller percentage of the Scheduled
Amortization Class than a Support Class
generally would represent in relation to a
Planned Amortization Class or a Targeted
Amortization Class. A Scheduled Amortization
Class is generally less sensitive to
weighted average life volatility as a result
of prepayments than a Support Class but more
sensitive than a Planned Amortization Class
or a Targeted Amortization Class.
36
Senior Securities Classes that are entitled to receive payments
of principal and interest on each
Distribution Date prior to the Classes of
Subordinated Securities.
Sequential Pay Class A Class that is entitled to receive
principal payments in a prescribed sequence,
that does not have a predetermined principal
balance schedule and that, in most cases, is
entitled to receive payments of principal
continuously from the first Distribution
Date on which it receives principal until it
is retired. A single Class is entitled to
receive principal payments before or after
other Classes in the same Series of
Securities may be identified as a Sequential
Pay Class.
Subordinated Securities Classes that are entitled to receive
payments of principal and interest on each
Distribution Date only after the Senior
Securities and certain Classes of
Subordinated Securities with higher priority
of distributions have received their full
principal and interest entitlements.
Super Senior Class A Class of Senior Securities that will not
bear its share of certain losses or is not
allocated certain losses after the Classes
of Subordinated Securities are no longer
outstanding and one or more specified
Classes of Senior Securities bear such
losses.
Super Senior Support Class A Class of Senior Securities that bears
certain losses allocated to one or more
Classes of Senior Securities or is allocated
certain losses while one or more Classes of
Senior Securities are not allocated losses.
Support Class (also sometimes A Class that is entitled to receive principal
referred to as a "Companion payments on any Distribution Date only if
Class") scheduled payments have been made on
specified Planned Amortization Classes,
Targeted Amortization Classes and/or
Scheduled Amortization Classes.
Targeted Amortization Class A Class that is designed to receive principal
(also sometimes referred to as payments using a predetermined principal
a "TAC") balance schedule derived by assuming a single
constant prepayment rate for the underlying
Assets. A TAC is designed to provide some
protection against shortening of weighted
average life if prepayments occur at a rate
exceeding the assumed constant prepayment
rate used to derive the principal balances
schedule of such Class.
INTEREST TYPES
Accrual Class A Class that accretes the amount of accrued
interest otherwise distributable on such
Class, which amount will be added as
principal to the principal balance of such
Class on each applicable Distribution Date.
Such accretion may continue until some
specified event has occurred or until such
Accrual Class is retired.
Fixed Rate Class A Class with an interest rate that is fixed
throughout the life of the Class.
37
Floating Rate Class A Class with an interest rate that resets
periodically based upon a designated index
and that varies directly with changes in such
index.
Interest Only Class A Class that is entitled to receive some or
all of the interest payments made on the
Assets and little or no principal. Interest
Only Classes have either no principal
balance, a nominal principal balance or a
notional amount. A nominal principal balance
represents actual principal that will be
paid on the Class. It is referred to as
nominal since it is extremely small compared
to other Classes. A notional amount is the
amount used as a reference to calculate the
amount of interest due on an Interest Only
Class that is not entitled to any
distributions in respect of principal.
Inverse Floating Rate Class A Class with an interest rate that resets
periodically based upon a designated index
and that varies inversely with changes in
such index and with changes in the interest
rate payable on the related Floating Rate
Class.
Prepayment Charge Class A Class that is only entitled to penalties or
premiums, if any, due in connection with a
full or partial prepayment of an Asset.
Principal Only Class A Class that does not bear interest and is
entitled to receive only distributions in
respect of principal.
Step Coupon Class A Class with a fixed interest rate that is
reduced to a lower fixed rate after a
specific 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 Class A Class with an interest rate that resets
periodically and is calculated by reference
to the rate or rates of interest applicable
to the Assets.
Components
To the extent specified in the related prospectus supplement, distribution
on a Class of Securities may be based on a combination of two or more different
Components as described under "--General" above. To such extent, the
descriptions set forth under "--Distributions of Interest on the Securities" and
"--Distributions of Principal of the Securities" above also relate to Components
of such a Class of Securities. In such case, reference in such sections to
Security Balance and Pass-Through Rate or interest rate refer to the principal
balance, if any, of any such Component and the Pass-Through Rate or interest
rate, if any, on any such Component, respectively.
Distributions on the Securities of Prepayment Charges
If so provided in the related prospectus supplement, Prepayment Charges
that are collected on the Mortgage Loans in the related Trust Fund will be
distributed on each Distribution Date to the Class or Classes of Securities
entitled thereto in accordance with the provisions described in such prospectus
supplement.
Allocation of Losses and Shortfalls
If so provided in the prospectus supplement for a Series of Securities
consisting of one or more Classes of Subordinated Securities, on any
Distribution Date in respect of which losses or shortfalls in collections on the
Assets have been incurred, the amount of such losses or shortfalls will be borne
first by a Class of Subordinated Securities
38
in the priority and manner and subject to the limitations specified in such
prospectus supplement. See "Description of Credit Support" for a description of
the types of protection that may be included in a Trust Fund against losses and
shortfalls on Assets comprising such Trust Fund.
Advances in Respect of Delinquencies
With respect to any Series of Securities evidencing an interest in a Trust
Fund, if so provided in the related prospectus supplement, the Servicer or
another entity described therein will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds or
funds held in the Collection Account that are not included in the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Assets in such Trust Fund during the related Collection Period and were
delinquent on the related Determination Date, subject to the Servicer's (or
another entity's) good faith determination that such advances will be
reimbursable from Related Proceeds (as defined below). In the case of a Series
of Securities that includes one or more Classes of Subordinated Securities and
if so provided in the related prospectus supplement, the Servicer's (or another
entity's) advance obligation may be limited only to the portion of such
delinquencies necessary to make the required distributions on one or more
Classes of Senior Securities and/or may be subject to the Servicer's (or another
entity's) good faith determination that such advances will be reimbursable not
only from Related Proceeds but also from collections on other Assets otherwise
distributable on one or more Classes of such Subordinated Securities. See
"Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the Class or Classes of Securities entitled
thereto, rather than to guarantee or insure against losses. Advances of the
Servicer's (or another entity's) funds will be reimbursable only out of related
recoveries on the Assets (including amounts received under any form of credit
support) respecting which such advances were made (as to any Assets, "Related
Proceeds") and from any other amounts specified in the related prospectus
supplement, including out of any amounts otherwise distributable on one or more
Classes of Subordinated Securities of such Series; provided, however, that any
such advance will be reimbursable from any amounts in the Collection Account
prior to any distributions being made on the Securities to the extent that the
Servicer (or such other entity) shall determine, based on its estimation of the
value of the Mortgaged Property or Manufactured Home in relation to the sum of
the unpaid principal balance of the related Asset, accrued interest, the amount
of previously unreimbursed Advances and anticipated disposition expenses, that
such advance (a "Nonrecoverable Advance") is not ultimately recoverable from
Related Proceeds or, if applicable, from collections on other Assets otherwise
distributable on such Subordinated Securities. If advances have been made by the
Servicer from excess funds in the Collection Account, the Servicer is required
to replace such funds in the Collection Account on any future Distribution Date
to the extent that funds in the Collection Account on such Distribution Date are
less than payments required to be made to Securityholders on such date. If so
specified in the related prospectus supplement, the obligations of the Servicer
(or another entity) to make advances may be secured by an advance facility, a
cash advance reserve fund, a surety bond, a letter of credit or another form of
limited guaranty. If applicable, information regarding the characteristics of,
and the identity of any obligor on, any such surety bond, will be set forth in
the related prospectus supplement.
If specified in the related prospectus supplement, the Master Servicer or
the Trustee will be required to make advances, subject to certain conditions
described in the prospectus supplement, in the event of a Servicer default.
Reports to Securityholders
With each distribution to holders of any Class of Securities of a Series,
the Servicer, the Master Servicer or the Trustee, as provided in the related
prospectus supplement, will forward or cause to be forwarded to each such
holder, to the Depositor and to such other parties as may be specified in the
applicable Agreement, a statement generally setting forth, in each case to the
extent applicable and available:
(i) the Record Date, Interest Accrual Period, Determination Date and
Distribution Date;
(ii) the amount of such distribution to holders of Securities of such
Class applied to reduce the Security Balance thereof;
39
(iii) the amount of such distribution to holders of Securities of such
Class allocable to Accrued Security Interest;
(iv) the aggregate Security Balance or notional amount, as the case may
be, of each Class of Securities (including any Class of Securities not offered
hereby) at the beginning and at the close of business on such Distribution Date,
separately identifying any reduction in such Security Balance due to the
allocation of any loss and increase in the Security Balance of a Class of
Accrual Securities in the event that Accrued Security Interest has been added to
such balance;
(v) if the distribution to holders of Securities is less than the full
amount that would be distributable if there were sufficient funds available, the
total amount of the shortfall, the interest portion of the shortfall and the
principal portion of the shortfall;
(vi) the amount of such distribution allocable to Prepayment Charges;
(vii) the amount of related servicing compensation and such other
customary information as is required to enable Securityholders to prepare their
tax returns;
(viii) the amount by which the servicing fee for the related Prepayment
Period has been reduced by interest shortfalls due to prepayments;
(ix) the aggregate amount of advances included in such distribution, the
aggregate amount of unreimbursed advances at the close of business on such
Distribution Date and the amount of advances reimbursed since the previous
Distribution Date;
(x) the aggregate principal balance of the Assets at the close of business
on such Distribution Date;
(xi) with respect to any Mortgage Loan or Contract liquidated during the
related Collection Period, (a) the portion of such liquidation proceeds payable
or reimbursable to a Servicer (or any other entity) in respect of such Mortgage
Loan and (b) the amount of any loss to Securityholders;
(xii) the number and aggregate principal amounts of Assets (A) delinquent
(exclusive of Assets 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.
(xiii) with respect to collateral acquired by the Trust Fund through
foreclosure or otherwise (a "REO Property") relating to a Mortgage Loan or
Contract and included in the Trust Fund as of the end of the related Collection
Period, the date of acquisition;
(xiv) with respect to each REO Property relating to a Mortgage Loan or
Contract and included in the Trust Fund as of the end of the related Collection
Period, (a) the book value, (b) the principal balance of the related Mortgage
Loan or Contract immediately following such Distribution Date (calculated as if
such Mortgage Loan or Contract were still outstanding taking into account
certain limited modifications to the terms thereof specified in the applicable
Agreement), (c) the aggregate amount of unreimbursed servicing expenses and
unreimbursed advances in respect thereof and (d) if applicable, the aggregate
amount of interest accrued and payable on related servicing expenses and related
advances;
(xv) with respect to any such REO Property sold during the related
Collection Period (a) the aggregate amount of sale proceeds, (b) the portion of
such sales proceeds payable or reimbursable to the Master Servicer in respect of
such REO Property or the related Mortgage Loan or Contract and (c) the amount of
any loss to Securityholders in respect of the related Mortgage Loan;
(xvi) the aggregate amount of principal prepayments made during the
related Collection Period;
40
(xvii) to each holder of a Security 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;
(xviii) 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;
(xix) the aggregate unpaid Accrued Security Interest, if any, on each
Class of Securities at the close of business on such Distribution Date;
(xx) the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding Distribution
Date, as calculated in accordance with the method specified in the related
prospectus supplement;
(xxi) the number and total principal balance of the Assets, the weighted
average Mortgage Interest Rate or Contract Rate and weighted average remaining
term to maturity of the Assets and cumulative prepayment amounts;
(xxii) any material modifications, extensions or waivers to the Asset
terms, fees, penalties or payments since the previous Distribution Date or
cumulatively since the Closing Date;
(xxiii) any material breaches of representations and warranties relating
to the Assets or material breaches of transaction covenants;
(xxiv) any expenses or indemnification amounts paid by the related Trust
Fund, the specific purpose of each payment and the parties to whom these
payments were made;
(xxv) during the Pre-Funding Period, the remaining Pre-Funded Amount and
the portion of the Pre-Funding Amount used to acquire Subsequent Assets since
the preceding Distribution Date;
(xxvi) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account;
(xxvii) whether any performance or servicing triggers were met; and
(xxviii) the aggregate amount of payments by the obligors of (a) default
interest, (b) late charges and (c) assumption and modification fees collected
during the related Collection Period.
In addition, the Servicer, the Master Servicer or the Trustee, as provided
in the related prospectus supplement, will include in the statement any
information specific to the Classes of Securities offered by the applicable
prospectus supplement and, within a reasonable period of time after the end of
each calendar year, shall furnish to each Securityholder of record at any time
during the calendar year such information required by the Code and applicable
regulations thereunder to enable Securityholders to prepare their tax returns.
See "Description of the Securities--Book-Entry Registration and Definitive
Securities."
Termination
The obligations created by the applicable Agreement for each Series of
Securities will terminate upon the payment to Securityholders of that Series of
all amounts held in the Collection Account or by a Servicer, the Master
Servicer, if any, or the Trustee and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all property
acquired
41
upon foreclosure of any Mortgage Loan or Contract subject thereto and (ii) upon
the reduction of the principal balance of all or a portion of the assets of
Trust Fund to a percentage specified in the applicable prospectus supplement,
the auction or purchase of some or all of such assets of the Trust Fund by the
party entitled to effect such termination, including a Securityholder, under the
circumstances and in the manner set forth in the related prospectus supplement.
In no event, however, will the Trust Fund continue beyond the date specified in
the related prospectus supplement. Written notice of termination of the
applicable Agreement will be given to each Securityholder, and the final
distribution will be made only upon presentation and surrender of the Securities
at the location to be specified in the notice of termination.
Definitive Form
If so specified in the related prospectus supplement, Securities of a
Series may be issued as Definitive Securities. Distributions of principal of,
and interest on, Definitive Securities will be made directly to holders of
Definitive Securities in accordance with the procedures set forth in the
Agreement. The Definitive Securities of a Series offered hereby and by means of
the applicable prospectus supplement will be transferable and exchangeable at
the office or agency maintained by the Trustee or such other entity for such
purpose set forth in the applicable prospectus supplement. No service charge
will be made for any transfer or exchange of Definitive Securities, but the
Trustee or such other entity may require payment of a sum sufficient to cover
any tax or other governmental charge in connection with such transfer or
exchange.
In the event that an election is made to treat the Trust Fund (or one or
more pools of segregated assets therein) as a REMIC, the Residual Securities
thereof will be issued as Definitive Securities. No legal or beneficial interest
in all or a portion of any Residual Security may be transferred without the
receipt by the transferor and the Trustee of an affidavit described under
"--Taxation of Owners of Residual Securities--Tax-Related Restrictions on
Transfer of Residual Securities."
Book-Entry Registration and Definitive Securities
Persons acquiring beneficial ownership interests ("Beneficial Owners") in
the Book-Entry Securities will hold their Securities 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 Securities 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 "Securityholder" of those Securities, as
those terms are used in this prospectus and the applicable prospectus supplement
for a Series. No Beneficial Owner of a Book-Entry Security will be entitled to
receive a Definitive Security representing that person's interest in the
Book-Entry Security, except as set forth below. Unless and until Definitive
Securities are issued under the limited circumstances described below, all
references to actions taken by Securityholders or holders shall, in the case of
the Book-Entry Securities, 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 Securityholders or holders shall, in the case of the Book-Entry
Securities, refer to distributions, notices, reports and statements to DTC or
Cede & Co., as the registered holder of the Book-Entry Securities, 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 Securities in minimum denominations of $1,000.
The Beneficial Owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Security will be recorded on the
records of DTC (or of a 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).
42
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Securities from the Trustee through DTC and
Participants. While the Book-Entry Securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Securities and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Securities.
Participants and Indirect Participants with whom Beneficial Owners have accounts
for their Book-Entry Securities are similarly required to make book-entry
transfers and receive and transmit 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
Securities, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interest.
Securityholders will not receive or be entitled to receive certificates
representing their respective interests in the Book-Entry Securities, except
under the limited circumstances described below. Unless and until Definitive
Securities are issued, Securityholders who are not Participants may transfer
ownership of Book-Entry Securities only through Participants and Indirect
Participants by instructing Participants and Indirect Participants to transfer
Book-Entry Securities, by book-entry transfer, through DTC, for the account of
the purchasers of the Book-Entry Securities, 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 Securities 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 Securityholders.
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 Securities see "--Certain U.S. Federal Income Tax
Documentation Requirements" below and "Federal Income Tax
Consequences--REMICs--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.
The Depository Trust Company ("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 (the "Exchange Act"). 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
Securities, whether held for its own account or as a nominee for another person.
In general, beneficial ownership of Book-Entry Securities will be subject to the
Rules, as in effect from time to time.
43
Clearstream International, a Luxembourg limited liability company, was
formed in January 2000 through the merger of Cedel International and Deutsche
Boerse Clearing.
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) 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 Securities 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 Securities that it represents and to each
Financial Intermediary for which it acts as agent. Each Financial Intermediary
will be responsible for disbursing funds to the Beneficial Owners of the
Book-Entry Securities that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Securities
may experience some delay in their receipt of payments, since payments will be
forwarded by the Trustee to Cede & Co. Distributions with respect to Securities
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--REMICs--Taxation of Certain Foreign
44
Investors" and "--Backup Withholding." Because DTC can only act on behalf of DTC
Participants, the ability of a Beneficial Owner to pledge Book-Entry Securities
to persons or entities that do not participate in the depository system, or
otherwise take actions regarding their Book-Entry Securities, may be limited due
to the lack of physical certificates for their Book-Entry Securities. In
addition, issuance of the Book-Entry Securities in book-entry form may reduce
the liquidity of the Book-Entry Securities in the secondary market since certain
potential investors may be unwilling to purchase Securities for which they
cannot obtain physical certificates.
DTC has advised the Depositor that, unless and until Definitive Securities
are issued, DTC will take any action the holders of the Book-Entry Securities
are permitted to take under the Pooling and Servicing Agreement only at the
direction of one or more DTC Participants to whose DTC accounts the Book-Entry
Securities are credited, to the extent that these actions are taken on behalf of
Financial Intermediaries whose holdings include the Book-Entry Securities.
Clearstream or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a Securityholder under the Pooling and Servicing
Agreement on behalf of a Clearstream Participant or Euroclear Participant only
in accordance with its relevant rules and procedures and subject to the ability
of the Relevant Depositary to effect these actions on its behalf through DTC.
DTC may take actions, at the direction of the related Participants, with respect
to some Book-Entry Securities which conflict with actions taken with respect to
other Book-Entry Securities.
Definitive Securities will be issued to beneficial owners of the
Book-Entry Securities, 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 Securities and the Depositor or the Trustee is unable
to locate a qualified successor or (b) in the case of Securities 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 Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of those Definitive Securities as
Securityholders under the Pooling and Servicing Agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Securities 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 Securities are registered, the ability
of the Beneficial Owners of the Book-Entry Securities 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
Securities may be impaired.
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 issued 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.
45
Trading between DTC seller and Clearstream or Euroclear purchaser. When
Book-Entry Securities are to be transferred from the account of a DTC
Participant to the account of a Clearstream Participant or a Euroclear
Participant, the purchaser will send instructions to Clearstream or Euroclear
through a Clearstream Participant or Euroclear Participant at least one business
day prior to settlement. Clearstream or Euroclear will instruct the respective
Depositary, as the case may be, to receive the Book-Entry Securities against
payment. Payment will include interest accrued on the Book-Entry Securities 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 Securities. After settlement has been
completed, the Book-Entry Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Clearstream Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Book-Entry Securities will accrue from,
the value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the Clearstream or Euroclear cash debt will be valued instead as
of the actual settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Book-Entry Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Book-Entry Securities would incur overdraft charges for
one day, assuming they cleared the overdraft when the Book-Entry Securities were
credited to their accounts. However, interest on the Book-Entry Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Book-Entry Securities earned during that one-day period may substantially
reduce or offset the amount of the overdraft charges, although this result will
depend on each Clearstream Participant's or Euroclear Participant's particular
cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Book-Entry Securities
to the respective European Depositary for the benefit of Clearstream
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Clearstream or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Book-Entry Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Book-Entry Securities to the DTC Participant's
account against payment. Payment will include interest accrued on the Book-Entry
Securities 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.
46
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 Securities from DTC Participants for delivery to Clearstream
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through Clearstream or Euroclear for one day (until
the purchase side of the day trade is reflected in their Clearstream or
Euroclear accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing the Book-Entry Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give
the Book-Entry Securities sufficient time to be reflected in their
Clearstream or Euroclear account in order to settle the sale side of the
trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant is
at least one day prior to the value date for the sale to the Clearstream
Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements. A Beneficial
Owner of Book-Entry Securities 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
Security 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:
(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 Securities 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 Securities):
(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,
47
(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 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 Securities, 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 Securities 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).
48
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
Securities.
Mandatory Auction of Certificates
If specified in the prospectus supplement for a series, one or more
Classes of Securities ("Auction Securities") 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 Securities then outstanding from third party investors.
On the Auction Distribution Date, the Auction Securities will be
transferred to third party investors, and upon this transfer the holders of each
class of Auction Securities will be entitled to receive an amount (the "Par
Price") equal to the related Security 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 Securities in the auction. If
all or a portion of a Class of Auction Securities 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 Securities. 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
Securityholders.
If the counterparty defaults on its obligations under the swap agreement,
no Securities of a Class of Auction Securities 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 Securities, only a portion of the Securities 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 Securities 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.
DESCRIPTION OF THE AGREEMENTS
Agreements Applicable to a Series
REMIC Securities, Grantor Trust Securities
Securities representing interests in a Trust Fund, or a portion thereof,
that the Trustee will elect to have treated as REMIC Securities or Grantor Trust
Securities will be issued, and the related Trust Fund will be created, pursuant
to a pooling and servicing agreement (a "Pooling and Servicing Agreement") among
the Depositor, the Trustee and the Servicer, Servicers or Master Servicer, as
applicable. The Assets of such Trust Fund will be transferred to the Trust Fund
and thereafter serviced in accordance with the terms of the Pooling and
Servicing Agreement. In the event there are multiple Servicers of the Assets of
such Trust Fund, each Servicer may perform its servicing functions pursuant to a
servicing agreement (each, an "Underlying Servicing Agreement").
Securities That Are Partnership Interests for Tax Purposes and Notes
Partnership Securities that are partnership interests for tax purposes
will be issued, and the related Trust Fund will be created, pursuant to a
Pooling and Servicing Agreement.
49
A Series of Notes issued by a Trust Fund will be issued pursuant to an
indenture (the "Indenture") between the related Trust Fund and the Indenture
Trustee named in the related prospectus supplement. The Trust Fund will be
established pursuant to a deposit trust agreement (each, a "Deposit Trust
Agreement") between the Depositor and an owner trustee specified in the
prospectus supplement relating to such Series of Notes. The Assets securing
payment on the Notes will be serviced in accordance with a servicing agreement
(each, an "Indenture Servicing Agreement") between the related Trust Fund as
issuer of the Notes, the Servicer and the Indenture Trustee. The Pooling and
Servicing Agreements, the Indenture Servicing Agreements, the Underlying
Servicing Agreements and the Indenture are referred to each as an "Agreement."
Material Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements
General
The following summaries describe the material provisions that may appear
in each Pooling and Servicing Agreement and Underlying Servicing Agreement. The
prospectus supplement for a Series of Securities will describe the specific
provisions of the applicable Agreement relating to such Series. The provisions
of each Agreement will vary depending upon the nature of the Securities to be
issued thereunder and the nature of the related Trust Fund. As used herein with
respect to any Series, the term "Security" refers to all of the Securities of
that Series, whether or not offered hereby and by the related prospectus
supplement, unless the context otherwise requires. A form of a Pooling and
Servicing Agreement has been filed as an exhibit to the Registration Statement
of which this prospectus is a part.
The servicers (the "Servicers"), any master servicer (the "Master
Servicer") and the trustee (the "Trustee") or indenture trustee (the "Indenture
Trustee"), as applicable, with respect to any Series of Securities will be named
in the related prospectus supplement. In the event there are multiple Servicers
for the Assets in a Trust Fund, a Master Servicer may perform certain
administration, calculation and reporting functions with respect to such Trust
Fund and supervise the related Servicers pursuant to a Pooling and Servicing
Agreement. With respect to Series involving a Master Servicer, references in
this prospectus to the Servicer will apply to the Master Servicer where
non-servicing obligations are described. If specified in the related prospectus
supplement, a securities administrator may be appointed pursuant to the Pooling
and Servicing Agreement for any Trust Fund to administer such Trust Fund.
Assignment of Assets; Repurchases
At the time of issuance of any Series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest to
be received on or with respect to such Assets after the Cut-off Date, other than
principal and interest due on or before the Cut-off Date and other than any
Retained Interest. The Trustee will, concurrently with such assignment, deliver
the Securities to the Depositor in exchange for the Assets and the other assets
comprising the Trust Fund for such Series. Each Asset will be identified in a
schedule appearing as an exhibit to the applicable Agreement. Such schedule will
include detailed information to the extent available and relevant (i) in respect
of each Mortgage Loan included in the related Trust Fund, including without
limitation, the state and zip code of the related Mortgaged Property and type of
such property, the Mortgage Interest Rate and, if applicable, the applicable
index, margin, adjustment date and any rate cap information, the original and
remaining term to maturity, the original and outstanding principal balance and
balloon payment, if any, the Loan-to-Value Ratio as of the date indicated and
payment and prepayment provisions, if applicable; and (ii) in respect of each
Contract included in the related Trust Fund, including without limitation the
outstanding principal amount and the Contract Rate.
With respect to each Mortgage Loan, the Depositor generally will deliver
or cause to be delivered to the Trustee (or a custodian for the Trustee) certain
loan documents, which will in most cases include the original Mortgage Note
endorsed, without recourse, in blank or to the order of the Trustee, the
original Mortgage (or a certified copy thereof) with evidence of recording
indicated thereon and an assignment of the Mortgage to the Trustee in recordable
form. Notwithstanding the foregoing, a Trust Fund may include Mortgage Loans
where the original Mortgage Note is not delivered to the Trustee if the
Depositor or Asset Seller delivers to the Trustee or a custodian for the Trustee
a copy or a duplicate original of the Mortgage Note, together with an affidavit
certifying that the original thereof has been lost or destroyed. With respect to
such Mortgage Loans, the Trustee (or its
50
nominee) may not be able to enforce the Mortgage Note against the related
borrower. The Asset Seller or other entity specified in the related prospectus
supplement will be required to agree to repurchase, or substitute for, each such
Mortgage Loan that is subsequently in default if the enforcement thereof or of
the related Mortgage is materially adversely affected by the absence of the
original Mortgage Note. The applicable Agreement will generally require the
Depositor or another party specified in the related prospectus supplement to
promptly cause each such assignment of Mortgage to be recorded in the
appropriate public office for real property records, unless (i) with respect to
a particular state, the Trustee has received an opinion of counsel acceptable to
it that such recording is not required to make the assignment effective against
the parties to the Mortgage or subsequent purchasers or encumbrancers of the
Mortgaged Property or (ii) recordation in a state is not required by the Rating
Agencies rating the Series in order to obtain the initial ratings on the
Securities described in the related prospectus supplement.
Notwithstanding the preceding paragraph, with respect to any Mortgage Loan
which has been recorded in the name of Mortgage Electronic Registration Systems,
Inc. ("MERS") or its designee, no mortgage assignment in favor of the Trustee
will be required to be prepared or delivered. Instead, the Master Servicer and
the applicable Servicer will be required to take all actions as are necessary to
cause the applicable Trust Fund 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 (or a custodian) will review such Mortgage Loan documents
within a period of days specified in the related prospectus supplement after
receipt thereof, and the Trustee (or a custodian) will hold such documents in
trust for the benefit of the Securityholders. If any such document is found to
be missing or defective in any material respect, the Trustee (or such custodian)
shall immediately notify the Asset Seller, the Servicer, the Depositor and any
other entity specified in the related prospectus supplement. If the Asset Seller
or other entity specified in the related prospectus supplement cannot cure the
omission or defect within a specified number of days after receipt of such
notice, then the Asset Seller or other entity specified in the related
prospectus supplement will be obligated, within a specified number of days of
receipt of such notice, to repurchase the related Mortgage Loan from the Trustee
at a price equal to the sum of the unpaid principal balance thereof, plus unpaid
accrued interest at the interest rate for such Asset from the date as to which
interest was last paid to the due date in the Collection Period in which the
relevant purchase is to occur, plus any unpaid servicing fees and unreimbursed
advances that are payable to the Servicer or such other price as specified in
the related prospectus supplement (the "Purchase Price") or substitute for such
Mortgage Loan. There can be no assurance that an Asset Seller or other named
entity will fulfill this repurchase or substitution obligation, and neither the
Servicer nor the Depositor will be obligated to repurchase or substitute for
such Mortgage Loan if the Asset Seller or other named entity defaults on its
obligation. This repurchase or substitution obligation constitutes the sole
remedy available to the Securityholders or the Trustee for omission of, or a
material defect in, a constituent document.
Notwithstanding the preceding two paragraphs, the documents with respect
to Home Equity Loans, Home Improvement Contracts and Unsecured Home Improvement
Loans will be delivered to the Trustee (or a custodian) only to the extent
specified in the related prospectus supplement. Generally such documents will be
retained by the Servicer, which may also be the Asset Seller. In addition,
assignments of the related Mortgages to the Trustee will be recorded only to the
extent specified in the related prospectus supplement.
With respect to each Contract, the Servicer (which may also be the Asset
Seller) generally will maintain custody of the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. In order to give notice of the
right, title and interest of the Trustee in the Contracts, the Depositor will
cause UCC-1 financing statements to be authorized by the related Asset Seller
identifying the Depositor as secured party and by the Depositor identifying the
Trustee as the secured party and, in each case, identifying all Contracts as
collateral. The Contracts will be stamped or otherwise marked to reflect their
assignment from the Company to the Trust Fund only to the extent specified in
the related prospectus supplement. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Contracts without notice of such assignment, the interest of the Trustee in the
Contracts could be defeated. See "Certain Legal Aspects of the Contracts."
While the Contract documents will not be reviewed by the Trustee or the
Servicer, if the Servicer finds that any such document is missing or defective
in any material respect, the Servicer will be required to immediately notify the
Depositor and the relevant Asset Seller or other entity specified in the related
prospectus supplement. If
51
the Asset Seller or such other entity cannot cure the omission or defect within
a specified number of days after receipt of such notice, then the Asset Seller
or such other entity will be obligated, within a specified number of days of
receipt of such notice, to repurchase the related Contract from the Trustee at
the Purchase Price or substitute for such Contract. There can be no assurance
that an Asset Seller or such other entity will fulfill this repurchase or
substitution obligation, and neither the Servicer nor the Depositor will be
obligated to repurchase or substitute for such Contract if the Asset Seller or
such other entity defaults on its obligation. This repurchase or substitution
obligation constitutes the sole remedy available to the Securityholders or the
Trustee for omission of, or a material defect in, a constituent document. To the
extent specified in the related prospectus supplement, in lieu of curing any
omission or defect in the Asset or repurchasing or substituting for such Asset,
the Asset Seller may agree to cover any losses suffered by the Trust Fund as a
result of such breach or defect.
Representations and Warranties; Repurchases
To the extent provided in the related prospectus supplement the Asset
Seller, the Sponsor or the Depositor or any combination thereof will, with
respect to each Asset, make or assign certain representations and warranties, as
of a specified date (the person making such representations and warranties, the
"Warranting Party") covering, by way of example, the following types of matters:
(i) the accuracy of the information set forth for such Asset on the schedule of
Assets appearing as an exhibit to the applicable Agreement; (ii) in the case of
a Mortgage Loan, the existence of title insurance insuring the lien priority of
the Mortgage Loan or an opinion of counsel of the type customarily rendered in
the applicable jurisdiction in lieu of a title insurance policy and, in the case
of a Contract, that the Contract creates a valid first security interest in or
lien on the related Manufactured Home; (iii) the authority of the Warranting
Party to sell the Asset; (iv) the payment status of the Asset; (v) in the case
of a Mortgage Loan, the existence of customary provisions in the related
Mortgage Note and Mortgage to permit realization against the Mortgaged Property
of the benefit of the security of the Mortgage; and (vi) the existence of hazard
insurance coverage on the Mortgaged Property or Manufactured Home.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Depositor and shall be identified in the
related prospectus supplement.
Representations and warranties made in respect of an Asset may have been
made as of a date prior to the applicable Cut-off Date. A substantial period of
time may have elapsed between such date and the date of initial issuance of the
related Series of Securities evidencing an interest in such Asset. In the event
of a breach of any such representation or warranty, the Warranting Party will be
obligated to reimburse the Trust Fund for losses caused by any such breach or
either cure such breach or repurchase or replace the affected Asset as described
below. Since the representations and warranties may not address events that may
occur following the date as of which they were made, the Warranting Party will
have a reimbursement, cure, repurchase or substitution obligation in connection
with a breach of such a representation and warranty only if the relevant event
that causes such breach occurs prior to such date. Although the Warranting Party
would have no such obligations if the relevant event that causes such breach
occurs after such date, the Sponsor specified in the applicable prospectus
supplement will generally be required by the applicable Rating Agencies to make
representations and warranties that address this gap period.
Each Agreement will provide that the Servicer and/or Trustee or such other
entity identified in the related prospectus supplement will be required to
notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of an Asset that materially and
adversely affects the value of such Asset or the interests therein of the
Securityholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which such party was notified of such
breach, then such Warranting Party will be obligated to repurchase such Asset
from the Trustee within a specified period from the date on which the Warranting
Party was notified of such breach, at the Purchase Price therefor. If so
provided in the prospectus supplement for a Series, a Warranting Party, rather
than repurchase an Asset as to which a breach has occurred, will have the
option, within a specified period after initial issuance of such Series of
Securities, to cause the removal of such Asset from the Trust Fund and
substitute in its place one or more other Assets, as applicable, in accordance
with the standards described in the related prospectus supplement. This
reimbursement, repurchase or substitution obligation will constitute the sole
remedy available to Securityholders or the Trustee for a breach of
representation by a Warranting Party.
52
The Sponsor identified in the applicable prospectus supplement, if not the
Warranting Party, in addition to making representations and warranties regarding
the Assets covering any gap between the date the Warranting Party made its
representations and warranties and the Closing Date as described above, will be
obligated to repurchase such Asset from the Trustee within a specified period
from the date on which it is notified of a breach of its representations and
warranties if it cannot cure such breach but only to the extent the Warranting
Party is not also obligated to repurchase such Asset from the Trustee. Neither
the Depositor nor the Servicer (except to the extent the Depositor or the
Servicer is the Warranting Party) will be obligated to purchase or substitute
for an Asset if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that Warranting Parties will carry out such obligations
with respect to the Assets.
A Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
applicable Agreement. A breach of any such representation of the Servicer which
materially and adversely affects the interests of the Securityholders and which
continues unremedied for the number of days specified in the applicable
Agreement after the giving of written notice of such breach to the Servicer by
the Trustee or the Depositor, or to the Servicer, the Depositor and the Trustee
by the holders of Securities evidencing not less than 25% of the Voting Rights
or such other percentage specified in the related prospectus supplement, will
constitute an Event of Default under such Agreement. See "--Events of Default
under the Agreements" and "--Rights Upon Event of Default under the Agreements."
Collection Account and Related Accounts
General. The Servicer will, as to each Trust Fund, establish and maintain
or cause to be established and maintained one or more separate accounts for the
collection of payments on the related Assets (collectively, the "Collection
Account"), which must meet the requirements set forth in the applicable
prospectus supplement. A Collection Account may be maintained as an interest
bearing or a non-interest bearing account and, if interest bearing, the funds
held therein may be invested pending each succeeding Distribution Date in
certain investments acceptable to the applicable Rating Agencies. Any interest
or other income earned on funds in the Collection Account will generally be paid
to the Servicer or its designee as additional servicing compensation. The
Collection Account may be maintained with an institution that is an affiliate of
the Servicer, if applicable, provided that such institution meets the standards
imposed by the Rating Agency or Agencies. If permitted by the Rating Agency or
Agencies, a Collection Account may contain funds relating to more than one
Series of mortgage pass-through certificates and may contain other funds
respecting payments on mortgage loans belonging to the Servicer or serviced or
master serviced by it on behalf of others. The Trustee or a securities
administrator, if specified in the applicable prospectus supplement, will, as to
each Trust Fund, establish and maintain or cause to be established and
maintained a separate account into which it will deposit amounts remitted by the
Servicer or Master Servicer for distribution to Securityholders (the
"Distribution Account"), which must meet the requirements set forth in the
applicable prospectus supplement.
Deposits. A Servicer will deposit or cause to be deposited in the
Collection Account for one or more Trust Funds on a daily basis, or such other
period provided in the applicable Agreement, the following payments and
collections received, or advances made, by the Servicer or the Trustee or on its
behalf subsequent to the Cut-off Date (other than payments due on or before the
Cut-off Date, and exclusive of any amounts representing a Retained Interest):
(i) all payments on account of principal, including principal prepayments,
on the Assets;
(ii) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion thereof retained by
a Servicer as its servicing compensation and net of any Retained Interest;
(iii) Liquidation Proceeds and Insurance Proceeds, together with the net
proceeds on a monthly basis with respect to any Assets acquired for the benefit
of Securityholders;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes credit support for the related Series of Securities as described
under "Description of Credit Support";
53
(v) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as described under
"Cash Flow Agreements";
(vii) all proceeds of any Asset or, with respect to a Mortgage Loan,
property acquired in respect thereof purchased by the Depositor, the Sponsor,
any Asset Seller or any other specified person as described under "--Assignment
of Assets; Repurchases" and "--Representations and Warranties; Repurchases," all
proceeds of any defaulted Mortgage Loan purchased as described under
"--Realization Upon Defaulted Assets," and all proceeds of any Asset purchased
as described under "Description of the Securities--Termination";
(viii) any amounts paid by a Servicer to cover certain interest shortfalls
arising out of the prepayment of Assets in the Trust Fund as described under
"Description of the Agreements--Retained Interest; Servicing Compensation and
Payment of Expenses";
(ix) to the extent that any such item does not constitute additional
servicing compensation to a Servicer, any payments on account of modification or
assumption fees, late payment charges or Prepayment Charges on the Assets;
(x) all payments required to be deposited in the Collection Account with
respect to any deductible clause in any blanket insurance policy described under
"--Hazard Insurance Policies";
(xi) any amount required to be deposited by a Servicer or the Trustee in
connection with losses realized on investments for the benefit of the Servicer
or the Trustee, as the case may be, of funds held in the Collection Account; and
(xii) any other amounts required to be deposited in the Collection Account
as provided in the applicable Agreement and described in the related prospectus
supplement.
Withdrawals. A Servicer may, from time to time, make withdrawals from the
Collection Account for each Trust Fund for any of the following purposes:
(i) to remit to the Trustee or securities administrator for deposit in the
Distribution Account;
(ii) to reimburse a Servicer for unreimbursed amounts advanced as
described under "Description of the Securities--Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received which were
identified and applied by the Servicer as late collections of interest (net of
related servicing fees and Retained Interest) on and principal of the particular
Assets with respect to which the advances were made or out of amounts drawn
under any form of credit support with respect to such Assets;
(iii) to reimburse a Servicer for unpaid servicing fees earned and certain
unreimbursed servicing advances and expenses incurred with respect to Assets and
properties acquired in respect thereof, such reimbursement to be made out of
amounts that represent Liquidation Proceeds and Insurance Proceeds collected on
the particular Assets and properties, and net income collected on the particular
properties, with respect to which such fees were earned or such expenses were
incurred or out of amounts drawn under any form of credit support with respect
to such Assets and properties;
(iv) to reimburse a Servicer for any advances described in clause (ii)
above and any servicing expenses described in clause (iii) above which, in the
Servicer's good faith judgment, will not be recoverable from the amounts
described in clauses (ii) and (iii), respectively, such reimbursement to be made
from amounts collected on other Assets;
(v) if and to the extent described in the related prospectus supplement,
to pay a Servicer interest accrued on the advances described in clause (ii)
above and the servicing expenses described in clause (iii) above while such
advances and servicing expenses remain outstanding and unreimbursed;
54
(vi) to reimburse a Servicer, the Depositor, or any of their respective
directors, officers, employees and agents, as the case may be, for certain
expenses, costs and liabilities incurred thereby, as and to the extent described
under "--Certain Matters Regarding Servicers and the Master Servicer" and "The
Depositor";
(vii) if and to the extent described in the related prospectus supplement,
to pay the Trustee's fees;
(viii) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under "--Certain
Matters Regarding the Trustee";
(ix) to pay a Servicer, as additional servicing compensation, interest and
investment income earned in respect of amounts held in the Collection Account;
(x) to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Servicer as
recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the proper
management and maintenance of any Mortgaged Property acquired for the benefit of
Securityholders by foreclosure or by deed in lieu of foreclosure or otherwise,
such payments to be made out of income received on such property;
(xii) if one or more elections have been made to treat the Trust Fund or
designated portions thereof as a REMIC, to pay any federal, state or local taxes
imposed on the Trust Fund or its assets or transactions, as and to the extent
described under "Federal Income Tax Consequences--REMICs--Taxes That May Be
Imposed on the REMIC Pool" or in the applicable prospectus supplement,
respectively;
(xiii) to pay for the cost of various opinions of counsel obtained
pursuant to the applicable Agreement for the benefit of Securityholders;
(xiv) to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset after its
removal from the Trust Fund whether by reason of purchase or substitution as
contemplated by "--Assignment of Assets; Repurchase" and "--Representations and
Warranties; Repurchases" or otherwise;
(xv) to make any other withdrawals permitted by the applicable Agreement;
and
(xvi) to clear and terminate the Collection Account at the termination of
the Trust Fund.
Other Collection Accounts. Notwithstanding the foregoing, if so specified
in the related prospectus supplement, the applicable Agreement for any Series of
Securities may provide for the establishment and maintenance of a separate
collection account into which the Servicer will deposit on a daily basis the
amounts described under "--Deposits" above for one or more Series of Securities.
Any amounts on deposit in any such collection account will be withdrawn
therefrom and deposited into the appropriate Collection Account by a time
specified in the related prospectus supplement. To the extent specified in the
related prospectus supplement, any amounts which could be withdrawn from the
Collection Account as described under "--Withdrawals" above, may also be
withdrawn from any such collection account. The prospectus supplement will set
forth any restrictions with respect to any such collection account, including
investment restrictions and any restrictions with respect to financial
institutions with which any such collection account may be maintained.
Collection and Other Servicing Procedures. The Servicer is required to
make reasonable efforts to collect all scheduled payments under the Assets and
will follow or cause to be followed such collection procedures as it would
follow with respect to assets that are comparable to the Assets and held for its
own account, provided such procedures are consistent with (i) the terms of the
applicable Agreement and any related hazard insurance policy or instrument of
credit support, if any, included in the related Trust Fund described herein or
under "Description of Credit Support," (ii) applicable law and (iii) the general
servicing standard specified in the related prospectus supplement or, if no such
standard is so specified, its normal servicing practices (in either case, the
"Servicing
55
Standard"). In connection therewith, the Servicer will be permitted in its
discretion to waive any late payment charge or penalty interest in respect of a
late payment on an Asset, subject to the terms and conditions of the applicable
agreement.
Each Servicer will also be required to perform other customary functions
of a servicer of comparable assets, including maintaining hazard insurance
policies as described herein and in any related prospectus supplement, and
filing and settling claims thereunder; maintaining, to the extent required by
the applicable Agreement, escrow or impoundment accounts of obligors for payment
of taxes, insurance and other items required to be paid by any obligor pursuant
to the terms of the Assets; processing assumptions or substitutions in those
cases where the Servicer has determined not to enforce any applicable
due-on-sale clause; attempting to cure delinquencies; supervising foreclosures
or repossessions; inspecting and managing Mortgaged Properties or Manufactured
Homes under certain circumstances; and maintaining accounting records relating
to the Assets. The Servicer or such other entity specified in the related
prospectus supplement will be responsible for filing and settling claims in
respect of particular Assets under any applicable instrument of credit support.
See "Description of Credit Support."
The Servicer may agree to modify, waive or amend any term of any Asset in
a manner consistent with the Servicing Standard so long as the modification,
waiver or amendment is not materially adverse to Securityholders and will not
change the Mortgage Interest Rate or Contract Rate, defer or forgive the payment
thereof of any principal or interest payments, reduce the outstanding principal
amount (except for actual payments of principal) or extend the final maturity
date with respect to such Asset. If a REMIC election has been made for the Trust
Fund, such modification, waiver or amendment may not affect adversely the status
of any REMIC constituting part of the Trust Fund as a REMIC or cause any such
REMIC to be subject to a tax on "prohibited transactions" or "contributions"
pursuant to the REMIC Provisions. The Servicer also may agree to any
modification, waiver or amendment that would reduce the Principal Balance
thereof, extend the term of the Asset or reduce the Mortgage Interest Rate or
Contract rate by up to 50 basis points if, in its judgment, a material default
on the Asset has occurred or a payment default is reasonably foreseeable. The
Servicer is required to notify the Trustee in the event of any modification,
waiver or amendment of any Asset.
Notwithstanding the foregoing to the contrary, in the event of a voluntary
principal prepayment in full of a Mortgage Loan, a Servicer may not waive any
Prepayment Charge or portion thereof required by the terms of the related
Mortgage Note unless (i)(a) the Servicer determines that such waiver is standard
and customary in servicing similar mortgage loans, (b) such waiver relates to a
default or a reasonably foreseeable default and (c) would, in the reasonable
judgment of the Servicer, maximize recovery of Liquidation Proceeds for such
Mortgage Loan, taking into account the value of such Prepayment Charge, or (ii)
the enforceability thereof is limited (1) by bankruptcy, insolvency, moratorium,
receivership, or other similar law relating to creditors' rights generally or
(2) due to acceleration in connection with a foreclosure or other involuntary
payment. If the Servicer waives or does not collect all or a portion of a
Prepayment Charge relating to a voluntary Principal Prepayment in full due to
any action or omission of the Servicer, other than as provided above, the
Servicer generally will, on the date on which the principal prepayment in full
is remitted to the Trustee, deliver to the Trustee the amount of the Prepayment
Charge from its own funds for distribution in accordance with the terms of the
applicable Agreement.
In the case of Multifamily Mortgage Loans, a mortgagor's failure to make
required Mortgage Loan payments may mean that operating income is insufficient
to service the Mortgage Loan debt, or may reflect the diversion of that income
from the servicing of the Mortgage Loan debt. In addition, a mortgagor under a
Multifamily Mortgage Loan that is unable to make Mortgage Loan payments may also
be unable to make timely payment of all required taxes and otherwise to maintain
and insure the related Mortgaged Property. In general, the Servicer will be
required to monitor any Multifamily Mortgage Loan that is in default, evaluate
whether the causes of the default can be corrected over a reasonable period
without significant impairment of the value of the related Mortgaged Property,
initiate corrective action in cooperation with the mortgagor if cure is likely,
inspect the related Multifamily Property and take such other actions as are
consistent with the applicable Agreement. A significant period of time may
elapse before the Servicer is able to assess the success of any such corrective
action or the need for additional initiatives. The time within which the
Servicer can make the initial determination of appropriate action, evaluate the
success of corrective action, develop additional initiatives, institute
foreclosure proceedings and actually foreclose may vary considerably depending
on the particular Multifamily Mortgage Loan, the Multifamily
56
Property, the mortgagor, the presence of an acceptable party to assume the
Multifamily Mortgage Loan and the laws of the jurisdiction in which the
Multifamily Property is located.
Realization Upon Defaulted Assets
Generally, the Servicer is required to monitor any Assets which is in
default, initiate corrective action in cooperation with the mortgagor or obligor
if cure is likely, inspect the Asset and take such other actions as are
consistent with the Servicing Standard. A significant period of time may elapse
before the Servicer is able to assess the success of such corrective action or
the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Mortgage Loans or
Contracts may grant to the Servicer and/or the holder or holders of certain
Classes of Securities a right of first refusal to purchase from the Trust Fund
at a predetermined purchase price any such Mortgage Loan or Contract as to which
a specified number of scheduled payments thereunder are delinquent. Any such
right granted to the holder of an Offered Security will be described in the
related prospectus supplement. The related prospectus supplement will also
describe any such right granted to any person if the predetermined purchase
price is less than the Purchase Price described under "--Representations and
Warranties; Repurchases."
If so specified in the related prospectus supplement, the Servicer may
offer to sell any defaulted Mortgage Loan or Contract described in the preceding
paragraph and not otherwise purchased by any person having a right of first
refusal with respect thereto, if and when the Servicer determines, consistent
with the Servicing Standard, that such a sale would produce a greater recovery
on a present value basis than would liquidation through foreclosure,
repossession or similar proceedings. The applicable Agreement will provide that
any such offering be made in a commercially reasonable manner for a specified
period and that the Servicer accept the highest cash bid received from any
person (including itself, an affiliate of the Servicer or any Securityholder)
that constitutes a fair price for such defaulted Mortgage Loan or Contract. In
the absence of any bid determined in accordance with the applicable Agreement to
be fair, the Servicer shall proceed with respect to such defaulted Mortgage Loan
or Contract as described below. Any bid in an amount at least equal to the
Purchase Price described under "--Representations and Warranties; Repurchases"
will in all cases be deemed fair.
The Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Mortgage Loan by operation of law or otherwise and may at
any time repossess and realize upon any Manufactured Home, if such action is
consistent with the Servicing Standard and a default on such Mortgage Loan or
Contract has occurred or, in the Servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a Trust Fund as to which
a REMIC election has been made, the Servicer, on behalf of the Trust Fund, will
be required to sell the Mortgaged Property by the close of the third calendar
year after the year of acquisition, unless (i) the Internal Revenue Service (the
"IRS") grants an extension of time to sell such property or (ii) the Trustee
receives an opinion of independent counsel to the effect that the holding of the
property by the Trust Fund subsequent to the close of the third calendar year
after the year of the acquisition of the property by the Trust Fund will not
result in the imposition of a tax on the Trust Fund or cause the Trust Fund to
fail to qualify as a REMIC under the Code at any time that any Securities are
outstanding. Subject to the foregoing, the Servicer will be required to (i)
solicit bids for any Mortgaged Property so acquired in such a manner as will be
reasonably likely to realize a fair price for such property and (ii) accept the
first (and, if multiple bids are contemporaneously received, the highest) cash
bid received from any person that constitutes a fair price.
The limitations imposed by the applicable Agreement and the REMIC
Provisions of the Code (if a REMIC election has been made with respect to the
related Trust Fund) on the ownership and management of any Mortgaged Property
acquired on behalf of the Trust Fund may result in the recovery of an amount
less than the amount that would otherwise be recovered.
See "Certain Legal Aspects of Mortgage Loans--Foreclosure."
If recovery on a defaulted Asset under any related instrument of credit
support is not available, the Servicer nevertheless will be obligated to follow
or cause to be followed such normal practices and procedures as it deems
necessary or advisable to realize upon the defaulted Asset. If the proceeds of
any liquidation of the property securing the defaulted Asset are less than the
outstanding principal balance of the defaulted Asset plus interest
57
accrued thereon at the applicable interest rate, plus the aggregate amount of
expenses incurred by the Servicer in connection with such proceedings and which
are reimbursable under the applicable Agreement, the Trust Fund will realize a
loss in the amount of such difference. The Servicer will be entitled to withdraw
or cause to be withdrawn from the Collection Account out of the Liquidation
Proceeds recovered on any defaulted Asset, prior to the distribution of such
Liquidation Proceeds to Securityholders, amounts representing its normal
servicing compensation on the Security, unreimbursed servicing expenses and
advances incurred with respect to the Asset and any unreimbursed advances of
delinquent payments made with respect to the Asset.
If any property securing a defaulted Asset is damaged the Servicer is not
required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Asset after reimbursement of the Servicer
for its expenses and (ii) that such expenses will be recoverable by it from
related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Assets, a Servicer, on behalf of itself, the Trustee
and the Securityholders, will present claims to the obligor under each
instrument of credit support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Assets.
If a Servicer or its designee recovers payments under any instrument of
credit support with respect to any defaulted Assets, the Servicer will be
entitled to withdraw or cause to be withdrawn from the Collection Account out of
such proceeds, prior to distribution thereof to Securityholders, amounts
representing its normal servicing compensation on such Asset, unreimbursed
servicing expenses incurred with respect to the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset. See "--Hazard
Insurance Policies" and "Description of Credit Support."
Hazard Insurance Policies
Mortgage Loans. Generally, each Agreement for a Trust Fund comprised of
Mortgage Loans will require the Servicer to cause the mortgagor on each Mortgage
Loan to maintain a hazard insurance policy providing for such coverage as is
required under the related Mortgage or, if any Mortgage permits the holder
thereof to dictate to the mortgagor the insurance coverage to be maintained on
the related Mortgaged Property, then such coverage as is consistent with the
Servicing Standard. Such coverage will be in general in an amount equal to the
lesser of the principal balance owing on such Mortgage Loan (but not less than
the amount necessary to avoid the application of any co-insurance clause
contained in the hazard insurance policy) and the amount necessary to fully
compensate for any damage or loss to the improvements on the Mortgaged Property
on a replacement cost basis or such other amount specified in the related
prospectus supplement. The ability of the Servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent upon its being
named as an additional insured under any hazard insurance policy and under any
other insurance policy referred to below, or upon the extent to which
information in this regard is furnished by mortgagors. All amounts collected by
the Servicer under any such policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor in
accordance with the Servicer's normal servicing procedures, subject to the terms
and conditions of the related Mortgage and Mortgage Note) will be deposited in
the Collection Account. The applicable Agreement may provide that the Servicer
may satisfy its obligation to cause each mortgagor to maintain such a hazard
insurance policy by the Servicer's maintaining a blanket policy insuring against
hazard losses on the Mortgage Loans. If such blanket policy contains a
deductible clause, the Servicer will be required to deposit in the Collection
Account all sums that would have been deposited therein but for such clause.
In general, the standard form hazard insurance covers physical damage to
or destruction of the improvements of the property by fire, lightning,
explosion, smoke, windstorm and hail, subject to the conditions and exclusions
specified in each policy. Although the policies relating to the Mortgage Loans
will be underwritten by different insurers under different state laws in
accordance with different applicable state forms, and therefore will not contain
identical terms and conditions, the basic terms thereof are dictated by
respective state laws, and most such policies typically do not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), wet or dry rot, vermin, domestic animals, riot, strike and civil
commotion, and certain other kinds of uninsured risks.
58
Each Agreement for a Trust Fund comprised of Mortgage Loans will require
the Servicer to cause the mortgagor on each Mortgage Loan to maintain all such
other insurance coverage with respect to the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area). Any cost incurred by the Servicer in maintaining any such insurance
policy will be reimbursable to it as a servicing advance as described above
under "--Collection Account and Related Accounts."
Under the terms of the Mortgage Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Servicer, on behalf of the
Trustee and Securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
Mortgaged Properties securing the Mortgage Loans. However, the ability of the
Servicer to present or cause to be presented such claims is dependent upon the
extent to which information in this regard is furnished to the Servicer by
mortgagors.
Contracts
Generally, the terms of the applicable Agreement for a Trust Fund
comprised of Contracts will require the Servicer to cause to be maintained with
respect to each Contract one or more hazard insurance policies which provide, at
a minimum, the same coverage as a standard form fire and extended coverage
insurance policy that is customary for manufactured housing, issued by a company
authorized to issue such policies in the state in which the Manufactured Home is
located, and in an amount which is not less than the maximum insurable value of
such Manufactured Home or the principal balance due from the obligor on the
related Contract, whichever is less; provided, however, that the amount of
coverage provided by each such hazard insurance policy shall be sufficient to
avoid the application of any co-insurance clause contained therein. When a
Manufactured Home's location was, at the time of origination of the related
Contract, within a federally designated special flood hazard area, the Servicer
shall cause such flood insurance to be maintained, which coverage shall be at
least equal to the minimum amount specified in the preceding sentence or such
lesser amount as may be available under the federal flood insurance program.
Each hazard insurance policy caused to be maintained by the Servicer shall
contain a standard loss payee clause in favor of the Servicer and its successors
and assigns. If any obligor is in default in the payment of premiums on its
hazard insurance policy or policies, the Servicer shall pay such premiums out of
its own funds, and may add separately such premium to the obligor's obligation
as provided by the Contract, but may not add such premium to the remaining
principal balance of the Contract.
The Servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained with respect to each Manufactured Home, and shall
maintain, to the extent that the related Contract does not require the obligor
to maintain a hazard insurance policy with respect to the related Manufactured
Home, one or more blanket insurance policies covering losses on the obligor's
interest in the Contracts resulting from the absence or insufficiency of
individual hazard insurance policies. The Servicer shall pay the premium for
such blanket policy on the basis described therein and shall pay any deductible
amount with respect to claims under such policy relating to the Contracts.
Fidelity Bonds and Errors and Omissions Insurance
Each Agreement will require that the Servicer obtain and maintain in
effect a fidelity bond or similar form of insurance coverage (which may provide
blanket coverage) or any combination thereof insuring against loss occasioned by
fraud, theft or other intentional misconduct of the officers, employees and
agents of the Servicer. The applicable Agreement may allow the Servicer to
self-insure against loss occasioned by the errors and omissions of the officers,
employees and agents of the Servicer so long as certain criteria set forth in
such Agreement are met.
Due-on-Sale Provisions
The Mortgage Loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
Mortgage Loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The Servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance
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of the underlying Mortgaged Property and it is entitled to do so under
applicable law; provided, however, that the Servicer will not take any action in
relation to the enforcement of any due-on-sale provision which would adversely
affect or jeopardize coverage under any applicable insurance policy. Any fee
collected by or on behalf of the Servicer for entering into an assumption
agreement will be retained by or on behalf of the Servicer as additional
servicing compensation. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses." The Contracts may also contain such clauses. The
Servicer will generally permit such transfer so long as the transferee satisfies
the Servicer's then applicable underwriting standards. The purpose of such
transfers is often to avoid a default by the transferring obligor. See "Certain
Legal Aspects of the Contracts--Transfers of Manufactured Homes; Enforceability
of "Due-on-Sale" Clauses."
Retained Interest; Servicing Compensation and Payment of Expenses
The prospectus supplement for a Series of Securities will specify whether
there will be any Retained Interest in the Assets, and, if so, the initial owner
thereof. If so, the Retained Interest will be established on a loan-by-loan
basis and will be specified on an exhibit to the applicable Agreement. A
"Retained Interest" in an Asset represents a specified portion of the interest
payable thereon. The Retained Interest will be deducted from mortgagor payments
as received and will not be part of the related Trust Fund.
The Servicer's primary servicing compensation with respect to a Series of
Securities will come from the periodic payment to it of a portion of the
interest payment on each Asset or such other amount specified in the related
prospectus supplement. Since any Retained Interest and a Servicer's primary
compensation are percentages of the principal balance of each Asset, such
amounts will decrease in accordance with the amortization of the Assets. The
Servicing Fee or range of Servicing Fees relating to the Assets underlying the
Securities of a Series will be specified in an expense table in the applicable
prospectus supplement. The prospectus supplement with respect to a Series of
Securities evidencing interests in a Trust Fund that includes Mortgage Loans or
Contracts may provide that, as additional compensation, the Servicer may retain
all or a portion of assumption fees, modification fees, late payment charges or
Prepayment Charges collected from mortgagors and any interest or other income
which may be earned on funds held in the Collection Account or any account
established by a Servicer pursuant to the applicable Agreement.
The Servicer may, to the extent provided in the related prospectus
supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and independent
accountants, payment of expenses incurred in connection with distributions and
reports to Securityholders, and payment of any other expenses described in the
related prospectus supplement. Certain other expenses, including certain
expenses relating to defaults and liquidations on the Assets and, to the extent
so provided in the related prospectus supplement, interest thereon at the rate
specified therein may be borne by the Trust Fund.
If and to the extent provided in the related prospectus supplement, the
Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Collection Period to certain interest
shortfalls resulting from the voluntary prepayment of any Assets in the related
Trust Fund during such period prior to their respective due dates therein.
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 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 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 Agreement throughout the year, or, if there has
been a default in the fulfillment of any obligation, specifying the default
known to the officer and the nature and status of the default.
In addition, each party that participates in the servicing and
administration of more than 5% of the Assets comprising a Trust will deliver
annually to the Depositor and the Trustee, a report (an "Assessment of
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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.
Certain Matters Regarding Servicers and the Master Servicer
The Servicers and Master Servicer under each Agreement will be named in
the related prospectus supplement. The entities serving as Servicer or Master
Servicer may be affiliates of the Depositor and may have other normal business
relationships with the Depositor or the Depositor's affiliates. Reference herein
to the Servicer shall be deemed to be to the Master Servicer, if applicable.
The applicable Agreement will provide that the Servicer may resign from
its obligations and duties thereunder only (i) upon a determination that its
duties under such Agreement are no longer permissible under applicable law or
are in material conflict by reason of applicable law with any other activities
carried on by it, the other activities of the Servicer so causing such a
conflict being of a type and nature carried on by the Servicer at the date of
such Agreement or (ii) upon satisfaction of the following conditions: (a) the
Servicer has proposed a successor servicer to the Trustee in writing and such
proposed successor servicer is reasonably acceptable to the Trustee; and (b)
each Rating Agency shall have delivered a letter to the Trustee, prior to the
appointment of the successor servicer, stating that the proposed appointment of
such successor servicer as Servicer will not result in a reduction of the
then-current ratings of the Securities. No such resignation will become
effective until the Trustee or a successor servicer has assumed the Servicer's
obligations and duties under the applicable Agreement.
Each Agreement will further provide that neither any Servicer nor any
director, officer, employee, or agent of a Servicer will be under any liability
to the related Trust Fund or Securityholders for any action taken, or for
refraining from the taking of any action, in good faith pursuant to the
applicable Agreement; provided, however, that neither of any Servicer nor any
such person will be protected against any breach of a representation, warranty
or covenant made in such Agreement, or against any liability specifically
imposed thereby, or against any liability which would otherwise be imposed by
reason of willful misfeasance, bad faith or negligence in the performance of
obligations or duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, each Agreement will provide that
no Servicer will be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its responsibilities under the
applicable Agreement and which in its opinion may involve it in any expense or
liability. Any such Servicer may, however, in its discretion undertake any such
action which it may deem necessary or desirable with respect to the applicable
Agreement and the rights and duties of the parties thereto and the interests of
the Securityholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Securityholders, and such Servicer will be entitled to be
reimbursed therefor from the Collection Account.
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Any person into which the Servicer or the Depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Servicer or the Depositor is a party, or any person succeeding to the
business of the Servicer or the Depositor, will be the successor of the Servicer
or the Depositor, as the case may be, under the applicable Agreement.
Special Servicers
If and to the extent specified in the related prospectus supplement, a
special servicer (a "Special Servicer") may be a party to the applicable
Agreement or may be appointed by the Servicer or another specified party to
perform certain specified duties in respect of servicing the related Mortgage
Loans that would otherwise be performed by the Servicer (for example, the
workout and/or foreclosure of defaulted Mortgage Loans). The rights and
obligations of any Special Servicer will be specified in the related Agreement.
The Servicer will be liable for the performance of a Special Servicer only if,
and to the extent, set forth in such Agreement. Each Special Servicer will be
required to deliver, to the extent applicable, the documents described under
"--Evidence as to Compliance."
Events of Default under the Agreements
Events of default under the applicable Agreement will generally include
(i) any failure by the Servicer to remit to the Trustee for distribution to
Securityholders, any required payment that continues after a grace period, if
any; (ii) any failure by the Servicer duly to observe or perform in any material
respect any of its other covenants or obligations under the applicable Agreement
which continues unremedied for 30 days after written notice of such failure has
been given to the Servicer by the Trustee or the Depositor, or to the Servicer,
the Depositor and the Trustee by Securityholders evidencing not less than 25% of
the Voting Rights; (iii) any breach of a representation or warranty made by the
Servicer under the applicable Agreement which materially and adversely affects
the interests of Securityholders and which continues unremedied for 30 days
after written notice of such breach has been given to the Servicer by the
Trustee or the Depositor, or to the Servicer, the Depositor and the Trustee by
the holders of Securities evidencing not less than 25% of the Voting Rights;
(iv) certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings and certain actions by or on behalf of
the Servicer indicating its insolvency or inability to pay its obligations; and
(v) if specified in the applicable prospectus supplement, a delinquency
percentage exceeding a percentage specified in the related prospectus
supplement. Material variations to the foregoing events of default (other than
to shorten cure periods or eliminate notice requirements) will be specified in
the related prospectus supplement.
The manner of determining the "Voting Rights" of a Security or Class or
Classes of Securities will be specified in the related prospectus supplement.
Rights Upon Event of Default under the Agreements
So long as an event of default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Securities
generally evidencing not less than 51% of the Voting Rights, the Trustee shall
terminate all of the rights and obligations of the Servicer under the applicable
Agreement and in and to the Mortgage Loans (other than as a Securityholder or as
the owner of any Retained Interest), whereupon the Trustee will succeed to all
of the responsibilities, duties and liabilities of the Servicer under the
applicable Agreement (except that if the Trustee is prohibited by law from
obligating itself to make advances regarding delinquent Assets, or if the
related prospectus supplement so specifies, then the Trustee will not be
obligated to make such advances) and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable so to act, it
may or, at the written request of the holders of Securities generally entitled
to at least 51% of the Voting Rights, it shall appoint, or petition a court of
competent jurisdiction for the appointment of, a loan servicing institution
acceptable to the Rating Agency with a net worth at the time of such appointment
of at least $15,000,000 (or such other amount specified in the related
prospectus supplement) to act as successor to the Servicer under the applicable
Agreement. Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and any such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the Servicer under the applicable Agreement.
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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 holders of Securities representing generally at least 66 (2)/3% of the
Voting Rights allocated to the respective Classes of Securities affected by any
event of default will be entitled to waive such event of default; provided,
however, that an Event of Default involving a failure to distribute a required
payment to Securityholders described in clause (i) under "--Events of Default
under the Agreements" may be waived only by all of the Securityholders. Upon any
such waiver of an event of default, such event of default shall cease to exist
and shall be deemed to have been remedied for every purpose under the applicable
Agreement.
No Securityholders will have the right under any Agreement to institute
any proceeding with respect thereto unless such holder previously has given to
the Trustee written notice of default and unless the holders of Securities
generally evidencing not less than 25% of the Voting Rights have made written
request upon the Trustee to institute such 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 such proceeding. The
Trustee, however, is under no obligation to exercise any of the trusts or powers
vested in it by any Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the
Securityholders covered by such Agreement, unless such Securityholders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
Amendment
Each Agreement may be amended by the parties thereto, without the consent
of any Securityholders covered by the applicable Agreement, (i) to cure any
ambiguity or mistake, (ii) to correct, modify or supplement any provision
therein which may be inconsistent with any other provision therein or with the
related prospectus supplement, (iii) to make any other provisions with respect
to matters or questions arising under the applicable Agreement which are not
materially inconsistent with the provisions thereof, or (iv) to comply with any
requirements imposed by the Code; provided that, in the case of clause (iii),
such amendment will not adversely affect in any material respect the interests
of any Securityholders covered by the applicable Agreement as evidenced either
by an opinion of counsel to such effect or the delivery to the Trustee of
written notification from each Rating Agency that provides, at the request of
the Depositor, a rating for the Offered Securities of the related Series to the
effect that such amendment or supplement will not cause such Rating Agency to
lower or withdraw the then current rating assigned to such Securities. Each
Agreement may also be amended by the Depositor, the Servicer and the Trustee,
with the consent of the Securityholders affected thereby generally evidencing
not less than 51% of the Voting Rights, for any purpose; provided, however, no
such amendment may (i) reduce in any manner the amount of, or delay the timing
of, payments received or advanced on Assets which are required to be distributed
on any Security without the consent of the Securityholder or (ii) reduce the
consent percentages described in this paragraph without the consent of all the
Securityholders covered by such Agreement then outstanding. However, with
respect to any Series of Securities as to which a REMIC election is to be made,
the Trustee will not consent to any amendment of the applicable Agreement unless
it shall first have received an opinion of counsel to the effect that such
amendment will not result in the imposition of a tax on the related Trust Fund
or cause the related Trust Fund to fail to qualify as a REMIC at any time that
the related Securities are outstanding.
The Trustee
The Trustee under each Agreement will be named in the related prospectus
supplement. The commercial bank, national banking association, banking
corporation or trust company serving as Trustee may have a banking relationship
with the Depositor and its affiliates, with any Servicer and its affiliates and
with any Master Servicer and its affiliates. With respect to certain Series of
Securities, a securities administrator will perform certain duties and functions
normally performed by the Trustee. Any securities administrator will be a party
to the applicable Agreement and will be named in the applicable prospectus
supplement. Any securities administrator will have obligations and rights
similar to the Trustee as described in this Prospectus.
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Duties of the Trustee
The Trustee will make no representations as to the validity or sufficiency
of any Agreement, the Securities or any Asset or related document and is not
accountable for the use or application by or on behalf of any Servicer of any
funds paid to the Master Servicer or its designee in respect of the Securities
or the Assets, or deposited into or withdrawn from the Collection Account or any
other account by or on behalf of the Servicer. If no Event of Default has
occurred and is continuing, the Trustee is required to perform only those duties
specifically required under the applicable Agreement. However, upon receipt of
the various certificates, reports or other instruments required to be furnished
to it, the Trustee is required to examine such documents and to determine
whether they conform to the requirements of the applicable Agreement.
Certain Matters Regarding the Trustee
The Trustee and any director, officer, employee or agent of the Trustee
shall be reimbursed by the Trust Fund for all reasonable expenses, disbursements
and advances incurred or made by the Trustee in accordance with any of the
provisions of the applicable Agreement (including the reasonable compensation
and the expenses and disbursements of its counsel and of all persons not
regularly in its employ) except any such expense, disbursement or advance as may
arise from its negligence or bad faith or which is the responsibility of
Securityholders or the Trustee under the Agreement. In addition, the Trustee and
its officers, directors, employees and agents shall be indemnified by the Trust
Fund from, and held harmless against, any and all losses, liabilities, damages,
claims or expenses incurred in connection with any legal action relating to the
applicable Agreement or the Securities, other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or negligence of
the Trustee in the performance of its duties thereunder or by reason of the
Trustee's reckless disregard of obligations and duties thereunder.
Resignation and Removal of the Trustee
The Trustee may at any time resign from its obligations and duties under
an Agreement by giving written notice thereof to the Depositor, the Servicer and
all Securityholders. Upon receiving such notice of resignation, the Depositor is
required promptly to appoint a successor trustee acceptable to the Servicer. If
no successor trustee shall have been so appointed and have accepted appointment
within 30 days after the giving of such notice of resignation, the resigning
Trustee may petition any court of competent jurisdiction for the appointment of
a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as such
under the applicable Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will adversely
affect the rating on any Class of the Securities, then the Depositor may remove
the Trustee and appoint a successor trustee acceptable to the Servicer.
Securityholders of any Series generally entitled to at least 51% of the Voting
Rights for such Series may at any time remove the Trustee without cause and
appoint a successor trustee.
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 Fund. Notwithstanding the foregoing, if the predecessor Trustee has been
removed by a vote of the holders of the Securities 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 Fund.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
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Material Terms of the Indenture
General
The following summary describes the material provisions that may appear in
each Indenture. The prospectus supplement for a Series of Notes will describe
the specific provisions of the Indenture relating to such Series. The provisions
of each Indenture will vary depending upon the nature of the Securities to be
issued thereunder and the nature of the related Trust Fund. A form of an
Indenture has been filed as an exhibit to the Registration Statement of which
this prospectus is a part.
Events of Default
Events of default under the Indenture for each Series of Notes will
generally include: (i) a default for thirty (30) days or more in the payment of
any principal of or interest on any Note of such Series; (ii) failure to perform
any other covenant of the Trust in the Indenture which continues for a period of
sixty (60) days after notice thereof is given in accordance with the procedures
described in the related prospectus supplement; (iii) any representation or
warranty made by the Trust in the Indenture or in any certificate or other
writing delivered pursuant thereto or in connection therewith with respect to or
affecting such Series having been incorrect in a material respect as of the time
made, and such breach is not cured within sixty (60) days after notice thereof
is given in accordance with the procedures described in the related prospectus
supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust; or (v) any other event of default
provided with respect to Notes of that Series.
If an event of default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Indenture Trustee or the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such Series may declare the principal amount (or, if the Notes of that
Series are Accrual Securities, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related prospectus
supplement) of all the Notes of such Series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled by
the Securityholders of a majority in aggregate outstanding amount of the Notes
of such Series.
If, following an event of default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such Series
as they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a Series following an event of default, other
than a default in the payment of any principal or interest on any Note of such
Series for thirty (30) days or more, unless (a) the Securityholders of 100% of
the then aggregate outstanding amount of the Notes of such Series consent to
such sale, (b) the proceeds of such sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the outstanding
Notes of such Series at the date of such sale or (c) the Indenture Trustee
determines that such collateral would not be sufficient on an ongoing basis to
make all payments on such Notes as such payments would have become due if such
Notes had not been declared due and payable, and the Indenture Trustee obtains
the consent of the Securityholders of 66 (2)/3% of the then aggregate
outstanding amount of the Notes of such Series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an event of default involving a default for thirty (30) days or
more in the payment of principal of or interest on the Notes of a Series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any such liquidation for unpaid fees and expenses. As a result, upon
the occurrence of such an event of default, the amount available for
distribution to the Securityholders would be less than would otherwise be the
case. However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Securityholders
after the occurrence of such an event of default.
65
To the extent provided in the related prospectus supplement, in the event
the principal of the Notes of a Series is declared due and payable, as described
above, the Securityholders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an event of default shall occur and be continuing
with respect to a Series of Notes, the Indenture Trustee shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the Securityholders of such Series, unless such
holders offered to the Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such Series shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Indenture Trustee
or exercising any trust or power conferred on the Indenture Trustee with respect
to the Notes of such Series, and the Securityholders of a majority of the then
aggregate outstanding amount of the Notes of such Series may, in certain cases,
waive any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of the
Indenture that cannot be modified without the waiver or consent of all the
Securityholders of the outstanding Notes of such Series affected thereby.
Discharge of Indenture
The Indenture will be discharged with respect to a Series of Notes (except
with respect to certain continuing rights specified in the Indenture) upon the
delivery to the Indenture Trustee for cancellation of all the Notes of such
Series or, with certain limitations, upon deposit with the Indenture Trustee of
funds sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Indenture Trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the maturity date
for such Notes and any installment of interest on such Notes in accordance with
the terms of the Indenture and the Notes of such Series. In the event of any
such defeasance and discharge of Notes of such Series, holders of Notes of such
Series would be able to look only to such money and/or direct obligations for
payment of principal and interest, if any, on their Notes until maturity.
Indenture Trustee's Annual Report
The Indenture Trustee for each Series of Notes will be required to mail
each year to all related Securityholders a brief report relating to its
eligibility and qualification to continue as Indenture Trustee under the related
Indenture, any amounts advanced by it under the Indenture, the amount, interest
rate and maturity date of certain indebtedness owing by such Trust to the
applicable Indenture Trustee in its individual capacity, the property and funds
physically held by such Indenture Trustee as such and any action taken by it
that materially affects such Notes and that has not been previously reported.
The Indenture Trustee
The Indenture Trustee for a Series of Notes will be specified in the
related prospectus supplement. The Indenture Trustee for any Series may resign
at any time, in which event the Depositor will be obligated to appoint a
successor trustee for such Series. The Depositor may also remove any such
Indenture Trustee if such Indenture Trustee ceases to be eligible to continue as
such under the related Indenture or if such Indenture Trustee becomes insolvent.
In such circumstances the Depositor will be obligated to appoint a successor
trustee for the applicable Series of Notes. Any resignation or removal of the
Indenture Trustee and appointment of a successor trustee for any
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Series of Notes does not become effective until acceptance of the appointment by
the successor trustee for such Series.
The bank or trust company serving as Indenture Trustee may have a banking
relationship with the Depositor or any of its affiliates, a Servicer or any of
its affiliates or the Master Servicer or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
Credit enhancement may be provided with respect to any Series of
Securities 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 Securities, 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 Securities will be filed with the Commission as an exhibit to a
Current Report on Form 8-K.
Subordination
If provided in the applicable prospectus supplement, one or more Classes
of Senior Securities 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 Securities will have the effect of accelerating the
amortization of these Senior Securities while increasing the interests evidenced
by the Subordinated Securities in the Trust Fund. Increasing the interests of
the Subordinated Securities relative to that of the Senior Securities is
intended to preserve the availability of the subordination provided by the
Subordinated Securities.
If specified in the applicable prospectus supplement, the rights of the
holders of the Subordinated Securities of a Series of Securities for which
credit enhancement is provided through subordination to receive distributions
with respect to the Assets in the related Trust Fund will be subordinated to the
rights of the holders of the Senior Securities of the same Series. This
subordination is intended to enhance the likelihood of regular receipt by
holders of Senior Securities 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 Securities against losses due to obligor defaults.
The protection afforded to the holders of Senior Securities of a Series of
Securities 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 Subordinated
Securities on each Distribution Date, current distributions on the related
Assets of principal and interest due them on each Distribution Date out of the
funds available for distribution on that date in the related Distribution
Account, (ii) the right of these holders to receive future distributions on the
Assets that would otherwise have been payable to the holders of Subordinated
Securities and/or (iii) the prior allocation to the Subordinated Securities of
all or a portion of losses realized on the related Assets.
Losses realized on liquidated Assets (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 Subordinated Securities through a reduction of the amount of
principal payments on the Assets to which these holders are entitled before any
corresponding reduction is made in respect of the Senior Security.
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A "Special Hazard Loss" is a loss on a liquidated Asset occurring as a
result of a hazard not insured against under a standard hazard insurance policy
of the type described below under "Description of the Agreements--Material Terms
of the Pooling and Servicing Agreements and Underlying Servicing
Agreements--Hazard Insurance Policies." A "Fraud Loss" is a loss on a liquidated
Asset due to fraud in the origination of that Asset. A "Bankruptcy Loss" is a
loss on a liquidated Asset attributable to certain actions which may be taken by
a bankruptcy court in connection with a Asset, including a reduction by a
bankruptcy court of the principal balance of or the interest rate on an Asset 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
Subordinated Securities. An allocation of a loss on a "pro rata" basis among two
or more Classes of Securities means an allocation on a pro rata basis to each of
those Classes of Securities on the basis of their then-outstanding Security
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 Securities are each expected to be less
than the amount of principal payments on the Assets to which the holders of the
Subordinated Securities 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 Assets that are not Special Hazard Losses,
Fraud Losses or Bankruptcy Losses), the holders of Subordinated Securities 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 Assets.
Although the subordination feature described above is intended to enhance
the likelihood of timely payment of principal and interest to the holders of
Senior Securities, shortfalls could result in certain circumstances. For
example, a shortfall in the payment of principal otherwise due the holders of
Senior Securities could occur if losses realized on the Assets in a Trust Fund
were exceptionally high and were concentrated in a particular month.
The holders of Subordinated Securities 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 Securities of the same Series.
Limited Guarantee
If specified in the prospectus supplement for a Series of Securities,
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 Securities 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 Assets included in a Trust Fund, provide payment of
administrative expenses, or establish a minimum reinvestment rate on the
payments made on the Assets or principal payment rate on the Assets. A limited
guarantee will be limited in amount to the dollar amount or percentage of the
principal balance of the Assets or Securities specified in the applicable
prospectus supplement.
Financial Guaranty Insurance Policy or Surety Bond
If specified in the prospectus supplement for a Series of Securities,
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 Securities 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 Securityholder that is subsequently
recovered as a preferential transfer under the Bankruptcy Code.
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Letter of Credit
If specified in the prospectus supplement for a Series of Securities,
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 Assets or of one or more Classes of Securities. 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 an Asset. 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
Securities 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
Securities, credit enhancement may be provided by a mortgage pool insurance
policy for the Mortgage Loans in the related Trust Fund. Each mortgage pool
insurance policy, in accordance with the limitations described in this
prospectus and in the prospectus supplement, if any, will cover all or a portion
of 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 "Material Terms of
the Pooling and Servicing Agreements and Underlying Servicing
Agreements--Due-on-Sale Provisions," 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.
Securityholders may experience a shortfall in the amount of interest
payable on the related Securities 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, Securityholders may
also experience losses with respect to the related Securities 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 Securityholders. If any Mortgaged Property securing a defaulted
Mortgage Loan is damaged and proceeds, if any from the related hazard insurance
policy or 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 Securities
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.
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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 Securities 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 Securities, 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 Securityholders from Special Hazard Losses. Aggregate claims under a
special hazard insurance policy will be limited to the amount set forth in the
related Pooling and Servicing Agreement or Indenture and will be subject to
reduction as described in the related Pooling and Servicing Agreement or
Indenture. 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 or Manufactured Home securing the Contract 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 or Manufactured Home securing a foreclosed
Contract, 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 obligor 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 Manufactured Home or (ii) upon
transfer of the property to the insurer, the unpaid principal balance of the
Mortgage Loan or Contract Rate 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 or Contract 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 or Manufactured
Home.
If the Mortgaged Property or Manufactured Home 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 or Manufactured Home. 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 sale of the Mortgaged Property or Manufactured Home. 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 or Contract secured by the related Manufactured Home. The
payment described under (ii) above will render presentation of a claim relating
to an Asset 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 Asset plus accrued
interest and certain Advances will not affect the total insurance proceeds paid
to Securityholders, but will affect the relative amounts of coverage remaining
under the related special hazard insurance policy and mortgage pool insurance
policy.
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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 Securities 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
Assets, 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 an Asset. 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 Securities.
If specified in the prospectus supplement, any reinvestment income or
other gain from investments in certain investments acceptable to the applicable
Rating Agencies 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 Fund.
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 Securityholders and
use of investment earnings from the reserve fund, if any.
Cross Collateralization
If specified in the applicable prospectus supplement, the beneficial
ownership of separate groups of Assets included in a Trust Fund may be evidenced
by separate Classes of Securities. In this case, credit support may be provided
by a cross collateralization feature which requires that distributions be made
to certain Classes from Asset payments that would otherwise be distributed to
Subordinated Securities evidencing a beneficial ownership interest in other loan
groups within the same Trust Fund. As a result, the amount of credit enhancement
available to a Class of Securities against future losses on the Assets in which
that Class represents an interest may be reduced as the result of losses on a
group of Assets 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 Securities relative to the amortization
of the
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related Assets. The accelerated amortization is achieved by the application of
certain excess interest to the payment of principal of one or more Classes of
Securities. This acceleration feature creates, with respect to the Assets or a
group of Assets, overcollateralization which results from the excess of the
aggregate principal balance of the related Assets, or group of Assets, over the
Security Balance of the related Class or Classes of Securities. This
acceleration may continue for the life of the related Securities, 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 Assets in a Trust
may generate more interest than is necessary to pay the interest earned on the
Classes of Securities 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 Securities and to reimburse certain Classes of Securities
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 Securities.
CASH FLOW AGREEMENTS
If specified in the prospectus supplement, the Trust Fund 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
Securities (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 Securities will disclose the
significance percentage, 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 or substitution of the Cash Flow Agreement. Copies
of the Cash Flow Agreement, if any, relating to a Series of Securities will be
filed with the Commission 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
Securityholders. 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
Securities 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 Securities. 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
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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
Security Balance or Balances of one or more Classes of Securities 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 Securities and
will be paid to the Class or Classes of Securities 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 Securities. 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 Securityholders.
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 Securities in the event those Securities 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
Security Balance of the applicable Class or Classes of Securities plus any
accrued and unpaid interest. In the event the proceeds from the auction are
greater than the outstanding Security Balance or Security Balances of the
applicable Class or Classes of Securities 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 Securities" in this prospectus.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal aspects of loans secured by single-family or multi-family
residential properties. Because these legal aspects are governed primarily by
applicable state law(which laws may differ substantially), the summaries do not
purport to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans. See "Description
of the Trust Funds--Assets."
General
All of the Mortgage Loans are loans evidenced by a note or bond and
secured by instruments granting a security interest in real property which may
be mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
Types of Mortgage Instruments
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast,
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a deed of trust is a three-party instrument, among a trustor (the equivalent of
a mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this prospectus, unless the context otherwise requires, "mortgagor" includes the
trustor under a deed of trust and a grantor under a security deed or a deed to
secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by the
related mortgage note. In case the mortgagor under a mortgage is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the mortgagor.
At origination of a mortgage loan involving a land trust, the mortgagor executes
a separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, certain federal laws (including, without limitation, the Relief Act)
and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
The Mortgages that encumber Multifamily Properties may contain an
assignment of rents and leases, pursuant to which the mortgagor assigns to the
lender the mortgagor's right, title and interest as landlord under each lease
and the income derived therefrom, while retaining a revocable license to collect
the rents for so long as there is no default. If the mortgagor defaults, the
license terminates and the lender is entitled to collect the rents. Local law
may require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
Interest in Real Property
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. The Depositor, the Asset Seller or other entity specified
in the related prospectus supplement will make certain representations and
warranties in the applicable Agreement or certain representations and warranties
will be assigned to the Trustee with respect to any Mortgage Loans that are
secured by an interest in a leasehold estate. Such representation and
warranties, if applicable, will be set forth in the prospectus supplement.
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 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
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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.
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.
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.
Land Sale Contracts
Under Land Sale Contracts the contract seller (hereinafter referred to as
the "Contract Lender") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the "contract
borrower") for the payment of the purchase price, plus interest, over the term
of the Land Sale Contract. Only after full performance by the borrower of the
contract is the contract lender obligated to convey title to the real estate to
the purchaser. As with mortgage or deed of trust financing, during the effective
period of the Land Sale
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Contract, the contract borrower is responsible for maintaining the property in
good condition and for paying real estate taxes, assessments and hazard
insurance premiums associated with the property.
The method of enforcing the rights of the contract lender under an
installment contract varies on a state-by-state basis depending upon the extent
to which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to its terms. The terms of Land Sale Contracts
generally provide that upon default by the contract borrower, the borrower loses
his or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The contract
lender in such a situation does not have to foreclose in order to obtain title
to the property, although in some cases a quiet title action is in order if the
contract borrower has filed the Land Sale Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of contract borrower default during the early years of a
Land Sale Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Land Sale Contracts from the harsh consequences of forfeiture.
Under such statues, a judicial contract may be reinstated upon full payment of
the default amount and the borrower may have a post-foreclosure statutory
redemption right. In other states, courts in equity may permit a contract
borrower with significant investment in the property under a Land Sale Contract
for the sale of real estate to share the proceeds of sale of the property after
the indebtedness is repaid or may otherwise refuse to enforce the forfeiture
clause. Nevertheless, generally speaking, the contract lender's procedures for
obtaining possession and clear title under a Land Sale Contract for the sale of
real estate in a given state are simpler and less time consuming and costly than
are the procedures for foreclosing and obtaining clear title to a mortgaged
property.
Foreclosure
General
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have
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required that lenders reinstate loans or recast payment schedules in order to
accommodate mortgagors who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose if the
default under the mortgage is not monetary, e.g., the mortgagor failed to
maintain the mortgaged property adequately or the mortgagor executed a junior
mortgage on the mortgaged property. The exercise by the court of its equity
powers will depend on the individual circumstances of each case presented to it.
Finally, some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a mortgagor receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have upheld the reasonableness of
the notice provisions or have found that a public sale under a mortgage
providing for a power of sale does not involve sufficient state action to afford
constitutional protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The mortgagor or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears
(without acceleration) plus the expenses incurred in enforcing the obligation.
In other states, the mortgagor or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, the procedure for public sale, the
parties entitled to notice, the method of giving notice and the applicable time
periods are governed by state law and vary among the states. Foreclosure of a
deed to secure debt is also generally accomplished by a non-judicial sale
similar to that required by a deed of trust, except that the lender or its
agent, rather than a trustee, is typically empowered to perform the sale in
accordance with the terms of the deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of such property
at the time of sale, due to, among other things, redemption rights which may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. For these reasons, it is common for the lender to
purchase the mortgaged property for an amount equal to or less than the
underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses which may be recovered by a lender. Thereafter, subject to the
mortgagor's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and have
both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Moreover, a lender commonly incurs substantial legal fees and court costs in
acquiring a mortgaged property through contested foreclosure and/or bankruptcy
proceedings. Generally, state law controls the amount of foreclosure expenses
and costs, including attorneys' fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, in the event that the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, with respect to
those
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Mortgage Loans, if any, that are junior mortgage loans, if the lender purchases
the property the lender's title will be subject to all senior mortgages, prior
liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been sold
in accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the mortgagor,
must be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three calendar years
following the year the Trust Fund acquired the property. With respect to a
Series of Securities for which an election is made to qualify the Trust Fund or
a part thereof as a REMIC, the applicable Agreement will permit foreclosed
property to be held for more than such period of time if the IRS grants an
extension of time within which to sell such property or independent counsel
renders an opinion to the effect that holding such property for such additional
period is permissible under the REMIC Provisions.
Cooperative Loans
The Cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and by-laws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder 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 such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such 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 in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code ("UCC") and the security agreement relating to those shares. Article 9 of
the UCC requires that a sale be conducted in a "commercially reasonable" manner.
Whether a foreclosure sale has been conducted in a "commercially reasonable"
manner will depend on the facts in each case. In determining commercial
reasonableness, a court will look to the notice given the debtor and the method,
manner, time, place and terms of the foreclosure. Generally, a sale conducted
according to the usual practice of banks selling similar collateral will be
considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in a building so converted.
Junior Mortgages
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the Trust Fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the mortgagor, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "--Foreclosure" herein.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event of
a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
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Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been sold
in accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the mortgagor,
must be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
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 the
public sale. The purpose of these statutes is generally to prevent a beneficiary
or a mortgagee from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the judicial sale.
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 "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 thereof caused by
such 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
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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 under
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 with
respect to a mortgage loan on such debtor's 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,
such term commencing when the 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 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 residence and by collateral that
is not "inextricably bound" to the real property, such as appliances, machinery,
or furniture. Certain courts have also allowed modifications when the Mortgage
Loan is fully unsecured at the time of bankruptcy.
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 such a loan 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.
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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
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 Bankruptcy 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 Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and
related statutes. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the applicable laws. In some cases, this liability may affect assignees of
the Mortgage Loans.
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.
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.
Environmental Considerations
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to such a
security interest may be subject to federal, state, and local laws and
regulations relating to environmental protection. Such 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 ("PCBs").
Failure to comply with such 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 such property are subordinated to such a lien
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 Superlien could be adversely affected.
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
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the costs of remedial action ("Cleanup Costs") if hazardous wastes or hazardous
substances have been released or disposed of on the property. Such Cleanup Costs
may be substantial. CERCLA imposes strict, as well as joint and several
liability for environmental remediation and/or damage costs on several classes
of "potentially responsible parties," including current "owners and/or
operators" of property, irrespective of whether those owners or operators caused
or contributed to the contamination on the property. In addition, owners and
operators of properties that generate hazardous substances that are disposed of
at other "off-site" locations may be held strictly, jointly and severally liable
for environmental remediation and/or damages at those off-site locations. Many
states also have laws that are similar to CERCLA. Liability under CERCLA or
under similar state law could exceed the value of the property itself as well as
the 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 Fund. Under the laws of some states and under
CERCLA, a lender may be liable as an "owner or operator" for costs of addressing
releases or threatened releases of hazardous substances on a mortgaged property
if such lender or its agents or employees have "participated in the management"
of the operations of the borrower, even though the environmental damage or
threat was caused by a prior owner or current owner or operator or other third
party. Excluded from CERCLA's definition of "owner or operator" is a person "who
without participating in the management of . . . [the] facility, holds indicia
of ownership primarily to protect his security interest" (the "secured-creditor
exemption"). This exemption for holders of a security interest such as a secured
lender applies only to the extent that a lender seeks to protect its security
interest in the contaminated facility or property. Thus, if a lender's
activities begin to encroach on the actual management of such facility or
property, the lender faces potential liability as an "owner or operator" under
CERCLA. Similarly, when a lender forecloses and takes title to a contaminated
facility or property, the lender may incur potential CERCLA liability in various
circumstances, including among others, when it holds the facility or property as
an investment (including leasing the facility or property to a third party),
fails to market the property in a timely fashion or fails to properly address
environmental conditions at the property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"), contains
a similar secured-creditor exemption for those lenders who hold a security
interest in a petroleum underground storage tank ("UST") or in real estate
containing a UST, or that acquire title to a petroleum UST or facility or
property on which such a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if such 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
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 such 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
secured-creditor exemption, leading to administrative and legislative efforts to
provide guidance to lenders on the scope of activities that would trigger CERCLA
and/or RCRA liability. Until recently, these efforts have failed to provide
substantial guidance.
On September 28, 1996, Congress enacted, and on September 30, 1996 the
President signed into law the Asset Conservation Lender Liability and Deposit
Insurance Protection Act of 1996 (the "Asset Conservation Act"). The Asset
Conservation Act was intended to clarify the scope of the secured creditor
exemption. This legislation more clearly defines the kinds of activities that
would constitute "participation in management" and that therefore would trigger
liability for secured parties under CERCLA. It also identified certain
activities that ordinarily would not trigger liability, provided, however, that
such activities did not otherwise rise to the level of "participation in
management." The Asset Conservation Act specifically reverses the Fleet Factors
"capacity to influence" standard.
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The Asset Conservation Act also provides additional protection against liability
in the event of foreclosure. However, since the courts have not yet had the
opportunity to interpret the new statutory provisions, the scope of the
additional protections offered by the Asset Conservation Act is not fully
defined. It also is important to note that the Asset Conservation Act does not
offer complete protection to lenders and that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the Trust Fund and occasion a loss to the Trust Fund and to Securityholders in
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 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. Neither the
Depositor nor any Servicer makes any representations or warranties or assumes
any liability with respect to: environmental conditions of such Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from such Mortgaged Property; the impact on
Securityholders of any environmental condition or presence of any substance on
or near such Mortgaged Property; or the compliance of any Mortgaged Property
with any environmental laws. In addition, no agent, person or entity otherwise
affiliated with the Depositor is authorized or able to make any such
representation, warranty or assumption of liability relative to any such
Mortgaged Property.
Due-on-Sale Clauses
The Mortgage Loans will generally contain due-on-sale clauses. These
clauses generally provide that the lender may accelerate the maturity of the
loan if the mortgagor sells, transfers or conveys the related Mortgaged
Property. The enforceability of due-on-sale clauses has been the subject of
legislation or litigation in many states and, in some cases, the enforceability
of these clauses was limited or denied. However, with respect to certain loans
the Garn-St. Germain Depository Institutions Act of 1982 preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. Due-on-sale clauses
contained in mortgage loans originated by federal savings and loan associations
of federal savings banks are fully enforceable pursuant to regulations of the
United States Federal Home Loan Bank Board, as succeeded by the Office of Thrift
Supervision, which preempt state law restrictions on the enforcement of such
clauses. Similarly, "due-on-sale" clauses in mortgage loans made by national
banks and federal credit unions are now fully enforceable pursuant to preemptive
regulations of the Comptroller of the Currency and the National Credit Union
Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in which
a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, certain transfers by operation of law,
leases of fewer than three years and the creation of a junior encumbrance.
Regulations promulgated under the Garn-St. Germain Act also prohibit the
imposition of a prepayment charge upon the acceleration of a loan pursuant to a
due-on-sale clause. The inability to enforce a "due-on-sale" clause may result
in a mortgage that bears an interest rate below the current market rate being
assumed by a new home buyer rather than being paid off, which may affect the
average life of the Mortgage Loans and the number of Mortgage Loans which may
extend to maturity.
Prepayment Charges
Some state laws restrict the imposition of Prepayment Charges and late
fees even when the mortgage loans expressly provide for the collection of those
charges. Although the Alternative Mortgage Transaction Parity Act of 1982 (the
"Parity Act"), permits the collection of Prepayment Charges and late fees in
connection with some types of eligible mortgage loans preempting any contrary
state law prohibitions, some states may not recognize the preemptive authority
of the Parity Act or have formally opted out of the Parity Act. As a result, it
is possible that
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Prepayment Charges and late fees may not be collected even on loans that provide
for the payment of those charges. The "OTS", the agency that administers the
Parity Act for unregulated, non-federally chartered housing creditors, withdrew
its favorable Parity Act regulations and Chief Counsel Opinions that previously
authorized state-chartered housing creditors to charge Prepayment Charges and
late fees in certain circumstances notwithstanding contrary state law, effective
with respect to mortgage loans originated on or after July 1, 2003. However, the
OTS's ruling does not retroactively affect mortgage loans originated by such
entities before July 1, 2003.
Subordinate Financing
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1, 1980
are subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly rejected
or a provision limiting discount points or other charges is adopted, no mortgage
loan originated after the date of such state action will be eligible for
inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be usurious and the mortgagor's counsel
has rendered an opinion that such choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the mortgagor may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only for
the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
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Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St. Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
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. Such
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. Such 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 such 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 rate/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 such 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 such Mortgage Loans may exclude coverage for some of the risks described in
this paragraph.
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Servicemembers Civil Relief Act
Generally, under the terms of the Servicemembers Civil Relief Act (the
"Relief Act"), a mortgagor who enters military service after the origination of
such mortgagor's Mortgage Loan, including a mortgagor who was in reserve status
and is called to active duty after origination of the Mortgage Loan, may not be
charged interest, including fees and charges, in excess of 6% per annum during
the period of the mortgagor's active duty status. In addition to adjusting the
interest, the lender must forgive any such interest in excess of 6%, unless a
court or administrative agency orders otherwise upon application of the lender.
Further, the Relief Act provides broad discretion for a court to modify a
mortgage loan upon application by the mortgagor. The Relief Act applies to
mortgagors who are members of the U.S. Armed Forces and officers of the U.S.
Public Health Service or the National Oceanic and Atmospheric Administration
assigned to duty with the military. The California Military and Veterans Code
(the "California Military Code") provides protection substantially similar to
that provided by the Relief Act to California national guard members called up
to active service by the Governor, California national guard members called up
to active service by the President and reservists called to active duty. In
addition, other states have enacted comparable legislation which may 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 mortgagors in
such states who are active or reserve members of the armed services. It is
possible that the Relief Act, the California Military Code or similar state law
could have an effect, for an indeterminate period of time, on the ability of the
Servicer to collect full amounts of interest on certain of the Mortgage Loans in
a Trust Fund. Any shortfall in interest collections resulting from the
application of the Relief Act, the California Military Code or similar state law
could result in losses to the holders of the Securities of the related Series.
Further, since the Relief Act, the California Military Code and similar state
law impose limitations which would impair the ability of the Servicer to
foreclose on an affected Mortgage Loan during the mortgagor's period of active
duty status, in the event that such a 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.
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 such 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 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 (ii) 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
such a defense will be successful.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Contracts. Because such legal aspects
are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Contracts is situated. The summaries are qualified in their
entirety by reference to the appropriate laws of the states in which Contracts
may be originated.
General
As a result of the assignment of the Contracts to the Trustee, the Trustee
will succeed collectively to all of the rights (including the right to receive
payment on the Contracts) of the obligee under the Contracts. Each Contract
evidences both (a) the obligation of the obligor to repay the loan evidenced
thereby, and (b) the grant of a
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security interest in the Manufactured Home to secure repayment of such loan.
Certain aspects of both features of the Contracts are described more fully
below.
The Contracts generally are "chattel paper" as defined in the UCC in
effect in the states in which the Manufactured Homes initially were registered.
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the applicable
Agreement, the Servicer will transfer physical possession of the Contracts to
the Trustee or its custodian or may retain possession of the Contracts as
custodian for the Trustee. In addition, the Servicer will make an appropriate
filing of a UCC-1 financing statement in the appropriate states to give notice
of the Trustee's ownership of the Contracts. The Contracts will be stamped or
marked otherwise to reflect their assignment from the Company to the Trustee
only if provided in the related prospectus supplement. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Contracts without notice of such assignment, the
Trustee's interest in Contracts could be defeated.
Security Interests in the Manufactured Homes
The Manufactured Homes securing the Contracts may be located in all 50
states and the District of Columbia. Security interests in manufactured homes
may be perfected either by notation of the secured party's lien on the
certificate of title or by delivery of the required documents and payment of a
fee to the state motor vehicle authority, depending on state law. In some
nontitle states, perfection pursuant to the provisions of the UCC is required.
The Asset Seller may effect such notation or delivery of the required documents
and fees, and obtain possession of the certificate of title, as appropriate
under the laws of the state in which any manufactured home securing a
manufactured housing conditional sales contract is registered. In the event the
Asset Seller fails, due to clerical error, to effect such notation or delivery,
or files the security interest under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC, in a few states), the Asset
Seller may not have a first priority security interest in the Manufactured Home
securing a Contract. As manufactured homes have become larger and often have
been attached to their sites without any apparent intention to move them, courts
in many states have held that manufactured homes, under certain circumstances,
may become subject to real estate title and recording laws. As a result, a
security interest in a manufactured home could be rendered subordinate to the
interests of other parties claiming an interest in the home under applicable
state real estate law. In order to perfect a security interest in a manufactured
home under real estate laws, the holder of the security interest must file
either a "fixture filing" under the provisions of the UCC or a real estate
mortgage under the real estate laws of the state where the home is located.
These filings must be made in the real estate records office of the county where
the home is located. Substantially all of the Contracts contain provisions
prohibiting the borrower from permanently attaching the Manufactured Home to its
site. So long as the borrower does not violate this agreement, a security
interest in the Manufactured Home will be governed by the certificate of title
laws or the UCC, and the notation of the security interest on the certificate of
title or the filing of a UCC financing statement will be effective to maintain
the priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to its site, other parties could
obtain an interest in the Manufactured Home which is prior to the security
interest originally retained by the Asset Seller and transferred to the
Depositor. With respect to a Series of Securities and if so described in the
related prospectus supplement, the Servicer may be required to perfect a
security interest in the Manufactured Home under applicable real estate laws.
The Warranting Party will represent that as of the date of the sale to the
Depositor it has obtained a perfected first priority security interest by proper
notation or delivery of the required documents and fees with respect to
substantially all of the Manufactured Homes securing the Contracts.
The Depositor will cause the security interests in the Manufactured Homes
to be assigned to the Trustee on behalf of the Securityholders. The Depositor or
the Trustee will amend the certificates of title (or file UCC-3 statements) to
identify the Trustee as the new secured party, and will deliver the certificates
of title to the Trustee or note thereon the interest of the Trustee only if
specified in the related prospectus supplement. Accordingly, the Asset Seller
(or other originator of the Contracts) will continue to be named as the secured
party on the certificates of title relating to the Manufactured Homes. In some
states, such assignment is an effective conveyance of such security interest
without amendment of any lien noted on the related certificate of title and the
new secured party succeeds to Servicer's rights as the secured party. However,
in some states, in the absence of an amendment to the certificate of title (or
the filing of a UCC-3 statement), such assignment of the security interest in
the Manufactured Home may not be held effective or such security interests may
not be perfected and in the absence of such notation
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or delivery to the Trustee, the assignment of the security interest in the
Manufactured Home may not be effective against creditors of the Asset Seller (or
such other originator of the Contracts) or a trustee in bankruptcy of the Asset
Seller (or such other originator).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Asset Seller
(or other originator of the Contracts) on the certificate of title or delivery
of the required documents and fees will be sufficient to protect the
Securityholders against the rights of subsequent purchasers of a Manufactured
Home or subsequent lenders who take a security interest in the Manufactured
Home. If there are any Manufactured Homes as to which the security interest
assigned to the Trustee is not perfected, such security interest would be
subordinate to, among others, subsequent purchasers for value of Manufactured
Homes and holders of perfected security interests. There also exists a risk in
not identifying the Trustee as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the Trustee could be
released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another state
and not re-register the Manufactured Home in such state, and if steps are not
taken to re-perfect the Trustee's security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Servicer must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien, the
Asset Seller (or other originator) would receive notice of surrender if the
security interest in the Manufactured Home is noted on the certificate of title.
Accordingly, the Trustee would have the opportunity to re-perfect its security
interest in the Manufactured Home in the state of relocation. In states which do
not require a certificate of title for registration of a manufactured home,
re-registration could defeat perfection. In the ordinary course of servicing the
manufactured housing contracts, the Servicer takes steps to effect such
re-perfection upon receipt of notice of re-registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing contract sells a manufactured home, the Servicer must surrender
possession of the certificate of title or, if it is noted as lienholder on the
certificate of title, will receive notice as a result of its lien noted thereon
and accordingly will have an opportunity to require satisfaction of the related
manufactured housing conditional sales contract before release of the lien.
Under the applicable Agreement, the Servicer is obligated to take such steps, at
the Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority even over
a perfected security interest. The Warranting Party will represent in the
applicable Agreement that it has no knowledge of any such liens with respect to
any Manufactured Home securing payment on any Contract. However, such liens
could arise at any time during the term of a Contract. No notice will be given
to the Trustee or Securityholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes
The Servicer on behalf of the Trustee, to the extent required by the
applicable Agreement, may take action to enforce the Trustee's security interest
with respect to Contracts in default by repossession and resale of the
Manufactured Homes securing such defaulted Contracts. So long as the
Manufactured Home has not become subject to the real estate law, a creditor can
repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale of
a Manufactured Home, the Trustee would be entitled to be paid out of the sale
proceeds before such proceeds could be
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applied to the payment of the claims of unsecured creditors or the holders of
subsequently perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including Insolvency Laws and general
equitable principles, may limit or delay the ability of a lender to repossess
and resell collateral or enforce a deficiency judgment.
Servicemembers Civil Relief Act
The terms of the Relief Act apply to an obligor on a Contract as described
for a mortgagor on a Mortgage Loan under "Certain Legal Aspects of Mortgage
Loans--Servicemembers Civil Relief Act."
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
Contract.
Transfers of Manufactured Homes; Enforceability of Due-on-Sale Clauses
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer that is not consented to. Generally, it is expected that the
Servicer will permit most transfers of Manufactured Homes and not accelerate the
maturity of the related Contracts. In certain cases, the transfer may be made by
a delinquent obligor in order to avoid a repossession proceeding with respect to
a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St. Germain Depositary Institutions Act of 1982
preempts, subject to certain exceptions and conditions, state laws prohibiting
enforcement of "due-on-sale" clauses applicable to the Manufactured Homes.
Consequently, in some states the Servicer may be prohibited from enforcing a
"due-on-sale" clause in respect of certain Manufactured Homes.
Applicability of Usury Laws
Title V provides that, subject to the following conditions, state usury
limitations shall not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
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adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The related Asset Seller will represent that all of the Contracts comply with
applicable usury law.
FEDERAL INCOME TAX CONSEQUENCES
General
The following discussion is based on the advice of Cadwalader, Wickersham
& Taft LLP or Hunton & Williams LLP, as to the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Securities offered hereunder. As to any Securities offered pursuant hereto,
Cadwalader, Wickersham & Taft LLP or Hunton & Williams LLP is of the opinion
that the following discussion, as supplemented by the discussion under the
heading "Federal Income Tax Consequences," if any, in the prospectus supplement
accompanying this prospectus with respect to those Securities, is correct in all
material respects as of the date of such prospectus supplement. Except as
specifically set forth elsewhere herein, the opinion set forth in the preceding
sentence and any opinions specifically set forth in this discussion or the
related prospectus supplement are the only opinions being rendered with respect
to tax matters affecting the Securities offered hereunder by Cadwalader,
Wickersham & Taft LLP or Hunton & Williams LLP. The opinion stated above and the
opinions specifically identified as such in the following discussion and in the
related prospectus supplement are the only opinions that Cadwalader, Wickersham
& Taft LLP or Hunton & Williams LLP has been asked to render with respect to the
tax consequences of the purchase, ownership and dispositions of the Securities
offered under this prospectus and the related prospectus supplement. This
discussion is directed solely to Securityholders that hold the Securities as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code") and does not purport to discuss all federal
income tax consequences that may be applicable to particular categories of
investors, some of which (such as banks, insurance companies and foreign
investors) may be subject to special rules. Further, the authorities on which
this discussion, and the opinion referred to below, are based are subject to
change or differing interpretations, which could apply retroactively. In
addition to the federal income tax consequences described herein, potential
investors should consider the state and local tax consequences, if any, of the
purchase, ownership and disposition of the Securities. See "State and Other Tax
Consequences." Securityholders are encouraged to consult their own tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the Securities offered hereunder.
The following discussion addresses securities of four general types: (i)
securities ("REMIC Securities") representing interests in a Trust Fund, or a
portion thereof, that the Trustee will elect to have treated as a real estate
mortgage investment conduit ("REMIC" ) under Sections 860A through 860G (the
"REMIC Provisions") of the Code, (ii) securities ("Grantor Trust Securities")
representing interests in a Trust Fund ("Grantor Trust Fund") as to which no
such election will be made, (iii) securities ("Partnership Securities")
representing interests in a Trust Fund ("Partnership Trust Fund") which is
treated as a partnership for federal income tax purposes, and (iv) securities
("Debt Securities") representing indebtedness of a Partnership Trust Fund for
federal income tax purposes. The prospectus supplement for each Series of
Securities will indicate which of the foregoing treatments will apply to such
Series and, if a REMIC election (or elections) will be made for the related
Trust Fund, will identify all "regular interests" and "residual interests" in
the REMIC. For purposes of this tax discussion, (i) references to a
"Securityholder" or a "holder" are to the beneficial owner of a Security, (ii)
references to "REMIC Pool" are to an entity or portion thereof as to which a
REMIC election will be made and (iii) references to "Mortgage Loans" include
Contracts. Generally, no REMIC election will be made with respect to Unsecured
Home Improvement Loans.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271-1273 and 1275 of the
Code and in the Treasury regulations issued thereunder (the "OID Regulations"),
and in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC Regulations"). The OID Regulations do not adequately
address certain issues relevant to, and in some instances provide that they are
not applicable to, securities such as the Securities.
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Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of certain entities
issuing non-REMIC debt obligations secured by real estate mortgages ("Taxable
Mortgage Pools"). Any entity other than a REMIC will be considered a Taxable
Mortgage Pool if (i) substantially all of the assets of the entity consist of
debt obligations and more than 50% of such obligations consist of "real estate
mortgages," (ii) such entity is the obligor under debt obligations with two or
more maturities, and (iii) under the terms of the debt obligations on which the
entity is the obligor, payments on such obligations bear a relationship to
payments on the obligations held by the entity. Furthermore, a group of assets
held by an entity can be treated as a separate Taxable Mortgage Pool if the
assets are expected to produce significant cash flow that will support one or
more of the entity's issues of debt obligations. The Depositor generally will
structure offerings of non-REMIC Securities to avoid the application of the
Taxable Mortgage Pool rules.
REMICS
Classification of REMICs
With respect to each Series of REMIC Securities, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the related Trust
Fund (or each applicable portion thereof) will qualify as a REMIC and the REMIC
Securities offered with respect thereto will be considered to evidence ownership
of "regular interests" ("Regular Securities") or "residual interests" ("Residual
Securities") in that REMIC within the meaning of the REMIC Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Securities) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant to
which the de minimis requirement will be met if at all times the 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. The Pooling and Servicing
Agreement with respect to each Series of REMIC Securities will contain
provisions meeting these requirements. See "--Taxation of Owners of Residual
Securities--Tax-Related Restrictions on Transfer of Residual
Securities--Disqualified Organizations."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that (i) is either transferred to the REMIC Pool
on the Startup Day, (ii) is purchased by the REMIC Pool within a three-month
period thereafter pursuant to a fixed price contract in effect on the Startup
Day or (iii) represents an increase in the principal amount of the obligation
under the terms of such obligation described in (i) or (ii) above if such
increase is attributable to an advance made to the obligor pursuant to the
original terms of the obligation, occurs after the Startup Day of the REMIC and
is purchased by the REMIC 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 and regular interests in another REMIC, such as
lower-tier regular interests in Tiered REMICs. The REMIC Regulations specify
that loans secured by timeshare interests, shares held by a tenant stockholder
in a cooperative housing corporation, and manufactured housing that qualifies as
a "single family residence" under Code Section 25(e)(10) can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage, which
is any property that would have been treated as a qualified mortgage if it were
transferred to the REMIC Pool on the Startup Day and that is received either (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 such mortgage is
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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 such 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 (i) 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 or (ii) to provide a source
of funding for the purchase of additional mortgage loans pursuant to a
qualifying fixed price or additional draws made by mortgagors under the terms of
loans held by the related REMIC. The aggregate fair market of any such reserve
cannot exceed 50% of the aggregate fair market value of all assets of the REMIC
on the Startup Day. The reserve fund will be disqualified if more than 30% of
the gross income from the assets in such fund for the year is derived from the
sale or other disposition of property held for less than three months, unless
required to prevent a default on the regular interests caused by a default on
one or more qualified mortgages. A reserve fund must be reduced "promptly and
appropriately" as payments on the Mortgage Loans are received. Foreclosure
property is real property acquired by the REMIC Pool in connection with the
default or imminent default of a qualified mortgage and generally may not be
held beyond the close of the third calendar year beginning after the taxable
year of acquisition unless an extension is granted by the IRS.
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. Such 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 with respect to such 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 Securities of a Series will constitute one
or more Classes of regular interests, and the Residual Securities with respect
to that Series will constitute a single Class of residual interests with respect
to each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Securities may not be accorded
the status or given the tax treatment described below. Although the Code
authorizes the Treasury Department to issue regulations providing relief in the
event of an inadvertent termination of REMIC status, no such regulations have
been issued. Any such relief, moreover, may be accompanied by sanctions, such as
the imposition of a corporate tax on all or a portion of the Trust Fund's income
for the period in which the requirements for such status are not satisfied. The
Pooling and Servicing Agreement with respect to each REMIC Pool will include
provisions designed to maintain the Trust Fund's status as a REMIC under the
REMIC Provisions. It is not anticipated that the status of any Trust Fund as a
REMIC will be terminated.
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Characterization of Investments in REMIC Securities
In general, the REMIC Securities will be treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code in the same proportion that the assets of the
REMIC Pool underlying such Securities would be so treated. Moreover, if 95% or
more of the assets of the REMIC Pool qualify for either of the foregoing
treatments at all times during a calendar year, the REMIC Securities will
qualify for the corresponding status in their entirety for that calendar year.
If the assets of the REMIC Pool include Buydown Mortgage Loans, it is possible
that the percentage of such assets constituting "loans . . . secured by an
interest in real property which is . . . residential real property" for purposes
of Code Section 7701(a)(19)(C)(v) may be required to be reduced by the amount of
the related funds paid thereon (the "Buydown Funds"). Interest (including
original issue discount) on the Regular Securities and income allocated to the
Class of Residual Securities will be interest described in Section 856(c)(3)(B)
of the Code to the extent that such Securities are treated as "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Code. In addition, the
Regular Securities generally will be "qualified mortgages" within the meaning of
Section 860G(a)(3) of the Code if transferred to another REMIC on its Startup
Day in exchange for regular or residual interests therein. The determination as
to the percentage of the REMIC Pool's assets that constitute assets described in
the foregoing sections of the Code will be made with respect to each calendar
quarter based on the average adjusted basis of each category of the assets held
by the REMIC Pool during such calendar quarter. The REMIC will report those
determinations to Securityholders in the manner and at the times required by
applicable Treasury regulations.
The assets of the REMIC Pool will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Securities and
property acquired by foreclosure held pending sale, and may include amounts in
reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. The REMIC
Regulations do provide, however, that payments on Mortgage Loans held pending
distribution are considered part of the Mortgage Loans for purposes of Section
856(c)(4)(A) of the Code. Furthermore, foreclosure property generally will
qualify as "real estate assets" under Section 856(c)(4)(A) of the Code.
Tiered REMIC Structures
For certain Series of REMIC Securities, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
Series of REMIC Securities, Cadwalader, Wickersham & Taft LLP or Hunton &
Williams LLP will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the Tiered REMICs will each qualify as a REMIC and the REMIC Securities issued
by the Tiered REMICs will be considered to evidence ownership of Regular
Securities or Residual Securities in the related REMIC within the meaning of the
REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Securities is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
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Taxation of Owners of Regular Securities
General
In general, interest, original issue discount, and market discount on a
Regular Security will be treated as ordinary income to a holder of the Regular
Security (the "Regular Securityholder"), and principal payments on a Regular
Security will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by such
Regular Securityholder.
Original Issue Discount
Accrual Securities will be, and other Classes of Regular Securities may
be, issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or subclass of Regular Securities having original
issue discount generally must include original issue discount in ordinary income
for federal income tax purposes as it accrues, in accordance with a constant
yield method that takes into account the compounding of interest, in advance of
the receipt of the cash attributable to such income. The following discussion is
based in part on OID Regulations issued under Code Sections 1271 through 1273
and 1275 and in part on the provisions of the 1986 Act. Regular Securityholders
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Regular
Securities. To the extent such issues are not addressed in such regulations, the
Depositor intends to apply the methodology described in the Conference Committee
Report to the 1986 Act. No assurance can be provided that the IRS 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 IRS 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 discussion therein and the appropriate method for reporting
interest and original issue discount with respect to the Regular Securities.
Each Regular Security (except to the extent described below with respect
to a Regular Security on which principal is distributed in a single installment
or by lots of specified principal amounts upon the request of a Securityholder
or by random lot (a "Non-Pro Rata Security")) will be treated as a single
installment obligation for purposes of determining the original issue discount
includable in a Regular Securityholder's income. The total amount of original
issue discount on a Regular Security is the excess of the "stated redemption
price at maturity" of the Regular Security over its "issue price." The issue
price of a Class of Regular Securities offered pursuant to this prospectus
generally is the first price at which a substantial amount of such Class is sold
to the public (excluding bond houses, brokers and underwriters). Although
unclear under the OID Regulations, it is anticipated that the Trustee will treat
the issue price of a Class as to which there is no substantial sale as of the
issue date or that is retained by the Depositor as the fair market value of the
Class as of the issue date. The issue price of a Regular Security also includes
any amount paid by an initial Regular Securityholder for accrued interest that
relates to a period prior to the issue date of the Regular Security, unless the
Regular Securityholder elects on its federal income tax return to exclude such
amount from the issue price and to recover it on the first Distribution Date.
The stated redemption price at maturity of a Regular Security always includes
the original principal amount of the Regular Security, but generally will not
include distributions of interest if 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 such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Regular
Security. Because there is no penalty or default remedy in the case of
nonpayment of interest with respect to a Regular Security, it is possible that
no interest on any Class of Regular Securities will be treated as qualified
stated interest. However, except as provided in the following three sentences or
in the 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 with respect to the Regular Securities as qualified stated
interest. Distributions of interest on an Accrual Security, or on other Regular
Securities with respect to which deferred interest will accrue, will not
constitute qualified stated interest, in which case the stated redemption price
at maturity of such Regular Securities 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
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qualified stated interest. Where the interval between the issue date and the
first Distribution Date on a Regular Security is shorter than the interval
between subsequent Distribution Dates, the interest attributable to the
additional days will be included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Security
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular Security is computed as the sum of the
amounts determined by multiplying the number of full years (i.e., rounding down
partial years) from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security. The
Conference Committee Report to the 1986 Act provides that the schedule of 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 Securities. The
Prepayment Assumption with respect to a Series of Regular Securities 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
such income will be capital gain if the Regular Security is held as a capital
asset. Under the OID Regulations, however, Regular Securityholders may elect to
accrue all de minimis original issue discount as well as market discount and
market premium, under the constant yield method. See "--Election to Treat All
Interest Under the Constant Yield Method."
A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for each
day on which it holds the Regular Security, including the date of purchase but
excluding the date of disposition. The Trustee will treat the monthly period
ending on the day before each Distribution Date as the accrual period. With
respect to each Regular Security, a calculation will be made of the original
issue discount that accrues during each successive full accrual period (or
shorter period from the date of original issue) that ends on the day before the
related Distribution Date on the Regular Security. The Conference Committee
Report to the 1986 Act states that the rate of accrual of original issue
discount is intended to be based on the Prepayment Assumption. The original
issue discount accruing in a full accrual period would be the excess, if any, of
(i) the sum of (a) the present value of all of the remaining distributions to be
made on the Regular Security as of the end of that accrual period, and (b) the
distributions made on the Regular Security during the accrual period that are
included in the Regular Security's stated redemption price at maturity, over
(ii) the adjusted issue price of the Regular Security at the beginning of the
accrual period. The present value of the remaining distributions referred to in
the preceding sentence is calculated based on (i) the yield to maturity of the
Regular Security 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
Security at the beginning of any accrual period equals the issue price of the
Regular Security, increased by the aggregate amount of original issue discount
with respect to the Regular Security that accrued in all prior accrual periods
and reduced by the amount of distributions included in the Regular Security's
stated redemption price at maturity that were made on the Regular Security in
such prior periods. The original issue discount accruing during any accrual
period (as determined in this paragraph) will then be divided by the number of
days in the period to determine the daily portion of original issue discount for
each day in the period. With respect to an initial accrual period shorter than a
full accrual period, the daily portions of original issue discount must be
determined according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the Mortgage Loans that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. An increase in
prepayments on the Mortgage Loans with respect to a Series of Regular Securities
can result in both a change in the priority of principal payments with respect
to certain Classes of Regular Securities and either an increase or decrease in
the daily portions of original issue discount with respect to such Regular
Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the Trustee
will determine the yield to maturity of such Security based upon the anticipated
payment characteristics of the Class as a whole under the Prepayment
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Assumption. In general, the original issue discount accruing on each Non-Pro
Rata Security in a full accrual period would be its allocable share of the
original issue discount with respect to 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
Security (or portion of such unpaid principal balance), (a) the remaining
unaccrued original issue discount allocable to such Security (or to such
portion) will accrue at the time of such distribution, and (b) the accrual of
original issue discount allocable to each remaining Security of such Class will
be adjusted by reducing the present value of the remaining payments on such
Class and the adjusted issue price of such 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 Security having original issue discount at a
price greater than its adjusted issue price but less than its stated redemption
price at maturity will be required to include in gross income the daily portions
of the original issue discount on the Regular Security reduced pro rata by a
fraction, the numerator of which is the excess of its purchase price over such
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, such a subsequent purchaser may elect to treat all such
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 Securities
Regular Securities 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 can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds. A multiple of a qualified
floating rate is considered a qualified floating rate only if the rate is equal
to either (a) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (b) the product of a qualified
floating rate and a fixed multiple that is greater that 0.65 but not more than
1.35, increased or decreased by a fixed rate. Such rate may also be subject to a
fixed cap or floor, or a cap or floor that is not reasonably expected as of the
issue date to affect the yield of the instrument significantly. An objective
rate is any rate (other than a qualified floating rate) that is determined using
a single fixed formula and that is based on objective financial or economic
information, provided that 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 Securities 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 such a Class may be
considered to bear "contingent interest" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to Regular Securities. However, if
final regulations dealing with contingent interest with respect to Regular
Securities apply the same principles as the OID Regulations, such regulations
may lead to different timing of income inclusion that would be the case under
the OID Regulations. Furthermore, application of such principles could lead to
the characterization of gain on the sale of contingent interest Regular
Securities as ordinary income. Investors should consult their tax advisors
regarding the appropriate treatment of any Regular Security that does not pay
interest at a fixed rate or variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Security (i) bearing interest at 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),
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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 Securities 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 with respect to a Regular Security
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 such Regular Security generally to be determined by assuming that interest
will be payable for the life of the Regular Security based on the initial rate
(or, if different, the value of the applicable variable rate as of the pricing
date) for the relevant Class. Unless required otherwise by applicable final
regulations, it is anticipated that the Trustee will treat such variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium Class, which will be treated as non-qualified
stated interest includable 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, the Seller intends to treat Regular Securities
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 such Regular Securities
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 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 the Regular Securities.
Market Discount
A subsequent purchaser of a Regular Security also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Security (i) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified stated
interest payments due on a Regular Security, or (ii) in the case of a Regular
Security having original issue discount, is exceeded by the adjusted issue price
of such Regular Security at the time of purchase. Such purchaser generally will
be required to recognize ordinary income to the extent of accrued market
discount on such Regular Security as distributions includable 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, such 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
Security issued with original issue discount, in the ratio of original issue
discount accrued for the relevant period to the sum of the original issue
discount accrued for such period plus the remaining original issue discount as
of the end of such period. Such purchaser also generally will be required to
treat a portion of any gain on a sale or exchange of the Regular Security as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial distributions in reduction of
the stated redemption price at maturity were received. Such purchaser will be
required to defer deduction of a portion of the excess of the interest paid or
accrued on indebtedness incurred to purchase or carry a Regular Security over
the interest distributable thereon. The deferred portion of such interest
expense in any taxable year generally will not exceed the accrued market
discount on the Regular Security for such year. Any such deferred interest
expense is, in general, allowed as a deduction not later than the year in which
the related market discount income is recognized or the Regular Security is
disposed of. As an alternative to the inclusion of market
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discount in income on the foregoing basis, the Regular Securityholder may elect
to include market discount in income currently as it accrues on all market
discount instruments acquired by such Regular Securityholder in that taxable
year or thereafter, in which case the interest deferral rule will not apply. See
"--Election to Treat All Interest Under the Constant Yield Method" below
regarding an alternative manner in which such election may be deemed to be made.
A person who purchases a Regular Security at a price lower than the remaining
amounts includable in the stated redemption price at maturity of the security,
but higher than its adjusted issue price, does not acquire the Regular Security
with market discount, but will be required to report original issue discount,
appropriately adjusted to reflect the excess of the price paid over the adjusted
issue price.
Market discount with respect to a Regular Security will be considered to
be zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Security (or, in the case of a
Regular Security having original issue discount, the adjusted issue price of
such Regular Security) multiplied by the weighted average maturity of the
Regular Security (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.
Under provisions of the OID Regulations relating to contingent payment
obligations, a secondary purchaser of a Regular Security that has "contingent
interest" at a discount generally would continue to accrue interest and
determine adjustments on the Regular Security based on the original projected
payment schedule devised by the issuer of the Security. The holder of such a
Regular Security would be required, however, to allocate the difference between
the adjusted issue price of the Regular Security and its basis in the Regular
Security as positive adjustments to the accruals or projected payments on the
Regular Security over the remaining term of the Regular Security in a manner
that is reasonable (e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those rules.
Due to the substantial lack of regulatory guidance with respect to the market
discount rules, it is unclear how those rules will affect any secondary market
that develops for a given Class of Regular Securities. Prospective investors in
Regular Securities should consult their own tax advisors regarding the
application of the market discount rules to the Regular Securities. 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.
Amortizable Premium
A Regular Security purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds such Regular Security as a "capital
asset" within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize such premium under a constant yield
method that reflects compounding based on the interval between payments on the
Regular Security. Such election will apply to all taxable debt obligations
(including REMIC regular interests) acquired by the Regular Securityholder at a
premium held in that taxable year or thereafter, unless revoked with the
permission of the IRS. Final Treasury regulations have been issued with respect
to amortizable bond premiums which do not by their terms apply to prepayable
debt instruments such as the Regular Securities. 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 Securities, although it is unclear whether the
alternatives to the constant interest method described above under "--Market
Discount" are available. Amortizable bond premium generally will be treated as
an offset to interest income on a Regular Security, rather than as a separate
deduction. 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.
Amortizable premium on a Regular Security that is subject to redemption at
the option of the issuer generally must be amortized as if the optional
redemption price and date were the Security's principal amount and maturity date
if doing so would result in a smaller amount of premium amortization during the
period ending with the optional redemption date. Thus, a holder of a Regular
Security would not be able to amortize any premium on a
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Regular Security that is subject to optional redemption at a price equal to or
greater than the Securityholder's acquisition price unless and until the
redemption option expires. A Regular Security subject to redemption at the
option of the issuer described in the preceding sentence will be treated as
having matured on the redemption date for the redemption price and then as
having been reissued on that date for that price. Any premium remaining on the
Regular Security at the time of the deemed reissuance will be amortized on the
basis of (i) the original principal amount and maturity date or (ii) the price
and date of any succeeding optional redemption, under the principles described
above.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to such an 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 such an election on an instrument by instrument basis or for
a Class or group of debt instruments. However, if the holder makes such an
election with respect to 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 IRS. Investors should consult their own tax advisors regarding
the advisability of making such an election.
Treatment of Losses
Regular Securityholders will be required to report income with respect to
Regular Securities on the accrual method of accounting, without giving effect to
delays or reductions in distributions attributable to defaults or delinquencies
on the Mortgage Loans, except to the extent it can be established that such
losses are uncollectable. Accordingly, the holder of a Regular Security,
particularly a Subordinated Security, may have income, or may incur a diminution
in cash flow as a result of a default or delinquency, but may not be able to
take a deduction (subject to the discussion below) for the corresponding loss
until a subsequent taxable year. In this regard, investors are cautioned that
while they may generally cease to accrue interest income if it reasonably
appears that the interest will be uncollectable, the IRS may take the position
that original issue discount must continue to be accrued in spite of its
uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166. Under Code Section 166, it appears that Regular Securityholders that are
corporations or that otherwise hold the Regular Securities in connection with a
trade or business should in general be allowed to deduct as an ordinary loss
such loss with respect to principal sustained during the taxable year on account
of any such Regular Securities becoming wholly or partially worthless, and that,
in general, Regular Securityholders that are not corporations and do not hold
the Regular Securities in connection with a trade or business should be allowed
to deduct as a short-term capital loss any loss sustained during the taxable
year on account of a portion of any such Regular Securities becoming wholly
worthless. Although the matter is not free from doubt, such non-corporate
Regular Securityholders should be allowed a bad debt deduction at such time as
the principal balance of such Regular Securities is reduced to reflect losses
resulting from any liquidated Mortgage Loans. The IRS, however, could take the
position that non-corporate holders will be allowed a bad debt deduction to
reflect such losses only after all the Mortgage Loans remaining in the Trust
Fund have been liquidated or the applicable Class of Regular Securities has been
otherwise retired. The IRS could also assert that losses on the Regular
Securities are deductible based on some other method that may defer such
deductions for all holders, such as reducing future cashflow for purposes of
computing original issue discount. This may have the effect of creating
"negative" original issue discount which would be deductible only against future
positive original issue discount or otherwise upon termination of the Class.
Regular Securityholders are urged to consult their own tax advisors regarding
the appropriate timing, amount and character of any loss sustained with respect
to such Regular Securities. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
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non-corporate holders, the IRS may take the position that losses attributable to
accrued original issue discount may only be deducted as capital losses in the
case of non-corporate holders who do not hold the Regular Securities in
connection with a trade or business. Special loss rules 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 Securities.
Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular Security.
The adjusted basis of a Regular Security generally will equal the original cost
of the Regular Security to the seller, increased by any original issue discount
or market discount previously included in the seller's gross income with respect
to the Regular Security and reduced by amounts included in the stated redemption
price at maturity of the Regular Security that were previously received by the
seller, by any amortized premium, and by any recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). Such gain will be
treated as ordinary income (i) if a Regular Security is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Securityholder's net investment
in the conversion transaction at 120% of the appropriate applicable Federal rate
in effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income 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 includable in the gross
income of the holder if its yield on such Regular Security were 110% of the
applicable Federal rate as of the date of purchase, over (b) the amount of
income actually includable in the gross income of such holder with respect to
such Regular Security. In addition, gain or loss recognized from the sale of a
Regular Security by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c). 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 for more than one year. Currently, the maximum tax rate for
corporations is the same with respect to both ordinary income and capital gains.
Taxation of Owners of Residual Securities
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will
be includable as ordinary income or loss in determining the federal taxable
income of holders of Residual Securities ("Residual Holders"), and will not be
taxed separately to the REMIC Pool. The daily portions of REMIC taxable income
or net loss of a Residual Holder are determined by allocating the REMIC Pool's
taxable income or net loss for each calendar quarter ratably to each day in such
quarter and by allocating such daily portion among the Residual Holders in
proportion to their respective holdings of Residual Securities 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 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 Securities, plus income on reinvestment
of cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the Regular Securities. The REMIC Pool's
deductions include interest and original issue discount expense on the Regular
Securities, servicing fees on the Mortgage Loans, other administrative expenses
of the REMIC Pool and realized losses on the Mortgage Loans. The
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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 Securities of any
Class of the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year
will be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium with respect to the Mortgage Loans, on the one hand, and
the timing of deductions for interest (including original issue discount) or
income from amortization of issue premium on the Regular Securities, on the
other hand. In the event that an interest in the Mortgage Loans is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Loans is prepaid,
the prepayment may be used in whole or in part to make distributions in
reduction of principal on the Regular Securities, and (ii) the discount on the
Mortgage Loans which is includable in income may exceed the deduction allowed
upon such distributions on those Regular Securities on account of any unaccrued
original issue discount relating to those Regular Securities. When there is more
than one Class of Regular Securities that distribute principal sequentially,
this mismatching of income and deductions is particularly likely to occur in the
early years following issuance of the Regular Securities when distributions in
reduction of principal are being made in respect of earlier Classes of Regular
Securities to the extent that 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 Securities are made.
Taxable income may also be greater in earlier years than in later years as a
result of the fact that interest expense deductions, expressed as a percentage
of the outstanding principal amount of such a Series of Regular Securities, may
increase over time as distributions in reduction of principal are made on the
lower yielding Classes of Regular Securities, whereas, to the extent the REMIC
Pool consists of fixed rate Mortgage Loans, interest income 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 such mismatching or unrelated deductions against which
to offset such income, subject to the discussion of "excess inclusions" below
under "--Limitations on Offset or Exemption of REMIC Income." The timing of such
mismatching of income and deductions described in this paragraph, if present
with respect to a Series of Securities, may have a significant adverse effect
upon a Residual Holder's after-tax rate of return.
A portion of the income of a Residual Securityholder may be treated
unfavorably in three contexts: (i) it may not be offset by current or net
operating loss deductions; (ii) it will be considered unrelated business taxable
income to tax-exempt entities; and (iii) it is ineligible for any statutory or
treaty reduction in the 30% withholding tax otherwise available to a foreign
Residual Securityholder. See "--Limitations on Offset or Exemption of REMIC
Income" below. In addition, a Residual Holder's taxable income during certain
periods may exceed the income reflected by such Residual Holders for such
periods in accordance with generally accepted accounting principles. Investors
should consult their own accountants concerning the accounting treatment of
their investment in Residual Securities.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Holder is limited to the adjusted basis of the Residual
Security as of the close of the quarter (or time of disposition of the Residual
Security if earlier), determined without taking into account the net loss for
the quarter. The initial adjusted basis of a purchaser of a Residual Security is
the amount paid for such Residual Security. Such adjusted basis will be
increased by the amount of taxable income of the REMIC Pool reportable by the
Residual Holder and will be decreased (but not below zero), first, by a cash
distribution from the REMIC Pool and, second, by the amount of loss of the REMIC
Pool reportable by the Residual Holder. Any loss that is disallowed on account
of this limitation may be carried over indefinitely with respect to the Residual
Holder as to whom such loss was disallowed and may be used by such Residual
Holder only to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, the taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Although the law is unclear in certain respects, such recovery of basis
by the REMIC Pool will have the effect of amortization of the issue price of the
Residual Securities over their life. However, in view of the possible
acceleration of the income of
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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 Securities.
A Residual Security may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such 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. The regulations require inducement fees to be
included in income over a period reasonably related to the period in which a
Residual Security 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
holder uses for financial reporting purposes, provided that such 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 a Residual Holder sells or otherwise
disposes of the residual interest, any unrecognized portion of the inducement
fee is required to be taken into account at the time of the sale or disposition.
Further, to the extent that the initial adjusted basis of a Residual
Holder (other than an original holder) in the Residual Security is greater than
the corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such 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 so provide. See "--Treatment of Certain
Items of REMIC Income and Expense--Market Discount" below regarding the basis of
Mortgage Loans to the REMIC Pool and "--Sale or Exchange of a Residual Security"
below regarding possible treatment of a loss upon termination of the REMIC Pool
as a capital loss.
Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the Trustee will compute REMIC income and
expense in accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The Depositor makes no representation as to the
specific method that will be used for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Securities, and
different methods could result in different timing or reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of premium
will be determined in the same manner as original issue discount income on
Regular Securities as described above under "--Taxation of Owners of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities,"
without regard to the de minimis rule described therein, and "--Taxation of
Owners of Regular Securities--Amortizable Premium."
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool in such
Mortgage Loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in such Mortgage Loans is generally the fair market value of the Mortgage
Loans immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool. The accrued
portion of such 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 Owners of Regular Securities--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Loans at a premium equal to the amount of such
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 Owners of Regular Securities--Amortizable Premium," a
person that holds a Mortgage Loan
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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 with
respect to such Mortgage Loans may be deductible in accordance with a reasonable
method regularly employed by the holder thereof. The allocation of such premium
pro rata among principal payments should be considered a reasonable method;
however, the IRS may argue that such premium should be allocated in a different
manner, such as allocating such 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 includable in determining
the federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Security over the daily accruals for such quarterly period of (i) 120% of the
long-term applicable Federal rate that would have applied to the Residual
Security (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (ii) the adjusted issue price of such Residual Security
at the beginning of such quarterly period. For this purpose, the adjusted issue
price of a Residual Security at the beginning of a quarter is the issue price of
the Residual Security, plus the amount of such daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made with respect to such Residual Security prior to the beginning
of such 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
such income as the adjusted issue price of the Residual Securities 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 such 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 with respect to certain persons who are
not U.S. Persons (as defined below under "--Tax-Related Restrictions on Transfer
of Residual Securities--Foreign Investors"), and the portion thereof
attributable to excess inclusions is not eligible for any reduction in the rate
of withholding tax (by treaty or otherwise). See "--Taxation of Certain Foreign
Investors--Residual Securities" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Security, a portion
(allocated under Treasury regulations yet to be issued) of dividends paid by the
real estate investment trust or regulated investment company could not be offset
by net operating losses of its shareholders, would constitute unrelated business
taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to 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 Securities
Disqualified Organizations. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security 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 transfer for a term ending with
the last calendar quarter in which excess inclusions are expected to accrue.
Such rate is applied to the anticipated excess inclusions from the
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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 Security, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Security would in no event be liable for such tax with
respect to a transfer if the transferee furnished to the transferor an affidavit
stating that the transferee is not a Disqualified Organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. The tax also may be waived by the IRS if the Disqualified
Organization promptly disposes of the Residual Security and the transferor pays
income tax at the highest corporate rate on the excess inclusion for the period
the Residual Security is actually held by the Disqualified Organization.
In addition, if a Pass-Through Entity (as defined below) has excess
inclusion income with respect to a Residual Security 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 such 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 such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such 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
such tax if it has received an affidavit from such record holder that it is not
a Disqualified Organization or stating such holder's taxpayer identification
number and, during the period such person is the record holder of the Residual
Security, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
If an "electing large partnership" holds a Residual Security, all
interests in the electing large partnership are treated as held by Disqualified
Organizations for purposes of the tax imposed upon a Pass-Through Entity by
section 860E(c) of the Code. 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 such 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 in
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service or persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 531) that is exempt from
taxation under the Code unless such 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. 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, 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.
The Pooling and Servicing Agreement with respect to a Series will provide
that no legal or beneficial interest in a Residual Security may be transferred
or registered unless (i) the proposed transferee furnished to the transferor and
the Trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual Security
and is not a Disqualified Organization and is not purchasing such Residual
Security on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman thereof) and (ii) the transferor provides a statement in writing to
the Trustee that it has no actual knowledge that such affidavit is false.
Moreover, the Pooling and Servicing Agreement will provide that any attempted or
purported transfer in violation of these transfer restrictions will be null and
void and will vest no rights in any purported transferee. Each Residual Security
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 and Servicing
Agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the IRS and to the requesting party
within 60 days of the request, and the Depositor or the Trustee may charge a fee
for computing and providing such information.
105
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person as defined below under "--Foreign Investors") is
disregarded 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 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. Under the REMIC Regulations, as amended on
July 19, 2002, 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 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 Residual Security to be attributable to a foreign
permanent establishment or fixed base (within the meaning of an applicable
income tax treaty) of the transferee or any other person. The Pooling and
Servicing Agreement with respect to each Series of Certificates will require the
transferee of a Residual Security to certify to the matters in the preceding
sentence as part of the affidavit described above under the heading
"Disqualified Organizations."
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 the transferor to be presumed to lack such knowledge. This fourth condition
requires that one of the two following tests be satisfied: Either
(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 REMIC generates losses.
For purposes of these computations, 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; 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.
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The Pooling and Servicing Agreement will not require that transfers of the
Residual Securities meet the fourth requirement above, and thus meet the safe
harbor. Persons considering the purchase of the Residual Securities should
consult their advisors regarding the advisability of meeting the safe harbor in
any transfer of the Residual Securities.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, (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 Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The prospectus supplement relating to the Securities of a Series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizens 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 thereof 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 U.S. federal income tax regardless of the source of
its income, or a trust if a court within the United States is able to exercise
primary supervision over the administration of 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).
Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder will
recognize gain or loss equal to the excess, if any, of the amount realized over
the adjusted basis (as described above under "--Taxation of Owners of Residual
Securities--Basis and Losses") of such Residual Holder in such Residual Security
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 Holder's Residual Security, in which case, if the
Residual Holder has an adjusted basis in its Residual Security remaining when
its interest in the REMIC Pool terminates, and if it holds such Residual
Security 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.
Any gain on the sale of a Residual Security will be treated as ordinary
income (i) if a Residual Security is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the Residual Holder's net investment in the conversion transaction at
120% of the appropriate applicable Federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income 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 Security by
certain banks or thrift institutions will be treated as ordinary income or loss
pursuant to 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 Securities where the seller
of the Residual Security, during the period beginning six months before the sale
or disposition of the Residual Security and ending six months after such sale or
disposition, acquires (or enters into any
107
other transaction that results in the application of Code Section 1091) any
residual interest in any REMIC or any interest in a "taxable mortgage pool"
(such as a non-REMIC owner trust) that is economically comparable to a Residual
Security.
Mark to Market Regulations
The IRS 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 Security is not treated as a security and thus may not be marked to
market.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions
Income from certain transaction by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includable
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 mortgages 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), it is not a prohibited
transaction to sell a qualified mortgage or cash flow investment held by a REMIC
Pool to prevent a default on Regular Securities as a result of a default on
qualified mortgages or to facilitate a clean-up call (generally, an optional
termination to save administrative costs when no more than a small percentage of
the Securities is outstanding). The REMIC Regulations indicate that the
modification of a Mortgage Loan generally will not be treated as a disposition
if it is occasioned by a default or reasonably foreseeable default, an
assumption of the Mortgage Loan, the waiver of a due-on-sale or
due-on-encumbrance clause, or the conversion of an interest rate by a 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.
108
Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period ending with the close of the third calendar
year beginning after the year in which the REMIC Pool acquires 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 such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular Securities
and Residual Holders within the 90-day period.
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 such 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 IRS of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit in a unified administrative
proceeding. The Master Servicer will be obligated to act as "tax matters
person," as defined in applicable Treasury regulations, with respect to the
REMIC Pool as agent of the Residual Holders holding the largest percentage
interest in the Residual Securities. If the Code or applicable Treasury
regulations do not permit the Master Servicer to act as tax matters person in
its capacity as agent of such Residual Holder, such Residual Holder or such
other person specified pursuant to Treasury regulations will be required to act
as tax matters person. The tax matters person generally has responsibility for
overseeing and providing notice to the other Residual Holders of certain
administrative and judicial proceedings regarding the REMIC Pool's tax affairs,
although other holders of the Residual Securities of the same Series would be
able to participate in such proceedings in appropriate circumstances.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such 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, such 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 with respect to a
regular interest it holds in another REMIC. Such investors who hold REMIC
Securities 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,
such expenses are not deductible at all for purposes of computing the
alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Temporary Treasury regulations provide
that the additional gross income and corresponding amount of expenses generally
are to be allocated entirely to the holders of Residual Securities in the case
of a REMIC Pool that would not qualify as a fixed investment trust in the
absence of a REMIC election. With respect to a REMIC Pool that would be
classified as an investment trust in the absence of a REMIC
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election or that is substantially similar to an investment trust, any holder of
a Regular Security that is an individual, trust, estate, or pass-through entity
also will be allocated its pro rata share of such expenses and a corresponding
amount of income and will be subject to the limitations or deductions imposed by
Code Sections 67 and 68, as described above. All such expenses will be allocable
to the Residual Securities. In general, such allocable portion will be
determined based on the ratio that a REMIC Securityholder's income, determined
on a daily basis, bears to the income of all holders of Regular Securities and
Residual Securities with respect to a REMIC Pool. As a result, individuals,
estates or trusts holding REMIC Securities (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 Securities that are issued in a single Class or otherwise
consistently with fixed investment trust status or in excess of cash
distributions for the related period on Residual Securities.
Taxation of Certain Foreign Investors
Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
non-U.S. Persons, generally will be considered "portfolio interest" and,
therefore, generally will not be subject to 30% United States withholding tax,
provided that (i) such interest is not effectively connected with the conduct of
a trade or business in the United States of the Securityholder, (ii) such
non-U.S. Person is not a "10-percent shareholder" within the meaning of Code
Section 871(h)(3)(B) or a controlled foreign corporation described in Code
Section 881(c)(3)(C) and (iii) such non-U.S. Person provides the Trustee, or the
person who would otherwise be required to withhold tax from such distributions
under Code Section 1441 or 1442, with an appropriate statement, signed under
penalties of perjury, identifying the beneficial owner and stating, among other
things, that the beneficial owner of the Regular Security is a non-U.S. Person.
If such statement, or any other required statement, is not provided, 30%
withholding will apply unless reduced or eliminated pursuant to an applicable
tax treaty or unless the interest on the Regular Security is effectively
connected with the conduct of a trade or business within the United States by
such non-U.S. Person. In the latter case, such non-U.S. Person will be subject
to United States federal income tax at regular rates. Investors who are non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning a Regular Security.
Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Holders who are non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "--Regular Securities" above, but only to the extent that (i) the
Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Fund or
segregated pool of assets therein (as to which a separate REMIC election will be
made), to which the Residual Security relates, consists of obligations issued in
"registered form" within the meaning of Code Section 163(f)(1). Generally,
Mortgage Loans will not be, but regular interests in another REMIC Pool will be,
considered obligations issued in registered form. Furthermore, Residual Holders
will not be entitled to any exemption from the 30% withholding tax (or lower
treaty rate) to the extent of that portion of REMIC taxable income that
constitutes an "excess inclusion." See "--Taxation of Owners of Residual
Securities--Limitations on Offset or Exemption of REMIC Income." 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 such non-U.S.
Persons, 30% (or lower treaty rate) withholding will not apply. Instead, the
amounts paid to such 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, such amounts generally will be taken into account for purposes of
withholding only when paid or otherwise distributed (or when the Residual
Security is disposed of) under rules similar to withholding upon disposition of
debt instruments that have original issue discount. See "--Taxation of Owners of
Residual Securities--Tax-Related Restrictions on Transfer of Residual
Securities--Foreign Investors" above concerning the disregard of certain
transfers having "tax avoidance potential."
The Internal Revenue Service issued temporary regulations on August 1,
2006 (the "Temporary Regulations") modifying the general rule that excess
inclusions from a REMIC residual interest are not includible in the income of a
foreign person (or subject to withholding tax) until paid or distributed. The
Temporary Regulations
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are effective generally for interests in a REMIC residual interest first
acquired on or after August 1, 2006, and accelerate the time both for reporting
of, and withholding tax on, excess inclusions allocated to the foreign equity
holders of partnerships and certain other pass-through entities. The Temporary
Regulations also provide that excess inclusions are United States source income.
In the case of REMIC residual interests held by a foreign person through a
partnership, the Temporary Regulations deem the amount of excess inclusion
income allocated to the foreign partner to be received by the foreign partner on
the last day of the partnership's taxable year, except to the extent that the
excess inclusion was required to be taken into account by the foreign partner at
an earlier time under section 860G(b) of the Code as a result of a distribution
by the partnership to the foreign partner or a disposition in whole or in part
of the foreign partner's indirect interest in the REMIC residual interest. A
disposition in whole or in part of the foreign partner's indirect interest in
the REMIC residual interest may occur as a result of a termination of the REMIC,
a disposition of the partnership's residual interest in the REMIC, a disposition
of the foreign partner's interest in the partnership, or any other reduction in
the foreign partner's allocable share of the portion of the REMIC net income or
deduction allocated to the partnership.
In the case of a residual interest held by a foreign person as a
shareholder of a real estate investment trust or regulated investment company,
as a participant in a common trust fund or as a patron in an organization
subject to part I of subchapter T (cooperatives), the foreign person must
include in income the amount of excess inclusion allocated to it at the same
time that other income from the trust, company, fund, or organization would be
taken into account.
The Temporary Regulations also expressly make subject to withholding tax
excess inclusions allocated to a foreign person (whether as a partner or holder
of an interest in a pass-through entity). In addition, in the case of excess
inclusions allocable to a foreign person as a partner, the Temporary Regulations
eliminate an important exception to the withholding requirements under which a
withholding agent unrelated to a payee is obligated to withhold on a payment
only to the extent that the withholding agent has control over the payee's money
or property and knows the facts giving rise to the payment.
Investors who are non-U.S. Persons should consult their own tax advisors
regarding the specific tax consequences to them of owning Residual Securities.
Backup Withholding
Distributions made on the Regular Securities, and proceeds from the sale
of the Regular Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 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 Holder complies with certain reporting and/or certification procedures,
including the provision of its taxpayer identification number to the Trustee,
its agent or the broker who effected the sale of the Regular Security, or such
Holder is otherwise an exempt recipient under applicable provisions of the Code.
Any amounts to be withheld from distribution on the Regular Securities would be
refunded by the IRS or allowed as a credit against the Regular Holder's federal
income tax liability. The Withholding Regulations change certain of the rules
relating to certain presumptions relating to information reporting and backup
withholding. Non-U.S. Persons are urged to contact their own tax advisors
regarding the application to them of backup withholding and 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
IRS and to individuals, estates, non-exempt and non-charitable trusts, and
partnerships who are either holders of record of Regular Securities or
beneficial owners who own Regular Securities through a broker or middleman as
nominee. All brokers, nominees and all other non-exempt holders of record of
Regular Securities (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
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Internal Revenue Service Publication 938 with respect to a particular Series of
Regular Securities. Holders through nominees must request such information from
the nominee.
The IRS'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 Securities, and filed annually with the IRS concerning Code
Section 67 expenses (see "--Taxes That May Be Imposed on the REMIC
Pool--Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Securities, and filed annually with the IRS concerning the percentage of the
REMIC Pool's assets meeting the qualified asset tests described above under
"Characterization of Investments in REMIC Securities."
Residual Holders should be aware that their responsibilities as holders of
the residual interest in a REMIC Pool, including the duty to account for their
shares of the REMIC Pool's income or loss on their returns, continue for the
life of the REMIC Pool, even after the principal and interest on their Residual
Securities have been paid in full.
Treasury regulations provide that a Residual Holder is not required to
treat items on its return consistently with their treatment on the REMIC Pool's
return if the Holder owns 100% of the Residual Securities for the entire
calendar year. Otherwise, each Residual Holder is required to treat items on its
returns consistently with their treatment on the REMIC Pool's return, unless the
Holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Pool. The IRS may assess a deficiency resulting from a failure to comply
with the consistency requirement without instituting an administrative
proceeding at the REMIC Pool level. Any person that holds a Residual Security as
a nominee for another person may be required to furnish the related REMIC Pool,
in a manner to be provided in Treasury regulations, with the name and address of
such person and other specified information.
Grantor Trust Funds
Classification of Grantor Trust Funds
With respect to each Series of Grantor Trust Securities, assuming
compliance with all provisions of the applicable Agreement, the related Grantor
Trust Fund will be classified as a grantor trust under subpart E, part I of
subchapter J of the Code and not as a partnership, an association taxable as a
corporation, or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Accordingly, each holder of a Grantor Trust Security generally will be
treated as the beneficial owner of an undivided interest in the Mortgage Loans
included in the Grantor Trust Fund.
Standard Securities
General
Where there is no Retained Interest or "excess" servicing with respect to
the Mortgage Loans underlying the Securities of a Series, and where such
Securities are not designated as "Stripped Securities," the holder of each such
Security in such Series (referred to herein as "Standard Securities") will be
treated as the owner of a pro rata undivided interest in the ordinary income and
corpus portions of the Grantor Trust Fund represented by its Standard Security
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 Standard
Security 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 Standard Security, including interest at the coupon 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 Securityholder's method of accounting. A Securityholder
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generally will be able to deduct its share of the Servicing Fee and all
administrative and other expenses of the Trust Fund in accordance with its
method of accounting, provided that such amounts are reasonable compensation for
services rendered to that Grantor Trust Fund. However, investors who are
individuals, estates or trusts who own Securities, either directly or indirectly
through certain pass-through entities, will be subject to limitations 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 Grantor Trust Fund, 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, such investors holding Standard
Securities, directly or indirectly through a pass-through entity, may have
aggregate taxable income in excess of the aggregate amount of cash received on
such Standard Securities with respect to interest at the pass-through rate or as
discount income on such Standard Securities. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Moreover, where there is Retained Interest with respect to the Mortgage Loans
underlying a Series of Securities 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 Securities" and "--Recharacterization of
Servicing Fees," respectively.
Holders of Standard Securities, particularly any Class of a Series which
is a Subordinated Security, may incur losses of interest or principal with
respect to the Mortgage Loans. Such losses would be deductible generally only as
described above under "--REMICs--Taxation of Owners of Regular
Securities--Treatment of Losses," except that Securityholders on the cash method
of accounting would not be required to report qualified stated interest as
income until actual receipt.
Tax Status
With respect to a Series, Cadwalader, Wickersham & Taft LLP or Hunton &
Williams LLP has advised the Depositor that, except with respect to a Trust Fund
consisting of Unsecured Home Improvement Loans:
o A Standard Security 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 Standard
Security is of the type described in such section of the Code.
o A Standard Security 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 Grantor Trust Fund 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).
o A Standard Security 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 Grantor
Trust Fund consist of "qualified mortgages" within the meaning of
Code Section 860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be characterized
in their entirety under the Code provisions cited in the first two bullet points
above or whether the amount qualifying for such treatment must be reduced by the
amount of the Buydown Funds. There is indirect authority supporting treatment of
an investment in a Buydown Mortgage 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 proper.
Accordingly, Securityholders are urged to
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consult their own tax advisors concerning the effects of such arrangements on
the characterization of such Securityholder's investment for federal income tax
purposes.
Premium and Discount
Securityholders 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 Standard Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Security will be determined generally as described above under
"--REMICs--Taxation of Owners of Residual Securities--Premium." The rules
allowing for the amortization of premium are available with respect to Mortgage
Loans originated after September 27, 1985.
Original Issue Discount. The original issue discount rules of Code Section
1271 through 1275 will be applicable to a Securityholder'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
generally are applicable to mortgages originated after March 2, 1984. Under the
OID Regulations, 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
Securities" below regarding original issue discount on Stripped Securities.
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 such accrual.
However, Code Section 1272 provides for a reduction in the amount of original
issue discount includable 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 such Mortgage Loans
acquired by a Securityholder are purchased at a price equal to the then unpaid
principal amount of such 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 includable by such holder.
Market Discount. Securityholders 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 "--REMICs--Taxation of Owners of Regular Securities--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 such accrual.
Recharacterization of Servicing Fees
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither income
nor a deduction to Securityholders. 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 Standard Securities, 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. IRS 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. Such
guidance provides safe harbors for servicing deemed to be reasonable and
requires taxpayers to demonstrate that the value of servicing fees in excess of
such amounts is not greater than the value of the services provided.
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Accordingly, if the IRS'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 such Mortgage Loans as "stripped coupons" and "stripped bonds."
Subject to the de minimis rule discussed below under "Stripped Securities," 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 Standard
Securities, and the original issue discount rules of the Code would apply to the
holder thereof. While Securityholders would still be treated as owners of
beneficial interests in a grantor trust for federal income tax purposes, the
corpus of such trust could be viewed as excluding the portion of the Mortgage
Loans the ownership of which is attributed to the Servicer, or as including such
portion as a second Class of equitable interest. Applicable Treasury regulations
treat such an 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, such a
recharacterization should not have any significant effect upon the timing or
amount of income reported by a Securityholder, except that the income reported
by a cash method holder may be slightly accelerated. See "--Stripped Securities"
below for a further description of the federal income tax treatment of stripped
bonds and stripped coupons.
Sale or Exchange of Standard Securities
Upon sale or exchange of a Standard Securities, a Securityholder 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 Security. In general, the aggregate adjusted basis will equal
the Securityholder's cost for the Standard Security, exclusive of accrued
interest, increased by the amount of any income previously reported with respect
to the Standard Security and decreased by the amount of any losses previously
reported with respect to the Standard Security and the amount of any
distributions (other than accrued interest) received thereon. Except as provided
above with respect 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 Standard
Security was held as a capital asset. However, gain on the sale of a Standard
Security will be treated as ordinary income (i) if a Standard Security is held
as part of a "conversion transaction" as defined in Code Section 1258(c), up to
the amount of interest that would have accrued on the Securityholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any prior
disposition of property that was held as 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
for more than one year. The maximum tax rate for corporations currently is the
same with respect to both ordinary income and capital gains.
Stripped Securities
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,
Securities that are subject to those rules will be referred to as "Stripped
Securities." The Securities 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 Retained Interest 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
"--Standard Securities--Recharacterization of Servicing Fees" above), and (iii)
a Class of Securities are 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.
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In general, a holder of a Stripped Security will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Security's allocable share of the
servicing fees paid to a Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"--Standard Securities--Recharacterization of Servicing Fees." Although not free
from doubt, for purposes of reporting to Stripped Securityholders, the servicing
fees will be allocated to the Classes of Stripped Securities in proportion to
the distributions to such Classes for the related period or periods. The holder
of a Stripped Security generally will be entitled to a deduction each year in
respect of the servicing fees, as described above under "--Standard
Securities--General," subject to the limitation described therein.
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 Securities
for federal income tax purposes is not clear in certain respects, particularly
where such Stripped Securities are issued with respect to a Mortgage Pool
containing variable-rate Mortgage Loans, the Depositor has been advised by
counsel that (i) the Grantor Trust Fund 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 Security 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 Securities
could be made in one of the ways described below under "--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 Securities should
be aggregated and treated as though they were made on a single debt instrument.
The Pooling and Servicing 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
Security as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under such
regulations, a Stripped Security 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 such a Stripped Security would be treated as qualified
stated interest under the OID Regulations, assuming it is not an interest-only
or super-premium Stripped Security. Further, these regulations provide that the
purchaser of such a Stripped Security 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 Security 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 "--REMICs--Taxation of
Owners of Regular Securities--Market Discount," without regard to the de minimis
rule therein, assuming that a prepayment assumption is employed in such
computation.
The holder of a Stripped Security will be treated as owning an interest in
each of the Mortgage Loans held by the Grantor Trust Fund and will recognize an
appropriate share of the income and expenses associated with the Mortgage Loans.
Accordingly, an individual, trust or estate that holds a Stripped Security
directly or through a pass-through entity will be subject to the limitations on
deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Security, particularly any Class of a Series which
is a Subordinated Security, may deduct losses incurred with respect to the
Stripped Security as described above under "--Standard Securities--General."
Status of Stripped Securities
No specific legal authority exists as to whether the character of the
Stripped Securities, 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, except with respect to a Trust Fund consisting of
Unsecured Home Improvement Loans,
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Stripped Securities 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 which
is . . . residential real estate" 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 Stripped Securities 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 such Mortgage Loans qualify for such treatment.
The application of such Code provisions to Buydown Mortgage Loans is uncertain.
See "--Standard Securities--Tax Status" above.
Taxation of Stripped Securities
Original Issue Discount. Except as described above under "--General," each
Stripped Security 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 Security must be included in ordinary income as it accrues, in
accordance with a constant yield method that takes into account the compounding
of interest, which may be prior to the receipt of the cash attributable to such
income. Based in part on the issue discount required to be included in the
income of a holder of a Stripped Security (referred to in this discussion as a
"Stripped Securityholder") in any taxable year likely will be computed generally
as described above under "--REMICs--Taxation of Owner of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities."
However, with the apparent exception of a Stripped Security qualifying as a
market discount obligation as described above under "--General," the issue price
of a Stripped Security 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, other than qualified stated interest, to be made on the Stripped
Security to such Securityholder, presumably under the Prepayment Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Securityholder'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 Securityholder's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security 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 such Stripped Security 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 Securities 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 Securities. However, if final regulations dealing with contingent
interest with respect to the Stripped Securities apply the same principles as
the OID Regulations, such regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on the
sale of contingent interest Stripped Securities as ordinary income. Investors
should consult their tax advisors regarding the appropriate tax treatment of
Stripped Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Securityholder's
adjusted basis in such Stripped Security, as described above under
"--REMICs--Taxation of Owners of Regular Securities--Sale or Exchange of Regular
Securities." Gain or loss from the sale or exchange of a Stripped Security
generally will be capital gain or loss to the Securityholder if the Stripped
Security is held as a "capital asset" within the meaning of Code Section 1221,
and will be long-term or short-term depending on whether the Stripped Security
has been held for the long-term capital gain holding period (currently, more
than one year). To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Securities, such subsequent
purchaser will be required for federal income tax purposes to accrue and report
such excess as if it were original issue 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 Securityholder other than an original Securityholder
should be the Prepayment Assumption or a new rate based on the circumstances at
the date of subsequent purchase.
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Purchase of More Than One Class of Stripped Securities. When an investor
purchases more than one Class of Stripped Securities, it is currently unclear
whether for federal income tax purposes such Classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
Possible Alternative Characterization. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations of
the applicable Code provisions. For example, the Securityholder may be treated
as the owner of (i) one installment obligation consisting of such Stripped
Security's pro rata share of the payments attributable to principal on each
Mortgage Loan and a second installment obligation consisting of such Stripped
Security'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 Security's pro rata share of payments of principal and/or interest to
be made with respect thereto. Alternatively, the holder of one or more Classes
of Stripped Securities may be treated as the owner of a pro rata fractional
undivided interest in each Mortgage Loan to the extent that such Stripped
Security, or Classes of Stripped Securities in the aggregate, represent the same
pro rata portion of principal and interest on each such 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. Treasury
regulations regarding original issue discount on stripped obligations make the
foregoing interpretations less likely to be applicable. The preamble to such
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 Securities
and the resultant differing treatment of income recognition, Securityholders are
urged to consult their own tax advisors regarding the proper treatment of
Stripped Securities 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 Securityholder at any time during such year, such
information (prepared on the basis described above) as is necessary to enable
such Securityholder to prepare its federal income tax returns. Such information
will include the amount of original issue discount accrued on Securities held by
persons other than Securityholders exempted from the reporting requirements.
However, 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 Securityholder, other than an original Securityholder that purchased
at the issue price. In particular, in the case of Stripped Securities, such
reporting will be based upon a representative initial offering price of each
Class of Stripped Securities. The Trustee will also file such original issue
discount information with the IRS. If a Securityholder fails to supply an
accurate taxpayer identification number or if the Secretary of the Treasury
determines that a Securityholder has not reported all interest and dividend
income required to be shown on his federal income tax return, backup withholding
may be required in respect of any reportable payments, as described above under
"--REMICs--Taxation of Certain Foreign Investors--Backup Withholding."
On January 24, 2006, the Internal Revenue Service published final
regulations which establish a reporting framework for interests in "widely held
fixed investment trusts" and place the responsibility of reporting on the person
in the ownership chain who holds an interest for a beneficial owner. A widely
held fixed investment trust is defined as an arrangement classified as a "trust"
under Treasury Regulation Section 301.7701-4(c) which is a U.S. Person and in
which any interest is held by a middleman, which includes, but is not limited to
(i) a custodian of a person's account, (ii) a nominee and (iii) a broker holding
an interest for a customer in street name. The Trustee, or its designated agent,
will be required to calculate and provide information to requesting persons with
respect to the related Trust in accordance with these new regulations beginning
with respect to the 2007 calendar year. The Trustee (or its designated agent),
or the applicable middleman (in the case of interests held through a middleman),
will be required to file information returns with the IRS and provide tax
information statements to Certificateholders in accordance with these new
regulations after December 31, 2007.
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Taxation of Certain Foreign Investors
To the extent that a Security 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 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 Securityholder on the sale or exchange of such a
Security 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 non-U.S. 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
"--REMICs--Taxation of Certain Foreign Investors--Regular Securities."
Partnership Trust Funds
Classification of Partnership Trust Funds
With respect to each Series of Partnership Securities or Debt Securities,
Cadwalader, Wickersham & Taft LLP or Hunton & Williams LLP will deliver its
opinion that the Trust Fund will not be a taxable mortgage pool or an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the applicable Agreement and related documents will be complied
with, and on counsel's conclusion that the nature of the income of the Trust
Fund will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations.
Characterization of Investments in Partnership Securities and Debt
Securities
For federal income tax purposes, (i) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning of Code
Section 7701(a)(19)(C)(v) and (ii) interest on Debt Securities held by a real
estate investment trust will not be treated as "interest on obligations secured
by mortgages on real property or on interests in real property" within the
meaning of Code Section 856(c)(3)(B), and Debt Securities held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code Section 856(c)(4)(A), but Partnership Securities held by a real estate
investment trust will qualify under those sections based on the real estate
investments trust's proportionate interest in the assets of the Partnership
Trust Fund qualifying for such treatments based on capital accounts.
Taxation of Debt Securityholders
Treatment of the Debt Securities as Indebtedness
The Depositor will agree, and the Securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
with respect to each Series of Debt Securities, Cadwalader, Wickersham & Taft
LLP or Hunton & Williams LLP will deliver its opinion that the Debt Securities
will be classified as indebtedness for federal income tax purposes. The
discussion below assumes this characterization of the Debt Securities is
correct.
If, contrary to the opinion of counsel, the IRS successfully asserted that
the Debt Securities were not debt for federal income tax purposes, the Debt
Securities might be treated as equity interests in the Partnership Trust, and
the timing and amount of income allocable to holders of such Debt Securities may
be different than as described in the following paragraph.
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Debt Securities generally will be subject to the same rules of taxation as
Regular Securities issued by a REMIC, as described above, except that (i) income
reportable on Debt Securities is not required to be reported under the accrual
method unless the holder otherwise uses the accrual method and (ii) the special
rule treating a portion of the gain on sale or exchange of a Regular Security as
ordinary income is inapplicable to Debt Securities. See "--REMICs--Taxation of
Owners of Regular Securities" and "--Sale or Exchange of Regular Securities."
Taxation of Owners of Partnership Securities
Treatment of the Partnership Trust Fund as a Partnership
If so specified in the applicable prospectus supplement, the Depositor
will agree, and the Securityholders will agree by their purchase of Securities,
to treat the Partnership Trust Fund as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
Partnership Trust Fund, the partners of the partnership being the
Securityholders (including the Depositor), and the Debt Securities (if any)
being debt of the partnership. However, the proper characterization of the
arrangement involving the Partnership Trust Fund, the Partnership Securities,
the Debt Securities, and the Depositor is not clear, because there is no
authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because one or more of the Classes of Partnership Securities have certain
features characteristic of debt, the Partnership Securities might be considered
debt of the Depositor or the Partnership Trust Fund. Any such characterization
would not result in materially adverse tax consequences to Securityholders as
compared to the consequences from treatment of the Partnership Securities as
equity in a partnership, described below. The following discussion assumes that
the Partnership Securities represent equity interests in a partnership.
Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to
federal income tax. Rather, each Securityholder will be required to separately
take into account such holder's allocated share of income, gains, losses,
deductions and credits of the Partnership Trust Fund. It is anticipated that the
Partnership Trust Fund's income will consist primarily of interest earned on the
Mortgage Loans (including appropriate adjustments for market discount, original
issue discount and bond premium) as described above under "--Grantor Trust
Funds-- Standard Securities--General" and "--Premium and Discount") and any gain
upon collection or disposition of Mortgage Loans. The Partnership Trust Fund's
deductions will consist primarily of interest accruing with respect to the Debt
Securities, servicing and other fees, and losses or deductions upon collection
or disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Agreements and related documents). The applicable Agreement will provide, in
general, that the Securityholders will be allocated taxable income of the
Partnership Trust Fund for each Collection Period equal to the sum of (i) the
interest that accrues on the Partnership Securities in accordance with their
terms for such Collection Period, including interest accruing at the applicable
pass-through rate for such Collection Period and interest on amounts previously
due on the Partnership Securities but not yet distributed; (ii) any Partnership
Trust Fund income attributable to discount on the Mortgage Loans that
corresponds to any excess of the principal amount of the Partnership Securities
over their initial issue price; and (iii) any other amounts of income payable to
the Securityholders for such Collection Period. Such allocation will be reduced
by any amortization by the Partnership Trust Fund of premium on Mortgage Loans
that corresponds to any excess of the issue price of Partnership Securities over
their principal amount. All remaining taxable income of the Partnership Trust
Fund will be allocated to the Depositor. Based on the economic arrangement of
the parties, this approach for allocating Partnership Trust Fund income should
be permissible under applicable Treasury regulations, although no assurance can
be given that the IRS would not require a greater amount of income to be
allocated to Securityholders. Moreover, even under the foregoing method of
allocation, Securityholders may be allocated income equal to the entire
pass-through rate plus the other items described above even though the Trust
Fund might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Partnership Securities on the accrual basis and Securityholders may
become
120
liable for taxes on Partnership Trust Fund income even if they have not received
cash from the Partnership Trust Fund to pay such taxes.
Part or all of the taxable income allocated to a Securityholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) may constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of the
Master Servicer but not interest expense) allocable to an individual, estate or
trust Securityholder would be miscellaneous itemized deductions subject to the
limitations described above under "--Grantor Trust Funds--Standard
Securities--General". Accordingly, such deductions might be disallowed to the
individual in whole or in part and might result in such holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to such
holder over the life of the Partnership Trust Fund.
Discount income or premium amortization with respect to each Mortgage Loan
would be calculated in a manner similar to the description above under
"--Grantor Trust Funds--Standard Securities--General" and "--Premium and
Discount." Notwithstanding such description, it is intended that the Partnership
Trust Fund will make all tax calculations relating to income and allocations to
Securityholders on an aggregate basis with respect to all Mortgage Loans held by
the Partnership Trust Fund rather than on a Mortgage Loan-by-Mortgage Loan
basis. If the IRS were to require that such calculations be made separately for
each Mortgage Loan, the Partnership Trust Fund might be required to incur
additional expense, but it is believed that there would not be a material
adverse effect on Securityholders.
Discount and Premium
It is not anticipated that the Mortgage Loans will have been issued with
original issue discount and, therefore, the Partnership Trust Fund should not
have original issue discount income. However, the purchase price paid by the
Partnership Trust Fund for the Mortgage Loans may be greater or less than the
remaining principal balance of the Mortgage Loans at the time of purchase. If
so, the Mortgage Loans will have been acquired at a premium or discount, as the
case may be. See "--Grantor Trust Funds--Standard Securities--Premium and
Discount." (As indicated above, the Partnership Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Mortgage Loan-by-Mortgage Loan basis).
If the Partnership Trust Fund acquires the Mortgage Loans at a market
discount or premium, the Partnership Trust Fund will elect to include any such
discount in income currently as it accrues over the life of the Mortgage Loans
or to offset any such premium against interest income on the Mortgage Loans. As
indicated above, a portion of such market discount income or premium deduction
may be allocated to Securityholders.
Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be deemed
to terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, it would cause a deemed
contribution of the assets of a Partnership Trust Fund (the "old partnership")
to a new Partnership Trust Fund (the "new partnership") in exchange for
interests in the new partnership. Such interests would be deemed distributed to
the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange. The Partnership Trust Fund will not comply with
certain technical requirements that might apply when such a constructive
termination occurs. As a result, the Partnership Trust Fund may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Partnership Trust Fund might
not be able to comply due to lack of data.
Disposition of Securities
Generally, capital gain or loss will be recognized on a sale of
Partnership Securities in an amount equal to the difference between the amount
realized and the seller's tax basis in the Partnership Securities sold. A
121
Securityholder's tax basis in an Partnership Security will generally equal the
holder's cost increased by the holder's share of Partnership Trust Fund income
(includable in income) and decreased by any distributions received with respect
to such Partnership Security. In addition, both the tax basis in the Partnership
Securities and the amount realized on a sale of an Partnership Security would
include the holder's share of the Debt Securities and other liabilities of the
Partnership Trust Fund. A holder acquiring Partnership Securities at different
prices may be required to maintain a single aggregate adjusted tax basis in such
Partnership Securities, and, upon sale or other disposition of some of the
Partnership Securities, allocate a portion of such aggregate tax basis to the
Partnership Securities sold (rather than maintaining a separate tax basis in
each Partnership Security for purposes of computing gain or loss on a sale of
that Partnership Security).
Any gain on the sale of a Partnership Security attributable to the
holder's share of unrecognized accrued market discount on the Mortgage Loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a Securityholder is required to recognize an aggregate amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Partnership Securities that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Partnership Securities.
Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Collection Period and the tax items for a particular Collection
Period will be apportioned among the Securityholders in proportion to the
principal amount of Partnership Securities owned by them as of the close of the
last day of such Collection Period. As a result, a holder purchasing Partnership
Securities may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a Collection Period convention may not be permitted by
existing regulations. If a Collection Period convention is not allowed (or only
applies to transfers of less than all of the partner's interest), taxable income
or losses of the Partnership Trust Fund might be reallocated among the
Securityholders. The Depositor will be authorized to revise the Partnership
Trust Fund's method of allocation between transferors and transferees to conform
to a method permitted by future regulations.
Section 731 Distributions
In the case of any distribution to a Securityholder, no gain will be
recognized to that Securityholder to the extent that the amount of any money
distributed with respect to such Security does not exceed the adjusted basis of
such Securityholder's interest in the Security. To the extent that the amount of
money distributed exceeds such Securityholder's adjusted basis, gain will be
currently recognized. In the case of any distribution to a Securityholder, no
loss will be recognized except upon a distribution in liquidation of a
Securityholder's interest. Any gain or loss recognized by a Securityholder will
be capital gain or loss.
Section 754 Election
In the event that a Securityholder sells its Partnership Securities at a
profit (loss), the purchasing Securityholder will have a higher (lower) basis in
the Partnership Securities than the selling Securityholder had. The tax basis of
the Partnership Trust Fund's assets would not be adjusted to reflect that higher
(or lower) basis unless the Partnership Trust Fund were to file an election
under Section 754 of the Code. In order to avoid the administrative complexities
that would be involved in keeping accurate accounting records, as well as
potentially onerous information reporting requirements, the Partnership Trust
Fund will not make such an election. As a result, a Securityholder might be
allocated a greater or lesser amount of Partnership Trust Fund income than would
be appropriate based on its own purchase price for Partnership Securities.
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Administrative Matters
The Trustee is required to keep or have kept complete and accurate books
of the Partnership Trust Fund. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Partnership Trust Fund and will report each Securityholder's
allocable share of items of Partnership Trust Fund income and expense to holders
and the IRS on Schedule K-1. The Trustee will provide the Schedule K-1
information to nominees that fail to provide the Partnership Trust Fund with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Partnership Securities.
Generally, holders must file tax returns that are consistent with the
information return filed by the Partnership Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership Securities
so held. Such information includes (i) the name, address and taxpayer
identification number of the nominee and (ii) as to each beneficial owner (x)
the name, address and identification number of such person, (y) whether such
person is a United States person, a tax-exempt entity or a foreign government,
an international organization, or any wholly-owned agency or instrumentality of
either of the foregoing, and (z) certain information on Partnership Securities
that were held, bought or sold on behalf of such person throughout the year. In
addition, brokers and financial institutions that hold Partnership Securities
through a nominee are required to furnish directly to the Trustee information as
to themselves and their ownership of Partnership Securities. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Partnership Trust Fund. The information
referred to above for any calendar year must be furnished to the Partnership
Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Partnership Trust Fund with the
information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the Pooling
and Servicing Agreement and, as such, will be responsible for representing the
Securityholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the Securityholders,
and, under certain circumstances, a Securityholder may be precluded from
separately litigating a proposed adjustment to the items of the Partnership
Trust Fund. An adjustment could also result in an audit of a Securityholder's
returns and adjustments of items not related to the income and losses of the
Partnership Trust Fund.
Tax Consequences to Foreign Securityholders
It is not clear whether the Partnership Trust Fund would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to non-U.S. Persons, because there is no clear
authority dealing with that issue under facts substantially similar to those
described herein. Although it is not expected that the Partnership Trust Fund
would be engaged in a trade or business in the United States for such purposes,
if so specified in the applicable prospectus supplement, the Partnership Trust
Fund may withhold as if it were so engaged in order to protect the Partnership
Trust Fund from possible adverse consequences of a failure to withhold. The
Partnership Trust Fund may withhold on the portion of its taxable income that is
allocable to Securityholders who are non-U.S. Persons pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at the maximum tax rate for corporations or individuals, as
applicable. Amounts withheld will be deemed distributed to the non-U.S. Person
Securityholders. Subsequent adoption of Treasury regulations or the issuance of
other administrative pronouncements may require the Partnership Trust Fund to
change its withholding procedures. In determining a holder's withholding status,
the Partnership Trust Fund may rely on IRS Form W-8BEN, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
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To the extent specified in the applicable prospectus supplement, (i) each
non-U.S. Person holder might be required to file a U.S. individual or corporate
income tax return (including, in the case of a corporation, the branch profits
tax) on its share of the Partnership Trust Fund's income; (ii) each non-U.S.
Person holder must obtain a taxpayer identification number from the IRS and
submit that number to the Partnership Trust Fund on Form W-8BEN in order to
assure appropriate crediting of the taxes withheld; and (iii) a non-U.S. Person
holder generally would be entitled to file with the IRS a claim for refund with
respect to taxes withheld by the Partnership Trust Fund, taking the position
that no taxes were due because the Partnership Trust Fund was not engaged in a
U.S. trade or business. Notwithstanding the foregoing, interest payments made
(or accrued) to a Securityholder who is a non-U.S. Person may be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Partnership Trust Fund. If these interest payments are
properly characterized as guaranteed payments, then the interest may not be
considered "portfolio interest." As a result, Securityholders who are non-U.S.
Persons may be subject to United States federal income tax and withholding tax
at a rate of 30 percent, unless reduced or eliminated pursuant to an applicable
treaty. In such case, a non-U.S. Person holder would only be entitled to claim a
refund for that portion of the taxes in excess of the taxes that should be
withheld with respect to the guaranteed payments.
Backup Withholding
Distributions made on the Partnership Securities and proceeds from the
sale of the Partnership Securities will be subject to a "backup" withholding tax
of 28% (increasing to 31% after 2010) if, in general, the Securityholder fails
to comply with certain identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS CONCERNING ANY
POSSIBLE TAX RETURN DISCLOSURE OBLIGATION WITH RESPECT TO THE SECURITIES
DISCUSSED HEREIN. THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
SECURITYHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT
THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF REMIC SECURITIES, GRANTOR TRUST SECURITIES,
PARTNERSHIP SECURITIES AND DEBT SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN
FEDERAL OR OTHER TAX LAWS.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
Securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Securities offered
hereunder.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA" )
and the Code impose certain requirements on employee benefit plans and on
certain other retirement plans and arrangements, including individual retirement
accounts, individual retirement annuities, Keogh plans and collective investment
funds and separate accounts in which such plans, accounts or arrangements are
invested, that are subject to Title I of ERISA and Section 4975 of the Code
("Plans") and on persons who are fiduciaries with respect to such Plans in
connection with the investment of Plan assets. Certain employee benefit plans,
such as governmental plans (as defined in ERISA Section 3(32)), and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
However, such plans may be subject to the provisions of other applicable
federal, state and local law materially similar to the foregoing provisions of
ERISA and the Code. Any such plan which is qualified and exempt from taxation
under Sections 401(a) and 501(a) of the Code, however, is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
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ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, ERISA and the Code prohibit a broad range of
transactions involving assets of a Plan and persons ("Parties in Interest") who
have certain specified relationships to the Plan unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code, unless a statutory or administrative
exemption is available. These prohibited transactions generally are set forth in
Sections 406 and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in Securities may cause the Mortgage Loans, Contracts,
Unsecured Home Improvement Loans and other assets included in a related Trust
Fund to be deemed Plan assets. United States Department of Labor ("DOL")
regulations Section 2510.3-101 (as modified by Section 3(42) of ERISA) provides
that when a Plan acquires an equity interest in an entity, the Plan's assets
include both such equity interest and an undivided interest in each of the
underlying assets of the entity, unless certain exceptions not applicable here
apply, or unless the equity participation in the entity by "benefit plan
investors" (i.e., Plans and any entity whose underlying assets are deemed to
include assets of such Plans by reason of such Plan's investment in the entity)
is not "significant," both as defined therein. For this purpose, in general,
equity participation by benefit plan investors will be "significant" on any date
if 25% or more of the value of any Class of equity interests in the entity is
held by benefit plan investors. To the extent the Securities are treated as
equity interests for purposes of DOL regulations Section 2510.3-101 (as modified
by Section 3(42) of ERISA), equity participation in a Trust Fund will be
significant on any date if immediately after the most recent acquisition of any
Security, 25% or more of any Class of Securities is held by benefit plan
investors. With respect to the application of the 25% limit described above, if
a benefit plan investor that is an entity whose underlying assets are deemed to
include Plan assets, acquires equity interests in the issuing entity, only a pro
rata portion of such equity interests will be treated as being held by benefit
plan investors for purposes of DOL regulations Section 2510.3-101 (as modified
by Section 3(42) of ERISA).
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Mortgage Loans, Contracts, Unsecured Home Improvement Loans and
other assets included in a Trust Fund constitute Plan assets, then any party
exercising management or discretionary control regarding those assets, such as
the Servicer or Master Servicer, may be deemed to be a Plan "fiduciary" and thus
subject to the fiduciary responsibility provisions and prohibited transaction
provisions of ERISA and the Code with respect to the investing Plan. In
addition, if the Mortgage Loans, Contracts, Unsecured Home Improvement Loans and
other assets included in a Trust Fund constitute Plan assets, the purchase of
Securities by a Plan, as well as the operation of the Trust Fund, may constitute
or involve a prohibited transaction under ERISA and the Code.
On May 14, 1993, the DOL granted to NationsBank Corporation, the
predecessor to Bank of America Corporation, the corporate parent of Banc of
America Securities LLC, an individual administrative exemption, Prohibited
Transaction Exemption ("PTE") 93-31, as amended by PTE 97-34, PTE 2000-58 and
PTE 2002-41 (the "Exemption"), which generally exempts from the application of
the prohibited transaction provisions of Sections 406(a) and 407 of ERISA, and
the excise taxes imposed on such prohibited transactions pursuant to Section
4975(a) and (b) of the Code, certain transactions, among others, relating to the
servicing and operation of mortgage pools and the purchase, sale and holding of
Securities underwritten by an Underwriter (as hereinafter defined), that (a)
represent a beneficial ownership interest in the assets of a Trust Fund and
entitle the holder the pass-through payments of principal, interest and/or other
payments made with respect to the assets of the Trust Fund or (b) are
denominated as a debt instrument and represent an interest in a REMIC or certain
other specified entities, provided that certain conditions set forth in the
Exemption are satisfied. For purposes of this Section "ERISA Considerations,"
the term "Underwriter" shall include (a) Bank of America Corporation, (b) any
person directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with Bank of America Corporation,
including Banc of America Securities LLC, and (c) any member of the underwriting
syndicate or selling group of which a person described in (a) or (b) is a
manager or co-manager with respect to a Class of Securities.
The Exemption sets forth five general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief thereunder. First, the acquisition of Securities
by a Plan must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length
125
transaction with an unrelated party. Second, the Securities at the time of
acquisition by the Plan must be rated in one of the four highest generic rating
categories by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"), Moody's Investors Service, Inc. ("Moody's") or Fitch Ratings ("Fitch").
Third, the Trustee cannot be an affiliate of any member of the Restricted Group
other than an Underwriter; the "Restricted Group" consists of the Underwriter,
the Depositor, the Trustee, the Master Servicer, any Servicer, any insurer and
any obligor with respect to Assets constituting more than 5% of the aggregate
unamortized principal balance of the Assets in the related Trust Fund as of the
date of initial issuance of the Securities. Fourth, the sum of all payments made
to and retained by the Underwriter(s) must represent not more than reasonable
compensation for underwriting the Securities; the sum of all payments made to
and retained by the Depositor pursuant to the assignment of the Assets to the
related Trust Fund must represent not more than the fair market value of such
obligations; and the sum of all payments made to and retained by the Servicer
must represent not more than reasonable compensation for such person's services
under the applicable Agreement and reimbursement of such person's reasonable
expenses in connection therewith. Fifth, the investing Plan must be an
accredited investor as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act of 1933, as amended. In addition, the Trust
Fund must meet the following requirements: (i) the assets of the Trust Fund must
consist solely of assets of the type that have been included in other investment
pools; (ii) securities evidencing interests in such other investment pools must
have been rated in one of the four highest generic rating categories by S&P,
Moody's or Fitch for at least one year prior to the Plan's acquisition of the
securities; and (iii) securities evidencing interests in such other investment
pools must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of the Securities.
A fiduciary of a Plan contemplating purchasing a Security must make its
own determination that the general conditions set forth above will be satisfied
with respect to such Security. In addition, any Securities representing a
beneficial ownership interest in Unsecured Home Improvement Loans or Revolving
Credit Line Loans will not satisfy the general conditions of the Exemption.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407 of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code) in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of
Securities by Plans. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding
of a Security on behalf of an "Excluded Plan" by any person who has
discretionary authority or renders investment advice with respect to the assets
of such Excluded Plan. For purposes of the Securities, an Excluded Plan is a
Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Sections 4975(a) and (b)
of the Code by reason of Section 4975(c)(1)(E) of the Code in connection with
(1) the direct or indirect sale, exchange or transfer of Securities in the
initial issuance of Securities between the Depositor or an Underwriter and a
Plan when the person who has discretionary authority or renders investment
advice with respect to the investment of Plan assets in the Securities is (a) an
obligor with respect to 5% or less of the fair market value of the Assets or (b)
an affiliate of such a person, (2) the direct or indirect acquisition or
disposition in the secondary market of Securities by a Plan and (3) the holding
of Securities by a Plan.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 of ERISA, and the taxes imposed by Sections 4975(a) and
(b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the Trust Fund. The
Depositor expects that the specific conditions of the Exemption required for
this purpose will be satisfied with respect to the Securities so that the
Exemption would provide an exemption from the restrictions imposed by Sections
406(a) and (b) of ERISA (as well as the excise taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code) for transactions
in connection with the servicing, management and operation of the Mortgage
Pools, provided that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if such restrictions are deemed to otherwise apply merely because a person is
126
deemed to be a "party in interest" (within the meaning of Section 3(14) of
ERISA) or a "disqualified person" (within the meaning of Section 4975(e)(2) of
the Code) with respect to an investing Plan by virtue of providing services to
the Plan (or by virtue of having certain specified relationships to such a
person) solely as a result of the Plan's ownership of Securities.
The Exemption was amended by PTE 97-34, 62 Fed. Reg. 39021 (July 21,
1997), which, among other changes, permits the inclusion of a pre-funding
account in a trust fund, provided that the following conditions are met: (a) the
pre-funding account may not exceed 25% of the total amount of certificates being
offered; (b) additional obligations purchased generally must meet the same terms
and conditions as those of the original obligations used to create the trust
fund; (c) the transfer of additional obligations to the trust during the
pre-funding period must not result in the certificates receiving a lower rating
at the termination of the pre-funding period than the rating that was obtained
at the time of the initial issuance of the certificates; (d) the weighted
average interest rate for all of the obligations in the trust at the end of the
pre-funding period must not be more than 100 basis points less than the weighted
average interest rate for the obligations which were transferred to the trust on
the closing date; (e) the characteristics of the additional obligations must be
monitored to confirm that they are substantially similar to those which were
acquired as of the closing date either by a credit support provider or insurance
provider independent of the sponsor or by an independent accountant retained by
the sponsor that confirms such conformance in writing; (f) the pre-funding
period must be described in the prospectus or private placement memorandum
provided to investing plans; and (g) the trustee of the trust must be a
substantial financial institution or trust company experienced in trust
activities and familiar with its duties, responsibilities and liabilities as a
fiduciary under ERISA.
Further, the pre-funding period must be a period beginning on the closing
date and ending no later than the earliest to occur of (x) the date the amount
on deposit in the pre-funding account is less than the minimum dollar amount
specified in the pooling and servicing agreement; (y) the date on which an event
of default occurs under the pooling and servicing agreement; or (z) the date
which is the later of three months or 90 days after the closing date. It is
expected that the Pre-Funding Account will meet all of these requirements.
To the extent the Securities are not treated as equity interests for
purposes of DOL regulations section 2510.3-101 (as modified by Section 3(42) of
ERISA), a Plan's investment in such Securities ("Non-Equity Securities") would
not cause the assets included in a related Trust Fund to be deemed Plan assets.
However, the Depositor, the Servicer, the Trustee, or Underwriter may be the
sponsor of or investment advisor with respect to one or more Plans. Because such
parties may receive certain benefits in connection with the sale of Non-Equity
Securities, the purchase of Non-Equity Securities using Plan assets over which
any such parties has investment authority might be deemed to be a violation of
the prohibited transaction rules of ERISA and the Code for which no exemption
may be available. Accordingly, Non-Equity Securities may not be purchased using
the assets of any Plan if any of the Depositor, the Servicer, the Trustee or
Underwriter has investment authority with respect to such assets.
In addition, certain affiliates of the Depositor might be considered or
might become Parties in Interest with respect to a Plan. Also, any holder of
Securities, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by such holder. In either
case, the acquisition or holding of Non-Equity Securities by or on behalf of
such a Plan could be considered to give rise to an indirect prohibited
transaction within the meaning of ERISA and the Code, unless it is subject to
one or more statutory or administrative exemptions such as Prohibited
Transaction Class Exemption ("PTCE") 84-14, which exempts certain transactions
effected on behalf of a Plan by a "qualified professional asset manager", PTCE
90-1, which exempts certain transactions involving insurance company pooled
separate accounts, PTCE 91-38, which exempts certain transactions involving bank
collective investment funds, PTCE 95-60, which exempts certain transactions
involving insurance company general accounts, or PTCE 96-23, which exempts
certain transactions effected on behalf of a Plan by certain "in-house" asset
managers. It should be noted, however, that even if the conditions specified in
one or more of these exemptions are met, the scope of relief provided by these
exemptions may not necessarily cover all acts that might be construed as
prohibited transactions.
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to such investment, the availability of the exemptive relief
provided in the Exemption and the potential applicability of any other
prohibited transaction exemption in connection therewith. In particular, a Plan
fiduciary which proposes to cause a Plan to purchase
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Securities representing a beneficial ownership interest in a pool of
single-family residential first mortgage loans, a Plan fiduciary should consider
the applicability of PTCE 83-1, which provides exemptive relief for certain
transactions involving mortgage pool investment trusts. The prospectus
supplement with respect to a Series of Securities may contain additional
information regarding the application of the Exemption, PTCE 83-1 or any other
exemption, with respect to the Securities offered thereby. In addition, any Plan
fiduciary that proposes to cause a Plan to purchase Strip Securities should
consider the federal income tax consequences of such investment. Fiduciaries of
plans not subject to ERISA or the Code, such as governmental plans, should
consider the application of any applicable federal, state or local law
materially similar to the prohibited transaction rules of ERISA or the Code or
the fiduciary provisions of ERISA, as well as the need for and the availability
of exemptive relief under such applicable law.
Any Plan fiduciary considering whether to purchase a Security on behalf of
a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment.
The sale of Securities to a Plan is in no respect a representation by the
Depositor or the Underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan.
LEGAL INVESTMENT
As will be specified in the applicable prospectus supplement, certain
Classes of the Securities will constitute "mortgage related securities " for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended
("SMMEA"), so long as (i) they are rated in one of the two highest rating
categories by at least one Rating Agency and (ii) are part of a Series
representing interests in a Trust Fund 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 Securities not qualifying
as "mortgage related securities" for purposes of SMMEA ("Non-SMMEA Securities")
under various legal investment restrictions, and thus the ability of investors
subject to these restrictions to purchase such Securities, 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 Securities constitute legal investments for them.
Classes which qualify as "mortgage related securities" will constitute
legal investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including but not limited to depository
institutions, insurance companies and pension funds) created pursuant to or
existing under the laws of the United States or of any state (including the
District of Columbia and Puerto Rico) whose authorized investments are subject
to state regulation, to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for such
entities. Pursuant to SMMEA, a number of states enacted legislation, on or
before the October 3, 1991 cut-off for such enactments, limiting to varying
extents the ability of certain entities (in particular, insurance companies) to
invest in "mortgage related securities" secured by loans 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.
Pursuant to Section 347 of the Riegle Community Development and Regulatory
Improvement Act of 1994, which amended the definition of "mortgage related
security" to include, in relevant part, Securities satisfying the rating and
qualified originator requirements for "mortgage related securities," but
evidencing interests in a Trust Fund consisting, in whole or in part, of first
liens on one or more parcels of real estate upon which are located one or more
commercial structures, states were authorized to enact legislation, on or before
September 23, 2001, specifically referring to Section 347 and prohibiting or
restricting the purchase, holding or investment by state-regulated entities in
those types of Securities. Accordingly, the investors affected by such
legislation will be authorized to invest in the Offered Securities only to the
extent provided in such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in mortgage related
securities without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in such securities, and national banks
may purchase mortgage related securities for their own
128
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
such regulations as the applicable federal regulatory authority may prescribe.
In this connection, the OCC has amended 12 C. F. R. Part 1 to authorize national
banks to purchase and sell for their own account, without limitation as to a
percentage of the bank's capital and surplus (but subject to compliance with
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), residual interests in mortgage
related securities and commercial 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 of the Offered Securities.
All depository institutions considering an investment in the Offered
Securities 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.
Investors 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 Class of the Offered
Securities, 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 Class of Offered
Securities 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 Offered Securities as
"mortgage related securities," no representations are made as to the proper
characterization of the Offered Securities for legal investment purposes,
financial institution regulatory purposes, or other purposes, or as to the
ability of particular investors to purchase any Offered Securities under
applicable legal investment restrictions. The uncertainties described above (and
any unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Offered Securities) may adversely
affect the liquidity of the Offered Securities.
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 legal advisors in
determining whether and to what extent the Offered Securities of any Class
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 such investor.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the supplements to this prospectus
will be offered in Series. The distribution of the Securities may be effected
from time to time in one or more transactions, including negotiated
129
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related prospectus supplement, the Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Banc of America Securities LLC
("Banc of America Securities") acting as underwriter with other underwriters, if
any, named therein. In such event, the prospectus supplement may also specify
that the underwriters will not be obligated to pay for any Securities agreed to
be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of the Securities, underwriters may
receive compensation from the Depositor or from purchasers of the Securities in
the form of discounts, concessions or commissions. The prospectus supplement
will describe any such compensation paid by the Depositor.
Alternatively, the prospectus supplement may specify that the Securities
will be distributed by Banc of America Securities acting as agent or in some
cases as principal with respect to Securities which it has previously purchased
or agreed to purchase. If Banc of America Securities acts as agent in the sale
of Securities, Banc of America Securities will receive a selling commission with
respect to each Series of Securities, depending on market conditions, expressed
as a percentage of the aggregate principal balance of the related Assets as of
the Cut-off Date. The exact percentage for each Series of Securities will be
disclosed in the related prospectus supplement. To the extent that Banc of
America Securities elects to purchase Securities as principal, Banc of America
Securities may realize losses or profits based upon the difference between its
purchase price and the sales price.
In addition, the prospectus supplement may specify that the Securities may
be offered by direct placements by the Depositor with investors, in which event
the Depositor will be an underwriter with respect to the Securities, or by
inclusion as underlying securities backing another series of asset-backed
securities 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
asset-backed securities, the Depositor or its affiliate will be an underwriter
with respect to the underlying securities.
The prospectus supplement with respect to any Series offered other than
through underwriters will contain information regarding the nature of such
offering and any agreements to be entered into between the Depositor and
purchasers of Securities of such Series.
The Depositor will indemnify Banc of America Securities and any
underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, or will contribute to payments Banc of America
Securities and any underwriters may be required to make in respect thereof.
In the ordinary course of business, Banc of America Securities and the
Depositor may engage in various securities and financing transactions, including
repurchase agreements to provide interim financing of the Depositor's mortgage
loans pending the sale of such mortgage loans or interests therein, including
the Securities.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be "underwriters"
within the meaning of the Securities Act of 1933 in connection with reoffers and
sales by them of Securities. Securityholders should consult with their legal
advisors in this regard prior to any such reoffer or sale.
As to each Series of Securities, only those Classes rated in one of the
four highest rating categories by any Rating Agency will be offered hereby. Any
unrated Class may be initially retained by the Depositor, and may be sold by the
Depositor at any time to one or more institutional investors.
LEGAL MATTERS
The legality of, including the federal income tax matters related to the
Securities of a Series, will be passed upon for the Depositor by Cadwalader,
Wickersham & Taft LLP, New York, New York or Hunton & Williams LLP, Charlotte,
North Carolina.
130
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this prospectus or in the related prospectus supplement.
RATING
It is a condition to the issuance of any Class of Offered Securities that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one nationally recognized
statistical rating organization ("Rating Agency").
Ratings on mortgage pass-through securities address the likelihood of
receipt by Securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such securities, the nature of the underlying assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
securities and other asset-backed securities do not represent any assessment of
the likelihood of principal prepayments by borrowers or of the degree by which
such prepayments might differ from those originally anticipated. As a result,
securityholders might suffer a lower than anticipated yield, and, in addition,
holders of stripped interest securities in extreme cases might fail to recoup
their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization.
REPORTS TO SECURITYHOLDERS
The Trustee will prepare and forward to the Securityholders of each Series
statements containing information with respect to principal and interest
payments and the related Trust Fund, as described under "Description of the
Securities--Reports to Securityholders." Copies of these statements will be
filed with the Commission through its EDGAR system located at
"http://www.sec.gov" under the name of the Issuing Entity as an exhibit to the
Issuing Entity's monthly distribution reports on Form 10-D for each Series of
Securities for so long as the Issuing Entity is subject to the reporting
requirement of the Securities Exchange Act of 1934, as amended. In addition,
each party to the servicing function for a Series of Securities (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 "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Evidence as to Compliance." Copies of these
statements and reports will be filed with the Commission under the name of the
Issuing Entity as an exhibit to the Issuing Entity's annual statement on Form
10-K for each Series of Securities.
WHERE YOU CAN FIND MORE INFORMATION
The Depositor filed a registration statement (the "Registration
Statement") relating to the Securities with the Securities and Exchange
Commission (the "Commission"). 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 Commission, 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
Commission's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549.
Information concerning the operation of the Commission's Public Reference Room
may be obtained by calling the Commission at (800) SEC-0330. The Commission 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 such materials should be
available by logging onto the Commission's Web site. Copies of any documents
incorporated to this prospectus by reference will be provided at
131
no cost to each person, including any beneficial owner, to whom a prospectus is
delivered upon written or oral request directed to Asset Backed Funding
Corporation, 214 North Tryon Street, Charlotte, North Carolina 28255, telephone
number (704) 386-2400.
Copies of filed Periodic Reports relating to an Issuing Entity will also
be available on the applicable Trustee's website on the same day they are filed
through the EDGAR system as described under "Reports to Certificateholders" or
"Reports to Noteholders," as the case may be, in the related prospectus
supplement.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Commission allows the Depositor to "incorporate by reference"
information it files with the Commission, 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 Commission 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
Securities.
Copies of any documents incorporated to this prospectus by reference will
be provided at no cost to each person, including any beneficial owner, to whom a
prospectus is delivered upon written or oral request directed to Asset Backed
Funding Corporation, 214 North Tryon Street, Charlotte, North Carolina 28255,
telephone number (704) 386-2400.
132
INDEX OF PROSPECTUS DEFINITIONS
Terms Page
Accrual Securities............................................................32
Accrued Security Interest.....................................................34
Adjustable Rate Assets........................................................20
Agreement.....................................................................50
ARM Contracts.................................................................24
ARM Loans.....................................................................22
ARM Unsecured Home Improvement Loans..........................................23
Assessment of Compliance......................................................61
Asset Conservation Act........................................................83
Asset Group...................................................................32
Asset Seller..................................................................20
Assets........................................................................20
Attestation Report............................................................61
Auction Administrator.........................................................49
Auction Distribution Date.....................................................49
Auction Securities............................................................49
Available Distribution Amount.................................................33
Balloon Payment Assets........................................................20
Banc of America Securities...................................................130
Bank of America...............................................................31
Bankruptcy Code...............................................................80
Bankruptcy Loss...............................................................68
Bankruptcy Loss Amount........................................................68
Beneficial Owners.............................................................42
Bi-weekly Assets..............................................................20
Book-Entry Securities.........................................................32
Buy Down Assets...............................................................20
Buydown Funds.................................................................94
Buydown Mortgage Loans........................................................29
Buydown Period................................................................29
California Military Code......................................................87
Capitalized Interest Account..................................................25
Cash Flow Agreement...........................................................72
CERCLA........................................................................82
Certificates..................................................................32
Class.........................................................................32
Cleanup Costs.................................................................83
Closing Date...................................................................5
Code..........................................................................91
Collection Account............................................................53
Collection Period.............................................................33
Combined Loan-to-Value Ratio..................................................21
Commission...................................................................131
Companion Class...............................................................37
Component.....................................................................35
contract borrower.............................................................75
Contract Lender...............................................................75
Contract Rate.................................................................24
Contracts.....................................................................20
Convertible Assets............................................................20
Cooperatives..................................................................21
CPR...........................................................................28
Cut-off Date..................................................................22
Cut-off Date...................................................................5
Debt Securities...............................................................91
Definitive Securities.........................................................32
Deposit Trust Agreement.......................................................50
Depositor......................................................................5
Determination Date............................................................33
Disqualified Organization....................................................105
Distribution Account..........................................................53
Distribution Date.............................................................26
DTC...........................................................................43
electing large partnership...................................................105
ERISA........................................................................124
Euroclear Operator............................................................44
European Depositaries.........................................................42
Excess Bankruptcy Losses......................................................68
Excess Fraud Losses...........................................................68
excess servicing.............................................................114
Excess Special Hazard Losses..................................................68
Exchange Act..................................................................43
Excluded Plan................................................................126
Exemption....................................................................125
Financial Intermediary........................................................42
Fitch........................................................................126
Fraud Loss....................................................................68
Fraud Loss Amount.............................................................68
GEM Assets....................................................................20
GPM Assets....................................................................20
Grantor Trust Fund............................................................91
Grantor Trust Securities......................................................91
Home Equity Loans.............................................................21
Home Improvement Contracts....................................................21
HOPA..........................................................................86
Increasing Payment Assets.....................................................20
Indenture.....................................................................50
Indenture Servicing Agreement.................................................50
Indenture Trustee.............................................................50
Indirect Participants.........................................................42
Insolvency Laws...............................................................80
Insurance Proceeds............................................................33
Interest Accrual Period.......................................................26
Interest Reduction Assets.....................................................20
IRS...........................................................................57
Issuing Entity.................................................................5
Land Sale Contracts...........................................................21
Level Payment Assets..........................................................20
Liquidation Proceeds..........................................................33
Lock-out Date.................................................................23
Lock-out Period...............................................................23
Manufactured Home.............................................................24
Mark to Market Regulations...................................................108
Master Servicer...............................................................50
133
MERS..........................................................................51
Moody's......................................................................126
Mortgage Interest Rate........................................................22
Mortgage Loans................................................................20
Mortgage Notes................................................................21
Mortgaged Properties..........................................................21
Mortgages.....................................................................21
Multifamily Mortgage Loan.....................................................21
Multifamily Property..........................................................21
National Housing Act..........................................................22
NCUA.........................................................................129
new partnership..............................................................121
Non-Equity Securities........................................................127
Non-Pro Rata Security.........................................................95
Nonrecoverable Advance........................................................39
Non-SMMEA Securities.........................................................128
Non-U.S. Holder...............................................................47
Notes.........................................................................32
OCC...........................................................................31
Offered Securities............................................................32
OID Regulations...............................................................91
old partnership..............................................................121
Originator....................................................................21
OTS...........................................................................85
PAC...........................................................................36
PAC I.........................................................................36
PAC II........................................................................36
Par Price.....................................................................49
Parity Act....................................................................84
Participants..................................................................42
Parties in Interest..........................................................125
Partnership Securities........................................................91
Partnership Trust Fund........................................................91
Pass-Through Entity..........................................................105
Pass-Through Rate.............................................................34
PCBs..........................................................................82
Periodic Reports.............................................................131
Plans........................................................................124
PMI...........................................................................86
Pooling and Servicing Agreement...............................................49
Pre-Funded Amount.............................................................25
Pre-Funding Account...........................................................25
Pre-Funding Period............................................................25
Prepayment Assumption.........................................................96
Prepayment Charge.............................................................23
PTCE.........................................................................127
PTE..........................................................................125
Purchase Price................................................................51
Qualified Intermediary........................................................47
Rating Agency................................................................131
RCRA..........................................................................83
Record Date...................................................................33
Registration Statement.......................................................131
Regular Securities............................................................92
Regular Securityholder........................................................95
Related Proceeds..............................................................39
Relevant Depositary...........................................................42
Relief Act....................................................................87
REMIC.........................................................................91
REMIC Pool....................................................................91
REMIC Provisions..............................................................91
REMIC Regulations.............................................................91
REMIC Securities..............................................................91
REO Property..................................................................40
Residual Holders.............................................................101
Residual Securities...........................................................92
Restricted Group.............................................................126
Retained Interest.............................................................60
Revolving Credit Line Loans...................................................23
Rules.........................................................................43
S&P..........................................................................126
secured-creditor exemption....................................................83
Securities....................................................................32
Security......................................................................50
Security Balance..............................................................27
Securityholder................................................................26
Senior Certificates...........................................................32
Senior Notes..................................................................32
Senior Securities.............................................................32
Series........................................................................32
Servicer.......................................................................5
Servicers.....................................................................50
Servicing Standard............................................................56
Single Family Mortgage Loan...................................................21
Single Family Property........................................................21
SMMEA........................................................................128
Special Hazard Loss...........................................................68
Special Hazard Loss Amount....................................................68
Special Servicer..............................................................62
Sponsor........................................................................5
Standard Securities..........................................................112
Startup Day...................................................................92
Step-up Rate Assets...........................................................20
Strip Securities..............................................................32
Stripped Securities..........................................................115
Stripped Securityholder......................................................117
Subordinated Certificates.....................................................32
Subordinated Notes............................................................32
Subordinated Securities.......................................................32
Subsequent Assets.............................................................25
Superliens....................................................................82
super-premium.................................................................95
TAC...........................................................................37
Taxable Mortgage Pools........................................................92
Texas Home Equity Laws........................................................86
Tiered REMICs.................................................................94
Title V.......................................................................85
Title VIII....................................................................86
Trust.........................................................................32
Trust Fund....................................................................32
Trustee.......................................................................50
U.S. Person..................................................................107
134
U.S. Withholding Agent........................................................47
UCC...........................................................................79
Underlying Servicing Agreement................................................49
Underwriter..................................................................125
Unsecured Home Improvement Loans..............................................20
UST...........................................................................83
Value.........................................................................21
Voting Rights.................................................................62
Warranting Party..............................................................52
135
$803,217,000
(Approximate)
Asset Backed Funding Corporation
Depositor
ABFC 2006-OPT3 Trust
Issuing Entity
Bank of America, National Association
Sponsor
Option One Mortgage Corporation
Servicer
Asset Backed Funding Corporation
Asset-Backed Certificates, Series 2006-OPT3
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PROSPECTUS SUPPLEMENT
- --------------------------------------------------------------------------------
Banc of America Securities LLC
We are not offering the Offered Certificates in any state where the offer is
not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
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 be required to deliver a prospectus
supplement and prospectus for ninety days following the date of this prospectus
supplement.
November 13, 2006