PROSPECTUS SUPPLEMENT
(To Prospectus Dated April 27, 2007)
[BANK OF AMERICA LOGO]
Banc of America Mortgage Securities, Inc.
Depositor
Bank of America, National Association
Sponsor and Servicer
Banc of America Alternative Loan Trust 2007-2
Issuing Entity
$393,967,243
(Approximate)
Mortgage Pass-Through Certificates, Series 2007-2
Principal and interest payable monthly, commencing in June 2007
The Issuing Entity will Issue -
o Three groups consisting of eighteen classes of senior certificates.
o Six classes of subordinate certificates all of which are subordinated to,
and provide credit enhancement for, the senior certificates. Each class of
subordinate certificates is also subordinated to those classes of
subordinate certificates, if any, higher in order of payment priority.
The classes of offered certificates are listed and their sizes and basic payment
characteristics are described under the heading "Offered Certificates" in the
table beginning on page S-6 of this prospectus supplement.
The Assets of the Issuing Entity will Include -
o A pool of fully amortizing, fixed interest rate, one- to four-family,
residential first mortgage loans, substantially all of which have original
terms to stated maturity of approximately 20 to 30 years.
Credit Enhancement will Consist of -
o Subordination of the subordinate certificates to the senior certificates
for the distributions of principal and interest and the allocation of
losses.
o Shifting interest in prepayments through the allocation, subject to
certain exceptions, of most principal collections to the senior non-PO
certificates for the first five years and a lesser, but still
disproportionately large, allocation of these collections to the senior
non-PO certificates during the following four years.
o In the case of a class of super senior certificates, the subordination of
the related class of super senior support certificates for losses if the
subordinate certificates are no longer outstanding.
Interest Rate Support will be Provided for -
o The Class 2-A-6 Certificates through a yield maintenance agreement with
Bank of America, National Association, as counterparty.
- --------------------------------------------------------------------------------
You should carefully consider the risk factors beginning on page S-26 of this
prospectus supplement.
Neither the offered certificates nor the underlying mortgage loans are insured
or guaranteed by any governmental agency or instrumentality.
The offered certificates will represent interests in the issuing entity only and
will not represent interests in or obligations of the depositor, the sponsor or
any other entity.
This prospectus supplement may be used to offer and sell the offered
certificates only if accompanied by the prospectus.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved the offered certificates or determined that this
prospectus supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
The offered certificates will be offered by Banc of America Securities LLC, as
underwriter, at varying prices to be determined at the time of sale to
investors. The offered certificates are expected to be delivered on or about May
30, 2007. Total proceeds to the depositor for the offered certificates will be
approximately 100.687% of the initial class balance of the offered certificates,
plus accrued interest, if applicable, before deducting expenses payable by the
depositor.
Banc of America Securities LLC
May 29, 2007
TABLE OF CONTENTS
Important Notice About Information Presented in this
Prospectus Supplement and the Prospectus...................................S-4
SUMMARY OF TERMS.............................................................S-8
RISK FACTORS................................................................S-26
The Rate of Principal Payments on the Mortgage Loans Will
Affect the Yield on the Offered Certificates............................S-26
Delinquencies and Losses on the Mortgage Loans Will
Adversely Affect Your Yield.............................................S-28
Mortgage Loans Paying Interest Only During the First Ten
or Fifteen Years May Have a Higher Risk of Default or
Rates of Prepayment.....................................................S-28
Alternative Underwriting Standards May Increase Risk of
Loss....................................................................S-29
The Rate of Default on Mortgage Loans that Are Secured by
Investor Properties May be Higher than on Other Mortgage
Loans...................................................................S-29
There Are Risks Relating to Mortgaged Properties Subject
to Second Lien Mortgage Loans...........................................S-30
Credit Scores May Not Accurately Predict the Likelihood of
Default.................................................................S-30
Subordination of Super Senior Support Certificates and
Subordinate Certificates Increases Risk of Loss.........................S-30
Subordinate Certificates Provide Subordination for All
Groups..................................................................S-31
High Balance Loans May Increase Risk of Loss on
Certificates............................................................S-31
Decrement and Sensitivity Tables Are Based Upon
Assumptions and Models..................................................S-31
Geographic Concentration May Increase Risk of Loss Due to
Adverse Economic Conditions or Natural Disasters........................S-32
Decline in Residential Real Estate Values May Increase
Risk and Adversely Affect Your Investment...............................S-32
The Class 2-A-6 Certificates are Subject to Counterparty
Risk....................................................................S-33
The Class 2-A-6 Certificates May Not Receive Amounts
Expected Under the Yield Maintenance Agreement..........................S-33
Tax Consequences of Residual Certificate..................................S-33
United States Military Operations May Increase Risk of
Relief Act Shortfalls...................................................S-34
THE MORTGAGE POOL...........................................................S-35
THE SPONSORn................................................................S-38
STATIC POOL INFORMATION.....................................................S-38
THE DEPOSITOR...............................................................S-39
THE ISSUING ENTITY..........................................................S-39
THE TRUSTEE.................................................................S-39
THE SERVICER................................................................S-41
THE POOLING AGREEMENT.......................................................S-41
General...................................................................S-41
Compensating Interest.....................................................S-41
Compensation and Payment of Expenses of the Servicer and
the Trustee.............................................................S-42
Voting Rights.............................................................S-43
DESCRIPTION OF THE CERTIFICATES.............................................S-43
Distributions.............................................................S-44
Pool Distribution Amount..................................................S-44
Priority of Distributions.................................................S-45
Interest..................................................................S-46
LIBOR.....................................................................S-48
The Yield Maintenance Agreement...........................................S-49
The Reserve Fund..........................................................S-50
Principal.................................................................S-50
Cross-Collateralization...................................................S-58
Allocation of Losses......................................................S-59
Restrictions on Transfer of the Class 1-A-R Certificate...................S-61
Restrictions on Transfer of the Class 1-A-3, Class 2-A-3,
Class 2-A-5, Class 3-A-3 and Subordinate Certificates...................S-64
PREPAYMENT AND YIELD CONSIDERATIONS.........................................S-65
Assumptions Relating to Tables............................................S-67
Weighted Average Lives of the Offered Certificates........................S-68
Yield on the Inverse Floating Rate Certificates...........................S-69
Yield on the Class 2-A-9 Certificates.....................................S-70
Yield on the Class 3-IO Certificates......................................S-71
Yield on the Class 1-PO Certificates......................................S-72
S-2
Yield on the Class 1-A-R Certificate......................................S-73
Yield on the Subordinate Certificates.....................................S-73
Yield Considerations with Respect to the Class B-2 and
Class B-3 Certificates..................................................S-74
USE OF PROCEEDS.............................................................S-75
FEDERAL INCOME TAX CONSEQUENCES.............................................S-75
Regular Certificates......................................................S-76
Residual Certificate......................................................S-76
Taxation of the Class 2-A-6 Certificates..................................S-77
Backup Withholding and Reporting Requirements.............................S-78
ERISA CONSIDERATIONS........................................................S-78
REPORTS TO CERTIFICATEHOLDERS...............................................S-79
METHOD OF DISTRIBUTION......................................................S-81
LEGAL MATTERS...............................................................S-81
CERTIFICATE RATINGS.........................................................S-81
INDEX OF PROSPECTUS SUPPLEMENT DEFINITIONS..................................S-83
Appendix A: Mortgage Loan Data...............................................A-1
Appendix B: Decrement Tables.................................................B-1
Appendix C: Hypothetical Mortgage Loans......................................C-1
Appendix D: Sensitivity and Aggregate Realized Loss Tables...................D-1
Appendix E: Yield Maintenance Agreement Notional Amounts.....................E-1
S-3
Important Notice About Information Presented
in this Prospectus Supplement and the Prospectus
The offered certificates are described in two separate documents that
progressively provide more detail: (i) the accompanying prospectus, which
provides general information, some of which may not apply to a particular series
of certificates such as your certificates; and (ii) this prospectus supplement,
which incorporates and includes the appendices, and describes the specific terms
of your certificates.
Cross-references are included in this prospectus supplement and the
prospectus to captions in these materials where you can find additional
information. The table of contents in this prospectus supplement and the table
of contents in the prospectus provide the locations of these captions.
The Index of Prospectus Supplement Definitions beginning on page S-83 of this
prospectus supplement and the Index of Prospectus Definitions beginning on page
147 of the prospectus direct you to the locations of the definitions of
capitalized terms used in each of the documents. Any capitalized terms that are
not defined in this prospectus supplement and that do not have obvious meanings
are defined in the prospectus.
Banc of America Mortgage Securities, Inc.'s principal offices are located at
214 North Tryon Street, Mail Code NC1-027-22-02, Charlotte, North Carolina
28255. Its phone number is (704) 387-8239.
----------------------------
This prospectus supplement and the accompanying prospectus contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended. Specifically, forward-looking statements, together with
related qualifying language and assumptions, are found in the material
(including tables) under the headings "Risk Factors" and "Prepayment and Yield
Considerations" and in the appendices. Forward-looking statements are also found
in other places throughout this prospectus supplement and the prospectus, and
may be identified by, among other things, accompanying language such as
"expects," "intends," "anticipates," "estimates" or analogous expressions, or by
qualifying language or assumptions. These statements involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results or performance to differ materially from the forward-looking statements.
These risks, uncertainties and other factors include, among others, general
economic and business conditions, competition, changes in political, social and
economic conditions, regulatory initiatives and compliance with governmental
regulations, customer preference and various other matters, many of which are
beyond the depositor's control. These forward-looking statements speak only as
of the date of this prospectus supplement. The depositor expressly disclaims any
obligation or undertaking to disseminate any updates or revisions to any
forward-looking statements to reflect changes in the depositor's expectations
with regard to those statements or any change in events, conditions or
circumstances on which any forward-looking statement is based.
European Economic Area
In relation to each Member State of the European Economic Area which has
implemented the Prospectus Directive (each, a "Relevant Member State"), the
underwriter has represented and agreed that with effect from and including the
date on which the Prospectus Directive is implemented in that Relevant Member
State (the "Relevant Implementation Date"), it has not made and will not make an
offer of certificates to the public in that Relevant Member State prior to the
publication of a prospectus in relation to the certificates which has been
approved by the competent authority in that Relevant Member State or, where
appropriate, approved in another Relevant Member State and notified to the
competent authority in that Relevant Member State, all in accordance with the
Prospectus Directive, except that it
S-4
may, with effect from and including the Relevant Implementation Date, make an
offer of certificates to the public in that Relevant Member State at any time:
(a) to legal entities which are authorized or regulated to operate in the
financial markets or, if not so authorized or regulated, whose corporate
purpose is solely to invest in securities;
(b) to any legal entity which has two or more of (1) an average of at
least 250 employees during the last financial year; (2) a total balance sheet
of more than (euro)43,000,000 and (3) an annual net turnover of more than
(euro)50,000,000, as shown in its last annual or consolidated accounts; or
(c) in any other circumstances which do not require the publication by the
issuer of a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an "offer of certificates
to the public" in relation to any offered certificates in any Relevant Member
State means the communication in any form and by any means of sufficient
information on the terms of the offer and the certificates to be offered so as
to enable an investor to decide to purchase or subscribe the certificates, as
the same may be varied in that Member State by any measure implementing the
Prospectus Directive in that Member State and the expression "Prospectus
Directive" means Directive 2003/71/EC and includes any relevant implementing
measure in each Relevant Member State.
United Kingdom
The underwriter has represented and agreed that:
(a) it has only communicated or caused to be communicated and will only
communicate or cause to be communicated an invitation or inducement to engage
in investment activity (within the meaning of Section 21 of the Financial
Services and Markets Act 2000 (the "FSMA")) received by it in connection with
the issue or sale of the offered certificates in circumstances in which
Section 21(1) of the FSMA does not apply to the Trust; and
(b) it has complied and will comply with all applicable provisions of the
FSMA with respect to anything done by it in relation to the offered
certificates in, from or otherwise involving the United Kingdom.
Notice to United Kingdom Investors
The distribution of this prospectus supplement and the accompanying
prospectus, if made by a person who is not an authorized person under the FSMA,
is being made only to, or directed only at persons who (1) are outside the
United Kingdom, or (2) have professional experience in matters relating to
investments, or (3) are persons falling within Articles 49(2)(a) through (d)
("high net worth companies, unincorporated associations, etc.") or 19
(Investment Professionals) of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2005 (all such persons together being referred to as
the "Relevant Persons"). This prospectus supplement and the accompanying
prospectus must not be acted on or relied on by persons who are not Relevant
Persons. Any investment or investment activity to which this prospectus
supplement and the accompanying prospectus relates, including the offered
certificates, is available only to Relevant Persons and will be engaged in only
with Relevant Persons.
Potential investors in the United Kingdom are advised that all, or most, of
the protections afforded by the United Kingdom regulatory system will not apply
to an investment in the offered certificates and that compensation will not be
available under the United Kingdom Financial Services Compensation Scheme.
S-5
THE SERIES 2007-2 CERTIFICATES
Pass-
Initial Class Through Minimum Incremental
Class Balance (1) Rate Principal Types(2) Interest Types(2) Denomination Denomination
- ----- ------------- ------- ---------------------- ----------------- ------------ ------------
Offered
Certificates
Class 1-A-1.......... $5,000,000 5.500% Senior, Pass-Through Fixed Rate $1,000 $1
Class 1-A-2.......... $18,995,000 5.500% Super Senior, Pass-Through Fixed Rate $1,000 $1
Class 1-A-3.......... $1,485,000 5.500% Super Senior Support, Fixed Rate $1,000 $1
Pass-Through
Class 1-A-R.......... $100 5.500% Senior, Sequential Pay Fixed Rate $100 N/A
Class 1-PO........... $108,143 (5) Senior, Ratio Strip Principal Only $25,000 $1
Class 2-A-1.......... $57,000,000 6.000% Senior, Pass-Through Fixed Rate $1,000 $1
Class 2-A-2.......... $12,255,000 6.000% Super Senior, Lockout Fixed Rate $1,000 $1
Class 2-A-3.......... $958,000 6.000% Super Senior Support, Fixed Rate $1,000 $1
Lockout
Class 2-A-4.......... $61,970,000 5.750% Super Senior, Sequential Fixed Rate $1,000 $1
Pay
Class 2-A-5.......... $4,845,000 6.000% Super Senior Support, Fixed Rate $1,000 $1
Sequential Pay
Class 2-A-6.......... $40,089,000 (6) Senior, Sequential Pay Floating Rate $1,000 $1
Class 2-A-7.......... (7) (8) Senior, Notional Amount Inverse Floating $1,000,000 $1
Rate, Interest Only
Class 2-A-8.......... $2,428,000 6.000% Senior, Sequential Pay Fixed Rate $1,000 $1
Class 2-A-9.......... (7) 6.000% Senior, Notional Amount Fixed Rate, Interest $100,000 $1
Only
Class 3-A-1.......... (7) (9) Senior, Notional Amount Inverse Floating $1,000,000 $1
Rate, Interest Only
Class 3-A-2.......... $162,192,000 (10) Super Senior, Pass-Through Floating Rate $1,000 $1
Class 3-A-3.......... $4,587,000 (11) Super Senior Support, Floating Rate $1,000 $1
Pass-Through
Class 3-IO........... (7) 7.000% Senior, Notional Amount Fixed Rate $100,000 $1
Class B-1............ $12,431,000 (12) Subordinated Variable Rate $25,000 $1
Class B-2............ $5,614,000 (12) Subordinated Variable Rate $25,000 $1
Class B-3............ $4,010,000 (12) Subordinated Variable Rate $25,000 $1
Non-Offered
Certificates
Class B-4............ $2,807,000 (12) Subordinated Variable Rate N/A N/A
Class B-5............ $2,205,000 (12) Subordinated Variable Rate N/A N/A
Initial Rating of
Certificates(4)
Final Scheduled -----------------
Class Certificate Form Distribution Date(3) Fitch S&P
- ----- ---------------- -------------------- ----- ---
Offered
Certificates
Class 1-A-1.......... Book-Entry June 25, 2037 AAA AAA
Class 1-A-2.......... Book-Entry June 25, 2037 AAA AAA
Class 1-A-3.......... Book-Entry June 25, 2037 AAA AAA
Class 1-A-R.......... Definitive June 25, 2037 AAA AAA
Class 1-PO........... Book-Entry June 25, 2037 AAA AAA
Class 2-A-1.......... Book-Entry June 25, 2037 AAA AAA
Class 2-A-2.......... Book-Entry June 25, 2037 AAA AAA
Class 2-A-3.......... Book-Entry June 25, 2037 AAA AAA
Class 2-A-4.......... Book-Entry June 25, 2037 AAA AAA
Class 2-A-5.......... Book-Entry June 25, 2037 AAA AAA
Class 2-A-6.......... Book-Entry June 25, 2037 AAA AAA
Class 2-A-7.......... Book-Entry June 25, 2037 AAA AAA
Class 2-A-8.......... Book-Entry June 25, 2037 AAA AAA
Class 2-A-9.......... Book-Entry June 25, 2037 AAA AAA
Class 3-A-1.......... Book-Entry June 25, 2037 AAA AAA
Class 3-A-2.......... Book-Entry June 25, 2037 AAA AAA
Class 3-A-3.......... Book-Entry June 25, 2037 AAA AAA
Class 3-IO........... Book-Entry June 25, 2037 AAA AAA
Class B-1............ Book-Entry June 25, 2037 AA None
Class B-2............ Book-Entry June 25, 2037 A None
Class B-3............ Book-Entry June 25, 2037 BBB None
Non-Offered
Certificates
Class B-4............ N/A N/A BB None
Class B-5............ N/A N/A B B
S-6
Pass-
Initial Class Through Minimum Incremental
Class Balance (1) Rate Principal Types(2) Interest Types(2) Denomination Denomination
- ----- ------------- ------- ---------------------- ----------------- ------------ ------------
Offered
Certificates
Class B-6............ $2,005,822 (12) Subordinated Variable Rate N/A N/A
Initial Rating of
Certificates(4)
Final Scheduled -----------------
Class Certificate Form Distribution Date(3) Fitch S&P
- ----- ---------------- -------------------- ----- ---
Offered
Certificates
Class B-6............ N/A N/A None None
- ----------
(1) Approximate. The initial class balance of the offered certificates may
vary by a total of plus or minus 5%.
(2) See "Description of the Certificates -- Categories of Classes of
Certificates" in the prospectus for a description of these principal and
interest types and see "Description of the Certificates -- Priority of
Distributions" and "-- Allocation of Losses" in this prospectus supplement
for a description of the effects of subordination.
(3) The final scheduled distribution date represents the distribution date in
the month following the latest maturity date of any mortgage loan
contributing to the related cashflow group or in the mortgage pool, as the
case may be. The actual final payment on your offered certificates could
occur earlier or later than the final scheduled distribution date.
(4) The offered certificates will not be issued unless they receive at least
the ratings set forth in this table. See "Certificate Ratings" in this
prospectus supplement.
(5) The Class 1-PO Certificates are principal only certificates and will not
be entitled to distributions of interest.
(6) During the initial interest accrual period, interest will accrue on the
Class 2-A-6 Certificates at the rate of 5.770% per annum. During each
interest accrual period after the initial, interest will accrue on the
Class 2-A-6 Certificates at a per annum rate equal to (i) 0.450% plus (ii)
one-month LIBOR, determined monthly as set forth under "Description of the
Certificates -- LIBOR" in this prospectus supplement, subject to a minimum
rate of 0.450% and a maximum rate of 6.000%. In addition, under certain
circumstances, the Class 2-A-6 Certificates will be entitled to amounts
received under a yield maintenance agreement. See "Description of the
Certificates -- Interest," "--Yield Maintenance Agreement" and "--The
Reserve Fund" in this prospectus supplement.
(7) The Class 2-A-7, Class 2-A-9, Class 3-A-1 and Class 3-IO Certificates are
interest only certificates, have no class balances and will bear interest
on their notional amounts (initially approximately $40,089,000,
$2,582,083, $166,779,000 and $2,871,650, respectively) as described in
this prospectus supplement under "Description of the Certificates --
Interest."
(8) During the initial interest accrual period, interest will accrue on the
Class 2-A-7 Certificates at the rate of 0.230% per annum. During each
interest accrual period after the initial, interest will accrue on the
Class 2-A-7 Certificates at a per annum rate equal to (i) 5.550% minus
(ii) one-month LIBOR, determined monthly as set forth under "Description
of the Certificates -- LIBOR" in this prospectus supplement, subject to a
minimum rate of 0.000% and a maximum rate of 5.550%. See "Description of
the Certificates -- Interest" in this prospectus supplement.
(9) During the initial interest accrual period, interest will accrue on the
Class 3-A-1 Certificates at the rate of 1.320% per annum. During each
interest accrual period after the initial, interest will accrue on the
Class 3-A-1 Certificates at a per annum rate equal to (i) 6.640% minus
(ii) one-month LIBOR, determined monthly as set forth under "Description
of the Certificates -- LIBOR" in this prospectus supplement, subject to a
minimum rate of 0.000% and a maximum rate of 6.640%. See "Description of
the Certificates -- Interest" in this prospectus supplement.
(10) During the initial interest accrual period, interest will accrue on the
Class 3-A-2 Certificates at the rate of 5.680% per annum. During each
interest accrual period after the initial, interest will accrue on the
Class 3-A-2 Certificates at a per annum rate equal to (i) 0.360% plus (ii)
one-month LIBOR, determined monthly as set forth under "Description of the
Certificates -- LIBOR" in this prospectus supplement, subject to a minimum
rate of 0.360% and a maximum rate of 7.000%.
(11) During the initial interest accrual period, interest will accrue on the
Class 3-A-3 Certificates at the rate of 5.680% per annum. During each
interest accrual period after the initial, interest will accrue on the
Class 3-A-3 Certificates at a per annum rate equal to (i) 0.360% plus (ii)
one-month LIBOR, determined monthly as set forth under "Description of the
Certificates -- LIBOR" in this prospectus supplement, subject to a minimum
rate of 0.360% and a maximum rate of 7.000%.
(12) Interest will accrue on these Certificates for each distribution date at a
per annum rate equal to the weighted average (based on the excess, if any,
of the sum of the non-PO portion of the mortgage loans contributing to
each cashflow group over the sum of the class balances of the senior
non-PO certificates in the related group) of (i) with respect to cashflow
group 1, 5.500%, (ii) with respect to cashflow group 2, 6.000% and (iii)
with respect to cashflow group 3, 7.000%. For the initial distribution
date in June 2007, this rate is expected to be approximately 6.4140% per
annum.
S-7
SUMMARY OF TERMS
This summary highlights selected information from this prospectus supplement.
It does not contain all of the information that you need to consider in making
your investment decision. To understand the terms of the offered certificates,
you should read this entire prospectus supplement and the prospectus carefully.
Title of Series: Banc of America Alternative Loan Trust 2007-2,
Mortgage Pass-Through Certificates, Series 2007-2
Sponsor: Bank of America, National Association
Depositor: Banc of America Mortgage Securities, Inc.
Servicer: Bank of America, National Association
Issuing Entity: Banc of America Alternative Loan Trust 2007-2
Trustee: Wells Fargo Bank, N.A.
Counterparty: Bank of America, National Association
Closing Date: On or about May 30, 2007
Cut-off Date: May 1, 2007
Distribution Date: The 25th day of each month (or, if not a
business day, the next business day) beginning
June 25, 2007
Determination Date: The sixteenth day of each month in which a
distribution date occurs (or, if not a
business day, the immediately preceding
business day).
Record Date: The last business day of the month preceding
the month in which a distribution date occurs.
----------------------
The Transaction Parties
The sponsor originated and currently services the mortgage loans. On the
closing date the sponsor will sell the mortgage loans to the depositor, who will
in turn deposit them into a common law trust, which is the issuing entity. The
trust will be formed by a pooling and servicing agreement, to be dated the
closing date, among the depositor, the servicer and the trustee. The servicer
will service the mortgage loans in accordance with the pooling and servicing
agreement and provide the information to the trustee necessary for the trustee
to calculate distributions and other information regarding the certificates.
S-8
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
-------------- <---------------- --------------
Mortgage Loans | Cash |
| /|\ Offered | /|\
| | Certificates | |
\|/ | \|/ | Cash
| All Certificates |
-------------- --------------
Issuing Entity Investors
-------------- --------------
The Certificates
A summary chart of the initial class balances, initial notional amounts,
pass-through 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 of this prospectus supplement.
S-9
The certificates represent all of the beneficial ownership interest in the
trust.
Classifications of Classes of Certificates
- -------------------------------------------------------------------------------------------------------------
Offered Certificates: 1-A-1, 1-A-2, 1-A-3, 1-A-R, 1-PO, 2-A-1, 2-A-2, 2-A-3, 2-A-4, 2-A-5,
2-A-6, 2-A-7, 2-A-8, 2-A-9, 3-A-1, 3-A-2, 3-A-3, 3-IO, B-1, B-2 and B-3
- -------------------------------------------------------------------------------------------------------------
Non-Offered Certificates B-4, B-5 and B-6
- -------------------------------------------------------------------------------------------------------------
Senior Certificates: 1-A-1, 1-A-2, 1-A-3, 1-A-R, 1-PO, 2-A-1, 2-A-2, 2-A-3, 2-A-4, 2-A-5,
2-A-6, 2-A-7, 2-A-8, 2-A-9, 3-A-1, 3-A-2, 3-A-3 and 3-IO
- -------------------------------------------------------------------------------------------------------------
Senior Non-PO Certificates: 1-A-1, 1-A-2, 1-A-3, 1-A-R, 2-A-1, 2-A-2, 2-A-3, 2-A-4, 2-A-5, 2-A-6,
2-A-7, 2-A-8, 2-A-9, 3-A-1, 3-A-2, 3-A-3 and 3-IO
- -------------------------------------------------------------------------------------------------------------
Subordinate Certificates: B-1, B-2, B-3, B-4, B-5 and B-6
- -------------------------------------------------------------------------------------------------------------
Group 1 Certificates: 1-A-1, 1-A-2, 1-A-3, 1-A-R and 1-PO
- -------------------------------------------------------------------------------------------------------------
Group 2 Certificates: 2-A-1, 2-A-2, 2-A-3, 2-A-4, 2-A-5, 2-A-6, 2-A-7, 2-A-8 and 2-A-9
- -------------------------------------------------------------------------------------------------------------
Group 3 Certificates: 3-A-1, 3-A-2, 3-A-3 and 3-IO
- -------------------------------------------------------------------------------------------------------------
Floating Rate Certificates: 2-A-6, 3-A-2 and 3-A-3
- -------------------------------------------------------------------------------------------------------------
Inverse Floating Rate Certificates: 2-A-7 and 3-A-1
- -------------------------------------------------------------------------------------------------------------
Interest Only Certificates: 2-A-7, 2-A-9, 3-A-1 and 3-IO
- -------------------------------------------------------------------------------------------------------------
Lockout Certificates: 2-A-2 and 2-A-3
- -------------------------------------------------------------------------------------------------------------
Principal Only Certificates: 1-PO
- -------------------------------------------------------------------------------------------------------------
Residual Certificate: 1-A-R
- -------------------------------------------------------------------------------------------------------------
Super Senior Certificates: 1-A-2, 2-A-2, 2-A-4 and 3-A-2
- -------------------------------------------------------------------------------------------------------------
Super Senior Support Certificates: 1-A-3, 2-A-3, 2-A-5 and 3-A-3
- -------------------------------------------------------------------------------------------------------------
The senior certificates are divided into three groups. The mortgage loans are
divided into three cashflow groups as described below under "The Mortgage Pool."
Each cashflow group is comprised of certain mortgage loans or portions thereof.
Other than as to certain cross-collateralization payments described under
"Description of the Certificates -- Cross-Collateralization" and the payment of
any PO deferred amounts described under "-- Allocation of Losses," the senior
certificates whose class designations begin with "1" relate to cashflow group 1,
the senior certificates whose class designations begin with "2" relate to
cashflow group 2 and the senior certificates whose class designations begin with
"3" relate to cashflow group 3. The subordinate certificates relate to all
cashflow groups.
The total principal balance of the mortgage loans or portions thereof in each
cashflow group is represented by the senior certificates indicated in the
preceding paragraph and a portion of each class of subordinate certificates. The
principal only certificates will represent a portion of the principal balance of
the discount mortgage loans in cashflow group 1. Discount mortgage loans are
mortgage loans with net mortgage interest rates as of the cut-off date lower
than 5.500%. There are no discount mortgage loans in cashflow group 2 and
cashflow group 3. Because the principal only certificates represent an interest
solely in the discount mortgage loans in cashflow group 1, referred to as the PO
portion, only principal payments, including prepayments of principal, and
realized losses on the discount mortgage loans in cashflow group 1 will affect
the principal only certificates. The portion of the total principal balance of
the mortgage loans or portions thereof in cashflow group 1 not represented by
the principal only certificates is the non-PO portion and is represented by the
other senior certificates of such group, referred to as the senior non-PO
certificates, and a portion of the subordinate certificates. With respect to
cashflow group 2 and cashflow group 3, the entire principal balance of the
mortgage loans or portions thereof is the non-PO portion and is represented by
all of the senior certificates of group 2 and group 3, respectively, referred to
as senior non-PO certificates, and a portion of the subordinate certificates.
S-10
The subordinate certificates are subordinated to the senior certificates for
distributions of principal and interest and for allocations of losses on the
mortgage loans contributing to all cashflow groups and each class of subordinate
certificates is subordinated to those classes of subordinate certificates higher
in order of payment priority for distributions of principal and interest and for
allocations of losses on the mortgage loans contributing to all cashflow groups.
Only the senior, Class B-1, Class B-2 and Class B-3 Certificates are being
offered by this prospectus supplement.
The Class B-4, Class B-5 and Class B-6 Certificates are not offered by this
prospectus supplement. Information provided about the non-offered certificates
is included in this prospectus supplement only to aid your understanding of the
offered certificates.
Mortgage Pool
The mortgage pool will consist of a pool (the "Mortgage Pool") of
fully-amortizing mortgage loans (the "Mortgage Loans") secured by first liens on
one- to four-family residential properties.
The Mortgage Loans have been divided into three cashflow groups, referred to
herein as cashflow group 1, cashflow group 2 and cashflow group 3. The principal
balance of each Mortgage Loan has been allocated, based on such loan's net
mortgage interest rate, either (i) to one cashflow group only or (ii) between
two cashflow groups, based on two fixed fractions that differ among Mortgage
Loans (in each case, the "Applicable Fractions"). Each cashflow group consists
of differing percentages of the interest on, and principal of, particular
Mortgage Loans, calculated so that the principal and interest due on each such
Mortgage Loan is treated as if that Mortgage Loan were two Mortgage Loans
bearing interest at two different effective net mortgage interest rates, one
higher than and one lower than the original net mortgage interest rate of such
Mortgage Loan. This allocation enables the Mortgage Pool to be treated as if it
were made up of multiple groups of mortgage loans bearing interest at various
fixed rates. This allocation will affect the rate of prepayment of the
certificates because principal payments collected on each Mortgage Loan may be
allocated to more than one cashflow group and used to pay one or more classes of
certificates related to those cashflow groups. For further detail on the
calculation of the Applicable Fractions applied to each Mortgage Loan, see
"Description of the Certificates--The Mortgage Pool" in this prospectus
supplement.
"Cashflow Group 1" consists of Mortgage Loans with net mortgage interest
rates less than or equal to 5.500% and a portion of the Mortgage Loans with net
mortgage interest rates greater than 5.500% but less than 6.000%.
"Cashflow Group 2" consists of Mortgage Loans with net mortgage interest
rates equal to 6.000% and a portion of the Mortgage Loans with net mortgage
interest rates greater than 5.500% but less than 6.000% and a portion of the
Mortgage Loans with net mortgage interest rates greater than 6.000% but less
than 7.000%.
"Cashflow Group 3" consists of a portion of the Mortgage Loans with net
mortgage interest rates greater than 6.000% but less than 7.000% and Mortgage
Loans with net mortgage interest rates equal to or greater than 7.000%.
S-11
The following table shows the cashflow group, the related group of
certificates and the certificates relating to each cashflow group:
Cashflow Group Related Group Related Certificates
- --------------------------------------------------------------------------------
Cashflow Group 1 Group 1 Group 1 Senior Certificates and a
portion of each class of
Subordinate Certificates
- --------------------------------------------------------------------------------
Cashflow Group 2 Group 2 Group 2 Senior Certificates and a
portion of each class of
Subordinate Certificates
- --------------------------------------------------------------------------------
Cashflow Group 3 Group 3 Group 3 Senior Certificates and a
portion of each class of
Subordinate Certificates
- --------------------------------------------------------------------------------
The tables below indicate the original terms of the mortgage loans next to
the row heading "Original Term," any seasoning of the mortgage loans next to the
row headings "Remaining Terms to Stated Maturity" and "Number of Months Since
Origination" and the latest maturing mortgage loan next to the row heading
"Latest Maturity Date." The "Loan-to-Value Ratio" of a mortgage loan at
origination shown in the tables below is the percentage equal to (i) the
principal balance of the mortgage loan divided by (ii) the lesser of (a) the
appraised value of the related mortgaged property determined in an appraisal
obtained by the originator at origination of the mortgage loan or an automated
valuation model or tax assessed value (if permitted by the applicable mortgage
loan program) and (b) except for mortgage loans made for refinancing purposes,
the sales price for the mortgaged property. The "Credit Scores" shown in the
tables below are statistical credit scores obtained by the sponsor in connection
with the loan application to help assess a borrower's creditworthiness. Credit
scores are generated by models developed by a third party and are made available
to lenders through three national credit bureaus, Experian (FICO), Equifax
(Beacon) and TransUnion (Empirica).
The mortgage pool also includes mortgage loans that (i) have a Borrowers
Protection Plan(R) addendum to the related mortgage note ("BPP Mortgage Loans")
whereby the sponsor agrees to cancel (a) certain payments of principal and
interest on the mortgage loan for up to twelve months upon the disability or
involuntary unemployment of the mortgagor or (b) the outstanding principal
balance of the mortgage loan upon the accidental death of the mortgagor;
provided that the plan has not been terminated in accordance with its terms,
(ii) require only payments of interest for a term specified in the related
mortgage note ("Interest Only Mortgage Loans") or (iii) are secured by leases on
real property meeting the requirements of the prospectus and the pooling
agreement. All of the mortgage loans were originated by the sponsor under either
the sponsor's general underwriting standards or "Alternative A" underwriting
standards. See "The Mortgage Loan Programs -- Mortgage Loan Underwriting -- Bank
of America General Underwriting Standards" and "-- Bank of America Alternative
Underwriting Standards" in the prospectus.
The servicing fees for the mortgage loans are payable out of the interest
payments on the mortgage loans, prior to any payments to the trustee or
distributions to certificateholders. The servicing fees accrue on the mortgage
loans at the servicing fee rate set forth in the tables below. In addition to
the servicing fees, the servicer will be entitled to retain as additional
servicing compensation (i) any late payment fees, assumption fees and other
similar charges, (ii) net income from investment of funds in the servicer
custodial account and (iii) any profits from the liquidation of mortgage loans.
See "The Pooling Agreement -- Compensation and Payment of Expenses of the
Servicer and the Trustee" in this prospectus supplement for more information
about fees and expenses of the servicer and the trustee.
The depositor expects the mortgage loans to have the following approximate
characteristics:
S-12
Selected Cashflow Group 1 Mortgage Loan Data as of May 1, 2007
Range or Total Weighted Average
---------------------------- ----------------
Number of Mortgage Loans(1) 338 -
Aggregate Unpaid Principal Balance(2) $27,588,550.77 -
Range of Unpaid Principal Balance(3) $26,374.95 to $1,884,592.00 $267,783.85 (4)
Range of Mortgage Interest Rates 5.250% to 6.250% 5.870%
Servicing Fee Rate 0.2500% -
Trustee Fee Rate 0.0056% -
Administrative Fee Rate 0.2556% -
Remaining Terms to Stated Maturity 234 to 360 months 357 months
Original Term 240 to 360 months 358 months
Number of Months Since Origination 1 to 19 months 3 months
Range of Original Loan-to-Value Ratio 16.00% to 103.00% 72.96%
Range of Credit Scores 611 to 811 717
Latest Maturity Date May 1, 2037 -
Number of Interest Only Mortgage Loans(1) 21 -
Aggregate Unpaid Principal Balance of Interest
Only Mortgage Loans(2) $1,762,708.77 -
Range of Unpaid Principal Balance of Interest
Only Mortgage Loans(3) $83,200.00 to $652,000.00 $262,172.90(4)
Number of Buy-Down Mortgage Loans(1) 0 -
Aggregate Unpaid Principal Balance of Buy-Down
Mortgage Loans(2) $0.00 -
Range of Unpaid Principal Balance of Buy-Down
Mortgage Loans(3) - -
Number of BPP Mortgage Loans(1) 46 -
Aggregate Unpaid Principal Balance of BPP
Mortgage Loans(2) $2,401,617.20 -
Range of Unpaid Principal Balance of BPP
Mortgage Loans(3) $30,221.29 to $1,098,700.00 $196,790.43 (4)
Number of Mortgage Loans underwritten using
"Alternative A" underwriting standards(1) 116 -
Aggregate Unpaid Principal Balance of Mortgage
Loans underwritten using "Alternative A"
underwriting standards(2) $10,903,672.32 -
Range of Unpaid Principal Balance of Mortgage
Loans underwritten using "Alternative A"
underwriting standards(3) $51,950.65 to $1,884,592.00 $358,371.32 (4)
Number of Mortgage Loans secured by leases on
real property(1) 6 -
Aggregate Unpaid Principal Balance of Mortgage
Loans secured by leases on real property(2) $117,281.49 -
Range of Unpaid Principal Balance of Mortgage
Loans secured by leases on real property(3) $65,600.00 to $171,342.05 $121,781.86(4)
Geographic Concentration of Mortgaged Properties in
Excess of 5.00% of the Aggregate Unpaid Principal Balance(2)
California...................................... 42.98%
Texas........................................... 11.60%
Florida......................................... 8.35%
Georgia......................................... 5.55%
Maximum Single Five-Digit Zip Code Concentration(2) 3.77%
- ----------
(1) This number represents the number of mortgage loans contributing to this
cashflow group (even if such loans also contribute to another cashflow group).
(2) Based on the portion of the mortgage loans contributing to this cashflow
group (based on the applicable fraction).
(3) Based on the mortgage loans contributing to this cashflow group (even if
such loans also contribute to another cashflow group).
(4) The balance shown is the average unpaid principal balance.
S-13
Selected Cashflow Group 2 Mortgage Loan Data as of May 1, 2007
Range or Total Weighted Average
---------------------------- ----------------
Number of Mortgage Loans(1) 1,392 -
Aggregate Unpaid Principal Balance(2) $193,580,502.10 -
Range of Unpaid Principal Balance(3) $15,680.00 to $2,210,663.81 $233,178.47(4)
Range of Mortgage Interest Rates 5.875% to 7.250% 6.458%
Servicing Fee Rate 0.2500% -
Trustee Fee Rate 0.0056% -
Administrative Fee Rate 0.2556% -
Remaining Terms to Stated Maturity 234 to 360 months 357 months
Original Term 240 to 360 months 358 months
Number of Months Since Origination 1 to 25 months 3 months
Range of Original Loan-to-Value Ratio 9.32% to 103.00% 74.29%
Range of Credit Scores 604 to 817 708
Latest Maturity Date May 1, 2037 -
Number of Interest Only Mortgage Loans(1) 99 -
Aggregate Unpaid Principal Balance of Interest
Only Mortgage Loans(2) $18,595,573.59 -
Range of Unpaid Principal Balance of Interest
Only Mortgage Loans(3) $68,000.00 to $2,180,000.00 $334,517.37(4)
Number of Buy-Down Mortgage Loans(1) 0 -
Aggregate Unpaid Principal Balance of Buy-Down
Mortgage Loans(2) $0.00 -
Range of Unpaid Principal Balance of Buy-Down
Mortgage Loans(3) - -
Number of BPP Mortgage Loans(1) 141 -
Aggregate Unpaid Principal Balance of BPP
Mortgage Loans(2) $15,909,614.27 -
Range of Unpaid Principal Balance of BPP Mortgage
Loans(3) $30,221.29 to $1,098,700.00 $168,201.24(4)
Number of Mortgage Loans underwritten using
"Alternative A" underwriting standards(1) 472 -
Aggregate Unpaid Principal Balance of Mortgage
Loans underwritten using "Alternative A"
underwriting standards(2) $88,402,350.06 -
Range of Unpaid Principal Balance of Mortgage
Loans underwritten using "Alternative A"
underwriting standards(3) $15,680.00 to $1,884,592.00 $299,616.35(4)
Number of Mortgage Loans secured by leases on
real property(1) 12 -
Aggregate Unpaid Principal Balance of Mortgage
Loans secured by leases on real property(2) $1,203,937.56 -
Range of Unpaid Principal Balance of Mortgage
Loans secured by leases on real property(3) $41,964.71 to $319,473.87 $143,293.62(4)
Geographic Concentration of Mortgaged Properties in
Excess of 5.00% of the Aggregate Unpaid Principal Balance(2)
California...................................... 30.31%
Florida......................................... 13.86%
Texas........................................... 5.48%
Maximum Single Five-Digit Zip Code Concentration(2) 0.96%
- --------
(1) This number represents the number of mortgage loans contributing to this
cashflow group (even if such loans also contribute to another cashflow group).
(2) Based on the portion of the mortgage loans contributing to this cashflow
group (based on the applicable fraction).
(3) Based on the mortgage loans contributing to this cashflow group (even if
such loans also contribute to another cashflow group).
(4) The balance shown is the average unpaid principal balance.
S-14
Selected Cashflow Group 3 Mortgage Loan Data as of May 1, 2007
Range or Total Weighted Average
---------------------------- ----------------
Number of Mortgage Loans(1) 1,435 -
Aggregate Unpaid Principal Balance(2) $179,816,013.16 -
Range of Unpaid Principal Balance(3) $15,680.00 to $2,997,773.56 $216,358.27(4)
Range of Mortgage Interest Rates 6.375% to 8.125% 7.129%
Servicing Fee Rate 0.2500% -
Trustee Fee Rate 0.0056% -
Administrative Fee Rate 0.2556% -
Remaining Terms to Stated Maturity 235 to 360 months 357 months
Original Term 240 to 360 months 359 months
Number of Months Since Origination 1 to 25 months 3 months
Range of Original Loan-to-Value Ratio 9.32% to 103.00% 76.44%
Range of Credit Scores 601 to 817 697
Latest Maturity Date May 1, 2037 -
Number of Interest Only Mortgage Loans(1) 102 -
Aggregate Unpaid Principal Balance of Interest
Only Mortgage Loans(2) $21,777,238.77 -
Range of Unpaid Principal Balance of Interest
Only Mortgage Loans(3) $68,000.00 to $2,180,000.00 $359,116.57(4)
Number of Buy-Down Mortgage Loans(1) 0 -
Aggregate Unpaid Principal Balance of Buy-Down
Mortgage Loans(2) $0.00 -
Range of Unpaid Principal Balance of Buy-Down
Mortgage Loans(3) - -
Number of BPP Mortgage Loans(1) 116 -
Aggregate Unpaid Principal Balance of BPP
Mortgage Loans(2) $8,437,550.14 -
Range of Unpaid Principal Balance of BPP Mortgage
Loans(3) $30,351.22 to $649,397.97 $152,555.36(4)
Number of Mortgage Loans underwritten using
"Alternative A" underwriting standards(1) 496 -
Aggregate Unpaid Principal Balance of Mortgage
Loans underwritten using "Alternative A"
underwriting standards(2) $76,504,206.51 -
Range of Unpaid Principal Balance of Mortgage
Loans underwritten using "Alternative A"
underwriting standards(3) $15,680.00 to $1,500,000.00 $270,643.46(4)
Number of Mortgage Loans secured by leases on
real property(1) 9 -
Aggregate Unpaid Principal Balance of Mortgage
Loans secured by leases on real property(2) $709,970.45 -
Range of Unpaid Principal Balance of Mortgage
Loans secured by leases on real property(3) $41,964.71 to $319,473.87 $144,499.82(4)
Geographic Concentration of Mortgaged Properties in
Excess of 5.00% of the Aggregate Unpaid Principal Balance(2)
California...................................... 17.16%
Florida......................................... 16.77%
Illinois........................................ 9.51%
New York........................................ 7.17%
Maximum Single Five-Digit Zip Code Concentration(2) 1.67%
- --------
(1) This number represents the number of mortgage loans contributing to this
cashflow group (even if such loans also contribute to another cashflow group).
(2) Based on the portion of the mortgage loans contributing to this cashflow
group (based on the applicable fraction).
(3) Based on the mortgage loans contributing to this cashflow group (even if
such loans also contribute to another cashflow group).
(4) The balance shown is the average unpaid principal balance.
S-15
Selected Aggregate Mortgage Loan Data as of May 1, 2007
Range or Total Weighted Average
---------------------------- ----------------
Number of Mortgage Loans 1,773 -
Aggregate Unpaid Principal Balance $400,985,066.03 -
Unpaid Principal Balance $15,680.00 to $2,997,773.56 $226,161.91(1)
Mortgage Interest Rate 5.250% to 8.125% 6.718%
Servicing Fee Rate 0.2500% -
Trustee Fee Rate 0.0056% -
Administrative Fee Rate 0.2556% -
Remaining Terms to Stated Maturity 234 to 360 months 357 months
Original Term 240 to 360 months 358 months
Number of Months Since Origination 1 to 25 months 3 months
Original Loan-to-Value Ratio 9.32% to 103.00% 75.16%
Credit Scores 601 to 817 704
Latest Maturity Date May 1, 2037 -
Number of Interest Only Mortgage Loans 123 -
Aggregate Unpaid Principal Balance of Interest
Only Mortgage Loans $42,135,521.12 -
Unpaid Principal Balance of Interest Only
Mortgage Loans $68,000.00 to $2,180,000.00 $342,565.21(1)
Number of Buy-Down Mortgage Loans 0 -
Aggregate Unpaid Principal Balance of Buy-Down -
Mortgage Loans $0.00
Unpaid Principal Balance of Buy-Down Mortgage
Loans - -
Number of BPP Mortgage Loans 162 -
Aggregate Unpaid Principal Balance of BPP
Mortgage Loans $26,748,781.61 -
Unpaid Principal Balance of BPP Mortgage Loans $30,221.29 to $1,098,700.00 $165,115.94(1)
Number of Mortgage Loans underwritten using
"Alternative A" underwriting standards 612 -
Aggregate Unpaid Principal Balance of Mortgage
Loans underwritten using "Alternative A"
underwriting standards $175,810,228.89 -
Unpaid Principal Balance of Mortgage Loans
underwritten using "Alternative A" underwriting
standards $15,680.00 to $1,884,592.00 $287,271.62(1)
Number of Mortgage Loans secured by leases on
real property 15 -
Aggregate Unpaid Principal Balance of Mortgage
Loans secured by leases on real property $2,031,189.50 -
Unpaid Principal Balance of Mortgage Loans
secured by leases on real property $41,964.71 to $319,473.87 $135,412.63(1)
Geographic Concentration of Mortgaged Properties in
Excess of 5.00% of the Aggregate Unpaid Principal Balance
California...................................... 25.29%
Florida......................................... 14.79%
New York........................................ 5.50%
Illinois........................................ 5.38%
Texas........................................... 5.18%
Maximum Single Five-Digit Zip Code Concentration 0.75%
- ----------
(1) The balance shown is the average unpaid principal balance.
S-16
The characteristics of the cashflow groups 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.
o After the certificates are issued, mortgage loans contributing to a
cashflow group may be removed from the trust because of repurchases by the
depositor for breaches of representations or failure to deliver required
documents. Under certain circumstances and generally only during the
two-year period following the closing date, the depositor may instead make
substitutions for these mortgage loans.
See "The Pooling Agreement -- Repurchases of Mortgage Loans" in the
prospectus for a discussion of the circumstances under which the depositor is
required to repurchase or substitute for mortgage loans. These removals and/or
substitutions may result in changes in the cashflow group characteristics shown
above. These changes may affect the weighted average lives and yields to
maturity of the related offered certificates.
Additional information on the mortgage pool and each cashflow group is set
forth in the tables in Appendix A to this prospectus supplement and information
regarding repurchases and substitutions of the mortgage loans after the closing
date will be available on the trust's monthly distribution reports on Form 10-D.
See "Reports to Certificateholders" in this prospectus supplement.
Optional Termination
At its option, the depositor may, subject to certain conditions, purchase all
remaining mortgage loans in the trust on any distribution date on which the
aggregate stated principal balance of the mortgage loans is less than 10% of the
aggregate unpaid principal balance of the mortgage loans as of the cut-off date.
See "The Pooling Agreement -- Termination; Optional Purchase of Mortgage
Loans" in the prospectus.
If the depositor exercises its right to repurchase all of the mortgage loans,
the certificates outstanding at that time will be retired earlier than would
otherwise be the case.
See "Prepayment and Yield Considerations" in this prospectus supplement.
S-17
Priority of Distributions
Distributions on each group of senior certificates (except to the extent of
cross-collateralization payments and PO deferred amounts) and on the subordinate
certificates will be made on each distribution date from the collections on the
mortgage loans contributing to the related cashflow group, in the case of the
senior certificates, or all cashflow groups, in the case of the subordinate
certificates, less certain expenses (such as servicing fees, reimbursements for
advances made by the servicer and payment of other expenses and indemnities
described in this prospectus supplement) in the following order of priority:
---------------------------------------------------------------
first, to the trustee to pay trustee fees relating to the
cashflow group;
---------------------------------------------------------------
|
\|/
---------------------------------------------------------------
second, to the senior certificates to pay interest;
---------------------------------------------------------------
|
\|/
---------------------------------------------------------------
third, to the senior certificates of the related group to pay
principal;
---------------------------------------------------------------
|
\|/
---------------------------------------------------------------
fourth, to the principal only certificates, to pay any PO
deferred amounts, but only from amounts that would otherwise be
distributable on such distribution date as principal of the
subordinate certificates;
---------------------------------------------------------------
|
\|/
---------------------------------------------------------------
fifth, from the collections for all cashflow groups, to
each class of subordinate certificates, subject to any
payments described under "Descriptions of the Certificates
-- Cross Collateralization," first to pay interest and
then to pay principal sequentially to the classes
of subordinate certificates, in numerical order,
beginning with the Class B-1
Certificates; and
---------------------------------------------------------------
|
\|/
---------------------------------------------------------------
sixth, to the Class 1-A-R Certificate, any remaining amounts.
---------------------------------------------------------------
The source of the distributions to certificateholders is more fully described
under "Description of the Certificates -- Pool Distribution Amount" in this
prospectus supplement. The amount of interest and principal distributions on
each class of certificates is more fully described under "Description of the
Certificates -- Interest" and "-- Principal" in this prospectus supplement.
Interest Distributions
The amount of interest that will accrue on each interest-bearing class of
certificates during each interest accrual period equals:
S-18
o one-twelfth of the pass-through rate for that class (as described in the
table beginning on page S-6 of this prospectus supplement) multiplied by
the class balance or notional amount of the certificate on the
distribution date, minus
o the class' share of certain interest shortfalls arising from the timing of
prepayments on the mortgage loans and interest limitations applicable to
certain military or similar personnel and the class' share of interest
losses, as described under "The Pooling Agreement -- Compensating
Interest" and "Description of the Certificates -- Interest" in this
prospectus supplement.
The Class 1-PO Certificates are principal only certificates and are not
entitled to distributions of interest.
See "Description of the Certificates -- Distributions" and "-- Interest" in
this prospectus supplement.
Principal Distributions
Principal received or advanced on the mortgage loans generally will be
allocated between the applicable senior certificates and the subordinate
certificates as described below under "-- Credit Support -- Shifting Interest in
Prepayments."
On each distribution date on which the subordinate certificates are
outstanding, the portion of principal received or advanced on the mortgage loans
contributing to a cashflow group that is allocated to the related senior non-PO
certificates will be distributed among the senior non-PO certificates of the
related group as described in "Description of the Certificates -- Principal --
Senior Principal Distribution Amount" in this prospectus supplement. However, if
the subordinate certificates are no longer outstanding, each class of senior
non-PO certificates of a group will generally receive principal pro rata
according to its class balance. The Class 1-PO Certificates will generally
receive principal as described in "Description of the Certificates -- Principal
- -- PO Principal Distribution Amount" in this prospectus supplement.
The Class 2-A-7, Class 2-A-9, Class 3-A-1 and Class 3-IO Certificates are
interest only certificates and are not entitled to distributions of principal.
See "Description of the Certificates -- Priority of Distributions" and "--
Principal" in this prospectus supplement.
S-19
Credit Support
Credit support for the offered certificates is provided by subordination as
follows:
Subordination of Subordinate Certificates(1)
------------------------------------------------------------------------
Priority of Payment Senior /|\
(Credit Support 7.25%) |
| ---------------------- |
| Class B-1 |
| (Credit Support 4.15%) |
| ---------------------- |
| Class B-2 |
| (Credit Support 2.75%) |
| ---------------------- |
| Class B-3 |
| (Credit Support 1.75%) |
| ---------------------- |
| Class B-4 |
| (Credit Support 1.05%) |
| ---------------------- |
| Class B-5 |
| (Credit Support 0.50%) |
| ----------------------
| Class B-6 Order of Loss
\|/ (Credit Support 0.00%) Allocation
------------------------------------------------------------------------
- ----------
(1) The credit support percentages set forth in this chart show the aggregate
initial class balance of the classes of certificates subordinate to a
class or classes as a percentage of the initial aggregate principal
balance of the mortgage loans.
See "Description of the Certificates -- Priority of Distributions" and "--
Allocation of Losses" in this prospectus supplement.
Under certain circumstances, certain principal payments on the mortgage loans
contributing to a cashflow group otherwise distributable to the subordinate
certificates may be allocated to one or more unrelated groups of senior non-PO
certificates as discussed in "Description of the Certificates --
Cross-Collateralization" in this prospectus supplement.
After the subordinate certificates are no longer outstanding, any principal
losses allocated to a class of super senior certificates will be borne by the
related class of super senior support certificates, for so long as the related
class of super senior support certificates is outstanding.
Shifting Interest in Prepayments
Additional credit enhancement is provided by the allocation, subject to
certain exceptions, of the applicable non-PO percentage of principal prepayments
and certain liquidation proceeds on the mortgage loans contributing to a
cashflow group (based on the applicable fraction) to the senior non-PO
certificates of the related group during the first five years after the closing
date. In addition, a reduced, but still disproportionately large, allocation of
these principal collections to those senior certificates will occur during the
sixth through ninth years following the closing date. This disproportionate
allocation of the applicable non-PO percentage of prepayments and certain
liquidation proceeds on the mortgage loans contributing to a cashflow group
(based on the applicable fraction) will accelerate the amortization of the
senior non-PO certificates of the related group relative to the amortization of
the subordinate certificates. As a result, it is more likely that the credit
support percentage for the senior certificates of a group will be maintained and
may be increased during the first nine years.
S-20
See "Description of the Certificates -- Principal" in this prospectus
supplement.
Yield Maintenance Agreement
The trustee, on behalf of the issuing entity, will enter into a yield
maintenance agreement with the sponsor, as counterparty. For any distribution
date prior to and including the distribution date in October 2011, for the
benefit of the Class 2-A-6 Certificates, if one-month LIBOR, calculated for that
distribution date by the counterparty in accordance with the yield maintenance
agreement, exceeds 5.55% per annum, the counterparty will be obligated to pay to
the trustee, for deposit into the reserve fund, an amount equal to the product
of (a) the amount by which the lesser of one-month LIBOR and 9.05% exceeds
5.55%, (b) the lesser of (x) the class balance of the Class 2-A-6 Certificates
prior to distributions on that distribution date and (y) the notional amount as
set forth for that distribution date in the table in Appendix E and (c)
one-twelfth. The amount in the reserve fund on a distribution date will be used
to make certain payments to the Class 2-A-6 Certificates on that distribution
date as described in this prospectus supplement under "Description of the
Certificates -- The Reserve Fund."
See "Description of the Certificates -- The Yield Maintenance Agreement" in
this prospectus supplement.
Prepayment and Yield Considerations
The yield to maturity on your offered certificates will be sensitive to the
rate and timing of principal payments (which will be affected by prepayments,
defaults and liquidations) on the mortgage loans contributing to the related
cashflow group or cashflow groups. As a result, your yield may fluctuate
significantly.
o In general, if you purchased your offered certificates at a premium or if
you purchased an interest only certificate (which has no class balance)
and principal distributions occur at a rate faster than you assumed, your
actual yield to maturity will be lower than anticipated.
o Conversely, if you purchased your offered certificates at a discount or if
you purchased a principal only certificate and principal distributions
occur at a rate slower than you assumed, your actual yield to maturity
will be lower than anticipated.
Because the Class 1-PO Certificates represent only the right to receive a
portion of the principal received with respect to the discount mortgage loans in
cashflow group 1, the yield to maturity on the Class 1-PO Certificates will be
extremely sensitive to the rate and timing of principal prepayments on the
discount mortgage loans in cashflow group 1.
Because the interest accrued on each distribution date on the Class 3-IO
Certificates will be based on the aggregate stated principal balances of the
premium mortgage loans in cashflow group 3 multiplied by a fraction, the
numerator of which is equal to the weighted average of the net mortgage interest
rates of the premium mortgage loans in cashflow group 3 minus 7.000% and the
denominator of which is equal to 7.000%, the yield to maturity on the Class 3-IO
Certificates will be extremely sensitive to the rate and timing of principal
payments on the premium mortgage loans in cashflow group 3, particularly the
premium mortgage loans with higher mortgage interest rates. The mortgage loans
in cashflow group 3 with Net Mortgage Interest Rates greater than 7.000% are
premium mortgage loans. There are no premium mortgage loans in cashflow group 1
or cashflow group 2.
Because a class of the super senior support certificates will bear principal
losses allocated to the related class of super senior certificates, as well as
its own share of principal losses, once the subordinate certificates are no
longer outstanding, the yield to maturity of each class of super senior support
S-21
certificates will be more sensitive to the amount and timing of losses on the
mortgage loans contributing to the related cashflow group than the related class
of super senior certificates. See "Description of the Certificates -- Allocation
of Losses" in this prospectus supplement.
The yield to maturity on the floating rate certificates will be sensitive to
changes in the rate of one-month LIBOR. The yield to maturity on the inverse
floating rate certificates will be extremely sensitive to changes in the rate of
one-month LIBOR. In the case of the inverse floating rate certificates,
increases in one-month LIBOR may result in a lower yield than you expected or a
negative yield. In particular, if you are purchasing inverse floating rate
certificates, which are also interest only certificates, you should consider the
risk that high constant rates of one-month LIBOR combined with high constant
prepayment rates on the related mortgage loans may result in the failure to
recover your initial investment.
The yield to maturity of the Class B-1, Class B-2 and Class B-3 Certificates
will be increasingly sensitive to the amounts and timing of losses on the
mortgage loans due to the fact that, once the total class balance of the more
junior classes of subordinate certificates has been reduced to zero, all losses
will be allocated to the Class B-3, Class B-2 and Class B-1 Certificates, in
that order, until the class balance of each class has been reduced to zero.
Because the mortgage loans may be prepaid at any time, it is not possible to
predict the rate at which you will receive distributions of principal. Since
prevailing interest rates are subject to fluctuation, you may not be able to
reinvest your distributions at yields equaling or exceeding the yields on the
offered certificates. Yields on any reinvestments may be lower, and could be
significantly lower, than the yields on your offered certificates.
See "Prepayment and Yield Considerations" in this prospectus supplement and
in the prospectus.
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Weighted Average Life (in years)(1)
PPC(2)
---------------------------------------------------------
Class 0% 50% 100% 150% 200%
- --------------------- ---------- -------- --------- --------- -------
Class 1-A-1.......... 19.21 6.95 3.59 2.24 1.63
Class 1-A-2.......... 19.21 6.95 3.59 2.24 1.63
Class 1-A-3.......... 19.21 6.95 3.59 2.24 1.63
Class 1-A-R.......... 0.07 0.07 0.07 0.07 0.07
Class 1-PO........... 18.55 7.22 4.00 2.67 1.96
Class 2-A-1.......... 19.60 7.04 3.62 2.25 1.64
Class 2-A-2.......... 21.14 13.21 10.30 5.77 3.96
Class 2-A-3.......... 21.14 13.21 10.30 5.77 3.96
Class 2-A-4.......... 14.74 4.81 3.50 2.34 1.74
Class 2-A-5.......... 14.74 4.81 3.50 2.34 1.74
Class 2-A-6.......... 26.60 7.58 1.28 0.81 0.61
Class 2-A-7.......... 26.60 7.58 1.28 0.81 0.61
Class 2-A-8.......... 29.67 25.75 9.38 4.48 3.22
Class 2-A-9.......... 14.74 4.81 3.50 2.34 1.74
Class 3-A-1.......... 20.11 7.13 3.65 2.27 1.65
Class 3-A-2.......... 20.11 7.13 3.65 2.27 1.65
Class 3-A-3.......... 20.11 7.13 3.65 2.27 1.65
Class 3-IO........... 20.58 7.62 4.14 2.74 2.01
Class B-1............ 19.78 12.46 9.77 8.46 6.31
Class B-2............ 19.82 12.46 9.77 8.46 6.31
Class B-3............ 19.82 12.46 9.77 8.46 6.31
- ----------
(1) Determined as described under "Prepayment and Yield Considerations" in
this prospectus supplement. Prepayments will not occur at any assumed rate
shown or any other constant rate, and the actual weighted average lives of
any or all of the classes of offered certificates are likely to differ
from those shown, perhaps significantly.
(2) "PPC" is an abbreviation for prepayment curve. The prepayment curve is
described under "Prepayment and Yield Considerations -- Weighted Average
Lives of the Offered Certificates" in this prospectus supplement.
Federal Income Tax Consequences
The issuing entity of your certificates is a New York common law trust. For
federal income tax purposes, elections will be made to treat this trust as
multiple "real estate mortgage investment conduits" or "REMICs" in a tiered
structure.
o The certificates (other than the Class 1-A-R Certificate and the portion
of the Class 2-A-6 Certificates representing the right to receive payments
from the reserve fund) will constitute "regular interests" in a REMIC and
will be treated as debt instruments for federal income tax purposes.
o The Class 1-A-R Certificate will constitute the sole "residual interest"
in each REMIC.
Interest on the certificates must be included in your income under an accrual
method of tax accounting, even if you are otherwise a cash method taxpayer.
The interest only and principal only certificates will, and certain other
classes may, be issued with original issue discount for federal income tax
purposes. If you hold a certificate of one of these classes, you will be
required to include original issue discount in income as it accrues on a
constant yield method, regardless of when you receive the cash related to the
original issue discount.
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Beneficial owners of the Class 2-A-6 Certificates will be treated as owning
two assets, the corresponding REMIC regular interest and the right to receive
payments from the reserve fund, and will be required to account separately for
each of these assets for federal income tax purposes.
The holder of the Class 1-A-R Certificate will be required to report as
ordinary income or loss the net income or the net loss of each REMIC and will be
required to fund tax liabilities relating to any of this net income although no
cash distributions are expected to be made to the Class 1-A-R Certificate other
than the distribution of its class balance and interest on that balance.
See "Federal Income Tax Consequences" in this prospectus supplement and in
the accompanying prospectus.
Legal Investment
Prospective purchasers, particularly those whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities, then you may be subject to
restrictions on investment in the offered certificates. You are encouraged to
consult your legal, tax, financial and accounting advisers for assistance in
determining the suitability of and consequences to you of the purchase,
ownership and sale of offered certificates.
o The senior certificates and the Class B-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as amended, or "SMMEA," so long as they
are rated in one of the two highest rating categories by at least one
nationally recognized statistical rating agency.
o The Class B-2 and Class B-3 Certificates will not constitute "mortgage
related securities" under SMMEA.
See "Legal Investment" in the prospectus.
ERISA Considerations
If you are a fiduciary or other person acting on behalf of any employee
benefit plan or arrangement, including an individual retirement account, subject
to the Employee Retirement Income Security Act of 1974, as amended, or "ERISA,"
the Internal Revenue Code of 1986, as amended, or the "Code," or any federal,
state or local law which is similar to ERISA or the Code, you should carefully
review with your legal advisors whether the purchase or holding of an offered
certificate could give rise to a transaction prohibited or not otherwise
permissible under ERISA, the Code or a similar law.
Subject to the considerations and conditions described under "ERISA
Considerations" in this prospectus supplement, it is expected that the offered
senior certificates (other than the Class 1-A-3, Class 2-A-3, Class 2-A-5, Class
3-A-3 and Class 1-A-R Certificates) may be purchased by benefit plans. The Class
1-A-R Certificate may not be acquired by benefit plans and the Class 1-A-3,
Class 2-A-3, Class 2-A-5 and Class 3-A-3 Certificates and the offered
subordinate certificates may not be acquired by benefit plans except under
certain conditions.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
Affiliations
Bank of America, National Association, which is the sponsor, the originator
and servicer of the mortgage loans and the counterparty under the yield
maintenance agreement, is the direct parent of the depositor and is an affiliate
of the underwriter. There are no additional relationships, agreements or
S-24
arrangements outside of this transaction among the affiliated parties that are
material to an understanding of the offered certificates.
S-25
- --------------------------------------------------------------------------------
RISK FACTORS
- --------------------------------------------------------------------------------
o The risk factors discussed below and under the heading "Risk Factors" in
the prospectus describe the material risks of an investment in the offered
certificates and should be carefully considered by all potential
investors.
o The offered certificates are not suitable investments for all investors
and may especially not be suitable for individual investors.
o The offered certificates are complex financial instruments, so you should
not purchase any offered certificates unless you or your financial advisor
possess the necessary expertise to analyze the potential risks associated
with an investment in mortgage-backed securities.
o You should not purchase any offered certificates unless you understand,
and are able to bear, the prepayment, credit, liquidity and market risks
associated with such offered certificates.
The Rate of Principal Payments on the Mortgage Loans Will Affect the Yield on
the Offered Certificates
Because the applicable fraction of principal payments on the mortgage loans
contributing to a cashflow group will be distributed currently on the senior
certificates in the related group and the subordinate certificates, the rate of
distributions of principal and the yield to maturity on your certificates will
be directly related to (i) the rate and timing of payments of principal on the
applicable mortgage loans and (ii) the amount and timing of defaults by
borrowers that result in losses on the applicable mortgage loans. Borrowers are
permitted to prepay their mortgage loans, in whole or in part, at any time
without penalty. The principal payments on the mortgage loans may be in the form
of scheduled principal payments or principal prepayments (for this purpose, the
term "principal prepayment" includes prepayments and any other recovery of
principal in advance of the scheduled due date, including repurchases and
liquidations due to default, casualty, condemnation and the like). Any of these
prepayments will result in distributions to you of amounts that would otherwise
be distributed over the remaining term of the mortgage loans.
The rate of principal payments on the mortgage loans will be affected by the
following:
o the amortization schedules of the mortgage loans;
o the rate of partial prepayments and full prepayments by borrowers due to
refinancing, job transfer, changes in property values or other factors;
o liquidations of the properties that secure defaulted mortgage loans;
o repurchases of mortgage loans by the depositor as a result of defective
documentation or breaches of representations or warranties;
o the exercise of due-on-sale clauses by the servicer in connection with
transfers of mortgaged properties;
o the optional repurchase of all the mortgage loans by the depositor to
effect a termination of the trust when the aggregate stated principal
balance of the mortgage loans is less than 10% of the aggregate unpaid
principal balance of the mortgage loans as of the cut-off date; and
S-26
o general and targeted solicitations for refinancing by mortgage originators
(including the sponsor).
The rate of principal payments on the mortgage loans will depend greatly on
the level of mortgage interest rates:
o If prevailing interest rates for similar mortgage loans fall below the
interest rates on the mortgage loans in the trust, the rate of prepayment
is likely to increase.
o Conversely, if prevailing interest rates for similar mortgage loans rise
above the interest rates on the mortgage loans in the trust, the rate of
prepayment is likely to decrease.
If you are purchasing offered certificates at a discount, or if you are
purchasing principal only certificates, you should consider the risk that if
principal payments on the mortgage loans contributing to the related cashflow
group or cashflow groups, or, in the case of the Class 1-PO Certificates, the
discount mortgage loans in cashflow group 1, occur at a rate slower than you
expected, your yield will be lower than you expected. See "Prepayment and Yield
Considerations--Yield on the Class 1-PO Certificates" in this prospectus
supplement for a more detailed description of risks associated with the purchase
of the principal only certificates. See Appendix D for a table demonstrating the
particular sensitivity of the principal only certificates to the rate of
prepayments on the discount mortgage loans in cashflow group 1.
If you are purchasing offered certificates at a premium, or if you are
purchasing interest only certificates (which have no class balance), you should
consider the risk that if principal payments on the mortgage loans contributing
to the related cashflow group or cashflow groups or, in the case of the Class
3-IO Certificates, the premium mortgage loans in cashflow group 3, occur at a
rate faster than you expected, your yield may be lower than you expected. If you
are purchasing Class 2-A-7, Class 2-A-9, Class 3-A-1 or Class 3-IO Certificates
you should consider the risk that a rapid rate of principal payments on the
applicable mortgage loans contributing to the related cashflow group could
result in your failure to recover your initial investment. See "Prepayment and
Yield Considerations -- Yield on the Inverse Floating Rate Certificates,"
"--Yield on the Class 2-A-9 Certificates" and "-- Yield on the Class 3-IO
Certificates" in this prospectus supplement for a more detailed description of
risks associated with the purchase of the Class 2-A-7, Class 2-A-9, Class 3-A-1
and Class 3-IO Certificates. See Appendix D for tables demonstrating the
particular sensitivities of the Class 2-A-7, Class 2-A-9, Class 3-A-1 and Class
3-IO Certificates to the rate of prepayments on the applicable mortgage loans
contributing to the related cashflow group.
If you are purchasing the inverse floating rate certificates (i.e., the Class
2-A-7 or Class 3-A-1 Certificates), you should also consider the risk that a
high rate of one-month LIBOR may result in a lower actual yield than you
expected or a negative yield. Because the inverse floating rate certificates are
also interest only certificates, the yield on the inverse floating rate
certificates will also be highly sensitive to the rate of principal payment on
the mortgage loans contributing to the related cashflow group. In particular,
you should consider the risk that high constant rates of one-month LIBOR or high
constant prepayment rates on the applicable mortgage loans may result in the
failure to recover your initial investment. See "Prepayment and Yield
Considerations -- Yield on the Inverse Floating Rate Certificates" in this
prospectus supplement for a more detailed description of the risks associated
with the purchase of the inverse floating rate certificates, and Appendix D for
tables demonstrating the particular sensitivities of the inverse floating rate
certificates to the rate of prepayments on the applicable mortgage loans and to
the rate of one-month LIBOR.
You must make your own decisions as to the appropriate prepayment assumptions
to be used when purchasing offered certificates.
S-27
As described in this prospectus supplement under "Description of the
Certificates -- Principal," the senior prepayment percentage for a cashflow
group of the applicable non-PO percentage of principal prepayments (excluding
for this purpose, partial liquidations due to default, casualty, condemnation
and the like) initially will be distributed to the classes of senior non-PO
certificates of the related group that are entitled to receive principal
prepayment distributions at that time. This may result in all (or a
disproportionately high percentage) of those principal prepayments being
distributed to the senior non-PO certificates of that group and none (or a
disproportionately low percentage) of those principal prepayments being
distributed to holders of the subordinate certificates during the periods of
time described in the definition of "Senior Prepayment Percentage."
The timing of changes in the rate of prepayments may significantly affect the
actual yield to you, even if the average rate of principal prepayments is
consistent with your expectations. In general, the earlier the payment of
principal of the mortgage loans, the greater the effect on your yield to
maturity. As a result, the effect on your yield of principal prepayments
occurring at a rate higher (or lower) than the rate you anticipate during the
period immediately following the issuance of the certificates will not be offset
by a subsequent like reduction (or increase) in the rate of principal
prepayments.
Delinquencies and Losses on the Mortgage Loans Will Adversely Affect Your Yield
Delinquencies on the mortgage loans contributing to a cashflow group that are
not advanced by or on behalf of the servicer (because the servicer has
determined that these amounts, if advanced, would be nonrecoverable), will
adversely affect the yield on the senior certificates of the related group and
the subordinate certificates. The servicer will determine that a proposed
advance is nonrecoverable when, in the good faith exercise of its servicing
judgment, it believes the proposed advance would not be ultimately recoverable
from the related mortgagor, related liquidation proceeds, or other recoveries in
respect of the mortgage loan. Because of the priority of distributions,
shortfalls resulting from delinquencies that are not covered by advances will be
borne first by the subordinate certificates (in reverse order of payment
priority), and then by the senior certificates of the group.
Net interest shortfalls will adversely affect the yields on the offered
certificates. In addition, the non-PO percentage of the principal portion of
realized losses generally will be borne by the subordinate certificates, as
described in this prospectus supplement under "Description of the Certificates
- -- Allocation of Losses." As a result, the yields on the offered certificates
will depend on the rate and timing of realized losses on the applicable mortgage
loans contributing to the related cashflow group or cashflow groups.
Mortgage Loans Paying Interest Only During the First Ten or Fifteen Years May
Have a Higher Risk of Default or Rates of Prepayment
Certain of the mortgage loans have an initial interest only period of up to
fifteen years after the date of origination. During this interest only period,
the payment due from the related mortgagor will be less than that of a
traditional mortgage loan. In addition, the principal balance of the mortgage
loan will not be reduced (except in the case of prepayments) because there will
be no scheduled monthly payments of principal during this period. Accordingly,
no principal payments will be distributed to the related certificates from these
mortgage loans during their interest only period except in the case of a
prepayment.
After the initial interest only period, payments on a mortgage loan with an
interest only period will be recalculated to amortize fully its unpaid principal
balance over its remaining life and the mortgagor will be required to make
scheduled payments of both principal and interest. The required payment of
principal will increase the burden on the mortgagor and may increase the risk of
default or prepayment under the
S-28
related mortgage loan. In underwriting mortgage loans with interest only
periods, the sponsor generally does not consider the ability of mortgagors to
make payments of principal at the end of the interest only period. Higher
scheduled monthly payments may induce the related mortgagors to refinance their
mortgage loans, which would result in higher prepayments. In addition, in
default situations losses may be greater on these mortgage loans because they do
not amortize during the initial period. These losses will be allocated to the
certificates.
The performance of mortgage loans with an interest only period may be
significantly different from mortgage loans that amortize from origination. In
particular these mortgagors may be more likely to refinance their mortgage
loans, which may result in higher prepayment speeds than would otherwise be the
case.
Alternative Underwriting Standards May Increase Risk of Loss
The following chart lists the expected approximate percentage of mortgage
loans in each cashflow group and the mortgage pool (in each case, by aggregate
stated principal balance and, in the case of each cashflow group, based on the
applicable fraction) originated using the sponsor's "Alternative A" underwriting
standards:
- --------------------- ------------------ ------------------ --------------------
Cashflow Group 1 Cashflow Group 2 Cashflow Group 3 Mortgage Pool
- --------------------- ------------------ ------------------ --------------------
39.52% 45.67% 42.55% 43.84%
- --------------------- ------------------ ------------------ --------------------
See "The Mortgage Loan Programs -- Mortgage Loan Underwriting -- Bank of
America Alternative Underwriting Standards" in the prospectus. These
underwriting standards are different from and, in certain respects, less
stringent than the general underwriting standards employed by the sponsor. For
example, certain of the mortgage loans may have been originated with less than
standard documentation or with higher maximum loan-to-value ratios. Accordingly,
the mortgage loans may experience rates of delinquencies, defaults, foreclosure,
bankruptcy and loss that are higher than those experienced by mortgage loans
underwritten using the sponsor's general underwriting standards.
The Rate of Default on Mortgage Loans that Are Secured by Investor Properties
May be Higher than on Other Mortgage Loans
The following chart lists the expected approximate percentage of mortgage
loans in each cashflow group and the mortgage pool (in each case, by aggregate
stated principal balance and, in the case of each cashflow group, based on the
applicable fraction) secured by investor properties:
- --------------------- ------------------ ------------------ --------------------
Cashflow Group 1 Cashflow Group 2 Cashflow Group 3 Mortgage Pool
- --------------------- ------------------ ------------------ --------------------
23.67% 36.43% 53.17% 43.06%
- --------------------- ------------------ ------------------ --------------------
An investor property is a property which, at the time of origination, the
mortgagor represented would not be used as the mortgagor's primary residence or
second home. Because the mortgagor is not living on the property, the mortgagor
may be more likely to default on the mortgage loan than on a comparable mortgage
loan secured by a primary residence, or to a lesser extent, a second home. In
addition, income expected to be generated from an investor property may have
been considered for underwriting purposes in addition to the income of the
mortgagor from other sources. Should this income not materialize, it is possible
the mortgagor would not have sufficient resources to make payments on the
mortgage loan.
S-29
There Are Risks Relating to Mortgaged Properties Subject to Second Lien Mortgage
Loans
At the time of origination of certain of the mortgage loans, a lender other
than the sponsor may have originated a second lien mortgage loan. Mortgage loans
that have second lien mortgage loans encumbering the same mortgaged property may
have higher rates of delinquency and foreclosure relative to mortgage loans that
do not have second lien mortgage loans behind them. This may be due to changes
in the mortgagor's debt-to-income profile, the fact that mortgagors may then
have less equity in the mortgaged property or other factors. You should also
note that any mortgagor could obtain a second lien mortgage loan at any time
subsequent to the date of origination of their first lien mortgage loan from any
lender.
Credit Scores May Not Accurately Predict the Likelihood of Default
The sponsor generally uses credit scores as part of its underwriting process.
The tables in Appendix A show credit scores for the mortgagors obtained at the
time of origination of their mortgage loans. A credit score purports only to be
a measurement of the relative degree of risk a borrower represents to a lender,
i.e., that a borrower with a higher score is statistically expected to be less
likely to default in payment than a borrower with a lower score. In addition, it
should be noted that credit scores were developed to indicate a level of default
probability over a two-year period, which does not correspond to the life of
most mortgage loans. Furthermore, credit scores were not developed specifically
for use in connection with mortgage loans, but for consumer loans in general.
Therefore, credit scores do not address particular mortgage loan characteristics
that influence the probability of repayment by the borrower. Neither the
depositor nor the sponsor makes any representations or warranties as to any
borrower's current credit score or the actual performance of any mortgage loan
or that a particular credit score should be relied upon as a basis for an
expectation that a borrower will repay its mortgage loan according to its terms.
Subordination of Super Senior Support Certificates and Subordinate Certificates
Increases Risk of Loss
Subordinate certificateholders are more likely to suffer losses as a result
of losses or delinquencies on the mortgage loans than are senior
certificateholders.
o The rights of each class of subordinate certificates to receive
distributions of interest and principal are subordinated to the rights of
the senior certificates and each class of subordinate certificates higher
in order of payment priority. For example, the Class B-2 Certificates will
not receive principal or interest on a distribution date until the senior
certificates and Class B-1 Certificates have received the amounts to which
they are entitled on that distribution date.
o The non-PO percentage of losses that are realized on the mortgage loans
will be allocated to the subordinate certificates beginning with the Class
B-6 Certificates then to the Class B-5 Certificates and so on, in reverse
order of payment priority, until the outstanding class balances of the
subordinate certificates have been reduced to zero.
o The principal only certificates will be entitled to reimbursement for
certain losses allocated to them from amounts otherwise distributable as
principal on the subordinate certificates in reverse order of payment
priority regardless of the cashflow group from which such payments are
received.
Super senior support certificateholders should consider the risk that after
the subordinate certificates are no longer outstanding, the principal portion of
losses realized on the related mortgage loans that are
S-30
allocated to the related class of super senior certificates will be borne by
your class of super senior support certificates, rather than the related class
of super senior certificates, for so long as your class of super senior support
certificates is outstanding.
For a more detailed description of the subordination feature of the
subordinate certificates, see "Description of the Certificates -- Allocation of
Losses" and "-- Cross-Collateralization" in this prospectus supplement.
Subordinate Certificates Provide Subordination for All Groups
Because the subordinate certificates provide credit support for all groups,
the outstanding class balances of the subordinate certificates could be reduced
to zero as a result of a disproportionate amount of principal losses on the
mortgage loans contributing to one or more cashflow groups. Therefore, losses on
the mortgage loans contributing to one or more cashflow groups will reduce the
subordination provided by the subordinate certificates to the unrelated groups
of senior certificates and increase the likelihood that losses may be allocated
to the unrelated groups of senior certificates. See "Description of the
Certificates -- Allocation of Losses" in this prospectus supplement.
Under certain circumstances, principal otherwise payable to the subordinate
certificates will be paid to the senior non-PO certificates as described under
"Description of the Certificates -- Cross-Collateralization" in this prospectus
supplement.
High Balance Loans May Increase Risk of Loss on Certificates
Mortgage loans with large balances relative to the class balances of the
classes of subordinate certificates may, in the event of liquidation, result in
realized losses large enough to significantly reduce or eliminate the class
balance of one or more of such classes. In the event such mortgage loans are
discount mortgage loans in cashflow group 1, a realized loss may have a similar
impact on the Class 1-PO Certificates.
In addition, any realized loss that reduces the class balances of the
subordinate certificates decreases the subordination provided to the senior
certificates and increases the risk that the senior non-PO certificates will
have to bear realized losses in the future and the Class 1-PO Certificates will
not be reimbursed for principal losses.
The current principal balances of the mortgage loans and the percentages
they represent of the mortgage pool and each cashflow group (based on the
applicable fraction) are specified in Appendix A.
Decrement and Sensitivity Tables Are Based Upon Assumptions and Models
The decrement tables set forth in Appendix B and the sensitivity tables set
forth in Appendix D have been prepared on the basis of the modeling assumptions
described under "Prepayment and Yield Considerations -- Assumptions Relating to
Tables." There will likely be discrepancies between the characteristics of the
actual mortgage loans contributing to each cashflow group and the
characteristics of the assumed mortgage loans used in preparing the decrement
tables and the sensitivity tables. Any such discrepancy may have an effect upon
the percentages of initial class balances (or initial notional amounts)
outstanding set forth in the decrement tables (and the weighted average lives of
the offered certificates) and the yields to maturity set forth in the yield
tables. In addition, to the extent that the mortgage loans actually contributing
to a cashflow group have characteristics that differ from those assumed in
preparing the decrement tables and the sensitivity tables, the class balance or
notional amount of a class of offered certificates could be reduced to zero
earlier or later than indicated by the decrement tables and the yield to
maturity may be higher or lower than indicated in the sensitivity tables.
S-31
The models used in this prospectus supplement for prepayments and defaults
also do not purport to be a historical description of prepayment or default
experience or a prediction of the anticipated rate of prepayment or default of
any pool of mortgage loans, including the mortgage loans contained in the trust.
It is highly unlikely that the mortgage loans contributing to a cashflow group
will prepay or liquidate at any of the rates specified or that losses will be
incurred according to one particular pattern. The assumed percentages of SDA and
PPC and the loss severity percentages shown in the Appendices are for
illustrative purposes only. For a description of SDA and PPC, see "Prepayment
and Yield Considerations" in this prospectus supplement. The actual rates of
prepayment and liquidation and loss severity experience of the mortgage loans
contributing to a cashflow group may not correspond to any of the assumptions
made in this prospectus supplement. For these reasons, the weighted average
lives of the offered certificates may differ from the weighted average lives
shown in the tables in Appendix B. Further, because the timing of cash flows is
critical to determining yield, the pre-tax yields to maturity of the Class 1-PO,
Class 2-A-7, Class 2-A-9, Class 3-A-1, Class 3-IO, Class B-2 and Class B-3
Certificates are likely to differ from the pre-tax yields to maturity shown in
the tables in Appendix D.
Geographic Concentration May Increase Risk of Loss Due to Adverse Economic
Conditions or Natural Disasters
At various times, certain geographic regions will experience weaker economic
conditions and housing markets and, consequently, will experience higher rates
of delinquency and loss on mortgage loans generally. In addition, certain states
have experienced natural disasters, including earthquakes, fires, floods and
hurricanes, which may adversely affect property values. Although mortgaged
properties located in certain identified flood zones will be required to be
covered, to the maximum extent available, by flood insurance, no mortgaged
properties will otherwise be required to be insured against earthquake damage or
any other loss not covered by standard hazard insurance policies. Any
concentration of mortgaged properties in a state or region may present unique
risk considerations. The following chart lists the states with expected
concentrations of mortgaged properties in excess of 10% in any cashflow group
and in the mortgage pool (in each case, by aggregate stated principal balance
and, in the case of each cashflow group, based on the applicable fraction):
- -------------------- -------------------- --------------------- ----------------
Mortgage
Cashflow Group 1 Cashflow Group 2 Cashflow Group 3 Pool
- -------------------- -------------------- --------------------- ----------------
California California California California
- -------------------- -------------------- --------------------- ----------------
Texas Florida Florida Florida
- -------------------- -------------------- --------------------- ----------------
Any deterioration in housing prices in a state or region due to adverse
economic conditions, natural disaster or other factors, and any deterioration of
economic conditions in a state or region that adversely affects the ability of
borrowers to make payments on the mortgage loans, may result in losses on the
mortgage loans. Any losses may adversely affect the yield to maturity of the
offered certificates.
Decline in Residential Real Estate Values May Increase Risk and Adversely Affect
Your Investment
In recent months, delinquencies and losses with respect to residential
mortgage loans generally have increased and may continue to increase. In
addition, in recent months the value of mortgaged properties in many states have
declined or remained stable, after extended periods of appreciation. If
residential real estate values generally or in a particular geographic area
decline or fail to increase, a borrow may have less equity in the mortgaged
property than originally anticipated leading to less inclination on the part of
such borrower to cure delinquencies and avoid foreclosure. A continued decline
or lack of increase in property values where the outstanding balances of the
mortgage loans and any secondary financing on the
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related mortgaged properties are close to or exceed the value of the mortgaged
properties may result in delinquencies, foreclosures and losses that are higher
than you anticipated or those in the sponsor's prior securitizations involving
the depositor.
In addition, adverse economic conditions and other factors (which may or may
not affect real property values) may affect the mortgagors' timely payment of
scheduled payments of principal and interest on the mortgage loans and,
accordingly, the actual rates of delinquencies, foreclosures and losses with
respect to the mortgage pool. These other factors could include excessive
building resulting in an oversupply of housing in a particular area or a
decrease in employment reducing the demand for housing in an area. To the extent
that credit enhancements do not cover such losses, your yield may be adversely
impacted.
The Class 2-A-6 Certificates are Subject to Counterparty Risk
The trustee on behalf of the issuing entity will enter into a yield
maintenance agreement with the sponsor, as counterparty, for the benefit of the
Class 2-A-6 Certificates. The yield maintenance agreement will require the
counterparty to make certain payments in the circumstances set forth herein
under "Description of the Certificates -- The Yield Maintenance Agreement." To
the extent that payments on the Class 2-A-6 Certificates depend in part on
payments to be received by the trustee under the yield maintenance agreement,
the ability of the trustee to make these payments on the Class 2-A-6
Certificates will be subject to the credit risk of the counterparty.
The Class 2-A-6 Certificates May Not Receive Amounts Expected Under the Yield
Maintenance Agreement
The yield maintenance agreement payment for any distribution date is based on
the lesser of (x) the class balance of the Class 2-A-6 Certificates prior to
distributions on that distribution date or (y) the notional amount (as set forth
in the table in Appendix E), which decreases for each distribution date during
the life of the yield maintenance agreement. If prepayments on the related
mortgage loans occur at a rate which results in the class balance of the Class
2-A-6 Certificates being greater than the notional amount specified in Appendix
E for a distribution date, the amount holders will receive as a result of the
yield maintenance agreement will be less than if the counterparty were required
to make payments based on the class balance of the Class 2-A-6 Certificates.
Tax Consequences of Residual Certificate
o The Class 1-A-R Certificate will be the sole "residual interest" in each
REMIC for federal income tax purposes.
o The holder of the Class 1-A-R Certificate must report as ordinary income
or loss the net income or the net loss of each REMIC whether or not any
cash distributions are made to it. This allocation of income or loss may
result in a zero or negative after-tax return. No cash distributions are
expected to be made on the Class 1-A-R Certificate other than the
distribution of its class balance and interest on that balance.
o Under current law, the holder of the Class 1-A-R Certificate must account
separately for its interest in each REMIC, and may not offset income from
one REMIC with deductions from another REMIC.
o Treasury regulations require a seller of the Class 1-A-R Certificate
either to pay the buyer an amount designed to compensate the buyer for
assuming the tax liability or transfer only to certain
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eligible transferees should the seller wish to qualify for "safe harbor"
protection from possible disregard of such a transfer.
o Due to its tax consequences, the Class 1-A-R Certificate will be subject
to restrictions on transfer that affect its liquidity. In addition, the
Class 1-A-R Certificate may not be acquired by benefit plans.
See "Description of the Certificates -- Restrictions on Transfer of the Class
1-A-R Certificate," "Prepayment and Yield Considerations -- Yield on the Class
1-A-R Certificate," "ERISA Considerations" and "Federal Income Tax Consequences"
in this prospectus supplement.
United States Military Operations May Increase Risk of Relief Act Shortfalls
As a result of military operations in Afghanistan and Iraq, the United States
has placed a substantial number of armed forces reservists and members of the
National Guard on active duty status. It is possible that the number of
reservists and members of the National Guard placed on active duty status may
remain at high levels for an extended time. To the extent that a member of the
military, or a member of the armed forces reserves or National Guard who is
called to active duty, is a mortgagor of a mortgage loan in the trust, the
interest rate limitation of the Servicemembers Civil Relief Act, and any
comparable state law, will apply. This may result in interest shortfalls on the
mortgage loans in the trust, which will be borne by all classes of
interest-bearing certificates as described herein. Neither the sponsor nor the
depositor has taken any action to determine whether any of the mortgage loans
would be affected by these interest rate limitations. See "Description of the
Certificates -- Interest" in this prospectus supplement and "Certain Legal
Aspects of the Mortgage Loans -- Servicemembers Civil Relief Act and Similar
Laws" in the prospectus.
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THE MORTGAGE POOL
- --------------------------------------------------------------------------------
The descriptions of the Mortgage Loans and the Mortgaged Properties below and
in Appendix A are based upon the expected characteristics of the Mortgage Loans
as of the close of business on the Cut-off Date. The balances shown have been
adjusted for the scheduled principal payments due on or before the Cut-off Date.
Prior to the Closing Date, Mortgage Loans may be removed from the Mortgage Pool
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 Cashflow 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 Cashflow Group are
approximate percentages of the aggregate Stated Principal Balance of the
Mortgage Loans in the Cashflow Group (based on the Applicable Fractions
multiplied by the Stated Principal Balances of the Mortgage Loans contributing
to such Cashflow Group) as of the Cut-off Date and references below to
percentages of all Mortgage Loans are approximate percentages of the aggregate
Stated Principal Balance of the Mortgage Loans in all Cashflow Groups as of the
Cut-off Date.
The Mortgage Loans have been divided into three Cashflow Groups (as described
below). The principal balance of each Mortgage Loan has been allocated, based on
such Mortgage Loan's Net Mortgage Interest Rate, either (i) to one Cashflow
Group only or (ii) between two Cashflow Groups, based on two fixed fractions
that differ among Mortgage Loans (in each case, the "Applicable Fractions").
Each Cashflow Group consists of differing percentages of the interest on, and
principal of, particular Mortgage Loans, calculated so that the principal and
interest due on each such Mortgage Loan is treated as if that Mortgage Loan were
two mortgage loans bearing interest at two different effective Net Mortgage
Interest Rates, one higher than and one lower than the original Net Mortgage
Interest Rate of such Mortgage Loan. This allocation enables the Mortgage Pool
to be treated as if it were made up of multiple groups of mortgage loans bearing
interest at various fixed rates. This allocation will affect the rate of
prepayment of the Certificates because principal payments collected on each
Mortgage Loan may be allocated to more than one Cashflow Group and used to pay
one or more classes of certificates related to those Cashflow Groups.
"Cashflow Group 1" consists of all of the Mortgage Loans with Net Mortgage
Interest Rates less than or equal to 5.500% and the Applicable Fraction of each
Mortgage Loan with a Net Mortgage Interest Rate greater than 5.500% but less
than 6.000%. The "Effective Net Mortgage Interest Rate" with respect to each
Mortgage Loan or portion thereof in Cashflow Group 1 will be 5.500%.
"Cashflow Group 2" consists of Mortgage Loans with Net Mortgage Interest
Rates equal to 6.000% and the Applicable Fraction of each Mortgage Loan with a
Net Mortgage Interest Rate greater than 5.500% but less than 6.000% and the
Applicable Fraction of each Mortgage Loan with a Net Mortgage Interest Rate
greater than 6.000% but less than 7.000%. The "Effective Net Mortgage Interest
Rate" with respect to each Mortgage Loan or portion thereof in Cashflow Group 2
will be 6.000%.
"Cashflow Group 3" consists of the Applicable Fraction of each Mortgage Loan
with a Net Mortgage Interest Rate greater than 6.000% but less than 7.000% and
all the Mortgage Loans with Net Mortgage Interest Rates equal to or greater than
7.000%. The "Effective Net Mortgage Interest Rate" with respect to each Mortgage
Loan or portion thereof in Cashflow Group 3 will be 7.000%.
Cashflow Group 1, Cashflow Group 2 and Cashflow Group 3 are each referred to
herein as a "Cashflow Group."
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As stated above, specified portions of the Mortgage Loans may be allocable to
more than one Cashflow Group. Collections and losses on the Mortgage Loans will
be allocated to Cashflow Group 1, Cashflow Group 2 and Cashflow Group 3 on the
basis of the related Applicable Fraction of each Mortgage Loan having a Net
Mortgage Interest Rate within a specified range as set forth below:
(A) Mortgage Loans with Net Mortgage Interest Rates Less than or
Equal to 5.500%:
Principal of each of the Mortgage Loans with Net Mortgage
Interest Rates less than or equal to 5.500% will be allocated to
Cashflow Group 1.
The Applicable Fraction for each such Mortgage Loan and
Cashflow Group 1 is 100%.
(B) Mortgage Loans with Net Mortgage Interest Rates Greater than
5.500% but Less than 6.000%:
Principal of each of the Mortgage Loans with Net Mortgage
Interest Rates greater than 5.500% but less than 6.000% will be
allocated between Cashflow Group 1 and Cashflow Group 2 based upon
the Applicable Fraction.
The Applicable Fraction for the principal portion of each such
Mortgage Loan contributing to Cashflow Group 1 is equal to (i)
6.000% minus the related Net Mortgage Interest Rate of such Mortgage
Loan divided by (ii) 0.500% and the Applicable Fraction for the
portion of each such Mortgage Loan contributing to Cashflow Group 2
is equal to (i) 1 minus (ii) (a) 6.000% minus the related Net
Mortgage Interest Rate of such Mortgage Loan divided by (b) 0.500%.
(C) Mortgage Loans with Net Mortgage Interest Rates Equal to
6.000%:
Principal of each of the Mortgage Loans with Net Mortgage
Interest Rates equal to 6.000% will be allocated to Cashflow Group
2.
The Applicable Fraction for each such Mortgage Loan and
Cashflow Group 2 is 100%.
(D) Mortgage Loans with Net Mortgage Interest Rates Greater than
6.000% but Less than 7.000%:
Principal of each of the Mortgage Loans with Net Mortgage
Interest Rates greater than 6.000% but less than 7.000% will be
allocated between Cashflow Group 2 and Cashflow Group 3 based upon
the Applicable Fraction.
The Applicable Fraction for the principal portion of each such
Mortgage Loan contributing to Cashflow Group 2 is equal to (i)
7.000% minus the related Net Mortgage Interest Rate of such Mortgage
Loan divided by (ii) 1.000% and the Applicable Fraction for each
such Mortgage Loan contributing to Cashflow Group 3 is equal to (i)
1 minus (ii) (a) 7.000% minus the related Net Mortgage Interest Rate
of such Mortgage Loan divided by (b) 1.000%.
(E) Mortgage Loans with Net Mortgage Interest Rates Greater than or
Equal to 7.000%
Principal of each of the Mortgage Loans with Net Mortgage
Interest Rates greater than or equal to 7.000% will be allocated to
Cashflow Group 3.
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The Applicable Fraction for each such Mortgage Loan and
Cashflow Group 3 is 100%.
Since the entitlements of the holders of the Group 1 Certificates, Group 2
Certificates and Group 3 Certificates will be primarily based on distributions
from Cashflow Group 1, Cashflow Group 2 or Cashflow Group 3, respectively, the
performance of the Mortgage Loans contributing to each of those Cashflow Groups
will determine the distributions and the allocation of losses to each related
class of Certificates on each Distribution Date. Prospective investors should
also consider that the Mortgage Loans contributing to Cashflow Group 1, Cashflow
Group 2 or Cashflow Group 3 have different characteristics--in particular,
interest rates--that will have particular bearing on the prepayment experience
of such Mortgage Loans and, therefore, the related Certificates. For example,
Mortgage Loans with lower Net Mortgage Interest Rates might be expected to
experience lower rates of prepayment than Mortgage Loans with higher Net
Mortgage Interest Rates. Consequently, the Certificates related to Cashflow
Group 1 to which lower rate Mortgage Loans are allocated may be expected to pay
at a slower rate than Certificates related to Cashflow Group 3 to which higher
rate Mortgage Loans are allocated. See "Prepayment and Yield Considerations" in
this prospectus supplement.
Each Mortgage Loan in the Mortgage Pool will be fully amortized by its
maturity.
The Mortgage Loans were selected by the Sponsor, with advice from Banc of
America Securities LLC (the "Underwriter") as to the characteristics of the
Mortgage Loans contributing to each Cashflow Group that will optimize
marketability of the Certificates, from the Sponsor's portfolio of first lien,
closed-end, fixed-rate mortgage loans, and were chosen to meet the requirements
imposed by the rating agencies to achieve the credit support percentages listed
under "Summary of Terms -- Credit Support."
The Mortgage Pool consists of Mortgage Loans originated by the Sponsor. For a
description of the underwriting standards generally applicable to the Mortgage
Loans, see "The Mortgage Loan Programs -- Mortgage Loan Underwriting -- Bank of
America General Underwriting Standards" and "-- Bank of America Alternative
Underwriting Standards" in the prospectus. The Mortgage Loans will be sold by
the Sponsor to the Depositor on the Closing Date by a mortgage loan purchase
agreement between the Sponsor and the Depositor (the "Mortgage Loan Purchase
Agreement"). The representations and warranties made by the Sponsor in the
Mortgage Loan Purchase Agreement will provide the basis for the Depositor's
representations and warranties made in the Pooling Agreement regarding to the
Mortgage Loans. See "The Mortgage Loan Programs -- Representations and
Warranties" in the prospectus. In addition, the Mortgage Loan Purchase Agreement
will provide the Depositor with remedies against the Sponsor for the failure by
the Sponsor to deliver the Mortgage Loan documentation required to be delivered
to the Trustee or a custodian under the Pooling Agreement.
As of the Cut-off Date, no Mortgage Loan was delinquent and no Mortgage Loan
has been more than 30 days delinquent more than twice during the preceding
twelve months.
As of the Cut-off Date, no Mortgage Loan had a Loan-to-Value Ratio of more
than 103.00%. For more information on the Loan-to-Value Ratios of the Mortgage
Loans, see the Original Loan-to-Value Ratios tables in Appendix A. Subject to
minor exceptions permitted in the Sponsor's discretion, each Mortgage Loan with
a Loan-to-Value Ratio at origination in excess of 80% generally will be covered
by a primary mortgage guaranty insurance policy which conforms to the standards
of Fannie Mae or Freddie Mac. No primary mortgage insurance coverage will be
required for any Mortgage Loan after the date on which the related Loan-to-Value
Ratio is less than 80%. You should note, however, that a Mortgage Loan which at
origination was covered by a primary mortgage guaranty insurance policy may no
longer be covered by the policy if the mortgagor obtains an appraisal after
origination indicating the Loan-to-Value Ratio at the time of that appraisal is
less than 80%.
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- --------------------------------------------------------------------------------
THE SPONSOR
- --------------------------------------------------------------------------------
The Sponsor, Bank of America, National Association ("Bank of America"), is an
indirect wholly-owned subsidiary of Bank of America Corporation.
See "The Sponsor," "The Mortgage Loan Programs," "Servicing of the Mortgage
Loans" and "The Pooling Agreement" in the prospectus for more information about
the Sponsor, its securitization programs, its solicitation and underwriting
criteria used to originate the Mortgage Loans and its material roles and duties
in this securitization.
- --------------------------------------------------------------------------------
STATIC POOL INFORMATION
- --------------------------------------------------------------------------------
Information concerning the Sponsor's prior residential mortgage loan
securitizations involving both fixed-rate first lien mortgage loans underwritten
in accordance with the Sponsor's general underwriting standards described in the
prospectus under "The Mortgage Loan Programs -- Mortgage Loan Underwriting --
Bank of America General Underwriting Standards" and first lien mortgage loans
underwritten in accordance with the Sponsor's alternative underwriting standards
described in the prospectus under "The Mortgage Loan Programs -- Mortgage Loan
Underwriting -- Bank of America Alternative Underwriting Standards," and, in
each case, issued by the Depositor or the Depositor's predecessor is available
on the internet at
http://corp.bankofamerica.com/public/regulationab/boams/index.jsp. Although
those securitizations involve the most comparable type of mortgage loans to the
type of Mortgage Loans contained in the Mortgage Pool, the Sponsor also
maintains on that website, for the information of investors, statistical data
concerning the Sponsor's prior residential mortgage loan securitizations
involving either fixed-rate first lien mortgage loans or adjustable-rate first
lien mortgage loans underwritten in accordance with the Sponsor's general
underwriting standards issued by the Depositor or the Depositor's predecessor.
Without charge or registration, investors can view on this website the
following information for each of those securitizations:
o summary initial pool information; and
o delinquency, cumulative loss, and prepayment information as of each
distribution date for the five years preceding the date of first use of
this prospectus supplement.
In the event any changes or updates are made to the information available on
the Sponsor's website, the Depositor will provide a copy of the original
information upon request to any person who writes or calls the Depositor. The
Depositor's address is 214 North Tryon Street, Mail Code NC1-027-22-02,
Charlotte, North Carolina 28255. Its telephone number is 704-387-8239.
The static pool data available on the Sponsor's website relating to any of
the Sponsor's mortgage loan securitizations issued prior to January 1, 2006 is
not deemed to be part of this prospectus supplement, the accompanying prospectus
or the Depositor's registration statement.
This static pool data may have been influenced in the past by factors beyond
the Sponsor's control, such as unusually robust housing prices, low interest
rates and changes in product type. Therefore, the performance of prior
residential mortgage loan securitizations may not be indicative of the future
performance of the Mortgage Loans.
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THE DEPOSITOR
- --------------------------------------------------------------------------------
The Depositor was incorporated in the State of Delaware on November 26, 2002
under the name "BA Residential Securities, Inc." and filed a Certificate of
Amendment of Certificate of Incorporation changing its name to "Banc of America
Mortgage Securities, Inc." on December 4, 2002. The Depositor is a direct,
wholly-owned subsidiary of the Sponsor. It is not expected that the Depositor
will have any business operations other than offering mortgage pass-through
certificates and related activities. The Depositor will have limited obligations
and rights under the Pooling Agreement after the Closing Date, including, but
not limited to, repurchasing or substituting Mortgage Loans due to breaches of
representations and warranties or, in the circumstances described in the
prospectus under "The Pooling Agreement -- Termination; Optional Purchase of
Mortgage Loans," repurchasing all of the Mortgage Loans.
The Depositor maintains its principal executive office at 214 North Tryon
Street, Mail Code NC1-027-22-02, Charlotte, North Carolina 28255. Its telephone
number is 704-387-8239.
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THE ISSUING ENTITY
- --------------------------------------------------------------------------------
The Issuing Entity will be a New York common law trust (the "Trust"), formed
on the Closing Date pursuant to the Pooling Agreement. The Mortgage Loans will
be deposited by the Depositor into the Trust under the Pooling Agreement as
described in the prospectus under "The Pooling Agreement -- Assignment of
Mortgage Loans." The Trust will have no officers or directors and no activities
or continuing duties other than to hold the assets underlying the Certificates
and to issue the Certificates. The fiscal year end of the Trust will be December
31 of each year.
The Trust will be administered by the Trustee pursuant to the terms of the
Pooling Agreement as described under "The Pooling Agreement -- The Trustee" in
the prospectus. The Trustee, on behalf of the Trust, is only permitted to take
the actions specifically provided in the Pooling Agreement. Under the Pooling
Agreement, the Trustee on behalf of the Trust will not have the power to issue
additional certificates representing interests in the Trust, borrow money on
behalf of the Trust or make loans from the assets of the Trust to any person or
entity.
The Issuing Entity, as a common law trust, is not eligible to be a debtor in
a bankruptcy proceeding. In the event of the insolvency or bankruptcy of the
Sponsor or the Depositor, the transfer of the Mortgage Loans to the Trust may be
challenged. See "Risk Factors -- Special Powers of the FDIC in the Event of
Insolvency of the Sponsor Could Delay or Reduce Distributions on the
Certificates" and "-- Insolvency of the Depositor May Delay or Reduce
Collections on Mortgage Loans" in the prospectus.
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THE TRUSTEE
- --------------------------------------------------------------------------------
Wells Fargo Bank, National Association ("Wells Fargo Bank") will act as
Trustee and custodian under the Pooling Agreement. Wells Fargo Bank is a
national banking association and a wholly-owned subsidiary of Wells Fargo &
Company. A diversified financial services company with approximately $482
billion in assets, 23+ million customers and 158,000+ employees as of December
31, 2006, 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
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Sponsor, the Servicer, the Counterparty and the Underwriter may maintain banking
and other commercial relationships with Wells Fargo Bank and its affiliates.
Wells Fargo Bank maintains its principal corporate trust offices located at 9062
Old Annapolis Road, Columbia, Maryland 21045-1951 (among other locations) and
its office for certificate transfer services is located at Sixth Street and
Marquette Avenue, Minneapolis, Minnesota 55479 (together, the "Corporate Trust
Office"). The Trustee may appoint one or more co-trustees if necessary to comply
with the fiduciary requirements imposed by any jurisdiction in which a Mortgaged
Property is located.
In the case of any appointment of a co-trustee, all rights, powers, duties
and obligations conferred or imposed upon the Trustee will be conferred or
imposed upon and exercised or performed by the Trustee and the co-trustee
jointly, unless the law of a jurisdiction prohibits the Trustee from performing
its duties under the Pooling Agreement, in which event such rights, powers,
duties and obligations (including the holding of title to the Trust or any
portion of the Trust in any such jurisdiction) shall be exercised and performed
by the co-trustee at the direction of the Trustee.
Wells Fargo Bank has provided corporate trust services since 1934. As of
December 31, 2006, Wells Fargo Bank acts as trustee for a variety of
transactions and asset types, including corporate and municipal bonds,
mortgage-backed and asset-backed securities and collateralized debt obligations.
As of December 31, 2006, Wells Fargo Bank was acting as trustee on more than
1,346 series of residential mortgage-backed securities with an aggregate
principal balance of approximately $277,396,000,000.
Under the terms of the Pooling Agreement, the Trustee also is responsible for
securities administration, which includes pool performance calculations,
distribution calculations and the preparation of monthly distribution reports.
The Trustee does not independently verify the information received from the
Servicer that it uses for these calculations nor does it monitor access to and
activity in the Servicer Custodial Account, compliance with covenants in the
Pooling Agreement or the basis for the addition, substitution or removal of
Mortgage Loans from the Mortgage Pool. As securities administrator, the Trustee
is responsible for the preparation and filing of all REMIC tax returns on behalf
of the Trust and the preparation of monthly reports on Form 10-D, annual reports
on Form 10-K and current reports on Form 8-K that are required to be filed with
the Securities and Exchange Commission on behalf of the Trust. Wells Fargo Bank
has been engaged in the business of securities administration since June 30,
1995. As of December 31, 2006, Wells Fargo Bank was acting as securities
administrator with respect to more than $1,006,418,000,000 of outstanding
residential mortgage-backed securities.
Wells Fargo Bank's assessment of compliance with applicable servicing
criteria relating to its provision of master servicing, trustee, securities
administration and paying agent services for the twelve months ended December
31, 2006, furnished pursuant to Item 1122 of Regulation AB, discloses that it
was not in compliance with the 1122(d)(3)(i) servicing criteria during that
reporting period. The assessment of compliance indicates that certain monthly
investor or remittance reports included errors in the calculation and/or the
reporting of delinquencies for the related pool assets, which errors may or may
not have been material, and that all such errors were the result of data
processing errors and/or the mistaken interpretation of data provided by other
parties participating in the servicing function. The assessment further states
that all necessary adjustments to Wells Fargo Bank's data processing systems
and/or interpretive clarifications have been made to correct those errors and to
remedy related procedures.
Wells Fargo Bank will also act as custodian of the Mortgage Files pursuant to
the Pooling Agreement. In that capacity, Wells Fargo Bank is responsible to hold
and safeguard the Mortgage Notes and other contents of the Mortgage Files on
behalf of the Certificateholders. Wells Fargo Bank maintains each Mortgage File
in a separate file folder marked with a unique bar code to assure loan-level
file integrity and to assist in inventory management. Files are segregated by
transaction or investor. Wells Fargo Bank has been engaged in the mortgage
document custody business for more than 25 years. Wells Fargo Bank maintains
document custody facilities in its Minneapolis, Minnesota headquarters and in
three regional
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offices located in Richfield, Minnesota, Irvine, California, and Salt Lake City,
Utah. As of December 31, 2006, Wells Fargo Bank maintains mortgage custody
vaults in each of those locations with an aggregate capacity of over eleven
million files.
Wells Fargo Bank serves or has served within the past two years as loan file
custodian for various mortgage loans owned by the Sponsor or an affiliate of the
Sponsor and anticipates that one or more of those mortgage loans may be included
in the Trust. The terms of any custodial agreement under which those services
are provided by Wells Fargo are customary for the mortgage-backed securitization
industry and provide for the delivery, receipt, review and safekeeping of
mortgage loan files.
See "The Pooling Agreement -- The Trustee" in the prospectus for more
information about the Trustee and its obligations and rights (including its
right to indemnity and reimbursement in certain circumstances) under the Pooling
Agreement.
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THE SERVICER
- --------------------------------------------------------------------------------
All of the Mortgage Loans will be serviced by the Sponsor, as "Servicer," in
accordance with the terms of the Pooling Agreement. The Servicer may perform any
of its obligations under the Pooling Agreement through one or more subservicers.
Despite the existence of subservicing arrangements, the Servicer will be liable
for its servicing duties and obligations under the Pooling Agreement as if the
Servicer alone were servicing the Mortgage Loans. See "The Sponsor," "Servicing
of the Mortgage Loans -- The Servicers," "-- Servicing Experience and Procedures
of Bank of America" and "The Pooling Agreement" in the prospectus for more
information about the Servicer, the Servicer's experience, its servicing
procedures and its obligations under the Pooling Agreement.
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THE POOLING AGREEMENT
- --------------------------------------------------------------------------------
General
The Certificates will be issued on the Closing Date pursuant to the pooling
and servicing agreement, dated the Closing Date (the "Pooling Agreement" ),
among the Depositor, the Servicer and the Trustee. The prospectus contains
important additional information regarding the terms and conditions of the
Certificates and the Pooling Agreement beyond the summaries below of certain
provisions specific to this transaction. See "Description of the Certificates,"
"The Pooling Agreement" and "Servicing of the Mortgage Loans" in the prospectus.
Compensating Interest
When a mortgagor prepays its mortgage loan in part or in full between due
dates, the mortgagor is required to pay interest on the amount prepaid only to
the date of prepayment in the case of a prepayment in full or to the due date in
the month in which a partial prepayment is made. No interest will be paid by the
mortgagor on the amount prepaid after those dates. Prepayments will be
distributed to Certificateholders on the Distribution Date in the month
following the month of receipt.
In the Pooling Agreement, the aggregate Servicing Fee payable to the Servicer
for any month will be reduced (but not below zero) by an amount equal to the
lesser of (i) the Prepayment Interest Shortfall for the related Distribution
Date and (ii) one-twelfth of 0.25% of the aggregate Stated Principal Balance of
the Mortgage Loans as of the Due Date in the month preceding the month of the
related Distribution Date (this amount, "Compensating Interest").
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The "Prepayment Interest Shortfall" for a Distribution Date is equal to the
difference between (x) 30 days' interest at the mortgage interest rate (less the
Servicing Fee Rate) on the amount of each prepayment on the Mortgage Loans minus
(y) the amount of interest actually paid by the related mortgagors on the amount
of the prepayments during the preceding month.
Any Prepayment Interest Shortfalls in excess of the amount of the
Compensating Interest for a month will reduce the amount of interest available
to be distributed on the Certificates from what would have been the case in the
absence of these Prepayment Interest Shortfalls. See "Description of the
Certificates -- Interest" in this prospectus supplement.
Compensation and Payment of Expenses of the Servicer and the Trustee
The fees payable each month from interest payments received on each Mortgage
Loan contributing to a Cashflow Group are called the Administrative Fees. The
"Administrative Fees" consist of (a) a servicing fee payable to the Servicer in
respect of its servicing activities (the "Servicing Fee") and (b) a fee paid to
the Trustee for its services (the "Trustee Fee"). The Administrative Fees will
accrue on the Stated Principal Balance of each Mortgage Loan as of the Due Date
in the month preceding the month of the related Distribution Date at a rate (the
"Administrative Fee Rate") equal to the sum of the Servicing Fee Rate and the
Trustee Fee Rate. The "Trustee Fee Rate" and the "Servicing Fee Rate" for each
Mortgage Loan will be a per annum rate set forth in the table below:
Servicing Fee Rate Trustee Fee Rate
------------------ ----------------
0.2500% 0.0056%
In the event the Trustee succeeds to the role of Servicer, it will be
entitled to the same Servicing Fee as the predecessor servicer and if the
Trustee appoints a successor servicer under the Pooling Agreement, the Trustee
may make such arrangements for the compensation of such successor out of the
payments on the Mortgage Loans serviced by the predecessor Servicer as it and
such successor shall agree, not to exceed the Servicing Fee Rate. In addition to
the Servicing Fee, the Servicer will be entitled to retain as additional
servicing compensation (i) any ancillary income, consisting of late payment
fees, assumption fees and other similar charges, (ii) net income from investment
of funds in the Servicer Custodial Account and (iii) any Foreclosure Profits
from the liquidation of Mortgage Loans.
Any co-trustee, if applicable, will be paid by the Trustee, without
reimbursement from the Trust.
The Servicing Fee for the Mortgage Loans will be retained by the Servicer out
of the interest payments on the Mortgage Loans, prior to any payments to the
trustee or distributions to Certificateholders. The Trustee Fee will be paid
from the Cashflow Group Distribution Amount (as described under "Description of
the Certificates -- Pool Distribution Amount") for each Cashflow Group to the
Trustee for its services relating to that Cashflow Group prior to any
distributions to Certificateholders.
The Servicer is generally obligated to pay expenses incurred by it in
connection with its responsibilities under the Pooling Agreement. Those amounts,
including the fees of any subservicer hired by the Servicer, will be paid by the
Servicer out of its own funds, without reimbursement. The Servicer is entitled
to be reimbursed from collections on the Mortgage Loans for any Advances
previously made by it, as described under "Servicing of the Mortgage Loans --
Periodic Advances and Servicing Advances" in the prospectus.
The amount of the Servicer's Servicing Fee will be reduced by payments of
Compensating Interest for prepaid Mortgage Loans, as described above under "--
Compensating Interest."
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The Trustee is obligated to pay routine ongoing expenses incurred by it in
connection with its responsibilities under the Pooling Agreement. Those amounts
will be paid by the Trustee out of its own funds, without reimbursement. In
addition to the Trustee Fee, the Trustee is also entitled to all investment
income earned on amounts on deposit in the Certificate Account.
The Depositor, the Servicer and the Trustee are entitled to indemnification
and reimbursement of certain expenses from the Trust under the Pooling Agreement
as discussed in the prospectus under the headings "The Depositor," "Servicing of
the Mortgage Loans -- The Servicers" and "The Pooling Agreement -- The Trustee."
Voting Rights
Voting Rights for certain actions specified in the Pooling Agreement will be
allocated as follows:
o 95% of all Voting Rights will be allocated among the holders of the Senior
Certificates (other than the Class 1-A-R, Class 2-A-7, Class 2-A-9, Class
3-A-1 and Class 3-IO Certificates) and Subordinate Certificates based on
the outstanding balances of their Certificates.
o 1% of all Voting Rights will be allocated to the holder of the Class 1-A-R
Certificate.
o 1% of all Voting Rights will be allocated to the holders of the
Class 2-A-7 Certificates.
o 1% of all Voting Rights will be allocated to the holders of the
Class 2-A-9 Certificates.
o 1% of all Voting Rights will be allocated to the holders of the
Class 3-A-1 Certificates.
o 1% of all Voting Rights will be allocated to the holders of the Class 3-IO
Certificates.
The Voting Rights allocated to each class will be allocated among the
Certificates of that class based on their Percentage Interests.
- --------------------------------------------------------------------------------
DESCRIPTION OF THE CERTIFICATES
- --------------------------------------------------------------------------------
The Certificates will consist of (i) the twenty-one classes of Offered
Certificates listed in the table beginning on page S-6 of this prospectus
supplement and (ii) the Class B-4, Class B-5 and Class B-6 Certificates, which
are not offered by this prospectus supplement.
The Senior Certificates are divided into three groups and each group will in
the aggregate evidence an initial beneficial ownership interest of approximately
92.75% in the related Cashflow Group. The Subordinate Certificates in the
aggregate represent the remaining initial beneficial ownership interest in each
Cashflow Group. The Class 1-PO Certificates are Principal Only Certificates and
are not entitled to distributions in respect of interest. The Class 2-A-7, Class
2-A-9, Class 3-A-1 and Class 3-IO Certificates are Interest Only Certificates
and are not entitled to distributions in respect of principal.
The Offered Certificates will be issuable in the forms and denominations set
forth in the table beginning on page S-6 of this prospectus supplement. The
Offered Certificates are not intended to be and should not be directly or
indirectly held or beneficially owned in amounts lower than the minimum
denominations in the table.
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Distributions
Distributions on the Certificates will be made by the Trustee on each
Distribution Date to the persons in whose names the Certificates are registered
on the Record Date.
Distributions on each Distribution Date will be made by check mailed to your
address as it appears on the applicable certificate register or, if you have
notified the Trustee in writing in accordance with the Pooling Agreement, by
wire transfer in immediately available funds to your account at a bank or other
depository institution having appropriate wire transfer facilities. However, the
final distribution on a Certificate will be made only upon presentment and
surrender of the Certificate at the Corporate Trust Office of the Trustee in
Minnesota. If you own a Book-Entry Certificate, distributions will be made to
you through the facilities of DTC, as described under "Description of the
Certificates -- Book-Entry Form" in the prospectus.
Pool Distribution Amount
The "Pool Distribution Amount" for each Distribution Date will be the sum of
the following:
(i) all scheduled installments of interest (net of the related
Servicing Fee) and principal due on the Mortgage Loans on the Due Date in
the month in which the Distribution Date occurs and received prior to the
related Determination Date, together with any Advances (as described under
"Servicing of the Mortgage Loans -- Periodic Advances and Servicing
Advances" in the prospectus) and payments of Compensating Interest made by
the Servicer allocable to the Mortgage Loans;
(ii) all proceeds of any primary mortgage guaranty insurance policies
and any other insurance policies relating to the Mortgage Loans, to the
extent these proceeds are not applied to the restoration of the related
Mortgaged Property or released to the mortgagor in accordance with the
Servicer's normal servicing procedures and all other cash amounts received
and retained in connection with the liquidation of defaulted Mortgage
Loans, by foreclosure or otherwise (collectively, "Liquidation Proceeds"),
during the calendar month preceding the month of the Distribution Date;
(iii) all partial or full prepayments received on the Mortgage Loans
during the calendar month preceding the month of the Distribution Date;
(iv) the amounts received for the Distribution Date as the
Substitution Adjustment Amount or Purchase Price (each as described under
"The Pooling Agreement -- Repurchases of Mortgage Loans" in the
prospectus) for any Deleted Mortgage Loan or amounts received in
connection with the optional termination of the Trust as of the
Distribution Date;
(v) any amount required to be deposited by the Servicer in connection
with any losses on investments of funds in the Servicer Custodial Account
and net income received in connection with REO Property;
(vi) any amounts received from the Depositor representing a
reimbursement to the Trust for all costs or damages incurred by the Trust
as a result of the violation of Depositor's representation that all
Mortgage Loans complied with all applicable predatory or abusive lending
laws; and
(vii) any Recoveries (as described below under "-- Allocation of
Losses") received during the calendar month preceding the month of the
Distribution Date;
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minus the sum of the amounts which the Servicer or the Trustee are permitted
to withdraw from the Servicer Custodial Account or Certificate Account as
described under "Servicing of the Mortgage Loans -- Payments on Mortgage Loans;
Certificate and Custodial Accounts" in the prospectus, including, among other
things:
(i) amounts payable to the Servicer representing servicing
compensation (to the extent not previously retained);
(ii) reimbursements to the Servicer for Advances (as described under
"Servicing of the Mortgage Loans -- Periodic Advances and Servicing
Advances" in the prospectus);
(iii) reimbursements to the Servicer for the amount of any expenses
incurred in connection with the liquidation of Mortgage Loans;
(iv) reimbursements to the Servicer for expenses covered by insurance
policies from proceeds of those policies;
(v) amounts to the Depositor, the Servicer or the Trustee
representing any indemnification payments or reimbursable expenses payable
as described in the prospectus under "The Depositor," "Servicing of the
Mortgage Loans -- The Servicers" and "The Pooling Agreement -- The
Trustee";
(vi) amounts payable to the Depositor or the Servicer representing
collections received after the date of repurchase or purchase of any
Mortgage Loan or REO Property repurchased by the Depositor or purchased by
the Servicer; and
(vii) any amounts deposited in error.
The Pool Distribution Amount will be divided into three "Cashflow Group
Distribution Amounts," one for each Cashflow Group. The Pool Distribution Amount
will be divided among the Cashflow Group Distribution Amounts based upon the
Applicable Fraction of all amounts representing principal collections on the
Mortgage Loans contributing to such Cashflow Group and the Effective Net
Mortgage Interest Rates of all amounts representing interest collections on the
Mortgage Loans contributing to such Cashflow Group.
Priority of Distributions
As more fully described below under "-- Interest" and "-- Principal,"
distributions will be made on each Distribution Date from the Cashflow Group
Distribution Amounts in the following order of priority (the "Cashflow Group
Distribution Amount Allocation"):
(a) for each group of Senior Certificates from the applicable Cashflow
Group Distribution Amount for the related Cashflow Group, as follows:
(i) to the Trustee, to pay for its services with respect to the
related Cashflow Group for such Distribution Date;
(ii) to the Senior Certificates of the related group based on their
respective Interest Distribution Amounts, in each case as described below
under "-- Interest," to pay interest;
(iii) (a) with respect to group 1 pro rata (1) to the Class 1-PO
Certificates based on the PO Principal Amount, and (2) to the Senior
Non-PO Certificates based on the Senior Principal Distribution Amount for
Cashflow Group 1, as described below under "-- Principal," to pay
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principal and (b) with respect to group 2 and group 3, to the Senior
Non-PO Certificates of the related group based on the Senior Principal
Distribution Amount for the related Cashflow Group, as described below
under "-- Principal," to pay principal; and
(iv) with respect to group 1, to the Class 1-PO Certificates to pay
any PO Deferred Amounts, but only from amounts that would otherwise be
distributable on such Distribution Date as principal to the Subordinate
Certificates; and
(b) from the Cashflow Group Distribution Amounts for all Cashflow Groups,
to each class of Subordinate Certificates, subject to any payments described
below under "-- Cross Collateralization," first to pay interest and then to
pay principal sequentially first to the Class B-1 Certificates and then to
the remaining classes of Subordinate Certificates in numerical order.
The Class 1-A-R Certificate will be entitled to any remaining amounts in each
REMIC, subject to the limitations set forth below under "-- Interest" and "--
Principal."
Interest
The pass-through rate for each class of Offered Certificates for each
Distribution Date is set forth or described in the table beginning on page S-6
of this prospectus supplement.
On each Distribution Date, to the extent funds are available, each class of
interest-bearing Certificates will be entitled to receive interest (as to each
class, the "Interest Distribution Amount") for the related Interest Accrual
Period. The Interest Distribution Amount for any class of Certificates will be
equal to the sum of (i) interest accrued during the related Interest Accrual
Period at the applicable pass-through rate on the related Class Balance or
notional amount and (ii) the sum of the amounts, if any, by which the amount
described in clause (i) above on each prior Distribution Date exceeded the
amount actually distributed as interest on each prior Distribution Date and not
subsequently distributed.
The Class 1-PO Certificates are Principal Only Certificates and will not bear
interest.
The interest entitlement described in clause (i) of the Interest Distribution
Amount for each class of interest-bearing Certificates will be reduced by the
amount of Net Interest Shortfalls for each Distribution Date. For any
Distribution Date, the "Net Interest Shortfall" is equal to the sum of (i) the
shortfall in interest received relating to any Mortgage Loan as a result of a
Relief Act Reduction and (ii) any Non-Supported Interest Shortfalls. Net
Interest Shortfalls on any Distribution Date will be allocated pro rata among
all classes of interest-bearing Certificates, based on the amount of interest
accrued on each such class of Certificates on the Distribution Date before
taking into account any reduction in the amount of interest accrued resulting
from Net Interest Shortfalls. A "Relief Act Reduction" is a reduction in the
amount of the monthly interest payment on a Mortgage Loan due to the
Servicemembers Civil Relief Act or similar state legislation. See "Certain Legal
Aspects of the Mortgage Loans -- Servicemembers Civil Relief Act and Similar
Laws" in the prospectus. For a Distribution Date, the "Non-Supported Interest
Shortfall" is the amount by which the aggregate of Prepayment Interest
Shortfalls for the Mortgage Loans during the calendar month preceding the month
of the Distribution Date exceeds the Compensating Interest paid by the Servicer
for that Distribution Date.
By virtue of the priority of distributions, the allocable amount of the
interest portion of Realized Losses on the Mortgage Loans contributing to a
Cashflow Group will be allocated first to the Subordinate Certificates in
reverse order of payment priority and then to the related Senior Certificates
because these losses will reduce the applicable Cashflow Group Distribution
Amount, which is paid first to the Senior Certificates of the related group and
then to the classes of Subordinate Certificates in order of payment priority.
After the Senior Credit Support Depletion Date (as described below under "--
Principal"), the
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interest-bearing Senior Certificates of a group will bear the allocable amount
of the interest portion of any Realized Losses on the Mortgage Loans
contributing to such Cashflow Group pro rata based on the interest entitlement
described in clause (i) of the applicable Interest Distribution Amount. For a
description of Realized Losses, see "-- Allocation of Losses" below.
Accrued interest to be distributed on any Distribution Date will be
calculated for each class of interest-bearing Certificates on the basis of the
related Class Balance or notional amount for the Distribution Date. Interest
will be calculated and payable on the basis of a 360-day year consisting of
twelve 30-day months.
If on a particular Distribution Date, the applicable Cashflow Group
Distribution Amount or, in the case of the Subordinate Certificates, the
Cashflow Group Distribution Amounts, applied in the order described above under
"-- Priority of Distributions" is not sufficient to make a full distribution of
the Interest Distribution Amount for each interest-bearing class, interest will
be distributed on each interest-bearing class of equal priority pro rata based
on the Interest Distribution Amount these classes would otherwise have been
entitled to receive in the absence of the shortfall. Any unpaid amount of
interest entitlement described in clause (i) of the applicable Interest
Distribution Amount (reduced by Net Interest Shortfalls) will be carried forward
and added to the Interest Distribution Amount of that class on the next
Distribution Date. A shortfall could occur, for example, if Realized Losses (as
described below under "-- Allocation of Losses") on the Mortgage Loans were
exceptionally high or were concentrated in a particular month. These unpaid
interest amounts will not bear interest.
Under certain circumstances, amounts otherwise distributable as principal on
the Subordinate Certificates (in reverse order of payment priority) will be
distributed to pay the unpaid interest amounts for a group or groups of
interest-bearing Senior Certificates. See "--Cross-Collateralization" in this
prospectus supplement.
Interest will accrue on each class of interest-bearing Certificates (other
than the Class 2-A-6, Class 2-A-7, Class 3-A-1, Class 3-A-2 and Class 3-A-3
Certificates) during each one-month period ending on the last day of the month
preceding the month in which each Distribution Date occurs (each, a "Regular
Interest Accrual Period"). The initial Regular Interest Accrual Period will be
deemed to have commenced on May 1, 2007. Interest which accrues on each class of
interest-bearing Certificates during a Regular Interest Accrual Period will be
calculated on the assumption that distributions in reduction of the Class
Balances or notional amount of each such class of Certificates on the
Distribution Date in that Regular Interest Accrual Period are made on the first
day of the Regular Interest Accrual Period. Interest will accrue on the Class
2-A-6, Class 2-A-7, Class 3-A-1, Class 3-A-2 and Class 3-A-3 Certificates during
each one-month period commencing on the 25th day of the month preceding the
month in which each Distribution Date occurs and ending on the 24th day of the
month in which such Distribution Date occurs (each, a "LIBOR Based Interest
Accrual Period" and, together with a Regular Interest Accrual Period, an
"Interest Accrual Period"). The initial LIBOR Based Interest Accrual Period will
be deemed to have commenced on May 25, 2007.
The "Class 2-A-7 Notional Amount" with respect to each Distribution Date and
the Class 2-A-7 Certificates will be equal to the Class Balance of the Class
2-A-6 Certificates. Accordingly, any distribution in respect of principal made
to, or losses in respect of principal allocated in reduction of, the Class
Balance of the Class 2-A-6 Certificates will result in a proportional reduction
in the Class 2-A-7 Notional Amount. See "-- Principal" and "-- Allocation of
Losses" in this Prospectus Supplement. The Class 2-A-7 Notional Amount with
respect to the first Distribution Date will be approximately $40,089,000.
The "Class 2-A-9 Notional Amount" with respect to each Distribution Date and
the Class 2-A-9 Certificates will be equal to approximately 4.1666661288% of the
Class Balance of the Class 2-A-4
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Certificates. Accordingly, any distribution in respect of principal made to, or
losses in respect of principal allocated in reduction of, the Class Balance of
the Class 2-A-4 Certificates will result in a proportional reduction in the
Class 2-A-9 Notional Amount. See "-- Principal" and "-- Allocation of Losses" in
this Prospectus Supplement. The Class 2-A-9 Notional Amount with respect to the
first Distribution Date will be approximately $2,582,083
The "Class 3-A-1 Notional Amount" with respect to each Distribution Date and
the Class 3-A-1 Certificates will be equal to the sum of the Class Balances of
the Class 3-A-2 and Class 3-A-3 Certificates. Accordingly, any distribution in
respect of principal made to, or losses in respect of principal allocated in
reduction of, the Class Balances of the Class 3-A-2 or Class 3-A-3 Certificates
will result in a proportional reduction in the Class 3-A-1 Notional Amount. See
"-- Principal" and "-- Allocation of Losses" in this Prospectus Supplement. The
Class 3-A-1 Notional Amount with respect to the first Distribution Date will be
approximately $166,779,000.
The "Class 3-IO Notional Amount" with respect to each Distribution Date and
the Class 3-IO Certificates will be equal to the product of (i) the aggregate of
the Stated Principal Balances of the Premium Mortgage Loans in Cashflow Group 3
as of the due date in the month preceding the month of the Distribution Date and
(ii) a fraction, (a) the numerator of which is equal to the weighted average of
the Net Mortgage Interest Rates of the Premium Mortgage Loans in Cashflow Group
3 (based on the Stated Principal Balances of the Premium Mortgage Loans in
Cashflow Group 3 as of the due date in the month preceding the month of the
Distribution Date) minus 7.000% and (b) the denominator of which is equal to
7.000%. The Class 3-IO Notional Amount with respect to the first Distribution
Date will be approximately $2,871,650.
The "Class Balance" of a class of Certificates at any time will equal its
initial Class Balance set forth in the table beginning on page S-6 of this
prospectus supplement less (i) all distributions of principal made to that class
and (ii) losses allocated to that class as described under "--Allocation of
Losses" below.
The "Net Mortgage Interest Rate" of a Mortgage Loan is the excess of the
mortgage interest rate payable by the related borrower over the Administrative
Fee Rate.
LIBOR
The Floating Rate Certificates and the Inverse Floating Rate Certificates
will bear interest at their respective pass-through rates, which are each based
on one-month LIBOR determined by the Trustee as described below. The Trustee
will determine one-month LIBOR and the respective pass-through rates for the
Floating Rate Certificates and the Inverse Floating Rate Certificates for each
Interest Accrual Period (after the first Interest Accrual Period) on the second
business day (in both New York and London) prior to the day on which such
Interest Accrual Period commences (each, a "LIBOR Determination Date").
On each LIBOR Determination Date, the Trustee will determine one-month LIBOR
for the succeeding Interest Accrual Period on the basis of the British Bankers'
Association ("BBA") "Interest Settlement Rate" for one-month deposits in U.S.
dollars as found on Telerate page 3750 as of 11:00 A.M. London time on that
LIBOR Determination Date. These Interest Settlement Rates currently are based on
rates quoted by 16 BBA designated banks as being, in the view of these banks,
the offered rate at which deposits are being quoted to prime banks in the London
interbank market. These Interest Settlement Rates are calculated by eliminating
the four highest rates and the four lowest rates, averaging the eight remaining
rates, carrying the results (expressed as a percentage) out to six decimal
places, and rounding to five decimal places. As used in this prospectus
supplement, "Telerate page 3750" means the display designated as page 3750 on
the Reuters Telerate Service.
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If on any LIBOR Determination Date the Trustee is unable to determine
one-month LIBOR on the basis of the method set forth in the preceding paragraph,
one-month LIBOR for the next Interest Accrual Period will be the higher of (i)
one-month LIBOR as determined on the previous LIBOR Determination Date or (ii)
the Reserve Interest Rate.
The "Reserve Interest Rate" will be the per annum rate that the Trustee
determines to be either (a) the arithmetic mean (rounded upwards if necessary to
the nearest whole multiple of 1/16%) of the one-month U.S. dollar lending rate
that New York City banks selected by the Trustee are quoting on the relevant
LIBOR Determination Date to the principal London offices of at least two leading
banks in the London interbank market or (b) in the event that the Trustee cannot
determine an arithmetic mean, the lowest one-month U.S. dollar lending rate that
the New York City banks selected by the Trustee are quoting on the relevant
LIBOR Determination Date to leading European banks.
If on any LIBOR Determination Date the Trustee is required, but is unable to
determine the Reserve Interest Rate in the manner provided in the preceding
paragraph, one-month LIBOR for the next Interest Accrual Period will be
one-month LIBOR as determined on the previous LIBOR Determination Date or, in
the case of the first LIBOR Determination Date for which the Trustee is required
to determine one-month LIBOR, 5.32%.
The establishment of one-month LIBOR on each LIBOR Determination Date by the
Trustee and the Trustee's calculation of the rate of interest applicable to the
Floating Rate Certificates and the Inverse Floating Rate Certificates for the
related Interest Accrual Period shall (in the absence of manifest error) be
final and binding. Each of these rates of interest may be obtained by
telephoning the Trustee at (866) 846-4526.
Notwithstanding the forgoing, one-month LIBOR will be calculated for the
Yield Maintenance Agreement in accordance with the provisions set forth in the
Yield Maintenance Agreement, which may be different than the procedures used to
calculate interest payments on the Certificates. Accordingly, payments under the
Yield Maintenance Agreement could be higher or lower than if one-month LIBOR was
determined under the procedures used for determining interest due on the
Certificates.
The Yield Maintenance Agreement
The Trustee, on behalf of the Issuing Entity, will enter into a yield
maintenance agreement with the Sponsor, as Counterparty, which will be for the
benefit of the Class 2-A-6 Certificates (the "Yield Maintenance Agreement.") For
any Distribution Date prior to and including the Distribution Date in October
2011, if one-month LIBOR, as calculated for the Interest Accrual Period related
to such Distribution Date, exceeds 5.55% per annum, the Counterparty will be
obligated to pay to the Trustee, for deposit into the Reserve Fund, the Yield
Maintenance Agreement Payment. The "Yield Maintenance Agreement Payment" for any
Distribution Date will be an amount equal to the product of (a) the amount by
which (i) the lesser of one-month LIBOR and 9.05% exceeds (ii) 5.55%, (b) the
lesser of (x) the Class Balance of the Class 2-A-6 Certificates prior to
distributions on that Distribution Date and (y) the notional amount set forth
for that Distribution Date in the table in Appendix E and (c) one-twelfth. The
Counterparty is required to make any Yield Maintenance Agreement Payment on the
twenty-third day of each month in which a Distribution Date occurs (or, if not a
business day, the immediately preceding business day).
For each Distribution Date prior to and including the Distribution Date in
October 2011, any Yield Maintenance Agreement Payment received by the Trustee
will be deposited into the Reserve Fund for distribution to the holders of the
Class 2-A-6 Certificates, as described below under "-- The Reserve Fund."
Amounts received on the Yield Maintenance Agreement will not be available to
make distributions on any class of Certificates other than the Class 2-A-6
Certificates.
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The Yield Maintenance Agreement will be governed by and construed in
accordance with the laws of the State of New York. The obligations of the
Counterparty are limited to those specifically set forth in the Yield
Maintenance Agreement. The Class 2-A-6 Certificates do not represent obligations
of the Counterparty. The holders of the Class 2-A-6 Certificates are not parties
to or beneficiaries under the Yield Maintenance Agreement and will not have any
right to proceed directly against the Counterparty in respect of its obligations
under the Yield Maintenance Agreement. The Yield Maintenance Agreement is
terminable by the Trustee on behalf of the Issuing Entity or the Counterparty
following the occurrence of certain specified events of default, including
failure of the Counterparty to make required payments, and certain standard
events under the 1992 International Swaps and Derivatives Association, Inc.
Master Swap Agreement (Multi-Cross-Border) (the "Master Agreement").
In addition, a ratings downgrade of the Counterparty below the levels
specified in the Yield Maintenance Agreement may be an "additional termination
event," and the Counterparty will be required to (a) assign the Yield
Maintenance Agreement to another counterparty meeting certain requirements set
forth in the Yield Maintenance Agreement or (b) post collateral in accordance
with the Yield Maintenance Agreement. If the Counterparty does not comply with
the immediately preceding sentence, then it will be an "additional termination
event" and the Counterparty may be required to make a termination payment under
the Yield Maintenance Agreement.
It may also be an "additional termination event" under the Yield Maintenance
Agreement if any amendment and/or supplement to any document that pertains to
the Yield Maintenance Agreement is made without the prior written consent of the
Counterparty, if such amendment and/or supplement would: (i) adversely affect
any of the Counterparty's rights or obligations under the Yield Maintenance
Agreement; or (ii) modify the obligations of, or impair the ability of, the
Issuing Entity to fully perform any of the Issuing Entity's obligations under
the Yield Maintenance Agreement or under the Master Agreement.
For a general description of the Counterparty, see "The Sponsor" in the
prospectus. As of the date of this prospectus supplement, the long-term senior
unsecured debt of the Sponsor was assigned ratings of "AA+" by S&P and "AA" by
Fitch.
As of May 30, 2007, the Yield Maintenance Agreement had a "significance
percentage," as defined in Item 1115 of Regulation AB (17 CFR 229.1115), of less
than 10%.
The Reserve Fund
Pursuant to the Pooling Agreement, the Trustee will establish a separate
trust account (the "Reserve Fund") for deposit of any Yield Maintenance
Agreement Payments that it may receive under the Yield Maintenance Agreement.
The Reserve Fund is part of the Trust Fund and will not be an asset of any
REMIC.
On or before each Distribution Date, the Trustee will deposit in the Reserve
Fund any Yield Maintenance Agreement Payment for the related Interest Accrual
Period. This Yield Maintenance Agreement Payment received on or before a
Distribution Date will be distributed to the Class 2-A-6 Certificates on that
Distribution Date.
Principal
On each Distribution Date, Certificateholders will be entitled to receive
principal distributions from the applicable Cashflow Group Distribution Amount
or Amounts to the extent described below and in accordance with the priorities
set forth under "-- Priority of Distributions" above. The principal
distributions distributed to a class on any Distribution Date will be allocated
among the holders of the
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class pro rata in accordance with their respective Percentage Interests. The
Class 2-A-7, Class 2-A-9, Class 3-A-1 and Class 3-IO Certificates are Interest
Only Certificates and are not entitled to distributions of principal.
The Applicable Fractions of all payments and other amounts received in
respect of principal of the Mortgage Loans contributing to Cashflow Group 1 will
be allocated between (i) the Senior Non-PO Certificates of group 1 and the
Subordinate Certificates and (ii) the Class 1-PO Certificates, in each case
based on the applicable Non-PO Percentage and the applicable PO Percentage,
respectively, of such amounts. The Applicable Fractions of all payments and
other amounts received in respect of principal of the Mortgage Loans
contributing to Cashflow Group 2 and Cashflow Group 3 will be allocated between
the Senior Non-PO Certificates of such group and the Subordinate Certificates.
The "Non-PO Percentage" applicable to Cashflow Group 1 with respect to any
Mortgage Loan contributing to Cashflow Group 1 with a Net Mortgage Interest Rate
as of the Cut-off Date less than 5.500% (each such Mortgage Loan, a "Discount
Mortgage Loan" ) will be equal to the Net Mortgage Interest Rate as of the
Cut-off Date divided by 5.500%. The Non-PO Percentage applicable to Cashflow
Group 1 with respect to any other Mortgage Loan contributing to Cashflow Group 1
will be 100%.
The "Non-PO Percentage" applicable to Cashflow Group 2 or Cashflow Group 3
with respect to any Mortgage Loan contributing to Cashflow Group 2 or Cashflow
Group 3 will be 100%.
The Mortgage Loans in Cashflow Group 3 with a Net Mortgage Interest Rate
greater than 7.000% are "Premium Mortgage Loans."
The "PO Percentage" applicable to Cashflow Group 1 with respect to any
Discount Mortgage Loan contributing to Cashflow Group 1 will be equal to 100%
minus the Non-PO Percentage for such Mortgage Loan. The PO Percentage applicable
to Cashflow Group 1 with respect to any other Mortgage Loan contributing to
Cashflow Group 1 will be 0%.
The "PO Percentage" applicable to Cashflow Group 2 or Cashflow Group 3 with
respect to any Mortgage Loan contributing to Cashflow Group 2 or Cashflow Group
3 will be 0%.
The "Group Subordinate Amount" for any Distribution Date and any Cashflow
Group is equal to the excess of the Pool Principal Balance (Non-PO Portion) for
such Cashflow Group over the aggregate Class Balance of the Senior Certificates
relating to such Cashflow Group immediately prior to such date.
Non-PO Principal Amount
On each Distribution Date, the Non-PO Principal Amount for a Cashflow Group
will be distributed (i) as principal of the Senior Non-PO Certificates of the
related group in an amount up to the Senior Principal Distribution Amount for
the Cashflow Group and (ii) as principal of the Subordinate Certificates in an
amount up to the Subordinate Principal Distribution Amount for the Cashflow
Group.
The "Non-PO Principal Amount" for a Distribution Date and a Cashflow Group
will equal the sum of the applicable Non-PO Percentage of:
(a) the Applicable Fraction of all monthly payments of principal due on
each Mortgage Loan contributing to the Cashflow Group on the Due Date in the
month of that Distribution Date;
(b) the Applicable Fraction of the principal portion of the Purchase Price
(as described under "The Pooling Agreement -- Repurchases of Mortgage Loans"
in the prospectus and net of unreimbursed Advances) of each Mortgage Loan
contributing to the Cashflow Group that was
S-51
repurchased by the Depositor pursuant to the Pooling Agreement received
during the calendar month preceding the month of that Distribution Date;
(c) the Applicable Fraction of any Substitution Adjustment Amount (net of
unreimbursed Advances) in connection with a Deleted Mortgage Loan
contributing to the Cashflow Group received during the calendar month
preceding the month of that Distribution Date as described under "The Pooling
Agreement -- Repurchases of Mortgage Loans" in the prospectus;
(d) the Applicable Fraction of any Liquidation Proceeds (net of
unreimbursed liquidation expenses and unreimbursed Advances, if any) related
to recoveries of principal of Mortgage Loans contributing to the Cashflow
Group that are not yet Liquidated Mortgage Loans (as described below under
"-- Allocation of Losses") received during the calendar month preceding the
month of that Distribution Date;
(e) for each Mortgage Loan that became a Liquidated Mortgage Loan (as
described below under "-- Allocation of Losses") during the calendar month
preceding the month of that Distribution Date, the Applicable Fraction of the
amount of the Liquidation Proceeds (other than any Foreclosure Profits and
net of unreimbursed liquidation expenses and unreimbursed Advances, if any)
related to principal received with respect to that Mortgage Loan; and
(f) the Applicable Fraction of all partial and full principal prepayments
on the Mortgage Loans contributing to the Cashflow Group by mortgagors
received during the calendar month preceding the month of that Distribution
Date.
The amounts described in clauses (a) through (d) are referred to as
"Scheduled Principal Payments." The amounts described in clauses (e) and (f) are
referred to as "Unscheduled Principal Payments."
Senior Principal Distribution Amount
For the Senior Non-PO Certificates of group 1:
On each Distribution Date, the Trustee will distribute an amount equal to the
lesser of (a) the Senior Principal Distribution Amount for Cashflow Group 1 for
that Distribution Date and (b) the product of (1) the Cashflow Group
Distribution Amount for Cashflow Group 1 remaining after payment of funds due to
the Trustee and distributions of interest on the group 1 Certificates and (2) a
fraction, the numerator of which is the Senior Principal Distribution Amount for
Cashflow Group 1 and the denominator of which is the sum of the PO Principal
Amount for Cashflow Group 1 and the Senior Principal Distribution Amount for
Cashflow Group 1, as principal, sequentially, as follows:
first, to the Class 1-A-R Certificate, until its Class Balance has been
reduced to zero; and
second, concurrently, to the Class 1-A-1, Class 1-A-2 and Class 1-A-3
Certificates, pro rata, until their Class Balances have been reduced to zero.
For the Senior Non-PO Certificates of group 2:
On each Distribution Date, the Trustee will distribute an amount equal to the
lesser of (a) the Senior Principal Distribution Amount for Cashflow Group 2 for
that Distribution Date and (b) the Cashflow Group Distribution Amount for
Cashflow Group 2 remaining after payment of funds due to the Trustee and
distributions of interest on the group 2 Certificates, as principal,
concurrently, as follows:
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(A) approximately 31.7469158150% to the Class 2-A-1 Certificates,
until their Class Balance has been reduced to zero; and
(B) approximately 68.2530841850%, sequentially, as follows:
(i) concurrently, to the Class 2-A-2 and Class 2-A-3
Certificates, pro rata, up to the Priority Amount for such
Distribution Date;
(ii) up to $1,000 to the Class 2-A-6 Certificates, until its
Class Balance has been reduced to zero;
(iii) concurrently, to the Class 2-A-4 and Class 2-A-5
Certificates, pro rata, up to 0.91% of the sum of the initial Class
Balances of the Class 2-A-4 and Class 2-A-5 Certificates, until their
Class Balances have been reduced to zero;
(iv) to the Class 2-A-6 Certificates, until their Class
Balance has been reduced to zero;
(v) concurrently, to the Class 2-A-4 and Class 2-A-5
Certificates, pro rata, until their Class Balances have been reduced
to zero;
(vi) to the Class 2-A-8 Certificates, until their Class
Balance has been reduced to zero; and
(vii) concurrently, to the Class 2-A-2 and Class 2-A-3
Certificates, pro rata, until their Class Balances have been reduced
to zero.
For the Senior Non-PO Certificates of group 3:
On each Distribution Date, the Trustee will distribute an amount equal to the
lesser of (a) the Senior Principal Distribution Amount for Cashflow Group 3 for
that Distribution Date and (b) the Cashflow Group Distribution Amount for
Cashflow Group 3 remaining after payment of funds due to the Trustee and
distributions of interest on the group 3 Certificates, as principal,
concurrently, to the Class 3-A-2 and Class 3-A-3 Certificates, pro rata, until
their Class Balances have been reduced to zero.
The preceding distribution priorities for a group will not apply on any
Distribution Date on or after the Senior Credit Support Depletion Date. On each
of those Distribution Dates, the amount to be distributed as principal to the
Senior Non-PO Certificates of a group will be distributed, concurrently, as
principal of the classes of Senior Non-PO Certificates of that group pro rata.
The "Senior Credit Support Depletion Date" is the date on which the aggregate
Class Balance of the Subordinate Certificates has been reduced to zero.
The "Senior Principal Distribution Amount" for a Cashflow Group for any
Distribution Date will equal the sum of:
(a) the Senior Percentage for that Cashflow Group of the applicable Non-PO
Percentage of the Scheduled Principal Payments for that Distribution Date;
and
(b) the Senior Prepayment Percentage for that Cashflow Group of the
applicable Non-PO Percentage of the Unscheduled Principal Payments for that
Distribution Date.
S-53
The "Pool Principal Balance" for any Cashflow Group for any Distribution Date
equals the sum of the Applicable Fractions of the Stated Principal Balances of
the Mortgage Loans contributing to such Cashflow Group outstanding on the Due
Date in the month preceding the month of that Distribution Date.
The "Pool Principal Balance (Non-PO Portion)" for any Cashflow Group for any
Distribution Date equals the sum of the product for each Mortgage Loan
contributing to such Cashflow Group, of the applicable Non-PO Percentage of each
such Mortgage Loan multiplied by the Applicable Fraction of its Stated Principal
Balance on the Due Date in the month preceding the month of that Distribution
Date.
The "Senior Percentage" for a Cashflow Group for any Distribution Date will
equal (i) the sum of the Class Balances of the Senior Non-PO Certificates of the
related group, divided by (ii) the Pool Principal Balance (Non-PO Portion) of
the Cashflow Group.
The "Subordinate Percentage" for a Cashflow Group for any Distribution Date
will equal 100% minus the Senior Percentage for that Cashflow Group and that
Distribution Date.
As of the Cut-off Date, the approximate Senior Percentage and Subordinate
Percentage for each Cashflow Group are expected to be as follows:
Cashflow Group Senior Percentage Subordinate Percentage
- -------------- ----------------- ----------------------
1 92.7210% 7.2790%
2 92.7495% 7.2505%
3 92.7498% 7.2502%
The "Senior Prepayment Percentage" for a Cashflow Group for any Distribution
Date occurring during the periods set forth below will be as follows:
Distribution Date Occurring In Senior Prepayment Percentage
- ------------------------------ ----------------------------
June 2007 through May 2012.... 100%
June 2012 through May 2013.... the applicable Senior Percentage, plus 70% of the
applicable Subordinate Percentage;
June 2013 through May 2014.... the applicable Senior Percentage, plus 60% of the
applicable Subordinate Percentage;
June 2014 through May 2015.... the applicable Senior Percentage, plus 40% of the
applicable Subordinate Percentage;
June 2015 through May 2016.... the applicable Senior Percentage, plus 20% of the
applicable Subordinate Percentage; and
June 2016 and thereafter...... the applicable Senior Percentage.
If, however, on any Distribution Date the percentage equal to (x) the sum of
the Class Balances of the Senior Non-PO Certificates of all groups divided by
(y) the sum of the Pool Principal Balance (Non-PO Portion) for all Cashflow
Groups (this percentage, the "Total Senior Percentage") exceeds the Total Senior
Percentage calculated on the Closing Date, then the Senior Prepayment Percentage
for all Cashflow Groups for that Distribution Date will equal 100%.
In addition, no decrease in the Senior Prepayment Percentages for the
Cashflow Groups will occur if the following occurs as of any Distribution Date
as to which any such decrease applied with respect to the Mortgage Loans in the
aggregate: (i) the outstanding principal balance of all Mortgage Loans
(including, for this purpose, any Mortgage Loans in foreclosure, any REO
Property and any Mortgage Loan for which the mortgagor has filed for bankruptcy
after the Closing Date) delinquent 60 days or more (averaged over the preceding
six-month period), as a percentage of the sum of the Class Balances of the
Subordinate Certificates, is equal to or greater than 50% or (ii) cumulative
Realized Losses (as described
S-54
under "-- Allocation of Losses") on the Mortgage Loans exceed the percentages of
the sum of the Class Balances of the Subordinate Certificates on the Closing
Date (the "Original Subordinate Principal Balance") indicated below:
Percentage of Original Subordinate
Distribution Date Occurring In Principal Balance
- ------------------------------------------- ----------------------------------
June 2012 through May 2013................. 30%
June 2013 through May 2014................. 35%
June 2014 through May 2015................. 40%
June 2015 through May 2016................. 45%
June 2016 and thereafter................... 50%
This disproportionate allocation of certain unscheduled payments in respect
of principal will have the effect of accelerating the amortization of the Senior
Non-PO Certificates of a group while, in the absence of Realized Losses (as
described under "-- Allocation of Losses") on the Mortgage Loans contributing to
the related Cashflow Group, increasing the relative interest in the Pool
Principal Balance evidenced by the Subordinate Certificates. Increasing the
interest of the Subordinate Certificates relative to that of the Senior
Certificates of a group is intended to preserve the availability of the
subordination provided by the Subordinate Certificates.
The "Subordinate Prepayment Percentage" for a Cashflow Group as of any
Distribution Date will equal 100% minus the Senior Prepayment Percentage for the
Cashflow Group for that date.
The "Total Subordinate Percentage" as of any date will equal 100% minus the
Total Senior Percentage for that date.
If a distribution of full and partial prepayments and other amounts on a
Distribution Date in accordance with the applicable Senior Prepayment
Percentage, as described above, would reduce the outstanding Class Balance of a
class below zero, the distribution to that class of the applicable Senior
Prepayment Percentage of those amounts for that Distribution Date will be
limited to the percentage necessary to reduce the Class Balance of that class to
zero.
Priority Amount
On each Distribution Date prior to the Senior Credit Support Depletion Date,
to the extent funds are available, an amount up to the Priority Amount for such
Distribution Date will be distributed as principal to the Class 2-A-2 and Class
2-A-3 Certificates in accordance with the priorities described above under "--
Senior Principal Distribution Amount."
The "Priority Amount" for any Distribution Date will be equal to the lesser
of (i) the aggregate Class Balance of the Class 2-A-2 and Class 2-A-3
Certificates and (ii) the product of (a) the Non-PO Principal Amount for
Cashflow Group 2, (b) the Shift Percentage and (c) the Priority Percentage.
The "Priority Percentage" for any Distribution Date will equal (i) the
aggregate Class Balance of the Class 2-A-2 and Class 2-A-3 Certificates divided
by (ii) the Pool Principal Balance (Non-PO Portion) for Cashflow Group 2.
S-55
The "Shift Percentage" for any Distribution Date will be the percentage
indicated below:
Distribution Date Occurring In Shift Percentage
- ------------------------------------------------ ----------------
June 2007 through May 2012...................... 0%
June 2012 through May 2013...................... 30%
June 2013 through May 2014...................... 40%
June 2014 through May 2015...................... 60%
June 2015 through May 2016...................... 80%
June 2016 and thereafter........................ 100%
PO Principal Distribution Amount
On each Distribution Date, distributions of principal to the Class 1-PO
Certificates will be made in an amount (the "PO Principal Distribution Amount")
equal to the lesser of:
(a) the PO Principal Amount for such Distribution Date; and
(b) the product of (1) the Cashflow Group Distribution Amount for Cashflow
Group 1 remaining after distribution of funds due to the Trustee and interest
on the Group 1 Senior Certificates and (2) a fraction, the numerator of which
is the PO Principal Amount and the denominator of which is the sum of the PO
Principal Amount and the Senior Principal Distribution Amount for Cashflow
Group 1.
The "PO Principal Amount" for any Distribution Date and Cashflow Group 1 will
equal the sum of the applicable PO Percentage of:
(a) all monthly payments of principal due on each Discount Mortgage Loan
in Cashflow Group 1 on the related Due Date;
(b) the principal portion of the Purchase Price (net of unreimbursed
Advances and other amounts as to which the Servicer is entitled to be
reimbursed pursuant to the Pooling Agreement) of each Discount Mortgage Loan
in Cashflow Group 1 that was repurchased by the Depositor pursuant to the
Pooling Agreement during the calendar month preceding the month of such
Distribution Date;
(c) any Substitution Adjustment Amount (net of unreimbursed Advances and
other amounts as to which the Servicer is entitled to be reimbursed pursuant
to the Pooling Agreement) in connection with a Deleted Mortgage Loan in
Cashflow Group 1 that was a Discount Mortgage Loan received during the
calendar month preceding the month of such Distribution Date;
(d) any Liquidation Proceeds (net of unreimbursed expenses and
unreimbursed Advances, if any) allocable to recoveries of principal of
Discount Mortgage Loans in Cashflow Group 1 that are not yet Liquidated
Mortgage Loans received during the calendar month preceding the month of that
Distribution Date;
(e) with respect to each Discount Mortgage Loan in Cashflow Group 1 that
became a Liquidated Mortgage Loan during the calendar month preceding the
month of such Distribution Date, the amount of Liquidation Proceeds (other
than any Foreclosure Profits and net of unreimbursed expenses and
unreimbursed Advances, if any) allocable to principal received with respect
to that Discount Mortgage Loan; and
(f) all partial and full principal prepayments by mortgagors on Discount
Mortgage Loans in Cashflow Group 1 received during the calendar month
preceding that Distribution Date.
S-56
Subordinate Principal Distribution Amount
The "Subordinate Principal Distribution Amount" for a Cashflow Group for any
Distribution Date will equal the sum of:
(a) the Subordinate Percentage for that Cashflow Group of the applicable
Non-PO Percentage of the Scheduled Principal Payments for that Distribution
Date; and
(b) the Subordinate Prepayment Percentage for that Cashflow Group of the
applicable Non-PO Percentage of the Unscheduled Principal Payments for that
Distribution Date.
On each Distribution Date, each class of Subordinate Certificates that is
entitled to receive a principal distribution will receive its pro rata share
(calculated based on the Class Balances of all the Subordinate Certificates that
are entitled to receive a principal distribution) of the Subordinate Principal
Distribution Amounts, to the extent of the remaining Cashflow Group Distribution
Amounts from all Cashflow Groups. For each class of Subordinate Certificates, if
on any Distribution Date the Fractional Interest is less than the Fractional
Interest for that class on the Closing Date, no classes junior to that class
will be entitled to receive a principal distribution.
Distributions of principal on the Subordinate Certificates that are entitled
to receive a principal distribution on a Distribution Date will be made
sequentially in order of payment priority, beginning with the Class B-1
Certificates, until each class has received its pro rata share for the
Distribution Date. However, the PO Deferred Amounts will be paid to the Class
1-PO Certificates from amounts otherwise distributable as principal to the
Subordinate Certificates, beginning with the amounts otherwise distributable as
principal to the class of Subordinate Certificates lowest in order of payment
priority.
The "Fractional Interest" for any Distribution Date and each class of
Subordinate Certificates will equal (i) the sum of the Class Balances of all
classes of Subordinate Certificates lower in order of payment priority, divided
by (ii) the sum of the Pool Principal Balances (Non-PO Portion) for all Cashflow
Groups for the Distribution Date.
The approximate Fractional Interests for the Subordinate Certificates on the
Closing Date are expected to be as follows:
Class B-1.................................. 4.15%
Class B-2.................................. 2.75%
Class B-3.................................. 1.75%
Class B-4.................................. 1.05%
Class B-5.................................. 0.50%
Class B-6.................................. 0.00%
Residual Certificate
The Class 1-A-R Certificate will remain outstanding for so long as the Trust
exists, whether or not it is receiving current distributions of principal or
interest. In addition to distributions of interest and principal as described
above, on each Distribution Date, the holder of the Class 1-A-R Certificate will
be entitled to receive any Cashflow Group Distribution Amount for a Cashflow
Group remaining after the payment of (i) interest and principal on the Senior
Certificates of the related group, (ii) PO Deferred Amounts on the Class 1-PO
Certificates and (iii) interest and principal on the Subordinate Certificates,
as described above. It is not anticipated that there will be any significant
amounts remaining to distribute on the Class 1-A-R Certificate.
S-57
Cross-Collateralization
On each Distribution Date before the Senior Credit Support Depletion Date but
on or after the date on which the Class Balances of the Senior Non-PO
Certificates of a group have been reduced to zero, amounts otherwise
distributable as principal payments for the related Cashflow Group on the
Subordinate Certificates will be distributed as principal to the remaining
classes of Senior Non-PO Certificates together with the applicable Senior
Principal Distribution Amount in accordance with the priorities set forth for
the applicable group above under "--Principal--Senior Principal Distribution
Amount," provided that on that Distribution Date either:
(a) the Total Subordinate Percentage for that Distribution Date is less
than twice the initial Total Subordinate Percentage; or
(b) the outstanding principal balance of all Mortgage Loans (including,
for this purpose, any Mortgage Loans in foreclosure, any REO Property and any
Mortgage Loan for which the mortgagor has filed for bankruptcy after the
Closing Date) delinquent 60 days or more (averaged over the preceding six
month period) as a percentage of the sum of the Class Balances of the
Subordinate Certificates is greater than or equal to 50%.
If the Senior Non-PO Certificates of two groups remain outstanding, the
distributions described above will be made to the Senior Non-PO Certificates of
those groups, pro rata, in proportion to the aggregate Class Balance of the
Senior Non-PO Certificates of each of those groups.
In addition, if on any Distribution Date the sum of the Class Balances of the
Senior Non-PO Certificates of a group (after giving effect to distributions to
be made on that Distribution Date) is greater than the Adjusted Pool Amount
(Non-PO Portion) (as described below under "-- Allocation of Losses") of the
related Cashflow Group (any such group, the "Undercollateralized Group" and any
such excess, the "Undercollateralized Amount"), all amounts otherwise
distributable as principal on the Subordinate Certificates, in reverse order of
payment priority will be paid as principal to the Senior Non-PO Certificates of
the Undercollateralized Group together with the applicable Senior Principal
Distribution Amount in accordance with the priorities set forth above under
"--Principal--Senior Principal Distribution Amount," until the sum of the Class
Balances of the Senior Non-PO Certificates of the Undercollateralized Group
equals the Adjusted Pool Amount (Non-PO Portion) of the related Cashflow Group.
Also, the amount of any unpaid interest shortfall amounts for the
Certificates of the Undercollateralized Group (including any interest shortfall
amount for that Distribution Date) will be paid to the Undercollateralized Group
in the manner described in clause (a)(ii) in the definition of "Cashflow Group
Distribution Amount Allocation" prior to the payment of any Undercollateralized
Amount from amounts otherwise distributable as principal on the Subordinate
Certificates, in reverse order of payment priority.
If two groups are Undercollateralized Groups, the distributions described
above will be made, pro rata, in proportion to their Undercollateralized
Amounts.
The PO Deferred Amounts for the Class 1-PO Certificates will be paid from
amounts otherwise distributable as principal on the Subordinate Certificates
before any payments are made pursuant to the preceding paragraphs.
S-58
Allocation of Losses
On each Distribution Date, the applicable PO Percentage of any Realized Loss
on a Discount Mortgage Loan in Cashflow Group 1 will be allocated to the Class
1-PO Certificates until their Class Balance is reduced to zero. This allocation
will be effected on each Distribution Date by reducing the Class Balance of the
Class 1-PO Certificates, if and to the extent that the Class Balance (after
taking into account the amount of all distributions to be made to the related
group on that Distribution Date) exceeds the Adjusted Pool Amount (PO Portion)
for Cashflow Group 1 for that Distribution Date. The amount of any Realized Loss
allocated to the Class 1-PO Certificates will be treated as a "PO Deferred
Amount." To the extent funds are available on that Distribution Date or on any
future Distribution Date from amounts that would otherwise be allocable to the
Subordinate Principal Distribution Amounts, the PO Deferred Amounts will be paid
on the Class 1-PO Certificates prior to distributions of principal on the
Subordinate Certificates. Payments of the PO Deferred Amounts will be made from
the principal payable to the Subordinate Certificates beginning with the
principal payable to the class of Subordinate Certificates lowest in order of
payment priority. Any distribution in respect of unpaid PO Deferred Amounts for
the Class 1-PO Certificates will not further reduce the Class Balance of the
Class 1-PO Certificates. The PO Deferred Amounts will not bear interest. The
Class Balance of the class of Subordinate Certificates then outstanding lowest
in order of payment priority will be reduced by the amount of any payments in
respect of PO Deferred Amounts. Any excess of these PO Deferred Amounts over the
Class Balance of that class will be allocated to the next most subordinate class
of Subordinate Certificates to reduce its Class Balance and so on, as necessary.
On each Distribution Date, the applicable Non-PO Percentage of the Applicable
Fraction of any Realized Loss on a Mortgage Loan contributing to a Cashflow
Group will be allocated first to the Subordinate Certificates, in reverse order
of payment priority (beginning with the class of Subordinate Certificates then
outstanding lowest in order of payment priority), in each case until the Class
Balance of each class of Subordinate Certificates has been reduced to zero, and
then to the Senior Non-PO Certificates of the related group pro rata based on
their Class Balances.
This allocation of Realized Losses will be accomplished on each Distribution
Date by reducing the Class Balance of the class of Subordinate Certificates then
outstanding lowest in order of payment priority if and to the extent that the
sum of the Class Balances of all classes of Senior Non-PO Certificates and
Subordinate Certificates (after taking into account the amount of all
distributions to be made on the Distribution Date) exceeds the sum of the
Adjusted Pool Amounts (Non-PO Portion) for the Distribution Date.
In the event that on any Distribution Date after giving effect to the
allocation of Realized Losses, the amount which is available for the
distribution of principal to a class of Subordinate Certificates is greater than
the Class Balance of such class, such excess instead will be distributed first
to the other classes of Subordinate Certificates in order of payment priority
and then to the Senior Non-PO Certificates, pro rata based on their Class
Balances.
After the Senior Credit Support Depletion Date, on each Distribution Date,
the sum of the Class Balances of all classes of Senior Non-PO Certificates of a
group then outstanding will be reduced if and to the extent that sum (after
taking into account the amount of all distributions to be made on the
Distribution Date) exceeds the Adjusted Pool Amount (Non-PO Portion) for the
related Cashflow Group for the Distribution Date. The amount of the reduction
will be allocated among the Senior Non-PO Certificates of the applicable group
pro rata based on their Class Balances.
After the Senior Credit Support Depletion Date, the Class Balance of a class
of Super Senior Support Certificates will be reduced not only by the principal
portion of Realized Losses allocated to that class as
S-59
provided in the preceding paragraph, but also by the portion allocated to the
related class of Super Senior Certificates indicated in the following table.
The related classes of Super Senior and Super Senior Support Certificates are
as follows:
Super Senior Classes Super Senior Support Classes
-------------------- ----------------------------
1-A-2 1-A-3
2-A-2 2-A-3
2-A-4 2-A-5
3-A-2 3-A-3
Realized Losses allocated to the Class 2-A-6 Certificates will reduce the
Class 2-A-7 Notional Amount, Realized Losses allocated to the Class 2-A-4
Certificates will reduce the Class 2-A-9 Notional Amount and Realized Losses
allocated to any of the Class 3-A-2 or Class 3-A-3 Certificates will reduce the
Class 3-A-1 Notional Amount.
In the event an amount is received relating to a Mortgage Loan contributing
to Cashflow Group 1 as to which a Realized Loss had previously been allocated to
a class of Certificates, the Applicable Fraction of such amount (a "Group 1
Recovery"), will be distributed to the Class 1-PO Certificates in an amount
equal to the applicable PO Percentage of such Group 1 Recovery provided that the
sum of the Group 1 Recoveries distributed to the Class 1-PO Certificates on any
Distribution Date will not exceed the related PO Deferred Amount. The remaining
portion of any Group 1 Recovery will be distributed to the Senior Non-PO
Certificates of Group 1 and the then-outstanding Subordinate Certificates in the
same manner as Liquidation Proceeds are distributed.
In the event an amount is received relating to a Mortgage Loan contributing
to Cashflow Group 2 or Cashflow Group 3 as to which a Realized Loss had
previously been allocated to a class of Certificates, the Applicable Fraction of
such amount (a "Group 2 Recovery" or "Group 3 Recovery", as the case may be, and
together with the Group 1 Recovery, the "Recoveries" ), will be distributed to
the Senior Non-PO Certificates of group 2 or group 3, as the case may be, and
the then-outstanding Subordinate Certificates in the same manner as Liquidation
Proceeds are distributed.
In general, a "Realized Loss" means, (a) for a Liquidated Mortgage Loan, the
amount by which the remaining unpaid principal balance of the Mortgage Loan
exceeds the amount of Liquidation Proceeds applied to the principal balance of
the Mortgage Loan and (b) a Bankruptcy Loss.
"Bankruptcy Losses" are losses that are incurred as a result of Debt Service
Reductions or Deficient Valuations. As used in this prospectus supplement, a
"Deficient Valuation" occurs when a bankruptcy court establishes the value of a
Mortgaged Property at an amount less than the then-outstanding principal balance
of the Mortgage Loan secured by such Mortgaged Property or reduces the
then-outstanding principal balance of a Mortgage Loan. In the case of a
reduction in the value of the related Mortgaged Property, the amount of the
secured debt could be reduced to the value established by the court, and the
holder of the affected Mortgage Loan would become an unsecured creditor to the
extent the then-outstanding principal balance of the Mortgage Loan exceeds the
value assigned to the Mortgaged Property by the bankruptcy court. In addition,
certain other modifications of the terms of a Mortgage Loan can result from a
bankruptcy proceeding, including the reduction (a "Debt Service Reduction") of
the amount of the Monthly Payment on the related Mortgage Loan. However, none of
these events will be considered a Debt Service Reduction or Deficient Valuation
so long as the Servicer is pursuing any other remedies that may be available for
the Mortgage Loan and (i) the Mortgage Loan is not in default or (ii) scheduled
Monthly Payments are being advanced by the Servicer without giving effect to any
Debt Service Reduction.
S-60
A "Liquidated Mortgage Loan" is a defaulted Mortgage Loan as to which the
Servicer has determined that all recoverable Liquidation Proceeds have been
received.
With respect to any Distribution Date, the "Adjusted Pool Amount" for a
Cashflow Group will equal the sum as to each Mortgage Loan contributing to such
Cashflow Group as of the Cut-off Date of the product of (A) the Applicable
Fraction and (B) the unpaid principal balance of the Mortgage Loan as of the
Cut-off Date less the sum of (i) the product of the Applicable Fraction and all
principal amounts received relating to the Mortgage Loan (including amounts
received as Advances, as described under "Servicing of the Mortgage Loans --
Periodic Advances and Servicing Advances" in the prospectus, principal
prepayments and Liquidation Proceeds relating to principal) and distributed on
the Certificates on that Distribution Date and all prior Distribution Dates and
(ii) the product of the Applicable Fraction and the principal portion of all
Realized Losses (other than Debt Service Reductions) incurred on the Mortgage
Loan from the Cut-off Date through the end of the month preceding the
Distribution Date.
With respect to any Distribution Date, the "Adjusted Pool Amount (PO
Portion)" for Cashflow Group 1 will equal the sum as to each Discount Mortgage
Loan outstanding in Cashflow Group 1 as of the Cut-off Date of the product of
(A) the PO Percentage for the Mortgage Loan and (B) the unpaid principal balance
of the Mortgage Loan as of the Cut-off Date less the sum of (i) all principal
amounts received relating to the Mortgage Loan (including amounts received as
Advances, as described under "Servicing of the Mortgage Loans -- Periodic
Advances and Servicing Advances" in the prospectus, principal prepayments and
Liquidation Proceeds relating to principal) and distributed on the Certificates
on that Distribution Date and all prior Distribution Dates and (ii) the
principal portion of any Realized Loss (other than a Debt Service Reduction)
incurred on the Mortgage Loan from the Cut-off Date through the end of the month
preceding the month in which that Distribution Date occurs. The Adjusted Pool
Amount (PO Portion) for Cashflow Group 2 and Cashflow Group 3 will be zero.
With respect to any Distribution Date, the "Adjusted Pool Amount (Non-PO
Portion)" for Cashflow Group 1 will equal the difference between the Adjusted
Pool Amount for Cashflow Group 1 and the Adjusted Pool Amount (PO Portion) for
Cashflow Group 1. The "Adjusted Pool Amount (Non-PO Portion)" for Cashflow Group
2 will equal the Adjusted Pool Amount for Cashflow Group 2 and the "Adjusted
Pool Amount (Non-PO Portion)" for Cashflow Group 3 will equal the Adjusted Pool
Amount for Cashflow Group 3.
Restrictions on Transfer of the Class 1-A-R Certificate
The Class 1-A-R Certificate will be subject to the following restrictions on
transfer and will contain a legend describing these restrictions.
The REMIC provisions of the Code impose certain taxes on (i) transferors of
residual interests to, or agents that acquire residual interests on behalf of,
Disqualified Organizations (as defined in the prospectus) and (ii) certain
Pass-Through Entities (as defined in the prospectus) that have Disqualified
Organizations as beneficial owners. No tax will be imposed on a Pass-Through
Entity (other than an "electing large partnership" (as defined in the
prospectus)) because of the Class 1-A-R Certificate to the extent the
Pass-Through Entity has received an affidavit from each owner of the
Pass-Through Entity that it is not a Disqualified Organization or a nominee for
a Disqualified Organization.
The Pooling Agreement will provide that no legal or beneficial interest in
the Class 1-A-R Certificate may be transferred to or registered in the name of
any person unless:
o the proposed purchaser provides to the Trustee an affidavit to the effect
that, among other items, the transferee is not a Disqualified Organization
and is not purchasing the Class 1-A-R Certificate as an agent for a
Disqualified Organization (i.e., as a broker, nominee or other middleman);
and
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o the transferor states in writing to the Trustee that it has no actual
knowledge that the affidavit is false.
Further, the affidavit will require the transferee to affirm that it (a)
historically has paid its debts as they have come due and intends to do so in
the future, (b) understands that it may incur tax liabilities relating to the
Class 1-A-R Certificate in excess of cash flows generated by the Class 1-A-R
Certificate, (c) intends to pay taxes associated with holding the Class 1-A-R
Certificate as these taxes become due and (d) will not transfer the Class 1-A-R
Certificate to any person or entity that does not provide a similar affidavit.
The transferor must certify in writing to the Trustee that, as of the date of
the transfer, it had no knowledge or reason to know that the affirmations made
by the transferee stated in the preceding sentence were false.
Treasury regulations applicable to REMICs (the "REMIC Regulations") disregard
certain transfers of residual certificates, and if applicable to a purported
transfer of the Class 1-A-R Certificate, the transferor would continue to be
treated as the owner of the Class 1-A-R Certificate and therefore would continue
to be subject to tax on its allocable portion of the net income of each REMIC.
Under the REMIC Regulations, a transfer of a "noneconomic residual interest" (as
defined below) to a holder generally is disregarded for all federal income tax
purposes if a significant purpose of the transfer is to impede the assessment or
collection of tax. A residual interest in a REMIC (including a residual interest
with a positive value at issuance) is a "noneconomic residual interest" unless,
at the time of the transfer, (i) the present value of the expected future
distributions on the residual interest at least equals the product of the
present value of the anticipated excess inclusions and the highest corporate
income tax rate in effect for the year in which the transfer occurs, and (ii)
the transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes on each
excess inclusion. The REMIC Regulations explain that a significant purpose to
impede the assessment or collection of tax exists if the transferor, at the time
of the transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. Under the REMIC Regulations, a safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, (ii) the transferee represents to the transferor
that it understands that, as the holder of the noneconomic residual interest,
the transferee may incur liabilities in excess of any cash flows generated by
the interest and that the transferee intends to pay taxes associated with
holding the residual interest as they become due and (iii) the transferee
represents to the transferor that it will not cause income from the noneconomic
residual interest to be attributable to a foreign permanent establishment or
fixed base, within the meaning of an applicable income tax treaty, and the
noneconomic residual interest is, in fact, not transferred to a foreign
permanent establishment or fixed base of the transferee or any other person. The
Pooling Agreement will require the transferee of a Class 1-A-R Certificate to
certify to the matters in the preceding sentence as part of the affidavit
described above.
In addition to the three conditions set forth above for the transferor of a
noneconomic residual interest to be presumed not to have knowledge that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC, the REMIC Regulations contain a fourth condition
for the transferor to be presumed to lack such knowledge. This fourth condition
requires that one of the two following tests be satisfied:
(a) the present value of the anticipated tax liabilities associated with
holding the noneconomic residual interest not exceed the sum of:
(i) the present value of any consideration given to the transferee to
acquire the interest;
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(ii) the present value of the expected future distributions on the
interest; and
(iii) the present value of the anticipated tax savings associated
with holding the interest as the applicable REMIC generates losses; or
(b) (i) the transferee must be a domestic "C" corporation (other than a
corporation exempt from taxation or a regulated investment company or real
estate investment trust) that meets certain asset tests;
(ii) the transferee must agree in writing that any subsequent
transfer of the residual interest would be to an eligible "C" corporation
and would meet the requirements for a safe harbor transfer; and
(iii) the facts and circumstances known to the transferor on or
before the date of the transfer must not reasonably indicate that the
taxes associated with ownership of the residual interest will not be paid
by the transferee.
For purposes of the computations in clause (a), the transferee is assumed to
pay tax at the highest corporate rate of tax specified in the Code or, in
certain circumstances, the alternative minimum tax rate. Further, present values
generally are computed using a discount rate equal to the short-term Federal
rate set forth in Section 1274(d) of the Code for the month of the transfer and
the compounding period used by the transferee.
The Pooling Agreement will not require that transfers of the Class 1-A-R
Certificate meet the fourth requirement above, and therefore transfers may not
meet the safe harbor. The holder of the Class 1-A-R Certificate is advised to
consult its tax advisor regarding the advisability of meeting the safe harbor.
In addition, the Class 1-A-R Certificate may not be purchased by or
transferred to any person that is not a U.S. Person, unless:
o that person holds the Class 1-A-R Certificate in connection with the
conduct of a trade or business within the United States and furnishes the
transferor and the Trustee with an effective Internal Revenue Service Form
W-8ECI; or
o the transferee delivers to both the transferor and the Trustee an opinion
of a nationally-recognized tax counsel to the effect that the proposed
transfer is in accordance with the requirements of the Code and the
related Treasury regulations and that the proposed transfer of the Class
1-A-R Certificate will not be disregarded for federal income tax purposes.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation or partnership (unless, in the case of a partnership, Treasury
regulations are adopted that provide otherwise) created or organized in or under
the laws of the United States, the District of Columbia or any state, including
an entity treated as a corporation or partnership for federal income tax
purposes, an estate whose income is subject to United States federal income tax
regardless of its source, or a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust, and one or
more U.S. Persons have the authority to control all substantial decisions of the
trust (or, to the extent provided in applicable Treasury regulations, certain
trusts in existence on August 20, 1996 which are eligible to elect to be treated
as U.S. Persons).
The Pooling Agreement will provide that any attempted or purported transfer
in violation of these transfer restrictions will be null and void and will vest
no rights in any purported transferee.
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Any transferor or agent to whom the Trustee provides information as to any
applicable tax imposed on such transferor or agent may be required to bear the
cost of computing or providing this information.
See "Federal Income Tax Consequences -- Federal Income Tax Consequences for
REMIC Certificates -- Taxation of Residual Certificates -- Tax-Related
Restrictions on Transfer of Residual Certificates" in the prospectus.
The Class 1-A-R Certificate may not be purchased by or transferred to any
Plan or any person acting on behalf of or investing the assets of a Plan.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
Restrictions on Transfer of the Class 1-A-3, Class 2-A-3, Class 2-A-5, Class
3-A-3 and Subordinate Certificates
Under current law the purchase and holding of the Class 1-A-3, Class 2-A-3,
Class 2-A-5, Class 3-A-3 and Subordinate Certificates by or on behalf of a Plan
may result in "prohibited transactions" within the meaning of ERISA, Section
4975 of the Code or Similar Law. Transfers of the Class 1-A-3, Class 2-A-3,
Class 2-A-5, Class 3-A-3 or Subordinate Certificates will not be made unless the
transferee delivers to the Trustee either:
(a) a representation letter, in form and substance satisfactory to the
Trustee, stating that:
(1) it is not, and is not acting on behalf of, any such Plan or using
the assets of any such Plan to effect such purchase; or
(2) if it is an insurance company, that the source of funds used to
purchase the Class 1-A-3, Class 2-A-3, Class 2-A-5, Class 3-A-3 or
Subordinate Certificates is an "insurance company general account" (as
such term is defined in Section V(e) of Prohibited Transaction Class
Exemption 95-60 ("PTE 95-60"), 60 Fed. Reg. 35925 (July 12, 1995)), that
there is no Plan with respect to which the amount of such general
account's reserves and liabilities for the contract(s) held by or on
behalf of such Plan and all other Plans maintained by the same employer
(or affiliate thereof as defined in Section V(a)(1) of PTE 95-60) or by
the same employee organization exceeds 10% of the total of all reserves
and liabilities of such general account (as such amounts are determined
under Section I(a) of PTE 95-60) at the date of acquisition and that all
Plans that have an interest in such general account are Plans to which PTE
95-60 applies; or
(b) an opinion of counsel, in form and substance satisfactory to the
Trustee and the Servicer, to the effect that the purchase or holding of the
Class 1-A-3, Class 2-A-3, Class 2-A-5, Class 3-A-3 or Subordinate
Certificates by or on behalf of such Plan will not constitute or result in a
non-exempt prohibited transaction within the meaning of ERISA, Section 4975
of the Code or Similar Law and will not subject the Depositor, the Servicer
or the Trustee to any obligation in addition to those undertaken in the
Pooling Agreement.
The Class 1-A-3, Class 2-A-3, Class 2-A-5, Class 3-A-3 and Subordinate
Certificates will contain a legend describing these restrictions on transfer.
Any transferee of a Class 1-A-3, Class 2-A-3, Class 2-A-5, Class 3-A-3 or
Subordinate Certificate that does not comply with either clause (a) or clause
(b) above will be deemed to have made the representation described in clause (a)
above.
The Pooling Agreement will provide that any attempted or purported transfer
in violation of these transfer restrictions will be null and void and will vest
no rights in any purported transferee.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
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PREPAYMENT AND YIELD CONSIDERATIONS
- --------------------------------------------------------------------------------
Delinquencies on the Mortgage Loans contributing to a Cashflow Group which
are not advanced by or on behalf of the Servicer (because the Servicer has
determined that these amounts, if advanced, would be nonrecoverable), will
adversely affect the yield on the Senior Certificates of the related group and
the Subordinate Certificates. See "Servicing of the Mortgage Loans -- Periodic
Advances and Servicing Advances" in the prospectus. Because of the priority of
distributions, shortfalls resulting from delinquencies that are not advanced
will be borne first by the Subordinate Certificates (in reverse order of payment
priority), and then by the Senior Certificates of the group.
Net Interest Shortfalls will adversely affect the yields on the Offered
Certificates. In addition, losses generally will be borne by the Subordinate
Certificates, as described in this prospectus supplement under "Description of
the Certificates -- Allocation of Losses." As a result, the yields on the
Offered Certificates will depend on the rate and timing of Realized Losses on
the Mortgage Loans contributing to the related Cashflow Group or Cashflow
Groups.
The effective yields to investors (other than investors in the Class 2-A-6,
Class 2-A-7, Class 3-A-1, Class 3-A-2 and Class 3-A-3 Certificates) will be
lower than the yields otherwise produced by the applicable rate at which
interest is passed through to investors and the purchase price of their
Certificates because monthly distributions will not be payable to investors
until the 25th day (or, if not a business day, the next business day) of the
month following the month in which interest accrues on the Mortgage Loans
(without any additional distribution of interest or earnings to cover the
delay).
Because principal payments on the Mortgage Loans contributing to a Cashflow
Group will be distributed currently on the Senior Non-PO Certificates in the
related group and the PO Certificates, in the case of Cashflow Group 1, and the
Subordinate Certificates, the rate of principal payments on the Offered
Certificates entitled to payments of principal, the aggregate amount of each
interest payment on the Offered Certificates entitled to interest payments, and
the yield to maturity of Offered Certificates purchased at a price other than
par are directly related to the rate of payments of principal on the Mortgage
Loans contributing to the related Cashflow Group or Cashflow Groups. The
principal payments on the Mortgage Loans may be in the form of scheduled
principal payments or principal prepayments (for this purpose, the term
"principal prepayment" includes prepayments and any other recovery of principal
in advance of the scheduled Due Date, including repurchases and liquidations due
to default, casualty, condemnation and the like). Any of these prepayments will
result in distributions to you of amounts that would otherwise be distributed
over the remaining term of the Mortgage Loans. See "Prepayment and Yield
Considerations" in the prospectus.
The rate at which mortgage loans in general prepay may be influenced by a
number of factors, including general economic conditions, mortgage market
interest rates, availability of mortgage funds and homeowner mobility.
o In general, if prevailing mortgage interest rates fall significantly below
the mortgage interest rates on the Mortgage Loans, the Mortgage Loans are
likely to prepay at higher rates than if prevailing mortgage interest
rates remain at or above the mortgage interest rates on the Mortgage
Loans.
o Conversely, if prevailing mortgage interest rates rise above the mortgage
interest rates on the Mortgage Loans, the rate of prepayment would be
expected to decrease.
The timing of changes in the rate of prepayments may significantly affect the
actual yield to you, even if the average rate of principal prepayments is
consistent with your expectations. In general, the
S-65
earlier the payment of principal of the Mortgage Loans, the greater the effect
on your yield to maturity. As a result, the effect on your yield of principal
prepayments occurring at a rate higher (or lower) than the rate you anticipate
during the period immediately following the issuance of the Certificates will
not be offset by a subsequent like reduction (or increase) in the rate of
principal prepayments. You should also consider the risk, in the case of an
Offered Certificate purchased at a discount, particularly a Principal Only
Certificate, that a slower than anticipated rate of payments in respect of
principal (including prepayments) on the Mortgage Loans contributing to the
related Cashflow Group or Cashflow Groups, or the Discount Mortgage Loans in
Cashflow Group 1 in the case of the Class 1-PO Certificates, will have a
negative effect on the yield to maturity of the Offered Certificate. You should
also consider the risk, in the case of an Offered Certificate purchased at a
premium or in the case of the Interest Only Certificates (which have no Class
Balance), that a faster than anticipated rate of payments in respect of
principal (including prepayments) on the Mortgage Loans contributing to the
related Cashflow Group or Cashflow Groups, or the Premium Mortgage Loans in
Cashflow Group 3 in the case of the Class 3-IO Certificates, particularly those
Premium Mortgage Loans with higher mortgage interest rates, will have a negative
effect on the yield to maturity of the Offered Certificates. You must make your
own decisions as to the appropriate prepayment assumptions to be used in
deciding whether to purchase Offered Certificates.
Mortgagors are permitted to prepay the Mortgage Loans, in whole or in part,
at any time without penalty. The rate of payment of principal may also be
affected by any repurchase of the Mortgage Loans permitted or required by the
Pooling Agreement, including any optional termination of the Trust by the
Depositor. See "The Pooling Agreement -- Termination; Optional Purchase of
Mortgage Loans" in the prospectus for a description of the Depositor's option to
repurchase the Mortgage Loans when the aggregate Stated Principal Balance of the
Mortgage Loans is less than 10% of the aggregate unpaid principal balance of the
Mortgage Loans as of the Cut-off Date. The Depositor may be required to
repurchase Mortgage Loans because of defective documentation or material
breaches in its representations and warranties relating to such Mortgage Loans.
Any repurchases will shorten the weighted average lives of the related classes
of Offered Certificates.
All of the Mortgage Loans will include "due-on-sale" clauses which allow the
holder of the Mortgage Loan to demand payment in full of the remaining principal
balance upon sale or certain transfers of the property securing the Mortgage
Loan. To the extent that the Servicer has knowledge of the conveyance or
proposed conveyance of the underlying Mortgaged Property, the Servicer will
enforce "due-on-sale" clauses to the extent permitted by applicable law.
However, the Servicer will not take any action in relation to the enforcement of
any "due-on-sale" provisions which would impair or threaten to impair any
recovery under any related primary mortgage insurance policy. See "Prepayment
and Yield Considerations" in the prospectus. Acceleration of Mortgage Loans as a
result of enforcement of "due-on-sale" provisions in connection with transfers
of the related Mortgaged Properties or the occurrence of certain other events
resulting in acceleration would affect the level of prepayments on the Mortgage
Loans, which in turn would affect the weighted average lives of the related
classes of Offered Certificates.
As described in this prospectus supplement under "Description of the
Certificates -- Principal," the Senior Prepayment Percentage for a Cashflow
Group of the applicable Non-PO Percentage of the Applicable Fraction of the
principal prepayments (excluding for this purpose, partial liquidations due to
default, casualty, condemnation and the like) of each Mortgage Loan contributing
to such Cashflow Group initially will be distributed to the classes of Senior
Non-PO Certificates of the group that are entitled to receive principal
prepayment distributions at that time. This may result in all (or a
disproportionate percentage) of those principal prepayments being distributed to
the Senior Non-PO Certificates of that group and none (or less than their pro
rata share) of those principal prepayments being distributed to holders of the
Subordinate Certificates during the periods of time described in the definition
of "Senior Prepayment Percentage."
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Investors in the Class 2-A-6 Certificates should understand that if one-month
LIBOR is greater than or equal to 5.550% per annum, their pass-through rate will
remain at their maximum rate of 6.000% per annum. On or prior to the
Distribution Date in October 2011, if LIBOR is greater than 5.550%, investors in
the Class 2-A-6 Certificates will also be entitled to receive amounts payable
under the Yield Maintenance Agreement in addition to the interest that will
accrue on their Certificates. See "Description of the Certificates -- The Yield
Maintenance Agreement" and "-- The Reserve Fund."
Investors in the Class 3-A-2 and Class 3-A-3 Certificates should understand
that if one-month LIBOR is greater than or equal to 6.640% per annum, their
pass-through rates will remain at their maximum rate of 7.000% per annum.
Investors in the Class 2-A-6, Class 3-A-2 and Class 3-A-3 Certificates should
consider the risk that if one-month LIBOR is lower than anticipated, the actual
yield to such investors will be lower than the anticipated yield. Conversely,
investors in the Class 2-A-7 and Class 3-A-1 Certificates should consider the
risk that if one-month LIBOR is higher than anticipated, the actual yields to
such investors will be significantly lower than the anticipated yield or may be
negative.
Investors in the Class 2-A-7 and Class 3-A-1 Certificates should understand
that if one-month LIBOR is greater than or equal to 5.550% and 6.640% per annum,
respectively, the Class 2-A-7 and Class 3-A-1 Certificates will accrue interest
at the minimum rate of 0.000% per annum. See "-- Yield on the Inverse Floating
Rate Certificates" below.
Investors in the Floating Rate and Inverse Floating Rate Certificates should
understand that the timing of changes in one-month LIBOR may affect the actual
yields to such investors even if the average rate of one-month LIBOR is
consistent with such investors' expectations. Each investor must make an
independent decision as to the appropriate LIBOR assumptions to be used in
deciding whether to purchase a Floating Rate or Inverse Floating Rate
Certificate.
As described in this prospectus supplement under "Description of the
Certificates -- Principal," unless the Class Balances of the other Senior Non-PO
Certificates of group 2 (other than the Class 2-A-1 Certificates) have been
reduced to zero, the Class 2-A-2 and Class 2-A-3 Certificates will not be
entitled to any distributions of principal for five years following the Closing
Date, and during the next four years the percentage of principal allocated to
the Class 2-A-2 and Class 2-A-3 Certificates will gradually increase.
Assumptions Relating to Tables
The decrement tables set forth in Appendix B have been prepared on the basis
of the following assumptions (the "Modeling Assumptions"):
(a) the Mortgage Pool consists of the hypothetical mortgage loans
presented in Appendix C;
(b) the initial Class Balances and initial notional amounts for the
Offered Certificates are as set forth or described in the table beginning on
page S-6 of this prospectus supplement;
(c) the initial pass-through rates for the Offered Certificates are as set
forth or described in the table beginning on page S-6 of this prospectus
supplement;
(d) there are no Net Interest Shortfalls, delinquencies or Realized Losses
on the Mortgage Loans;
(e) scheduled payments of principal and interest on the Mortgage Loans are
received on the applicable Due Date beginning on June 1, 2007;
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(f) prepayments are received, together with a full 30 days of interest, on
the last day of each month beginning in May 2007;
(g) the Mortgage Loans prepay at the indicated percentages of the PPC;
(h) the Depositor does not exercise its option to purchase the Mortgage
Loans and related property;
(i) no Mortgage Loans are required to be repurchased from the Trust and no
Mortgage Loans are substituted for the Mortgage Loans included in the Trust
on the Closing Date;
(j) the Certificates are issued on the Closing Date;
(k) cash payments on the Certificates are received on the 25th day of each
month beginning in June 2007 in accordance with the priorities and amounts
described in this prospectus supplement under "Description of the
Certificates";
(l) the Administrative Fee Rate is 0.2556% per annum; and
(m) the one-month LIBOR used to determine the pass-through rates of the
Floating Rate Certificates and the Inverse Floating Rate Certificates remains
constant at 5.32%.
Although the characteristics of the mortgage loans for the decrement tables
have been prepared on the basis of the weighted average characteristics of the
Mortgage Loans which are expected to be in the Mortgage Pool, there is no
assurance that the Modeling Assumptions will reflect the actual characteristics
or performance of the Mortgage Loans or that the performance of the Offered
Certificates will conform to the results set forth in the decrement tables.
Weighted Average Lives of the Offered Certificates
Weighted average life of a class of Offered Certificates (other than the
Interest Only Certificates) refers to the average amount of time that will
elapse from the date of issuance of the Certificate until each dollar in
reduction of its Class Balance is distributed to investors. The weighted average
life of a class of Interest Only Certificates is equal to the average amount of
time that will elapse from the date of issuance of such class and the date on
which each dollar in reduction in the notional amount of such class occurs.
The weighted average lives of classes of Offered Certificates will be
influenced by, among other things, the rate at which principal of the Mortgage
Loans contributing to the related Cashflow Group or Cashflow Groups, is paid,
which may be in the form of scheduled principal payments or principal
prepayments (for this purpose, the term "prepayments" includes prepayments and
liquidations due to default, casualty, condemnation and the like), the timing of
changes in the rate of principal payments and the priority sequence of
distributions of principal of the Offered Certificates. The interaction of these
factors may have different effects on each class of Offered Certificates and the
effects on any class may vary at different times during the life of the class.
Accordingly, no assurance can be given as to the weighted average life of any
class of Offered Certificates. For an example of how the weighted average lives
of the Offered Certificates are affected by these factors at various constant
percentages of PPC, see the decrement tables set forth in Appendix B.
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The prepayment model used in this prospectus supplement is
the Prepayment Curve ("PPC"), which represents an assumed rate of principal
prepayment each month relative to the then-outstanding principal balance of a
pool of mortgage loans for the life of the mortgage loans. A 100% PPC for each
Cashflow Group assumes a prepayment rate of 8.00% CPR in the first month of the
life of the mortgage loans and
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an increase of approximately 1.2727272727% CPR in each month thereafter until
22.00% CPR is reached in the twelfth month. Beginning in the twelfth month and
in each month thereafter during the life of the mortgage loan, 100% PPC for each
Cashflow Group assumes a constant prepayment rate of 22.00% CPR each month.
"Constant Prepayment Rate" or "CPR" represents a constant assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of mortgage loans for the life of such mortgage loans. Neither PPC nor CPR
purports to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of mortgage loans, including
the Mortgage Loans. The Depositor is not aware of any existing statistics that
provide a reliable basis for investors to predict the amount or the timing of
receipt of prepayments on the Mortgage Loans.
The decrement tables set forth in Appendix B have been prepared on the basis
of the Modeling Assumptions described above under "-- Assumptions Relating to
Tables." There will likely be discrepancies between the characteristics of the
actual Mortgage Loans contributing to each Cashflow 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 outstanding
of initial Class Balances (or initial notional amounts, in the case of the
Interest Only Certificates) of the Certificates 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 contribute to a
Cashflow Group have characteristics that differ from those assumed in preparing
the decrement tables, the Class Balance or notional amount of a class of Offered
Certificates could be reduced to zero earlier or later than indicated by the
decrement tables.
Furthermore, the weighted average life information contained in the decrement
tables is not necessarily indicative of the weighted average lives of the
Offered Certificates that might be calculated or projected under different or
varying prepayment assumptions.
It is not likely that (i) all of the Mortgage Loans contributing to a
Cashflow Group will have the interest rates or remaining terms to maturity
assumed or (ii) the Mortgage Loans contributing to a Cashflow Group will prepay
at the indicated percentage of PPC until maturity. In addition, the diverse
remaining terms to maturity of the Mortgage Loans contributing to a Cashflow
Group (which include many recently originated Mortgage Loans) could produce
slower or faster reductions of the Class Balances or notional amount than
indicated in the decrement tables at the various percentages of PPC specified.
Based upon the Modeling Assumptions, the decrement tables in Appendix B
indicate the projected weighted average life of each class of the Offered
Certificates and set forth the percentages of the initial Class Balance or
initial notional amount of each class that would be outstanding after each of
the dates shown at various constant percentages of PPC.
Yield on the Inverse Floating Rate Certificates
The significance of the effects of prepayment on the applicable Mortgage
Loans and changes in one-month LIBOR on the Class 2-A-7 and Class 3-A-1
Certificates is illustrated in the applicable tables in Appendix D, which show
the pretax yields (on a corporate bond equivalent basis) to the holders of the
Class 2-A-7 and Class 3-A-1 Certificates under different constant percentages of
PPC and rates of one-month LIBOR. The yield of the Class 2-A-7 and Class 3-A-1
Certificates set forth in the applicable tables in Appendix D were calculated
using the Modeling Assumptions (other than assumption (m) after the initial
Interest Accrual Period) and the additional assumptions that (i) on the first
LIBOR Determination Date and on each LIBOR Determination Date thereafter,
one-month LIBOR will be as indicated in the applicable tables in Appendix D,
(ii) the Class 2-A-7 and Class 3-A-1 Certificates are purchased on the Closing
Date at assumed purchase prices equal to 0.6875% and 3.6250%, respectively, of
their initial notional amounts, plus accrued interest from May 25, 2007 to (but
not including) the Closing Date and (iii) the initial notional amounts for the
Class 2-A-7 and Class 3-A-1 Certificates
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applicable to the Distribution Date in June 2007 will be approximately
$40,089,000 and $166,779,000, respectively.
As indicated in the applicable tables in Appendix D, the yield to investors
in the Inverse Floating Rate Certificates will be extremely sensitive to changes
in the rate of one-month LIBOR. Increases in one-month LIBOR may have a negative
effect on the yield to investors in Inverse Floating Rate Certificates. In
addition, investors in the classes of Inverse Floating Rate Certificates which
are also Interest Only Certificates, should consider the risk that a rapid rate
of repayment on the applicable Mortgage Loans or a high level of one-month LIBOR
could result in a failure of such investors to fully recover their initial
investment.
It is not likely that the applicable Mortgage Loans will prepay at a constant
rate until maturity, that all of the applicable Mortgage Loans will prepay at
the same rate or that they will have the characteristics assumed. There can be
no assurance that the applicable Mortgage Loans will prepay at any of the rates
shown in the applicable tables in Appendix D or at any other particular rate.
The timing of changes in the rate of prepayments may affect significantly the
yield realized by a holder of an Inverse Floating Rate Certificate and there can
be no assurance that your pre-tax yield on the Inverse Floating Rate
Certificates will correspond to any of the pre-tax yields shown in this
prospectus supplement. You must make your own decision as to the appropriate
prepayment assumptions to be used in deciding whether to purchase an Inverse
Floating Rate Certificate.
Changes in one-month LIBOR may not correlate with changes in prevailing
mortgage interest rates. Each investor must make its own decision as to the
appropriate interest rate assumptions to be used in deciding whether to purchase
an Inverse Floating Rate Certificate.
The yields set forth in the tables in Appendix D were calculated by (i)
determining the monthly discount rates that, when applied to the assumed streams
of cash flows to be paid on the Inverse Floating Rate Certificates would cause
that discounted present value of such assumed streams of cash flows to equal the
assumed purchase prices of the Inverse Floating Rate Certificates, plus accrued
interest from May 25, 2007 to (but not including) the Closing Date indicated
above and (ii) converting such monthly rates to corporate bond equivalent rates.
Such calculation does not take into account variations that may occur in the
interest rates at which you may be able to reinvest funds received as payments
of interest on the Inverse Floating Rate Certificates and consequently does not
purport to reflect the return on any investment in the Inverse Floating Rate
Certificates when such reinvestment rates are considered.
Yield on the Class 2-A-9 Certificates
The Class 2-A-9 Certificates are Interest Only Certificates and, as such,
will not be entitled to receive distributions of principal in respect of the
Mortgage Loans.
The significance of the effects of prepayments on the Class 2-A-9
Certificates is illustrated in the applicable table in Appendix D, which show
the pre-tax yield (on a corporate bond equivalent basis) to the holders of Class
2-A-9 Certificates under different constant percentages of PPC. The yields of
the Class 2-A-9 Certificates set forth in the applicable table in Appendix D
were calculated using the Modeling Assumptions and the additional assumption
that (i) the Class 2-A-9 Certificates are purchased on the Closing Date at an
assumed purchase price equal to 18.00% of their initial notional amount, plus
accrued interest from May 1, 2007 to (but not including) the Closing Date and
(ii) that the initial notional amount for the Class 2-A-9 Certificates
applicable to the Distribution Date in June 2007 will be approximately
$2,582,083
As indicated in the applicable table in Appendix D, investors in the Class
2-A-9 Certificates, which are Interest Only Certificates and have no Class
Balance, should consider carefully the risk that a rapid
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rate of prepayment on the Mortgage Loans contributing to Cashflow Group 2 could
result in the failure of investors in the Class 2-A-9 Certificates to fully
recover their initial investment.
It is not likely that the Mortgage Loans contributing to Cashflow Group 2
will prepay at a constant rate until maturity, that all the Mortgage Loans
contributing to Cashflow Group 2 will prepay at the same rate or that they will
have the characteristics assumed. There can be no assurance that the Mortgage
Loans contributing to Cashflow Group 2 will prepay at any of the rates shown in
the applicable table in Appendix D or at any other particular rate. The timing
of changes in the rate of prepayments may affect significantly the yield
realized by a holder of a Class 2-A-9 Certificate and there can be no assurance
that your pre-tax yield on the Class 2-A-9 Certificates will correspond to any
of the pre-tax yields shown in this prospectus supplement. You must make your
own decision as to the appropriate prepayment assumptions to be used in deciding
whether to purchase a Class 2-A-9 Certificate.
The yields set forth in the applicable table in Appendix D were calculated by
(i) determining the monthly discount rates that, when applied to the assumed
streams of cash flows to be paid on the Class 2-A-9 Certificates, would cause
the discounted present value of such assumed streams of cash flows to equal the
assumed purchase price of the Class 2-A-9 Certificates indicated above plus
accrued interest from May 1, 2007 to (but not including) the Closing Date and
(ii) converting such monthly rates to corporate bond equivalent rates. This
calculation does not take into account variations that may occur in the interest
rates at which you may be able to reinvest funds received as payments of
interest on the Class 2-A-9 Certificates and consequently does not purport to
reflect the return on any investment in the Class 2-A-9 Certificates when such
reinvestment rates are considered.
Yield on the Class 3-IO Certificates
The Class 3-IO Certificates are Interest Only Certificates and, as such, will
not be entitled to receive distributions of principal in respect of the Mortgage
Loans.
The significance of the effects of prepayments on the applicable Mortgage
Loans is illustrated in the applicable table in Appendix D, which shows the
pre-tax yields (on a corporate bond equivalent basis) to the holders of Class
3-IO Certificates under different constant percentages of PPC. The yields set
forth were calculated using the Modeling Assumptions and the additional
assumption that the Class 3-IO Certificates are purchased on the Closing Date at
an assumed purchase price equal to 19.50% of their initial notional amount, plus
accrued interest from May 1, 2007 to (but not including) the Closing Date and
that the initial notional amount for the Class 3-IO Certificates applicable to
the Distribution Date in June 2007 will be approximately $2,871,650.
Because the interest accrued on the Class 3-IO Certificates is based on the
aggregate of the Stated Principal Balances of the Premium Mortgage Loans in
Cashflow Group 3 multiplied by a fraction, the numerator of which is equal to
the weighted average of the Net Mortgage Interest Rates of the Premium Mortgage
Loans in Cashflow Group 3 minus 7.000%, and the denominator of which is equal to
7.000%, the yield to maturity on the Class 3-IO Certificates will be extremely
sensitive to the rate and timing of principal payments (including prepayments)
on the Premium Mortgage Loans in Cashflow Group 3.
The Premium Mortgage Loans in Cashflow Group 3 will have higher Mortgage
Interest Rates than the other Mortgage Loans contributing to Cashflow Group 3.
In general, mortgage loans with higher mortgage interest rates may tend to
experience faster rates of prepayment in respect of principal than mortgage
loans with lower mortgage interest rates in response to changes in market
interest rates. As a result, the Premium Mortgage Loans in Cashflow Group 3 may
prepay at a faster rate than the other Mortgage Loans contributing to Cashflow
Group 3, resulting in a lower yield on the Class 3-IO Certificates than would be
the case if the Premium Mortgage Loans in Cashflow Group 3 prepaid at the same
rate as the other Mortgage Loans contributing to Cashflow Group 3. An investor
in the Class 3-IO
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Certificates should fully consider the associated risks, including the risk that
a rapid rate of principal payments (including prepayments) could result in the
failure of such investor to fully recover its initial investment.
It is not likely that the Premium Mortgage Loans contributing to Cashflow
Group 3 will prepay at a constant rate until maturity, that all of the Premium
Mortgage Loans contributing to Cashflow Group 3 will prepay at the same rate or
that they will have the characteristics assumed. There can be no assurance that
the Premium Mortgage Loans contributing to Cashflow Group 3 will prepay at any
of the rates shown in the applicable table in Appendix D or at any other
particular rate. The timing of changes in the rate of prepayments may affect
significantly the yield realized by a holder of a Class 3-IO Certificate and
your pre-tax yield on the Class 3-IO Certificates will likely not correspond to
any of the pre-tax yields shown in this prospectus supplement. You must make
your own decision as to the appropriate prepayment assumptions to be used in
deciding whether to purchase a Class 3-IO Certificate.
The yields set forth in the applicable table in Appendix D were calculated by
(i) determining the monthly discount rates that, when applied to the assumed
streams of cash flows to be paid on the Class 3-IO Certificates, would cause the
discounted present value of such assumed stream of cash flows to equal the
assumed purchase price of the Class 3-IO Certificates indicated above plus
accrued interest from May 1, 2007 to (but not including) the Closing Date and
(ii) converting such monthly rates to corporate bond equivalent rates. This
calculation does not take into account variations that may occur in the interest
rates at which you may be able to reinvest funds received as payments of
interest on the Class 3-IO Certificates and consequently does not purport to
reflect the return on any investment in the Class 3-IO Certificates when such
reinvestment rates are considered.
Yield on the Class 1-PO Certificates
The Class 1-PO Certificates are Principal Only Certificates and, as such,
will not be entitled to receive distributions of interest in respect of the
Mortgage Loans. As a result, the Class 1-PO Certificates will be offered at a
substantial discount to their original Class Balance.
The significance of the effects of prepayments on the Class 1-PO Certificates
is illustrated in the applicable table in Appendix D which shows the pre-tax
yields (on a corporate bond equivalent basis) to the holders of Class 1-PO
Certificates under different constant percentages of PPC. The yields set forth
were calculated using the Modeling Assumptions and the additional assumption
that the Class 1-PO Certificates are purchased on the Closing Date at an assumed
purchase price equal to 65.00% of their initial Class Balance.
As indicated in the applicable table in Appendix D, because the Class 1-PO
Certificates represent the right to receive only a portion of the principal
received with respect to the Discount Mortgage Loans in Cashflow Group 1, the
yield to maturity on the Class 1-PO Certificates will be extremely sensitive to
the rate and timing of principal payments (including prepayments) on the
Discount Mortgage Loans in Cashflow Group 1.
It is not likely that the Discount Mortgage Loans in Cashflow Group 1 will
prepay at a constant rate until maturity, that all of the Discount Mortgage
Loans in Cashflow Group 1 will prepay at the same rate or that they will have
the characteristics assumed. There can be no assurance that the Discount
Mortgage Loans in Cashflow Group 1 will prepay at any of the rates shown in the
applicable table in Appendix D or at any other particular rate. The timing of
changes in the rate of prepayments may affect significantly the yield realized
by holders of the Class 1-PO Certificates and there can be no assurance that
your pre-tax yield on your Class 1-PO Certificates will correspond to any of the
pre-tax yields shown in this prospectus supplement. You must make your own
decision as to the appropriate prepayment assumptions to be used in deciding
whether to purchase a Class 1-PO Certificate.
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The yields set forth in the applicable table in Appendix D were calculated by
(i) determining the monthly discount rates that, when applied to the assumed
streams of cash flows to be paid on the Class 1-PO Certificates, would cause the
discounted present values of such assumed streams of cash flows to equal the
assumed purchase price of the Class 1-PO Certificates indicated above and (ii)
converting such monthly rates to corporate bond equivalent rates. This
calculation does not take into account variations that may occur in the interest
rates at which you may be able to reinvest funds received as payments of
principal of the Class 1-PO Certificates and consequently does not purport to
reflect the return on any investment in the Class 1-PO Certificates when such
reinvestment rates are considered.
Yield on the Class 1-A-R Certificate
The after-tax rate of return to the holder of the Class 1-A-R Certificate
will reflect its pre-tax rate of return, reduced by the taxes required to be
paid relating to that Certificate. If you hold the Class 1-A-R Certificate, you
may have tax liabilities during the early years of each REMIC's term that
substantially exceed any distributions payable to you during that period. In
addition, the present value of the tax liabilities relating to your Class 1-A-R
Certificate may substantially exceed the present value of expected distributions
on your Class 1-A-R Certificate and of any tax benefits that may arise with
respect to it. Accordingly, the after-tax rate of return on the Class 1-A-R
Certificate may be negative or may be otherwise significantly adversely
affected. The timing and amount of taxable income attributable to the Class
1-A-R Certificate will depend on, among other things, the timing and amounts of
prepayments and losses experienced on the Mortgage Loans.
If you own the Class 1-A-R Certificate, you are encouraged to consult your
tax advisors regarding the effect of taxes and the receipt of any payments made
in connection with the purchase of the Class 1-A-R Certificate on your after-tax
rate of return. See "Federal Income Tax Consequences" in this prospectus
supplement and in the prospectus.
Yield on the Subordinate Certificates
The weighted average life of, and the yield to maturity on, the Subordinate
Certificates, in descending order of their payment priority, will be
progressively more sensitive to the rate and timing of defaults and the severity
of ensuing losses on the Mortgage Loans. If the actual rate and severity of
losses on the Mortgage Loans is higher than those you assumed, the actual yield
to maturity of your Subordinate Certificate may be lower than the yield you
expected. The timing of losses on Mortgage Loans will also affect your actual
yield to maturity, even if the rate of defaults and severity of losses over the
life of the Trust are consistent with your expectations. In general, the earlier
a loss occurs, the greater the effect on an investor's yield to maturity. The
applicable Non-PO Percentage of the Applicable Fraction of Realized Losses on
the Mortgage Loans contributing to a Cashflow Group will be allocated to reduce
the Class Balance of the applicable class of Subordinate Certificates (as
described in this prospectus supplement under "Description of the Certificates
- -- Allocation of Losses"), without the receipt of cash equal to the reduction.
In addition, shortfalls in cash available for distributions on the Subordinate
Certificates will result in a reduction in the Class Balance of the class of
Subordinate Certificates then outstanding lowest in order of payment priority if
and to the extent that the sum of the Class Balances of all classes of Senior
Non-PO Certificates and Subordinate Certificates, following all distributions
and the allocation of Realized Losses on a Distribution Date, exceeds the
aggregate Adjusted Pool Amount (Non-PO Portion). As a result of these
reductions, less interest will accrue on that class of Subordinate Certificates
than otherwise would be the case. The yield to maturity of the Subordinate
Certificates will also be affected by the disproportionate allocation of
principal prepayments to the Senior Non-PO Certificates, Net Interest
Shortfalls, other cash shortfalls in the Cashflow Group Distribution Amounts,
distribution of funds to holders of the Class 1-PO Certificates available for
distribution of funds to the Subordinate Certificates to the extent of
reimbursement for PO Deferred Amounts and distribution of funds to the Senior
Non-PO
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Certificates as a result of cross-collateralization otherwise available for
distribution on the Subordinate Certificates. See "Description of the
Certificates -- Allocation of Losses" in this prospectus supplement.
If on any Distribution Date, the Fractional Interest for any class of
Subordinate Certificates is less than its original Fractional Interest,
principal distributions on the Subordinate Certificates will be allocated solely
to that class and all other classes of Subordinate Certificates higher in order
of payment priority, thereby accelerating the amortization thereof relative to
that of the classes junior to that class and reducing the weighted average lives
of the classes of Subordinate Certificates receiving such distributions.
Accelerating the amortization of the classes of Subordinate Certificates higher
in order of payment priority relative to the other classes of Subordinate
Certificates is intended to preserve the availability of the subordination
provided by those other classes.
Yield Considerations with Respect to the Class B-2 and Class B-3 Certificates
Defaults on mortgage loans may be measured relative to a default standard or
model. The model used in this prospectus supplement, the standard default
assumption ("SDA"), represents an assumed rate of default each month relative to
the outstanding performing principal balance of a pool of new mortgage loans. A
default assumption of 100% SDA assumes constant default rates of 0.02% per annum
of the outstanding principal balance of the pool of mortgage loans in the first
month of the life of the mortgage loans and an additional 0.02% per annum in
each subsequent month until the 30th month. Beginning in the 30th month and in
each subsequent month through the 60th month of the life of the mortgage loans,
100% SDA assumes a constant default rate of 0.60% per annum each month.
Beginning in the 61st month and in each subsequent month through the 120th month
of the life of the mortgage loans, 100% SDA assumes that the constant default
rate declines each month by 0.0095% per annum, and that the constant default
rate remains at 0.03% per annum in each month after the 120th month. For the
tables in Appendix D, it is assumed that there is no delay between the default
and liquidation of the mortgage loans. As used in the tables in Appendix D, "0%
SDA" assumes no defaults. SDA is not a historical description of default
experience or a prediction of the rate of default of any pool of mortgage loans.
The tables in Appendix D indicate the sensitivity of the pre-tax yield to
maturity on the Class B-2 and Class B-3 Certificates to various rates of
prepayment and varying levels of Realized Losses. The tables in Appendix D are
based upon, among other things, the Modeling Assumptions (other than the
assumption that the Mortgage Loans experience no defaults) and the additional
assumption that liquidations (other than those scenarios indicated as 0% of SDA
(no defaults)) occur monthly on the last day of the preceding month at the
percentages of SDA set forth in the tables.
In addition, it was assumed that (i) Realized Losses on liquidations of 25%
or 50% of the outstanding principal balance of the Liquidated Mortgage Loans, as
indicated in the tables in Appendix D (referred to as a "Loss Severity
Percentage"), will occur at the time of liquidation and (ii) the Class B-2 and
Class B-3 Certificates are purchased on the Closing Date at assumed purchase
prices equal to 96.50% and 78.50%, in each case, of their initial Class Balance
plus accrued interest from May 1, 2007 to (but not including) the Closing Date.
It is highly unlikely that the Mortgage Loans contributing to a Cashflow
Group will have the precise characteristics referred to in this prospectus
supplement or that they will prepay or liquidate at any of the rates specified
or that the Realized Losses will be incurred according to one particular
pattern. The assumed percentages of SDA and PPC and the Loss Severity
Percentages shown in the Appendices are for illustrative purposes only. Those
assumptions may not be correct and the actual rates of prepayment and
liquidation and loss severity experience of the Mortgage Loans contributing to a
Cashflow Group may not correspond to any of the assumptions made in this
prospectus supplement. For these reasons, and because the timing of cash flows
is critical to determining yield, the pre-tax yield to maturity of the
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Class B-2 and Class B-3 Certificates are likely to differ from the pre-tax
yields to maturity shown in the tables in Appendix D.
The pre-tax yields to maturity appearing in the tables in Appendix D were
calculated by determining the monthly discount rates which, when applied to the
assumed streams of cash flows to be paid on the Class B-2 and Class B-3
Certificates, would cause the discounted present value of those assumed streams
of cash flows to equal the sum of the assumed purchase prices of the Class B-2
and Class B-3 Certificates set forth above plus, in each case, accrued interest
from May 1, 2007 to (but not including) the Closing Date. In all cases, monthly
rates were then converted to the corporate bond equivalent rates shown in the
tables in Appendix D. Implicit in the use of any discounted present value or
internal rate of return calculations such as these is the assumption that
intermediate cash flows are reinvested at the discount rates at which investors
may be able to reinvest funds received by them as distributions on the Class B-2
and Class B-3 Certificates. Consequently, these yields do not purport to reflect
the total return on any investment in the Class B-2 and Class B-3 Certificates
when reinvestment rates are considered.
You should make your investment decisions based on your determinations of
anticipated rates of prepayment and Realized Losses under a variety of
scenarios. If you are purchasing Class B-2 or Class B-3 Certificates you should
fully consider the risk that Realized Losses on the Mortgage Loans could result
in the failure fully to recover your investments.
- --------------------------------------------------------------------------------
USE OF PROCEEDS
- --------------------------------------------------------------------------------
The Depositor will apply the net proceeds of the sale of the Offered
Certificates to the purchase of the Mortgage Loans from the Sponsor.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSEQUENCES
- --------------------------------------------------------------------------------
Elections will be made to treat the Trust as three separate "real estate
mortgage investment conduits" (the "upper-tier REMIC," the "middle-tier REMIC"
and the "lower-tier REMIC" and each, a "REMIC") for federal income tax purposes
under the Internal Revenue Code of 1986, as amended (the "Code").
o The Certificates (other than the Class 1-A-R Certificates and the portion
of the Class 2-A-6 Certificates representing the right to receive payments
from the Reserve Fund) will be designated as "regular interests" in the
upper-tier REMIC. All the Certificates (other than the Class 1-A-R
Certificate) are "Regular Certificates" for purposes of the following
discussion.
o The Class 1-A-R Certificate will be designated as the sole "residual
interest" in each of the REMICs.
The portion of the Trust exclusive of the REMICs, consisting of the right of
the Class 2-A-6 Certificates to receive payments from the Reserve Fund will
qualify as a grantor trust under subpart E, part 1 of subchapter J of the Code.
The Yield Maintenance Agreement and the Reserve Fund will not be assets of any
REMIC.
See "Federal Income Tax Consequences -- Federal Income Tax Consequences for
REMIC Certificates" in the prospectus.
In the opinion of Cadwalader, Wickersham & Taft LLP, the following
discussion, together with the discussion under "Federal Income Tax Consequences"
in the prospectus, describes the material federal income tax consequences of the
purchase, ownership and disposition of the Offered Certificates.
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Regular Certificates
The Regular Certificates generally will be treated as debt instruments issued
by the upper-tier REMIC for federal income tax purposes. Income on the Regular
Certificates must be reported under an accrual method of accounting.
The Interest Only Certificates and Principal Only Certificates will, and the
other classes of Offered Certificates may, depending on their respective issue
prices, be treated for federal income tax purposes as having been issued with
original issue discount. See "Federal Income Tax Consequences -- Federal Income
Tax Consequences for REMIC Certificates -- Taxation of Regular Certificates --
Original Issue Discount" in the prospectus. Certain other classes of the Regular
Certificates may be treated for federal income tax purposes as having been
issued at a premium. Whether any holder of a class of Certificates will be
treated as holding a Certificate with amortizable bond premium will depend on
the Certificateholder's purchase price and the distributions remaining to be
made on the Certificate at the time of acquisition by the Certificateholder. A
holder of any class of Certificates issued at a premium is encouraged to consult
its tax advisor regarding the possibility of making an election to amortize the
premium. See "Federal Income Tax Consequences -- Federal Income Tax Consequences
for REMIC Certificates -- Taxation of Regular Certificates -- Premium" in the
prospectus. For purposes of determining the amount and the rate of accrual of
original issue discount and market discount, the Depositor intends to assume
that there will be prepayments on the Mortgage Loans at a rate equal to 100%
PPC. No representation is made as to the actual rate at which the Mortgage Loans
will be prepaid.
The Regular Certificates will be treated as regular interests in a REMIC
under Section 860G of the Code. Accordingly, to the extent described in the
prospectus:
o the Regular Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code;
o the Regular Certificates will be treated as "real estate assets" within
the meaning of Section 856(c)(5)(B) of the Code; and
o interest on the Regular Certificates will be treated as interest on
obligations secured by mortgages on real property within the meaning of
Section 856(c)(3)(B) of the Code.
The Class 2-A-6 Certificates, to the extent that they represent the right to
receive payments from the Reserve Fund, will not qualify for the foregoing
treatments. Consequently, the Class 2-A-6 Certificates will not be suitable
assets for a REMIC.
See "Federal Income Tax Consequences -- Federal Income Tax Consequences for
REMIC Certificates -- Status of REMIC Certificates" in the prospectus.
Residual Certificate
If you hold the Class 1-A-R Certificate, you must include the taxable income
or loss of each REMIC in determining your federal taxable income. Your resulting
tax liability may exceed cash distributions to you during certain periods. In
addition, all or a portion of the taxable income you recognize from the Class
1-A-R Certificate may be treated as "excess inclusion" income, which, among
other consequences, will result in your inability to use net operating losses to
offset this income from any REMIC. You also generally must account separately
for your interest in each REMIC and you may not offset income from one REMIC
with losses from another REMIC.
You should consider carefully the tax consequences of any investment in the
Class 1-A-R Certificate discussed in the prospectus and you are encouraged to
consult your tax advisors regarding those consequences. See "Federal Income Tax
Consequences" in the prospectus. Specifically, you are
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encouraged to consult your tax advisors regarding whether, at the time of
acquisition, the Class 1-A-R Certificate will be treated as a "noneconomic"
residual interest and "tax avoidance potential" residual interest. See "Federal
Income Tax Consequences -- Federal Income Tax Consequences for REMIC
Certificates -- Taxation of Residual Certificates -- Tax-Related Restrictions on
Transfer of Residual Certificates -- Noneconomic Residual Interests," "--
Foreign Investors" and "-- Mark to Market Regulations" in the prospectus.
Additionally, for information regarding Prohibited Transactions, see "Federal
Income Tax Consequences -- Federal Income Tax Consequences for REMIC
Certificates -- Taxes That May Be Imposed on the REMIC Pool -- Prohibited
Transactions" in the prospectus.
Taxation of the Class 2-A-6 Certificates
General
The portion of the Class 2-A-6 Certificates representing their REMIC regular
interest will be treated as discussed above under "--Regular Certificates." In
addition, the holder of a Class 2-A-6 Certificate will be treated for federal
income tax purposes as having entered into a notional principal contract
pursuant to its rights to receive payment from the Reserve Fund on the date it
purchases its Certificates. The right to receive such payments (referred to as a
"Basis Risk Arrangement") is beneficially owned by holders of the Class 2-A-6
Certificates in the portion of the Trust, exclusive of the REMICs, which is
treated as a grantor trust for federal income tax purposes. 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 Class 2-A-6 Certificates must allocate the
price they pay for the Class 2-A-6 Certificates between their REMIC regular
interest and the Basis Risk Arrangement 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 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 holders of the Class 2-A-6 Certificates. A
holder of a Class 2-A-6 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 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 the Class
2-A-6 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 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 a Basis Risk
Arrangement must be netted against payments, if any, deemed made as a result of
the Cap Premiums 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 deduction and are encouraged to consult their tax advisors prior to
investing in the Class 2-A-6 Certificates.
Any amount of proceeds from the sale, redemption or retirement of a Class
2-A-6 Certificate that is considered to be allocated to rights under the Basis
Risk Arrangement would be considered a "termination
S-77
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 Basis Risk Arrangement in connection
with the sale or exchange of a Class 2-A-6 Certificate would be considered a
"termination payment" under the Swap Regulations allocable to that Class 2-A-6
Certificate. A holder of a Class 2-A-6 Certificate will have gain or loss from
such a termination of the 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 the Basis Risk Arrangement.
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.
Backup Withholding and Reporting Requirements
Certain holders or other beneficial owners of Offered Certificates may be
subject to backup withholding at a rate of 28% (increasing to 31% after 2010) on
interest paid on the Offered Certificates if those holders or beneficial owners,
upon issuance, fail to supply the Trustee or their broker with their taxpayer
identification number, furnish an incorrect taxpayer identification number, fail
to report interest, dividends or other "reportable payments" (as defined in the
Code) properly, or, under certain circumstances, fail to provide the Trustee or
their broker with a certified statement, under penalty of perjury, that they are
not subject to backup withholding. See "Federal Income Tax Consequences --
Federal Income Tax Consequences for REMIC Certificates -- Backup Withholding" in
the prospectus.
The Trustee will be required to report annually to the IRS and to each
Certificateholder of record, the amount of interest paid (and original issue
discount accrued, if any) on the Regular Certificates and the amount of interest
withheld for federal income taxes, if any, for each calendar year, except as to
exempt holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their status
as nonresidents). As long as the only "Certificateholder" of record of the
Offered Certificates (other than the Class 1-A-R Certificate) is Cede & Co., as
nominee for DTC, beneficial owners of the Offered Certificates and the IRS will
receive tax and other information including the amount of interest paid on the
Offered Certificates from Participants rather than from the Trustee. The
Trustee, however, will respond to requests for necessary information to enable
Participants and certain other persons to complete their reports. See "Federal
Income Tax Consequences -- Federal Income Tax Consequences for REMIC
Certificates -- Reporting Requirements" in the prospectus.
All investors are encouraged to consult their tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Offered Certificates.
- --------------------------------------------------------------------------------
ERISA CONSIDERATIONS
- --------------------------------------------------------------------------------
A fiduciary or other person acting on behalf of any employee benefit plan or
arrangement, including an individual retirement account, subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), the Code or any
federal, state or local law ("Similar Law") which is similar to ERISA or the
Code (collectively, a "Plan") should carefully review with its legal advisors
whether the purchase or holding of an Offered Certificate could give rise to a
transaction prohibited or not otherwise permissible under ERISA, the Code or
Similar Law. See "ERISA Considerations" in the prospectus.
S-78
The U.S. Department of Labor has extended to the Underwriter an
administrative exemption (the "Exemption") from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code for the initial purchase, the holding and the subsequent resale by
certain Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemption.
For a general description of the Exemption and the conditions that must be
satisfied for the Exemption to apply, see "ERISA Considerations --
Administrative Exemptions -- Individual Administrative Exemptions" in the
prospectus.
The Exemption may cover the acquisition and holding of the Senior
Certificates (other than the Class 1-A-3, Class 2-A-3, Class 2-A-5, Class 3-A-3
and 1-A-R Certificates) by the Plans to which it applies provided that all
conditions of the Exemption other than those within the control of the investors
are met. In addition, as of the date hereof, there is no single mortgagor that
is the obligor on 5% of the initial balance of the Mortgage Pool.
Because (i) the Subordinate Certificates are subordinated to the Senior
Certificates and because some of the Mortgage Loans have Loan-to-Value Ratios in
excess of 100% and (ii) after the Subordinate Certificates are no longer
outstanding, the Class 1-A-3, Class 2-A-3, Class 2-A-5 and Class 3-A-3
Certificates are subordinated to the Class 1-A-2, Class 2-A-2, Class 2-A-4 and
Class 3-A-2 Certificates, respectively, with respect to principal losses and
because some of the Mortgage Loans have Loan-to-Value Ratios in excess of 100%,
none of the Class 1-A-3, Class 2-A-3, Class 2-A-5 or Class 3-A-3 Certificates or
the Subordinate Certificates may be transferred unless the transferee has
delivered (i) a representation letter to the Trustee stating that either the
transferee is not a Plan and is not acting on behalf of a Plan or using the
assets of a Plan to effect such purchase or, subject to the conditions described
in this prospectus supplement, the source of funds used to purchase the Class
1-A-3, Class 2-A-3, Class 2-A-5, Class 3-A-3 or Subordinate Certificates is an
"insurance company general account" or (ii) an opinion of counsel and such other
documentation as described in this prospectus supplement under "Description of
the Certificates -- Restrictions on Transfer of the Class 1-A-3, Class 2-A-3,
Class 2-A-5 and Class 3-A-3 Certificates and Subordinate Certificates." Any
transferee of a Class 1-A-3, Class 2-A-3, Class 2-A-5, Class 3-A-3 or
Subordinate Certificate that does not comply with either clause (i) or clause
(ii) of the preceding sentence will be deemed to have made one of the
representations described in clause (i) of the preceding sentence.
Plan investors are encouraged to consult with their legal advisors concerning
the impact of ERISA, the Code and Similar Law, the applicability of PTE 83-1
described under "ERISA Considerations" in the prospectus and the Exemption, and
the potential consequences in their specific circumstances, prior to making an
investment in the Offered Certificates. Moreover, each Plan fiduciary should
determine whether under the governing plan instruments and the applicable
fiduciary standards of investment prudence and diversification, an investment in
the Offered Certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
The Class 1-A-R Certificate may not be purchased by or transferred to a Plan
or a person acting on behalf of or investing assets of a Plan. See "Description
of the Certificates -- Restrictions on Transfer of the Class 1-A-R Certificate"
in this prospectus supplement.
- --------------------------------------------------------------------------------
REPORTS TO CERTIFICATEHOLDERS
- --------------------------------------------------------------------------------
The Trustee will prepare on a monthly basis a statement containing, among
other things, information relating to principal and interest distributions on
the Certificates, the status of the Mortgage Pool and
S-79
certain other information, as set forth in the Pooling Agreement, required under
Item 1121 of Regulation AB (17 CFR 229.1121) as described under "The Pooling
Agreement -- Reports to Certificateholders" in the prospectus. In addition, the
Trustee and the Servicer will furnish to the Depositor and the Trustee the
compliance statements, assessments and attestation reports in accordance with
Item 1122 and 1123 of Regulation AB (17 CFR 229.1122 and 229.1123) detailed
under "Servicing of the Mortgage Loans -- Evidence as to Compliance" in the
prospectus.
Copies of these statements and reports will be filed on Forms 10-D and 10-K
with the SEC through its EDGAR system located at "http://www.sec.gov" under the
name of the Issuing Entity for so long as the Issuing Entity is subject to the
reporting requirement of the Securities Exchange Act of 1934, as amended.
The Trustee will make the statement described in the prospectus under "The
Pooling Agreement -- Reports to Certificateholders" available each month to
Certificateholders and the other parties to the Pooling Agreement via the
Trustee's internet website. The Trustee will also make the Periodic Reports
described in the prospectus under "Where You Can Find More Information" relating
to the Issuing Entity available through its website promptly after they are
filed with the SEC (which may not be the same day). The Trustee's internet
website will initially be located at "www.ctslink.com." Assistance in using the
website can be obtained by calling the Trustee's customer service desk at (866)
846-4526. Parties that are unable to use the website are entitled to have a
paper copy mailed to them at no charge via first class mail by calling the
customer service desk.
S-80
- --------------------------------------------------------------------------------
METHOD OF DISTRIBUTION
- --------------------------------------------------------------------------------
Subject to the terms and conditions of the underwriting agreement among the
Depositor, the Underwriter and the Sponsor, the Depositor has agreed to sell to
the Underwriter and the Underwriter has agreed to purchase from the Depositor,
all of the Offered Certificates. Proceeds to the Depositor from the sale of the
Offered Certificates are expected to be approximately 100.687% of the aggregate
initial Class Balance of those Certificates, before deducting expenses estimated
at approximately $371,649 payable by the Depositor.
Distribution of the Offered Certificates will be made by the Underwriter from
time to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The Underwriter and any dealers that participate
with the Underwriter in the distribution of the Offered Certificates will be
underwriters and the difference between the purchase price for the Offered
Certificates paid to the Depositor and the proceeds from the sale of the Offered
Certificates realized by the Underwriter and any dealers that participate with
the Underwriter in the distribution of the Offered Certificates will constitute
underwriting discounts and commissions.
The Depositor has been advised by the Underwriter that it intends to make a
market in the Offered Certificates but has no obligation to do so. There can be
no assurance that a secondary market for the Offered Certificates will develop
or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
The Underwriter is an affiliate of the Depositor, the Sponsor, the Servicer
and the Counterparty, and is a registered broker/dealer. Any obligations of the
Underwriter are the sole responsibility of the Underwriter and do not create any
obligation or guarantee on the part of any affiliate of the Underwriter.
- --------------------------------------------------------------------------------
LEGAL MATTERS
- --------------------------------------------------------------------------------
The legality of, and certain federal income tax matters related to the
Offered Certificates, will be passed upon for the Depositor and Underwriter by
Cadwalader, Wickersham & Taft LLP, New York, New York.
- --------------------------------------------------------------------------------
CERTIFICATE RATINGS
- --------------------------------------------------------------------------------
At their issuance, each class of Offered Certificates is required to receive
from Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P")
and Fitch Ratings ("Fitch") at least the rating set forth in the table beginning
on page S-6 of this prospectus supplement.
S&P's and Fitch's ratings take into consideration the credit quality of the
Mortgage Pool, including any credit support, structural and legal aspects
associated with the Offered Certificates, and the extent to which the payment
stream of the Mortgage Pool is adequate to make payments required under the
Offered Certificates. S&P's and Fitch's ratings on the Offered Certificates do
not, however, constitute a statement regarding frequency of prepayments on the
Mortgage Loans.
S-81
S&P's and Fitch's ratings do not address the possibility that, because the
Interest Only Certificates are extremely sensitive to principal prepayments, a
holder of an Interest Only Certificate may not fully recover its initial
investment. S&P's and Fitch's ratings on the Principal Only Certificates only
address the return of the principal balance of those Certificates and do not
address the possibility that a slower than anticipated rate of prepayments may
adversely affect the yield to investors. S&P's and Fitch's rating on the Class
1-A-R Certificate does not address the likelihood of a return to investors other
than to the extent of its Class Balance and interest at its pass-through rate.
Fitch's and S&P's ratings do not address the payment of any Yield Maintenance
Agreement Payments.
The Depositor has not requested a rating of any class of Offered Certificates
by any rating agency other than S&P and Fitch. However, there can be no
assurance as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned. The rating assigned
by any other rating agency to a class of Offered Certificates may be lower than
the ratings assigned by S&P and Fitch.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
agency.
In addition, the rating agencies that assign the initial ratings to the
Offered Certificates will monitor those ratings for so long as the Offered
Certificates remain outstanding.
S-82
- --------------------------------------------------------------------------------
INDEX OF PROSPECTUS SUPPLEMENT DEFINITIONS
- --------------------------------------------------------------------------------
Adjusted Pool Amount........................................................S-61
Adjusted Pool Amount (Non-PO Portion).......................................S-61
Adjusted Pool Amount (PO Portion)...........................................S-61
Administrative Fee Rate.....................................................S-42
Administrative Fees.........................................................S-42
Bank of America.............................................................S-38
Bankruptcy Losses...........................................................S-60
Basis Risk Arrangement......................................................S-77
BBA.........................................................................S-48
BPP Mortgage Loans..........................................................S-12
Cap Premium.................................................................S-77
Cashflow Group..............................................................S-35
Cashflow Group 1......................................................S-11, S-35
Cashflow Group 2......................................................S-11, S-35
Cashflow Group 3......................................................S-11, S-35
Cashflow Group Distribution Amount Allocation...............................S-45
Cashflow Group Distribution Amounts.........................................S-45
Class 2-A-7 Notional Amount.................................................S-47
Class 2-A-9 Notional Amount.................................................S-47
Class 3-A-1 Notional Amount.................................................S-48
Class 3-IO Notional Amount..................................................S-48
Class Balance...............................................................S-48
Closing Date.................................................................S-8
Code........................................................................S-75
Compensating Interest.......................................................S-41
Constant Prepayment Rate....................................................S-69
Corporate Trust Office......................................................S-40
CPR.........................................................................S-69
Credit Scores...............................................................S-12
Cut-off Date.................................................................S-8
Debt Service Reduction......................................................S-60
Deficient Valuation.........................................................S-60
Depositor....................................................................S-8
Determination Date...........................................................S-8
Discount Mortgage Loan......................................................S-51
Distribution Date............................................................S-8
Effective Net Mortgage Interest Rate........................................S-35
ERISA.......................................................................S-78
Exemption...................................................................S-79
Fitch.......................................................................S-81
Fractional Interest.........................................................S-57
FSMA.........................................................................S-5
Group 1 Recovery............................................................S-60
Group 2 Recovery............................................................S-60
Group 3 Recovery............................................................S-60
Group Subordinate Amount....................................................S-51
Interest Accrual Period.....................................................S-47
Interest Distribution Amount................................................S-46
Interest Only Mortgage Loans................................................S-12
Interest Settlement Rate....................................................S-48
Issuing Entity...............................................................S-8
S-83
LIBOR Based Interest Accrual Period.........................................S-47
LIBOR Determination Date....................................................S-48
Liquidated Mortgage Loan....................................................S-61
Liquidation Proceeds........................................................S-44
Loan-to-Value Ratio.........................................................S-12
Loss Severity Percentage....................................................S-74
Master Agreement............................................................S-50
Modeling Assumptions........................................................S-67
Mortgage Loan Purchase Agreement............................................S-37
Mortgage Loans..............................................................S-11
Mortgage Pool...............................................................S-11
Net Interest Shortfall......................................................S-46
Net Mortgage Interest Rate..................................................S-48
Non-PO Percentage...........................................................S-51
Non-PO Principal Amount.....................................................S-51
Non-Supported Interest Shortfall............................................S-46
Original Subordinate Principal Balance......................................S-55
Plan........................................................................S-78
PO Deferred Amount..........................................................S-59
PO Percentage...............................................................S-51
PO Principal Amount.........................................................S-56
PO Principal Distribution Amount............................................S-56
Pool Distribution Amount....................................................S-44
Pool Principal Balance......................................................S-54
Pool Principal Balance (Non-PO Portion).....................................S-54
Pooling Agreement...........................................................S-41
PPC.........................................................................S-68
Premium Mortgage Loans......................................................S-51
Prepayment Interest Shortfall...............................................S-42
Priority Amount.............................................................S-55
Priority Percentage.........................................................S-55
Realized Loss...............................................................S-60
Record Date..................................................................S-8
Recoveries..................................................................S-60
Regular Certificates........................................................S-75
Regular Interest Accrual Period.............................................S-47
Relevant Implementation Date.................................................S-4
Relevant Member State........................................................S-4
Relevant Persons.............................................................S-5
Relief Act Reduction........................................................S-46
REMIC.......................................................................S-75
REMIC Regulations...........................................................S-62
Reserve Fund................................................................S-50
Reserve Interest Rate.......................................................S-49
S&P.........................................................................S-81
Scheduled Principal Payments................................................S-52
SDA.........................................................................S-74
Senior Credit Support Depletion Date........................................S-53
Senior Percentage...........................................................S-54
Senior Prepayment Percentage................................................S-54
Senior Principal Distribution Amount........................................S-53
Servicer.....................................................................S-8
Servicing Fee...............................................................S-42
Servicing Fee Rate..........................................................S-42
Shift Percentage............................................................S-56
Similar Law.................................................................S-78
S-84
Sponsor......................................................................S-8
Subordinate Percentage......................................................S-54
Subordinate Prepayment Percentage...........................................S-55
Subordinate Principal Distribution Amount...................................S-57
Swap Regulations............................................................S-77
Telerate page 3750..........................................................S-48
Total Senior Percentage.....................................................S-54
Total Subordinate Percentage................................................S-55
Trust.......................................................................S-39
Trustee......................................................................S-8
Trustee Fee.................................................................S-42
Trustee Fee Rate............................................................S-42
U.S. Person.................................................................S-63
Undercollateralized Amount..................................................S-58
Undercollateralized Group...................................................S-58
Underwriter.................................................................S-37
Unscheduled Principal Payments..............................................S-52
Wells Fargo Bank............................................................S-39
Yield Maintenance Agreement.................................................S-49
Yield Maintenance Agreement Payment.........................................S-49
S-85
Appendix A - Mortgage Loan Data
Cashflow Group 1 Mortgage Loan Data
The following tables set forth certain characteristics of the Mortgage Loans
contributing to Cashflow Group 1 as of the Cut-off Date. The balances and
percentages may not be exact due to rounding.
All Discount
Mortgage Loans relating to Mortgage Loans relating to
Cashflow Group 1 Cashflow Group 1
-------------------------- --------------------------
Number of Mortgage Loans(1) ............ 338 43
Aggregate Stated Principal
Balance(2)(3) ........................ $27,588,551 $11,699,431
Range of Original Terms to Stated
Maturity ............................. 240 to 360 months 240 to 360 months
Range of Stated Principal
Balances(2)(4) ....................... $26,375 to $1,884,592 $32,730 to $1,041,386
Average Stated Principal
Balance(2)(4) ........................ $267,784 $272,080
Latest Stated Maturity Date ............ May 1, 2037 May 1, 2037
Range of Mortgage Interest Rates. ...... 5.250% to 6.250% 5.250% to 5.750%
Weighted Average Mortgage
Interest Rate(2) ..................... 5.870% 5.705%
Range of Remaining Terms to
Stated Maturity ...................... 234 to 360 months 237 to 360 months
Weighted Average Remaining Term
to Stated Maturity(2) ................ 357 months 357 months
Range of Original Loan-to-Value
Ratios ............................... 16.00% to 103.00% 22.49% to 100.00%
Weighted Average Original
Loan-to-Value Ratio(2) ............... 72.96% 73.21%
Geographic Concentration of
Mortgaged Properties Securing
Mortgage Loans in Excess of 5%
of the Aggregate Stated
Principal Balance(2)(3)
California ...................... 42.98% 55.61%
Texas ........................... 11.60% 13.93%
Florida ......................... 8.35% 6.43%
Georgia ......................... 5.55% *
New Jersey ...................... * 5.98%
Pennsylvania .................... * 5.59%
- ----------
(1) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(2) Approximate.
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
(4) Based on the Mortgage Loans contributing to this Cashflow Group (even if
such Mortgage Loans also contribute to another Cashflow Group).
* Less than 5% of the aggregate Stated Principal Balance.
A-1
Occupancy of Mortgaged Properties(1)
Aggregate Stated % of Cashflow Group 1
Number of Principal Balance as of Cut-off Date Pool
Occupancy Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
Primary Residence ................. 219 $20,457,520.72 74.15%
Investor Property ................. 108 6,530,784.58 23.67
Second Home ....................... 11 600,245.47 2.18
----------------- ------------------------ ----------------------
Total: .................... 338 $27,588,550.77 100.00%
================= ======================== ======================
- ----------
(1) Based solely on representations of the mortgagor at the time of
origination of the related Mortgage Loan contributing to Cashflow Group 1.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
Property Types
Aggregate Stated % of Cashflow Group 1
Number of Principal Balance as of Cut-off Date Pool
Property Type Mortgage Loans(1) Cut-off Date(2) Principal Balance(2)
- ----------------------------------- ----------------- ------------------------ ----------------------
Single Family Residence ........... 207 $17,143,965.33 62.14%
PUD ............................... 59 5,251,828.80 19.04
Condominium ....................... 37 1,871,574.93 6.78
2-Family .......................... 20 1,860,954.02 6.75
Townhouse ......................... 6 315,561.22 1.14
4-Family .......................... 4 726,876.39 2.63
3-Family .......................... 3 416,151.59 1.51
Cooperative ....................... 2 1,638.48 0.01
----------------- ------------------------ ----------------------
Total: .................... 338 $27,588,550.77 100.00%
================= ======================== ======================
- ----------
(1) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(2) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-2
Mortgage Loan Purposes
Aggregate Stated % of Cashflow Group 1
Number of Principal Balance as of Cut-off Date Pool
Purpose Mortgage Loans(1) Cut-off Date(2) Principal Balance(2)
- ----------------------------------- ----------------- ------------------------ ----------------------
Purchase .......................... 162 $13,181,663.86 47.78%
Refinance - Cashout(3) ............ 112 8,426,889.49 30.54
Refinance - Rate/Term(4) .......... 64 5,979,997.42 21.68
----------------- ------------------------ ----------------------
Total: .................... 338 $27,588,550.77 100.00%
================= ======================== ======================
- ----------
(1) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(2) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
(3) "Refinance -- Cashout" means a mortgage loan originated in connection with
a refinancing that has a principal balance in excess of the principal
balance on the old loan plus settlement costs where cash is distributed to
the mortgagor.
(4) "Refinance -- Rate/Term" means a mortgage loan originated in connection
with a refinancing to reduce the mortgage interest rate or reduce or
increase the term.
Documentation Type
Aggregate Stated % of Cashflow Group 1
Number of Principal Balance as of Cut-off Date Pool
Documentation Type Mortgage Loans(1) Cut-off Date(2) Principal Balance(2)
- ----------------------------------- ----------------- ------------------------ ----------------------
Standard .......................... 121 $9,146,415.77 33.15%
Accelerated - Stated .............. 106 9,896,482.33 35.87
Accelerated - Stated Income/Stated
Asset ........................... 57 5,187,330.78 18.80
Accelerated - PaperSaver(R)/
Threshold ....................... 42 2,492,990.03 9.04
Desktop Underwriter/Loan Prospector 8 216,128.99 0.78
Accelerated - No Ratio ............ 4 649,202.87 2.35
----------------- ------------------------ ----------------------
Total: .................... 338 $27,588,550.77 100.00%
================= ======================== ======================
- ----------
(1) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(2) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-3
Geographical Distribution of the Mortgaged Properties(1)
Aggregate Stated % of Cashflow Group 1
Number of Principal Balance as of Cut-off Date Pool
Geographical Area Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
Alabama ........................... 1 $1,539.86 0.01%
Arizona ........................... 8 674,705.03 2.45
Arkansas .......................... 3 39,483.05 0.14
California ........................ 89 11,856,791.06 42.98
Colorado .......................... 8 653,034.69 2.37
Connecticut ....................... 6 239,334.69 0.87
Delaware .......................... 1 3,005.47 0.01
Florida ........................... 46 2,303,613.98 8.35
Georgia ........................... 27 1,530,791.02 5.55
Hawaii ............................ 4 241,238.46 0.87
Idaho ............................. 1 40,603.22 0.15
Illinois .......................... 3 166,848.67 0.60
Iowa .............................. 2 220,107.99 0.80
Kansas ............................ 4 57,437.98 0.21
Kentucky .......................... 1 186,950.72 0.68
Louisiana ......................... 1 1,252.01 0.00
Maryland .......................... 8 134,516.71 0.49
Massachusetts ..................... 3 177,398.13 0.64
Michigan .......................... 1 881.16 0.00
Minnesota ......................... 3 260,586.36 0.94
Missouri .......................... 5 403,261.15 1.46
Nevada ............................ 3 373,029.91 1.35
New Jersey ........................ 3 708,591.58 2.57
New Mexico ........................ 1 2,787.46 0.01
New York .......................... 9 549,958.90 1.99
North Carolina .................... 13 505,463.13 1.83
Ohio .............................. 2 113,739.77 0.41
Oklahoma .......................... 3 58,900.10 0.21
Oregon ............................ 1 91,832.33 0.33
Pennsylvania ...................... 5 659,080.01 2.39
Rhode Island ...................... 2 6,806.96 0.02
South Carolina .................... 10 421,092.16 1.53
Tennessee ......................... 3 168,631.35 0.61
Texas ............................. 39 3,200,298.99 11.60
Utah .............................. 1 44,898.54 0.16
Virginia .......................... 10 1,039,145.04 3.77
Washington ........................ 6 448,296.65 1.62
Wisconsin ......................... 2 2,616.47 0.01
----------------- ------------------------ ----------------------
Total: .................... 338 $27,588,550.77 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, no more than approximately 3.77% of the Mortgage
Loans contributing to Cashflow Group 1 are expected to be secured by
Mortgaged Properties located in any one five-digit postal zip code.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-4
Current Mortgage Loan Principal Balances(1)
Aggregate Stated % of Cashflow Group 1
Current Mortgage Loan Principal Number of Principal Balance as of Cut-off Date Pool
Balances Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
$0.01 to $50,000.00 ............... 9 $94,925.93 0.34%
$50,000.01 to $100,000.00 ......... 32 712,537.18 2.58
$100,000.01 to $150,000.00 ........ 76 3,448,969.57 12.50
$150,000.01 to $200,000.00 ........ 50 3,254,084.20 11.80
$200,000.01 to $250,000.00 ........ 37 2,551,459.40 9.25
$250,000.01 to $300,000.00 ........ 35 2,773,500.55 10.05
$300,000.01 to $350,000.00 ........ 21 2,481,803.53 9.00
$350,000.01 to $400,000.00 ........ 14 1,356,172.44 4.92
$400,000.01 to $450,000.00 ........ 14 2,414,793.03 8.75
$450,000.01 to $500,000.00 ........ 6 725,491.80 2.63
$500,000.01 to $550,000.00 ........ 5 422,961.42 1.53
$550,000.01 to $600,000.00 ........ 13 2,901,139.14 10.52
$600,000.01 to $650,000.00 ........ 12 1,658,123.79 6.01
$650,000.01 to $700,000.00 ........ 4 1,064,981.50 3.86
$700,000.01 to $750,000.00 ........ 2 15,944.86 0.06
$750,000.01 to $800,000.00 ........ 1 593,130.66 2.15
$800,000.01 to $850,000.00 ........ 1 9,326.34 0.03
$950,000.01 to $1,000,000.00 ...... 1 10,853.69 0.04
$1,000,000.01 to $1,500,000.00 .... 4 1,077,244.31 3.90
$1,500,000.01 to $2,000,000.00 .... 1 21,107.43 0.08
----------------- ------------------------ ----------------------
Total: .................... 338 $27,588,550.77 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the average outstanding principal balance of the
Mortgage Loans contributing to Cashflow Group 1 is expected to be
approximately $267,784.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-5
Original Debt-to-Income Ratios(1)
Aggregate Stated % of Cashflow Group 1
Number of Principal Balance as of Cut-off Date Pool
Original Debt-to-Income Ratios Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
Unknown ........................... 1 $2,976.37 0.01%
5.01% to 10.00% ................... 6 678,665.58 2.46
10.01% to 15.00% .................. 3 2,862.47 0.01
15.01% to 20.00% .................. 20 793,241.87 2.88
20.01% to 25.00% .................. 28 2,598,120.97 9.42
25.01% to 30.00% .................. 48 4,224,068.47 15.31
30.01% to 35.00% .................. 58 4,109,823.92 14.90
35.01% to 40.00% .................. 64 4,229,607.01 15.33
40.01% to 45.00% .................. 51 5,511,485.89 19.98
45.01% to 50.00% .................. 31 3,344,126.10 12.12
50.01% to 55.00% .................. 11 648,075.80 2.35
55.01% to 60.00% .................. 16 1,378,532.70 5.00
65.01% to 70.00% .................. 1 66,963.62 0.24
----------------- ------------------------ ----------------------
Total: .................... 338 $27,588,550.77 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average Debt-to-Income Ratio at
origination of the Mortgage Loans contributing to Cashflow Group 1 (other
than the Mortgage Loans contributing to Cashflow Group 1 for which no
Debt-to-Income Ratio was calculated) is expected to be approximately
36.32%.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
Original Loan-to-Value Ratios(1)
Aggregate Stated % of Cashflow Group 1
Number of Principal Balance as of Cut-off Date Pool
Original Loan-to-Value Ratios Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
15.01% to 20.00% .................. 1 $446.01 0.00%
20.01% to 25.00% .................. 4 331,961.51 1.20
25.01% to 30.00% .................. 3 167,905.96 0.61
30.01% to 35.00% .................. 4 334,714.86 1.21
35.01% to 40.00% .................. 5 569,571.50 2.06
40.01% to 45.00% .................. 9 434,152.60 1.57
45.01% to 50.00% .................. 10 891,585.44 3.23
50.01% to 55.00% .................. 12 1,360,359.00 4.93
55.01% to 60.00% .................. 9 590,380.03 2.14
60.01% to 65.00% .................. 9 1,383,813.36 5.02
65.01% to 70.00% .................. 22 1,664,804.91 6.03
70.01% to 75.00% .................. 20 2,375,645.92 8.61
75.01% to 80.00% .................. 184 14,432,479.60 52.31
80.01% to 85.00% .................. 6 724,506.00 2.63
85.01% to 90.00% .................. 19 985,945.81 3.57
90.01% to 95.00% .................. 14 931,317.51 3.38
95.01% to 100.00% ................. 5 354,151.68 1.28
100.01% to 103.00% ................ 2 54,809.04 0.20
----------------- ------------------------ ----------------------
Total: .................... 338 $27,588,550.77 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Mortgage Loans contributing to Cashflow Group 1 is
expected to be approximately 72.96%.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-6
Mortgage Interest Rates(1)
Aggregate Stated % of Cashflow Group 1
Number of Principal Balance as of Cut-off Date Pool
Mortgage Interest Rates Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
5.001% to 5.250% .................. 1 $163,632.92 0.59%
5.251% to 5.500% .................. 3 513,526.81 1.86
5.501% to 5.750% .................. 39 11,022,271.24 39.95
5.751% to 6.000% .................. 88 12,077,106.70 43.78
6.001% to 6.250% .................. 207 3,812,013.10 13.82
----------------- ------------------------ ----------------------
Total: .................... 338 $27,588,550.77 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average mortgage interest rate of the
Mortgage Loans contributing to Cashflow Group 1 is expected to be
approximately 5.870% per annum.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
Number of Months Since Origination(1)
Aggregate Stated % of Cashflow Group 1
Number of Principal Balance as of Cut-off Date Pool
Months Since Origination Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
1 to 2 months ..................... 203 $18,209,670.81 66.00%
3 to 4 months ..................... 114 8,247,281.81 29.89
5 to 6 months ..................... 10 549,645.25 1.99
7 to 8 months ..................... 2 47,686.00 0.17
9 to 10 months .................... 2 3,858.04 0.01
11 to 12 months ................... 2 153,565.78 0.56
13 to 14 months ................... 2 84,925.45 0.31
15 to 16 months ................... 1 2,843.36 0.01
19 to 20 months ................... 2 289,074.27 1.05
----------------- ------------------------ ----------------------
Total: .................... 338 $27,588,550.77 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average number of months since
origination of the Mortgage Loans contributing to Cashflow Group 1 is
expected to be approximately 3 months.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-7
Remaining Terms(1)
Aggregate Stated % of Cashflow Group 1
Number of Principal Balance as of Cut-off Date Pool
Remaining Terms Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
221 to 240 months ................. 9 $364,409.64 1.32%
281 to 300 months ................. 4 120,450.55 0.44
341 to 360 months ................. 325 27,103,690.58 98.24
----------------- ------------------------ ----------------------
Total: .................... 338 $27,588,550.77 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity of the Mortgage Loans contributing to Cashflow Group 1 is
expected to be approximately 357 months.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
Credit Scores of Mortgagors
Aggregate Stated % of Cashflow Group 1
Number of Principal Balance as of Cut-off Date Pool
Credit Scores Mortgage Loans(1) Cut-off Date(2) Principal Balance(2)
- ----------------------------------- ----------------- ------------------------ ----------------------
801 to 850 ........................ 7 $118,529.49 0.43%
751 to 800 ........................ 78 5,900,721.18 21.39
701 to 750 ........................ 108 11,576,114.83 41.96
651 to 700 ........................ 114 7,956,851.90 28.84
601 to 650 ........................ 28 2,030,853.62 7.36
Not Scored ........................ 3 5,479.74 0.02
----------------- ------------------------ ----------------------
Total: .................... 338 $27,588,550.77 100.00%
================= ======================== ======================
- ----------
(1) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(2) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-8
Cashflow Group 2 Mortgage Loan Data
The following tables set forth certain characteristics of the Mortgage Loans
contributing to Cashflow Group 2 as of the Cut-off Date. The balances and
percentages may not be exact due to rounding.
All
Mortgage Loans relating
to Cashflow Group 2
-----------------------
Number of Mortgage Loans(1).... ................. 1,392
Aggregate Stated Principal Balance(2)(3) ........ $193,580,502
Range of Original Terms to Stated Maturity ...... 240 to 360 months
Range of Stated Principal Balances(2)(4) ........ $15,680 to $2,210,664
Average Stated Principal Balance(2)(4) .......... $233,178
Latest Stated Maturity Date.... ................. May 1, 2037
Range of Mortgage Interest Rates ................ 5.875% to 7.250%
Weighted Average Mortgage Interest Rate(2) ...... 6.458%
Range of Remaining Terms to Stated Maturity ..... 234 to 360 months
Weighted Average Remaining Term to Stated
Maturity(2).................. ................. 357 months
Range of Original Loan-to-Value Ratios........... 9.32% to 103.00%
Weighted Average Original Loan-to-Value Ratio(2) 74.29%
Geographic Concentration of Mortgaged Properties
Securing Mortgage Loans in Excess of 5% of the
Aggregate Stated Principal Balance(2)(3)
California.............. ................. 30.31%
Florida................. ................. 13.86%
Texas................... ................. 5.48%
- ----------
(1) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(2) Approximate.
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
(4) Based on the Mortgage Loans contributing to this Cashflow Group (even if
such Mortgage Loans also contribute to another Cashflow Group).
A-9
Occupancy of Mortgaged Properties(1)
Aggregate Stated % of Cashflow Group 2
Number of Principal Balance as of Cut-off Date Pool
Occupancy Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
Investor Property ................. 695 $70,526,984.84 36.43%
Primary Residence ................. 639 114,630,270.90 59.22
Second Home ....................... 58 8,423,246.37 4.35
----------------- ------------------------ ----------------------
Total: .................... 1,392 $193,580,502.10 100.00%
================= ======================== ======================
- ----------
(1) Based solely on representations of the mortgagor at the time of
origination of the related Mortgage Loan contributing to Cashflow Group 2.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
Property Types
Aggregate Stated % of Cashflow Group
Number of Principal Balance as of 2 Cut-off Date Pool
Property Type Mortgage Loans(1) Cut-off Date(2) Principal Balance(2)
- ----------------------------------- ----------------- ------------------------ ----------------------
Single Family Residence ........... 908 $122,306,812.99 63.18%
Condominium ....................... 167 18,915,221.48 9.77
PUD ............................... 165 31,327,543.89 16.18
2-Family .......................... 85 12,362,414.14 6.39
Townhouse ......................... 23 2,220,952.08 1.15
3-Family .......................... 21 2,828,140.26 1.46
4-Family .......................... 21 3,474,762.94 1.79
Cooperative ....................... 2 144,654.32 0.07
----------------- ------------------------ ----------------------
Total: .................... 1,392 $193,580,502.10 100.00%
================= ======================== ======================
- ----------
(1) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(2) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
Mortgage Loan Purposes
Aggregate Stated % of Cashflow Group
Number of Principal Balance as of 2 Cut-off Date Pool
Purpose Mortgage Loans(1) Cut-off Date(2) Principal Balance(2)
- ----------------------------------- ----------------- ------------------------ ----------------------
Purchase .......................... 635 $85,007,853.90 43.91%
Refinance - Cashout(3) ............ 510 69,137,224.67 35.71
Refinance - Rate/Term(4) .......... 247 39,435,423.53 20.37
----------------- ------------------------ ----------------------
Total: .................... 1,392 $193,580,502.10 100.00%
================= ======================== ======================
- ----------
(1) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(2) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
(3) "Refinance -- Cashout" means a mortgage loan originated in connection with
a refinancing that has a principal balance in excess of the principal
balance on the old loan plus settlement costs where cash is distributed to
the mortgagor.
(4) "Refinance -- Rate/Term" means a mortgage loan originated in connection
with a refinancing to reduce the mortgage interest rate or reduce or
increase the term.
A-10
Documentation Type
Aggregate Stated % of Cashflow Group
Number of Principal Balance as of 2 Cut-off Date Pool
Documentation Type Mortgage Loans(1) Cut-off Date(2) Principal Balance(2)
- ----------------------------------- ----------------- ------------------------ ----------------------
Accelerated - Stated .............. 438 $85,000,127.27 43.91%
Standard .......................... 369 42,565,224.47 21.99
Accelerated - Stated Income/Stated Ass 331 39,843,899.93 20.58
Accelerated - Paper Saver/Threshold 205 21,641,197.72 11.18
Desktop Underwriter/Loan Prospector 31 2,477,108.28 1.28
Accelerated - No Ratio ............ 12 1,559,117.04 0.81
Accelerated - Rapid ............... 3 273,614.28 0.14
Accelerated - All Ready Home ...... 3 220,213.11 0.11
----------------- ------------------------ ----------------------
Total: .................... 1,392 $193,580,502.10 100.00%
================= ======================== ======================
- ----------
(1) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(2) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-11
Geographical Distribution of the Mortgaged Properties(1)
Aggregate Stated % of Cashflow Group 2
Number of Principal Balance as of Cut-off Date Pool
Geographical Area Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
Alabama ........................... 9 $573,244.05 0.30%
Arizona ........................... 40 5,433,409.83 2.81
Arkansas .......................... 28 1,546,042.06 0.80
California ........................ 222 58,681,150.66 30.31
Colorado .......................... 22 3,249,280.30 1.68
Connecticut ....................... 22 3,607,405.07 1.86
Delaware .......................... 2 286,854.11 0.15
District of Columbia .............. 11 2,111,229.26 1.09
Florida ........................... 213 26,832,080.06 13.86
Georgia ........................... 79 8,867,030.64 4.58
Hawaii ............................ 6 1,388,963.19 0.72
Idaho ............................. 3 278,783.80 0.14
Illinois .......................... 43 4,313,601.81 2.23
Indiana ........................... 8 337,543.21 0.17
Iowa .............................. 4 281,597.91 0.15
Kansas ............................ 15 1,053,145.18 0.54
Kentucky .......................... 1 58,649.28 0.03
Louisiana ......................... 5 284,467.20 0.15
Maine ............................. 3 526,370.05 0.27
Maryland .......................... 50 7,143,343.12 3.69
Massachusetts ..................... 21 3,994,826.06 2.06
Michigan .......................... 18 2,004,473.64 1.04
Minnesota ......................... 24 2,569,205.34 1.33
Mississippi ....................... 4 117,698.05 0.06
Missouri .......................... 35 1,689,485.35 0.87
Montana ........................... 1 229,849.93 0.12
Nebraska .......................... 3 73,253.96 0.04
Nevada ............................ 7 820,537.55 0.42
New Hampshire ..................... 1 127,764.60 0.07
New Jersey ........................ 26 4,235,828.67 2.19
New Mexico ........................ 9 1,144,781.80 0.59
New York .......................... 47 8,605,560.70 4.45
North Carolina .................... 58 5,080,400.21 2.62
Ohio .............................. 23 775,820.01 0.40
Oklahoma .......................... 14 1,369,113.28 0.71
Oregon ............................ 13 1,826,308.72 0.94
Pennsylvania ...................... 35 3,290,661.05 1.70
Rhode Island ...................... 5 864,704.08 0.45
South Carolina .................... 40 4,171,850.38 2.16
Tennessee ......................... 13 1,370,963.48 0.71
Texas ............................. 108 10,605,725.95 5.48
Utah .............................. 7 947,376.98 0.49
Vermont ........................... 3 25,807.88 0.01
Virginia .......................... 56 7,079,290.75 3.66
Washington ........................ 25 3,134,860.39 1.62
West Virginia ..................... 1 72,339.58 0.04
Wisconsin ......................... 9 497,822.91 0.26
----------------- ------------------------ ----------------------
Total: .................... 1,392 $193,580,502.10 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, no more than approximately 0.96% of the Mortgage
Loans contributing to Cashflow Group 2 are expected to be secured by
Mortgaged Properties located in any one five-digit postal zip code.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-12
Current Mortgage Loan Principal Balances(1)
Aggregate Stated % of Cashflow Group 2
Current Mortgage Loan Principal Number of Principal Balance as of Cut-off Date Pool
Balances Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
$0.01 to $50,000.00 ............... 54 $1,081,731.43 0.56%
$50,000.01 to $100,000.00 ......... 241 9,680,087.61 5.00
$100,000.01 to $150,000.00 ........ 303 22,175,966.37 11.46
$150,000.01 to $200,000.00 ........ 215 20,976,736.31 10.84
$200,000.01 to $250,000.00 ........ 134 17,377,514.17 8.98
$250,000.01 to $300,000.00 ........ 122 19,790,401.19 10.22
$300,000.01 to $350,000.00 ........ 76 14,968,278.12 7.73
$350,000.01 to $400,000.00 ........ 52 12,261,312.48 6.33
$400,000.01 to $450,000.00 ........ 47 11,759,954.79 6.07
$450,000.01 to $500,000.00 ........ 30 8,325,454.69 4.30
$500,000.01 to $550,000.00 ........ 23 7,649,142.10 3.95
$550,000.01 to $600,000.00 ........ 25 10,056,291.15 5.19
$600,000.01 to $650,000.00 ........ 23 11,204,793.56 5.79
$650,000.01 to $700,000.00 ........ 11 4,586,864.25 2.37
$700,000.01 to $750,000.00 ........ 8 3,798,258.93 1.96
$750,000.01 to $800,000.00 ........ 4 1,439,411.81 0.74
$800,000.01 to $850,000.00 ........ 1 823,382.80 0.43
$850,000.01 to $900,000.00 ........ 4 1,462,326.83 0.76
$900,000.01 to $950,000.00 ........ 1 233,171.51 0.12
$950,000.01 to $1,000,000.00 ...... 4 2,450,684.28 1.27
$1,000,000.01 to $1,500,000.00 .... 11 8,492,999.48 4.39
$1,500,000.01 to $2,000,000.00 .... 1 1,863,484.57 0.96
$2,000,000.01 to $2,500,000.00 .... 2 1,122,253.67 0.58
----------------- ------------------------ ----------------------
Total: .................... 1,392 $193,580,502.10 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the average outstanding principal balance of the
Mortgage Loans contributing to Cashflow Group 2 is expected to be
approximately $233,178.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-13
Original Debt-to-Income Ratios(1)
Aggregate Stated % of Cashflow Group 2
Number of Principal Balance as of Cut-off Date Pool
Original Debt-to-Income Ratios Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
Unknown ........................... 5 $735,935.10 0.38%
0.01% to 5.00% .................... 13 1,171,262.55 0.61
5.01% to 10.00% ................... 28 3,723,521.65 1.92
10.01% to 15.00% .................. 57 3,917,515.95 2.02
15.01% to 20.00% .................. 107 14,222,163.37 7.35
20.01% to 25.00% .................. 119 13,212,930.98 6.83
25.01% to 30.00% .................. 163 21,391,787.56 11.05
30.01% to 35.00% .................. 243 36,816,904.55 19.02
35.01% to 40.00% .................. 253 37,801,756.83 19.53
40.01% to 45.00% .................. 195 31,271,332.33 16.15
45.01% to 50.00% .................. 105 15,478,393.75 8.00
50.01% to 55.00% .................. 46 6,214,653.48 3.21
55.01% to 60.00% .................. 51 6,235,269.16 3.22
60.01% to 65.00% .................. 4 711,379.24 0.37
65.01% to 70.00% .................. 3 675,695.61 0.35
----------------- ------------------------ ----------------------
Total: .................... 1,392 $193,580,502.10 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average Debt-to-Income Ratio at
origination of the Mortgage Loans contributing to Cashflow Group 2 (other
than the Mortgage Loans contributing to Cashflow Group 2 for which no
Debt-to-Income Ratio was calculated) is expected to be approximately
34.70%.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-14
Original Loan-to-Value Ratios(1)
Aggregate Stated % of Cashflow Group 2
Number of Principal Balance as of Cut-off Date Pool
Original Loan-to-Value Ratios Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
5.01% to 10.00% ................... 1 $67,366.20 0.03%
15.01% to 20.00% .................. 4 224,911.86 0.12
20.01% to 25.00% .................. 5 533,098.86 0.28
25.01% to 30.00% .................. 7 718,048.42 0.37
30.01% to 35.00% .................. 12 1,226,966.62 0.63
35.01% to 40.00% .................. 14 2,077,308.73 1.07
40.01% to 45.00% .................. 23 3,565,021.30 1.84
45.01% to 50.00% .................. 33 7,244,163.02 3.74
50.01% to 55.00% .................. 33 4,890,608.51 2.53
55.01% to 60.00% .................. 38 5,951,035.52 3.07
60.01% to 65.00% .................. 37 4,990,708.32 2.58
65.01% to 70.00% .................. 124 18,209,870.59 9.41
70.01% to 75.00% .................. 135 20,021,595.29 10.34
75.01% to 80.00% .................. 722 101,162,246.73 52.26
80.01% to 85.00% .................. 33 4,518,883.96 2.33
85.01% to 90.00% .................. 94 10,849,683.93 5.60
90.01% to 95.00% .................. 50 5,018,513.09 2.59
95.01% to 100.00% ................. 16 1,394,105.43 0.72
100.01% to 103.00% ................ 11 916,365.73 0.47
----------------- ------------------------ ----------------------
Total: .................... 1,392 $193,580,502.10 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Mortgage Loans contributing to Cashflow Group 2 is
expected to be approximately 74.29%.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
Mortgage Interest Rates(1)
Aggregate Stated % of Cashflow Group 2
Number of Principal Balance as of Cut-off Date Pool
Mortgage Interest Rates Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
5.751% to 6.000% .................. 88 $8,148,787.56 4.21%
6.001% to 6.250% .................. 207 54,773,603.18 28.30
6.251% to 6.500% .................. 394 77,084,195.98 39.82
6.501% to 6.750% .................. 255 29,748,429.47 15.37
6.751% to 7.000% .................. 298 22,226,252.80 11.48
7.001% to 7.250% .................. 150 1,599,233.12 0.83
----------------- ------------------------ ----------------------
Total: .................... 1,392 $193,580,502.10 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average mortgage interest rate of the
Mortgage Loans contributing to Cashflow Group 2 is expected to be
approximately 6.458% per annum.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-15
Number of Months Since Origination(1)
Aggregate Stated % of Cashflow Group 2
Number of Principal Balance as of Cut-off Date Pool
Months Since Origination Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
1 to 2 months ..................... 854 $121,359,915.52 62.69%
3 to 4 months ..................... 460 60,862,468.67 31.44
5 to 6 months ..................... 39 5,356,927.72 2.77
7 to 8 months ..................... 6 462,407.29 0.24
9 to 10 months .................... 7 868,305.08 0.45
11 to 12 months ................... 4 1,035,194.72 0.53
13 to 14 months ................... 8 1,023,267.81 0.53
15 to 16 months ................... 6 1,010,475.22 0.52
17 to 18 months ................... 1 272,314.82 0.14
19 to 20 months ................... 4 891,980.21 0.46
21 to 22 months ................... 2 343,140.88 0.18
25 to 26 months ................... 1 94,104.16 0.05
----------------- ------------------------ ----------------------
Total: .................... 1,392 $193,580,502.10 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average number of months since
origination of the Mortgage Loans contributing to Cashflow Group 2 is
expected to be approximately 3 months.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
Remaining Terms(1)
Aggregate Stated % of Cashflow Group 2
Number of Principal Balance as of Cut-off Date Pool
Remaining Terms Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
221 to 240 months ................. 31 $2,948,882.10 1.52%
281 to 300 months ................. 6 870,522.83 0.45
341 to 360 months ................. 1,355 189,761,097.17 98.03
----------------- ------------------------ ----------------------
Total: .................... 1,392 $193,580,502.10 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity of the Mortgage Loans contributing to Cashflow Group 2 is
expected to be approximately 357 months.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-16
Credit Scores of Mortgagors
Aggregate Stated % of Cashflow Group 2
Number of Principal Balance as of Cut-off Date Pool
Credit Scores) Mortgage Loans(1) Cut-off Date(2) Principal Balance(2)
- ----------------------------------- ----------------- ------------------------ ----------------------
801 to 850 ........................ 26 $3,587,886.54 1.85%
751 to 800 ........................ 297 34,933,868.24 18.05
701 to 750 ........................ 387 58,747,799.09 30.35
651 to 700 ........................ 506 74,793,295.51 38.64
601 to 650 ........................ 162 19,896,879.36 10.28
Not Scored ........................ 14 1,620,773.36 0.84
----------------- ------------------------ ----------------------
Total: .................... 1,392 $193,580,502.10 100.00%
================= ======================== ======================
- ----------
(1) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(2) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-17
Cashflow Group 3 Mortgage Loan Data
The following tables set forth certain characteristics of the Mortgage Loans
contributing to Cashflow Group 3 as of the Cut-off Date. The balances and
percentages may not be exact due to rounding.
All Premium
Mortgage Loans relating Mortgage Loans relating
to Cashflow Group 3 to Cashflow Group 3
-------------------------- --------------------------
Number of Mortgage Loans(1) ...................... 1,435 338
Aggregate Stated Principal Balance(2)(3) ......... $179,816,013 $64,701,203
Range of Original Terms to Stated Maturity ....... 240 to 360 months 240 to 360 months
Range of Stated Principal Balances(2)(4) ......... $15,680 to $2,997,774 $21,985 to $2,997,774
Average Stated Principal Balance(2)(4) ........... $216,358 $191,424
Latest Stated Maturity Date ...................... May 1, 2037 May 1, 2037
Range of Mortgage Interest Rates ................. 6.375% to 8.125% 7.375% to 8.125%
Weighted Average Mortgage Interest Rate(2) ....... 7.129% 7.566%
Range of Remaining Terms to Stated Maturity ...... 235 to 360 months 236 to 360 months
Weighted Average Remaining Term to Stated
Maturity(2) .................................... 357 months 358 months
Range of Original Loan-to-Value Ratios ........... 9.32% to 103.00% 17.44% to 100.00%
Weighted Average Original Loan-to-Value Ratio(2) . 76.44% 77.26%
Geographic Concentration of Mortgaged Properties
Securing Mortgage Loans in Excess of 5% of the
Aggregate Stated Principal Balance(2)(3)
California ................................ 17.16% 10.70%
Florida ................................... 16.77% 18.56%
Illinois .................................. 9.51% 15.42%
New York .................................. 7.17% 5.43%
Missouri .................................. * 7.98%
Massachusetts ............................. * 5.50%
- ----------
(1) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(2) Approximate.
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
(4) Based on the Mortgage Loans contributing to this Cashflow Group (even if
such Mortgage Loans also contribute to another Cashflow Group).
* Less than 5% of the aggregate Stated Principal Balance.
A-18
Occupancy of Mortgaged Properties(1)
Aggregate Stated % of Cashflow Group 3
Number of Principal Balance as of Cut-off Date Pool
Occupancy Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
Investor Property ................. 850 $95,609,758.82 53.17%
Primary Residence ................. 517 71,811,950.84 39.94
Second Home ....................... 68 12,394,303.50 6.89
----------------- ------------------------ ----------------------
Total: .................... 1,435 $179,816,013.16 100.00%
================= ======================== ======================
- ----------
(1) Based solely on representations of the mortgagor at the time of
origination of the related Mortgage Loan contributing to Cashflow Group 3.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
Property Types
Aggregate Stated % of Cashflow Group 3
Number of Principal Balance as of Cut-off Date Pool
Property Type Mortgage Loans(1) Cut-off Date(2) Principal Balance(2)
- ----------------------------------- ----------------- ------------------------ ----------------------
Single Family Residence ........... 943 $104,183,949.09 57.94%
Condominium ....................... 167 23,675,237.95 13.17
PUD ............................... 135 20,241,672.89 11.26
2-Family .......................... 115 18,765,613.88 10.44
Townhouse ......................... 27 2,748,722.02 1.53
4-Family .......................... 26 6,613,207.90 3.68
3-Family .......................... 22 3,587,609.42 2.00
----------------- ------------------------ ----------------------
Total: .................... 1,435 $179,816,013.16 100.00%
================= ======================== ======================
- ----------
(1) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(2) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
Mortgage Loan Purposes
Aggregate Stated % of Cashflow Group 3
Number of Principal Balance as of Cut-off Date Pool
Purpose Mortgage Loans(1) Cut-off Date(2) Principal Balance(2)
- ----------------------------------- ----------------- ------------------------ ----------------------
Purchase .......................... 605 $68,735,326.56 38.23%
Refinance - Cashout(3) ............ 594 78,603,215.36 43.71
Refinance - Rate/Term(4) .......... 236 32,477,471.24 18.06
----------------- ------------------------ ----------------------
Total: .................... 1,435 $179,816,013.16 100.00%
================= ======================== ======================
- ----------
(1) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(2) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
(3) "Refinance -- Cashout" means a mortgage loan originated in connection with
a refinancing that has a principal balance in excess of the principal
balance on the old loan plus settlement costs where cash is distributed to
the mortgagor.
(4) "Refinance -- Rate/Term" means a mortgage loan originated in connection
with a refinancing to reduce the mortgage interest rate or reduce or
increase the term.
A-19
Documentation Type
Aggregate Stated % of Cashflow Group 3
Number of Principal Balance as of Cut-off Date Pool
Documentation Type Mortgage Loans(1) Cut-off Date(2) Principal Balance(2)
- ----------------------------------- ----------------- ------------------------ ----------------------
Accelerated - Stated .............. 466 $74,175,004.49 41.25%
Accelerated - Stated Income/
Stated Asset .................... 429 58,293,827.94 32.42
Standard .......................... 302 30,750,127.20 17.10
Accelerated - Paper Saver/Threshold 188 12,848,371.48 7.15
Desktop Underwriter/Loan Prospector 33 2,415,643.17 1.34
Accelerated - No Ratio ............ 11 861,390.18 0.48
Accelerated - Rapid ............... 3 247,499.39 0.14
Accelerated - All Ready Home ...... 3 224,149.32 0.12
----------------- ------------------------ ----------------------
Total: .................... 1,435 $179,816,013.16 100.00%
================= ======================== ======================
- ----------
(1) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(2) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-20
Geographical Distribution of the Mortgaged Properties(1)
Aggregate Stated % of Cashflow Group 3
Number of Principal Balance as of Cut-off Date Pool
Geographical Area Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
Alabama ........................... 10 $1,073,030.95 0.60%
Arizona ........................... 36 3,172,937.13 1.76
Arkansas .......................... 25 1,995,330.19 1.11
California ........................ 163 30,852,903.64 17.16
Colorado .......................... 16 2,347,218.02 1.31
Connecticut ....................... 19 1,997,521.46 1.11
Delaware .......................... 1 143,220.88 0.08
District of Columbia .............. 12 1,387,548.33 0.77
Florida ........................... 221 30,155,906.91 16.77
Georgia ........................... 64 5,256,518.40 2.92
Hawaii ............................ 2 216,519.07 0.12
Idaho ............................. 2 385,673.93 0.21
Illinois .......................... 74 17,103,610.49 9.51
Indiana ........................... 20 1,100,287.04 0.61
Iowa .............................. 4 157,296.70 0.09
Kansas ............................ 13 818,590.36 0.46
Kentucky .......................... 1 50,925.93 0.03
Louisiana ......................... 5 520,447.66 0.29
Maine ............................. 3 142,522.90 0.08
Maryland .......................... 52 4,882,560.23 2.72
Massachusetts ..................... 27 6,356,129.39 3.53
Michigan .......................... 37 4,237,496.64 2.36
Minnesota ......................... 25 2,453,393.01 1.36
Mississippi ....................... 4 165,881.76 0.09
Missouri .......................... 68 6,757,158.10 3.76
Montana ........................... 2 372,758.32 0.21
Nebraska .......................... 4 165,408.21 0.09
Nevada ............................ 6 789,933.83 0.44
New Hampshire ..................... 2 624,843.40 0.35
New Jersey ........................ 29 4,188,520.29 2.33
New Mexico ........................ 10 982,926.73 0.55
New York .......................... 57 12,900,770.49 7.17
North Carolina .................... 52 4,365,215.70 2.43
Ohio .............................. 34 1,688,361.38 0.94
Oklahoma .......................... 15 1,110,315.65 0.62
Oregon ............................ 12 1,230,242.54 0.68
Pennsylvania ...................... 49 3,771,347.22 2.10
Rhode Island ...................... 3 229,729.07 0.13
South Carolina .................... 39 2,310,806.77 1.29
Tennessee ......................... 16 920,816.53 0.51
Texas ............................. 89 6,981,490.04 3.88
Utah .............................. 7 431,684.90 0.24
Vermont ........................... 5 1,102,820.52 0.61
Virginia .......................... 56 6,376,200.14 3.55
Washington ........................ 23 3,199,627.09 1.78
West Virginia ..................... 1 70,737.12 0.04
Wisconsin ......................... 20 2,270,828.11 1.26
----------------- ------------------------ ----------------------
Total: .................... 1,435 $179,816,013.16 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, no more than approximately 1.67% of the Mortgage
Loans contributing to Cashflow Group 3 are expected to be secured by
Mortgaged Properties located in any one five-digit postal zip code.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-21
Current Mortgage Loan Principal Balances(1)
Aggregate Stated % of Cashflow Group 3
Current Mortgage Loan Principal Number of Principal Balance as of Cut-off Date Pool
Balances Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
$0.01 to $50,000.00 ............... 82 $2,344,142.51 1.30%
$50,000.01 to $100,000.00 ......... 327 17,033,572.90 9.47
$100,000.01 to $150,000.00 ........ 297 21,271,892.90 11.83
$150,000.01 to $200,000.00 ........ 216 22,100,842.53 12.29
$200,000.01 to $250,000.00 ........ 113 14,003,589.75 7.79
$250,000.01 to $300,000.00 ........ 105 15,973,632.87 8.88
$300,000.01 to $350,000.00 ........ 64 9,986,120.01 5.55
$350,000.01 to $400,000.00 ........ 54 11,947,386.17 6.64
$400,000.01 to $450,000.00 ........ 39 8,175,404.47 4.55
$450,000.01 to $500,000.00 ........ 33 9,414,103.44 5.24
$500,000.01 to $550,000.00 ........ 22 6,176,962.30 3.44
$550,000.01 to $600,000.00 ........ 22 7,244,605.40 4.03
$600,000.01 to $650,000.00 ........ 16 4,763,432.35 2.65
$650,000.01 to $700,000.00 ........ 8 2,534,419.28 1.41
$700,000.01 to $750,000.00 ........ 8 3,458,832.54 1.92
$750,000.01 to $800,000.00 ........ 6 3,408,668.64 1.90
$800,000.01 to $850,000.00 ........ 1 833,381.05 0.46
$850,000.01 to $900,000.00 ........ 4 2,072,273.23 1.15
$900,000.01 to $950,000.00 ........ 1 679,080.10 0.38
$950,000.01 to $1,000,000.00 ...... 4 2,411,439.00 1.34
$1,000,000.01 to $1,500,000.00 .... 10 7,716,048.01 4.29
$2,000,000.01 to $2,500,000.00 .... 2 3,268,410.14 1.82
$2,500,000.01 to $3,000,000.00 .... 1 2,997,773.56 1.67
----------------- ------------------------ ----------------------
Total: .................... 1,435 $179,816,013.16 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the average outstanding principal balance of the
Mortgage Loans contributing to Cashflow Group 3 is expected to be
approximately $216,358.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-22
Original Debt-to-Income Ratios(1)
Aggregate Stated % of Cashflow Group 3
Number of Principal Balance as of Cut-off Date Pool
Original Debt-to-Income Ratios Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
Unknown ........................... 5 $526,977.94 0.29%
0.01% to 5.00% .................... 15 1,365,066.33 0.76
5.01% to 10.00% ................... 32 2,778,672.10 1.55
10.01% to 15.00% .................. 72 7,685,367.00 4.27
15.01% to 20.00% .................. 113 10,962,320.41 6.10
20.01% to 25.00% .................. 137 12,979,122.56 7.22
25.01% to 30.00% .................. 173 20,421,746.58 11.36
30.01% to 35.00% .................. 252 39,049,627.10 21.72
35.01% to 40.00% .................. 265 38,913,938.61 21.64
40.01% to 45.00% .................. 195 26,791,982.75 14.90
45.01% to 50.00% .................. 86 9,044,968.61 5.03
50.01% to 55.00% .................. 42 4,257,835.98 2.37
55.01% to 60.00% .................. 41 4,381,725.90 2.44
60.01% to 65.00% .................. 5 418,025.87 0.23
65.01% to 70.00% .................. 2 238,635.40 0.13
----------------- ------------------------ ----------------------
Total: .................... 1,435 $179,816,013.16 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average Debt-to-Income Ratio at
origination of the Mortgage Loans contributing to Cashflow Group 3 (other
than the Mortgage Loans contributing to Cashflow Group 3 for which no
Debt-to-Income Ratio was calculated) is expected to be approximately
33.40%.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-23
Original Loan-to-Value Ratios(1)
Aggregate Stated % of Cashflow Group 3
Number of Principal Balance as of Cut-off Date Pool
Original Loan-to-Value Ratios Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
5.01% to 10.00% ................... 1 $109,633.80 0.06%
15.01% to 20.00% .................. 4 347,990.01 0.19
20.01% to 25.00% .................. 3 146,216.60 0.08
25.01% to 30.00% .................. 5 203,736.36 0.11
30.01% to 35.00% .................. 9 488,338.31 0.27
35.01% to 40.00% .................. 12 591,883.41 0.33
40.01% to 45.00% .................. 18 1,916,007.70 1.07
45.01% to 50.00% .................. 29 4,206,853.91 2.34
50.01% to 55.00% .................. 27 3,392,656.68 1.89
55.01% to 60.00% .................. 32 2,871,078.33 1.60
60.01% to 65.00% .................. 38 3,803,444.54 2.12
65.01% to 70.00% .................. 126 15,118,943.98 8.41
70.01% to 75.00% .................. 147 22,792,073.26 12.68
75.01% to 80.00% .................. 767 98,932,424.52 55.02
80.01% to 85.00% .................. 55 6,846,189.16 3.81
85.01% to 90.00% .................. 97 12,723,544.30 7.08
90.01% to 95.00% .................. 42 3,570,123.53 1.99
95.01% to 100.00% ................. 14 1,138,859.61 0.63
100.01% to 103.00% ................ 9 616,015.15 0.34
----------------- ------------------------ ----------------------
Total: .................... 1,435 $179,816,013.16 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Mortgage Loans contributing to Cashflow Group 3 is
expected to be approximately 76.44%.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
Mortgage Interest Rates(1)
Aggregate Stated % of Cashflow Group 3
Number of Principal Balance as of Cut-off Date Pool
Mortgage Interest Rates Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
6.251% to 6.500% .................. 394 $17,301,356.17 9.62%
6.501% to 6.750% .................. 255 23,952,342.75 13.32
6.751% to 7.000% .................. 298 45,260,404.34 25.17
7.001% to 7.250% .................. 150 28,600,706.72 15.91
7.251% to 7.500% .................. 187 37,740,553.92 20.99
7.501% to 7.750% .................. 110 19,783,433.44 11.00
7.751% to 8.000% .................. 39 7,015,715.81 3.90
8.001% to 8.250% .................. 2 161,500.00 0.09
----------------- ------------------------ ----------------------
Total: .................... 1,435 $179,816,013.16 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average mortgage interest rate of the
Mortgage Loans contributing to Cashflow Group 3 is expected to be
approximately 7.129% per annum.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-24
Number of Months Since Origination(1)
Aggregate Stated % of Cashflow Group 3
Number of Principal Balance as of Cut-off Date Pool
Months Since Origination Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
1 to 2 months ..................... 893 $118,019,738.00 65.63%
3 to 4 months ..................... 474 52,145,256.55 29.00
5 to 6 months ..................... 35 4,381,996.27 2.44
7 to 8 months ..................... 6 494,141.37 0.27
9 to 10 months .................... 5 255,615.88 0.14
11 to 12 months ................... 2 255,001.33 0.14
13 to 14 months ................... 7 1,476,741.70 0.82
15 to 16 months ................... 7 1,717,383.71 0.96
17 to 18 months ................... 1 266,282.52 0.15
19 to 20 months ................... 2 637,596.82 0.35
21 to 22 months ................... 2 135,820.87 0.08
25 to 26 months ................... 1 30,438.14 0.02
----------------- ------------------------ ----------------------
Total: .................... 1,435 $179,816,013.16 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average number of months since
origination of the Mortgage Loans contributing to Cashflow Group 3 is
expected to be approximately 3 months.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
Remaining Terms(1)
Aggregate Stated % of Cashflow Group 3
Number of Principal Balance as of Cut-off Date Pool
Remaining Terms Mortgage Loans(2) Cut-off Date(3) Principal Balance(3)
- ----------------------------------- ----------------- ------------------------ ----------------------
221 to 240 months ................. 26 $1,996,257.17 1.11%
281 to 300 months ................. 3 318,829.59 0.18
341 to 360 months ................. 1,406 177,500,926.39 98.71
----------------- ------------------------ ----------------------
Total: .................... 1,435 $179,816,013.16 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity of the Mortgage Loans contributing to Cashflow Group 3 is
expected to be approximately 357 months.
(2) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(3) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-25
Credit Scores of Mortgagors
Aggregate Stated % of Cashflow Group 3
Number of Principal Balance as of Cut-off Date Pool
Credit Scores Mortgage Loans(1) Cut-off Date(2) Principal Balance(2)
- ----------------------------------- ----------------- ------------------------ ----------------------
801 to 850 ........................ 22 $2,324,564.91 1.29%
751 to 800 ........................ 282 27,787,832.89 15.45
701 to 750 ........................ 357 43,515,249.29 24.20
651 to 700 ........................ 552 74,781,019.13 41.59
601 to 650 ........................ 206 29,076,055.14 16.17
Not Scored ........................ 16 2,331,291.79 1.30
----------------- ------------------------ ----------------------
Total: .................... 1,435 $179,816,013.16 100.00%
================= ======================== ======================
- ----------
(1) This number represents the number of Mortgage Loans contributing to this
Cashflow Group (even if such Mortgage Loans also contribute to another
Cashflow Group).
(2) Based on the portion that is contributed to this Cashflow Group (based on
the Applicable Fraction).
A-26
Aggregate Mortgage Loan Data
The following tables set forth certain characteristics of all the Mortgage
Loans in all Cashflow Groups as of the Cut-off Date in the aggregate. The
balances and percentages may not be exact due to rounding.
All
Mortgage Loans
--------------
Number of Mortgage Loans....................... 1,773
Aggregate Stated Principal Balance(1) ......... $400,985,066
Range of Original Terms to Stated Maturity .... 240 to 360 months
Range of Stated Principal Balances(1) ......... $15,680 to $2,997,774
Average Stated Principal Balance(1)............ $226,162
Latest Stated Maturity Date.................... May 1, 2037
Range of Mortgage Interest Rates............... 5.250% to 8.125%
Weighted Average Mortgage Interest Rate(1) .... 6.718%
Range of Remaining Terms to Stated Maturity ... 234 to 360 months
Weighted Average Remaining Term to Stated
Maturity(1).................................. 357 months
Range of Original Loan-to-Value Ratios ........ 9.32% to 103.00%
Weighted Average Original Loan-to-Value
Ratio(1)..................................... 75.16%
Geographic Concentration of Mortgaged
Properties Securing Mortgage Loans in Excess
of 5% of the Aggregate Stated Principal
Balance(1)
California............................. 25.29%
Florida................................ 14.79%
New York............................... 5.50%
Illinois............................... 5.38%
Texas.................................. 5.18%
- ----------
(1) Approximate.
Occupancy of Mortgaged Properties(1)
Aggregate Stated % of Aggregate
Number of Principal Balance as of Cut-off Date Pool
Occupancy Mortgage Loans Cut-off Date Principal Balance
- ----------------------------------- ----------------- ------------------------ ----------------------
Investor Property ................. 958 $172,667,528.24 43.06%
Primary Residence ................. 736 206,899,742.46 51.60
Second Home ....................... 79 21,417,795.33 5.34
----------------- ------------------------ ----------------------
Total: .................... 1,773 $400,985,066.03 100.00%
================= ======================== ======================
- ----------
(1) Based solely on representations of the mortgagor at the time of
origination of the related Mortgage Loan.
A-27
Property Types
Aggregate Stated % of Aggregate
Number of Principal Balance as of Cut-off Date Pool
Property Type Mortgage Loans Cut-off Date Principal Balance
- ----------------------------------- ----------------- ------------------------ ----------------------
Single Family Residence ........... 1,150 $243,634,727.41 60.76%
Condominium ....................... 204 44,462,034.37 11.09
PUD ............................... 194 56,821,045.57 14.17
2-Family .......................... 135 32,988,982.05 8.23
Townhouse ......................... 33 5,285,235.32 1.32
4-Family .......................... 30 10,814,847.24 2.70
3-Family .......................... 25 6,831,901.27 1.70
Cooperative ....................... 2 146,292.80 0.04
----------------- ------------------------ ----------------------
Total: .................... 1,773 $400,985,066.03 100.00%
================= ======================== ======================
Mortgage Loan Purposes
Aggregate Stated % of Aggregate
Number of Principal Balance as of Cut-off Date Pool
Purpose Mortgage Loans Cut-off Date Principal Balance
- ----------------------------------- ----------------- ------------------------ ----------------------
Purchase .......................... 767 $166,924,844.32 41.63%
Refinance - Cashout(1) ............ 706 156,167,329.52 38.95
Refinance - Rate/Term(2) .......... 300 77,892,892.19 19.43
----------------- ------------------------ ----------------------
Total: .................... 1,773 $400,985,066.03 100.00%
================= ======================== ======================
- ----------
(1) "Refinance -- Cashout" means a mortgage loan originated in connection with
a refinancing that has a principal balance in excess of the principal
balance on the old loan plus settlement costs where cash is distributed to
the mortgagor.
(2) "Refinance -- Rate/Term" means a mortgage loan originated in connection
with a refinancing to reduce the mortgage interest rate or reduce or
increase the term.
Documentation Type
Aggregate Stated % of Aggregate
Number of Principal Balance as of Cut-off Date Pool
Documentation Type Mortgage Loans Cut-off Date Principal Balance
- ----------------------------------- ----------------- ------------------------ ----------------------
Accelerated - Stated .............. 572 $169,071,614.09 42.16%
Accelerated - Stated Income/
Stated Asset .................... 486 103,325,058.65 25.77
Standard .......................... 423 82,461,767.43 20.56
Accelerated - Paper Saver/Threshold 230 36,982,559.22 9.22
Desktop Underwriter/Loan Prospector 41 5,108,880.44 1.27
Accelerated - No Ratio ............ 15 3,069,710.10 0.77
Accelerated - Rapid ............... 3 521,113.67 0.13
Accelerated - All Ready Home ...... 3 444,362.43 0.11
----------------- ------------------------ ----------------------
Total: .................... 1,773 $400,985,066.03 100.00%
================= ======================== ======================
A-28
Geographical Distribution of the Mortgaged Properties(1)
Aggregate Stated % of Aggregate
Number of Principal Balance as of Cut-off Date Pool
Geographical Area Mortgage Loans Cut-off Date Principal Balance
- ----------------------------------- ----------------- ------------------------ ----------------------
Alabama ........................... 11 $1,647,814.87 0.41%
Arizona ........................... 44 9,281,051.99 2.31
Arkansas .......................... 28 3,580,855.30 0.89
California ........................ 252 101,390,845.37 25.29
Colorado .......................... 24 6,249,533.01 1.56
Connecticut ....................... 25 5,844,261.22 1.46
Delaware .......................... 2 433,080.45 0.11
District of Columbia .............. 12 3,498,777.59 0.87
Florida ........................... 267 59,291,600.95 14.79
Georgia ........................... 91 15,654,340.06 3.90
Hawaii ............................ 6 1,846,720.72 0.46
Idaho ............................. 3 705,060.95 0.18
Illinois .......................... 77 21,584,060.96 5.38
Indiana ........................... 20 1,437,830.25 0.36
Iowa .............................. 6 659,002.60 0.16
Kansas ............................ 17 1,929,173.52 0.48
Kentucky .......................... 2 296,525.93 0.07
Louisiana ......................... 6 806,166.87 0.20
Maine ............................. 3 668,892.95 0.17
Maryland .......................... 60 12,160,420.06 3.03
Massachusetts ..................... 30 10,528,353.58 2.63
Michigan .......................... 38 6,242,851.44 1.56
Minnesota ......................... 28 5,283,184.71 1.32
Mississippi ....................... 4 283,579.81 0.07
Missouri .......................... 73 8,849,904.60 2.21
Montana ........................... 2 602,608.25 0.15
Nebraska .......................... 4 238,662.17 0.06
Nevada ............................ 9 1,983,501.29 0.49
New Hampshire ..................... 2 752,608.00 0.19
New Jersey ........................ 32 9,132,940.55 2.28
New Mexico ........................ 11 2,130,495.99 0.53
New York .......................... 66 22,056,290.09 5.50
North Carolina .................... 65 9,951,079.04 2.48
Ohio .............................. 36 2,577,921.16 0.64
Oklahoma .......................... 18 2,538,329.03 0.63
Oregon ............................ 13 3,148,383.59 0.79
Pennsylvania ...................... 54 7,721,088.28 1.93
Rhode Island ...................... 5 1,101,240.11 0.27
South Carolina .................... 49 6,903,749.31 1.72
Tennessee ......................... 19 2,460,411.36 0.61
Texas ............................. 128 20,787,514.98 5.18
Utah .............................. 8 1,423,960.42 0.36
Vermont ........................... 5 1,128,628.40 0.28
Virginia .......................... 66 14,494,635.93 3.61
Washington ........................ 29 6,782,784.13 1.69
West Virginia ..................... 1 143,076.70 0.04
Wisconsin ......................... 22 2,771,267.49 0.69
----------------- ------------------------ ----------------------
Total: .................... 1,773 $400,985,066.03 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, no more than approximately 0.75% of the Mortgage
Loans are expected to be secured by Mortgaged Properties located in any
one five-digit postal zip code.
A-29
Current Mortgage Loan Principal Balances(1)
Aggregate Stated % of Aggregate
Current Mortgage Loan Principal Number of Principal Balance as of Cut-off Date Pool
Balances Mortgage Loans Cut-off Date Principal Balance
- ----------------------------------- ----------------- ------------------------ ----------------------
$0.01 to $50,000.00 ............... 91 $3,520,799.87 0.88%
$50,000.01 to $100,000.00 ......... 359 27,426,197.70 6.84
$100,000.01 to $150,000.00 ........ 373 46,896,828.84 11.70
$150,000.01 to $200,000.00 ........ 266 46,331,663.05 11.55
$200,000.01 to $250,000.00 ........ 150 33,932,563.31 8.46
$250,000.01 to $300,000.00 ........ 140 38,537,534.62 9.61
$300,000.01 to $350,000.00 ........ 85 27,436,201.66 6.84
$350,000.01 to $400,000.00 ........ 68 25,564,871.09 6.38
$400,000.01 to $450,000.00 ........ 53 22,350,152.29 5.57
$450,000.01 to $500,000.00 ........ 39 18,465,049.94 4.60
$500,000.01 to $550,000.00 ........ 27 14,249,065.81 3.55
$550,000.01 to $600,000.00 ........ 35 20,202,035.69 5.04
$600,000.01 to $650,000.00 ........ 28 17,626,349.70 4.40
$650,000.01 to $700,000.00 ........ 12 8,186,265.02 2.04
$700,000.01 to $750,000.00 ........ 10 7,273,036.33 1.81
$750,000.01 to $800,000.00 ........ 7 5,441,211.11 1.36
$800,000.01 to $850,000.00 ........ 2 1,666,090.19 0.42
$850,000.01 to $900,000.00 ........ 4 3,534,600.06 0.88
$900,000.01 to $950,000.00 ........ 1 912,251.61 0.23
$950,000.01 to $1,000,000.00 ...... 5 4,872,976.97 1.22
$1,000,000.01 to $1,500,000.00 .... 14 17,286,291.80 4.31
$1,500,000.01 to $2,000,000.00 .... 1 1,884,592.00 0.47
$2,000,000.01 to $2,500,000.00 .... 2 4,390,663.81 1.09
$2,500,000.01 to $3,000,000.00 .... 1 2,997,773.56 0.75
----------------- ------------------------ ----------------------
Total: .................... 1,773 $400,985,066.03 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the average outstanding principal balance of the
Mortgage Loans is expected to be approximately $226,162.
Original Debt-to-Income Ratios(1)
Aggregate Stated % of Aggregate
Number of Principal Balance as of Cut-off Date Pool
Original Debt-to-Income Ratios Mortgage Loans Cut-off Date Principal Balance
- ----------------------------------- ----------------- ------------------------ ----------------------
Unknown ........................... 6 $1,265,889.41 0.32%
0.01% to 5.00% .................... 15 2,536,328.88 0.63
5.01% to 10.00% ................... 38 7,180,859.33 1.79
10.01% to 15.00% .................. 75 11,605,745.41 2.89
15.01% to 20.00% .................. 133 25,977,725.65 6.48
20.01% to 25.00% .................. 165 28,790,174.52 7.18
25.01% to 30.00% .................. 221 46,037,602.61 11.48
30.01% to 35.00% .................. 310 79,976,355.57 19.94
35.01% to 40.00% .................. 329 80,945,302.46 20.19
40.01% to 45.00% .................. 246 63,574,800.97 15.85
45.01% to 50.00% .................. 117 27,867,488.46 6.95
50.01% to 55.00% .................. 53 11,120,565.26 2.77
55.01% to 60.00% .................. 57 11,995,527.76 2.99
60.01% to 65.00% .................. 5 1,129,405.11 0.28
65.01% to 70.00% .................. 3 981,294.63 0.24
----------------- ------------------------ ----------------------
Total: .................... 1,773 $400,985,066.03 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average Debt-to-Income Ratio at
origination of the Mortgage Loans (other than the Mortgage Loans for which
no Debt-to-Income Ratio was calculated) is expected to be approximately
34.23%.
A-30
Original Loan-to-Value Ratios(1)
Aggregate Stated % of Aggregate
Number of Principal Balance as of Cut-off Date Pool
Original Loan-to-Value Ratios Mortgage Loans Cut-off Date Principal Balance
- ----------------------------------- ----------------- ------------------------ ----------------------
5.01% to 10.00% ................... 1 $177,000.00 0.04%
15.01% to 20.00% .................. 5 573,347.88 0.14
20.01% to 25.00% .................. 7 1,011,276.97 0.25
25.01% to 30.00% .................. 8 1,089,690.74 0.27
30.01% to 35.00% .................. 13 2,050,019.79 0.51
35.01% to 40.00% .................. 17 3,238,763.64 0.81
40.01% to 45.00% .................. 27 5,915,181.61 1.48
45.01% to 50.00% .................. 39 12,342,602.37 3.08
50.01% to 55.00% .................. 39 9,643,624.19 2.40
55.01% to 60.00% .................. 41 9,412,493.88 2.35
60.01% to 65.00% .................. 47 10,177,966.22 2.54
65.01% to 70.00% .................. 148 34,993,619.48 8.73
70.01% to 75.00% .................. 167 45,189,314.47 11.27
75.01% to 80.00% .................. 951 214,527,150.86 53.50
80.01% to 85.00% .................. 61 12,089,579.12 3.01
85.01% to 90.00% .................. 116 24,559,174.04 6.12
90.01% to 95.00% .................. 56 9,519,954.12 2.37
95.01% to 100.00% ................. 19 2,887,116.73 0.72
100.01% to 103.00% ................ 11 1,587,189.92 0.40
----------------- ------------------------ ----------------------
Total: .................... 1,773 $400,985,066.03 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Mortgage Loans is expected to be approximately 75.16%.
Mortgage Interest Rates(1)
Aggregate Stated % of Aggregate
Number of Principal Balance as of Cut-off Date Pool
Mortgage Interest Rates Mortgage Loans Cut-off Date Principal Balance
- ----------------------------------- ----------------- ------------------------ ----------------------
5.001% to 5.250% .................. 1 $163,632.92 0.04%
5.251% to 5.500% .................. 3 513,526.81 0.13
5.501% to 5.750% .................. 39 11,022,271.24 2.75
5.751% to 6.000% .................. 88 20,225,894.26 5.04
6.001% to 6.250% .................. 207 58,585,616.28 14.61
6.251% to 6.500% .................. 394 94,385,552.15 23.54
6.501% to 6.750% .................. 255 53,700,772.22 13.39
6.751% to 7.000% .................. 298 67,486,657.14 16.83
7.001% to 7.250% .................. 150 30,199,939.84 7.53
7.251% to 7.500% .................. 187 37,740,553.92 9.41
7.501% to 7.750% .................. 110 19,783,433.44 4.93
7.751% to 8.000% .................. 39 7,015,715.81 1.75
8.001% to 8.250% .................. 2 161,500.00 0.04
----------------- ------------------------ ----------------------
Total: .................... 1,773 $400,985,066.03 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average mortgage interest rate of
thege Loans is expected to be approximately 6.718% per annum.
A-31
Number of Months Since Origination(1)
Aggregate Stated % of Aggregate
Number of Principal Balance as of Cut-off Date Pool
Months Since Origination Mortgage Loans Cut-off Date Principal Balance
- ----------------------------------- ----------------- ------------------------ ----------------------
1 to 2 months ..................... 1,096 $257,589,324.33 64.24%
3 to 4 months ..................... 588 121,255,007.03 30.24
5 to 6 months ..................... 45 10,288,569.25 2.57
7 to 8 months ..................... 8 1,004,234.66 0.25
9 to 10 months .................... 7 1,127,778.99 0.28
11 to 12 months ................... 4 1,443,761.83 0.36
13 to 14 months ................... 9 2,584,934.97 0.64
15 to 16 months ................... 8 2,730,702.29 0.68
17 to 18 months ................... 1 538,597.34 0.13
19 to 20 months ................... 4 1,818,651.29 0.45
21 to 22 months ................... 2 478,961.75 0.12
25 to 26 months ................... 1 124,542.30 0.03
----------------- ------------------------ ----------------------
Total: .................... 1,773 $400,985,066.03 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average number of months since
origination of the Mortgage Loans is expected to be approximately 3
months.
Remaining Terms(1)
Aggregate Stated % of Aggregate
Number of Principal Balance as of Cut-off Date Pool
Remaining Terms ................... Mortgage Loans Cut-off Date Principal Balance
- ----------------------------------- ----------------- ------------------------ ----------------------
221 to 240 months ................. 35 $5,309,548.92 1.32%
281 to 300 months ................. 7 1,309,802.97 0.33
341 to 360 months ................. 1,731 394,365,714.14 98.35
----------------- ------------------------ ----------------------
Total: .................... 1,773 $400,985,066.03 100.00%
================= ======================== ======================
- ----------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity of the Mortgage Loans is expected to be approximately 357 months.
Credit Scores of Mortgagors
Aggregate Stated % of Aggregate
Number of Principal Balance as of Cut-off Date Pool
Credit Scores Mortgage Loans Cut-off Date Principal Balance
- ----------------------------------- ----------------- ------------------------ ----------------------
801 to 850 ........................ 29 $6,030,980.94 1.50%
751 to 800 ........................ 360 68,622,422.32 17.11
701 to 750 ........................ 465 113,839,163.21 28.39
651 to 700 ........................ 666 157,531,166.54 39.29
601 to 650 ........................ 234 51,003,788.13 12.72
Not Scored ........................ 19 3,957,544.89 0.99
----------------- ------------------------ ----------------------
Total: .................... 1,773 $400,985,066.03 100.00%
================= ======================== ======================
A-32
Appendix B - Decrement Tables
The following tables have been prepared based on the assumptions described
in this prospectus supplement under "Prepayment and Yield Considerations" and
should be read in conjunction with that section.
Percentage of Initial Class Balance Outstanding
at the Respective Percentages of PPC Set Forth Below:
Class 1-A-1, Class 1-A-2 and Class 1-A-3 Class 1-A-R
---------------------------------------- ---------------------------------------
Distribution Date 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
----------------- ---- --- ---- ---- ---- --- --- ---- ---- ----
Initial Percentage ...... 100 100 100 100 100 100 100 100 100 100
May 25, 2008 ............ 99 90 81 72 62 0 0 0 0 0
May 25, 2009 ............ 98 78 61 45 31 0 0 0 0 0
May 25, 2010 ............ 96 68 45 27 14 0 0 0 0 0
May 25, 2011 ............ 95 59 33 15 4 0 0 0 0 0
May 25, 2012 ............ 93 50 24 8 0 0 0 0 0 0
May 25, 2013 ............ 92 44 17 4 0 0 0 0 0 0
May 25, 2014 ............ 90 38 12 1 0 0 0 0 0 0
May 25, 2015 ............ 88 33 9 * 0 0 0 0 0 0
May 25, 2016 ............ 86 28 7 0 0 0 0 0 0 0
May 25, 2017 ............ 84 24 5 0 0 0 0 0 0 0
May 25, 2018 ............ 82 21 4 0 0 0 0 0 0 0
May 25, 2019 ............ 79 18 3 0 0 0 0 0 0 0
May 25, 2020 ............ 77 16 2 0 0 0 0 0 0 0
May 25, 2021 ............ 74 14 2 0 0 0 0 0 0 0
May 25, 2022 ............ 71 12 1 0 0 0 0 0 0 0
May 25, 2023 ............ 68 10 1 0 0 0 0 0 0 0
May 25, 2024 ............ 65 8 1 0 0 0 0 0 0 0
May 25, 2025 ............ 61 7 * 0 0 0 0 0 0 0
May 25, 2026 ............ 57 6 * 0 0 0 0 0 0 0
May 25, 2027 ............ 53 5 * 0 0 0 0 0 0 0
May 25, 2028 ............ 49 4 * 0 0 0 0 0 0 0
May 25, 2029 ............ 45 3 * 0 0 0 0 0 0 0
May 25, 2030 ............ 40 3 * 0 0 0 0 0 0 0
May 25, 2031 ............ 35 2 * 0 0 0 0 0 0 0
May 25, 2032 ............ 30 2 * 0 0 0 0 0 0 0
May 25, 2033 ............ 24 1 * 0 0 0 0 0 0 0
May 25, 2034 ............ 18 1 * 0 0 0 0 0 0 0
May 25, 2035 ............ 12 * * 0 0 0 0 0 0 0
May 25, 2036 ............ 5 * * 0 0 0 0 0 0 0
May 25, 2037 ............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1) ........... 19.21 6.95 3.59 2.24 1.63 0.07 0.07 0.07 0.07 0.07
- ---------------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Balance thereof by the number of years from the date of the issuance of
such class to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the initial Class Balance of that class.
* Less than 0.5%, but greater than zero.
B-1
Percentage of Initial Class Balance Outstanding
at the Respective Percentages of PPC Set Forth Below:
Class 1-PO Class 2-A-1
---------------------------------------- ---------------------------------------
Distribution Date 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
----------------- ---- --- ---- ---- ---- --- --- ---- ---- ----
Initial Percentage ...... 100 100 100 100 100 100 100 100 100 100
May 25, 2008 ............ 99 90 82 74 65 99 90 81 72 63
May 25, 2009 ............ 97 79 63 49 36 98 78 61 45 31
May 25, 2010 ............ 96 69 48 32 20 97 68 45 27 14
May 25, 2011 ............ 94 61 37 21 11 95 59 33 16 4
May 25, 2012 ............ 92 53 28 14 6 94 51 24 8 0
May 25, 2013 ............ 91 46 22 9 3 93 44 17 4 0
May 25, 2014 ............ 89 40 17 6 2 91 38 12 1 0
May 25, 2015 ............ 87 35 13 4 1 89 33 9 * 0
May 25, 2016 ............ 85 30 10 3 1 88 29 7 0 0
May 25, 2017 ............ 82 26 7 2 * 86 25 5 0 0
May 25, 2018 ............ 80 23 6 1 * 84 22 4 0 0
May 25, 2019 ............ 77 20 4 1 * 81 19 3 0 0
May 25, 2020 ............ 74 17 3 * * 79 16 2 0 0
May 25, 2021 ............ 71 14 2 * * 76 14 2 0 0
May 25, 2022 ............ 68 12 2 * * 73 12 1 0 0
May 25, 2023 ............ 64 10 1 * * 70 10 1 0 0
May 25, 2024 ............ 61 9 1 * * 67 9 1 0 0
May 25, 2025 ............ 57 7 1 * * 63 7 1 0 0
May 25, 2026 ............ 53 6 1 * * 60 6 * 0 0
May 25, 2027 ............ 49 5 * * * 56 5 * 0 0
May 25, 2028 ............ 45 4 * * * 51 4 * 0 0
May 25, 2029 ............ 41 3 * * * 47 3 * 0 0
May 25, 2030 ............ 37 3 * * * 42 3 * 0 0
May 25, 2031 ............ 32 2 * * * 37 2 * 0 0
May 25, 2032 ............ 27 2 * * * 31 2 * 0 0
May 25, 2033 ............ 22 1 * * 0 25 1 * 0 0
May 25, 2034 ............ 17 1 * * 0 19 1 * 0 0
May 25, 2035 ............ 11 * * * 0 13 * * 0 0
May 25, 2036 ............ 5 * * * 0 5 * * 0 0
May 25, 2037 ............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1) ........... 18.55 7.22 4.00 2.67 1.96 19.60 7.04 3.62 2.25 1.64
- ---------------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Balance thereof by the number of years from the date of the issuance of
such class to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the initial Class Balance of that class.
* Less than 0.5%, but greater than zero.
B-2
Percentage of Initial Class Balance(1) Outstanding
at the Respective Percentages of PPC Set Forth Below:
Class 2-A-2 and Class 2-A-3 Class 2-A-4, Class 2-A-5 and Class 2-A-9
---------------------------------------- ----------------------------------------
Distribution Date 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
----------------- ---- --- ---- ---- ---- ---- --- ---- ---- ----
Initial Percentage ...... 100 100 100 100 100 100 100 100 100 100
May 25, 2008 ............ 100 100 100 100 100 98 89 89 89 89
May 25, 2009 ............ 100 100 100 100 100 96 78 78 59 34
May 25, 2010 ............ 100 100 100 100 100 94 67 60 27 2
May 25, 2011 ............ 100 100 100 100 42 92 56 37 5 0
May 25, 2012 ............ 100 100 100 73 0 89 45 20 0 0
May 25, 2013 ............ 100 96 92 34 0 87 34 10 0 0
May 25, 2014 ............ 99 91 83 12 0 84 25 3 0 0
May 25, 2015 ............ 98 84 71 2 0 81 17 0 0 0
May 25, 2016 ............ 96 75 57 0 0 78 10 0 0 0
May 25, 2017 ............ 94 66 44 0 0 75 6 0 0 0
May 25, 2018 ............ 92 57 33 0 0 72 1 0 0 0
May 25, 2019 ............ 89 49 25 0 0 68 0 0 0 0
May 25, 2020 ............ 86 42 19 0 0 64 0 0 0 0
May 25, 2021 ............ 83 37 14 0 0 60 0 0 0 0
May 25, 2022 ............ 80 31 11 0 0 55 0 0 0 0
May 25, 2023 ............ 77 27 8 0 0 50 0 0 0 0
May 25, 2024 ............ 73 23 6 0 0 45 0 0 0 0
May 25, 2025 ............ 69 19 4 0 0 39 0 0 0 0
May 25, 2026 ............ 65 16 3 0 0 33 0 0 0 0
May 25, 2027 ............ 61 13 2 0 0 27 0 0 0 0
May 25, 2028 ............ 56 11 2 0 0 20 0 0 0 0
May 25, 2029 ............ 51 9 1 0 0 12 0 0 0 0
May 25, 2030 ............ 46 7 1 0 0 5 0 0 0 0
May 25, 2031 ............ 40 6 1 0 0 0 0 0 0 0
May 25, 2032 ............ 34 4 * 0 0 0 0 0 0 0
May 25, 2033 ............ 28 3 * 0 0 0 0 0 0 0
May 25, 2034 ............ 21 2 * 0 0 0 0 0 0 0
May 25, 2035 ............ 14 1 * 0 0 0 0 0 0 0
May 25, 2036 ............ 6 * * 0 0 0 0 0 0 0
May 25, 2037 ............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(2) ........... 21.14 13.21 10.30 5.77 3.96 14.74 4.81 3.50 2.34 1.74
- ---------------
(1) With respect to the Class 2-A-9 Certificates, percentages are expressed as
percentages of initial notional amount.
(2) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Balance or notional amount thereof by the number of years from the date of
the issuance of such class to the related Distribution Date, (ii) adding
the results and (iii) dividing the sum by the initial Class Balance or
notional amount of that class.
* Less than 0.5%, but greater than zero.
B-3
Percentage of Initial Class Balance(1) Outstanding
at the Respective Percentages of PPC Set Forth Below:
Class 2-A-6 and Class 2-A-7 Class 2-A-8
---------------------------------------- ----------------------------------------
Distribution Date 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
----------------- ---- --- ---- ---- ---- ---- --- ---- ---- ----
Initial Percentage ...... 100 100 100 100 100 100 100 100 100 100
May 25, 2008 ............ 100 88 60 33 5 100 100 100 100 100
May 25, 2009 ............ 100 70 17 0 0 100 100 100 100 100
May 25, 2010 ............ 100 57 0 0 0 100 100 100 100 100
May 25, 2011 ............ 100 47 0 0 0 100 100 100 100 0
May 25, 2012 ............ 100 41 0 0 0 100 100 100 0 0
May 25, 2013 ............ 100 40 0 0 0 100 100 100 0 0
May 25, 2014 ............ 100 40 0 0 0 100 100 100 0 0
May 25, 2015 ............ 100 40 0 0 0 100 100 69 0 0
May 25, 2016 ............ 100 39 0 0 0 100 100 27 0 0
May 25, 2017 ............ 100 39 0 0 0 100 100 20 0 0
May 25, 2018 ............ 100 39 0 0 0 100 100 15 0 0
May 25, 2019 ............ 100 35 0 0 0 100 100 12 0 0
May 25, 2020 ............ 100 29 0 0 0 100 100 9 0 0
May 25, 2021 ............ 100 24 0 0 0 100 100 7 0 0
May 25, 2022 ............ 100 20 0 0 0 100 100 5 0 0
May 25, 2023 ............ 100 16 0 0 0 100 100 4 0 0
May 25, 2024 ............ 99 13 0 0 0 100 100 3 0 0
May 25, 2025 ............ 99 10 0 0 0 100 100 2 0 0
May 25, 2026 ............ 99 7 0 0 0 100 100 2 0 0
May 25, 2027 ............ 99 5 0 0 0 100 100 1 0 0
May 25, 2028 ............ 99 3 0 0 0 100 100 1 0 0
May 25, 2029 ............ 99 1 0 0 0 100 100 1 0 0
May 25, 2030 ............ 99 0 0 0 0 100 97 * 0 0
May 25, 2031 ............ 93 0 0 0 0 100 76 * 0 0
May 25, 2032 ............ 78 0 0 0 0 100 57 * 0 0
May 25, 2033 ............ 62 0 0 0 0 100 42 * 0 0
May 25, 2034 ............ 46 0 0 0 0 100 28 * 0 0
May 25, 2035 ............ 28 0 0 0 0 100 16 * 0 0
May 25, 2036 ............ 9 0 0 0 0 100 6 * 0 0
May 25, 2037 ............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(2) ........... 26.60 7.58 1.28 0.81 0.61 29.67 25.75 9.38 4.48 3.22
- ---------------
(1) With respect to the Class 2-A-7 Certificates, percentages are expressed as
percentages of initial notional amount.
(2) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Balance or notional amount thereof by the number of years from the date of
the issuance of such class to the related Distribution Date, (ii) adding
the results and (iii) dividing the sum by the initial Class Balance or
notional amount of that class.
* Less than 0.5%, but greater than zero.
B-4
Percentage of Initial Class Balance(1) Outstanding
at the Respective Percentages of PPC Set Forth Below:
Class 3-A-1, Class 3-A-2 and Class 3-A-3 Class 3-IO
---------------------------------------- ----------------------------------------
Distribution Date 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
----------------- ---- --- ---- ---- ---- ---- --- ---- ---- ----
Initial Percentage ...... 100 100 100 100 100 100 100 100 100 100
May 25, 2008 ............ 99 90 81 72 63 99 91 83 75 67
May 25, 2009 ............ 98 79 61 46 32 98 80 64 50 37
May 25, 2010 ............ 97 69 46 28 14 98 71 50 33 21
May 25, 2011 ............ 96 59 33 16 5 97 63 38 22 11
May 25, 2012 ............ 95 51 24 8 0 96 55 30 15 6
May 25, 2013 ............ 94 45 18 4 0 94 48 23 10 3
May 25, 2014 ............ 92 39 13 1 0 93 43 18 6 2
May 25, 2015 ............ 91 34 9 * 0 92 37 14 4 1
May 25, 2016 ............ 89 29 7 0 0 91 33 10 3 1
May 25, 2017 ............ 87 26 5 0 0 89 29 8 2 *
May 25, 2018 ............ 85 22 4 0 0 87 25 6 1 *
May 25, 2019 ............ 83 19 3 0 0 85 22 5 1 *
May 25, 2020 ............ 81 17 2 0 0 83 19 4 1 *
May 25, 2021 ............ 78 14 2 0 0 80 16 3 * *
May 25, 2022 ............ 76 12 1 0 0 78 14 2 * *
May 25, 2023 ............ 73 11 1 0 0 75 12 2 * *
May 25, 2024 ............ 69 9 1 0 0 72 10 1 * *
May 25, 2025 ............ 66 8 1 0 0 68 9 1 * *
May 25, 2026 ............ 62 6 * 0 0 64 7 1 * *
May 25, 2027 ............ 58 5 * 0 0 61 6 * * *
May 25, 2028 ............ 54 4 * 0 0 56 5 * * *
May 25, 2029 ............ 49 4 * 0 0 52 4 * * *
May 25, 2030 ............ 44 3 * 0 0 47 3 * * *
May 25, 2031 ............ 39 2 * 0 0 41 3 * * *
May 25, 2032 ............ 33 2 * 0 0 36 2 * * *
May 25, 2033 ............ 27 1 * 0 0 29 1 * * *
May 25, 2034 ............ 21 1 * 0 0 23 1 * * *
May 25, 2035 ............ 14 * * 0 0 15 1 * * *
May 25, 2036 ............ 6 * * 0 0 7 * * * *
May 25, 2037 ............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in
years)(2) ............... 20.11 7.13 3.65 2.27 1.65 20.58 7.62 4.14 2.74 2.01
- ---------------
(1) With respect to the Class 3-A-1 and Class 3-IO Certificates, percentages
are expressed as percentages of initial notional amount.
(2) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Balance or notional amount thereof by the number of years from the date of
the issuance of such class to the related Distribution Date, (ii) adding
the results and (iii) dividing the sum by the initial Class Balance or
notional amount of that class.
* Less than 0.5%, but greater than zero.
B-5
Percentage of Initial Class Balance Outstanding
at the Respective Percentages of PPC Set Forth Below:
Class B-1 Class B-2 and Class B-3
---------------------------------------- ----------------------------------------
Distribution Date 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
----------------- ---- --- ---- ---- ---- ---- --- ---- ---- ----
Initial Percentage ...... 100 100 100 100 100 100 100 100 100 100
May 25, 2008 ............ 99 99 99 99 99 99 99 99 99 99
May 25, 2009 ............ 98 98 98 98 98 98 98 98 98 98
May 25, 2010 ............ 97 97 97 97 97 97 97 97 97 97
May 25, 2011 ............ 96 96 96 96 96 96 96 96 96 96
May 25, 2012 ............ 94 94 94 94 85 94 94 94 94 85
May 25, 2013 ............ 93 90 86 83 47 93 90 86 83 47
May 25, 2014 ............ 91 84 77 69 26 92 84 77 69 26
May 25, 2015 ............ 90 77 65 54 14 90 77 65 54 14
May 25, 2016 ............ 88 69 52 37 8 88 69 52 37 8
May 25, 2017 ............ 86 60 40 24 4 86 60 40 24 4
May 25, 2018 ............ 84 52 30 16 2 84 52 30 16 2
May 25, 2019 ............ 82 45 23 10 1 82 45 23 10 1
May 25, 2020 ............ 79 39 18 7 1 80 39 18 7 1
May 25, 2021 ............ 77 34 13 4 * 77 34 13 4 *
May 25, 2022 ............ 74 29 10 3 * 74 29 10 3 *
May 25, 2023 ............ 71 25 7 2 * 71 25 7 2 *
May 25, 2024 ............ 68 21 6 1 * 68 21 6 1 *
May 25, 2025 ............ 64 18 4 1 * 64 18 4 1 *
May 25, 2026 ............ 61 15 3 * * 61 15 3 * *
May 25, 2027 ............ 57 12 2 * * 57 12 2 * *
May 25, 2028 ............ 52 10 2 * * 52 10 2 * *
May 25, 2029 ............ 48 8 1 * * 48 8 1 * *
May 25, 2030 ............ 43 7 1 * * 43 7 1 * *
May 25, 2031 ............ 38 5 1 * * 38 5 1 * *
May 25, 2032 ............ 32 4 * * * 32 4 * * *
May 25, 2033 ............ 26 3 * * * 26 3 * * *
May 25, 2034 ............ 20 2 * * * 20 2 * * *
May 25, 2035 ............ 13 1 * * * 13 1 * * *
May 25, 2036 ............ 6 * * * * 6 * * * *
May 25, 2037 ............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in
years)(1) ............... 19.78 12.46 9.77 8.46 6.31 19.82 12.46 9.77 8.46 6.31
- ---------------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Balance thereof by the number of years from the date of the issuance of
such class to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the initial Class Balance of that class.
* Less than 0.5%, but greater than zero.
B-6
Appendix C - Hypothetical Mortgage Loans
Gross Mortgage Remaining Term Original Interest Only
Unpaid Principal Balance ($) Interest Rate (%) (Months) Age (Months) Term (Months)
- ---------------------------- ----------------- -------------- ------------ ----------------------
163,632.92 5.2500000000 358 2 0
127,780.60 5.3750000000 237 3 0
385,746.21 5.5000000000 359 1 0
1,041,385.50 5.6250000000 359 1 0
1,019,419.12 5.6250000000 358 2 0
333,492.58 5.7500000000 358 2 0
3,504,174.64 5.7500000000 359 1 0
4,531,907.90 5.7500000000 357 2 0
962,088.88 5.8750000000 359 1 0
999,943.28 5.8750000000 359 1 0
4,516,486.07 5.8750000000 358 2 0
1,361,891.95 6.0000000000 359 1 0
3,448,325.19 6.0000000000 358 2 0
7,652,018.89 6.0000000000 354 2 0
1,408,468.28 6.1250000000 359 1 0
4,891,268.59 6.1250000000 359 1 0
4,902,826.38 6.1250000000 351 1 0
1,617,842.91 6.2500000000 359 1 0
2,630,742.60 6.2500000000 355 2 0
17,482,762.14 6.2500000000 359 1 0
22,023,106.01 6.2500000000 354 2 0
2,370,922.00 6.3750000000 359 1 0
4,151,391.99 6.3750000000 358 2 0
9,474,560.43 6.3750000000 359 1 0
23,742,700.54 6.3750000000 357 2 0
1,898,588.19 6.5000000000 313 1 0
3,840,075.64 6.5000000000 359 1 0
10,809,043.59 6.5000000000 359 1 0
27,722,320.49 6.5000000000 355 1 0
626,328.57 6.6250000000 357 3 0
1,207,168.97 6.6250000000 359 1 0
2,282,499.33 6.6250000000 358 2 0
15,001,475.38 6.6250000000 354 2 0
1,778,100.51 6.7500000000 359 1 0
5,119,552.55 6.7500000000 359 1 0
5,464,114.76 6.7500000000 358 2 0
17,205,652.15 6.7500000000 358 2 0
2,998,061.39 6.8750000000 359 1 0
8,351,346.34 6.8750000000 359 1 0
5,276,168.07 6.8750000000 359 1 0
16,863,189.05 6.8750000000 354 2 0
763,500.00 7.0000000000 360 0 0
3,442,935.32 7.0000000000 353 1 0
5,101,683.01 7.0000000000 358 2 0
14,621,232.96 7.0000000000 356 1 0
1,061,150.73 7.1250000000 359 1 0
757,356.52 7.1250000000 343 1 0
1,535,935.52 7.1250000000 358 2 0
7,362,894.87 7.1250000000 359 1 0
1,788,603.61 7.2500000000 359 1 0
C-1
Gross Mortgage Remaining Term Original Interest Only
Unpaid Principal Balance ($) Interest Rate (%) (Months) Age (Months) Term (Months)
- ---------------------------- ----------------- -------------- ------------ ----------------------
2,934,758.73 7.2500000000 356 2 0
2,671,121.33 7.2500000000 359 1 0
9,345,008.53 7.2500000000 357 2 0
454,403.97 7.3750000000 359 1 0
4,150,220.16 7.3750000000 356 1 0
3,954,412.23 7.3750000000 358 2 0
9,790,029.28 7.3750000000 354 1 0
960,000.00 7.5000000000 360 0 0
2,507,217.75 7.5000000000 359 1 0
6,278,896.19 7.5000000000 359 1 0
5,967,904.37 7.5000000000 359 1 0
439,361.04 7.6250000000 358 2 0
1,960,250.44 7.6250000000 359 1 0
537,500.00 7.6250000000 360 0 0
6,083,986.31 7.6250000000 359 1 0
1,056,253.98 7.7500000000 359 1 0
1,801,744.24 7.7500000000 359 1 0
2,254,407.73 7.7500000000 359 1 0
1,727,349.70 7.7500000000 359 1 0
1,267,085.61 7.8750000000 359 1 0
974,150.00 7.8750000000 360 0 0
2,257,049.47 7.8750000000 359 1 0
425,169.31 8.0000000000 359 1 0
798,922.85 8.0000000000 358 2 0
466,978.57 8.0000000000 359 1 0
85,500.00 8.1250000000 360 0 0
76,000.00 8.1250000000 360 0 0
363,992.00 5.6250000000 359 1 120
226,400.00 5.8750000000 359 1 120
593,140.00 6.0000000000 359 1 120
1,420,853.54 6.1250000000 356 4 120
652,000.00 6.2500000000 359 1 120
1,304,545.83 6.2500000000 359 1 120
278,000.00 6.3750000000 359 1 120
3,203,300.00 6.3750000000 358 2 120
2,910,907.28 6.3750000000 359 1 120
1,500,000.00 6.5000000000 359 1 120
2,068,542.00 6.5000000000 359 1 120
580,000.00 6.6250000000 359 1 120
1,003,480.00 6.6250000000 359 1 120
2,325,000.00 6.7500000000 358 2 120
949,250.00 6.7500000000 359 1 120
345,000.00 6.8750000000 360 0 120
3,134,203.00 6.8750000000 359 1 120
2,546,338.00 6.8750000000 359 1 120
676,000.00 7.0000000000 359 1 120
888,000.00 7.0000000000 360 0 120
647,650.00 7.1250000000 359 1 120
907,000.00 7.2500000000 359 1 120
924,840.00 7.2500000000 360 0 120
468,000.00 7.3750000000 358 2 120
344,000.00 7.3750000000 359 1 120
346,100.00 7.5000000000 359 1 120
C-2
Gross Mortgage Remaining Term Original Interest Only
Unpaid Principal Balance ($) Interest Rate (%) (Months) Age (Months) Term (Months)
- ---------------------------- ----------------- -------------- ------------ ----------------------
1,867,049.97 7.5000000000 359 1 120
652,320.00 7.5000000000 359 1 120
221,760.00 7.6250000000 360 0 120
400,000.00 7.6250000000 359 1 120
1,260,000.00 7.7500000000 359 1 120
503,220.00 7.7500000000 359 1 120
800,000.00 7.7500000000 358 2 120
145,600.00 7.7500000000 360 0 120
826,360.00 7.8750000000 358 2 120
227,899.50 5.7500000000 358 2 180
245,600.00 5.8750000000 359 1 180
220,000.00 6.0000000000 359 1 180
251,200.00 6.2500000000 360 0 180
415,200.00 6.5000000000 360 0 180
77,600.00 6.6250000000 358 2 180
80,550.00 6.7500000000 356 4 180
299,000.00 6.8750000000 359 1 180
2,180,000.00 7.0000000000 358 2 180
75,920.00 7.1250000000 360 0 180
187,700.00 7.2500000000 359 1 180
592,000.00 7.7500000000 360 0 180
C-3
Appendix D - Sensitivity and Aggregate Realized Loss Tables
The following tables have been prepared based on the assumptions described in
this prospectus supplement under "Prepayment and Yield Considerations" and
should be read in conjunction with that section.
Sensitivity of Pre-Tax Yields to Maturity of the Class 1-PO
Certificates to Prepayments
Percentage of PPC
-----------------
0% 50% 100% 150% 200%
----- ----- ------ ------ ------
Class 1-PO Certificates......... 2.44% 7.18% 13.36% 20.16% 27.54%
Sensitivity of Pre-Tax Yields to Maturity of the Class 2-A-7
Certificates to Changes in One-Month LIBOR
Percentage of PPC
-----------------
One-Month LIBOR 0% 50% 100% 150% 200%
- --------------------- --------- --------- --------- --------- ---------
0.00000%............. 1,988.55% 1,940.09% 1,752.23% 1,551.34% 1,340.33%
2.32000%............. 842.66% 809.91% 702.42% 582.93% 460.66%
3.8200%.............. 355.36% 329.92% 254.96% 169.93% 91.43%
5.32000%............. 35.83% 19.94% (69.25)% ** **
5.33000%............. 34.20% 18.54% (71.64)% ** **
6.6400% and above.... ** ** ** ** **
- ----------
** Pre-tax yield to maturity is less than (99.99)%
Sensitivity of Pre-Tax Yields to Maturity of the Class 2-A-9
Certificates to Prepayments
Percentage of PPC
-----------------
0% 50% 100% 150% 200%
------ ------ ------ ------- ------
Class 2-A-9 Certificates........ 32.05% 15.90% 6.14% (17.12)% (42.78)%
Sensitivity of Pre-Tax Yields to Maturity of the Class 3-A-1
Certificates to Changes in One-Month LIBOR
Percentage of PPC
-----------------
One-Month LIBOR 0% 50% 100% 150% 200%
- --------------------- ------- -------- -------- -------- --------
0.00000%............. 237.10% 219.38% 200.59% 180.47% 158.67%
2.32000%............. 141.96% 126.47% 109.85% 91.74% 71.61%
3.8200%.............. 87.40% 73.15% 57.61% 40.03% 19.92%
5.32000%............. 37.98% 24.86% 9.98% (9.79)% (32.15)%
5.33000%............. 37.66% 24.55% 9.67% (10.13)% (32.53)%
6.6400% and above.... ** ** ** ** **
- ----------
** Pre-tax yield to maturity is less than (99.99)%
D-1
Sensitivity of Pre-Tax Yields to Maturity of the Class 3-IO
Certificates to Prepayments
Percentage of PPC
-----------------
0% 50% 100% 150% 200%
------ ------ ------ ------- ------
Class 3-IO Certificates......... 36.57% 24.62% 11.96% (1.56)% (16.14)%
Sensitivity of Pre-Tax Yields to Maturity of the Class B-2
Certificates to Prepayments and Realized Losses
Loss Percentage of PPC
Severity -------------------------------------------
Percentage of SDA Percentage 0% 50% 100% 150% 200%
- ----------------- ---------- ---- ---- ---- ---- ----
0%................... 0% 6.81% 6.90% 6.97% 7.01% 7.13%
50%.................. 25% 6.81 6.90 6.97 7.01 7.13
50%.................. 50% 6.79 6.91 6.97 7.01 7.13
75%.................. 25% 6.80 6.91 6.97 7.01 7.13
75%.................. 50% 6.78 6.91 6.97 7.01 7.13
100%................. 25% 6.79 6.91 6.97 7.01 7.13
100%................. 50% 6.77 6.91 6.97 7.01 7.13
150%................. 25% 6.78 6.91 6.97 7.01 7.13
150%................. 50% 6.55 6.92 6.97 7.01 7.13
Sensitivity of Pre-Tax Yields to Maturity of the Class B-3
Certificates to Prepayments and Realized Losses
Loss Percentage of PPC
Severity -------------------------------------------
Percentage of SDA Percentage 0% 50% 100% 150% 200%
- ----------------- ---------- ---- ---- ---- ---- ----
0%................... 0% 8.98% 9.71% 10.17% 10.50% 11.45%
50%.................. 25% 8.79 9.72 10.17 10.50 11.45
50%.................. 50% 8.66 9.72 10.17 10.50 11.44
75%.................. 25% 8.72 9.73 10.17 10.50 11.45
75%.................. 50% 8.58 9.75 10.17 10.50 11.44
100%................. 25% 8.66 9.72 10.17 10.50 11.46
100%................. 50% 7.94 9.77 10.17 10.50 11.43
150%................. 25% 8.59 9.76 10.18 10.51 11.46
150%................. 50% (11.29) 9.46 10.18 10.50 11.42
D-2
The following table sets forth the amount of Realized Losses that would be
incurred with respect to the Mortgage Loans, expressed as a percentage of the
aggregate outstanding principal balance of the Mortgage Loans as of the Cut-off
Date.
Aggregate Realized Losses
Loss Percentage of PPC
Severity -------------------------------------------
Percentage of SDA Percentage 0% 50% 100% 150% 200%
- ----------------- ---------- ---- ---- ---- ---- ----
50%.................. 25% 0.49% 0.30% 0.19% 0.13% 0.08%
50%.................. 50% 0.98 0.59 0.38 0.25 0.17
75%.................. 25% 0.73 0.44 0.28 0.19 0.13
75%.................. 50% 1.46 0.88 0.57 0.37 0.25
100%................. 25% 0.97 0.59 0.38 0.25 0.17
100%................. 50% 1.94 1.17 0.75 0.50 0.34
150%................. 25% 1.44 0.87 0.56 0.37 0.25
150%................. 50% 2.88 1.75 1.13 0.75 0.50
D-3
Appendix E - Yield Maintenance Agreement Notional Amounts
Yield Maintenance Agreement Yield Maintenance
Distribution Date Agreement Notional Amount
- --------------------------------------- -------------------------
June 25, 2007.......................... $ 40,089,000
July 25, 2007.......................... $ 39,748,428
August 25, 2007........................ $ 39,301,759
September 25, 2007..................... $ 38,750,524
October 25, 2007....................... $ 38,096,516
November 25, 2007...................... $ 37,341,795
December 25, 2007...................... $ 36,488,681
January 25, 2008....................... $ 35,539,747
February 25, 2008...................... $ 34,497,817
March 25, 2008......................... $ 33,366,595
April 25, 2008......................... $ 32,149,582
May 25, 2008........................... $ 30,901,943
June 25, 2008.......................... $ 29,682,505
July 25, 2008.......................... $ 28,491,493
August 25, 2008........................ $ 27,328,477
September 25, 2008..................... $ 26,193,029
October 25, 2008....................... $ 25,084,730
November 25, 2008...................... $ 24,003,166
December 25, 2008...................... $ 22,947,931
January 25, 2009....................... $ 21,918,624
February 25, 2009...................... $ 20,914,850
March 25, 2009......................... $ 19,936,220
April 25, 2009......................... $ 18,982,351
May 25, 2009........................... $ 18,052,866
June 25, 2009.......................... $ 17,147,394
July 25, 2009.......................... $ 16,265,568
August 25, 2009........................ $ 15,407,030
September 25, 2009..................... $ 14,571,423
October 25, 2009....................... $ 13,758,398
November 25, 2009...................... $ 12,967,612
December 25, 2009...................... $ 12,198,726
January 25, 2010....................... $ 11,451,405
February 25, 2010...................... $ 10,725,321
March 25, 2010......................... $ 10,020,150
April 25, 2010......................... $ 9,335,574
May 25, 2010........................... $ 8,671,279
E-1
Yield Maintenance Agreement Yield Maintenance
Distribution Date Agreement Notional Amount
- --------------------------------------- -------------------------
June 25, 2010.......................... $ 8,026,955
July 25, 2010.......................... $ 7,402,297
August 25, 2010........................ $ 6,797,007
September 25, 2010..................... $ 6,210,789
October 25, 2010....................... $ 5,643,351
November 25, 2010...................... $ 5,094,408
December 25, 2010...................... $ 4,563,678
January 25, 2011....................... $ 4,050,882
February 25, 2011...................... $ 3,555,747
March 25, 2011......................... $ 3,078,003
April 25, 2011......................... $ 2,617,386
May 25, 2011........................... $ 2,173,634
June 25, 2011.......................... $ 1,746,489
July 25, 2011.......................... $ 1,335,699
August 25, 2011........................ $ 941,013
September 25, 2011..................... $ 562,186
October 25, 2011....................... $ 198,976
November 25, 2011 ------------
E-2
Banc of America Mortgage Securities, Inc.
Depositor
Bank of America, National Association
Sponsor
Mortgage Pass-Through Certificates
(Issuable in Series)
----------------------------------
- --------------------------------------------------------------------------------
You should carefully consider the risk factors beginning on page 11 of this
prospectus.
Except as otherwise described in the applicable prospectus supplement,
neither the certificates of any series nor the related underlying mortgage
loans will be insured or guaranteed by any governmental agency or
instrumentality.
The certificates of each series will represent interests in the related
issuing entity only and will not represent interests in or obligations of the
depositor, the sponsor or any other entity.
This prospectus may be used to offer and sell any series of certificates only
if accompanied by the prospectus supplement for that series.
- --------------------------------------------------------------------------------
Each Issuing Entity--
o will issue a series of mortgage pass-through certificates, which will
consist of one or more classes of certificates; and
o will own a pool or pools of fixed or adjustable interest rate mortgage
loans, each of which is secured by a first lien on a one- to four-family
residential property.
Each Pool of Mortgage Loans--
o will be sold to the related issuing entity by the depositor, who will have
in turn purchased the mortgage loans from the sponsor;
o will be underwritten to the standards described in this prospectus or the
accompanying prospectus supplement; and
o will be serviced by one or more servicers affiliated or unaffiliated with
the depositor.
Each Series of Certificates--
o will represent interests in the related issuing entity;
o may provide credit support by "subordinating" certain classes to other
classes of certificates; any subordinate classes will be entitled to
payment subject to the payment of more senior classes and will bear losses
before more senior classes;
o may be entitled to the benefit of one or more of the other types of credit
support or derivative instruments described in this prospectus and in more
detail in the accompanying prospectus supplement; and
o will be paid only from the assets of the related issuing entity.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the certificates or determined that this prospectus
is accurate or complete. Any representation to the contrary is a criminal
offense.
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The date of this prospectus is April 27, 2007.
TABLE OF CONTENTS
PROSPECTUS
IMPORTANT INFORMATION PRESENTED IN THIS PROSPECTUS
AND THE PROSPECTUS SUPPLEMENT..............................................5
SUMMARY OF PROSPECTUS.......................................................6
RISK FACTORS...............................................................11
Limited Source of Payments - No Recourse to Depositor, Sponsor,
Servicer or Trustee..................................................11
Limited Liquidity.......................................................11
Certificates May Not Be Appropriate For Individual Investors............12
Credit Enhancement is Limited in Amount and Coverage....................12
The Ratings of Your Certificates May Be Lowered or Withdrawn Which
May Adversely Affect the Liquidity or Market Value of Your
Certificates.........................................................13
Real Estate Market Conditions Affect Mortgage Loan Performance..........13
Geographic Concentration May Increase Risk of Loss......................13
General Economic Conditions May Increase Risk of Loss...................14
Collateral Securing Cooperative Loans May Diminish in Value.............14
Leaseholds May Be Subject to Default Risk on the Underlying Lease.......14
Yield is Sensitive to Rate of Principal Prepayment......................15
Timing of Prepayments on the Mortgage Loans May Result in Interest
Shortfalls on the Certificates.......................................16
Exercise of Rights Under Special Servicing Agreements May Be Adverse
to Other Certificateholders..........................................16
Special Powers of the FDIC in the Event of Insolvency of the Sponsor
Could Delay or Reduce Distributions on the Certificates..............17
Insolvency of the Depositor May Delay or Reduce Collections on
Mortgage Loans.......................................................18
Book-Entry System for Certain Classes of Certificates May Decrease
Liquidity and Delay Payment..........................................18
Cash Flow Agreements and External Credit Enhancements are Subject to
Third Party Risk.....................................................19
Amounts Received from an Auction and a Related Swap Agreement May Be
Insufficient to Assure Completion of the Auction.....................19
Servicing Transfer Following Event of Default May Result in Payment
Delays or Losses.....................................................20
Consumer Protection Laws May Limit Remedies.............................20
THE TRUST ESTATES..........................................................21
General.................................................................21
Mortgage Loans..........................................................21
THE SPONSOR................................................................27
THE DEPOSITOR..............................................................28
THE MORTGAGE LOAN PROGRAMS.................................................28
Mortgage Loan Underwriting..............................................28
General..............................................................29
Bank of America General Underwriting Standards.......................29
Bank of America Alternative Underwriting Standards...................36
Representations and Warranties..........................................37
DESCRIPTION OF THE CERTIFICATES............................................38
General.................................................................38
Definitive Form.........................................................39
Book-Entry Form.........................................................40
Distributions to Certificateholders.....................................48
Subordination...........................................................50
Other Credit Enhancement................................................51
Cash Flow Agreements....................................................56
Categories of Classes of Certificates...................................57
Mandatory Auction of Certificates.......................................61
Exchangeable REMIC Certificates and Exchangeable Certificates...........62
2
PREPAYMENT AND YIELD CONSIDERATIONS........................................64
Pass-Through Rates......................................................64
Scheduled Delays in Distributions.......................................65
Effect of Principal Prepayments.........................................65
Weighted Average Life of Certificates...................................66
SERVICING OF THE MORTGAGE LOANS............................................67
The Master Servicer.....................................................68
The Servicers...........................................................68
Servicing Experience and Procedures of Bank of America..................70
General..............................................................70
Delinquencies, Losses, Bankruptcies and Recoveries...................71
Payments on Mortgage Loans; Certificate and Custodial Accounts..........74
Periodic Advances and Servicing Advances................................77
Collection and Other Servicing Procedures...............................78
Enforcement of "Due-on-Sale" Clauses; Realization Upon Defaulted
Mortgage Loans.......................................................79
Insurance Policies......................................................81
Fixed Retained Yield, Servicing Compensation and Payment of Expenses....82
Evidence as to Compliance...............................................83
THE POOLING AGREEMENT......................................................84
Assignment of Mortgage Loans............................................84
Repurchases of Mortgage Loans...........................................84
Special Servicing Agreements............................................86
Reports to Certificateholders...........................................86
List of Certificateholders..............................................88
Events of Default.......................................................88
Rights Upon Event of Default............................................88
Amendment...............................................................89
Termination; Optional Purchase of Mortgage Loans........................90
The Trustee.............................................................91
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS................................92
General.................................................................92
Condominiums............................................................93
Cooperatives............................................................93
Foreclosure.............................................................93
Foreclosure on Shares of Cooperatives...................................94
Leaseholds..............................................................95
Rights of Redemption....................................................96
Anti-Deficiency Legislation, the Bankruptcy Code and Other
Limitations on Lenders...............................................96
Forfeiture for Drug, RICO and Money Laundering Violations...............98
Homeowners Protection Act of 1998.......................................99
Texas Home Equity Loans.................................................99
Servicemembers Civil Relief Act and Similar Laws.......................100
Environmental Considerations...........................................100
"Due-on-Sale" Clauses..................................................102
Applicability of Usury Laws............................................103
Enforceability of Certain Provisions...................................104
FEDERAL INCOME TAX CONSEQUENCES...........................................104
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES....................105
General................................................................105
Status of REMIC Certificates...........................................105
Qualification as a REMIC...............................................106
Taxation of Regular Certificates.......................................108
General.............................................................108
Original Issue Discount.............................................108
Acquisition Premium.................................................110
Variable Rate Regular Certificates..................................111
Market Discount.....................................................112
Premium.............................................................113
Election to Treat All Interest Under the Constant Yield Method......113
Treatment of Losses.................................................114
Sale or Exchange of Regular Certificates............................114
Taxation of Residual Certificates......................................115
Taxation of REMIC Income............................................115
Basis and Losses....................................................116
Treatment of Certain Items of REMIC Income and Expense..............117
Limitations on Offset or Exemption of REMIC Income..................118
Tax-Related Restrictions on Transfer of Residual Certificates.......119
3
Sale or Exchange of a Residual Certificate..........................122
Mark to Market Regulations..........................................123
Taxes That May Be Imposed on the REMIC Pool............................123
Prohibited Transactions.............................................123
Contributions to the REMIC Pool After the Startup Day...............123
Net Income from Foreclosure Property................................123
Liquidation of the REMIC Pool..........................................124
Administrative Matters.................................................124
Limitations on Deduction of Certain Expenses...........................124
Taxation of Certain Foreign Investors..................................125
Regular Certificates................................................125
Residual Certificates...............................................126
Backup Withholding.....................................................126
Reporting Requirements.................................................126
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO WHICH NO REMIC
ELECTION IS MADE.......................................................127
General................................................................127
Tax Status.............................................................128
Premium and Discount...................................................128
Premium.............................................................128
Original Issue Discount.............................................129
Market Discount.....................................................129
Recharacterization of Servicing Fees...................................129
Sale or Exchange of Certificates.......................................130
Stripped Certificates..................................................130
General.............................................................130
Status of Stripped Certificates.....................................132
Taxation of Stripped Certificates...................................132
Reporting Requirements and Backup Withholding..........................133
Taxation of Certain Foreign Investors..................................134
Reportable Transactions................................................134
FEDERAL INCOME TAX CONSEQUENCES FOR EXCHANGEABLE CERTIFICATES.............134
Tax Status.............................................................134
Exchangeable Certificates Representing Proportionate Interests in
Two or More Exchangeable REMIC Certificates.........................135
Exchangeable Certificates Representing Disproportionate Interests in
Exchangeable REMIC Certificates.....................................135
Sales, Exchanges and Other Dispositions of Exchangeable Certificates...136
ERISA CONSIDERATIONS......................................................136
General................................................................136
Certain Requirements Under ERISA and the Code..........................137
General.............................................................137
Parties in Interest/Disqualified Persons............................137
Delegation of Fiduciary Duty........................................137
Applicability to Non-ERISA Plans....................................138
Administrative Exemptions..............................................138
Individual Administrative Exemptions................................138
PTE 83-1............................................................139
Non-ERISA Plans and Exempt Plans.......................................140
Unrelated Business Taxable Income-Residual Certificates................140
LEGAL INVESTMENT..........................................................141
PLAN OF DISTRIBUTION......................................................143
USE OF PROCEEDS...........................................................144
LEGAL MATTERS.............................................................144
RATING....................................................................144
REPORTS TO CERTIFICATEHOLDERS.............................................145
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.........................145
WHERE YOU CAN FIND MORE INFORMATION.......................................145
INDEX OF PROSPECTUS DEFINITIONS...........................................147
4
Important Notice About Information Presented
in this Prospectus and the Prospectus Supplement
Information is provided to you about the certificates in two separate
documents that progressively provide more detail: (a) this prospectus, which
provides general information, some of which may not apply to a particular series
of certificates, including your series, and (b) the accompanying prospectus
supplement, which will describe the specific terms of your series of
certificates, including:
o the principal balances and/or interest rates of each class;
o the timing and priority of interest and principal payments;
o statistical and other information about the mortgage loans;
o information about credit enhancement, if any, for each class;
o the ratings for each class; and
o the method for selling the certificates.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement including the information incorporated by
reference. No one has been authorized to provide you with different information.
The certificates are not being offered in any state where the offer is not
permitted. The depositor does not claim that the information in this prospectus
or the accompanying prospectus supplement is accurate as of any date other than
the dates stated on their respective covers.
Cross-references are included in this prospectus and in the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The table of contents in this prospectus and the table of
contents in the accompanying prospectus supplement provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Prospectus Definitions"
beginning on page 147 in this prospectus.
----------------------------------
5
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SUMMARY OF PROSPECTUS
- --------------------------------------------------------------------------------
o This summary highlights selected information from this document, but
does not contain all of the information that you should consider in
making your investment decision. To understand all of the terms of a
series of certificates, please read this entire document and the
accompanying prospectus supplement carefully.
o This summary provides an overview of certain calculations, cash flows
and other information to aid your understanding of the terms of the
certificates and is qualified by the full description of these
calculations, cash flows and other information in this prospectus and
the accompanying prospectus supplement.
RELEVANT PARTIES FOR EACH SERIES OF CERTIFICATES
Issuing Entity
Each series of certificates will be issued by a separate common law trust.
Each trust will be established and each series of certificates will be issued
under a separate pooling and servicing agreement among the depositor, one or
more servicers and/or a master servicer and the trustee specified in the
applicable prospectus supplement.
Sponsor
Bank of America, National Association will be the sponsor of each series of
certificates. The mortgage loans will either be originated by the sponsor or
purchased by the sponsor from various entities that either originated the
mortgage loans to the sponsor's underwriting standards or to the underwriting
standards described in the related prospectus supplement. The sponsor will sell
the mortgage loans to the depositor on the closing date specified in the related
prospectus supplement by means of a mortgage loan purchase agreement between the
sponsor and the depositor.
Depositor
Banc of America Mortgage Securities, Inc. will serve as the depositor for
each series of certificates. The depositor will acquire the mortgage loans from
the sponsor, and will transfer them to each trust. The depositor is a direct,
wholly-owned subsidiary of the sponsor. It is not expected that the depositor
will have any business operations other than offering certificates and related
activities.
Servicer(s)
The sponsor or one or more entities affiliated or unaffiliated with the
depositor and named in the applicable prospectus supplement will service the
mortgage loans in each trust. Each servicer will perform certain servicing
functions relating to the mortgage loans serviced by it in accordance with the
related pooling and servicing agreement or underlying servicing agreement.
Master Servicer
To the extent specified in the related prospectus supplement, if there is
more than one servicer of the mortgage loans for a series, a master servicer,
affiliated or unaffiliated with the depositor, may be appointed by the depositor
to supervise the servicers.
Trustee
A trustee for each trust will be named in the applicable prospectus
supplement. The trustee generally will be responsible under each pooling and
servicing agreement for providing general administrative services on behalf of
the trust for a series. To the extent specified in the related prospectus
supplement, a securities administrator may perform certain of the duties of the
trustee.
6
THE MORTGAGE LOANS
Each trust will own the related mortgage loans (other than the fixed
retained yield, which is the portion of the mortgage interest rate, if any, not
contained in the trust).
The mortgage loans in each trust estate:
o will be fixed or adjustable interest rate mortgage loans secured by
first liens on some or all of the following types of property, to the
extent set forth in the applicable prospectus supplement: (i) one-family
attached or detached residences, (ii) two- to four-family units, (iii)
row houses, (iv) townhouses, (v) condominium units, including
condominium hotels, (vi) units within planned unit developments, (vii)
long-term leases on any of the foregoing types of property, and (viii)
shares issued by private non-profit housing corporations, known as
cooperatives, and the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specified units in cooperative
buildings;
o will have been acquired by the depositor from the sponsor;
o will have been originated or acquired by the sponsor; and
o will have been underwritten to the standards specified in this
prospectus or in the applicable prospectus supplement.
See "Servicing of the Mortgage Loans--Fixed Retained Yield, Servicing
Compensation and Payment of Expenses" for a description of fixed retained yield.
See "The Trust Estates" for a description of mortgage loans secured by leases
and "Certain Legal Aspects of the Mortgage Loans--Condominiums,"
"--Cooperatives" and "--Leaseholds" for a description of mortgage loans secured
by condominium units, shares issued by cooperatives and leaseholds. See "The
Mortgage Loan Programs--Mortgage Loan Underwriting" for a description of the
underwriting standards of the Sponsor and "The Sponsor" for a description of the
Sponsor.
You should refer to the applicable prospectus supplement for the precise
characteristics or expected characteristics of the mortgage loans included in a
particular trust estate.
DISTRIBUTIONS ON THE CERTIFICATES
Each series of certificates will include one or more classes. A class of
certificates will be entitled, to the extent of funds available, to receive
distributions from collections on the related mortgage loans and, to the extent
specified in the related prospectus supplement, from any credit enhancements or
cash flow agreements described in this prospectus.
Interest Distributions
For each series of certificates, interest on the related mortgage loans at
the weighted average of their mortgage interest rates (net of servicing fees and
certain other amounts as described in this prospectus or in the applicable
prospectus supplement), will be passed through to holders of the related classes
of certificates in accordance with the particular terms of each class of
certificates. The terms of each class of certificates will be described in the
related prospectus supplement. See "Description of the
Certificates--Distributions to Certificateholders--Distributions of Interest."
Interest will accrue at the pass-through rate for each class indicated in
the applicable prospectus supplement on its outstanding class balance or
notional amount.
Principal Distributions
For a series of certificates, principal payments (including prepayments) on
the related mortgage loans will be passed through to holders of the related
certificates or otherwise applied in accordance with the related pooling and
servicing agreement on each distribution date. Principal distributions will be
allocated among
7
the classes of certificates of a series in the manner specified in the
applicable prospectus supplement. See "Description of the
Certificates--Distributions to Certificateholders--Distributions of Principal."
Distribution Dates
Distributions on the certificates will be made on the dates specified in the
applicable prospectus supplement. The cut-off date for each series will be the
date specified in the applicable prospectus supplement.
Record Dates
Distributions will be made on each distribution date to certificateholders
of record at the close of business on the last business day of the month
preceding the month in which the distribution date occurs (unless a different
date is specified in the applicable prospectus supplement).
CREDIT ENHANCEMENT
Subordination
A series of certificates may include one or more classes of senior
certificates and one or more classes of subordinate certificates. The rights of
the holders of subordinate certificates of a series to receive distributions
will be subordinated to the rights of the holders of the senior certificates of
the same series to the extent and in the manner specified in the applicable
prospectus supplement.
Subordination is intended to enhance the likelihood of the timely receipt by
the senior certificateholders of their monthly principal and interest
distributions and to protect them from losses. This protection may be effected
by:
o the preferential right of the senior certificateholders to receive,
prior to any distribution being made to the related subordinate
certificates on each distribution date, current distributions of
principal and interest due them on each distribution date out of the
funds available for distributions for that date;
o the right of the senior certificateholders to receive future
distributions on the mortgage loans that would otherwise have been
payable to the subordinate certificateholders;
o the prior allocation to the subordinate certificates of all or a portion
of losses realized on the underlying mortgage loans; and
o any other method specified in the related prospectus supplement.
Other Types of Credit Enhancement
If specified in the applicable prospectus supplement, the certificates of
any series, or any one or more classes of a series, may, in addition to or in
lieu of subordination, be entitled to the benefits of one or more of the
following types of credit enhancement:
o limited guarantee
o financial guaranty insurance policy
o surety bond
o letter of credit
o mortgage pool insurance policy
o reserve fund
o cross collateralization
o overcollateralization
o excess interest
See "Description of the Certificates--Other Credit Enhancement." In
addition, if specified in the applicable prospectus supplement, amounts received
under any cash flow agreement described under "Description of the
Certificates--Cash Flow Agreements" may also be used to provide credit
enhancement for one or more classes of certificates.
PERIODIC ADVANCES ON DELINQUENT PAYMENTS
In the event that a principal or interest payment on a mortgage loan is
delinquent, the servicer of the mortgage loan will be obligated
8
to make cash advances to the servicer custodial account if the servicer
determines that it will be able to recover those amounts from future payments
and collections on the mortgage loan. A servicer who makes principal or interest
advances will be reimbursed for those advances as described in this prospectus.
If the servicer fails to make a required principal or interest advance, the
master servicer or trustee will be required to make the advance from its own
funds unless the trustee or master servicer, as the case may be, determines that
it will not be able to recover those amounts from future payments and
collections on the mortgage loan.
See "Servicing of the Mortgage Loans--Periodic Advances and Servicing
Advances."
FORMS OF CERTIFICATES
The certificates will be issued either:
o in book-entry form through the facilities of DTC; or
o in fully-registered, certificated form.
If you own book-entry certificates, you will not receive a physical
certificate representing your ownership interest in the book-entry certificates,
except under extraordinary circumstances which are discussed in "Description of
the Certificates--Book-Entry Form." Instead, DTC will effect payments and
transfers by means of its electronic recordkeeping services, acting through
certain participating organizations, including Clearstream and Euroclear. This
may result in certain delays in your receipt of distributions and may restrict
your ability to pledge your securities. Your rights relating to your book-entry
certificates may generally only be exercised through DTC and its participating
organizations, including Clearstream and Euroclear.
See "Description of the Certificates--Book-Entry Form."
OPTIONAL PURCHASE OF ALL MORTGAGE LOANS
If specified in the prospectus supplement for a series, the depositor or
another party (which may be a certificateholder) specified in the applicable
prospectus supplement may purchase all or a part of the mortgage loans in the
related trust and any property acquired in connection with those mortgage loans.
Any purchase must be made in the manner and at the price specified under "The
Pooling Agreement--Termination; Optional Purchase of Mortgage Loans."
If an election is made to treat the related trust estate (or one or more
segregated pools of assets in the trust estate) as one or more "real estate
mortgage investment conduits," any optional purchase will be permitted only
pursuant to a "qualified liquidation," as defined under Section 860F(a)(4)(A) of
the Internal Revenue Code of 1986, as amended.
Exercise of the right of purchase will cause the early retirement of some or
all of the certificates of that series.
See "Prepayment and Yield Considerations."
ERISA LIMITATIONS
If you are a fiduciary of any employee benefit plan or another type of
retirement plan or arrangement subject to the ERISA, the Internal Revenue Code
or similar law, you should carefully review with your legal advisors whether the
purchase or holding of certificates could give rise to a transaction prohibited
or otherwise impermissible under ERISA or the Internal Revenue Code.
Certain classes of certificates may not be transferred unless the trustee is
furnished with a letter of representation or an opinion of counsel to the effect
that the transfer will not result in a violation of the prohibited transaction
provisions of ERISA or the Internal Revenue Code and will not subject the
trustee, the depositor, any
9
servicers or the master servicer to additional obligations.
See "ERISA Considerations."
TAX STATUS
The treatment of the certificates for federal income tax purposes will
depend on:
o whether one or more REMIC elections are made for a series of
certificates;
o if one or more REMIC elections are made, whether the certificates are
regular interests or residual interests; and
o whether the certificates are interests in a trust fund treated as a
grantor trust.
If one or more REMIC elections are made, certificates that are regular
interests will be treated as newly issued debt instruments of the REMIC and must
be accounted for under an accrual method of accounting. Certificates that are
residual interests are not treated as debt instruments, but rather must be
treated according to the rules prescribed in the Internal Revenue Code for REMIC
residual interests, including restrictions on transfer and the reporting of net
income or loss of the REMIC, including the possibility of a holder of such
certificate having taxable income without a corresponding distribution of cash
to pay taxes currently due.
If the certificates represent interests in a grantor trust, beneficial
owners of certificates generally are treated as owning an undivided beneficial
interest in the mortgage loans that are assets of the trust.
See "Federal Income Tax Consequences."
LEGAL INVESTMENT
The applicable prospectus supplement will specify whether the class or
classes of certificates offered will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended. If your investment authority is subject to legal restrictions you
should consult your own legal advisors to determine whether and to what extent
the certificates constitute legal investments for you.
See "Legal Investment" in this prospectus and "Summary of Terms--Legal
Investment" in the applicable prospectus supplement.
RATING
Certificates of any series will not be offered by this prospectus and a
prospectus supplement unless each offered class is rated in one of the four
highest rating categories by at least one nationally recognized statistical
rating organization.
o A security rating is not a recommendation to buy, sell or hold the
certificates of any series and is subject to revision or withdrawal at
any time by the assigning rating agency.
o Ratings do not address the effect of prepayments on the yield you may
anticipate when you purchase your certificates.
10
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RISK FACTORS
- --------------------------------------------------------------------------------
Investors should consider, among other things, the following description of
the material risks associated with the purchase of certificates as well as the
specific risks discussed in the applicable prospectus supplement under "Risk
Factors."
Limited Source of Payments - No Recourse to Depositor, Sponsor, Servicer or
Trustee
Except for any related insurance policies and any reserve fund or other
external credit enhancement described in the applicable prospectus supplement:
o mortgage loans included in the related trust estate will be the sole
source of payments on the certificates of a series;
o the certificates of any series will not represent an interest in or
obligation of the depositor, the sponsor, the servicer, the trustee or
any of their affiliates, except for the depositor's limited obligations
relating to certain breaches of its representations and warranties and
limited obligations of the servicer with respect to its servicing
obligations; and
o neither the certificates of any series nor the related mortgage loans
will be guaranteed or insured by any governmental agency or
instrumentality or any other entity.
Consequently, in the event that payments on the mortgage loans underlying
your series of certificates are insufficient or otherwise unavailable to make
all payments required on your certificates, there will be no recourse to the
depositor, the sponsor, the servicer, the trustee or any of their affiliates or,
except as specified in the applicable prospectus supplement, any other entity.
Limited Liquidity
The liquidity of your certificates may be limited. You should consider that:
o a secondary market for the certificates of any series may not develop,
or if it does, it may not provide you with liquidity of investment, or
it may not continue for the life of the certificates of any series;
o the prospectus supplement for any series of certificates may indicate
that an underwriter intends to establish a secondary market in the
certificates of that series, but no underwriter will be obligated to do
so; and
o unless specified in the applicable prospectus supplement, the
certificates will not be listed on any securities exchange.
As a result, you may not be able to sell your certificates, or you may not
be able to sell your certificates at a price sufficient to produce your desired
return on investment.
The secondary market for mortgage-backed securities has experienced periods
of illiquidity and can be expected to do so in the future. Illiquidity can have
a severely adverse effect on the prices of certificates that are especially
sensitive to prepayment, credit, or interest rate risk (such as certificates
that receive only payments of principal or interest or subordinate
certificates), or that have been structured to meet the investment requirements
of limited categories of investors.
11
Certificates May Not Be Appropriate For Individual Investors
If you are an individual investor who does not have sufficient resources or
expertise to evaluate the particular characteristics of a class of certificates,
the certificates of a series may not be an appropriate investment for you. This
may be the case because, among other things:
o if you purchase your certificates at a price other than par, your yield
to maturity will be sensitive to the uncertain rate and timing of
principal prepayments on the applicable mortgage loans;
o the rate of principal distributions on, and the weighted average lives
of, the certificates will be sensitive to the uncertain rate and timing
of principal prepayments on the applicable mortgage loans and the
priority of principal distributions among the classes of certificates.
Because of this, the certificates may be inappropriate investments for
you if you require a distribution of a particular amount of principal on
a specific date or an otherwise predictable stream of distributions;
o you may not be able to reinvest amounts distributed relating to
principal on your certificates (which distributions, in general, are
expected to be greater during periods of relatively low interest rates)
at a rate at least as high as the applicable pass-through rate or your
expected yield;
o a secondary market for the certificates may not develop or provide you
with liquidity of investment; and
o you must pay tax on any interest or original issue discount in the
year it accrues, even if the cash is paid to you in a different year.
If you are an individual investor considering the purchase of a certificate
of a series, you should also carefully consider the other risk factors discussed
in this prospectus and in the applicable prospectus supplement.
Credit Enhancement is Limited in Amount and Coverage
Credit enhancement for a series of certificates may be provided in limited
amounts to cover certain types of losses on the underlying mortgage loans.
Credit enhancement will be provided in one or more of the forms referred to in
this prospectus, including, but not limited to: subordination of other classes
of certificates of the same series; a limited guarantee; a financial guaranty
insurance policy; a surety bond; a letter of credit; a mortgage pool insurance
policy; a reserve fund; cross collateralization; overcollateralization; or
excess interest. See "Description of the Certificates--Distributions to
Certificateholders" and "--Other Credit Enhancement."
Regardless of the form of credit enhancement provided:
o the amount of coverage will be limited in amount and in most cases will
be subject to periodic reduction in accordance with a schedule or
formula; and
o may provide only very limited coverage as to certain types of losses,
and may provide no coverage as to certain other types of losses.
If losses exceed the amount of coverage provided by any credit enhancement
or losses of a type not covered by any credit enhancement occur, they will be
borne by the holders of the related certificates (or certain classes).
12
None of the depositor, the sponsor, the servicer, the trustee or any of
their affiliates will have any obligation to replace or supplement any credit
enhancement, or to take any other action to maintain any rating of any class of
certificates.
See "Description of the Certificates--Distributions to Certificateholders"
and "--Other Credit Enhancement."
The Ratings of Your Certificates May Be Lowered or Withdrawn Which May Adversely
Affect the Liquidity or Market Value of Your Certificates
It is a condition to the issuance of the certificates that they be rated in
one of the four highest rating categories by at least one nationally recognized
statistical rating organization. A security rating is not a recommendation to
buy, sell or hold securities and may be subject to revision or withdrawal at any
time. No person is obligated to maintain the rating on any certificate, and
accordingly, there can be no assurance to you that the ratings assigned to any
certificate on the date on which the certificate is originally issued will not
be lowered or withdrawn by a rating agency at any time thereafter. The rating(s)
of any series of certificates by any applicable rating agency may be lowered
following the initial issuance of the certificates as a result of the
downgrading of the obligations of any applicable credit support provider, or as
a result of losses on the related mortgage loans in excess of the levels
contemplated by the rating agency at the time of its initial rating analysis.
Neither the depositor nor the sponsor nor any of their respective affiliates
will have any obligation to replace or supplement any credit support, or to take
any other action to maintain any rating(s) of any series of certificates. If any
rating is revised or withdrawn, the liquidity or the market value of your
certificate may be adversely affected.
Real Estate Market Conditions Affect Mortgage Loan Performance
An investment in securities such as the certificates, which generally
represent interests in pools of residential mortgage loans, may be affected by a
decline in real estate values and changes in the mortgagors' financial
condition. There is no assurance that the values of the mortgaged properties
securing the mortgage loans underlying any series of certificates have remained
or will remain at their levels on the dates of origination of the related
mortgage loans.
If the residential real estate market should experience an overall decline
in property values large enough to cause the outstanding balances of the
mortgage loans contained in a particular trust estate and any secondary
financing on the related mortgaged properties to become equal to or greater than
the value of the mortgaged properties, delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry or in the sponsor's prior securitizations involving the depositor and
the depositor's predecessor.
If losses on mortgage loans underlying a series are not covered by credit
enhancement, certificateholders of the series will bear all risk of loss
resulting from default by mortgagors and will have to look primarily to the
value of the mortgaged properties for recovery of the outstanding principal and
unpaid interest on the defaulted mortgage loans. See "The Trusts
Estates--Mortgage Loans" and "The Mortgage Loan Programs--Mortgage Loan
Underwriting."
Geographic Concentration May Increase Risk of Loss
The mortgage loans underlying certain series of certificates may be
concentrated in certain regions. Any concentration may present risk
considerations in addition to those generally present for similar
mortgage-backed securities without a concentration in a particular region.
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing
13
markets or be directly or indirectly affected by natural disasters or civil
disturbances such as earthquakes, hurricanes, floods, eruptions or riots.
Mortgage loans in these areas will experience higher rates of loss and
delinquency than on mortgage loans generally. Although mortgaged properties
located in certain identified flood zones will be required to be covered, to the
maximum extent available, by flood insurance, as described under "Servicing of
the Mortgage Loans--Insurance Policies," no mortgaged properties will otherwise
be required to be insured against earthquake damage or any other loss not
covered by standard hazard insurance policies, as described under "Servicing of
the Mortgage Loans--Insurance Policies."
See "The Mortgage Pool" in the related prospectus supplement for further
information regarding the geographic concentration of the mortgage loans
underlying the certificates of any series. See also "The Mortgage Loan
Programs--Mortgage Loan Underwriting."
General Economic Conditions May Increase Risk of Loss
Adverse economic conditions generally, in particular geographic areas or
industries, or affecting particular segments of the borrowing community (such as
mortgagors relying on commission income and self-employed mortgagors) and other
factors which may or may not affect real property values (including the purposes
for which the mortgage loans were made and the uses of the mortgaged properties)
may affect the timely payment by mortgagors of scheduled payments of principal
and interest on the mortgage loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses on the mortgage loans. If these losses
are not covered by the applicable credit enhancement, holders of certificates of
the series evidencing interests in the related trust estate will bear all risk
of loss resulting from default by mortgagors and will have to look primarily to
the value of the mortgaged properties for recovery of the outstanding principal
and unpaid interest on the defaulted mortgage loans.
Collateral Securing Cooperative Loans May Diminish in Value
If specified in the related prospectus supplement, certain of the mortgage
loans may be cooperative loans. There are certain risks that differentiate
cooperative loans from other types of mortgage loans. Ordinarily, the
cooperative incurs a blanket mortgage in connection with the construction or
purchase of the cooperative's apartment building and the underlying land. The
interests of the occupants under proprietary leases or occupancy agreements to
which the cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage. If the cooperative is unable to meet the
payment obligations arising under its blanket mortgage, the mortgagee holding
the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the cooperative to
refinance this mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of the collateral securing the
cooperative loans.
Leaseholds May Be Subject to Default Risk on the Underlying Lease
If specified in the related prospectus supplement, certain of the mortgage
loans may be secured by leasehold mortgages. Leasehold mortgages are subject to
certain risks not associated with mortgage loans secured by a fee estate of the
mortgagor. The most significant of these risks is that the ground lease creating
the leasehold estate could terminate, leaving the leasehold mortgagee without
its security. The ground lease may terminate, if among other reasons, the ground
lessee breaches or defaults in its obligations under the ground lease or there
is a bankruptcy of the ground lessee or the ground lessor. Any
14
leasehold mortgages underlying a series of certificates will contain provisions
protective of the mortgagee as described under "The Trust Estates -- Mortgage
Loans," such as the right of the leasehold mortgagee to receive notices from the
ground lessor of any defaults by the mortgagor and to cure those defaults, with
adequate cure periods; if a default is not susceptible of cure by the leasehold
mortgagee, the right to acquire the leasehold estate through foreclosure or
otherwise; the ability of the ground lease to be assigned to and by the
leasehold mortgagee or purchaser at a foreclosure sale and for the simultaneous
release of the ground lessee's liabilities under the new lease; and the right of
the leasehold mortgagee to enter into a new ground lease with the ground lessor
on the same terms and conditions as the old ground lease upon a termination.
Yield is Sensitive to Rate of Principal Prepayment
The yield on the certificates of each series will depend in part on the rate
of principal payment on the mortgage loans (including prepayments, liquidations
due to defaults and mortgage loan repurchases). Your yield may be adversely
affected, depending upon whether a particular certificate is purchased at a
premium or a discount, by a higher or lower than anticipated rate of prepayments
on the related mortgage loans. In particular:
o the yield on classes of certificates entitling their holders primarily
or exclusively to payments of interest, such as interest only
certificates, or primarily or exclusively to payments of principal, such
as principal only certificates, will be extremely sensitive to the rate
of prepayments on the related mortgage loans; and
o the yield on certain other classes of certificates, such as companion
certificates, may be relatively more sensitive to the rate of prepayment
of specified mortgage loans than other classes of certificates.
The rate of prepayments on mortgage loans is influenced by a number of
factors, including:
o prevailing mortgage market interest rates;
o local and national economic conditions;
o homeowner mobility; and
o the ability of the borrower to obtain refinancing.
If you are purchasing certificates at a discount, and specifically if you
are purchasing principal only certificates, you should consider the risk that if
principal payments on the mortgage loans, or, in the case of any ratio strip
certificates, the related mortgage loans, occur at a rate slower than you
expected, your yield will be lower than you expected. Further information
relating to yield on those certificates will be included in the applicable
prospectus supplement, including a table demonstrating the particular
sensitivity of any class of principal only certificates to the rate of
prepayments.
If you are purchasing certificates at a premium, or are purchasing an
interest only certificate, you should consider the risk that if principal
payments on the mortgage loans or, in the case of any interest only certificates
entitled to a portion of interest paid on certain mortgage loans with higher
mortgage interest rate, those mortgage loans, occur at a rate faster than you
expected, your yield may be lower than you expected. If you are purchasing
interest only certificates, you should consider the risk that a rapid rate of
principal payments on the applicable mortgage loans could result in your failure
to recover your initial investment. Further information relating to yield on
those certificates will be included in the applicable prospectus supplement,
including, in the case of interest only certificates that are extremely
sensitive to
15
principal prepayments, a table demonstrating the particular sensitivity of those
interest only certificates to the rate of prepayments.
If you are purchasing any inverse floating rate certificates, you should
also consider the risk that a high rate of the applicable index may result in a
lower actual yield than you expected or a negative yield. In particular, you
should consider the risk that high constant rates of the applicable index or
high constant prepayment rates on the mortgage loans may result in the failure
to recover your initial investment. Further information relating to yield on
those certificates will be included in the applicable prospectus supplement,
including a table demonstrating the particular sensitivity of those certificates
to the rate of prepayments on the mortgage loans and changes in the applicable
index.
Timing of Prepayments on the Mortgage Loans May Result in Interest Shortfalls on
the Certificates
When a mortgage loan is prepaid in full, the mortgagor pays interest on the
amount prepaid only to the date of prepayment. Liquidation proceeds and amounts
received in settlement of insurance claims are also likely to include interest
only to the time of payment or settlement. When a mortgage loan is prepaid in
full or in part, an interest shortfall may result depending on the timing of the
receipt of the prepayment and the timing of when those prepayments are passed
through to certificateholders. To partially mitigate this reduction in yield,
the pooling agreement and/or underlying servicing agreements relating to a
series may provide, to the extent specified in the applicable prospectus
supplement, that for specified types of principal prepayments received, the
applicable servicer or the master servicer will be obligated, on or before each
distribution date, to pay an amount equal to the lesser of (i) the aggregate
interest shortfall with respect to the distribution date resulting from those
principal prepayments by mortgagors and (ii) all or a portion of the servicer's
or the master servicer's, as applicable, servicing compensation for the
distribution date as specified in the applicable prospectus supplement or other
mechanisms specified in the applicable prospectus supplement. To the extent
these shortfalls from the mortgage loans are not covered by the amount of
compensating interest or other mechanisms specified in the applicable prospectus
supplement, they will be allocated among the classes of interest bearing
certificates as described in the related prospectus supplement under
"Description of the Certificates -- Interest." No comparable interest shortfall
coverage will be provided by the servicer or the master servicer with respect to
liquidations of any mortgage loans. Any interest shortfall arising from
liquidations will be covered by means of the subordination of the rights of
subordinate certificateholders or any other credit support arrangements
described in this prospectus.
Exercise of Rights Under Special Servicing Agreements May Be Adverse to Other
Certificateholders
The pooling agreement for a series will permit a servicer to enter into a
special servicing agreement with an unaffiliated holder of a class of
subordinate certificates or a class of securities backed by a class of
subordinate certificates, pursuant to which the holder may instruct the servicer
to commence or delay foreclosure proceedings with respect to delinquent mortgage
loans. This right is intended to permit the holder of a class of certificates
that is highly sensitive to losses on the mortgage loans to attempt to mitigate
losses by exercising limited power of direction over servicing activities which
accelerate or delay realization of losses on the mortgage loans. Such directions
may, however, be adverse to the interest of those classes of senior certificates
that are more sensitive to prepayments than to losses on the mortgage loans. In
particular, accelerating foreclosure will adversely affect the yield to maturity
on interest only certificates, while delaying foreclosure will adversely affect
the yield to maturity of principal only certificates.
16
Special Powers of the FDIC in the Event of Insolvency of the Sponsor Could Delay
or Reduce Distributions on the Certificates
The mortgage loans will be originated or acquired by the sponsor, a national
bank whose deposits are insured to the applicable limits by the FDIC. If the
sponsor becomes insolvent, is in an unsound condition or engages in violations
of its bylaws or regulations applicable to it or if similar circumstances occur,
the FDIC could act as conservator and, if a receiver were appointed, would act
as a receiver for the sponsor. As receiver, the FDIC would have broad powers to:
o require the trust, as assignee of the depositor, to go through an
administrative claims procedure to establish its rights to payments
collected on the mortgage loans; or
o request a stay of proceedings to liquidate claims or otherwise enforce
contractual and legal remedies against the sponsor, or
o if the sponsor is a servicer for a series of certificates, repudiate
without compensation the sponsor's ongoing servicing obligations under
the pooling agreement, such as its duty to collect and remit payments or
otherwise service the mortgage loans.
If the FDIC were to take any of those actions, distributions on the
certificates could be delayed or reduced.
By statute, the FDIC as conservator or receiver of the sponsor is authorized
to repudiate any "contract" of the sponsor upon payment of "actual direct
compensatory damages." This authority may be interpreted by the FDIC to permit
it to repudiate the transfer of the mortgage loans to the depositor. Under an
FDIC regulation, however, the FDIC as conservator or receiver of a bank has
stated that it will not reclaim, recover or recharacterize a bank's transfer of
financial assets in connection with a securitization or participation, provided
that the transfer meets all conditions for sale accounting treatment under
generally accepted accounting principles, other than the "legal isolation"
condition as it applies to institutions for which the FDIC may be appointed as
conservator or receiver, was made for adequate consideration and was not made
fraudulently, in contemplation of insolvency, or with the intent to hinder,
delay or defraud the bank or its creditors. For purposes of the FDIC regulation,
the term securitization means, as relevant, the issuance by a special purpose
entity of beneficial interests the most senior class of which at time of
issuance is rated in one of the four highest categories assigned to long-term
debt or in an equivalent short-term category (within either of which there may
be sub-categories or gradations indicating relative standing) by one or more
nationally recognized statistical rating organizations. A special purpose
entity, as the term is used in the regulation, means a trust, corporation, or
other entity demonstrably distinct from the insured depository institution that
is primarily engaged in acquiring and holding (or transferring to another
special purpose entity) financial assets, and in activities related or
incidental to these actions, in connection with the issuance by the special
purpose entity (or by another special purpose entity that acquires financial
assets directly or indirectly from the special purpose entity) of beneficial
interests. The transactions contemplated by this prospectus and the related
prospectus supplement will be structured so that this FDIC regulation should
apply to the transfer of the mortgage loans from the sponsor to the depositor.
If a condition required under the FDIC regulation, or other statutory or
regulatory requirement applicable to the transaction, were found not to have
been satisfied, the FDIC as conservator or receiver might refuse to recognize
the sponsor's transfer of the mortgage loans to the depositor. In that event the
depositor could be limited to seeking recovery based upon its security interest
in the mortgage loans. The FDIC's statutory authority has been interpreted by
the FDIC and at least one court to permit the repudiation of a security interest
upon payment of actual direct compensatory damages measured as of the
17
date of conservatorship or receivership. These damages do not include damages
for lost profits or opportunity, and no damages would be paid for the period
between the date of conservatorship or receivership and the date of repudiation.
The FDIC could delay its decision whether to recognize the sponsor's transfer of
the mortgage loans for a reasonable period following its appointment as
conservator or receiver for the sponsor. If the FDIC were to refuse to recognize
the sponsor's transfer of the mortgage loans, distributions on the certificates
could be delayed or reduced.
If specified in the applicable prospectus supplement, the sponsor will also
act as servicer of the mortgage loans. If the FDIC acted as receiver for the
sponsor after the sponsor's insolvency, the FDIC could prevent the termination
of the sponsor as servicer of the mortgage loans, even if a contractual basis
for termination exists. This inability to terminate the sponsor as servicer
could result in a delay or possibly a reduction in distributions on the
certificates to the extent the sponsor received, but did not remit to the
trustee, mortgage loan collections received by the sponsor before the date of
insolvency or if the sponsor failed to make any required advances.
Insolvency of the Depositor May Delay or Reduce Collections on Mortgage Loans
Neither the United States Bankruptcy Code nor similar applicable state laws
prohibit the depositor from filing a voluntary application for relief under
these laws. However, the transactions contemplated by this prospectus and the
related prospectus supplement will be structured so that the voluntary or
involuntary application for relief under the bankruptcy laws by the depositor is
unlikely. The depositor is a separate, limited purpose subsidiary, the
certificate of incorporation of which contains limitations on the nature of the
depositor's business, including the ability to incur debt other than debt
associated with the transactions contemplated by this prospectus, and
restrictions on the ability of the depositor to commence voluntary or
involuntary cases or proceedings under bankruptcy laws without the prior
unanimous affirmative vote of all its directors (who are required to consider
the interests of the depositor's creditors, in addition to the depositor's
stockholders in connection the filing of a voluntary application for relief
under applicable insolvency laws). Further, the transfer of the mortgage loans
to the related trust will be structured so that the trustee has no recourse to
the depositor, other than for breaches of representations and warranties about
the mortgage loans.
If the depositor were to become the subject of a proceeding under the
bankruptcy laws, a court could conclude that the transfer of the mortgage loans
from the depositor to the trust should not be characterized as an absolute
transfer, and accordingly, that the mortgage loans should be included as part of
the depositor's estate. Under these circumstances, the bankruptcy proceeding
could delay or reduce distributions on the certificates. In addition, a
bankruptcy proceeding could result in the temporary disruption of distributions
on the certificates.
Book-Entry System for Certain Classes of Certificates May Decrease Liquidity and
Delay Payment
Because transactions in the classes of book-entry certificates of any series
generally can be effected only through DTC, DTC participants and indirect DTC
participants:
o your ability to pledge book-entry certificates to someone who does not
participate in the DTC system, or to otherwise take action relating to
your book-entry certificates, may be limited due to the lack of a
physical certificate;
o you may experience delays in your receipt of payments on book-entry
certificates because distributions will be made by the trustee, or a
paying agent on behalf of the trustee, to Cede & Co., as nominee for
DTC, rather than directly to you; and
18
o you may experience delays in your receipt of payments on book-entry
certificates in the event of misapplication of payments by DTC, DTC
participants or indirect DTC participants or bankruptcy or insolvency of
those entities and your recourse will be limited to your remedies
against those entities.
See "Description of the Certificates--Book-Entry Form."
Cash Flow Agreements and External Credit Enhancements are Subject to Third Party
Risk
The assets of a trust may, if specified in the related prospectus
supplement, include cash flow agreements, such as swap, cap, floor or similar
agreements, which will require the counterparty to the trust (or the trustee
acting on behalf of the trust) to make payments to the trust under the
circumstances described in the prospectus supplement. If payments on the
certificates of the related series depend in part on payments to be received
under one or these agreements, the ability of the trust to make payments on the
certificates will be subject to the credit risk of the counterparty.
In addition, the ratings assigned to the certificates of a series may depend
in part on the ratings assigned to the provider of certain types of external
credit enhancement, such as a mortgage pool insurance policy, surety bond,
financial guaranty insurance policy or limited guarantee. Any reduction in the
ratings assigned to the provider of one of these types of external credit
enhancement could result in the reduction of the ratings assigned to the
certificates of the series. A reduction in the ratings assigned to the
certificates of a series is likely to affect adversely the liquidity and market
value of the certificates.
Amounts Received from an Auction and a Related Swap Agreement May Be
Insufficient to Assure Completion of the Auction
If specified in the prospectus supplement for a series, one or more classes
of certificates may be subject to a mandatory auction. If you hold a class of
certificates subject to a mandatory auction, on the distribution date specified
in the related prospectus supplement for the auction your certificate will be
transferred to successful auction bidders, thereby ending your investment in
that certificate. If the class balance of your class of auction certificates
plus, if applicable, accrued interest, after application of all distributions
and realized losses on the distribution date of the auction, is greater than the
amount received in the auction, a counterparty will be obligated, pursuant to a
swap agreement, to pay the amount of that difference to the administrator of the
auction for distribution to the holders of the class of auction certificates.
Auction bidders will be permitted to bid for all or a portion of a class of
auction certificates. If the counterparty under the swap agreement defaults on
its obligations, no bids for all or a portion of a class of auction certificates
will be accepted unless the amount of the bids are equal to the class balance of
a class of auction certificates plus, if applicable, accrued interest, after
application of all distributions and realized losses on the distribution date of
the auction (or the pro rata portion of this price). If the counterparty under
the swap agreement defaults and no bids for a class of auction certificates or
portion of a class are accepted or there are no bids for the class or portion of
the class, all or a portion of the certificates of the class will not be
transferred to auction bidders. In the event this happens, you will retain the
non-transferred portion of your certificates after the distribution date for the
auction.
See "Description of the Certificates -- Mandatory Auction of the Auction
Certificates" in this prospectus.
19
Servicing Transfer Following Event of Default May Result in Payment Delays or
Losses
Following the occurrence of an event of default under a pooling agreement,
the trustee for the related series may, in its discretion or pursuant to
direction from certificateholders, remove the defaulting master servicer or
servicer and succeed to its responsibilities, or may petition a court to appoint
a successor master servicer or servicer. The trustee or the successor master
servicer or servicer will be entitled to reimbursement of its costs of effecting
the servicing transfer from the predecessor master servicer or servicer, or from
the assets of the related trust if the predecessor fails to pay. In the event
that reimbursement to the trustee or the successor master servicer or servicer
is made from trust assets, the resulting shortfall will be borne by holders of
the related certificates, to the extent not covered by any applicable credit
support. In addition, during the pendency of a servicing transfer or for some
time thereafter, mortgagors of the related mortgage loans may delay making their
monthly payments or may inadvertently continue making payments to the
predecessor servicer, potentially resulting in delays in distributions on the
related certificates.
Consumer Protection Laws May Limit Remedies
There are various federal, state and local laws, public policies and
principles of equity that protect consumers. Among other things, these laws,
policies and principles:
o regulate interest rates and other charges;
o require certain disclosures;
o require licensing of mortgage loan originators;
o require lenders to provide credit counseling and/or make affirmative
determinations regarding the borrower's ability to repay the mortgage
loan;
o prohibit discriminatory or predatory lending practices;
o limit or prohibit certain mortgage loan features, such as prepayment
penalties or balloon payments;
o regulate the use of consumer credit information; and
o regulate debt collection practices.
Violation of certain provisions of these laws, policies and principles:
o may limit a servicer's ability to collect all or part of the principal
of or interest on the mortgage loans;
o may entitle the borrower to a refund of amounts previously paid; and
o could subject a servicer to damages and administrative sanctions.
The depositor will generally be required to repurchase any mortgage loan
which, at the time of origination, did not comply with federal, state and local
laws and regulations. In addition, the sponsor will be required to pay to the
depositor, and the depositor will be required to pay to the applicable trust,
any costs or damages incurred by the related trust as a result of a violation of
these laws or regulations. See "The Mortgage Loan Programs--Representations and
Warranties."
20
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THE TRUST ESTATES
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General
The assets underlying each series of Certificates (each, a "Trust Estate")
will consist primarily of mortgage loans (the "Mortgage Loans") evidenced by
promissory notes (the "Mortgage Notes") secured by mortgages, deeds of trust or
other instruments creating first liens (the "Mortgages") on some or all of the
following types of property (as so secured, the "Mortgaged Properties"), to the
extent set forth in the applicable prospectus supplement: (i) one-family
attached or detached residences, (ii) two- to four-family units, (iii) row
houses, (iv) townhouses, (v) condominium units, including those where features
of the property may include maid service, a front desk or resident manager,
rental pools and up to 20% of commercial space ("Condominium Hotels"), (vi)
units within planned unit developments, (vii) long-term leases with respect to
any of the foregoing, and (viii) stock, shares or membership certificates issued
by private, nonprofit, cooperative housing corporations, known as
"Cooperatives," and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings. In addition, a Trust Estate will also include (i)
amounts held from time to time in the related Certificate Account, (ii) the
Depositor's interest in any primary mortgage insurance, hazard insurance, title
insurance or other insurance policies relating to a Mortgage Loan, including the
Depositor's right to receive any payments from Mortgage Loans with Borrowers
Protection Plan(R) addendum (a debt-cancellation contract between the borrower
and Bank of America, National Association), (iii) any property which initially
secured a Mortgage Loan and which has been acquired by foreclosure or trustee's
sale or deed in lieu of foreclosure or trustee's sale, (iv) if applicable, and
to the extent set forth in the applicable prospectus supplement, any reserve
fund or funds, and (v) if applicable, and to the extent set forth in the
applicable prospectus supplement, contractual obligations of any person to make
payments in respect of any form of credit enhancement, any cash flow agreement
or any interest subsidy agreement described in this prospectus. See "The
Mortgage Loan Programs--Mortgage Loan Underwriting--Bank of America General
Underwriting Standards" for more information about Mortgage Loans with a
Borrowers Protection Plan(R) addendum. The Trust Estate will not include the
portion of interest on the Mortgage Loans which constitutes the Fixed Retained
Yield, if any. See "Servicing of the Mortgage Loans--Fixed Retained Yield,
Servicing Compensation and Payment of Expenses."
Mortgage Loans
The Mortgage Loans will have been acquired by the Depositor from the
Sponsor. The Mortgage Loans will have been either (i) originated by the Sponsor
or (ii) purchased by the Sponsor from various entities that either originated
the Mortgage Loans or acquired the Mortgage Loans pursuant to mortgage loan
purchase programs operated by these entities. If any originator or group of
affiliated originators, apart from the Sponsor and its affiliates, originated
10% or more of the Mortgage Loans in a Trust Estate, the applicable prospectus
supplement will disclose the identity of the originator and, if such originator
or group of affiliated originators originated 20% or more of the Mortgage Loans,
the applicable prospectus supplement will provide information about the
originator's form of organization and, to the extent material, a description of
the originator's origination program and how long it has been engaged in
originating mortgage loans of the same type. Each Mortgage Loan will have been
underwritten either to the standards set forth in this prospectus or to other
underwriting standards set forth in the applicable prospectus supplement. See
"The Mortgage Loan Programs--Mortgage Loan Underwriting."
Each of the Mortgage Loans will be secured by a Mortgage on a Mortgaged
Property located in any of the 50 states or the District of Columbia.
21
If specified in the applicable prospectus supplement, the Mortgage Loans may
be secured by leases on real property under circumstances that the Sponsor
determines in its discretion are commonly acceptable to institutional mortgage
investors. A Mortgage Loan secured by a lease on real property is secured not by
a fee simple interest in the Mortgaged Property but rather by a lease under
which the mortgagor has the right, for a specified term, to use the related real
estate and the residential dwelling located thereon. Generally, a Mortgage Loan
will be secured by a lease only if the use of leasehold estates as security for
mortgage loans is customary in the area where the Mortgaged Property is located,
the lease is not subject to any prior lien that could result in termination of
the lease and the term of the lease ends at least five years beyond the maturity
date of the related Mortgage Loan. The provisions of each lease securing a
Mortgage Loan will expressly permit (i) mortgaging of the leasehold estate, (ii)
assignment of the lease without the lessor's consent and (iii) acquisition by
the holder of the Mortgage, in its own or its nominee's name, of the rights of
the lessee upon foreclosure or assignment in lieu of foreclosure, unless
alternative arrangements provide the holder of the Mortgage with substantially
similar protections. No lease will contain provisions which (i) provide for
termination upon the lessee's default without the holder of the Mortgage being
entitled to receive written notice of, and opportunity to cure, the default,
(ii) provide for termination in the event of damage or destruction as long as
the Mortgage is in existence or (iii) prohibit the holder of the Mortgage from
being insured under the hazard insurance policy or policies related to the
premises.
The prospectus supplement for a series will contain information, as of the
Cut-off Date or another specified date, to the extent known to the Depositor,
detailing the following information about the Mortgage Loans in the Trust
Estate: (i) occupancy, (ii) property type; (iii) purpose; (iv) documentation
type; (v) geographic distribution; (vi) current principal balance; (vii)
original Loan-to-Value Ratio; (viii) current Mortgage Interest Rate; (ix)
remaining term to maturity; and (x) Credit Scores. If the Mortgage Loans include
adjustable-rate loans, the prospectus supplement will also set forth the
following additional information: (i) Gross Margin; (ii) rate ceiling; and (iii)
first adjustment date.
A Mortgage Loan will generally provide for level monthly installments (other
than Interest Only Mortgage Loans and, in the case of Balloon Loans, the final
payment) consisting of interest equal to one-twelfth of the applicable interest
rate specified in the related Mortgage Note (the "Mortgage Interest Rate") times
the unpaid principal balance, with the remainder of the payment applied to
principal (an "Actuarial Mortgage Loan"). No adjustment is made if payment on an
Actuarial Mortgage Loan is made earlier or later than the Due Date, although the
mortgagor may be subject to a late payment charge. If specified in the
applicable prospectus supplement, some Mortgage Loans may provide for payments
that are allocated to principal and interest according to the daily simple
interest method (each, a "Simple Interest Mortgage Loan"). A Simple Interest
Mortgage Loan provides for the amortization of the amount financed under the
Mortgage Loan over a series of equal monthly payments (except, in the case of a
Balloon Loan, the final payment). Each monthly payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of the Mortgage Loan multiplied by the stated Mortgage
Interest Rate and further multiplied by a fraction, the numerator of which is
the number of days in the period elapsed since the preceding payment of interest
was made and the denominator of which is the number of days in the annual period
for which interest accrues on the Mortgage Loan. As payments are received under
a Simple Interest Mortgage Loan, the amount received is applied first to
interest accrued to the date of payment and the balance is applied to reduce the
unpaid principal balance. Therefore, if a borrower pays a fixed monthly
installment on a Simple Interest Mortgage Loan before its scheduled Due Date,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. The next scheduled
payment, however, will result in an allocation of a greater amount to interest
if the payment is made on its scheduled Due Date. Conversely, if a borrower pays
a fixed monthly installment after its scheduled Due Date, the portion of the
payment allocable to interest for the period since the
22
preceding payment was made will be greater than it would have been had the
payment been made as scheduled, and the remaining portion, if any, of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. Therefore, if the borrower consistently makes scheduled payments after the
scheduled Due Date, the Mortgage Loan will amortize more slowly than scheduled.
If a Mortgage Loan is prepaid, the borrower is required to pay interest only to
the date of prepayment.
The information about the Mortgage Loans and Mortgaged Properties described
in the preceding three paragraphs may be presented in the prospectus supplement
for a series as ranges in which the actual characteristics of the Mortgage Loans
and Mortgaged Properties are expected to fall. In that case, information about
the final characteristics of the Mortgage Loans and Mortgaged Properties will be
available in a Current Report on Form 8-K which will be filed with the
Securities and Exchange Commission ("SEC") within four business days following
the initial issuance of the related series.
The Mortgage Loans in a Trust Estate will generally have monthly
payments due on the first of each month (each, a "Due Date") but may, if
specified in the applicable prospectus supplement, have payments due on a
different day of each month and will be of one of the following types of
mortgage loans:
a. Fixed-Rate Loans. If specified in the applicable prospectus
supplement, a Trust Estate may contain fixed-rate, fully-amortizing
Mortgage Loans providing for level monthly payments of principal and
interest and terms at origination or modification of not more than 40
years. If specified in the applicable prospectus supplement, fixed rates
on certain Mortgage Loans may be converted to adjustable rates after
origination of these Mortgage Loans and upon the satisfaction of other
conditions specified in the applicable prospectus supplement. If
specified in the applicable prospectus supplement, the Pooling Agreement
will require the Depositor or another party identified in the applicable
prospectus supplement to repurchase each of these converted Mortgage
Loans at the price set forth in the applicable prospectus supplement. A
Trust Estate containing fixed-rate Mortgage Loans may contain
convertible Mortgage Loans which have converted from an adjustable
interest rate prior to the formation of the Trust Estate and which are
subject to no further conversions.
b. Adjustable-Rate Loans. If specified in the applicable prospectus
supplement, a Trust Estate may contain adjustable-rate, fully-amortizing
Mortgage Loans having an original or modified term to maturity of not
more than 40 years with a related Mortgage Interest Rate which generally
adjusts initially either one, three or six months, one, three, five,
seven or ten years subsequent to the initial Due Date, and thereafter at
either one-month, six-month, one-year or other intervals over the term
of the Mortgage Loan to equal the sum of a fixed margin set forth in the
related Mortgage Note (the "Gross Margin") and an index. The applicable
prospectus supplement will set forth the relevant index and the highest,
lowest and weighted average Gross Margin with respect to the
adjustable-rate Mortgage Loans in the related Trust Estate. The index
will be one of the following: one-month, three-month, six-month or
one-year LIBOR (an average of the interest rate on one-month,
three-month, six-month or one-year dollar-denominated deposits traded
between banks in London), CMT (weekly or monthly average yields of U.S.
treasury short and long-term securities, adjusted to a constant
maturity), COFI (an index of the weighted average interest rate paid by
savings institutions in Nevada, Arizona and California), MTA (a one-year
average of the monthly average yields of U.S. treasury securities) or
the Prime Rate (an interest rate charged by banks for short-term loans
to their most creditworthy customers). The applicable prospectus
supplement will also indicate any periodic or lifetime limitations on
the adjustment of any Mortgage Interest Rate.
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If specified in the applicable prospectus supplement, adjustable rates on
certain Mortgage Loans may be converted to fixed rates generally on the first,
second or third Adjustment Date after origination of those Mortgage Loans at the
option of the mortgagor. If specified in the applicable prospectus supplement,
the Depositor or another party specified in the applicable prospectus supplement
will generally be required to repurchase each of these converted Mortgage Loans
at the price set forth in the applicable prospectus supplement. A Trust Estate
containing adjustable-rate Mortgage Loans may contain convertible Mortgage Loans
which have converted from a fixed interest rate prior to the formation of the
Trust Estate.
If specified in the applicable prospectus supplement, a Trust Estate may
contain adjustable-rate Mortgage Loans with original terms to maturity of not
more than 40 years and flexible payment options ("Option ARM Mortgage Loans").
The initial required monthly payment is fully amortizing based on the initial
Mortgage Interest Rate (which may be a rate that is less than the sum of the
applicable index at origination and the Gross Margin specified in the related
Mortgage). After an introductory period of either one or three months, the
borrower may select from up to four payment options each month: (i) a monthly
payment of principal and interest sufficient to fully amortize the mortgage loan
based on the remaining scheduled term of the loan, (ii) an interest only payment
that would cover solely the amount of interest that accrued during the previous
month (this option is only available if it would exceed the minimum payment
option for the month), (iii) a minimum payment equal to either (a) the initial
monthly payment, (b) the monthly payment as of the most recent annual adjustment
date, or (c) the monthly payment as of the most recent automatic adjustment,
whichever is most recent or (iv) a payment of principal and interest in an
amount that would fully amortize the mortgage loan over the first 180 months of
the mortgage loan. The minimum payment adjusts annually after the first payment
date but is subject to a payment cap which limits any increase or decrease to no
more than 7.5% of the previous year's minimum payment amount. In addition, the
minimum payment is subject to an automatic adjustment every five years or if the
outstanding principal balance of the mortgage loan exceeds 115% of the original
principal balance (110% for Mortgaged Properties located in New York), in each
case without regard to the 7.5% limitation. On each annual adjustment date and
in the event of an automatic adjustment, the minimum monthly payment is adjusted
to an amount sufficient to fully amortize the mortgage loan based on the
then-current Mortgage Interest Rate and remaining scheduled term of the loan,
unless, in the case of an annual adjustment, the monthly payment is restricted
by the 7.5% limitation, in which case the monthly payment is adjusted by 7.5%. A
minimum payment may not cover the amount of interest accrued during a month and
may not pay down any principal. Any interest not covered by a monthly payment
("Deferred Interest") will be added to the principal balance of the Mortgage
Loan. This is called "negative amortization" and results in an increase in the
amount of principal the borrower owes. Interest will then accrue on this new
larger principal balance. The index for an Option ARM Mortgage Loan will be
determined monthly or at other less frequent intervals specified in the
applicable prospectus supplement.
c. Interest Only Mortgage Loans. If specified in the applicable
prospectus supplement, a Trust Estate may contain "Interest Only
Mortgage Loans" which are (i) Mortgage Loans having an original term to
maturity of not more than 40 years with a Mortgage Interest Rate which
adjusts initially either one, three or six months, or one, three, five,
seven or ten years subsequent to the initial payment date, and
thereafter at one-month, six-month, one-year or other intervals (with
corresponding adjustments in the amount of monthly payments) over the
term of the mortgage loan to equal the sum of the related Gross Margin
and index, and providing for monthly payments of interest only prior to
the date of the initial Mortgage Interest Rate adjustment and monthly
payments of principal and interest after the adjustment sufficient to
fully-amortize the Mortgage Loans over their remaining terms to maturity
or (ii) fixed-rate, fully-amortizing Mortgage Loans having an original
term to maturity of not more than 40 years providing for monthly
payments of interest only prior to a date specified in the
24
Mortgage Note and monthly payments of principal and interest after such
date sufficient to fully-amortize the Mortgage Loans over their
remaining terms to maturity.
d. Graduated Payment Loans. If specified in the applicable
prospectus supplement, a Trust Estate may contain fixed-rate,
graduated-payment Mortgage Loans having original or modified terms to
maturity of not more than 30 years with monthly payments during the
first year calculated on the basis of an assumed interest rate which is
a specified percentage below the Mortgage Interest Rate on the Mortgage
Loan. The monthly payments increase at the beginning of the second year
by a specified percentage of the monthly payment during the preceding
year and each year thereafter to the extent necessary to amortize the
Mortgage Loan over the remainder of its term or other shorter period.
Mortgage Loans incorporating these graduated payment features may
include (i) "Graduated Pay Mortgage Loans," pursuant to which amounts
constituting Deferred Interest are added to the principal balances of
these Mortgage Loans, (ii) "Tiered Payment Mortgage Loans," pursuant to
which, if the amount of interest accrued in any month exceeds the
current scheduled payment for that month, these excess amounts are paid
from a subsidy account (usually funded by a home builder or family
member) established at closing and (iii) "Growing Equity Mortgage
Loans," for which the monthly payments increase at a rate which has the
effect of amortizing the loan over a period shorter than the stated
term.
e. Subsidy Loans. If specified in the applicable prospectus
supplement, a Trust Estate may contain Mortgage Loans subject to
temporary interest subsidy agreements ("Subsidy Loans") pursuant to
which the monthly payments made by the related mortgagors will be less
than the scheduled monthly payments on these Mortgage Loans with the
present value of the resulting difference in payment ("Subsidy
Payments") being provided by the employer of the mortgagor, generally on
an annual basis. Subsidy Payments will generally be placed in a
custodial account ("Subsidy Account") by the related Servicer. Despite
the existence of a subsidy program, a mortgagor remains primarily liable
for making all scheduled payments on a Subsidy Loan and for all other
obligations provided for in the related Mortgage Note and Mortgage Loan.
Subsidy Loans are offered by employers generally through either a graduated
or fixed subsidy loan program, or a combination of these programs. The terms of
the subsidy agreements relating to Subsidy Loans generally range from one to ten
years. The subsidy agreements relating to Subsidy Loans made under a graduated
program generally will provide for subsidy payments that result in effective
subsidized interest rates between three percentage points and five percentage
points below the Mortgage Interest Rates specified in the related Mortgage
Notes. Generally, under a graduated program, the subsidized rate for a Mortgage
Loan will increase approximately one percentage point per year until it equals
the full Mortgage Interest For example, if the initial subsidized interest
rate is five percentage points below the Mortgage Interest Rate in year one, the
subsidized rate will increase to four percentage points below the Mortgage
Interest Rate in year two, and likewise until year six, when the subsidized rate
will equal the Mortgage Interest Rate. Where the subsidy agreements relating to
Subsidy Loans are in effect for longer than five years, the subsidized interest
rates generally increase at smaller percentage increments for each year. The
subsidy agreements relating to Subsidy Loans made under a fixed program
generally will provide for subsidized interest rates at fixed percentages
(generally one percentage point to two percentage points) below the Mortgage
Interest Rates for specified periods, generally not in excess of ten years.
Subsidy Loans are also offered pursuant to combination fixed/graduated programs.
The subsidy agreements relating to these Subsidy Loans generally will provide
for an initial fixed subsidy of up to five percentage points below the related
Mortgage Interest Rate for up to five years, and then a periodic reduction in
the subsidy for up to five years, at an equal fixed percentage per year until
the subsidized rate equals the Mortgage Interest Rate.
25
Generally, employers may terminate subsidy programs in the event of (i) the
mortgagor's death, retirement, resignation or termination of employment, (ii)
the full prepayment of the Subsidy Loan by the mortgagor, (iii) the sale or
transfer by the mortgagor of the related Mortgaged Property as a result of which
the mortgagee is entitled to accelerate the Subsidy Loan under the "due-on-sale"
clause contained in the Mortgage, or (iv) the commencement of foreclosure
proceedings or the acceptance of a deed in lieu of foreclosure. In addition,
some subsidy programs provide that if prevailing market rates of interest on
mortgage loans similar to a Subsidy Loan are less than the Mortgage Interest
Rate of that Subsidy Loan, the employer may request that the mortgagor refinance
its Subsidy Loan and may terminate the related subsidy agreement if the
mortgagor fails to refinance its Subsidy Loan. In the event the mortgagor
refinances its Subsidy Loan, the new loan will not be included in the Trust
Estate. See "Prepayment and Yield Considerations." In the event a subsidy
agreement is terminated, the amount remaining in the Subsidy Account will be
returned to the employer, and the mortgagor will be obligated to make the full
amount of all remaining scheduled payments, if any. The mortgagor's reduced
monthly housing expense as a consequence of payments under a subsidy agreement
may be used by the Sponsor or other originator in determining certain
expense-to-income ratios utilized in underwriting a Subsidy Loan. See "The
Mortgage Loan Programs--Mortgage Loan Underwriting."
f. Buy-Down Loans. If specified in the applicable prospectus
supplement, a Trust Estate may contain Mortgage Loans subject to
temporary buy-down plans ("Buy-Down Loans") under which the monthly
payments made by the mortgagor during the early years of the Mortgage
Loan will be less than the scheduled monthly payments on the Mortgage
Loan. The resulting difference in payment will be compensated for from
an amount contributed by the seller of the related Mortgaged Property or
another source, including the originator of the Mortgage Loan (generally
on a present value basis) and, if specified in the applicable prospectus
supplement, placed in a custodial account (the "Buy-Down Fund") by the
related Servicer. If the mortgagor on a Buy-Down Loan prepays the
Mortgage Loan in its entirety, or defaults on the Mortgage Loan and the
related Servicer liquidates the related Mortgaged Property, during the
period when the mortgagor is not obligated, by virtue of the buy-down
plan, to pay the full monthly payment otherwise due on the loan, the
unpaid principal balance of the Buy-Down Loan will be reduced by the
amounts remaining in the Buy-Down Fund for the Buy-Down Loan, and these
amounts will be deposited in the Servicer Custodial Account or the
Certificate Account, net of any amounts paid relating to the Buy-Down
Loan by any insurer, guarantor or other person under a credit
enhancement arrangement described in the applicable prospectus
supplement.
g. Balloon Loans. If specified in the applicable prospectus
supplement, a Trust Estate may contain Mortgage Loans which are
amortized over a fixed period not exceeding 30 years but which have
shorter terms to maturity ("Balloon Loans") that causes the outstanding
principal balance of the related Mortgage Loan to be due and payable at
the end of a certain specified period (the "Balloon Period"). The
borrower of a Balloon Loan will be obligated to pay the entire
outstanding principal balance of the Balloon Loan at the end of the
related Balloon Period. In the event the related mortgagor refinances a
Balloon Loan at maturity, the new loan will not be included in the Trust
Estate. See "Prepayment and Yield Considerations" herein.
If specified in the applicable prospectus supplement, certain Mortgage Loans
originated by the Sponsor may include a BPP addendum to the related Mortgage
Note whereby the Sponsor agrees to cancel (i) certain payments of principal and
interest on the Mortgage Loan for up to twelve months upon the disability or
involuntary unemployment of the mortgagor or (ii) the outstanding principal
balance of the Mortgage Loan upon the accidental death of the mortgagor;
provided that the BPP has not been terminated in accordance with its terms. See
"The Mortgage Loan Programs--Mortgage Loan
26
Underwriting--Bank of America General Underwriting Standards" for more
information about BPP. In each case, the Sponsor will be required to pay these
cancelled amounts to the applicable Trust.
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THE SPONSOR
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Bank of America, National Association ("Bank of America") will serve as the
sponsor (the "Sponsor") of each series of Certificates. Bank of America is an
indirect wholly-owned subsidiary of Bank of America Corporation. Bank of America
is engaged in a general consumer banking, commercial banking, and trust
business, offering a wide range of commercial, corporate, international,
financial market, retail and fiduciary banking services. Bank of America is a
national banking association chartered by the Office of the Comptroller of the
Currency (the "OCC") and is subject to the regulation, supervision and
examination of the OCC.
Bank of America and its affiliates have been active in the securitization
market since inception. Bank of America has sponsored publicly offered
securitization transactions since 1977. Bank of America and its affiliates have
been involved with the origination of auto loans, student loans, home equity
loans, credit card receivables, manufactured housing contracts, residential
mortgage loans and commercial mortgage loans, as well as less traditional asset
classes. Bank of America and its affiliates have also participated in a variety
of collateralized loan obligation transactions, synthetic securitizations, and
asset-backed commercial paper programs. Bank of America and its affiliates have
served as sponsors, issuers, dealers, and servicers in a wide array of
securitization transactions.
The Depositor's securitization program principally is used to fund Bank of
America's consumer real estate business unit's self-originated portfolio of
fully amortizing mortgage loans secured by first liens on one- to four-family
residential properties. The Depositor's securitization program may also include
mortgage loans originated through correspondent arrangements. While Bank of
America currently does not rely on securitization as a material funding source,
the Depositor's securitization program is a material funding source for Bank of
America's portfolio of consumer real estate mortgage loans similar to the
Mortgage Loans.
The table below sets forth the number and aggregate principal balance of
mortgage loans of the type which may be included in Trusts formed by the
Depositor, which were originated by Bank of America during the periods
indicated:
Twelve-Months Ended December 31, 3-Months Ended
-------------------------------------- --------------
2003 2004 2005 2006 March 31, 2007
Number 792,496 454,683 394,942 371,079 98,240
Aggregate Principal
Balance (in Billions) $131.1 $87.5 $86.8 $85.5 $23.4
Bank of America serves as the Sponsor and, if specified in the applicable
prospectus supplement, the Servicer in the Depositor's securitization program,
in addition to owning all of the Depositor's equity. Banc of America Securities
LLC, which may act as an underwriter of Certificates, is an affiliate of Bank of
America and assists Bank of America and the Depositor in connection with the
selection of mortgage loans for various transactions. See "Method of
Distribution" in the applicable prospectus supplement.
Bank of America's headquarters and its executive offices are located at 101
South Tryon Street, Charlotte, North Carolina 28255, and the telephone number is
(704) 386-5478.
27
See "The Mortgage Loan Programs," "Servicing of the Mortgage Loans" and "The
Pooling Agreement" for more information about the Sponsor's solicitation and
underwriting criteria used to originate mortgage loans similar to the Mortgage
Loans and its material roles and duties in each securitization.
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THE DEPOSITOR
- --------------------------------------------------------------------------------
Banc of America Mortgage Securities, Inc. (the "Depositor") was incorporated
in the State of Delaware on November 26, 2002 under the name "BA Residential
Securities, Inc." and filed a Certificate of Amendment of Certificate of
Incorporation changing its name to "Banc of America Mortgage Securities, Inc."
on December 4, 2002. The Depositor is a wholly-owned subsidiary of the Sponsor.
It is not expected that the Depositor will have any business operations other
than offering mortgage pass-through certificates and related activities.
The Depositor will have limited obligations and rights under each Pooling
Agreement after the Closing Date for any series, including, but not limited to,
repurchasing Mortgage Loans due to breaches of representations and warranties,
and repurchasing in the circumstances described under "The Pooling
Agreement--Termination; Optional Purchase of Mortgage Loans," all or a portion
of the Mortgage Loans.
The Depositor will maintain its principal executive office at 214 North
Tryon Street, Mail Code NC1-027-22-02, Charlotte, North Carolina 28255,
Attention: Principal, telephone number (704) 387 8239.
The Depositor and any director, officer, employee or agent of the Depositor
shall be indemnified by the Trust Estate and held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
the Pooling Agreement or the Certificates, other than any loss, liability or
expense related to any specific Mortgage Loan or Mortgage Loans and any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties under the Pooling Agreement or
by reason of reckless disregard of its obligations and duties under the Pooling
Agreement.
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THE MORTGAGE LOAN PROGRAMS
- --------------------------------------------------------------------------------
Mortgage Loan Underwriting
The Depositor will purchase the Mortgage Loans from Bank of America, as the
Sponsor. The Mortgage Loans will have been either (i) originated by Bank of
America or (ii) purchased by Bank of America from various entities that either
originated the Mortgage Loans or acquired the Mortgage Loans pursuant to
mortgage loan purchase programs operated by these entities. The Mortgage Loans
will have been underwritten materially in accordance with one or more of the
following: (i) Bank of America's general underwriting standards set forth below
under "-- Bank of America General Underwriting Standards," (ii) Bank of
America's alternative underwriting standards set forth below under "--Bank of
America Alternative Underwriting Standards" or (iii) to the extent the Mortgage
Loans were originated by an entity other than Bank of America the underwriting
standards set forth in the applicable prospectus supplement, if material.
28
General
The underwriting standards used by mortgage loan originators are intended to
evaluate the mortgagor's credit standing and repayment ability and the value and
adequacy of the mortgaged property as collateral. The underwriting standards
used by originators other than Bank of America, unless such other originators
use standards materially similar to Bank of America's underwriting standards,
will be described in the applicable prospectus supplement. The following
paragraphs describe Bank of America's underwriting standards.
Bank of America General Underwriting Standards
Origination Channels
Bank of America originates mortgage loans (i) directly to consumers; (ii)
indirectly through brokers; and (iii) through other loan originators. Bank of
America's direct-to-consumer originations include mortgage loans made to:
o customers applying for a mortgage at one of Bank of America's banking
center locations;
o customers applying for a Bank of America mortgage via telephone;
o customers applying for a mortgage utilizing Bank of America's internet
site; and
o customers applying for a mortgage with one of Bank of America's retail
mortgage account executives, who obtain customers by networking with
realtors and builders in their local markets.
Bank of America also originates loans indirectly through its wholesale
channel where:
o the initial application is processed by an independent mortgage broker
approved to sell loans to Bank of America; or
o applications are processed and the mortgage loan is originated by
another entity and subsequently acquired by Bank of America after
closing.
The real estate lending processes for one- to four-family mortgage loans in
all origination channels follow standard procedures, designed to comply with
applicable federal, state and local laws and regulations.
The Application and Use of Credit Scoring
Regardless of the channel in which the loan was originated, a mortgage
application is completed containing information that assists in evaluating the
mortgagor's credit standing, capacity to repay the loan and adequacy of the
mortgaged property as collateral for the loan. During the application process,
the applicant is required to authorize Bank of America to obtain a credit report
that summarizes the applicant's credit history with merchants and lenders and
any record of bankruptcy or prior foreclosure. This credit information may be
obtained from either a single credit repository or from up to three credit
repositories. The credit bureau inquiry also includes a request for the
applicant's Credit Score. "Credit Scores" are statistical credit scores obtained
by many mortgage lenders in connection with the loan application to help assess
a borrower's creditworthiness. Credit Scores are generated by models developed
by a third party and are made available to lenders through three national credit
bureaus, Experian (FICO), Equifax (Beacon) and TransUnion (Empirica). The models
were derived by analyzing data on consumers in order to establish patterns which
are believed to be indicative of the borrower's
29
probability of default. A Credit Score is based on a borrower's historical
credit data, including, among other things, payment history, delinquencies on
accounts, levels of outstanding indebtedness, length of credit history, types of
credit, and bankruptcy experience. Credit Scores range from approximately 300 to
approximately 850, with higher scores indicating an individual with a more
favorable credit history compared to an individual with a lower score. If the
credit bureaus cannot generate a Credit Score due to insufficient information
about an applicant, Bank of America will consider proof of an applicant's
alternative credit history, such as a history of consistent rent and utility
payments.
In addition to a Credit Score, Bank of America may obtain a Custom Mortgage
Score. In order to generate a Custom Mortgage Score, the applicant must have at
least one trade line on his or her credit report and also have a Credit Score.
The "Custom Mortgage Score" was developed on a population of mortgage loans
serviced by Bank of America and is designed to assess the likelihood that a
mortgage loan will become 60 days or more delinquent within two years of
application. The Custom Mortgage Score used by Bank of America will either have
been developed by Bank of America individually or with the assistance of a third
party. The Custom Mortgage Score requires a Credit Score and utilizes
information obtained from one of the three major credit bureaus. The credit
bureau used depends on the geographic location of the applicant's residence at
the time of application. Bank of America may evaluate a prospective borrower's
creditworthiness with either (i) a Credit Score, (ii) a Custom Mortgage Score or
(iii) a combination of a Credit Score and a Custom Mortgage Score.
Underwriting Evaluation by Automated Underwriting Decision Engine or Manual
Underwriter
Each mortgage loan underwritten to Bank of America's general underwriting
standards is underwritten in accordance with guidelines established in Bank of
America's Product and Policy Guides (the "Product Guides"). These underwriting
standards applied by Bank of America in originating or acquiring mortgage loans
are intended to evaluate the applicants' repayment ability, credit standing, and
the adequacy of the mortgage property as collateral for the mortgage loan. The
underwriting standards as established in the Product Guides are continuously
updated to reflect prevailing conditions in the residential market, new mortgage
products, and the investment market for residential mortgage loans.
Each mortgage application is evaluated by either an automated underwriting
decision engine and/or a human underwriter to determine the appropriate credit
decision and documentation requirements for the loan transaction. The automated
underwriting decision engine may be an engine developed by an outside company
and updated by Bank of America risk management personnel to facilitate automated
decisions on Bank of America loan transactions. Alternatively, it may be an
external decision engine such as Fannie Mae's Desktop Underwriter(R) or Freddie
Mac's Loan Prospector(R). If the loan is not automatically approved or declined
by the automated underwriting decision engine, it is directed to an underwriter
who evaluates the application against a set of specific criteria. The
underwriter may be an employee of the lender or may be an individual performing
underwriting on a contract basis through a third party firm such as a mortgage
insurance company.
Desktop Underwriter(R) is an automated underwriting system developed by
Fannie Mae for conventional conforming loans. Desktop Underwriter(R) indicates
the minimum income and asset verification, credit-related documentation and
other requirements necessary to complete processing of the loan file. These
requirements are based on the specific risk factors present in each loan file.
Bank of America utilizes Fannie Mae's Custom Desktop Underwriter(R) which allows
Bank of America's conditions and policies to display on a customized findings
report specific to it.
Loan Prospector(R) is an automated underwriting system developed by Freddie
Mac for conventional conforming loans. Loan Prospector(R) indicates the minimum
income and asset verification, credit-related
30
documentation and other requirements necessary to complete processing of the
loan file. These requirements are based on the specific risk factors present in
each mortgage application.
Either the automated underwriting decision engine or the underwriter
evaluates the application information to the guidelines for the product type
under which the applicant has applied. As part of the underwriting evaluation,
the Loan-to-Value Ratio is calculated. The "Loan-to-Value Ratio" is the
percentage equal to (i) the principal balance of the mortgage loan at
origination divided by (ii) the lesser of (a) the appraised value of the related
mortgaged property determined in an appraisal obtained at origination of the
mortgage loan or an automated valuation model or tax assessed value (if
permitted by the applicable product type) and (b) except for mortgage loans made
for refinancing purposes, the sales price for the mortgaged property. In
addition to evaluating the Loan-to-Value Ratio, the automated underwriting
decision engine or human underwriter will also evaluate the applicant's credit
history and/or Credit Score and/or Custom Mortgage Score, the amount of the
applicant's debts (including proposed housing payment and related expenses such
as property taxes and hazard insurance) to his or her gross monthly income, the
intended occupancy of the subject property, the property type, and the purpose
of the loan transaction to determine whether the mortgage loan generally meets
the guidelines established for the program under which the applicant is
applying. If there are multiple applicants on a loan transaction, Bank of
America generally utilizes the Credit Score and/or Custom Mortgage Score
associated with the highest wage-earner on the transaction as the representative
score(s) for the transaction. The automated underwriting decision engine and/or
the underwriter may utilize compensating factors to offset one or more features
of the loan transaction that may not specifically comply with the product
guidelines. Therefore, the application of the underwriting guidelines for a
product type by either an underwriter or an automated decision engine does not
imply that each specific standard was satisfied individually. A loan is
considered to be underwritten in accordance with a given set of guidelines if,
based on an overall qualitative evaluation, the loan is in substantial
compliance with such underwriting guidelines.
As part of the underwriting evaluation, the applicant's "Debt-to-Income
Ratio" is calculated as the amount of the monthly debt obligations (including
the proposed new housing payment and related expenses such as property taxes and
hazard insurance) to his or her gross monthly income. Bank of America's
Debt-to-Income Ratio guidelines are based on the loan instrument, loan term,
Credit Score, Loan-to-Value Ratio, property type, and occupancy characteristics
of the subject loan transaction. Bank of America permits ratios to exceed
guidelines when the applicant has documented compensating factors for exceeding
ratio guidelines such as documented excess funds in reserves after closing, a
history of making a similar sized monthly debt payment on a timely basis,
substantial residual income after monthly obligations are met, evidence that
ratios will be reduced shortly after closing when a financed property under
contract for sale is sold, or additional income has been verified for one or
more applicants that is ineligible for consideration as qualifying income.
For certain mortgage loans, underwriting may be based on data obtained by
third parties that are involved at various stages in the mortgage origination or
acquisition process. This typically occurs under circumstances in which loans
are subject to more than one approval process, as when correspondents, certain
mortgage brokers or similar entities that have been approved by Bank of America
to underwrite loans on its behalf, or independent contractors hired by these
parties to perform underwriting services on Bank of America's behalf, make
initial determinations as to the consistency of loans with established
underwriting guidelines. The underwriting of mortgage loans acquired from
another lender generally relies on the representations from the originating
lender that the mortgage loans were underwritten in accordance with agreed upon
underwriting standards that are materially similar to Bank of America's. In the
event these standards differ materially from those set forth in this prospectus,
the related prospectus supplement will describe the applicable standards.
Generally, Bank of America conducts a post-purchase review of a sampling of all
mortgage loans acquired from another lender to determine whether agreed upon
requirements were met. In order to be eligible to sell mortgage loans under a
delegated
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underwriting arrangement, the lender must meet certain requirements including,
among other things, certain quality, operational and financial guidelines.
Certain of the mortgage loans may be purchased by Bank of America in
negotiated transactions, and these negotiated transactions may be governed by
contractual agreements. The contractual agreements may provide the commitment by
Bank of America to accept the delivery of a certain dollar amount of mortgage
loans over a specific period of time; this commitment may allow for the delivery
of mortgage loans one at a time or in multiples as aggregated by the seller.
Many of the contractual agreements allow the delegation of all underwriting
functions to the seller, who will represent that the mortgage loans have been
originated in accordance with underwriting standards agreed to by Bank of
America. In the event these standards differ materially from those set forth in
this prospectus, the related prospectus supplement will describe such standards.
Loans with Secondary Financing
First lien purchase money mortgage loans may have secondary financing to the
borrower contemporaneously with the origination of the first lien mortgage loan.
First lien refinance transactions may have existing secondary financing with the
applicant that is resubordinated to the new first lien transaction or may have
new secondary financing originated simultaneously with the first lien mortgage.
The secondary financing may or may not be provided by Bank of America. The Total
Loan-to-Value Ratio and Combined Loan-to-Value Ratio are evaluated on each loan
with subordinate financing. The "Total Loan-to-Value Ratio" is the principal
balance of the first lien mortgage loan at origination plus any secondary
financing that was drawn upon at that time divided by the value of the mortgaged
property. The "Combined Loan-to-Value Ratio" is the principal balance of the
first lien mortgage loan at origination plus the total amount of available
secondary financing (including any unused amount on a home equity line of
credit) divided by the value of the mortgaged property. A mortgage loan with
secondary financing is evaluated to determine if the Total Loan-to-Value Ratio
and Combined Loan-to-Value Ratio meet the requirements for the program under
which the application is submitted or if the application contains compensating
factors to warrant an exception to the applicable guidelines. Some applicants
request a first lien mortgage loan with a Loan-to-Value Ratio of 80% with a
simultaneously funded second lien transaction in order to avoid the cost of
primary mortgage insurance associated with first lien mortgage loans with
Loan-to-Value Ratios exceeding 80%.
Documentation
In assessing an applicant, Bank of America requires supporting documentation
(or other verification) for all material data provided by the applicant, such as
income and source of down payment, unless the applicant qualifies for one of the
Accelerated Processing Programs discussed below.
Under Bank of America's standard documentation process (the "Standard
Documentation Process") the following verifications are required: a salaried
applicant's income is verified by either having the applicant provide copies of
the previous year's federal withholding form (IRS W-2) and a current payroll
earnings statement or by sending a verification of employment form to the
applicant's employer. A verification of employment form asks the employer to
report the applicant's length of employment with the employer, the current
salary and an indication as to whether it is expected that the applicant will
continue to be employed in the future. A self-employed applicant is required to
provide copies of tax returns for the prior two years. Bank of America verifies
down payment funds by (i) obtaining bank or other financial statements covering
the most recent 60-day period confirming the existence of these funds, (ii)
determining electronically that these funds are on deposit with Bank of America,
(iii) obtaining documentation that these funds are to be obtained from a gift or
sale of assets or
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(iv) asking the applicant's financial institution to complete a verification of
deposit form detailing asset information. Asset verifications are not required
on refinance transactions.
If the applicant lacks a traditional credit history, then the loan approval
may be conditioned upon the documentation of an acceptable alternative credit
history consisting of at least three references showing timely payment of
utilities, insurance premiums or rent, or other alternative credit references in
the prior twelve months.
In order to qualify for Bank of America's general underwriting standards,
applicants must be willing to have the income and assets stated on their
application verified. Applicants who have indicated that they do not wish to
have their income and/or assets verified are directed to other Bank of America
programs outlined in "--Bank of America Alternative Underwriting Standards"
below. While the applicants under Bank of America's general underwriting
standards are willing to have income and asset information stated in the
application verified, the level of verifications required (if any) are based on
the applicant's credit profile, requested loan terms, and whether the applicant
has an existing loan serviced by Bank of America that is being refinanced with
the new loan transaction. Bank of America matches documentation requirements on
mortgage loans to the overall risk parameters of the loan file under various
"Accelerated Processing Programs" such as: (i) Rapid; (ii) PaperSaver(R) (also
known as Threshold and/or Rapid Plus); (iii) Stated Income, Stated Asset; (iv)
All-Ready Home; (v) Mortgage Rewards; (vi) No Ratio, (vii) Stated Income or
(viii) No Income No Asset.
Under Bank of America's "Rapid" documentation program, if the applicant
meets the Total Loan-to-Value Ratio and Credit Score requirements, only the most
recent year-to-date pay stub, W-2 or a verification of employment is required
for income verification (if salaried). A signed IRS Form 4506-T (Request for
Transcript of Tax Returns) and the last two Federal Income Tax Returns (Form
1040) with all schedules or, depending upon the program requirements, the first
two pages of the most recent tax return of a self-employed applicant, is
required for income verification. Documentation for asset verification is
necessary only for those assets needed for down payment, closing costs and the
reserve requirements on purchase transactions and may be required for certain
refinance transactions.
Under Bank of America's "PaperSaver(R)" documentation program, verification
of the applicant's stated income and stated assets is not requested (with the
exception of self-employed applicants who are required to sign the IRS form
4506-T (Request for Transcript of Tax Returns)) if the applicant meets the
designated Credit Score, Custom Mortgage Score, Loan-to-Value Ratios and other
eligibility requirements. An applicant with a designated higher Credit Score and
designated higher Custom Mortgage Score which together indicate a favorable
credit history is eligible for PaperSaver(R) documentation. The PaperSaver(R)
documentation program has certain limitations relating to occupancy, property
type, purpose and principal balance.
Under Bank of America's "Stated Income, Stated Asset" documentation program,
income or asset verifications are not requested from applicants if they meet the
Total Loan-to-Value Ratio, Credit Score and other eligibility requirements for
the program. Although the Stated Income, Stated Asset program permits applicants
to simply state their income and assets without verification, all applicants are
required to sign an IRS form 4506 permitting income verification from tax return
data if the file is selected as part of Bank of America's quality assurance
audit.
Bank of America may originate new mortgage loans under its "All-Ready Home"
mortgage refinance program or its "Mortgage Rewards" refinance program. Under
each of these programs, Bank of America will pay certain closing costs normally
paid by the customer. Under these programs, a borrower whose current mortgage
loan is serviced by Bank of America does not need to provide income or asset
verification documentation if the current mortgage loan has had no 30 day or
more delinquent
33
payments in the previous twelve months (or since origination if less than twelve
months). In addition, Bank of America typically requires only a drive-by
appraisal rather than an interior inspection appraisal. Because these programs
involve the refinancing of mortgage loans that Bank of America originally
underwrote, Bank of America will not apply any significant borrower credit or
property underwriting standards (other than a minimum Credit Score). Mortgage
Loans initially included in the Trust Estate for a particular series may have
been the subject of a refinancing described above. To the extent a borrower
becomes eligible for the All-Ready Home or Mortgage Rewards program after his or
her Mortgage Loan has been included in a particular Trust Estate, his or her
Mortgage Loan could be more easily refinanced, resulting in a prepayment of the
Mortgage Loan. See "Prepayment and Yield Considerations--Weighed Average Life of
Certificates."
For a description of the No Ratio, Stated Income and No Income No Asset
programs, see "--Bank of America Alternative Underwriting Standards" below.
In addition, mortgage applications evaluated by Desktop Underwriter(R) or
Loan Prospector(R) follow the Standard Documentation Process unless the
applicant's credit profile indicates a more favorable credit history, in which
case the mortgage loan may be originated with the applicant furnishing only a
recent pay stub showing year-to-date earnings (if salaried) or the first two
pages of the most recent tax return (if self-employed) for income verification
and only the most recent bank statement for asset verification.
Collateral Valuation
Bank of America conducts a valuation of the mortgaged property as collateral
for each mortgage loan. This collateral valuation may be determined by (i) an
interior inspection appraisal, (ii) a tax assessed value, (iii) a desktop
appraisal, (iv) a drive-by appraisal, (v) an automated valuation model, or (vi)
reference to the collateral valuation obtained in connection with the
origination of the previous loan if the loan is a refinance of a mortgage loan
that was previously serviced by Bank of America. An interior inspection
appraisal is an appraisal report based on an interior inspection of the subject
property. A tax assessed value is a factor applied to the tax value recorded for
the subject property that reflects the general relationship between the assessed
value and the market value of the property. These factors are established for
each county by a third party vendor. A tax assessed value also does not entail
any physical inspection of the subject property. A desktop appraisal is a report
completed by a certified/licensed appraiser utilizing a sales comparison
analysis from a local multiple listing service without conducting a physical
inspection of the property. A drive-by appraisal report is a limited, summary
appraisal report based on an exterior inspection of the property and comparable
sales by a certified/licensed appraiser. An automated valuation model is an
electronically generated valuation that utilizes real estate information such as
property characteristics, market demographics, sales price data, and regional
trends to calculate a value for a specific property. Bank of America utilizes
the automated valuation models of several vendors. An automated valuation model
does not entail any physical inspection of the subject property. In addition, no
updated appraisal valuation may be performed if the loan is a refinance of a
loan that was previously serviced by Bank of America and the valuation from the
time of origination of the loan being refinanced reflects adequate value for the
mortgaged property.
In certain instances, the interior, desktop or drive-by appraisal reports
may be conducted by an employee of Bank of America or an affiliate. The
appraisal report, however, may be performed by an independent appraiser
contracted by Bank of America or an affiliate of Bank of America on direct
channel originations. Appraisal reports on indirect channel originations are
generally performed by an appraiser selected by the originating lender but
indirect channel appraisers cannot be performed by appraisers that have been
deemed to be ineligible to perform appraisals by Bank of America.
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Appraisers may note on their appraisal any environmental hazard the
appraiser becomes aware of while appraising the property. EPA Lead Paint
requirements for notice and an inspection period are standard for properties
built before 1978. Properties containing other hazards may be eligible for
financing if the appraiser can value the property showing the impact of the
hazard, and the borrower executes a "hold harmless" letter to the lender.
Environmental hazards are not noted on collateral valuations where no physical
inspection of the property takes place, such as on loans where the collateral
valuation is conducted by an automated valuation model or tax assessed value.
Appraisers only note environmental hazards on a desktop appraisal if they
generally are known in the area.
Certain states have "anti-deficiency" laws which, in general, require
lenders providing credit on one to four family properties to look solely to the
property for repayment in the event of foreclosure. See "Certain Legal Aspects
of the Mortgage Loans--Anti-Deficiency Legislation, the Bankruptcy Code and
Other Limitations on Lenders" in this prospectus. The underwriting guidelines in
all states (including anti deficiency states) require that the value of the
property being financed, as indicated by the collateral valuation, currently
supports and is anticipated to support in the future the outstanding loan
balance and provides sufficient value to mitigate the effects of adverse shifts
in real estate values, although there can be no assurance that the value will
support the outstanding loan balance in the future.
Flood Determinations and Hazard Insurance
Each mortgage loan is evaluated to determine if the subject property is
located in a federal flood zone. If the property is located in a flood zone,
then flood insurance is required on the loan transaction with an amount of
coverage that meets or exceeds federal law requirements. Generally, evidence of
acceptable hazard insurance coverage on the subject property is a requirement
for loan approval. This documentation, however, is not required if the mortgage
loan is a refinance of an existing Bank of America serviced loan transaction and
hazard insurance was documented for the previous loan transaction or the
mortgage loan is originated under a program that does not require the review of
evidence of hazard insurance.
Mortgage Insurance and Title
Mortgage loans originated with Loan-to-Value Ratios in excess of 80% may be
covered by primary mortgage insurance. Except as noted below in connection with
certain refinance transactions, mortgage loans will generally be covered by an
appropriate standard form American Land Title Association ("ALTA") title
insurance policy, or a substantially similar policy or form of insurance
acceptable to Fannie Mae or Freddie Mac, or if the related mortgaged property is
located in a jurisdiction where these policies are generally not available, an
opinion of counsel of the type customarily rendered in these jurisdiction in
lieu of title insurance will be obtained instead. If required, the title
insurance policy may include environmental protection lien endorsement coverage
(ALTA Form 8.1 or its equivalent) excepting only Superliens which may arise
after the loan is made. See "Certain Legal Aspects of the Mortgage
Loans--Environmental Considerations" in this prospectus.
Mortgage loans on refinance transactions generally do not contain title
insurance policies. Title searches are often performed on these refinance
transactions in lieu of obtaining a title insurance policy. A title search is a
limited search of a specified parcel of land summarizing information concerning
current owner(s) and all judgments, mortgages, and tax obligations filed.
Borrowers Protection Plan(R)
Bank of America's Borrowers Protection Plan(R) ("BPP") is a
debt-cancellation contract between the borrower and Bank of America. This
optional plan can cancel a borrower's monthly principal and
35
interest payment for up to a total of twelve months if the borrower loses his or
her job or becomes disabled. Additionally, the outstanding principal balance of
a mortgage loan with BPP will be cancelled if the borrower dies as a result of
an accident. While Bank of America will cancel payment of the principal,
interest and BPP fees, the borrower will still be responsible for the payment of
taxes and insurance. Bank of America will be obligated to pay to the applicable
Trust any amounts cancelled due to BPP on a Mortgage Loan.
The following three protection options are available in a BPP contract: (i)
disability, involuntary unemployment and accidental death; (ii) involuntary
unemployment and accidental death or (iii) disability and accidental death.
The benefit period ranges from six to twelve months. A borrower may elect
single (i.e., one borrower who is named in the mortgage note) or joint coverage
(i.e., any two of the borrowers named in the mortgage note).
BPP is only available on certain first-lien fixed-rate and adjustable-rate
mortgage loan products and programs. The term of protection is the lesser of the
loan term and ten years. Upon expiration, BPP is discontinued and the monthly
BPP fee is no longer assessed. If the borrower has an active BPP claim prior to
the expiration date, however, loan protection can extend beyond the expiration
date. BPP is optional and the borrower's choice regarding BPP is not considered
when evaluating the loan request. The borrower must select the BPP plan prior to
loan closing.
Bank of America Alternative Underwriting Standards
In addition to the general underwriting standards described above under
"--Bank of America General Underwriting Standards," Bank of America provides for
certain alternative underwriting programs for qualified borrowers, some of which
enable the applicant to request reductions in the verification documentation
required for the mortgage loan.
Bank of America's "Stated Income Program" provides applicants the
ability to request that income stated on the loan application not be verified.
The Debt-to-Income Ratio calculation used by the underwriter to evaluate the
applicant's capacity for the loan is based on income the applicant discloses on
the application. Under the Stated Income Program, applicants who have steady
employment and complex sources of income or rapidly expanding incomes may be
eligible. The Stated Income Program is designed to meet the needs of applicants
with a traditional credit history who meet the minimum Credit Score requirement
of the program. A verbal verification of employment confirming the applicant's
date of employment, job status and title is required. While income information
is not provided, the applicant must continue to provide documentation of assets
used for down payment, closing costs, and reserves on purchase transactions.
Bank of America's "No Ratio Loan Program" provides applicants with a
minimum Credit Score and a sufficient asset base the ability to obtain mortgage
loans with no income verification or Debt-to-Income Ratio calculation. Under
this program, the applicant does not state his or her income at the time of loan
application. The applicant must evidence a propensity and capacity to save and
to maintain stable employment, defined as a minimum of two years in the same
line of work. A verbal verification of employment information provided in the
application, without reference to income, takes place under this program. While
income information is not provided, the applicant must continue to provide
documentation of his or her assets used for down payment, closing costs, and
reserves on purchase transactions.
36
Bank of America's "No Income No Asset Program" provides applicants with
a minimum Credit Score and steady employment the ability to obtain mortgage
loans with no income verification, Debt-to-Income Ratio calculation or asset
verification. Under this program, the applicant does not state his or her income
or assets at the time of loan application. The applicant must evidence stable
employment, defined as a minimum of two years in the same line of work. A verbal
verification of employment information provided in the application, without
reference to income, takes place under this program.
Bank of America's "100% LTV Program" provides applicants the ability to
obtain a mortgage loan with no down payment. The 100% LTV Program is only
available if the primary borrower has a minimum Credit Score. The 100% LTV
Program also permits Loan-to-Value Ratios of up to 103% (including closing costs
and prepaid items in an amount up to 3% of the value of the mortgaged property).
Under this program, Bank of America uses the Standard Documentation Process.
Bank of America's "97% LTV Program" provides applicants with the
opportunity to obtain low down payment mortgage loans. This program allows an
applicant to obtain financing for a mortgage loan by requiring only a 3% cash
down payment from the applicant's own funds. The 97% LTV Program is only
available if the primary borrower has a minimum Credit Score. The 97% LTV
Program is a fully amortizing 30-year fixed-rate mortgage that is available on
owner-occupied principal residences only. This program is available on purchase
and rate or term refinance transactions. Under this program, Bank of America
uses the Standard Documentation Process.
Bank of America's "Condominium Hotel Loan Program" provides applicants
the ability to purchase a unit in a Condominium Hotel. The Condominium Hotel
Loan Program offers a fully amortizing 15-year or 30-year fixed-rate mortgage
loan that is available on a primary residence or second home. The Condominium
Hotel Loan Program is only available if the primary borrower has a minimum
Credit Score. Condominium Hotel Mortgage Loans are available on purchase and
rate or term refinance transactions. Under this program, Bank of America uses
the Standard Documentation Process.
Bank of America's "Non-Resident Alien Loan Program" provides financing
to non-resident aliens to purchase or refinance second home properties within
the United States. Applicants without a United States credit history must
document an acceptable credit history within their primary country of origin.
Under this program, Bank of America uses the Standard Documentation Process.
Bank of America's "80/20 Program" provides applicants with an 80%
Loan-to-Value Ratio first lien mortgage that is funded simultaneously with a 20%
Loan-to-Value Ratio second lien mortgage so that the Total Loan-to-Value Ratio
is 100%. By structuring loans in such a manner, the applicant is able to avoid
the cost of primary mortgage insurance on the transaction. The 80/20 Program is
only available if the primary borrower has a minimum Credit Score. Bank of
America may originate both the first and second lien transactions under an 80/20
transaction or the second lien may be originated by another lender. Under this
program, Bank of America uses the Standard Documentation Process.
Representations and Warranties
In connection with the transfer of the Mortgage Loans related to any series
by the Depositor to the applicable Trust, the Depositor will generally make
certain representations and warranties regarding the Mortgage Loans. If so
indicated in the applicable prospectus supplement, the Depositor may, rather
than itself making representations and warranties, cause the representations and
warranties made by an originator to the Sponsor in connection with the purchase
of Mortgage Loans by the Sponsor to be assigned to the Trust Estate. In these
cases, these representations and warranties may have been made as of a date
prior to the date of execution of the Pooling Agreement. The representations and
warranties
37
made or assigned to the Trust (whether made by the Depositor or another party)
will generally include the following with respect to the Mortgage Loans, or each
Mortgage Loan, as the case may be: (i) the schedule of Mortgage Loans is correct
in all material respects at the date or dates on which the information is
furnished as specified in the schedule; (ii) immediately prior to the transfer
and assignment contemplated by the Pooling Agreement, the Depositor is the sole
owner and holder of the Mortgage Loan, free and clear of any and all liens,
pledges, charges or security interests of any nature and has full right and
authority to sell and assign the same; (iii) to the knowledge of the
representing party, no Mortgage Note or Mortgage is subject to any right of
rescission, set-off, counterclaim or defense; (iv) either (a) the Mortgage Loan
is covered by a title insurance policy, (b) a title search has been done showing
no lien, subject to certain limited exceptions, senior to the first lien of the
Mortgage or (c) in the case of any Mortgage Loan secured by a Mortgaged Property
located in a jurisdiction where title insurance policies are generally not
available, an opinion of counsel of the type customarily rendered in these
jurisdictions in lieu of title insurance is instead received; (v) subject to
certain limited exceptions, the Mortgage is a valid, subsisting and enforceable
first lien on the related Mortgaged Property; (vi) the Mortgaged Property is
undamaged by water, fire, earthquake or earth movement, windstorm, flood,
tornado or similar casualty (excluding casualty from the presence of hazardous
wastes or hazardous substances, as to which no representation is made), so as to
affect adversely the value of the Mortgaged Property as security for the
Mortgage Loan or the use for which the premises were intended; (vii) all
payments required to be made up to the Due Date immediately preceding the
Cut-off Date for the Mortgage Loan under the terms of the related Mortgage Note
have been made and, except to the extent specified in the applicable prospectus
supplement, no Mortgage Loan had more than one delinquency in the 12 months
preceding the Cut-off Date; and (viii) any and all requirements of any federal,
state or local law with respect to the origination of the Mortgage Loans
including, without limitation, usury, truth-in-lending, real estate settlement
procedures, consumer credit protection, all applicable predatory and abusive
lending laws, equal credit opportunity or disclosure laws applicable to the
Mortgage Loans have been complied with.
No representations or warranties will be made by the Depositor or any other
party as to the environmental condition of any Mortgaged Property including the
absence, presence or effect of hazardous wastes or hazardous substances on the
Mortgaged Property or any effect from the presence or effect of hazardous wastes
or hazardous substances on, near or emanating from the Mortgaged Property. See
"Certain Legal Aspects of the Mortgage Loans--Environmental Considerations."
See "The Pooling Agreement--Assignment of Mortgage Loans" for a description
of the limited remedies available in connection with breaches of the foregoing
representations and warranties. In addition to those remedies, in the case of a
breach of the representation that a Mortgage Loan at the time of its origination
complied with any applicable federal, state or local predatory or abusive
lending laws, the Depositor (or other party making this representation) will be
required to pay any costs or damages incurred by the Trust as a result of the
violation of these laws.
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DESCRIPTION OF THE CERTIFICATES
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General
A separate common law trust (each, a "Trust") will serve as the "Issuing
Entity" and issue each series of certificates (the "Certificates"). Each series
of Certificates will include one or more classes (each, a "Class"). Any Class of
Certificates may consist of two or more non-severable Components, each of which
may exhibit any of the principal or interest payment characteristics described
in this prospectus for a Class of Certificates. A series may include one or more
Classes of Certificates entitled, to the extent of funds available, to (i)
principal and interest distributions from the related Mortgage Loans,
38
(ii) principal distributions, with no interest distributions, (iii) interest
distributions, with no principal distributions or (iv) other distributions as
are described in the applicable prospectus supplement.
Each series of Certificates will be issued on the date specified in the
applicable prospectus supplement (the "Closing Date") pursuant to a pooling and
servicing agreement (the "Pooling Agreement") among the Depositor, the
Servicer(s) (or, if applicable, the Master Servicer), the Trustee (and, if
applicable, a securities administrator) named in the applicable prospectus
supplement. An illustrative form of Pooling Agreement has been filed as an
exhibit to the registration statement of which this prospectus is a part. The
following summaries describe material provisions common to the Certificates and
to each Pooling Agreement. The summaries are subject to, and are qualified by
reference to, the further material provisions of the Pooling Agreement for each
specific series of Certificates, as described in the applicable prospectus
supplement.
Beginning with the month following the month in which the Cut-off Date
occurs for a series of Certificates, distributions to the holders of
Certificates (the "Certificateholders") (other than the final distribution in
retirement of the Certificates) will be made on the Distribution Date to the
persons in whose names the Certificates are registered at the close of business
on the dated specified in the related prospectus supplement (the "Record Date")
(which in the case of Book-Entry Certificates will be Cede & Co. as nominee for
DTC) by check mailed to the address of the person in the certificate register,
except that, for any Certificateholder, distributions will be made by wire
transfer in immediately available funds, provided that the Trustee or the Paying
Agent acting on behalf of the Trustee shall have been furnished with appropriate
wiring instructions not less than seven business days prior to the related
Distribution Date. The final distribution in retirement of Certificates will be
made only upon presentation and surrender of the Certificates at the office or
agency maintained by the Trustee or other entity for that purpose, as specified
in the final distribution notice to Certificateholders.
Each series of Certificates will represent ownership interests in the
related Trust Estate. One or more elections may be made to treat the Trust
Estate (or one or more segregated pools of assets of the Trust Estate) for a
series of Certificates as one or more "real estate mortgage investment conduits"
(each, a "REMIC"). If a REMIC election is made, the related series will consist
of one or more Classes of Certificates that will represent "regular interests"
within the meaning of Code Section 860G(a)(1) (these Class or Classes
collectively referred to as the "Regular Certificates") and one Class of
Certificates that will be designated as the "residual interest" within the
meaning of Code Section 860G(a)(2) (the "Residual Certificate") representing the
right to receive distributions as specified in the prospectus supplement for
that series. See "Federal Income Tax Consequences."
The Depositor may sell certain Classes of the Certificates of a series,
including one or more Classes of Subordinate Certificates, in privately
negotiated transactions exempt from registration under the Securities Act of
1933, as amended (the "Securities Act"). Alternatively, if specified in a
prospectus supplement relating to those Subordinate Certificates, the Depositor
may offer one or more Classes of the Subordinate Certificates of a series by
means of this prospectus and that prospectus supplement.
Definitive Form
Certificates of a series that are issued in fully-registered, certificated
form are referred to as "Definitive Certificates." Distributions of principal
of, and interest on, the Definitive Certificates will be made directly to
holders of Definitive Certificates. The Definitive Certificates of a series
offered by this prospectus and by means of the applicable prospectus supplements
will be transferable and exchangeable at the office or agency maintained by the
Trustee or other entity for that purpose set forth in the applicable prospectus
supplement. No service charge will be made for any transfer or exchange of
Definitive
39
Certificates, but the Trustee or another entity may require payment of a sum
sufficient to cover any tax or other governmental charge in connection with a
transfer or exchange.
In the event that an election or multiple elections are made to treat the
Trust Estate (or one or more segregated pools of assets of the Trust Estate) as
one or more REMICs, the Residual Certificate will be issued as a Definitive
Certificate. No legal or beneficial interest in all or any portion of any
"residual interest" may be transferred without the receipt by the transferor and
the Trustee of an affidavit signed by the transferee stating, among other
things, that the transferee (i) is not a disqualified organization within the
meaning of Code Section 860E(e) or an agent (including a broker, nominee or
middleman) of a disqualified organization and (ii) understands that it may incur
tax liabilities in excess of any cash flows generated by the residual interest.
Further, the transferee must state in the affidavit that it (a) historically has
paid its debts as they have come due, (b) intends to pay its debts as they come
due in the future and (c) intends to pay taxes associated with holding the
residual interest as they become due. The transferor must certify to the Trustee
that, as of the time of the transfer, it has no actual knowledge that any of the
statements made in the transferee affidavit are false and no reason to know that
the statements made by the transferee pursuant to clauses (a), (b) and (c) of
the preceding sentence are false. See "Federal Income Tax Consequences--Federal
Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Tax-Related Restrictions on Transfer of Residual Certificates."
Book-Entry Form
Persons acquiring beneficial ownership interests ("Beneficial Owners") in
the Certificates issued in book-entry form (the "Book-Entry Certificates") will
hold their Certificates through DTC in the United States, or Clearstream or
Euroclear (in Europe) if they are participants of those systems (the
"Participants"), or indirectly through organizations which are participants in
those systems (the "Indirect Participants"). Each Class of the Book-Entry
Certificates of a series initially will be represented by one or more physical
certificates registered in the name of Cede & Co., as nominee of DTC, which will
be the "holder" or "Certificateholder" of those Certificates, as those terms are
used in this prospectus and the applicable prospectus supplement for a series.
No Beneficial Owner of a Book-Entry Certificate will be entitled to receive a
Definitive Certificate representing that person's interest in the Book-Entry
Certificate, except as set forth below. Unless and until Definitive Certificates
are issued under the limited circumstances described below, all references to
actions taken by Certificateholders or holders shall, in the case of the
Book-Entry Certificates, refer to actions taken by DTC upon instructions from
its DTC Participants, and all references in this prospectus and the applicable
prospectus supplement for a series to distributions, notices, reports and
statements to Certificateholders or holders shall, in the case of the Book-Entry
Certificates, refer to distributions, notices, reports and statements to DTC or
Cede & Co., as the registered holder of the Book-Entry Certificates, as the case
may be, for distribution to Beneficial Owners in accordance with DTC procedures.
Clearstream and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in Clearstream's and
Euroclear's names on the books of their respective depositaries which in turn
will hold those positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for Clearstream and
JPMorgan Chase Bank, National Association will act as depositary for Euroclear
(in those capacities, individually the "Relevant Depositary" and collectively
the "European Depositaries"). Investors may hold beneficial interest in the
Book-Entry Certificates in minimum denominations of $1,000.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of
40
DTC, if the beneficial owner's Financial Intermediary is not a DTC Participant,
and on the records of Clearstream or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and
Participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and Indirect Participants with whom Beneficial Owners have accounts
for their Book-Entry Certificates are similarly required to make book-entry
transfers and receive and transmit these distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess certificates representing their respective interests in the Book-Entry
Certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interest.
Certificateholders will not receive or be entitled to receive certificates
representing their respective interests in the Book-Entry Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificateholders who are not Participants may
transfer ownership of Book-Entry Certificates only through Participants and
Indirect Participants by instructing Participants and Indirect Participants to
transfer Book-Entry Certificates, by book-entry transfer, through DTC, for the
account of the purchasers of the Book-Entry Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of Book-Entry Certificates
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the Participants and Indirect
Participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Certificateholders.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. These credits or any transactions in
securities settled during this processing will be reported to the relevant
Euroclear or Clearstream Participants on that following business day. Cash
received in Clearstream or Euroclear as a result of sales of securities by or
through a Clearstream Participant or Euroclear Participant to a DTC Participant
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the Certificates see "--Certain U.S. Federal Income Tax
Documentation Requirements" below and "Federal Income Tax Consequences--Federal
Income Tax Consequences for REMIC Certificates--Taxation of Certain Foreign
Investors" and "--Backup Withholding."
Transfers between Participants will occur in accordance with the Rules.
Transfers between Clearstream Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in
accordance with the Rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, these cross-market
transfers will require delivery of instructions to the relevant European
international clearing system by the counterparty in the system in accordance
with its rules and procedures and within established deadlines (European time).
The relevant European
41
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to the Relevant Depositary to take action to
effect final settlement on its behalf by delivering or receiving securities in
DTC, and making or receiving payment in accordance with normal procedures for
same day funds settlement applicable to DTC. Clearstream Participants and
Euroclear Participants may not deliver instructions directly to the European
Depositaries.
DTC is a limited purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to Section 17A of the Securities Exchange Act of
1934, as amended. DTC performs services for its Participants, some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC Participant
in the Book-Entry Certificates, whether held for its own account or as a nominee
for another person. In general, beneficial ownership of Book-Entry Certificates
will be subject to the Rules, as in effect from time to time.
Clearstream International, a Luxembourg limited liability company, was
formed in January 2000 through the merger of Cedel International and Deutsche
Boerse Clearing.
Clearstream is registered as a bank in Luxembourg and is subject to
regulation by the Luxembourg Monetary Authority, which supervises Luxembourg
banks.
Clearstream holds securities for its Participants and facilitates the
clearance and settlement of securities transactions by electronic book-entry
transfers between their accounts. Clearstream provides various services,
including safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream also deals with domestic securities markets in several countries
through established depository and custodial relationships. Clearstream has
established an electronic bridge with Euroclear Bank S.A./N.V. (which operates
Euroclear) as the Euroclear operator in Brussels to facilitate settlement of
trades between systems. Clearstream currently accepts over 200,000 securities
issues on its books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 2,500 customers located in over 80 countries, including all major
European countries, Canada and the United States. Indirect access to Clearstream
is available to other institutions which clear through or maintain custodial
relationship with an account holder of Clearstream.
The Euroclear System was created in 1968 to hold securities for its
Participants and to clear and settle transactions between Euroclear Participants
through simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. Transactions may be
settled in a variety of currencies, including United States dollars. Euroclear
provides various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by Euroclear Bank S.A./N.V. (the "Euroclear Operator"). All operations
are conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator.
Euroclear plc establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
42
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law.
These terms and conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear, and receipts of
payments with respect to securities in Euroclear. All securities in Euroclear
are held on a fungible basis without attribution of specific certificates to
specific securities clearance accounts. The Euroclear Operator acts under the
terms and conditions of Euroclear only on behalf of Euroclear Participants, and
has no record of or relationship with persons holding through Euroclear
Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to Cede & Co., as nominee of DTC. DTC will be
responsible for crediting the amount of these distributions to the accounts of
the applicable DTC Participants in accordance with DTC's normal procedures. Each
DTC Participant will be responsible for disbursing these distributions to the
Beneficial Owners of the Book-Entry Certificates that it represents and to each
Financial Intermediary for which it acts as agent. Each Financial Intermediary
will be responsible for disbursing funds to the Beneficial Owners of the
Book-Entry Certificates that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since payments will be
forwarded by the Trustee to Cede & Co. Distributions with respect to
Certificates held through Clearstream or Euroclear will be credited to the cash
accounts of Clearstream Participants or Euroclear Participants in accordance
with the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. These distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Federal
Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Certain Foreign Investors" and"--Backup Withholding."
Because DTC can only act on behalf of DTC Participants, the ability of a
Beneficial Owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the depository system, or otherwise take actions regarding
their Book-Entry Certificates, may be limited due to the lack of physical
certificates for their Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of the
Book-Entry Certificates in the secondary market since certain potential
investors may be unwilling to purchase Certificates for which they cannot obtain
physical certificates.
DTC has advised the Depositor that, unless and until Definitive Certificates
are issued, DTC will take any action the holders of the Book-Entry Certificates
are permitted to take under the Pooling Agreement only at the direction of one
or more DTC Participants to whose DTC accounts the Book-Entry Certificates are
credited, to the extent that these actions are taken on behalf of Financial
Intermediaries whose holdings include the Book-Entry Certificates. Clearstream
or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Certificateholder under the Pooling Agreement on
behalf of a Clearstream Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to the ability of the
Relevant Depositary to effect these actions on its behalf through DTC. DTC may
take actions, at the direction of the related Participants, with respect to some
Book-Entry Certificates which conflict with actions taken with respect to other
Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
advises the Trustee in writing that DTC is no longer willing, qualified or able
to discharge properly its responsibilities as nominee and depository with
respect to the Book-Entry Certificates and the Depositor or the Trustee is
unable to locate a qualified successor or (b) in the case of Certificates of a
series that receive distributions pursuant to request or random lot, if pro rata
distributions cannot be made through the facilities of DTC.
43
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee will be required to notify the applicable beneficial
owners of the occurrence of the event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of those Definitive Certificates as
Certificateholders under the Pooling Agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among
participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform these procedures and these procedures may be
discontinued at any time.
In the event of the insolvency of DTC, a DTC Participant or an Indirect DTC
Participant in whose name Book-Entry Certificates are registered, the ability of
the Beneficial Owners of the Book-Entry Certificates to obtain timely payment
and, if the limits of applicable insurance coverage by the Securities Investor
Protection Corporation are exceeded or if the coverage is otherwise unavailable,
ultimate payment, of amounts distributable with respect to the Book-Entry
Certificates may be impaired.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
Trading between Clearstream and/or Euroclear Participants. Secondary market
trading between Clearstream Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC seller and Clearstream or Euroclear purchaser. When
Book-Entry Certificates are to be transferred from the account of a DTC
Participant to the account of a Clearstream Participant or a Euroclear
Participant, the purchaser will send instructions to Clearstream or Euroclear
through a Clearstream Participant or Euroclear Participant at least one business
day prior to settlement. Clearstream or Euroclear will instruct the respective
Depositary, as the case may be, to receive the Book-Entry Certificates against
payment. Payment will include interest accrued on the Book-Entry Certificates
from and including the last coupon payment date to and excluding the settlement
date, on the basis of either a 360-day year comprised of 30-day months or the
actual number of days in the accrual period and a year assumed to consist of 360
days, as applicable. For transactions settling on the 31st of the month, payment
will include interest accrued to and excluding the first day of the following
month. Payment will then be made by the respective Depositary of the DTC
Participant's account against delivery of the Book-Entry Certificates. After
settlement has been completed, the Book-Entry Certificates will be credited to
the respective clearing system and by the clearing system, in accordance with
its usual procedures, to the Clearstream Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the
Book-Entry Certificates will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Clearstream or
Euroclear cash debt will be valued instead as of the actual settlement date.
44
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Book-Entry Certificates are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of credit
to them, Clearstream Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Book-Entry Certificates would incur overdraft charges
for one day, assuming they cleared the overdraft when the Book-Entry
Certificates were credited to their accounts. However, interest on the
Book-Entry Certificates would accrue from the value date. Therefore, in many
cases the investment income on the Book-Entry Certificates earned during that
one-day period may substantially reduce or offset the amount of the overdraft
charges, although this result will depend on each Clearstream Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Book-Entry
Certificates to the respective European Depositary for the benefit of
Clearstream Participants or Euroclear Participants. The sale proceeds will be
available to the DTC seller on the settlement date. Thus, to the DTC
Participants a cross-market transaction will settle no differently than a trade
between two DTC Participants.
Trading between Clearstream or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Book-Entry Certificates are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Book-Entry Certificates to the DTC Participant's
account against payment. Payment will include interest accrued on the Book-Entry
Certificates from and including the last coupon payment to and excluding the
settlement date on the basis of either a 360-day year comprised of 30-day months
or the actual number of days in the accrual period and a year assumed to consist
of 360 days, as applicable. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of the
Clearstream Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Clearstream Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft incurred over
that one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that purchase
Book-Entry Certificates from DTC Participants for delivery to Clearstream
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
45
(a) borrowing through Clearstream or Euroclear for one day (until the
purchase side of the day trade is reflected in their Clearstream or
Euroclear accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing the Book-Entry Certificates in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give the
Book-Entry Certificates sufficient time to be reflected in their Clearstream
or Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the Clearstream Participant
or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements. A Beneficial
Owner of Book-Entry Certificates that is not a U.S. Person within the meaning of
Section 7701(a)(30) of the Code (a "Non-U.S. Holder") holding a Book-Entry
Certificate through Clearstream, Euroclear or DTC may be subject to U.S.
withholding tax unless it provides certain documentation to the Trustee, a
Paying Agent or any other entity required to withhold tax (any of the foregoing,
a "U.S. Withholding Agent") establishing an exemption from withholding. A
Non-U.S. Holder may be subject to withholding unless each U.S. Withholding Agent
receives:
(i) from a Non-U.S. Holder that is classified as a corporation for
U.S. federal income tax purposes or is an individual, and is eligible
for the benefits of the portfolio interest exemption or an exemption (or
reduced rate) based on a treaty, a duly completed and executed IRS Form
W-8BEN (or any successor form);
(ii) from a Non-U.S. Holder that is eligible for an exemption on the
basis that the holder's income from the Book-Entry Certificates is
effectively connected to its U.S. trade or business, a duly completed
and executed IRS Form W-8ECI (or any successor form);
(iii) from a Non-U.S. Holder that is classified as a partnership for
U.S. federal income tax purposes, a duly completed and executed IRS Form
W-8IMY (or any successor form) with all supporting documentation (as
specified in the U.S. Treasury regulations) required to substantiate
exemptions from withholding on behalf of its partners; certain
partnerships may enter into agreements with the IRS providing for
different documentation requirements and it is recommended that those
partnerships consult their tax advisors regarding these certification
rules;
(iv) from a Non-U.S. Holder that is an intermediary (i.e., a person
acting as a custodian, a broker, nominee or otherwise as an agent for
the Beneficial Owner of Book-Entry Certificates):
(a) if the intermediary is a "qualified intermediary" within the
meaning of Section 1.1441-1(e)(5)(ii) of the U.S. Treasury
regulations (a "Qualified Intermediary"), a duly completed and
executed IRS Form W-8IMY (or any successor or substitute form):
(1) stating the name, permanent residence address and
employer identification number of the Qualified Intermediary and
the country under the laws of which the Qualified Intermediary
is created, incorporated or governed,
(2) certifying that the Qualified Intermediary has provided,
or will provide, a withholding statement as required under
Section 1.1441-1(e)(5)(v) of the U.S. Treasury regulations,
46
(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 Certificates, either an IRS Form W-8BEN
or W-8IMY; any Non-U.S. Holder that is a trust should consult its tax
advisors to determine which of these forms it should provide.
All Non-U.S. Holders will be required to update the above-listed forms and
any supporting documentation in accordance with the requirements under the U.S.
Treasury regulations. These forms generally remain in effect for a period
starting on the date the form is signed and ending on the last day of the third
succeeding calendar year, unless a change in circumstances makes any information
on the form incorrect. Under certain circumstances, an IRS Form W-8BEN, if
furnished with a taxpayer identification number, remains in effect until the
status of the beneficial owner changes, or a change in circumstances makes any
information on the form incorrect.
In addition, all holders, including holders that are U.S. Persons, holding
Book-Entry Certificates through Clearstream, Euroclear or DTC may be subject to
backup withholding unless the holder:
(a) provides the appropriate IRS Form W-8 (or any successor or
substitute form), duly completed and executed, if the holder is a Non-U.S.
Holder;
(b) provides a duly completed and executed IRS Form W-9, if the Holder
is a U.S. Person; or
(c) can be treated as a "exempt recipient" within the meaning of Section
1.6049-4(c)(1)(ii) of the U.S. Treasury regulations (e.g., a corporation or
a financial institution such as a bank).
47
This summary does not deal with all of the aspects of U.S. federal income
tax withholding or backup withholding that may be relevant to investors that are
Non-U.S. Holders. Those holders are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of Book-Entry
Certificates.
Distributions to Certificateholders
General. Distributions on the Certificates will be made on a day specified
in the applicable prospectus supplement (or if that day is not a business day,
the first business day following that day) of each month, commencing with the
month stated in the applicable prospectus supplement (each, a "Distribution
Date"). The "Determination Date" for each Distribution Date will be the day of
the month specified in the applicable prospectus supplement in which the
Distribution Date occurs or, if that day is not a business day, the immediately
preceding business day. The "Cut-off Date" for a series of Certificates will be
the date specified in the applicable prospectus supplement. All payments of
principal and interest due after the Cut-off Date will be part of the Trust
Estate. On each Distribution Date, each holder of a Certificate of a Class will
be entitled to receive its Certificate's Percentage Interest of the portion of
the Pool Distribution Amount allocated to its Class. Generally, the undivided
percentage interest (the "Percentage Interest") represented by any Certificate
of a Class in distributions to the Class will be equal to the percentage
obtained by dividing the initial principal balance or notional amount of the
Certificate (or the portion of the maximum initial class balance or maximum
initial notional amount represented by such Certificate in the case of an
Exchangeable REMIC Certificate or Exchangeable Certificate) by the initial Class
Balance or notional amount of the Class (or the maximum initial class balance or
maximum initial notional amount in the case of a Class of Exchangeable REMIC
Certificates or Exchangeable Certificates). The Percentage Interest for a
Certificate of a Class that receives distributions pursuant to request or random
lot is equal to the percentage obtained by dividing the current principal
balance (or notional amount) of the Certificate by the current Class Balance (or
notional amount) of the Class of which the Certificate is a part.
In general, the funds available for distribution to Certificateholders of a
series of Certificates with respect to each Distribution Date for the series
(the "Pool Distribution Amount") will be the sum of:
(a) all previously undistributed payments or other receipts on account
of principal (including principal prepayments and Liquidation Proceeds, if
any) and interest on or related to the Mortgage Loans received by the
related Servicer after the Cut-off Date (except for amounts due on or prior
to the Cut-off Date), or received by the related Servicer on or prior to the
Cut-off Date but due after the Cut-off Date, in either case received on or
prior to the business day preceding the Determination Date in the month in
which the Distribution Date occurs, other than amounts required to be held
for distribution on future Distribution Dates, plus all Periodic Advances
and amounts received from the Sponsor in connection with amounts cancelled
due to BPP on a Mortgage Loan;
minus
(b) permitted withdrawals from the Servicer Custodial Account, Master
Servicer Custodial Account or Certificate Account by the Servicer, Master
Servicer or the Trustee, as applicable, as described under "Servicing of the
Mortgage Loans -- Payments on the Mortgage Loans," including, among other
things, reimbursements for Advances, liquidation expenses, expenses for
which the Servicer, Master Servicer or Trustee, as applicable, are entitled
to be reimbursed and amounts to which the Depositor, the Servicer, the
Master Servicer and the Trustee are entitled as indemnification and any
other amounts described in the applicable prospectus supplement.
48
The applicable prospectus supplement for a series will describe any material
variation in the calculation of the Pool Distribution Amount for that series.
"Foreclosure Profits" with respect to a Distribution Date and a liquidated
Mortgage Loan will be the excess of the amount by which net Liquidation Proceeds
on the liquidated Mortgage Loan exceed its unpaid principal balance plus accrued
interest on that balance at the Mortgage Interest Rate.
Distributions of Interest. For each series of Certificates, interest on the
related Mortgage Loans at the weighted average of their applicable Net Mortgage
Interest Rates, will be passed through monthly to holders of the related Classes
of Certificates in the aggregate, in accordance with the particular terms of
each Class of Certificates. The "Net Mortgage Interest Rate" for each Mortgage
Loan in a given period will equal the Mortgage Interest Rate for that Mortgage
Loan in that period, less the portion of the Mortgage Interest Rate, if any, not
contained in the Trust Estate (the "Fixed Retained Yield"), and less amounts
payable to the Servicer for servicing the Mortgage Loan (the "Servicing Fee"),
the fee payable to the Master Servicer, if any (the "Master Servicing Fee"), the
fee payable to the Trustee, if any (the "Trustee Fee") and any related fees and
expenses specified in the applicable prospectus supplement. See "Servicing of
the Mortgage Loans--Fixed Retained Yield, Servicing Compensation and Payment of
Expenses" for a description of Fixed Retained Yield.
Interest will accrue on the Class Balance (or notional amount, as described
below) of each Class of Certificates entitled to interest at the pass-through
rate for each Class (which may be a fixed rate or an adjustable rate) indicated
in the applicable prospectus supplement (each, a "Pass-Through Rate") from the
date and for the periods specified in the prospectus supplement. To the extent
the Pool Distribution Amount is sufficient, interest accrued during each
specified period on each Class of Certificates entitled to interest (other than
Accrual Certificates, as discussed below) will be distributable on the
Distribution Dates specified in the applicable prospectus supplement until the
Class Balance (or notional amount) of that Class has been reduced to zero.
Distributions allocable to interest on each Certificate that is not entitled to
distributions of principal will generally be calculated based on the notional
amount of that Certificate. The notional amount of a Certificate will not
evidence an interest in or entitlement to distributions of principal but will be
solely for convenience in expressing the calculation of interest and for certain
other purposes.
With respect to any Class of Accrual Certificates, any interest that has
accrued but is not paid on a given Distribution Date will be added to the Class
Balance of that Class of Certificates on that Distribution Date. Distributions
of interest on each Class of Accrual Certificates will commence only after the
occurrence of the events or the existence of the circumstance specified in the
applicable prospectus supplement and, prior to that time, or in the absence of
those circumstances, the Class Balance of that Class will increase on each
Distribution Date by the amount of interest that accrued on that Class during
the preceding interest accrual period but that was not required to be
distributed to that Class on that Distribution Date. In subsequent accrual
periods, a Class of Accrual Certificates will accrue interest on its increased
Class Balance. For a description of Accrual Certificates, see "-- Categories of
Classes of Certificates."
Distributions of Principal. The "Class Balance" at any time of any Class of
Certificates (other than any Class of Exchangeable REMIC Certificates or
Exchangeable Certificates) entitled to distributions of principal will generally
be the initial Class Balance of the Class specified in the applicable prospectus
supplement or, in the case of a Class of Exchangeable REMIC Certificates or
Exchangeable Certificates entitled to distributions of principal, the portion
then represented by the outstanding Certificates of such Class of the maximum
initial Class Balance specified in the applicable prospectus supplement, reduced
by all distributions reported to the holders of the Certificates of that Class
as allocable to principal and any losses on the related Mortgage Loans allocated
to that Class of Certificates and (i) in the case of Accrual
49
Certificates, increased by all interest accrued but not then distributable on
those Accrual Certificates and (ii) in the case of a series of Certificates
representing interests in a Trust Estate containing certain types of
adjustable-rate Mortgage Loans, increased by any Deferred Interest allocable to
that Class. The Class Balance of a Class of Certificates generally represents
the maximum specified dollar amount (exclusive of any interest that may accrue
on that Class to which the Certificateholder is entitled from the cash flow on
the related Mortgage Loans at that time) and will decline to the extent of
distributions in reduction of the Class Balance of, and allocations of losses
to, that Class. Certificates with no Class Balance will not receive
distributions in respect of principal. The applicable prospectus supplement will
specify the method by which the amount of principal to be distributed on the
Certificates on each Distribution Date will be calculated and the manner in
which that amount will be allocated among the Classes of Certificates entitled
to distributions of principal.
Subordination
If provided in the applicable prospectus supplement, one or more Classes of
Senior Certificates will be entitled to receive all or a disproportionate
percentage of the payments of principal that are received from borrowers in
advance of their scheduled Due Dates and are not accompanied by amounts
representing scheduled interest due after the months of those payments or of
other unscheduled principal receipts or recoveries in the percentages and under
the circumstances or for the periods specified in the applicable prospectus
supplement. This type of allocation of principal prepayments or other
unscheduled receipts or recoveries relating to principal to this Class or these
Classes of Senior Certificates will have the effect of accelerating the
amortization of these Senior Certificates while increasing the interests
evidenced by the Subordinate Certificates in the Trust Estate. Increasing the
interests of the Subordinate Certificates relative to that of the Senior
Certificates is intended to preserve the availability of the subordination
provided by the Subordinate Certificates.
If specified in the applicable prospectus supplement, the rights of the
holders of the Subordinate Certificates of a series of Certificates for which
credit enhancement is provided through subordination to receive distributions
with respect to the Mortgage Loans in the related Trust Estate will be
subordinated to the rights of the holders of the Senior Certificates of the same
series. This subordination is intended to enhance the likelihood of regular
receipt by holders of Senior Certificates of the full amount of scheduled
monthly payments of principal and interest due them and to provide limited
protection to the holders of the Senior Certificates against losses due to
mortgagor defaults.
The protection afforded to the holders of Senior Certificates of a series of
Certificates for which credit enhancement is provided by the subordination
feature described above will be effected by (i) the preferential right of these
holders to receive, prior to any distribution being made to the related
Subordinate Certificates on each Distribution Date, current distributions on the
related Mortgage Loans of principal and interest due them on each Distribution
Date out of the funds available for distribution on that date in the related
Certificate Account, (ii) by the right of these holders to receive future
distributions on the Mortgage Loans that would otherwise have been payable to
the holders of Subordinate Certificates and/or (iii) by the prior allocation to
the Subordinate Certificates of all or a portion of losses realized on the
related Mortgage Loans.
Losses realized on liquidated Mortgage Loans (other than, if specified in
the applicable prospectus supplement, Excess Special Hazard Losses, Excess Fraud
Losses and Excess Bankruptcy Losses as described below) will be allocated to the
holders of Subordinate Certificates through a reduction of the amount of
principal payments on the Mortgage Loans to which these holders are entitled
before any corresponding reduction is made in respect of the Senior Certificate.
50
A "Special Hazard Loss" is a loss on a liquidated Mortgage Loan occurring as
a result of a hazard not insured against under a standard hazard insurance
policy of the type described below under "Servicing of the Mortgage
Loans--Insurance Policies." A "Fraud Loss" is a loss on a liquidated Mortgage
Loan due to fraud in the origination of that Mortgage Loan. A "Bankruptcy Loss"
is a loss on a liquidated Mortgage Loan attributable to certain actions which
may be taken by a bankruptcy court in connection with a Mortgage Loan, including
a reduction by a bankruptcy court of the principal balance of or the interest
rate on a Mortgage Loan or an extension of its maturity. Special Hazard Losses
in excess of the amount specified in the applicable prospectus supplement (the
"Special Hazard Loss Amount"), if any, are "Excess Special Hazard Losses." Fraud
Losses in excess of the amount specified in the applicable prospectus supplement
(the "Fraud Loss Amount"), if any, are "Excess Fraud Losses." Bankruptcy Losses
in excess of the amount specified in the applicable prospectus supplement (the
"Bankruptcy Loss Amount"), if any, are "Excess Bankruptcy Losses." Any Excess
Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy Losses for a
series will be allocated on a pro rata basis among the related Classes of Senior
and Subordinate Certificates. An allocation of a loss on a "pro rata" basis
among two or more Classes of Certificates means an allocation on a pro rata
basis to each of those Classes of Certificates on the basis of their
then-outstanding Class Balances in the case of the principal portion of a loss
or based on accrued interest in the case of an interest portion of a loss.
Since the Special Hazard Loss Amount, Fraud Loss Amount and Bankruptcy Loss
Amount, if any, for a series of Certificates are each expected to be less than
the amount of principal payments on the Mortgage Loans to which the holders of
the Subordinate Certificates of the series are initially entitled (the amount of
principal payments being subject to reduction, as described above, as a result
of allocation of losses on liquidated Mortgage Loans that are not Special Hazard
Losses, Fraud Losses or Bankruptcy Losses), the holders of Subordinate
Certificates of that series will bear the risk of Special Hazard Losses, Fraud
Losses and Bankruptcy Losses to a lesser extent than they will bear other losses
on liquidated Mortgage Loans.
Although the subordination feature described above is intended to enhance
the likelihood of timely payment of principal and interest to the holders of
Senior Certificates, shortfalls could result in certain circumstances. For
example, a shortfall in the payment of principal otherwise due the holders of
Senior Certificates could occur if losses realized on the Mortgage Loans in a
Trust Estate were exceptionally high and were concentrated in a particular
month.
The holders of Subordinate Certificates will not be required to refund any
amounts previously properly distributed to them, regardless of whether there are
sufficient funds on a subsequent Distribution Date to make a full distribution
to holders of each Class of Senior Certificates of the same series.
Other Credit Enhancement
In addition to, or in substitution for, the subordination discussed above,
credit enhancement may be provided with respect to any series of Certificates
only in one or more of the methods described below. The applicable prospectus
supplement will describe the material terms of such credit enhancement,
including any limits on the timing or amount of such credit enhancement or any
conditions that must be met before such credit enhancement may be accessed. If
the provider of the credit enhancement is liable or contingently liable to
provide payments representing 10% or more of the cash flow supporting any
offered Class of Certificates, the applicable prospectus supplement will
disclose the name of the provider, the organizational form of the provider, the
general character of the business of the provider and the financial information
required by Item 1114(b)(2) of Regulation AB (17 CFR 229.1114). Copies of the
limited guarantee, financial guaranty insurance policy, surety bond, letter of
credit, pool insurance policy, mortgagor bankruptcy bond, special hazard
insurance policy or Cash Flow Agreement, if any, relating to a series of
Certificates will be filed with the SEC as an exhibit to a Current Report on
Form 8-K.
51
Limited Guarantee. If specified in the prospectus supplement for a series of
Certificates, credit enhancement may be provided in the form of a limited
guarantee issued by a guarantor named in that prospectus supplement. The limited
guarantee may cover deficiencies in amounts otherwise payable on some or all of
the Certificates of a series. The limited guarantee may cover timely
distributions of interest or full distributions of principal or both on the
basis of a schedule of principal distributions set forth in or determined in the
manner specified in the related prospectus supplement. The limited guarantee may
provide additional protection against losses on the Mortgage Loans included in a
Trust Estate, provide payment of administrative expenses, or establish a minimum
reinvestment rate on the payments made on the Mortgage Loans or principal
payment rate on the Mortgage Loans. A limited guarantee will be limited in
amount to the dollar amount or percentage of the principal balance of the
Mortgage Loans or Certificates specified in the applicable prospectus
supplement.
Financial Guaranty Insurance Policy or Surety Bond. If specified in the
prospectus supplement for a series of Certificates, credit enhancement may be
provided in the form of a financial guaranty insurance policy or a surety bond
issued by one or more insurers named in that prospectus supplement. The
financial guaranty insurance policy will guarantee, with respect to one or more
Classes of Certificates of the related series, timely distributions of interest
and ultimate distributions of principal at the dates set forth in or determined
in the manner specified in the prospectus supplement. If specified in the
prospectus supplement, the financial guaranty insurance policy will also
guarantee against any payment made to a Certificateholder that is subsequently
recovered as a preferential transfer under the Bankruptcy Code.
Letter of Credit. If specified in the prospectus supplement for a series of
Certificates, credit enhancement may be provided by a letter of credit issued by
a bank or other financial institution specified in the applicable prospectus
supplement. Under the letter of credit, the provider will be obligated to pay up
to an aggregate fixed dollar amount, net of previous drawings on the letter,
equal to the percentage specified in the prospectus supplement of the unpaid
principal balance of the Mortgage Loans or of one or more Classes of
Certificates. If specified in the prospectus supplement, the letter of credit
may permit drawings in the event of losses not covered by insurance policies or
other credit support, such as losses arising from damage not covered by standard
hazard insurance policies, losses resulting from the bankruptcy of a borrower
and the application of certain provisions of the Bankruptcy Code, or losses
resulting from denial of insurance coverage due to misrepresentations in
connection with the origination of a Mortgage Loan. The amount available under
the letter of credit will, in all cases, be reduced to the extent of the
unreimbursed payments previously paid. The obligations of the provider under the
letter of credit for each series of Certificates will expire at the earlier of
the date specified in the prospectus supplement or the termination of the Trust.
Pool Insurance Policy. If specified in the prospectus supplement relating to
a series of Certificates, credit enhancement may be provided by a mortgage pool
insurance policy for the Mortgage Loans in the related Trust Estate. Each
mortgage pool insurance policy, in accordance with the limitations described in
this prospectus and in the prospectus supplement, if any, will cover any loss by
reason of default on a Mortgage Loan in an amount equal to a percentage
specified in the applicable prospectus supplement of the unpaid principal
balance of the Mortgage Loans. As described under "Servicing of the Mortgage
Loans--Enforcement of "Due-on-Sale" Clauses; Realization Upon Defaulted Mortgage
Loans," the Servicer or the Master Servicer, as the case may be, generally will
be required to use its best efforts to maintain the mortgage pool insurance
policy and to present claims to the pool insurer. The mortgage pool insurance
policies, however, are not blanket policies against loss, since claims may only
be made respecting particular defaulted Mortgage Loans and only upon
satisfaction of specified conditions precedent described below. The mortgage
pool insurance policies will generally not cover losses due to a failure to pay
or denial of a claim under a primary mortgage insurance policy, regardless of
the reason for nonpayment.
52
As more specifically provided in the related prospectus supplement, each
mortgage pool insurance policy will provide for conditions under which claims
may be presented and covered under the policy. Upon satisfaction of these
conditions, the pool insurer will have the option either (a) to purchase the
property securing the defaulted Mortgage Loan at a price equal to its unpaid
principal balance plus accrued and unpaid interest at the applicable Mortgage
Interest Rate to the date of purchase plus certain Advances, or (b) to pay the
amount by which the sum of the unpaid principal balance of the defaulted
Mortgage Loan plus accrued and unpaid interest at the Mortgage Interest Rate to
the date of payment of the claim plus certain Advances exceeds the proceeds
received from an approved sale of the Mortgaged Property, in either case net of
certain amounts paid or assumed to have been paid under any related primary
mortgage insurance policy.
Certificateholders may experience a shortfall in the amount of interest
payable on the related Certificates in connection with the payment of claims
under a mortgage pool insurance policy because the pool insurer is only required
to remit unpaid interest through the date a claim is paid rather than through
the end of the month in which the claim is paid. In addition, Certificateholders
may also experience losses with respect to the related Certificates in
connection with payments made under a mortgage pool insurance policy to the
extent that the related Servicer expends funds to cover unpaid real estate taxes
or to repair the related Mortgaged Property in order to make a claim under a
mortgage pool insurance policy, as those amounts will not be covered by payments
under the policy and will be reimbursable to the related Servicer from funds
otherwise payable to the Certificateholders. If any Mortgaged Property securing
a defaulted Mortgage Loan is damaged and proceeds, if any from the related
hazard insurance policy or applicable special hazard insurance policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under the mortgage pool insurance policy, a Servicer will generally not
be required to expend its own funds to restore the damaged property unless it
determines that (a) restoration will increase the proceeds to one or more
Classes of Certificates on liquidation of the Mortgage Loan after reimbursement
of the related Servicer for its expenses and (b) the expenses will be
recoverable by it through Liquidation Proceeds or insurance proceeds.
A mortgage pool insurance policy and some primary mortgage insurance
policies will generally not insure against loss sustained by reason of a default
arising from, among other things, fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the mortgagor, the
seller or other persons involved in the origination of the Mortgage Loan,
failure to construct a mortgaged property in accordance with plans and
specifications or bankruptcy, unless as specified in the related prospectus
supplement, an endorsement to the mortgage pool insurance policy provides for
insurance against that type of loss.
The original amount of coverage under each mortgage pool insurance policy
will be reduced over the life of the related series of Certificates by the
aggregate amount of claims paid less the aggregate of the net amounts realized
by the pool insurer upon disposition of all foreclosed properties. The amount of
claims paid includes some expenses incurred by the related Servicer or Master
Servicer as well as accrued interest on delinquent Mortgage Loans to the date of
payment of the claim. Accordingly, if aggregate net claims paid under any
mortgage pool insurance policy reach the original policy limit, coverage under
that mortgage pool insurance policy will be exhausted and any further losses
will be borne by the related Certificates, to the extent not covered by other
credit enhancements.
Special Hazard Insurance Policy. Any insurance policy covering Special
Hazard Losses obtained for a Trust will be issued by the insurer named in the
related prospectus supplement. Each special hazard insurance policy will be
subject to limitations described in this paragraph and in the related prospectus
supplement, if any, and will protect the related Certificateholders from Special
Hazard Losses. Aggregate claims under a special hazard insurance policy will be
limited to the amount set forth in the related Pooling Agreement and will be
subject to reduction as described in the related Pooling Agreement. A
53
special hazard insurance policy will provide that no claim may be paid unless
hazard and, if applicable, flood insurance on the Mortgaged Property securing
the Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid by the related Servicer or Master Servicer, as the case
may be.
In accordance with the foregoing limitations, a special hazard insurance
policy will provide that, where there has been damage to the Mortgaged Property
securing a foreclosed Mortgage Loan, title to which has been acquired by the
insured, and to the extent the damage is not covered by the hazard insurance
policy or flood insurance policy, if any, maintained by the mortgagor or the
related Servicer or Master Servicer, as the case may be, the insurer will pay
the lesser of (i) the cost of repair or replacement of the related Mortgaged
Property or (ii) upon transfer of the property to the insurer, the unpaid
principal balance of the Mortgage Loan at the time of acquisition of the related
property by foreclosure or deed in lieu of foreclosure, plus accrued interest at
the Mortgage Interest Rate to the date of claim settlement and certain expenses
incurred by the related Servicer or Master Servicer, as the case may be, with
respect to the related Mortgaged Property.
If the Mortgaged Property is transferred to a third party in a sale approved
by the special hazard insurer, the amount that the special hazard insurer will
pay will be the amount under (ii) above reduced by the net proceeds of the sale
of the Mortgaged Property. If the unpaid principal balance plus accrued interest
and certain Advances is paid by the special hazard insurer, the amount of
further coverage under the related special hazard insurance policy will be
reduced by that amount less any net proceeds from the sale of the Mortgaged
Property. Any amount paid as the cost of repair of the property will further
reduce coverage by that amount. Restoration of the property with the proceeds
described under (i) above will satisfy the condition under any mortgage pool
insurance policy that the property be restored before a claim under the policy
may be validly presented with respect to the defaulted Mortgage Loan secured by
the related Mortgaged Property. The payment described under (ii) above will
render presentation of a claim relating to a Mortgage Loan under the related
mortgage pool insurance policy unnecessary. Therefore, so long as a mortgage
pool insurance policy remains in effect, the payment by the insurer under a
special hazard insurance policy of the cost of repair or of the unpaid principal
balance of the related Mortgage Loan plus accrued interest and certain Advances
will not affect the total insurance proceeds paid to Certificateholders, but
will affect the relative amounts of coverage remaining under the related special
hazard insurance policy and mortgage pool insurance policy.
Mortgagor Bankruptcy Bond. If specified in the related prospectus
supplement, a bankruptcy bond to cover losses resulting from proceedings under
the federal Bankruptcy Code with respect to a Mortgage Loan will be issued by an
insurer named in the prospectus supplement. Each bankruptcy bond will cover, to
the extent specified in the related prospectus supplement, certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a Mortgage Loan or a reduction by the court of the
unpaid principal balance of a Mortgage Loan and will cover certain unpaid
interest on the amount of a principal reduction from the date of the filing of a
bankruptcy petition. The required amount of coverage under each bankruptcy bond
will be set forth in the related prospectus supplement.
Reserve Fund. If specified in the applicable prospectus supplement, credit
enhancement with respect to a series of Certificates may be provided by the
establishment of one or more reserve funds for the series. Any reserve fund for
a series may be funded (i) by a deposit of cash, U.S. Treasury securities or
instruments evidencing entitlements to principal or interest payments, letters
of credit, demand notes, certificates of deposit or a combination of these in
the aggregate amount specified in the applicable prospectus supplement or (ii)
by the deposit from time to time of certain amounts received on or in respect of
the related Mortgage Loans, as specified in the applicable prospectus
supplement.
54
If specified in the prospectus supplement, reserve funds may be established
to provide limited protection, in an amount satisfactory to each Rating Agency,
against certain interest shortfalls arising from the timing of principal
prepayments, certain types of losses not covered by insurance policies or other
credit support, such as losses arising from damage not covered by standard
hazard insurance policies, losses resulting from the bankruptcy of a borrower
and the application of certain provisions of the Bankruptcy Code or losses
resulting from denial of insurance coverage due to fraud or misrepresentation in
connection with the origination of a Mortgage Loan. Following each Distribution
Date amounts in a reserve fund in excess of any required reserve fund amount may
be released from the reserve fund under the conditions and to the extent
specified in the prospectus supplement and will not be available for further
application to the related Certificates.
If specified in the prospectus supplement, any reinvestment income or other
gain from investments in Eligible Investments (as described below under
"--Payments on Mortgage Loans; Certificate and Custodial Accounts") will be
credited to the related reserve fund for the series, and any loss resulting from
the investments will be charged to the reserve fund. The reserve fund for a
series will not be a part of the Trust Estate.
Additional information concerning any reserve fund will be set forth in the
prospectus supplement, including the initial balance of the reserve fund, the
required reserve fund balance to be maintained, the purposes for which funds in
the reserve fund may be applied to make distributions to Certificateholders and
use of investment earnings from the reserve fund, if any.
Cross Collateralization. If specified in the applicable prospectus
supplement, the beneficial ownership of separate groups of Mortgage Loans
included in a Trust Estate may be evidenced by separate Classes of Certificates.
In this case, credit support may be provided by a cross collateralization
feature which requires that distributions be made to certain Classes from
Mortgage Loan payments that would otherwise be distributed to Subordinate
Certificates evidencing a beneficial ownership interest in other loan groups
within the same Trust Estate. As a result, the amount of credit enhancement
available to a Class of Certificates against future losses on the Mortgage Loans
in which that Class represents an interest may be reduced as the result of
losses on a group of Mortgage Loans in which that Class has no interest. The
applicable prospectus supplement for a series that includes a cross
collateralization feature will describe its specific operation.
Overcollateralization. If specified in the related prospectus supplement,
subordination provisions of a series may be used to accelerate to a limited
extent the amortization of one or more Classes of Certificates relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more Classes of Certificates. This acceleration feature
creates, with respect to the Mortgage Loans or a group of Mortgage Loans,
overcollateralization which results from the excess of the aggregate principal
balance of the related Mortgage Loans, or group of Mortgage Loans, over the
Class Balance of the related Class or Classes of Certificates. This acceleration
may continue for the life of the related Certificates, or may have a shorter
duration. In the case of limited acceleration, once the required level of
overcollateralization is reached, and subject to certain provisions specified in
the related prospectus supplement, this limited acceleration feature may cease,
unless necessary to maintain the required level of overcollateralization.
Excess Interest. If specified in the related prospectus supplement, the
Mortgage Loans in a Trust may generate more interest than is necessary to pay
the interest earned on the Classes of Certificates each month. The excess
interest may be used to maintain overcollateralization, to pay interest that was
previously earned but not paid to certain Classes of Certificates and to
reimburse certain Classes of Certificates for losses and certain shortfalls that
they experienced previously.
55
If specified in the applicable prospectus supplement, amounts received by
the Trustee under any Cash Flow Agreement described below under "--Cash Flow
Agreements" may also be used to provide credit enhancement for one or more
Classes of Certificates.
Cash Flow Agreements
If specified in the prospectus supplement, the Trust Estate may include cash
flow agreements consisting only of one or more guaranteed investment contracts,
swap agreements or interest rate cap or floor agreements (also called yield
maintenance agreements), each of which agreements is intended to reduce the
effects of interest rate fluctuations on the assets or on one or more Classes of
Certificates (each, a "Cash Flow Agreement"). The applicable prospectus
supplement will describe the name, organizational form and general character of
the business of the counterparty under any Cash Flow Agreement. In addition, the
prospectus supplement for the related series of Certificates will disclose
whether the significance percentage is less than 10%, at least 10% but less than
20%, or more than 20%, calculated in accordance with Item 1115 of Regulation AB
(17 CFR 229.1115). To the extent this percentage is (a) 10% or more but less
than 20%, the related prospectus supplement will provide financial data required
by Item 301 of Regulation S-K (17 CFR 229.301) or (b) greater than 20%, the
related prospectus supplement will provide financial statements required by Item
1115(b)(2) of Regulation AB (17 CFR 229.1115) and, in either case, the related
prospectus supplement will contain a description of the operation and material
terms of the Cash Flow Agreement, including, without limitation, conditions to
payment or limits on the timing or amount of payments and material provisions
relating to the termination of the Cash Flow Agreement or the substitution of
another Cash Flow Agreement for the Cash Flow Agreement. Copies of the Cash Flow
Agreement, if any, relating to a series of Certificates will be filed with the
SEC as an exhibit to a Current Report on Form 8-K.
Guaranteed Investment Contracts. If specified in the related prospectus
supplement, the Trustee on behalf of the Trust may enter into one or more
guaranteed investment contracts. Guaranteed investment contracts are generally
used to maximize the investment income on funds held between Distribution Dates
pending distribution to Certificateholders. Under a guaranteed investment
contract, the issuer of the contract, which is typically a highly rated
financial institution, guarantees a fixed or floating rate of interest over the
life of the contract, as well as the ultimate return of the principal. Any
payments received from the issuer of the contract by the Trust will be
distributed to the related Class or Classes of Certificates as specified in the
applicable prospectus supplement.
Yield Maintenance Agreements. If specified in the related prospectus
supplement, the Trustee on behalf of the Trust will enter into one or more yield
maintenance agreements in order to support the yield of one or more Classes of
Certificates. The counterparty to a yield maintenance agreement will receive an
upfront payment and the Trust will have no ongoing payment obligations.
Generally, if the index specified in the applicable prospectus supplement, which
index will be one-month, three-month, six-month or one-year LIBOR, CMT, COFI,
MTA or the Prime Rate, exceeds a percentage for a particular date specified in
the applicable prospectus supplement, the counterparty to the yield maintenance
agreement will be required to pay to the Trustee an amount equal to that excess
multiplied by a notional amount or the Class Balance or Balances of one or more
Classes of Certificates multiplied by one-twelfth. This amount may be adjusted
to reflect the actual number of days in the Interest Accrual Period for the
related Class or Classes of Certificates and will be paid to the Class or
Classes of Certificates as specified in the related prospectus supplement.
Swap Agreements. If specified in the related prospectus supplement, the
Trustee on behalf of the Trust will enter into a swap agreement to support the
yield on one or more Classes of Certificates. Under the swap agreement, the
Trust will be obligated to pay an amount equal to a certain percentage of a
notional amount set forth in the related prospectus supplement to the
counterparty and the Trust will be
56
entitled to receive an amount equal to one-month, three-month, six-month or
one-year LIBOR, CMT, COFI, MTA or the Prime Rate on the notional amount from the
counterparty, until the swap agreement is terminated. Only the net amount of the
two obligations will be paid by the appropriate party. In the event that the
Trust is required to make a payment to the counterparty, that payment will be
paid on the related Distribution Date prior to distributions to
Certificateholders. Generally, any payments received from the counterparty by
the Trust will be distributed to cover certain shortfalls as set forth in the
applicable prospectus supplement.
If specified in the related prospectus supplement, the Trustee on behalf of
the Trust will enter into one or more swap agreements to cover any shortfalls on
one or more Classes of Certificates in the event those Certificates are
auctioned to third-party investors on a date specified in the related prospectus
supplement and the proceeds from the auction are less than the outstanding Class
Balance of the applicable Class or Classes of Certificates plus any accrued and
unpaid interest. In the event the proceeds from the auction are greater than the
outstanding Class Balance or Class Balances of the applicable Class or Classes
of Certificates plus any accrued and unpaid interest, this excess will be paid
to the counterparty or counterparties under the swap agreement(s). See "Risk
Factors -- Amounts Received from the Auction and the Swap Agreement May Be
Insufficient to Assure Completion of the Auction" and "-- Mandatory Auction of
Certificates" in this prospectus.
Categories of Classes of Certificates
The Certificates of any series may be comprised of one or more Classes. The
Classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
prospectus supplement for a series of Certificates may identify the Classes
which comprise that series by reference to the following categories or another
category specified in the prospectus supplement.
PRINCIPAL TYPES
Categories of Classes ............. Definitions
Accretion Directed
Certificates .................... A Class of Certificates that receives principal
payments from amounts that would otherwise be
distributed as interest on specified Accrual
Certificates. These principal payments may be in
lieu of or in addition to principal payments from
principal receipts on the Mortgage Loans for the
related series.
Companion Certificates
(also sometimes referred to as
"Support Certificates") ......... A Class of Certificates that is entitled to
receive principal payments on any Distribution
Date only if scheduled payments have been made on
specified Planned Amortization Certificates,
Targeted Amortization Certificates and/or
Scheduled Amortization Certificates.
Component Certificates ............ A Class of Certificates consisting of two or more
specified components (each, a "Component"), as
described in the applicable prospectus
supplement. The Components of a Class of
Component Certificates may have different
principal and/or interest payment characteristics
but together constitute a single class and do not
represent severable interests. Each Component
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of a Class of Component Certificates may be
identified as falling into one or more of the
categories in this chart.
Exchangeable Certificates ......... A Class of Certificates that may be exchanged for
proportionate interests in one or more specified
Classes of Exchangeable REMIC Certificates in the
same series, as described in the applicable
prospectus supplement. Each Class of
Exchangeable Certificates may be identified as
falling into one or more of the categories in
this chart.
Exchangeable REMIC Certificates ... A Class of Certificates that may be exchanged for
proportionate interests in one or more specified
Classes of Exchangeable Certificates in the same
series, as described in the applicable prospectus
supplement. Each Class of Exchangeable REMIC
Certificates may be identified as falling into
one or more of the categories in this chart.
Lockout Certificates .............. A Class of Senior Certificates that is designed
not to participate in or to participate to a
limited extent in (i.e., to be "locked out" of ),
for a specified period, the receipt of
(1) principal prepayments on the Mortgage Loans
that are allocated disproportionately to the
Classes of Senior Certificates of its series as a
group pursuant to a "shifting interest" structure
and/or (2) scheduled principal payments on the
Mortgage Loans that are allocated to the senior
Classes as a group. A Class of Lockout
Certificates will typically not be entitled to
receive, or will be entitled to receive only a
restricted portion of, distributions of principal
prepayments and/or scheduled principal
prepayments, as applicable, for a period of
several years, during which time all or a portion
of the principal payments that it would otherwise
be entitled to receive in the absence of a
"lockout" structure will be distributed in
reduction of the Class Balances of other Senior
Certificates. Lockout Certificates are designed
to minimize weighted average life volatility
during the lockout period.
Notional Amount
Certificates..................... A Class of Certificates having no Class Balance
and bearing interest on a notional amount. The
notional amount is a hypothetical balance used
for calculating interest distributions.
Pass-Through Certificates ......... A Class of Senior Certificates that is entitled
to receive a specified percentage of the
principal payments that are distributable to the
Senior Certificates or applicable group of Senior
Certificates (other than any Ratio Strip
Certificates) in the aggregate on a Distribution
Date and that is not designated as a Class of
Sequential Pay Certificates.
Planned Amortization
Certificates (also sometimes
referred to as "PAC
Certificates") .................. A Class of Certificates that is designed to
receive principal payments (or has a notional
amount that is based on the Class
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Balance(s) of one or more Classes of Certificates
that are designed to receive principal payments)
using a predetermined principal balance schedule
derived by assuming two constant prepayment rates
for the underlying Mortgage Loans. These two
rates are the endpoints for the "structuring
range" for a Class of Planned Amortization
Certificates. The Classes of Planned Amortization
Certificates in any series may be subdivided into
different categories (e.g., Planned Amortization
I Certificates or PAC I Certificates, Planned
Amortization II Certificates or PAC II
Certificates and so forth) derived using
different structuring ranges and/or payment
priorities. A Class of PAC Certificates is
designed to provide protection against
prepayments occurring at a constant rate within
the structuring range.
Ratio Strip Certificates .......... A Class of Certificates that is entitled to
receive a constant proportion, or "ratio strip,"
of the principal payments on the underlying
Mortgage Loans.
Scheduled Amortization
Certificates .................... A Class of Certificates that is designed to
receive principal payments (or has a notional
amount that is based on the Class Balance(s) of
one or more Classes of Certificates that are
designed to receive principal payments) using a
predetermined principal balance schedule but is
not designated as a Class of Planned Amortization
Certificates or Targeted Amortization
Certificates. The schedule is derived by assuming
either two constant prepayment rates or a single
constant prepayment rate for the underlying
Mortgage Loans. In the former case, the two rates
are the endpoints for the "structuring range" for
a Class of Scheduled Amortization Certificates
and the range generally is narrower than that for
a Class of Planned Amortization Certificates.
Typically, the Companion Certificates for the
applicable series of Certificates generally will
represent a smaller percentage of a Class of
Scheduled Amortization Certificates than the
Companion Certificates generally would represent
in relation to a Class of Planned Amortization
Certificates or Targeted Amortization
Certificates. A Class of Scheduled Amortization
Certificates is generally less sensitive to
prepayments than a Class of Companion
Certificates, but more sensitive than a Class of
Planned Amortization Certificates or Targeted
Amortization Certificates.
Senior Certificates ............... A Class of Certificates that is entitled to
receive payments of principal and interest on
each Distribution Date prior to the Classes of
Subordinate Certificates.
Sequential Pay Certificates ....... Classes of Certificates that are entitled to
receive principal payments in a prescribed
sequence, that do not have predetermined
principal balance schedules and that, in most
cases, are entitled to receive payments of
principal continuously from the first
Distribution Date on which they receive principal
until they are retired. A Class of Sequential Pay
Certificates may
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preceive principal payments concurrently with one
or more other Classes of Sequential Pay
Certificates.
Subordinate Certificates .......... A Class of Certificates that is entitled to
receive payments of principal and interest on
each Distribution Date only after the Senior
Certificates and Classes of Subordinate
Certificates with higher priority of
distributions have received their full principal
and interest entitlements.
Super Senior Certificates ......... A Class of Senior Certificates that will not bear
its share of certain losses after the Classes of
Subordinate Certificates are no longer
outstanding for so long as one or more specified
Classes of Senior Certificates are outstanding.
Super Senior Support
Certificates .................... A Class of Senior Certificates that bears certain
losses allocated to one or more Classes of Super
Senior Certificates.
Targeted Amortization
Certificates (also sometimes
referred to as "TAC
Certificates") .................. A Class of Certificates that is designed to
receive principal payments (or has a notional
amount that is based on the Class Balance(s) of
one or more Classes of Certificates that are
designed to receive principal payments) using a
predetermined principal balance schedule derived
by assuming a single constant prepayment rate for
the underlying Mortgage Loans. A Class of TAC
Certificates is designed to provide some
protection against prepayments at a rate
exceeding the assumed constant prepayment rate
used to derive that Class's principal balance
schedule.
INTEREST TYPES
Categories of Class ............... Definitions
Accrual Certificates .............. A Class of Certificates that accretes the amount
of accrued interest otherwise distributable on
that Class, which amount will be added as
principal to the Class Balance of that Class on
each applicable Distribution Date. This accretion
may continue until some specified event has
occurred or until the Class of Accrual
Certificates is retired.
Fixed Rate Certificates ........... A Class of Certificates with an interest rate
that is fixed throughout the life of the Class.
Floating Rate Certificates ........ A Class of Certificates with an interest rate (or
an effective rate as a result of a yield
maintenance agreement) that resets periodically
based upon a designated index and that varies
directly with changes in that index.
Interest Only Certificates ........ A Class of Certificates that is entitled to
receive some or all of the interest payments made
on the Mortgage Loans and little or
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no principal. Interest Only Certificates have
either a nominal Class Balance or a notional
amount. A nominal Class Balance represents actual
principal that will be paid on the Class. It is
referred to as nominal since it is extremely
small compared to other Classes. A notional
amount is the amount used as a reference to
calculate the amount of interest due on a Class
of Interest Only Certificates that is not
entitled to any distributions in respect of
principal.
Inverse Floating Rate
Certificates .................... A Class of Certificates with an interest rate
that resets periodically based upon a designated
index and that varies inversely with changes in
that index and with changes in the interest rate
payable on the related Class of Floating Rate
Certificates.
Principal Only Certificates ....... A Class of Certificates that does not bear
interest and is entitled to receive only
distributions of principal.
Step Coupon Certificates .......... A Class of Certificates with a fixed interest
rate that is reduced to a lower fixed rate after
a specified period of time. The difference
between the initial interest rate and the lower
interest rate will be supported by a reserve fund
established on the Closing Date.
Variable Rate Certificates ........ A Class of Certificates with an interest rate
that resets periodically and is calculated by
reference to the rate or rates of interest
applicable to the Mortgage Loans.
Mandatory Auction of Certificates
If specified in the prospectus supplement for a series, one or more Classes
of Certificates ("Auction Certificates") may be subject to a mandatory auction.
Prior to a Distribution Date specified in the applicable prospectus supplement
(the "Auction Distribution Date"), the Trustee or another party specified in the
prospectus supplement, in its capacity as auction administrator (the "Auction
Administrator"), will solicit bids for the purchase of each Class of Auction
Certificates then outstanding from third-party investors.
On the Auction Distribution Date, the Auction Certificates will be
transferred to third-party investors, and upon this transfer the holders of each
class of Auction Certificates will be entitled to receive an amount (the "Par
Price") equal to the related Class Balance, plus, if applicable, accrued
interest on that Class Balance (following all distributions and the allocation
of Realized Losses on the Auction Distribution Date).
The Auction Administrator will enter into a swap agreement pursuant to which
the counterparty will agree to pay the excess, if any, of the Par Price over the
amounts received for a Class of Auction Certificates in the auction. If all or a
portion of a Class of Auction Certificates is not sold in the auction, the
counterparty will pay the Auction Administrator the Par Price (or portion of the
Par Price) of the unsold Certificates. If the amount received in the auction is
greater than the Par Price, that excess will be paid by the Trust to the
counterparty to the swap agreement and will not be available for distribution to
Certificateholders.
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If the counterparty defaults on its obligations under the swap agreement, no
Certificates of a Class of Auction Certificates will be transferred to third
parties unless bids equal to or higher than the applicable Par Price (or pro
rata portion in the case of a bid for less than all of a Class) are received. In
addition, if the counterparty defaults and third-party investors bid an amount
equal to or higher than the pro rata portion of the Par Price for some, but not
all, of a Class of Auction Certificates, only a portion of the Certificates of
such Class will be transferred to the successful bidders on the Auction
Distribution Date. If only a portion of a Class is transferred, each holder of
such Class will transfer only a pro rata portion of its Certificates on the
Auction Distribution Date.
See "Risk Factors -- Amounts Received from the Auction and the Swap
Agreement May Be Insufficient to Assure Completion of the Auction" in this
prospectus.
Exchangeable REMIC Certificates and Exchangeable Certificates
General. If specified in a prospectus supplement for a series, certain
Classes of Certificates may be Exchangeable REMIC Certificates or Exchangeable
Certificates. In any of these series, the holders of one or more of the Classes
of Exchangeable REMIC Certificates will be entitled, after notice and payment to
the Trustee of an administrative fee, to exchange all or a portion of those
Classes of Exchangeable REMIC Certificates for proportionate interests in one or
more specified Classes of Exchangeable Certificates in the same series and vice
versa.
If a series includes Exchangeable REMIC Certificates and Exchangeable
Certificates, all of these Classes of Exchangeable REMIC Certificates and
Exchangeable Certificates will be listed in the related prospectus supplement.
The Classes of Certificates that are exchangeable for one another will be
referred to in the related prospectus supplement as "Related" to each other, and
each related grouping of Exchangeable REMIC Certificates and Exchangeable
Certificates will be referred to as a "Combination," with the Classes of
Exchangeable REMIC Certificates in the Combination referred to as a "REMIC
Combination" and the Classes of Exchangeable Certificates in the Combination
referred to as an "Exchangeable Combination." At any time after their initial
issuance, any Class of Exchangeable REMIC Certificates may be exchanged for the
Related Class or Classes of Exchangeable Certificates. In some cases, multiple
Classes of Exchangeable REMIC Certificates may be exchanged for one or more
Classes of Related Exchangeable Certificates.
The descriptions in the related prospectus supplement of the Certificates of
a series that includes Exchangeable REMIC Certificates and Exchangeable
Certificates, including descriptions of principal and interest distributions,
registration and denominations of Certificates, credit enhancement, prepayment
and yield considerations, tax and legal investment considerations and ERISA
considerations, also will apply to each Class of Exchangeable REMIC Certificates
and Exchangeable Certificates. The related prospectus supplement will separately
describe the prepayment and yield considerations applicable to, and the risks of
investment in, each Class of Exchangeable REMIC Certificates and Exchangeable
Certificates. For example, separate decrement tables and yield tables, if
applicable, will be included for each Class of Exchangeable REMIC Certificates
and Exchangeable Certificates.
Exchanges. If a holder of Exchangeable REMIC Certificates elects to exchange
its Exchangeable REMIC Certificates for Related Exchangeable Certificates, then:
o the aggregate principal balance of the Related Exchangeable Certificates
received in the exchange, immediately after the exchange, will equal the
aggregate principal balance, immediately prior to the exchange, of the
Exchangeable REMIC Certificates so exchanged (for purposes of an
exchange, Interest Only Certificates will have a principal balance of
zero);
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o the aggregate amount of principal or interest payable on each
Distribution Date with respect to the Related Exchangeable Certificates
received in the exchange will equal the aggregate amount of principal or
interest payable on each Distribution Date with respect to the
Exchangeable REMIC Certificates so exchanged; and
o the Class or Classes of Exchangeable REMIC Certificates and Exchangeable
Certificates will be exchanged in the applicable proportions, if any,
described in the related prospectus supplement.
Different types of combinations may exist. Any individual series of
Certificates may have multiple types of Combinations. Some examples of
Combinations of Exchangeable REMIC Certificates and Exchangeable Certificates
that differ in their interest characteristics include:
o Floating Rate Certificates and Inverse Floating Rate Certificates that
are Exchangeable REMIC Certificates may be exchangeable, together, for
Related Fixed Rate Certificates. In such a Combination, the Floating
Rate Certificates and Inverse Floating Rate Certificates would produce,
in the aggregate, an annual interest amount equal to that generated by
the Related Fixed Rate Certificates. In addition, the aggregate Class
Balance of a Class of Floating Rate Certificates and a Class of Inverse
Floating Rate Certificates would equal the aggregate Class Balance of
the Related Fixed Rate Certificates.
o Interest Only Certificates and Principal Only Certificates that are
Exchangeable REMIC Certificates may be exchangeable, together, for
Related Exchangeable Certificates that are entitled to both principal
and interest payments. In such a Combination, the Class Balance of the
Class of Related Exchangeable Certificates would be equal to the Class
Balance of the Class of Principal Only Certificates, and the interest
rate on the Class of Related Exchangeable Certificates, when applied to
the Class Balance of this Related Class, would generate interest equal
to the annual interest amount of the Interest Only Certificates.
o Two Classes of Fixed Rate Certificates that are Exchangeable REMIC
Certificates with different interest rates may be exchangeable,
together, for a single Class of Related Exchangeable Certificates with a
fixed interest rate. In such a Combination, the Class Balance of the
single Class of Related Exchangeable Certificates would be equal to the
aggregate Class Balance of the two Classes of Exchangeable REMIC
Certificates, and the single Class of Related Exchangeable Certificates
would have a fixed interest rate that, when applied to the aggregate
Class Balance of the two Classes of Exchangeable REMIC Certificates,
would generate interest equal to the aggregate annual interest amount of
the two Classes of Exchangeable REMIC Certificates.
In some series, a Certificateholder may be able to exchange its Exchangeable
REMIC Certificates for other Related Exchangeable Certificates that have
different principal payment characteristics. Some examples of Combinations that
differ in the principal payment characteristics include:
o A Class of Exchangeable REMIC Certificates that is a Class of Accrual
Certificates, and a second Class of Exchangeable REMIC Certificates that
is a Class of Accretion Directed Certificates and receives all of the
interest accrued on the Class of Accrual Certificates for so long as the
Accrual Certificates are accreting, may be exchangeable, together, for a
single Class of Related Exchangeable Certificates that receives payments
of interest continuously from the first Distribution Date on which it
receives interest until it is retired.
o A Class of Exchangeable REMIC Certificates that is a Class of PAC,
Scheduled Amortization or TAC Certificates, and a Class of Exchangeable
REMIC Certificates that is a Class of Companion Certificates, may be
exchangeable, together, for a Class of Related Exchangeable Certificates
that receives principal payments without regard to the amortization
schedule for the Class of PAC,
63
Scheduled Amortization or TAC Certificates from the first Distribution
Date on which it receives principal until it is retired.
The holder of the Class or Classes of Exchangeable Certificates in any of
the example Combinations described above may also exchange its Exchangeable
Certificates for the Related Exchangeable REMIC Certificates and this process
may occur repeatedly in each direction.
A number of factors may limit the ability of a holder of Exchangeable REMIC
Certificates or Exchangeable Certificates to effect an exchange. For example,
the Certificateholder must own, at the time of the proposed exchange, the Class
or Classes of Exchangeable REMIC Certificates or Exchangeable Certificates
necessary to make the exchange in the necessary proportions. If a
Certificateholder does not own the necessary Classes of Exchangeable REMIC
Certificates or Exchangeable Certificates or does not own the necessary Classes
of Exchangeable REMIC Certificates or Exchangeable Certificates in the proper
proportions, the Certificateholder may not be able to obtain the desired Classes
of Exchangeable REMIC Certificates or Exchangeable Certificates, as the case may
be. The Certificateholder desiring to make the exchange may not be able to
purchase the necessary Class of Exchangeable REMIC Certificates or Exchangeable
Certificates from the then-current owner at a reasonable price, or the necessary
proportion of the needed Class of Exchangeable REMIC Certificates or
Exchangeable Certificates may no longer be available due to principal payments
or prepayments that have been applied to that Class of Exchangeable REMIC
Certificates or Exchangeable Certificates.
Procedures. The related prospectus supplement will describe the procedures
that must be followed to make an exchange of Exchangeable REMIC Certificates and
Exchangeable Certificates. A Certificateholder will be required to provide
notice to the Trustee prior to the proposed exchange date within the time period
specified in the related prospectus supplement. The notice must include, among
other things, the outstanding principal balance or notional amount of the
Exchangeable REMIC Certificates or Exchangeable Certificates to be exchanged and
the Related Exchangeable REMIC Certificates or Exchangeable Certificates to be
received, and the proposed exchange date. When the Trustee receives this notice,
it will provide instructions to the Certificateholder regarding delivery of the
Exchangeable REMIC Certificates or Exchangeable Certificates and payment of the
administrative fee. A Certificateholder's notice to the Trustee will become
irrevocable on the second day prior to the proposed exchange date specified in
the related prospectus supplement. Any Exchangeable REMIC Certificates or
Exchangeable Certificates that are Book-Entry Certificates will be subject to
DTC's Rules.
If the related prospectus supplement describes exchange proportions for a
Combination of Classes of Exchangeable REMIC Certificates and Exchangeable
Certificates, these proportions will be based on the original, rather than the
outstanding, principal balances or notional amounts of these Classes.
Distributions on an Exchangeable REMIC Certificate or Exchangeable
Certificate received in an exchange will be made as described in the related
prospectus supplement. Distributions will be made to the applicable
Certificateholder of record as of the applicable Record Date.
- --------------------------------------------------------------------------------
PREPAYMENT AND YIELD CONSIDERATIONS
- --------------------------------------------------------------------------------
Pass-Through Rates
Any Class of Certificates of a series may have a fixed Pass-Through Rate, or
a Pass-Through Rate which varies based on changes in an index or based on
changes in the underlying Mortgage Loans (such as, for example, varying on the
basis of changes in the weighted average Net Mortgage Interest Rates of the
underlying Mortgage Loans).
64
The prospectus supplement for each series will specify the range and the
weighted average of the Mortgage Interest Rates and, if applicable, Net Mortgage
Interest Rates for the Mortgage Loans underlying the series as of the Cut-off
Date. If the Trust Estate includes adjustable-rate Mortgage Loans or Interest
Only Mortgage Loans or includes Mortgage Loans with different Net Mortgage
Interest Rates, the weighted average Net Mortgage Interest Rate may vary from
time to time as set forth below. See "The Trust Estates." The prospectus
supplement for a series will also specify the initial Pass-Through Rate for each
Class of Certificates of the series and will specify whether each Pass-Through
Rate is fixed or is variable.
The Net Mortgage Interest Rate for any adjustable-rate Mortgage Loan will
change with any changes in the level of the index specified in the applicable
prospectus supplement on which Mortgage Interest Rate adjustments are based,
subject to any applicable periodic or lifetime caps or floors on the related
Mortgage Interest Rate. In addition, the Net Mortgage Interest Rate for any
adjustable-rate Mortgage Loan may change if a different index is substituted for
an index which is no longer available in accordance with the terms of the
related Mortgage Note. The weighted average Net Mortgage Interest Rate for any
series may vary due to changes in the Net Mortgage Interest Rates of
adjustable-rate Mortgage Loans, to the timing of the Mortgage Interest Rate
readjustments of those Mortgage Loans and to different rates of payment of
principal of fixed- or adjustable-rate Mortgage Loans bearing different Mortgage
Interest Rates.
Scheduled Delays in Distributions
At the date of initial issuance of the Certificates of each series offered
by this prospectus and the applicable prospectus supplement, the initial
purchasers of a Class of Certificates may be required to pay accrued interest at
the applicable Pass-Through Rate for that Class from the Cut-off Date for the
series to, but not including, the date of issuance. The effective yield to
Certificateholders will be below the yield otherwise produced by the applicable
Pass-Through Rate because the distribution of principal and interest which is
due on each Due Date will not be made until the Distribution Date of the month
in which the Due Date occurs (or until another Distribution Date specified in
the applicable prospectus supplement).
Effect of Principal Prepayments
When a Mortgage Loan is prepaid in full, the mortgagor pays interest on the
amount prepaid only to the date of prepayment. Liquidation Proceeds and amounts
received in settlement of insurance claims are also likely to include interest
only to the time of payment or settlement. When a Mortgage Loan is prepaid in
full or in part, an interest shortfall may result depending on the timing of the
receipt of the prepayment and the timing of when those prepayments are passed
through to Certificateholders. To partially mitigate this reduction in yield,
the Pooling Agreement and/or Underlying Servicing Agreements relating to a
series may provide, to the extent specified in the applicable prospectus
supplement, that for specified types of principal prepayments received, the
applicable Servicer or the Master Servicer will be obligated, on or before each
Distribution Date, to pay an amount equal to the lesser of (i) the aggregate
interest shortfall with respect to the Distribution Date resulting from those
principal prepayments by mortgagors and (ii) all or a portion of the Servicer's
or the Master Servicer's, as applicable, servicing compensation for the
Distribution Date specified in the applicable prospectus supplement. No
comparable interest shortfall coverage will be provided by the Servicer or the
Master Servicer with respect to liquidations of any Mortgage Loans. Any interest
shortfall arising from liquidations will be covered by means of the
subordination of the rights of Subordinate Certificateholders or any other
credit support arrangements.
A lower rate of principal prepayments than anticipated would negatively
affect the total return to investors in any Certificates of a series that are
offered at a discount to their principal amount and a higher rate of principal
prepayments than anticipated would negatively affect the total return to
investors in the
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Certificates of a series that are offered at a premium to their principal
amount. The yield on Certificates that are entitled solely or disproportionately
to distributions of principal or interest may be particularly sensitive to
prepayment rates, and further information relating to yield on those
Certificates will be included in the applicable prospectus supplement.
Weighted Average Life of Certificates
The Mortgage Loans may be prepaid in full or in part at any time. The
Mortgage Loans generally will not provide for a prepayment penalty but may so
provide if indicated in the related prospectus supplement. Fixed-rate Mortgage
Loans generally will contain due-on-sale clauses permitting the mortgagee to
accelerate the maturities of the Mortgage Loans upon conveyance of the related
Mortgaged Properties, and adjustable-rate Mortgage Loans generally will permit
creditworthy borrowers to assume the then-outstanding indebtedness on the
Mortgage Loans.
Prepayments on Mortgage Loans are commonly measured relative to a prepayment
standard or model. The prospectus supplement for each series of Certificates may
describe one or more prepayment standards or models and contain tables setting
forth the weighted average life of each Class and the percentage of the original
total Class Balance of each Class that would be outstanding on specified
Distribution Dates for the series and the projected yields to maturity on
certain Classes, in each case based on the assumptions stated in the related
prospectus supplement, including assumptions that prepayments on the Mortgage
Loans are made at rates corresponding to various percentages of the prepayment
standard or model specified in the related prospectus supplement.
There is no assurance that prepayment of the Mortgage Loans underlying a
series of Certificates will conform to any level of the prepayment standard or
model specified in the applicable prospectus supplement. A number of factors,
including but not limited to homeowner mobility, economic conditions, natural
disasters, changes in mortgagors' housing needs, job transfers, unemployment or,
in the case of borrowers relying on commission income and self-employed
borrowers, significant fluctuations in income or adverse economic conditions,
mortgagors' net equity in the properties securing the mortgage loans, including
the use of second or "home equity" mortgage loans by mortgagors or the use of
the properties as second or vacation homes, servicing decisions, enforceability
of due-on-sale clauses, mortgage market interest rates, mortgage recording
taxes, competition among mortgage loan originators resulting in reduced
refinancing costs, reduction in documentation requirements and willingness to
accept higher loan-to-value ratios, and the availability of mortgage funds, may
affect prepayment experience. In general, however, if prevailing mortgage
interest rates fall below the Mortgage Interest Rates borne by the Mortgage
Loans underlying a series of Certificates, the prepayment rates of the Mortgage
Loans are likely to be higher than if prevailing rates remain at or above the
rates on the Mortgage Loans. Conversely, if prevailing mortgage interest rates
rise above the Mortgage Interest Rates borne by the Mortgage Loans, the Mortgage
Loans are likely to experience a lower prepayment rate than if prevailing rates
remain at or below those Mortgage Interest Rates. However, because many
different factors affect prepayment behavior, as described above, prepayments
may not rise or fall in direct relation to changes in mortgage interest rates.
It should be noted that Certificates of a series may evidence an interest in a
Trust Estate with different Mortgage Interest Rates. Accordingly, the prepayment
experience of those Certificates will to some extent be a function of the mix of
interest rates of the Mortgage Loans. In addition, the terms of the Underlying
Servicing Agreements may require the related Servicer to enforce any due-on-sale
clause to the extent it has knowledge of the conveyance or the proposed
conveyance of the underlying Mortgaged Property; provided, however, that any
enforcement action that the Servicer determines would jeopardize any recovery
under any related primary mortgage insurance policy will not be required and
provided, further, that the Servicer may permit the assumption of defaulted
Mortgage Loans. See "Servicing of the Mortgage Loans--Enforcement of
"Due-on-Sale" Clauses; Realization Upon Defaulted Mortgage Loans" and "Certain
Legal Aspects of the Mortgage Loans--"Due-On-Sale" Clauses" for a
66
description of certain provisions of each Pooling Agreement and certain legal
developments that may affect the prepayment experience on the Mortgage Loans.
At the request of a borrower, a Servicer, including the Sponsor, may allow
the refinancing of a Mortgage Loan in any Trust Estate serviced by it by
accepting a prepayment in full and permitting a new mortgage loan secured by a
mortgage on the same property. Upon refinancing, the new mortgage loan will not
be included in the Trust Estate. Any refinancing will have the same effect as a
prepayment in full of the related Mortgage Loan. In this regard a Servicer,
including the Sponsor, may, from time to time, implement programs designed to
encourage refinancing through it, including but not limited to general or
targeted solicitations, or the offering of pre-approved applications, reduced or
nominal origination fees or closing costs, or other financial incentives. See
"The Mortgage Loan Programs--Mortgage Loan Underwriting--Bank of America General
Underwriting Standards" for a description of the Sponsor's mortgage refinance
programs. A Servicer may also encourage refinancing of defaulted Mortgage Loans,
or may encourage the assumption of defaulted Mortgage Loans by creditworthy
borrowers.
Provided that a borrower has been current in his or her mortgage loan
payment obligations in the previous twelve months, the Sponsor may agree to
refinance a mortgage loan in order to reduce the borrower's mortgage interest
rate or change the term of the mortgage loan through a reduced documentation
refinancing. In addition, in the case of certain borrowers who have indicated an
interest in refinancing or who have requested payoff information, the Sponsor
may refinance the existing mortgage loan through the extension of a replacement
mortgage loan or the modification of the existing mortgage loan, with minimal
new borrower credit or property underwriting standards or cost to the borrower.
Any refinancing of this type will have the same effect as a prepayment in full
of the related mortgage loan. See "The Mortgage Loan Programs--Mortgage Loan
Underwriting--Bank of America General Underwriting Standards." The streamlined
procedures, minimal borrower cost and minimal underwriting standards associated
with the Sponsor's refinancing programs may result in an increase in the number
of mortgage loans eligible for refinancing and a narrowing of the mortgage
interest rate differential that may otherwise need to exist before a refinancing
is practical and economical for the borrower. These factors, together with
generally increased borrower sophistication regarding the benefits of
refinancing, may also result in a significant increase in the rate of
prepayments on the Mortgage Loans.
The Depositor will be obligated, under the circumstances specified in "The
Pooling Agreement--Assignment of Mortgage Loans," to repurchase certain of the
Mortgage Loans. In addition, the terms of certain insurance policies relating to
the Mortgage Loans may permit the applicable insurer to purchase any Mortgage
Loan which is in default or as to which default is reasonably foreseeable. The
proceeds of any purchase or repurchase under these circumstances will be
deposited in the related Servicer Custodial Account and the purchase or
repurchase will have the same effect as a prepayment in full of the related
Mortgage Loan. See "The Pooling Agreement--Assignment of Mortgage Loans." In
addition, if specified in the applicable prospectus supplement, the Depositor or
another person identified in the prospectus supplement will have the option to
purchase all or a portion (generally an identified group of Mortgage Loans) of
the Mortgage Loans in any Trust under the limited conditions specified under
"The Pooling Agreement -- Termination; Optional Purchase of Mortgage Loans." For
any series of Certificates for which one or more elections has been made to
treat the Trust Estate (or one or more segregated pools of assets therein) as
one or more REMICs, these purchases or repurchases may be effected only pursuant
to a "qualified liquidation," as defined in Code Section 860F(a)(4)(A).
- --------------------------------------------------------------------------------
SERVICING OF THE MORTGAGE LOANS
- --------------------------------------------------------------------------------
The servicing of the Mortgage Loans in the Trust underlying a series of
Certificates will be performed by one or more Servicers, which may include the
Sponsor or its affiliates. If there is more than
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one Servicer of the Mortgage Loans related to a series, a master servicer, which
may be the Sponsor or an affiliate (the "Master Servicer"), may be engaged to
supervise some or all of the Servicers. The applicable prospectus supplement
will identify (i) any Master Servicer, (ii) each Servicer affiliated with the
Sponsor, (iii) each Servicer that services 10% or more of the Mortgage Loans and
(iv) any other material servicer that is responsible for performing an aspect of
the servicing on which the performance of the related Mortgage Loans or
Certificates are materially dependent.
The following is a summary of the material servicing provisions of the
Pooling Agreements. A form of Pooling Agreement has been filed as an exhibit to
the registration statement of which this prospectus forms a part. The Pooling
Agreement for each series will be filed with the SEC following the date of
initial issuance of the related Certificates.
The Master Servicer
The Master Servicer generally will be responsible under each applicable
Pooling Agreement for, among other things, (i) administering and supervising the
performance by the Servicers of their duties and responsibilities under the
Underlying Servicing Agreements, (ii) oversight of payments received on Mortgage
Loans, (iii) preparation of periodic reports to the Trustee regarding the
foregoing matters, (iv) performing certain of the servicing obligations of a
terminated Servicer as described below under "--The Servicers" and (v) making
Periodic Advances of delinquent payments of principal and interest on the
Mortgage Loans to the limited extent described below under the heading
"--Periodic Advances and Servicing Advances," if those amounts are not advanced
by a Servicer. The Master Servicer will also perform additional duties as
described in the applicable prospectus supplement. The Master Servicer will be
entitled to receive a portion of the interest payments on the Mortgage Loans
included in the Trust Estate for a series to cover its fees as Master Servicer
or will be paid in another manner specified in the applicable prospectus
supplement. The Master Servicer may subcontract with any other entity the
obligations of the Master Servicer under any Pooling Agreement. The Master
Servicer will remain primarily liable for the contractor's performance in
accordance with the applicable prospectus supplement. The Master Servicer may be
released from its obligations in certain circumstances. See "--The Servicers."
The Servicers
With respect to any series, one or more Servicers (each, a "Servicer")
specified in the applicable prospectus supplement, including the Sponsor, will
provide certain customary servicing functions for the Mortgage Loans pursuant to
the related Pooling Agreement or separate underlying servicing agreements (each,
an "Underlying Servicing Agreement") with the Depositor or an affiliate of the
Depositor. These Servicers may be the originators of the Mortgage Loans or
affiliates of the applicable originators or third parties identified in the
applicable prospectus supplement. The rights of the Depositor or affiliate of
the Depositor under the applicable Underlying Servicing Agreements relating to
the Mortgage Loans included in the Trust Estate for a series will be assigned
(directly or indirectly) to the Trustee for the benefit of Certificateholders of
that series. The Servicers may be entitled to withhold their Servicing Fees and
certain other fees and charges from remittances of payments received on Mortgage
Loans serviced by them.
Each Servicer generally will be approved by Fannie Mae or Freddie Mac as a
servicer of mortgage loans.
The duties to be performed by each Servicer include collection and
remittance of principal and interest payments on the Mortgage Loans,
administration of mortgage escrow accounts, collection of insurance claims,
foreclosure procedures, and, if necessary, the advance of funds to the extent
certain
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payments are not made by the mortgagor and have not been determined by the
Servicer to be not recoverable under the applicable insurance policies, from
proceeds of liquidation of those Mortgage Loans or otherwise. Each Servicer also
will provide necessary accounting and reporting services to provide required
information to the Trustee or to enable the Master Servicer to provide required
information to the Trustee for the Mortgage Loans included in the Trust Estate
for a series. Each Servicer is entitled to a periodic Servicing Fee equal to a
specified percentage of the outstanding principal balance of each Mortgage Loan
serviced by it. The obligations of a Servicer may be performed through
subservicers or vendors, provided that the Servicer remains primarily liable for
the servicing of the Mortgage Loans in the applicable Trust. In the event a
Servicer appoints a subservicer that meets the thresholds provided in Item
1108(a)(3) of Regulation AB (17 CFR 229.1108), the applicable prospectus
supplement will provide the disclosure required by Item 1108(b) and (c) of
Regulation AB (17 CFR 229.1108). In the event that such appointment occurs after
the issuance of the related series of Certificates, the Depositor will report
such appointment on Form 8-K for so long as the related Issuing Entity is
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended.
The Trustee, or if so provided in the applicable Pooling Agreement, the
Master Servicer, may terminate a Servicer who has failed to comply with its
covenants or breached one of its representations contained in the applicable
Pooling Agreement or Underlying Servicing Agreement or in certain other
circumstances. Upon termination of a Servicer by the Trustee or the Master
Servicer, the Trustee or the Master Servicer, as the case may be, will assume
certain servicing obligations of the terminated Servicer, or, at its option, may
appoint a substitute Servicer acceptable to the Trustee to assume the servicing
obligations of the terminated Servicer. Neither the Master Servicer's nor the
Trustee's obligations to act as substitute Servicer following the termination of
an Underlying Servicing Agreement or termination of the Servicer under the
applicable Pooling Agreement will, however, require the Master Servicer or the
Trustee, as applicable, to purchase a Mortgage Loan from the Trust Estate due to
a breach by the terminated Servicer of a representation or warranty in respect
of the Mortgage Loan.
The Trustee or a successor servicer is entitled to be reimbursed for its
costs in effecting a servicing transfer from the predecessor servicer. In the
event that the predecessor servicer fails to reimburse the Trustee or successor
servicer, the Trustee or successor servicer will be entitled to reimbursement
from the assets of the related Trust.
The Pooling Agreement will provide that a Servicer may not resign from its
obligations and duties under the Pooling Agreement for each series, except upon
its determination that its duties under the Pooling Agreement are no longer
permissible under applicable law. No resignation will become effective until the
Trustee for a series or a successor servicer or Master Servicer has assumed the
Servicer's obligations and duties under the Pooling Agreement. If a Servicer
resigns for the foregoing reason and the Trustee is unable or unwilling to
assume responsibility for its duties under the Pooling Agreement, it may appoint
another institution to so act as described under "The Pooling Agreement --
Rights Upon Event of Default" below.
The Pooling Agreement will provide that no Servicer nor any director,
officer, employee or agent of any Servicer will be under any liability to the
Trust Estate or the Certificateholders, for the taking of any action or for
refraining from the taking of any action in good faith pursuant to the Pooling
Agreement, or for errors in judgment; provided, however, that no Servicer nor
any director, officer, employee or agent of any Servicer will be protected
against any liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of reckless disregard of its obligations and duties under the Pooling
Agreement. Each Servicer and any director, officer, employee or agent of each
Servicer shall be indemnified by the Trust Estate and held harmless against any
loss, liability or expense incurred in connection with any legal action relating
to the Pooling Agreement or Underlying Servicing Agreement or the Certificates,
other than any loss, liability or
69
expense related to any specific Mortgage Loan or Mortgage Loans and any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of it duties under the Pooling Agreement or
Underlying Servicing Agreement or by reason of reckless disregard of obligations
and duties under the Pooling Agreement or Underlying Servicing Agreement. In
addition, the Pooling Agreement will provide that no Servicer will be under any
obligation to appear in, prosecute or defend any legal action that is not
incidental to its duties under the Pooling Agreement and that in its opinion may
involve it in any expense or liability. A Servicer may, however, in its
discretion, undertake any action deemed by it necessary or desirable relating to
the Pooling Agreement and the rights and duties of the parties to the Pooling
Agreement and the interests of the Certificateholders. In this event, the legal
expenses and costs of the action and any liability resulting from it will be
expenses, costs and liabilities of the Trust and the Servicer will be entitled
to be reimbursed out of the Servicer Custodial Account, and any loss to the
Trust arising from this right of reimbursement will be allocated first to the
Subordinate Certificate of a series before being allocated to the related Senior
Certificates, or if the series does not contain Subordinate Certificates, pro
rata among the various Classes of Certificates or in another manner specified in
the applicable prospectus supplement.
Any person into which the Servicer may be merged or consolidated, or any
person resulting from any merger, conversion or consolidation to which the
Servicer is a party, or any person succeeding to the business through the
transfer of substantially all of its assets or all assets relating to the
business, or otherwise, of the Servicer will be the successor of the Servicer
under the terms of the Pooling Agreement for each series provided that the
successor or resulting entity is qualified to service mortgage loans for Fannie
Mae or Freddie Mac.
The Servicer also has the right to assign its rights and delegate its duties
and obligations under the Pooling Agreement for each series; provided that, if
the Servicer desires to be released from its obligations under the Pooling
Agreement, (i) the purchaser or transferee accepting the assignment or
delegation is qualified to service mortgage loans for Fannie Mae or Freddie Mac,
(ii) the purchaser is satisfactory to the Trustee for the series, in the
reasonable exercise of its judgment, and executes and delivers to the Trustee an
agreement, in form and substance reasonably satisfactory to the Trustee, which
contains an assumption by the purchaser or transferee of the due and punctual
performance and observance of each covenant and condition to be performed or
observed by the Servicer under the Pooling Agreement from and after the date of
the agreement, and (iii) each applicable Rating Agency's rating of any
Certificates for the series in effect immediately prior to the assignment, sale
or transfer would not be qualified, downgraded or withdrawn as a result of the
assignment, sale or transfer and the Certificates would not be placed on credit
review status by any Rating Agency. The Servicer will be released from its
obligations under the Pooling Agreement upon the assignment and delegation of
its duties and obligations, except that the Servicer will remain liable for all
liabilities and obligations incurred by it prior to the time that the conditions
contained in clauses (i), (ii) and (iii) above are met.
In the event that there is a Master Servicer for a series, the provisions
described above will apply to the Master Servicer and substantially similar
provisions will apply to each Servicer under the Underlying Servicing
Agreements.
Servicing Experience and Procedures of Bank of America
General
Bank of America has been servicing consumer mortgage loans in excess of 25
years. The table below sets forth information about Bank of America's portfolio
of first-lien, residential mortgage loans (excluding revolving home equity lines
of credit) as of the dates indicated:
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As of As of As of As of As of
December 31, December 31, December 31, December 31, March 31,
First Lien Mortgage Loans 2003 2004 2005 2006 2007
- ------------------------- ------------ ------------ ------------ ------------ ---------
By Number 2,215,425 2,258,581 2,227,378 2,524,364 2,315,106
By Aggregate Unpaid
Principal
Balance (in Billions) $246.5 $273.1 $296.8 $344.0 $345.1
Within this portfolio, as of March 31, 2007, approximately 154,127 mortgage
loans with an unpaid principal balance of approximately $43.0 billion are
related to securities issued through the Depositor's securitization program.
Bank of America has been approved as a mortgagee and seller/servicer by the
Department of Housing and Urban Development, the Veterans Administration, Ginnie
Mae, Fannie Mae and Freddie Mac. In addition to servicing loans for mortgages
securitized by the Depositor, Bank of America also services loans that are held
in its portfolio and whole loans that are sold to a variety of investors.
Bank of America utilizes a mortgage-servicing technology platform with
multiple capabilities and reporting functions that is widely used within the
residential mortgage industry. This platform allows Bank of America to process
mortgage servicing activities including but not limited to: (i) performing
account maintenance; (ii) tracking consumer communications; (iii) facilitating
communication between Bank of America's different internal business units, and
between Bank of America and its third-party vendors; (iv) entering and updating
transaction data; and (v) generating various reports.
Bank of America has implemented and tested a business continuity plan. In
case of a disruption, all functions of the disrupted facility are automatically
transferred to a different undisrupted facility. The facility receiving the
transfer of functionality will have access to all data and tools necessary to
continue servicing all mortgage loans. Bank of America's business continuity
plan is tested and updated annually.
Bank of America's servicing policies and procedures have been generally
consistent for the last three years in all material respects. The only
significant changes in Bank of America's policies and procedures have come in
response to changes in federal or state law or investor requirements, such as
updates issued by Fannie Mae or Freddie Mac.
Bank of America may perform any of its obligations under the Pooling
Agreement through one or more third-party vendors, affiliates or subsidiaries.
Bank of America may engage third-party vendors to provide technology or process
efficiencies. Bank of America monitors its third-party vendors in compliance
with the guidelines reviewed by the OCC. Bank of America has entered into
contracts with third-party vendors for functions related to customer bankruptcy,
certain foreclosure-related activities, hazard insurance, lockbox and document
printing.
Delinquencies, Losses, Bankruptcies and Recoveries
Bank of America monitors Mortgage Loans for a variety of situations that
present the risk of delinquency or loss to a Trust. Those situations include,
without limitation, situations where a mortgagor has sold or transferred the
Mortgaged Property, where there has been damage to the Mortgaged Property, where
the mortgagor is late in making payments for any number of reasons, and where
the mortgagor has declared bankruptcy. The following is a description of Bank of
America's policies and procedures to respond to each of these situations.
Property Damage. When an underlying property is damaged and such damage is
covered by insurance, Bank of America takes certain actions to recover insurance
funds on behalf of the applicable
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Trust as described below under "-- Enforcement of "Due-on-Sale" Clauses;
Realization Upon Defaulted Mortgage Loans."
More specifically, Bank of America has retained a vendor to address most of
the work related to recovery of proceeds of hazard insurance. This vendor
generally performs the following tasks: (i) insurance customer service, (ii)
flood processing and tracking, (iii) renewal, (iv) lender-placed hazard
insurance tracking and placement and (v) claims processing. The vendor tracks
and reports its activities by directly accessing Bank of America's servicing
system which reports Bank of America employees actively monitor.
Collections and Loss Mitigation. Account status is monitored and efforts are
made to prevent a Mortgage Loan on which a payment is delinquent from going to
foreclosure. Based on account payment history, prior contact with the borrower,
property status, and various other factors, an appropriate course of action is
employed to make direct mail or phone contact with the borrower(s). All of the
preceding factors are considered when determining the appropriate timing for the
contact efforts.
Initial phone contact is pursued by Bank of America's collections
department, which utilizes a predictive dialer and manual efforts to perform
strategic call campaigns based on selected criteria including stage of
delinquency and industry credit/behavioral risk scoring. Call attempts may begin
within several days of the payment due date and continue throughout the
delinquency in accordance with investor, mortgage insurance and government
agency guidelines. The collection activities of Bank of America are consistent
with fair debt collection practices, including, but not limited to placing calls
to the mortgagor after 8:00 a.m. or before 9:00 p.m. local time at the
customer's location. Each caller in the collection department attempts to: (i)
obtain the reason for default; (ii) obtain information related to the
mortgagor's current financial situation; (iii) verify occupancy; (iv) refer the
mortgagor to counseling agencies if appropriate; and (v) determine the best
possible loss mitigation option. Systemic stops may be used to prevent accounts
from being subject to notices, letters, calls and inspections in certain
situations. Some examples of situations subject to a stop of collection activity
may include the initial period following the transfer of servicing to Bank of
America, certain bankruptcy accounts, and customers who are the victim of fraud
or identity theft.
Bank of America grants a grace period of fifteen days after the Due Date in
which a borrower can make a monthly payment without incurring a penalty or late
charge. In addition, a Mortgage Loan is not considered delinquent unless a full
monthly payment has not been received by the close of business on the last day
of the month of the Due Date. For example, a Mortgage Loan with a Due Date of
May 1 is considered delinquent if a full monthly payment is not received by May
31.
Late charges are generally assessed after the Due Date at the expiration of
a grace period, if applicable. There may be situations, based on the customer or
account circumstances, where a late fee could be waived. Also certain systemic
stops may prevent the assessment of late fees, such as during the initial period
following the transfer of servicing to Bank of America.
Direct mail contact efforts occur during the various stages of delinquency.
Generally a courtesy notice is sent to customers after the Due Date and
expiration of any grace period. General default communications may continue with
a late fee notice, account billing statements, breach letters, loss mitigation
solicitations, occupancy and property status inquiries, and foreclosure notices,
if appropriate. More specifically, customer contact is generally made as
follows: (i) during the first 30 days of delinquency, Bank of America generally
assesses a late fee, sends a late notice and generally calls the customer during
the last week of the 30-day period, (ii) during the next 30 days of delinquency,
Bank of America again calls the customer, sends a loss mitigation letter
(setting forth appropriate options to bring the loan current) within the first
15 days of this period and then, in the third week of this period, sends a
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formal notice, known as a "breach letter," that is legally required prior to
commencing formal foreclosure proceedings, (iii) during the next 15 days of
delinquency, Bank of America calls the customer, sends another loss mitigation
letter and performs an inspection of the property, and (iv) during the next 15
days of delinquency, Bank of America sends a final loss mitigation solicitation
letter before referring the matter to its foreclosure vendor.
In recognition of the fact that Mortgage Loans that are delinquent are at
higher risk for abandonment by the borrower, and may also face issues related to
maintenance, Bank of America has developed guidelines for inspecting properties
for which a monthly payment is delinquent. Depending on various factors, such as
the ability to contact the customer, the delinquency status of the account, and
the property occupancy status, Bank of America will hire a vendor to inspect the
related property to determine its condition. If the inspection results indicate
a need for property safeguarding measures, such as securing or winterizing, Bank
of America will ensure the appropriate safeguards are implemented in accordance
with industry, legal and investor standards.
Bank of America has a dedicated loss mitigation unit that receives case
referrals from its collection, foreclosure, and bankruptcy departments as well
as from the loss mitigation unit's own contact efforts. Delinquent Mortgage
Loans are reviewed for investor eligible loss mitigation options, which can
include a promise to pay, repayment plan, forbearance, moratorium, modification,
short sale, special forbearance, deed-in-lieu of foreclosure, borrower
assistance, partial claim, assumption, sale of property, demand arrears, or
foreclosure. Bank of America will opt for any one or more of these mitigation
options depending on various factors, but will pursue more extensive loss
mitigation solutions when a suitable arrangement for repayment or promise to pay
is not feasible because of the borrowers financial situation or unwillingness to
remain in the property. Payment activities on delinquent Mortgage Loans are
monitored to ensure the appropriate application of partial payments where
specific arrangements have been agreed to allow partial payments and to ensure
an appropriate response to situations in which a customer has paid with a check
that is returned for insufficient funds. Payment plans are monitored according
to the plan due dates.
During the default process, if Bank of America becomes aware that the
borrower cannot continue to make regular scheduled payments and escrow
contributions, the loan will be deemed uncollectible. This may occur due to the
borrower's inability to bear the payment plan or failure to adhere to the
payment plan. Losses may be experienced on a Mortgage Loan during the real
estate owned process if the value of the property at time of liquidation is less
than the sum of the unpaid principal balance and all outstanding advances
(including, but not limited to, the outstanding unpaid principal balance of the
Mortgage Loan, interest advances, escrow advances, uncollected Servicing Fees,
property maintenance fees, attorney fees, and other necessary fees).
Bankruptcy. When a mortgagor files for bankruptcy, Bank of America's options
for recovery are more limited. Bank of America monitors bankruptcy proceedings
and develops appropriate responses based on a variety of factors, including: (i)
the chapter of the Bankruptcy Code under which the mortgagor filed; (ii)
federal, state and local regulations; (iii) determination-of-claim requirements;
(iv) motion requirements; and (v) specific orders issued through the applicable
court. Bank of America utilizes a vendor to receive automated notices on all new
bankruptcy filings. The vendor is either a law firm or retains a law firm from a
pre-approved list of law firms. After validation of the bankruptcy, the loan is
automatically added to the mortgage servicing system's bankruptcy workstation
and the loan is flagged or coded to prevent collection calls and notices. Bank
of America's bankruptcy staff is responsible for the daily monitoring of the
bankruptcy cases, including all customer inquiries, debtor and trustee payment
application, escrow analysis, strict compliance orders, reaffirmation agreements
and compliance with all investor and agency servicing and reporting
requirements.
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The vendor is responsible for filing all proof of claims, reviewing plans,
making objections and filing motions for relief. Bank of America aggressively
monitors the performance of the vendor daily, weekly and monthly via control
reports to ensure that investor/agency requirements are met and that service
levels are maintained.
Foreclosure. Bank of America delegates to a vendor initial responsibility
for activities related to foreclosure. Once Bank of America's collections
department approves a foreclosure, it places a stop on the Mortgage Loan and
refers the matter to the foreclosure vendor. The foreclosure vendor performs the
following services: (a) conducting pre-foreclosure monitoring; (b) retaining and
managing counsel to pursue the foreclosure; (c) conducting property inspections
and taking appropriate actions to preserve the value of the Mortgaged Property;
(d) obtaining broker price opinions; and (e) if applicable, filing damaged
property claims with insurance carriers on foreclosure Mortgage Loans. Bank of
America obtains an inspection of the property for loans that are delinquent
sixty days or more.
Bank of America manages the foreclosure vendor by reviewing monthly
automated performance reports that measure the timeliness and efficiency of the
foreclosure vendor's processing of loans in the foreclosure process.
Payments on Mortgage Loans; Certificate and Custodial Accounts
The Trustee for each series will establish and maintain a separate trust
account in the name of the Trustee (the "Certificate Account"). Each Certificate
Account must be maintained with a depository institution either (i) whose
long-term debt obligations (or, in the case of an institution which is part of a
holding company structure, the long-term debt obligations of the parent holding
company) are, at the time of any deposit, rated in at least one of the two
highest rating categories by the Rating Agency or Rating Agencies rating the
Certificates of the series, or (ii) that is otherwise acceptable to the Rating
Agency or Rating Agencies rating the Certificates of the series and, if one or
more REMIC elections have been made, that would not cause each REMIC to fail to
qualify as a REMIC. To the extent that the portion of funds deposited in the
Certificate Account at any time exceeds the limit of insurance coverage
established by the FDIC, the excess will be subject to loss in the event of the
failure of the depository institution. This insurance coverage will be based on
the number of holders of Certificates, rather than the number of underlying
mortgagors. Holders of the Subordinate Certificates of a series will bear this
loss up to the amount of principal payments on the related Mortgage Loans to
which those holders are entitled.
Pursuant to the applicable Pooling Agreement or the Underlying Servicing
Agreements, if any, for a series, each Servicer will be required to establish
and maintain one or more accounts (collectively, the "Servicer Custodial
Account") into which the Servicer will be required to deposit on a daily basis
amounts received relating to the Mortgage Loans serviced by the Servicer
included in the Trust Estate for a series, as more fully described below. Each
Servicer Custodial Account must be a separate custodial account insured to the
available limits by the FDIC or otherwise acceptable to the applicable Rating
Agencies (an acceptable account, an "Eligible Custodial Account") and other than
in the case of a Servicer Custodial Account established by the Sponsor as
Servicer, will generally be limited to funds held relating to a particular
series. A Servicer Custodial Account established by the Sponsor as Servicer will
serve as a unitary Servicer Custodial Account both for the particular series and
for other series of Certificates as well as other Mortgage Loans serviced by the
Sponsor; provided, however, that commingling of funds will not be permitted at
any time during which the senior long-term unsecured debt rating of the Sponsor
falls below certain levels established by each Rating Agency. Notwithstanding
any commingling of funds, the Sponsor is required to keep records that
accurately reflect the funds on deposit in the Servicer Custodial Account that
have been identified by it as being attributable to funds relating to a
particular series.
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Funds credited to a Servicer Custodial Account may be invested for the
benefit and at the risk of the Servicer in certain investments acceptable to the
Rating Agencies ("Eligible Investments") maturing in general not later than the
business day preceding the next Distribution Date. All losses from investments
of funds in a Servicer Custodial Account are required to be deposited by the
applicable Servicer out of its own funds to the Servicer Custodial Account
immediately as realized.
Each Servicer will be required to remit to the Trustee for deposit to
the Certificate Account for each series of Certificates on the date the
Certificates are issued any amounts representing scheduled payments of principal
and interest on the Mortgage Loans serviced by it due after the applicable
Cut-off Date but received on or prior thereto. Each Servicer will be required to
remit to the Master Servicer for deposit in an Eligible Custodial Account
maintained by the Master Servicer in the name of the Trustee (the "Master
Servicer Custodial Account") or, if there is no Master Servicer, to remit to the
Trustee for deposit in the Certificate Account, the following payments and
collections received or made by it relating to the Mortgage Loans serviced by it
subsequent to the applicable Cut-off Date (other than (a) payments due on or
before the Cut-off Date and (b) amounts held for future distribution):
(i) all payments on account of principal, including prepayments, and
interest;
(ii) all amounts received by the Servicer in connection with the
liquidation of defaulted Mortgage Loans or property acquired relating to
the defaulted Mortgage Loan, whether through foreclosure sale or
otherwise, including payments in connection with defaulted Mortgage
Loans received from the mortgagor other than amounts required to be paid
to the mortgagor pursuant to the terms of the applicable Mortgage Loan
or otherwise pursuant to law ("Liquidation Proceeds") less, to the
extent permitted under the applicable Pooling Agreement or Underlying
Servicing Agreement, the amount of any expenses incurred in connection
with the liquidation of the applicable Mortgage Loans;
(iii) all proceeds received by the Servicer under any title, hazard
or other insurance policy covering any Mortgage Loan, other than
proceeds to be applied to the restoration or repair of the property
subject to the related Mortgage or released to the mortgagor in
accordance with the applicable Pooling Agreement or Underlying Servicing
Agreement;
(iv) all Periodic Advances made by the Servicer;
(v) all amounts withdrawn from Buy-Down Funds or Subsidy Funds, if
any, with respect to the Mortgage Loans, in accordance with the terms of
the applicable agreements;
(vi) all proceeds of any Mortgage Loans or property acquired
relating to the Mortgage Loan purchased or repurchased pursuant to the
Pooling Agreement or the Underlying Servicing Agreement; and
(vii) all other amounts required to be deposited to the Certificate
Account pursuant to the applicable Pooling Agreement or the Underlying
Servicing Agreement.
Notwithstanding the foregoing, each Servicer will be entitled, at its
election, either (a) to withhold and pay itself the applicable Servicing Fee
from any payment or other recovery on account of interest as received and prior
to deposit in the Servicer Custodial Account or (b) to withdraw from the
Servicer Custodial Account the applicable Servicing Fee after the entire payment
or recovery has been deposited.
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Each Servicer is also permitted, from time to time, to make withdrawals from
the applicable Servicer Custodial Account for the following purposes, to the
extent permitted in the applicable Pooling Agreement or Underlying Servicing
Agreement:
(i) to pay to itself, to the extent not previously retained, the
servicing compensation to which it is entitled;
(ii) to reimburse itself for Advances, to the extent of amounts
received on the Mortgage Loan(s) relating to which the Advances were
made (including any amounts received from the Sponsor in connection with
amounts cancelled due to BPP on a Mortgage Loan);
(iii) to reimburse itself for any Nonrecoverable Advance previously
made, to the extent of amounts received on the Mortgage Loans in the
same loan group as the Mortgage Loan(s) relating to which the
Nonrecoverable Advances were made;
(iv) to reimburse itself for expenses covered by insurance policies
from proceeds of those policies;
(v) to pay itself or the Depositor any indemnification payments
described under "The Depositor" and "--The Servicers";
(vi) to pay to the Depositor, itself or the Master Servicer with
respect to each Mortgage Loan or property acquired in respect thereof
that has been repurchased by the Depositor or purchased by it or the
Master Servicer all amounts received after the date of repurchase or
purchase;
(vii) to withdraw from the Servicer Custodial Account any amount
deposited in that account that was not required to be deposited therein;
and
(viii) to clear and terminate the Servicer Custodial Account.
If there is a Master Servicer for a series of Certificates, the Master
Servicer will be permitted by the Pooling Agreement to make withdrawals from the
Master Servicer Custodial Account to the extent described above for a Servicer,
to the extent permitted in the applicable Pooling Agreement. The Master Servicer
or Trustee will be required to deposit in the Certificate Account any Periodic
Advances made by the Master Servicer or Trustee, as applicable, in the event of
a Servicer default not later than the Distribution Date on which the Periodic
Advances are required to be distributed. All other amounts deposited in the
Master Servicer Custodial Account (other than Master Servicing Fees and, to the
extent the Master Servicer is entitled thereto under the applicable Pooling
Agreement, interest on amounts in the Master Servicer Custodial Account) are
required to be remitted by the Master Servicer to the Trustee for deposit in the
Certificate Account not later than the applicable Distribution Date. On each
Distribution Date, the Trustee will withdraw from the Certificate Account and
remit to Certificateholders all amounts constituting the Pool Distribution
Amount for that Distribution Date.
If a Servicer, the Master Servicer or the Trustee deposits in the
Certificate Account for a series any amount not required to be deposited, the
Trustee may at any time withdraw the amount from the Certificate Account for
itself or for remittance to the applicable Servicer or the Master Servicer, as
applicable. Funds on deposit in the Certificate Account may be invested in
Eligible Investments maturing in general not later than the business day
preceding the next Distribution Date (except that if the Eligible Investment is
an obligation of the institution that maintains the Certificate Account, then
the Eligible Investment may mature not later than the next Distribution Date).
In the event that one or more elections has been made to treat the Trust Estate
(or one or more segregated pools of assets therein) with respect to
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a series as one or more REMICs, no Eligible Investments will be sold or disposed
of at a gain prior to maturity unless the Trustee has received an opinion of
counsel or other evidence satisfactory to it that the sale or disposition will
not cause the Trust Estate (or segregated pool of assets) to be subject to the
tax on "prohibited transactions" imposed by Code Section 860F(a)(1), otherwise
subject the Trust Estate (or segregated pool of assets) to tax, or cause any
REMIC to fail to qualify as a REMIC while any Certificates of the series are
outstanding. All income and gain realized from any investment of funds in the
Certificate Account will generally be for the account of the Trustee as
additional compensation and all losses from investments of funds in the
Certificate Account will be deposited by the Trustee out of its own funds to the
Certificate Account immediately as realized.
The Trustee is permitted, from time to time, to make withdrawals from
the Certificate Account for the following purposes, to the extent permitted in
the applicable Pooling Agreement:
(i) to pay itself the applicable Trustee Fee and to pay to the owner
thereof any Fixed Retained Yield;
(ii) to reimburse itself for certain expenses and to pay itself any
amounts representing indemnification, each as described under "The
Pooling Agreement -- The Trustee";
(iii) to pay to itself any interest earned on or investment income
earned with respect to funds in the Certificate Account (all of this
interest or income to be withdrawn not later than the next Distribution
Date);
(iv) to withdraw from the Certificate Account any amount deposited
in that account that was not required to be deposited therein; and
(v) to clear and terminate the Certificate Account.
The Trustee will be authorized to appoint a paying agent (the "Paying
Agent") to make distributions, as agent for the Trustee, to Certificateholders
of a series. If the Paying Agent for a series is not the Trustee for that
series, the Trustee will, on each Distribution Date, deposit in immediately
available funds in an account designated by the Paying Agent the amount required
to be distributed to the Certificateholders on that Distribution Date.
The Trustee will cause any Paying Agent to execute and deliver to the
Trustee an instrument in which the Paying Agent agrees with the Trustee that the
Paying Agent will hold all amounts deposited with it by the Trustee for
distribution to Certificateholders in trust for the benefit of
Certificateholders until the amounts are distributed to Certificateholders or
otherwise disposed of as provided in the applicable Pooling Agreement.
Periodic Advances and Servicing Advances
Generally each Servicer will be required to make (i) an advance prior to
each Distribution Date of an amount equal to the payment of principal and
interest on each Mortgage Loan (net of the related Servicing Fee) which was due
on the related Due Date on the Mortgage Loans and which was delinquent on the
related Determination Date (a "Periodic Advance") and (ii) other advances of
cash ("Servicing Advances" and, collectively with Periodic Advances, "Advances")
to cover (a) delinquent payments of taxes, insurance premiums, and other
escrowed items and (b) rehabilitation expenses and foreclosure costs, including
reasonable attorneys' fees, in either case unless the Servicer has determined
that any subsequent payments on that Mortgage Loan or from the borrower will
ultimately not be available to reimburse it for those amounts.
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Advances by each Servicer will be made from its own funds or funds in the
applicable Servicer Custodial Account that do not constitute a portion of the
applicable Pool Distribution Amount for that Distribution Date. The obligation
to make an Advance with respect to any Mortgage Loan will continue until the
ultimate disposition of the REO Property or Mortgaged Property relating to the
Mortgage Loan unless the Servicer determines, based on its estimation of the
value of the Mortgaged Property in relation to the sum of the unpaid principal
balance of the related Mortgage Loan, accrued interest, the amount of previously
unreimbursed Advances and anticipated disposition expenses, that the advance
would not ultimately be recoverable under any applicable insurance policies,
from proceeds of liquidation of the Mortgage Loan or otherwise. An "REO
Property" is a Mortgaged Property that has been acquired by a Servicer on behalf
of the Trust through foreclosure or grant of a deed in lieu of foreclosure.
The failure of a Servicer to make any required Periodic Advances or
Servicing Advances under an Underlying Servicing Agreement or a Pooling
Agreement constitutes a default for which the Servicer will be subject to
termination. Upon default by a Servicer, the Master Servicer or the Trustee will
be required to make Periodic Advances to the extent necessary to make required
distributions on certain Certificates or certain Servicing Advances, provided
that the Master Servicer or Trustee, as applicable, determines that funds will
ultimately be available to reimburse it from proceeds of the related Mortgaged
Property. In the case of Certificates of any series for which credit enhancement
is provided in the form of a mortgage pool insurance policy, the Depositor may
obtain an endorsement to the mortgage pool insurance policy which obligates the
pool insurer to advance delinquent payments of principal and interest. The pool
insurer would only be obligated under the endorsement to the extent the
mortgagor fails to make his or her payment and the Master Servicer or Trustee
fails to make a required advance.
Any Periodic Advances made by the Servicers, the Master Servicer or Trustee
must be deposited into the applicable Servicer Custodial Account or the
Certificate Account and will be due no later than the business day before the
Distribution Date to which the delinquent payment relates. Advances by the
Servicers, the Master Servicer or Trustee will be reimbursable out of insurance
proceeds or Liquidation Proceeds of, or, except for Servicing Advances, future
payments on, the Mortgage Loans for which the amounts were advanced. If an
Advance made by a Servicer, the Master Servicer or the Trustee later proves, or
is deemed by the Servicer, the Master Servicer or the Trustee, to be
unrecoverable, the Servicer, the Master Servicer or the Trustee will be entitled
to reimbursement from funds in the applicable Servicer Custodial Account or the
Certificate Account prior to the distribution of payments to the
Certificateholders to the extent provided in the Underlying Servicing Agreement
or Pooling Agreement.
Any Periodic Advances made by a Servicer, the Master Servicer or the Trustee
relating to Mortgage Loans included in the Trust Estate for any series are
intended to enable the Trustee to make timely payment of the scheduled
distributions of principal and interest on the Certificates of the series.
However, none of the Master Servicer, the Trustee or any Servicer will insure or
guarantee the Certificates of any series or the Mortgage Loans included in the
Trust Estate for any Certificates.
Collection and Other Servicing Procedures
Each Servicer will be required by the related Underlying Servicing Agreement
or Pooling Agreement to make reasonable efforts to collect all payments called
for under the Mortgage Loans and, consistent with the applicable Underlying
Servicing Agreement or the Pooling Agreement and any applicable agreement
governing any form of credit enhancement, to follow the collection procedures as
it follows for mortgage loans serviced by it that are comparable to the Mortgage
Loans. Consistent with the above, the Servicer may, in its discretion, (i) waive
any prepayment premiums, assumption fee, late payment charge or any other charge
in connection with the prepayment of a Mortgage Loan and (ii) arrange with a
mortgagor a schedule for the liquidation of deficiencies running for not more
than 120 days (or any longer
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period to which the Master Servicer and any applicable pool insurer or primary
mortgage insurer have consented) after the applicable Due Date.
Under each Underlying Servicing Agreement or the Pooling Agreement, each
Servicer, to the extent permitted by law, will establish and maintain one or
more escrow accounts (each account, an "Escrow Account") in which it will be
required to deposit any payments made by mortgagors in advance for taxes,
assessments, primary mortgage (if applicable) and hazard insurance premiums and
other similar items. Withdrawals from the Escrow Account may be made to make
timely payment of taxes, assessments, mortgage and hazard insurance, to refund
to mortgagors amounts determined to be overages, to pay interest to mortgagors
on balances in the Escrow Account, if required, and to clear and terminate the
Escrow Account. Each Servicer will be responsible for the administration of its
Escrow Account. A Servicer will be obligated to advance certain tax and
insurance amounts which are not timely paid by the mortgagors, to the extent
that it determines, in good faith, that they will be recoverable out of
insurance proceeds, liquidation proceeds, or otherwise. Alternatively, in lieu
of establishing a Escrow Account, a Servicer may procure a performance bond or
other form of insurance coverage, in an amount acceptable to the Master Servicer
and each Rating Agency rating the related series of Certificates, covering loss
occasioned by the failure to escrow amounts.
Enforcement of "Due-on-Sale" Clauses; Realization Upon Defaulted Mortgage Loans
With respect to each Mortgage Loan having a fixed interest rate, the
applicable Underlying Servicing Agreement or Pooling Agreement will generally
provide that, when any Mortgaged Property is about to be conveyed by the
mortgagor, the Servicer will, to the extent it has knowledge of the prospective
conveyance, exercise its rights to accelerate the maturity of the Mortgage Loan
under the "due-on-sale" clause contained in the Mortgage Note or Mortgage, if
any, unless (i) it is not exercisable under applicable law, (ii) the exercise
would result in loss of insurance coverage relating to the Mortgage Loan or
(iii) the person to whom the related Mortgaged Property has been conveyed or is
proposed to be conveyed satisfies the terms and conditions contained in the
Mortgage Note and Mortgage related thereto and the consent of the related
mortgagee is not otherwise required as a condition to such transfer. In any case
where such nonenforcement is permitted by the Underlying Servicing Agreement or
Pooling Agreement, the Servicer is authorized to take or enter into an
assumption and modification agreement from or with the person to whom the
Mortgaged Property has been or is about to be conveyed, pursuant to which the
person becomes liable under the Mortgage Note and, unless prohibited by
applicable state law, the mortgagor also remains liable under the Mortgage Note,
provided that the Mortgage Loan will continue to be covered by any pool
insurance policy and any related primary mortgage insurance policy and the
Mortgage Interest Rate relating to the Mortgage Loan and the payment terms shall
remain unchanged. The Servicer will also be authorized, with the prior approval
of the pool insurer and the primary mortgage insurer, if any, to enter into a
substitution of liability agreement with the person to whom the Mortgaged
Property has been or is about to be conveyed, under which the original mortgagor
is released from liability and the person is substituted as mortgagor and
becomes liable under the Mortgage Note.
Each Underlying Servicing Agreement and Pooling Agreement with respect to a
series will require the Servicer or the Master Servicer, as the case may be, to
present claims to the insurer under any insurance policy applicable to the
Mortgage Loans included in the Trust Estate for the series and to take
reasonable steps as are necessary to permit recovery under the insurance
policies relating to defaulted Mortgage Loans, or losses on the Mortgaged
Property securing the Mortgage Loans.
Each Servicer is obligated to realize upon defaulted Mortgage Loans in
accordance with its normal servicing practices, which will conform generally to
those of prudent mortgage lending institutions which service mortgage loans of
the same type in the same jurisdictions. Notwithstanding the foregoing, each
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Servicer is authorized to permit the assumption of a defaulted Mortgage Loan
rather than to foreclose or accept a deed-in-lieu of foreclosure if, in the
Servicer's judgment, the default is unlikely to be cured and the assuming
borrower meets the applicable underwriting guidelines. In connection with any
assumption, the Mortgage Interest Rate and the payment terms of the related
Mortgage Note will not be changed. Each Servicer may also, with the consent of
the Master Servicer, if any, modify the payment terms of Mortgage Loans that are
in default, or as to which default is reasonably foreseeable, that remain in the
Trust Estate rather than foreclose on those Mortgage Loans; provided that no
modification shall forgive principal owing under a Mortgage Loan or permanently
reduce the interest rate on a Mortgage Loan. Further, a Servicer may encourage
the refinancing of defaulted Mortgage Loans, including Mortgage Loans that would
permit creditworthy borrowers to assume the outstanding indebtedness.
In the case of foreclosure or of damage to a Mortgaged Property from an
uninsured cause, the Servicer will not be required to expend its own funds to
foreclose or restore any damaged property, unless it reasonably determines (i)
that the foreclosure or restoration will increase the proceeds to
Certificateholders of the series of liquidation of the Mortgage Loan after
reimbursement to the related Servicer for its expenses and (ii) that its
expenses will be recoverable to it through Liquidation Proceeds or any
applicable insurance policy relating to the Mortgage Loan. In the event that a
Servicer has expended its own funds for foreclosure or to restore damaged
property, it will be entitled to be reimbursed from the applicable Servicer
Custodial Account an amount equal to all costs and expenses incurred by it.
No Servicer will be obligated to foreclose on any Mortgaged Property which
it believes may be contaminated with or affected by hazardous wastes or
hazardous substances. See "Certain Legal Aspects of the Mortgage
Loans--Environmental Considerations." If a Servicer does not foreclose on a
Mortgaged Property, the Certificateholders of the related series may experience
a loss on the related Mortgage Loan. A Servicer will not be liable to the
Certificateholders if it fails to foreclose on a Mortgaged Property which it
believes may be so contaminated or affected, even if the Mortgaged Property is,
in fact, not so contaminated or affected. Conversely, a Servicer will not be
liable to the Certificateholders if, based on its belief that no contamination
or effect exists, the Servicer forecloses on a Mortgaged Property and takes
title to the Mortgaged Property, and thereafter the Mortgaged Property is
determined to be so contaminated or affected.
The Servicer may foreclose against property securing a defaulted Mortgage
Loan either by foreclosure, by sale or by strict foreclosure and in the event a
deficiency judgment is available against the mortgagor or other person (see
"Certain Legal Aspects of the Mortgage Loans--Anti-Deficiency Legislation, the
Bankruptcy Code and Other Limitations on Lenders" for a discussion of the
availability of deficiency judgments), may proceed for the deficiency. It is
anticipated that in most cases the Servicer will not seek deficiency judgments,
and will not be required under the applicable Underlying Servicing Agreement or
Pooling Agreement to seek deficiency judgments. In lieu of foreclosure, each
Servicer may arrange for the sale by the borrower of the Mortgaged Property
related to a defaulted Mortgage Loan to a third party, rather than foreclosing
upon and selling the Mortgaged Property.
With respect to a Trust Estate (or any segregated pool of assets within a
Trust Estate) as to which one or more REMIC elections has been made, if the
Trustee acquires ownership of any Mortgaged Property as a result of a default or
reasonably foreseeable default of any Mortgage Loan secured by the Mortgaged
Property, the Trustee or Master Servicer will be required to dispose of the
property prior to the close of the third calendar year following the year the
Trust Estate acquired the property (or any shorter period as is provided in the
applicable Underlying Servicing Agreement or Pooling Agreement) unless the
Trustee (a) receives an opinion of counsel to the effect that the holding of the
Mortgaged Property by the Trust Estate will not cause the Trust Estate to be
subject to the tax on "prohibited transactions" imposed by Code Section
860F(a)(1) or cause any REMIC to fail to qualify as a REMIC or (b) applies for
and is granted an extension of the applicable period in the manner contemplated
by Code Section 856(e)(3). The
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Servicer also will be required to administer the Mortgaged Property in a manner
which does not cause the Mortgaged Property to fail to qualify as "foreclosure
property" within the meaning of Code Section 860G(a)(8) or result in the receipt
by the Trust Estate of any "net income from foreclosure property" within the
meaning of Code Section 860G(c)(2), respectively. In general, this would
preclude the holding of the Mortgaged Property by a party acting as a dealer in
property or the receipt of rental income based on the profits of the lessee of
the property. See "Federal Income Tax Consequences."
Insurance Policies
Each Servicer will generally be required to cause to be maintained for each
Mortgage Loan (other than Mortgage Loans secured by cooperative shares and
condominium apartments) a standard hazard insurance policy issued by a generally
acceptable insurer insuring the improvements on the Mortgaged Property
underlying each Mortgage Loan against loss by fire, with extended coverage (a
"Standard Hazard Insurance Policy"). A Standard Hazard Insurance Policy will be
required to be in an amount at least equal to the lesser of 100% of the
insurable value of the improvements on the Mortgaged Property or the principal
balance of the Mortgage Loan; provided, however, that the amount may not be less
than the minimum amount required to avoid the application of any coinsurance
clause. Each Servicer will also generally maintain on property acquired upon
foreclosure, or deed in lieu of foreclosure, of any Mortgage Loan, a Standard
Hazard Insurance Policy in an amount that is at least equal to the lesser of
100% of the insurable value of the improvements which are a part of the property
plus liability insurance and, if applicable, flood insurance as described below.
Any amounts collected under any of these insurance policies (other than amounts
to be applied to the restoration or repair of the Mortgaged Property or released
to the borrower in accordance with normal servicing procedures) will be
deposited in the Servicer Custodial Account for remittance to the Certificate
Account by the applicable Servicer.
The Standard Hazard Insurance Policies covering the Mortgage Loans generally
will cover physical damage to, or destruction of, the improvements on the
Mortgaged Property caused by fire, lightning, explosion, smoke, windstorm, hail,
riot, strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Because the Standard Hazard Insurance Policies
relating to the Mortgage Loans will be underwritten by different insurers and
will cover Mortgaged Properties located in various states, the policies will not
contain identical terms and conditions. The most significant terms of these
policies, however, generally will be determined by state law and generally will
be similar. Most of these policies typically will not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, hazardous wastes or hazardous substances, theft and, in
certain cases, vandalism. The foregoing list is merely indicative of certain
kinds of uninsured risks and is not all-inclusive.
In general, if the improvements on a Mortgaged Property are located in an
area identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards (and flood insurance has been made
available) each Underlying Servicing Agreement or the Pooling Agreement, as
applicable, will require the related Servicer to cause to be maintained a flood
insurance policy meeting the requirements of the current guidelines of the
Federal Insurance Administration and the requirements of Fannie Mae or Freddie
Mac with a generally acceptable insurance carrier.
Each Servicer may maintain a blanket policy insuring against hazard losses
on all of the Mortgaged Properties in lieu of maintaining the required Standard
Hazard Insurance Policies and may maintain a blanket policy insuring against
special hazards in lieu of maintaining any required flood insurance. Each
Servicer will be liable for the amount of any deductible under a blanket policy
if that amount would have been covered by a required Standard Hazard Insurance
Policy or flood insurance, had it been maintained.
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Any losses incurred relating to Mortgage Loans due to uninsured risks
(including earthquakes, mudflows, floods and hazardous wastes or hazardous
substances) or insufficient hazard insurance proceeds will adversely affect
distributions to the Certificateholders.
Fixed Retained Yield, Servicing Compensation and Payment of Expenses
Fixed Retained Yield for any Mortgage Loan is that portion, if any, of
interest at the Mortgage Interest Rate that is not included in the related Trust
Estate and is retained by the Depositor or the Sponsor. The prospectus
supplement for a series will describe the Fixed Retained Yield, if any, relating
to the Mortgage Loans of the series. Any Fixed Retained Yield will be
established on a loan-by-loan basis and will be specified in the schedule of
Mortgage Loans for a series. If the Sponsor or the Depositor retains Fixed
Retained Yield, the Sponsor, if it is the Servicer, may deduct the Fixed
Retained Yield from mortgagor payments as received and retain or remit the Fixed
Retained Yield to the Depositor, as the case may be. Otherwise, the Servicer
will deposit the Fixed Retained Yield in the Master Servicer Custodial Account
or Certificate Account and the Master Servicer or the Trustee will withdraw and
remit the Fixed Retained Yield to the owner thereof. Notwithstanding the
foregoing, with respect to any payment of interest received relating to a
Mortgage Loan (whether paid by the mortgagor or received as Liquidation
Proceeds, insurance proceeds or otherwise) which is less than the full amount of
interest then due with respect to the Mortgage Loan, the owner of the Fixed
Retained Yield for the Mortgage Loan will bear a ratable share of the interest
shortfall.
For each series of Certificates, each Servicer will be entitled to be paid
the Servicing Fee on the related Mortgage Loans serviced by it until termination
of the applicable Underlying Servicing Agreement or the Pooling Agreement. A
Servicer, at its election, will pay itself the Servicing Fee for a series
relating to each Mortgage Loan by (a) withholding the Servicing Fee from any
scheduled payment of interest prior to deposit of the payment in the Servicer
Custodial Account for the series or (b) withdrawing the Servicing Fee from the
Servicer Custodial Account after the entire interest payment has been deposited.
A Servicer may also pay itself out of the Liquidation Proceeds or other
recoveries of a Mortgage Loan, or withdraw from the Servicer Custodial Account.
The Servicing Fee or the range of Servicing Fees relating to the Mortgage Loans
underlying the Certificates of a series will be set forth in an expense table in
the applicable prospectus supplement. Additional servicing compensation in the
form of prepayment premiums, assumption fees, late payment charges, Foreclosure
Profits or otherwise will be retained by the Servicers.
Each Servicer will pay all expenses incurred in connection with the
servicing of the Mortgage Loans serviced by it underlying a series, including,
without limitation, payment of the Standard Hazard Insurance Policy premiums.
The Servicer will be entitled, in certain circumstances, to reimbursement from
the Servicer Custodial Account of Periodic Advances, of Servicing Advances made
by it to pay taxes, insurance premiums and similar items with respect to any
Mortgaged Property or for expenditures incurred by it in connection with the
restoration, foreclosure or liquidation of any Mortgaged Property (to the extent
of Liquidation Proceeds or insurance policy proceeds in respect of the related
Mortgaged Property) and of certain losses against which it is indemnified by the
Trust Estate as described above under "-- The Servicers."
As set forth in the preceding paragraph, a Servicer may be entitled to
reimbursement for certain expenses incurred by it, and payment of additional
fees for certain extraordinary services rendered by it (provided that those fees
do not exceed those which would be charged by third parties for similar
services) in connection with the liquidation of defaulted Mortgage Loans and
related Mortgaged Properties. In the event that claims are either not made or
are not fully paid from any applicable form of credit enhancement, the related
Trust Estate will suffer a loss to the extent that Liquidation Proceeds, after
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reimbursement of the Servicing Fee and the expenses of the Servicer, are less
than the principal balance of the related Mortgage Loan.
Evidence as to Compliance
Each Servicer and Master Servicer will deliver annually to the Trustee or
Master Servicer, as applicable, on or before the date specified in the
applicable Pooling Agreement or Underlying Servicing Agreement, an officer's
certificate stating that (i) a review of the Servicer's or Master Servicer's
activities during the preceding calendar year and of performance under the
applicable Pooling Agreement or Underlying Servicing Agreement has been made
under the supervision of the officer, and (ii) to the best of the officer's
knowledge, based on the review, the Servicer or Master Servicer has fulfilled
all its obligations under the applicable Pooling Agreement or Underlying
Servicing Agreement in all material respects throughout the year, or, if there
has been a failure to fulfill any of these obligations in any material respect,
specifying each failure known to the officer and the nature and status of the
failure.
In addition, each party that participates in the servicing and
administration of more than 5% of the Mortgage Loans and other assets comprising
a Trust will deliver annually to the Depositor and the Trustee, a report (an
"Assessment of Compliance") that assesses compliance by that party with the
servicing criteria set forth in Item 1122(d) of Regulation AB (17 CFR 229.1122)
and that contains the following:
o a statement of the party's responsibility for assessing compliance with
the servicing criteria applicable to it;
o a statement that the party used the criteria in Item 1122(d) of
Regulation AB to assess compliance with the applicable servicing
criteria;
o the party's assessment of compliance with the applicable servicing
criteria during and as of the end of the prior calendar year, setting
forth any material instance of noncompliance identified by the party;
and
o a statement that a registered public accounting firm has issued an
Attestation Report on the party's Assessment of Compliance with the
applicable servicing criteria during and as of the end of the prior
calendar year.
Each party which is required to deliver an Assessment of Compliance will
also be required to simultaneously deliver a report (an "Attestation Report") of
a registered public accounting firm, prepared in accordance with the standards
for attestation engagements issued or adopted by the Public Company Accounting
Oversight Board, that expresses an opinion, or states that an opinion cannot be
expressed, concerning the party's assessment of compliance with the applicable
servicing criteria.
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THE POOLING AGREEMENT
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Assignment of Mortgage Loans
In connection with the transfer and assignment of the Mortgage Loans to the
Trust, the Depositor will deliver or cause to be delivered to the Trustee, or a
custodian for the Trustee, among other things, with respect to each Mortgage
Loan (collectively, the "Mortgage File"):
o the original Mortgage Note endorsed without recourse in blank or to the
order of the Trustee (or its nominee) or an affidavit signed by an
officer of the Sponsor certifying that the related original Mortgage
Note has been lost;
o the original or a certified copy of the Mortgage with evidence of
recording indicated thereon (except for any Mortgage not returned from
the public recording office, which will be delivered to the Trustee as
soon as the same is available to the Depositor);
o except as described below, an assignment in recordable form of the
Mortgage (or a copy, if the assignment has been submitted for
recording); and
o if applicable, any riders or modifications to the Mortgage Note and
Mortgage.
Assignments of the Mortgage Loans to the Trustee (or its nominee) will not
be recorded except in states where recordation is required by any Rating Agency
rating the Certificates of a series to obtain the initial ratings on the
Certificates set forth in the applicable prospectus supplement. In addition to
the foregoing, assignments of the Mortgage Loans will not be recorded (i) in
states where, in the opinion of counsel acceptable to the Trustee, recording is
not required to protect the Trustee's interest in the Mortgage Loans against the
claim of any subsequent transferee or any successor to or creditor of the
Depositor or the Sponsor, or (ii) in the case of any Mortgage which has been
recorded in the name of Mortgage Electronic Registration Systems, Inc. ("MERS")
or its designee. If a Mortgage has been recorded in the name of MERS or its
designee, no mortgage assignment in favor of the Trustee will be required to be
prepared or delivered. Instead, the applicable Servicer will be required to take
all actions as are necessary to cause the Trust to be shown as the owner of the
related Mortgage Loan on the records of MERS for purposes of the system of
recording transfers of beneficial ownership of mortgages maintained by MERS. The
Trustee will promptly review each Mortgage File after the Closing Date (or
promptly after the Trustee's receipt of any document permitted to be delivered
after the Closing Date) to determine if any of the foregoing documents is
missing.
Unless another entity is named as custodian in the applicable prospectus
supplement, the Trustee will act as custodian of the Mortgage Files pursuant to
the Pooling Agreement. In that capacity, the Trustee will be responsible to hold
and safeguard the Mortgage Notes and other contents of the Mortgage Files on
behalf of the Certificateholders.
If no separate custodian is initially designated, the Trustee may be
authorized to appoint a custodian to maintain possession of the documents
relating to the Mortgage Loans and to conduct the review of the documents
described above. Any custodian so appointed will keep and review the documents
as the Trustee's agent under a custodial agreement.
Repurchases of Mortgage Loans
If any portion of the Mortgage File is not delivered to the Trustee or if a
Mortgage Loan does not conform to the representations made by the Depositor in
the Pooling Agreement, as described under "The
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Mortgage Loan Programs -- Representations and Warranties," and the Depositor
does not cure this omission or defect within 90 days, the Depositor will be
required on the Distribution Date in the month following the expiration of the
90-day period either (i) to repurchase the related Mortgage Loan (or any
property acquired relating to the Mortgage Loan) at a price (the "Purchase
Price") equal to 100% of the unpaid principal balance of the Mortgage Loan plus
accrued and unpaid interest on its principal balance at its Mortgage Interest
Rate or (ii) to substitute an Eligible Substitute Mortgage Loan; provided
however, that substitution generally is only allowed within two years of the
Closing Date. Any Mortgage Loan repurchased or subject to a substitution as
described in this paragraph is referred to as a "Deleted Mortgage Loan."
Generally, unless a representation is breached in a material respect, the
Depositor is not required to repurchase, cure or substitute for the affected
Mortgage Loan. In the case of the breach of the representation made by the
Depositor that a Mortgage Loan at the time of its origination complied with any
applicable federal, state or local predatory or abusive lending laws, the
Depositor will be required to pay any costs or damages incurred by the Trust as
a result of the violation of those laws.
An "Eligible Substitute Mortgage Loan" generally will:
o have a principal balance, after deduction of all monthly payments due in
the month of substitution, not in excess of, and not more than 10% less
than, the Stated Principal Balance of the Deleted Mortgage Loan;
o have a Net Mortgage Interest Rate equal to that of the Deleted Mortgage
Loan;
o have a Loan-to-Value Ratio not higher than that of the Deleted Mortgage
Loan;
o if an adjustable-rate Mortgage Loan, have a Gross Margin equal to that
of the Deleted Mortgage Loan;
o if an adjustable-rate Mortgage Loan, have a periodic cap and rate
ceiling equal to that of the Deleted Mortgage Loan;
o if an adjustable-rate Mortgage Loan, have the same index and frequency
of mortgage interest rate adjustment as the Deleted Mortgage Loan;
o have a remaining term to maturity not greater than (and not more than
one year less than) that of the Deleted Mortgage Loan; and
o comply with all of the representations and warranties in the Pooling
Agreement as of the date of substitution.
"Stated Principal Balance" means for any Mortgage Loan and Due Date, the
unpaid principal balance of that Mortgage Loan at that Due Date, as specified in
the amortization schedule (before any adjustment to that amortization schedule
due to any moratorium or similar waiver or grace period), after giving effect to
any previous partial principal prepayments and Liquidation Proceeds received, to
the payment of principal due on that Due Date and to any reduction of the
principal balance due to a bankruptcy proceeding but without taking into account
any delinquency in payment by the related mortgagor.
In connection with any substitution of a Deleted Mortgage Loan, the
Depositor will be required to deposit the amount of any shortfall to the
Servicer Custodial Account (any shortfall, a "Substitution Adjustment Amount");
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This cure, repurchase or substitution obligation constitutes the sole remedy
available to Certificateholders or the Trustee for omission of, or a material
defect in, a Mortgage Loan document or a material breach of any of the
representations made by the Depositor in the Pooling Agreement.
Special Servicing Agreements
The Pooling Agreement will permit the Servicer to enter into a special
servicing agreement with an unaffiliated holder of a class of Subordinate
Certificates or of a class of securities representing interests in one or more
classes of Subordinate Certificates alone or together with other subordinated
mortgage pass-through certificates. Pursuant to a special servicing agreement,
this holder may instruct the Servicer to commence or delay foreclosure
proceedings with respect to delinquent Mortgage Loans. In the event that there
is a Master Servicer for a series, the Pooling Agreement will permit the Master
Servicer to enter into an agreement with those holders which will allow the
Master Servicer to instruct the Servicers, to the extent provided in the
applicable Underlying Servicing Agreements, to commence or delay foreclosure
proceedings with respect to delinquent Mortgage Loans.
Reports to Certificateholders
The Trustee will prepare and include with each distribution to
Certificateholders of record of each series a statement setting forth, among
other things, the following information, if applicable:
(i) the amount of the distribution allocable to principal of the
related Mortgage Loans, separately identifying the aggregate amount of
any principal prepayments and Liquidation Proceeds and the amount of the
distribution allocable to interest on the related Mortgage Loans;
(ii) if the distribution to Certificateholders is less than the full
amount that would be distributable if there were sufficient funds
available, the amount of the shortfall and the allocation of the
shortfall between principal and interest;
(iii) the Class Balance of each Class of Certificates after giving
effect to the distribution of principal on the Distribution Date;
(iv) the amount of servicing compensation with respect to the
related Trust Estate and any other customary information as is required
to enable Certificateholders to prepare their tax returns;
(v) the amount by which the Servicing Fee or Master Servicing Fee,
as applicable, for the related Distribution Date has been reduced by
interest shortfalls due to prepayments;
(vi) the amount of Periodic Advances included in the distribution on
the Distribution Date and the aggregate amount of Periodic Advances
outstanding as of the close of business on the Distribution Date;
(vii) the amount of Servicing Advances made since the previous
Distribution Date, the aggregate amount of Servicing Advances
outstanding as of the close of business on the Distribution Date and the
amount of Servicing Advances reimbursed since the previous Distribution
Date;
(viii) to each holder of a Certificate entitled to the benefits of
payments under any form of credit enhancement:
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(a) the amounts so distributed under the form of credit
enhancement on the applicable Distribution Date; and
(b) the amount of coverage remaining under the form of credit
enhancement, after giving effect to any payments thereunder and
other amounts charged thereto on the Distribution Date;
(ix) any payments made or accrued relating to credit enhancement
provided by a party, identifying the general purpose of the payments and
the party receiving the payments;
(x) the Pass-Through Rate (if any) for each Class of Certificates;
(xi) for any Mortgage Loan that became an REO Property during the
preceding calendar month, the loan number and Stated Principal Balance
of the Mortgage Loan as of the close of business on the Determination
Date preceding the Distribution Date and the date of acquisition
thereof;
(xii) the total number and principal balance of any REO Properties
(and market value, if available) as of the close of business on the
Determination Date preceding the Distribution Date;
(xiii) the aggregate amount of Realized Losses incurred during the
preceding calendar month;
(xiv) any expenses or indemnification amounts paid by the related
Trust Estate, the specific purpose of each payment and the parties to
whom these payments are made;
(xv) the number and total principal balance of the Mortgage Loans,
the weighted average mortgage interest rate and weighted average
remaining term to maturity of the Mortgage Loans and cumulative
prepayment amounts;
(xvi) any material modifications, extensions or waivers to Mortgage
Loan terms, fees, penalties or payments since the previous Distribution
Date or cumulatively since the Closing Date;
(xvii) unless such information is set forth in the Form 10-D
relating to such Distribution Date and provided the Trustee is
reasonably able to include such information on the statement, any
material breaches of representations and warranties relating to the
Mortgage Loans or material breaches of transaction covenants;
(xviii) the number and aggregate principal balance of any Mortgage
Loans repurchased by the Depositor from the related Trust Estate since
the previous Distribution Date;
(xix) the number and aggregate principal amounts of Mortgage Loans
(A) delinquent (exclusive of Mortgage Loans in foreclosure or
bankruptcy), (B) in foreclosure, as of the close of business on the last
day of the calendar month preceding the Distribution Date and (C) in
bankruptcy as of the close of business on the last day of the calendar
month preceding the Distribution Date; and
(xx) whether any exchanges of Exchangeable REMIC Certificates and
Exchangeable Certificates have taken place since the preceding
Distribution Date and, if applicable, the class designations, Class
Balances or notional amounts, Pass-Through Rates, and any interest
and/or principal paid, including any shortfalls allocated, with respect
to any Classes of Certificates that were received by Certificateholders
as a result of such exchange.
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In addition, the Trustee will include in the statement any information
specific to the Classes of Certificates offered by the applicable prospectus
supplement and, within a reasonable period of time after the end of each
calendar year, the Trustee will furnish a report to each Certificateholder of
record at any time during the calendar year the information as required by the
Code and applicable regulations thereunder to enable Certificateholders to
prepare their tax returns. In the event that one or more elections has been made
to treat the Trust Estate (or one or more segregated pools of assets therein) as
one or more REMICs, the Trustee will be required to prepare and sign the federal
and applicable state and local income tax returns of each REMIC. See "Federal
Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Administrative Matters."
List of Certificateholders
The Pooling Agreement for each series will require the Trustee to provide
access to the most current list of names and addresses of Certificateholders of
the series to any group of three or more Certificateholders who advise the
Trustee in writing that they desire to communicate with other Certificateholders
with respect to their rights under the Pooling Agreement or under the
Certificates.
Events of Default
Events of Default under the Pooling Agreement for each series include (i)
any failure by the Master Servicer or, if a Servicer has executed the Pooling
Agreement, that Servicer, to deposit amounts in the Master Servicer Custodial
Account or Servicer Custodial Account, as applicable, in the amount and manner
provided in the Pooling Agreement so as to enable the Trustee to distribute to
Certificateholders any payment required to be made under the terms of the
Certificates of a series and the Pooling Agreement (other than Periodic
Advances) which continues unremedied for a period of five days; (ii) any failure
by the Master Servicer or a Servicer that has executed the Pooling Agreement
duly to observe or perform in any material respect any other of its covenants or
agreements in the Pooling Agreement which continues unremedied for 30 days after
the giving of written notice of the failure to the Master Servicer or Servicer
by the Trustee, or to the Master Servicer or the Servicer and the Trustee by the
holders of Certificates of the series having voting rights allocated to the
Certificates ("Voting Rights") aggregating not less than 25% of the Voting
Rights allocated to all Certificates for the series; (iii) certain events of
insolvency, readjustment of debt, marshaling of assets and liabilities or
similar proceedings and certain action by the Master Servicer or a Servicer that
has executed the Pooling Agreement indicating its insolvency, reorganization or
inability to pay its obligations; and (iv) the failure of the Master Servicer or
a Servicer to remit any Periodic Advance required to be remitted by it which
failure continues unremedied at 3:00 p.m. on the related Distribution Date.
Rights Upon Event of Default
So long as an Event of Default remains unremedied under the Pooling
Agreement for a series, the Trustee for the series may, or at the direction of
Certificateholders of the series evidencing not less than 51% of the Voting
Rights of all Certificates of the series affected by the Event of Default, will
terminate all of the rights and obligations of the Master Servicer or a Servicer
executing the Pooling Agreement, under the Pooling Agreement and in and to the
Mortgage Loans (other than the Master Servicer's or the Servicer's right to
recovery of the aggregate Servicing Fees or Master Servicing Fees, as
applicable, due prior to the date of termination, and other expenses and amounts
advanced pursuant to the terms of the Pooling Agreement, which rights the Master
Servicer or the Servicer will retain under all circumstances), whereupon the
Trustee will succeed to all the responsibilities, duties and liabilities of the
Master Servicer or the Servicer under the Pooling Agreement and will be entitled
to monthly compensation not to exceed the aggregate fees together with the other
compensation to which the Master Servicer or the Servicer is entitled under the
Pooling Agreement. In the event that the Trustee is unwilling or unable so to
act, it may
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select or petition a court of competent jurisdiction to appoint, a housing and
home finance institution, bank or mortgage servicing institution with a net
worth of at least $10,000,000 to act as successor to the Master Servicer or the
Servicer, under the provisions of the Pooling Agreement; provided however, that
the appointment not adversely affect the rating then assigned to any Class of
Certificates and that until a successor Master Servicer or Servicer is appointed
and has assumed the responsibilities, duties and liabilities of the Master
Servicer or the Servicer under the Pooling Agreement, unless prohibited by law,
the Trustee will continue as the successor to the Master Servicer or the
Servicer as described above. The Trustee or the successor Master Servicer or
Servicer will be entitled to be reimbursed from the predecessor Master Servicer
or Servicer (or the Trust if the predecessor Master Servicer or Servicer is
unable to fulfill its obligations under the Pooling Agreement) for all costs
associated with the transfer of servicing.
During the continuance of any Event of Default under the Pooling Agreement
for a series, the Trustee for that series will have the right to take action to
enforce its rights and remedies and to protect and enforce the rights and
remedies of the Certificateholders of that series, and holders of Certificates
aggregating not less than 25% of the Voting Rights of each Class of Certificates
affected by the Event of Default may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred upon the Trustee. However, the Trustee will not be
under any obligation to pursue any remedy or to exercise any of these trusts or
powers unless the applicable Certificateholders have offered the Trustee
reasonable security or indemnity against the cost, expenses and liabilities
which may be incurred by the Trustee. Also, the Trustee may decline to follow
any of these directions if the Trustee determines that the action or proceeding
so directed may not lawfully be taken or would involve it in personal liability
or be unjustly prejudicial to the non-assenting Certificateholders.
No Certificateholder of a series, solely by virtue of that holder's status
as a Certificateholder, will have any right under the Pooling Agreement for a
series to institute any proceeding with respect to the Pooling Agreement, unless
(i) the holder previously has given to the Trustee for the series written notice
of default and (ii) the holders of Certificates evidencing not less than 25% of
the Voting Interests for each Class of Certificates affected for the series have
made written request upon the Trustee to institute the proceeding in its own
name as Trustee thereunder and have offered to the Trustee reasonable indemnity
and the Trustee for 60 days has neglected or refused to institute any
proceeding.
Amendment
Each Pooling Agreement may be amended by the Depositor, the Servicer(s) (or
the Master Servicer, if applicable) and the Trustee without the consent of the
Certificateholders, (i) to cure any ambiguity or mistake, (ii) to correct or
supplement any provision in the Pooling Agreement that may be inconsistent with
any other provision of the Pooling Agreement or the related prospectus
supplement, (iii) if one or more REMIC elections has been made, to modify,
eliminate or add to any of its provisions to the extent necessary to maintain
the qualification of the Trust Estate (or one or more segregated pools of assets
therein) as one or more REMICs at all times that any Certificates are
outstanding or to avoid or minimize the risk of the imposition of any tax on the
Trust Estate pursuant to the Code that would be a claim against the Trust
Estate, provided that the Trustee has received an opinion of counsel to the
effect that the action is necessary or desirable to maintain qualification as
one or more REMICs or to avoid or minimize the risk of the imposition of any tax
and the action will not, as evidenced by the opinion of counsel, adversely
affect in any material respect the interests of any Certificateholder, (iv) to
change the timing and/or nature of deposits into the Certificate Account,
provided that the change will not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any Certificateholder
and that the change will not adversely affect the then current rating assigned
to any Certificates, as evidenced by a letter from each Rating Agency to that
effect, (v) to reduce the percentage of the unpaid principal
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balance of the Mortgage Loans as of the Cut off Date at which the Depositor or
other party specified in the applicable prospectus supplement will have the
option to purchase all the remaining Mortgage Loans as set forth under
"--Termination; Optional Purchase of Mortgage Loans," provided that the
reduction is considered necessary by the Depositor, as evidenced by an Officer's
Certificate delivered to the Trustee, to preserve the treatment of the transfer
of the Mortgage Loans to the Depositor by the Sponsor or to the Trust by the
Depositor as sale for accounting purposes, or (vi) to make any other provisions
with respect to matters or questions arising under the Pooling Agreement that
are not inconsistent with the provisions of the Pooling Agreement, provided that
the amendment will not, as evidenced by an opinion of counsel, adversely affect
in any material respect the interests of the Certificateholders of the related
series provided that the action will not be considered to adversely affect in
any material respect the interests of the Certificateholders and no opinion of
counsel will be required if each Rating Agency rating the Certificates states in
writing that the action will not result in the downgrading or withdrawal of the
ratings then assigned to the Certificates. The Pooling Agreement may also be
amended by the Depositor, the Servicer(s) (or the Master Servicer, if
applicable) and the Trustee with the consent of the holders of Certificates
evidencing interests aggregating not less than 66 2/3% of the Voting Interests
evidenced by the Certificates of each Class affected thereby, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Pooling Agreement or of modifying in any manner the rights of
the Certificateholders; provided, however, that no amendment may (i) reduce in
any manner the amount of, or delay the timing of, any payments received on or
with respect to Mortgage Loans that are required to be distributed on any
Certificate, without the consent of the holder of the Certificate or (ii) reduce
the aforesaid percentage of Certificates of any Class, the holders of which are
required to consent to the amendment, without the consent of the holders of all
Certificates of the affected Class then outstanding. Notwithstanding the
foregoing, the Trustee will not consent to any amendment if it would subject the
Trust Estate (or any segregated pool of assets therein) to tax or, if one or
more REMIC elections has been made, cause each REMIC to fail to qualify as a
REMIC.
Termination; Optional Purchase of Mortgage Loans
The obligations created by the Pooling Agreement for a series of
Certificates will terminate on the Distribution Date following the final payment
or other liquidation of the last Mortgage Loan in the Trust Estate and the
disposition of all property acquired upon foreclosure of any Mortgage Loan. In
no event, however, will the trust created by the Pooling Agreement continue
beyond the expiration of 21 years from the death of the last survivor of certain
persons named in the Pooling Agreement. For each series of Certificates, the
Trustee will give written notice of termination of the Pooling Agreement to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at an office or agency appointed by the
Depositor and specified in the notice of termination. The termination of the
Trust is required to be effected in a manner consistent with applicable federal
income tax regulations and the REMIC status of any REMIC.
In addition, the Depositor or another party specified in the applicable
prospectus supplement (which may be a Certificateholder) will have the option to
purchase all remaining Mortgage Loans and other assets in the Trust Estate (or
one or more groups of Mortgage Loans and other assets, if specified in the
applicable prospectus supplement) when the aggregate Stated Principal Balance of
the Mortgage Loans as of the Distribution Date on which the purchase proceeds
are to be distributed is less than 10% of the aggregate unpaid principal balance
of the Mortgage Loans as of the Cut-off Date or a lower percentage specified in
the applicable prospectus supplement. This percentage may be reduced by amending
to the Pooling Agreement, without Certificateholder consent, if the reduction is
considered necessary by the Depositor, as evidenced by an officer's certificate
delivered to the Trustee, to preserve the treatment of the transfer of the
Mortgage Loans to the Depositor by the Sponsor or to the Trust by the Depositor
as a sale for accounting purposes. The purchase price will generally be equal to
the sum of (a) the unpaid principal balances of the Mortgage Loans in the
applicable loan group or groups and (b) the fair market
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value of any related REO Properties held by the Trust together with the amount
of any unpaid interest shortfalls on the related Certificates and one month's
interest on the unpaid principal balance of each related Mortgage Loan. However,
for so long as the Depositor is subject to regulation by the OCC, the FDIC, the
Federal Reserve or the Office of Thrift Supervision ("OTS", the Depositor may
exercise its purchase option only if the aggregate fair market value of the
Mortgage Loans and REO Properties to be purchased is greater than or equal to
the purchase price described in the preceding sentence.
Distributions in respect of an optional purchase described above will be
paid to Certificateholders (or in the case of the optional purchase of one or
more, but less than all, groups of Mortgage Loans, to Certificateholders
entitled to distributions from that group or groups) in order of their priority
of distribution as described in the applicable prospectus supplement. The
proceeds from an optional purchase may not be sufficient to distribute the full
amount to which each Class of Certificates is entitled if the purchase price is
based in part on the fair market value of the REO Property and this fair market
value is less than the unpaid principal balance of the related Mortgage Loan.
The Trustee
The trustee under each Pooling Agreement (the "Trustee") will be named in
the applicable prospectus supplement. The commercial bank or trust company
serving as Trustee may have normal banking relationships with the Depositor or
any of its affiliates.
The Trustee generally will be responsible under each Pooling Agreement for
providing general administrative services for the Trust Estate for any series,
including, among other things, (i) establishing and maintaining the Certificate
Account; (ii) calculation of the amounts payable to Certificateholders on each
Distribution Date; (iii) making distributions to Certificateholders; (iv)
preparation of federal and applicable state and local tax and information
returns; (v) preparation of reports, if any, required under the Securities
Exchange Act of 1934, as amended; (vi) maintaining any mortgage pool insurance
policy, mortgagor bankruptcy bond, special hazard insurance policy or other form
of credit enhancement that may be required with respect to any series; and (vii)
making Periodic Advances on the Mortgage Loans to the limited extent described
under "Servicing of the Mortgage Loans--Periodic Advances and Servicing
Advances," if those amounts are not advanced by a Servicer or the Master
Servicer.
The Trustee and any director, officer, employee or agent of the Trustee
shall be entitled to indemnification by the Trust Estate and held harmless
against any loss, liability or expense (including reasonable attorney's fees)
(a) incurred in connection with any claim or legal action relating to (i) the
Pooling Agreement, (ii) the Certificates, or (iii) the performance of any of the
Trustee's duties under the Pooling Agreement, unless the loss, liability or
expense was incurred by reason of willful misfeasance, bad faith or gross
negligence in the performance of any of the Trustee's duties under the Pooling
Agreement, (b) resulting from any tax or information return which was prepared
by, or should have been prepared by, the applicable Servicer or Master Servicer
and (c) arising out of the transfer of any Certificate not in compliance with
ERISA.
The Trustee generally shall not be entitled to payment or reimbursement for
any routine ongoing expenses incurred by it in the ordinary course of its duties
as Trustee under the Pooling Agreement or for any other expenses. If, however,
one or more REMIC elections has been made, the expense is unanticipated and did
not arise from the Trustee's gross negligence, bad faith or willful misconduct,
the Trustee shall be entitled to reimbursement from the Trust Estate for all
reasonable expenses, disbursements and advances incurred or made it in
accordance with any of the provisions of the Pooling Agreement to the extent
permitted by Treasury regulations Section 1.860G-1(b)(3)(ii), which allows
reimbursement for "unanticipated expenses."
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The Trustee may resign at any time, in which event the Master Servicer or,
if there is no Master Servicer, the Servicer(s) will be obligated to appoint a
successor trustee. The Master Servicer or, if there is no Master Servicer, the
Servicer(s) may also remove the Trustee if the Trustee ceases to be eligible to
act as Trustee under the Pooling Agreement, is incapable of acting or if the
Trustee becomes insolvent. Upon becoming aware of these circumstances, the
Master Servicer or, if there is no Master Servicer, the Servicer(s) will become
obligated to appoint a successor trustee. The Trustee may also be removed at any
time by the holders of Certificates evidencing not less than 50% of the Voting
Rights in the Trust Estate, except that any Certificate registered in the name
of the Depositor or any affiliate thereof will not be taken into account in
determining whether the requisite Voting Rights in the Trust Estate necessary to
effect this removal have been obtained. Any resignation and removal of the
Trustee, and the appointment of a successor trustee, will not become effective
until acceptance of the appointment by the successor trustee. The Trustee, and
any successor trustee, must be (a) an institution the deposits of which are
fully insured by the FDIC and (b) a corporation or banking association organized
and doing business under the laws of the United States of America or of any
State, authorized under such laws to exercise corporate trust powers, having a
combined capital and surplus of not less than $50,000,000 and subject to
supervision or examination by Federal or State authority and (c) with respect to
every successor trustee, either an institution (i) the long term unsecured debt
obligations meet certain minimum ratings of the applicable Rating Agencies or
(ii) whose serving as Trustee would not result in the lowering of the ratings
originally assigned to any Class of Certificates.
Any costs associated with the appointment of a successor trustee are
required to be paid by the predecessor trustee and, if not paid, will be
reimbursed to the person incurring such costs from the assets of the related
Trust. Notwithstanding the foregoing, if the predecessor trustee has been
removed by a vote of the holders of the Certificates as provided in the
paragraph above, any costs associated with the appointment of a successor
trustee will be reimbursed to the party incurring such costs from the assets of
the related Trust.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
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The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because these legal aspects are
governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete, to reflect the laws of any particular
state or to encompass the laws of all states in which the security for the
Mortgage Loans is situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
General
The Mortgage Loans will be secured by either first mortgages, first deeds of
trust or similar security devices creating a first lien, depending upon the
prevailing practice in the state in which the underlying property is located. A
mortgage creates a lien upon the real property described in the mortgage. There
are two parties to a mortgage: the mortgagor, who is the borrower (or, in the
case of a Mortgage Loan secured by a property that has been conveyed to an inter
vivos revocable trust, the settlor of the trust); and the mortgagee, who is the
lender. In a mortgage instrument state, the mortgagor delivers to the mortgagee
a note or bond evidencing the loan and the mortgage. Although a deed of trust is
similar to a mortgage, a deed of trust has three parties: a borrower called the
trustor (similar to a mortgagor), a lender called the beneficiary (similar to a
mortgagee), and a third-party grantee called the trustee. Under a deed of trust,
the borrower grants the property, irrevocably until the debt is paid, in trust,
generally with a power of sale, to the trustee to secure payment of the loan.
The trustee's authority under a deed of trust and the mortgagee's authority
under a mortgage are governed by the express provisions of the deed of trust or
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mortgage, applicable law, and, in some cases, with respect to the deed of trust,
the directions of the beneficiary.
Condominiums
Certain of the Mortgage Loans may be loans secured by condominium units. The
condominium building may be a multi-unit building or buildings, or a group of
buildings whether or not attached to each other, located on property subject to
condominium ownership. Condominium ownership is a form of ownership of real
property as to which each owner is entitled to the exclusive ownership and
possession of his or her individual condominium unit. The owner also owns a
proportionate undivided interest in all parts of the condominium building (other
than the other individual condominium units) and all areas or facilities, if
any, for the common use of the condominium units. The condominium unit owners
appoint or elect the condominium association to govern the affairs of the
condominium.
Cooperatives
Certain of the Mortgage Loans may be cooperative loans. The Cooperative
either owns all the real property that comprises the project, including the land
and the apartment building comprised of separate dwelling units and common areas
or leases the land generally by a long term ground lease and owns the apartment
building. The Cooperative is directly responsible for project management and, in
most cases, payment of real estate taxes and hazard and liability insurance. If
there is a blanket mortgage on the property and/or underlying land, as is
generally the case, the Cooperative, as project mortgagor, is also responsible
for meeting these mortgage obligations. Ordinarily, the Cooperative incurs a
blanket mortgage in connection with the construction or purchase of the
Cooperative's apartment building. The interest of the occupants under
proprietary leases or occupancy agreements to which the Cooperative is a party
are generally subordinate to the interest of the holder of the blanket mortgage
in that building.
The Cooperative is owned by tenant stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant stockholder's pro rata share
of the Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is financed through a
cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement, and typically a
financing statement covering the proprietary lease or occupancy agreement and
the cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares.
See Risk Factors--Collateral Securing Cooperative Loans May Diminish in
Value" in this prospectus.
Foreclosure
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property.
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Delays in completion of the foreclosure occasionally may result from
difficulties in locating necessary parties defendant. When the mortgagee's right
of foreclosure is contested, the legal proceedings necessary to resolve the
issue can be time-consuming. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by non-judicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property to a third party upon any default by the
borrower under the terms of the note or deed of trust. In certain states,
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other individual
having an interest of record in the real property, including any junior
lienholders. If the deed of trust is not reinstated within any applicable cure
period, a notice of sale must be posted in a public place and, in most states,
published for a specified period of time in one or more newspapers. In addition,
some state laws require that a copy of the notice of sale be posted on the
property and sent to all parties having an interest of record in the property.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
receiver for an amount equal to the unpaid principal amount of the note, accrued
and unpaid interest and the expenses of foreclosure. Thereafter, subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance and making repairs at its own expense as are
necessary to render the property suitable for sale. The lender commonly will
obtain the services of a real estate broker and pay the broker a commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of mortgage
insurance proceeds, if any, or by judicial action against the borrower for the
deficiency, if a deficiency action is permitted by law. See "--Anti-Deficiency
Legislation, the Bankruptcy Code and Other Limitations on Lenders" below.
Foreclosure on Shares of Cooperatives
The cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and by-laws, as well as
in the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by the tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by the
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to
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terminate the lease or agreement in the event an obligor fails to make payments
or defaults in the performance of covenants required thereunder. Typically, the
lender and the Cooperative enter into a recognition agreement which establishes
the rights and obligations of both parties in the event of a default by the
tenant-stockholder on its obligations under the proprietary lease or occupancy
agreement. A default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate the lease or
agreement until the lender has been provided an opportunity to cure the default.
The recognition agreement typically provides that if the proprietary lease or
occupancy agreement is terminated, the Cooperative will recognize the lender's
lien against proceeds from a sale of the cooperative apartment, subject,
however, to the Cooperative's right to sums due under the proprietary lease or
occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited by the agreement in any rights it may have to dispossess the
tenant-stockholders.
Foreclosure on the cooperative shares is accomplished by a sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code (the
"UCC") and the security agreement relating to those shares. Article 9 of the UCC
requires that a sale be conducted in a "commercially reasonable" manner. Whether
a foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to the
usual practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "--Anti-Deficiency Legislation,
the Bankruptcy Code and Other Limitations on Lenders" below.
Leaseholds
Mortgage Loans may be secured by a mortgage on a ground lease. Leasehold
mortgages are subject to certain considerations not associated with mortgage
loans secured by the fee estate of the mortgagor. The most significant of these
consideration is that the ground lease creating the leasehold estate could
terminate, leaving the leasehold mortgagee without its security. The ground
lease may terminate, if among other reasons, the ground lessee breaches or
defaults in its obligations under the ground lease or there is a bankruptcy of
the ground lessee or the ground lessor. This possibility may be minimized if the
ground lease contains certain provisions protective of the mortgagee, but the
ground leases that secure Mortgage Loans may not contain all of these protective
provisions, and mortgages may not contain the other protection discussed in the
next paragraph. Protective ground lease provisions include the right of
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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.
Rights of Redemption
In some states, after sale pursuant to a deed of trust and/or foreclosure of
a mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
most states where the right of redemption is available, statutory redemption may
occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a right of redemption is to delay the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser at a foreclosure sale, or of any purchaser from the
lender subsequent to judicial foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has run.
Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on
Lenders
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement and foreclosure on the
beneficial interest in a land trust. Some courts have interpreted Section 9-504
of the UCC to prohibit a deficiency award unless the creditor establishes that
the sale of the collateral (which, in the case of a Mortgage Loan secured by
shares of a
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Cooperative, would be the shares and the related proprietary lease or occupancy
agreement) was conducted in a commercially reasonable manner.
A Servicer generally will not be required under the Pooling Agreement or
applicable Underlying Servicing Agreement to pursue deficiency judgments on the
Mortgage Loans even if permitted by law.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the United States Bankruptcy
Code, 11 U.S.C. Sections 101 et seq. (the "Bankruptcy Code"), and state laws
affording relief to debtors (together with the Bankruptcy Code (the "Insolvency
Laws") may interfere with or affect the ability of a secured mortgage lender to
obtain payment of a mortgage loan, to realize upon collateral and/or enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) are
automatically stayed upon the filing of a bankruptcy petition, and, usually, no
interest or principal payments are made during the course of the bankruptcy
case. Foreclosure of an interest in real property of a debtor in a case under
the Bankruptcy Code can typically occur only if the bankruptcy court vacates the
stay, an action, the court may be reluctant to take, particularly if the debtor
has the prospect of restructuring his or her debts and the mortgage collateral
is not deteriorating in value. The delay and the consequences of the delay
caused by an automatic stay can be significant. Also, under the Bankruptcy Code,
the filing of a petition in bankruptcy by or on behalf of a junior lienor (a
subordinate lender secured by a mortgage on the property) may stay a senior
lender from taking action to foreclose.
A homeowner may file for relief under the Bankruptcy Code under any of three
different chapters of the Bankruptcy Code. Under Chapter 7, the assets of the
debtor are liquidated and a lender secured by a lien may "bid in" (i.e., bid up
to the amount of the debt) at the sale of the asset. See "--Foreclosure." A
homeowner may also file for relief under Chapter 11 of the Bankruptcy Code and
reorganize his or her debts through his or her reorganization plan.
Alternatively, a homeowner may file for relief under Chapter 13 of the
Bankruptcy Code and address his or her debts in a rehabilitation plan. (Chapter
13 is often referred to as the "wage earner chapter" or "consumer chapter"
because most individuals seeking to restructure their debts file for relief
under Chapter 13 rather than Chapter 11).
The Bankruptcy Code permits a mortgage loan that is secured by property that
does not consist solely of the debtor's principal residence to be modified
without the consent of the lender provided certain substantive and procedural
safeguards are met. Under the Bankruptcy Code, the lender's security interest
may be reduced to the then-current value of the property as determined by the
court if the value is less than the amount due on the loan, thereby leaving the
lender as a general unsecured creditor for the difference between the value of
the collateral and the outstanding balance of the mortgage loan. A borrower's
unsecured indebtedness will typically be discharged in full upon payment of a
substantially reduced amount. Other modifications to a mortgage loan may include
a reduction in the amount of each scheduled payment, which reduction may result
from a reduction in the rate of interest, an alteration of the repayment
schedule, an extension of the final maturity date, and/or a reduction in the
outstanding balance of the secured portion of the loan. In certain
circumstances, subject to the court's approval, a debtor in a case under Chapter
11 of the Bankruptcy Code may have the power to grant liens senior to the lien
of a mortgage.
A reorganization plan under Chapter 11 and a rehabilitation plan under
Chapter 13 of the Bankruptcy Code may each allow a debtor to cure a default
relating to a mortgage loan on its residence by paying arrearages over a period
of time and to deaccelerate and reinstate the original mortgage loan payment
schedule, even though the lender accelerated the loan and a final judgment of
foreclosure had been entered in state court (provided no sale of the property
had yet occurred) prior to the filing of the debtor's petition under the
Bankruptcy Code. Under a Chapter 13 plan, curing of defaults must be
accomplished
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within the five year maximum term permitted for repayment plans, the term
commencing when repayment plan becomes effective, while defaults may be cured
over a longer period of time under a Chapter 11 plan of reorganization.
Generally, a repayment plan in a case under Chapter 13 and a plan of
reorganization under Chapter 11 may not modify the claim of a mortgage lender if
the borrower elects to retain the property, the property is the borrower's
principal residence and the property is the lender's only collateral. Certain
courts have allowed modifications when the mortgage loan is secured both by the
debtor's principal residence and by collateral that is not "inextricably bound"
to the real property, such as appliances, machinery, or furniture.
The general protection for mortgages secured only by the debtor's principal
residence is not applicable in a case under Chapter 13 if the last payment on
the original payment schedule is due before the final date for payment under the
debtor's Chapter 13 plan (which date could be up to five years after the debtor
emerges from bankruptcy). Under several recently decided cases, the terms of
these loans can be modified in the manner described above. While these decisions
are contrary to the holding in a prior case by a senior appellate court, it is
possible that the later decisions will become the accepted interpretation in
view of the language of the applicable statutory provision. If this
interpretation is adopted by a court considering the treatment in a Chapter 13
repayment plan of a Mortgage Loan, it is possible that the Mortgage Loan could
be modified.
State statutes and general principles of equity may also provide a mortgagor
with means to halt a foreclosure proceeding or sale and to force a restructuring
of a mortgage loan on terms a lender would not otherwise accept.
In a bankruptcy or similar proceeding of a mortgagor, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the mortgagor under the related mortgage loan prior to the
bankruptcy or similar proceeding. Payments on long-term debt may be protected
from recovery as preferences if they are payments in the ordinary course of
business made on debts incurred in the ordinary course of business or if the
value of the collateral exceeds the debt at the time of payment. Whether any
particular payment would be protected depends upon the facts specific to a
particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its costs
and expenses in preserving or selling the mortgaged property ahead of a payment
to the lender. Moreover, the laws of certain states also give priority to
certain tax and mechanics liens over the lien of a mortgage. Under the
Bankruptcy Code, if the court finds that actions of the mortgagee have been
unreasonable and inequitable, the lien of the related mortgage may be
subordinated to the claims of unsecured creditors.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
the federal Trust-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and
related statutes. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the applicable laws. In some cases, this liability may affect assignees of
the Mortgage Loans.
Forfeiture for Drug, RICO and Money Laundering Violations
Federal law provides that property purchased or improved with assets derived
from criminal activity or otherwise tainted, or used in the commission of
certain offenses, can be seized and ordered forfeited to
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the United States of America. The offenses which can trigger a seizure and
forfeiture include, among others, violations of the Racketeer Influenced and
Corrupt Organizations Act, the Bank Secrecy Act, the anti-money laundering laws
and regulations, including the USA Patriot Act of 2001 and the regulations
issued thereunder, as well as the narcotic drug laws. In many instances, the
United States may seize the property even before a conviction occurs.
In the event of a forfeiture proceeding, a lender may be able to establish
its interest in the property by proving that (i) its mortgage was executed and
recorded before the commission of the illegal conduct from which the assets used
to purchase or improve the property were derived or before any other crime upon
which the forfeiture is based, or (2) the lender, at the time of the execution
of the mortgage, "did not know or was reasonably without cause to believe that
the property was subject to forfeiture." However, there can be no assurance that
this defense will be successful.
Homeowners Protection Act of 1998
The Homeowners Protection Act of 1998 ("HOPA") provides for certain
disclosure and termination requirements for primary mortgage insurance ("PMI").
The termination provisions of HOPA apply only to mortgage loans relating to
single-family primary residences originated on or after July 29, 1999. These
termination provisions govern when a mortgagor may cancel the requirement to
maintain PMI and when the requirement to maintain PMI is automatically
terminated. In general, voluntary termination is permitted and automatic
termination occurs when the principal balance of the mortgage loan is reduced to
80% or 78%, respectively, of the original property value. The disclosure
requirements of HOPA vary depending on whether the mortgage loan was originated
before or after July 29, 1999. The disclosure requirements include notification
of the circumstances whereby a mortgagor may cancel PMI, the date when PMI
automatically terminates and servicer contact information. In addition, HOPA
provides that no later than 30 days after cancellation or termination of PMI,
the servicer shall provide written notification that PMI is terminated and no
further payments are due or payable. Any servicer, mortgagee or mortgage insurer
that violates provisions of HOPA is subject to possible liability which
includes, but is not limited to, actual damages, statutory damages and
reasonable attorney's fees.
Texas Home Equity Loans
Generally, any "cash-out" refinance or other non-purchase money transaction
(except for certain rate or term refinance loans and certain other narrow
exceptions) secured by a Texas resident's principal residence is subject to the
provisions set forth in Section 50(a)(6) of Article XVI of the Constitution of
Texas and its implementing statutes and regulations (the "Texas Home Equity
Laws"). The Texas Home Equity Laws provide for certain disclosure requirements,
caps on allowable fees, required loan closing procedures and other restrictions.
Failure, inadvertent or otherwise, to comply with any requirement may render the
Mortgage Loan unenforceable and/or the lien on the Mortgaged Property voidable
unless cured within 60 days after the borrower provides notice of the defect to
the lender. Because mortgage loans which are subject to the Texas Home Equity
Laws can be foreclosed only pursuant to court order, rather than non-judicial
foreclosure as is available for other types of mortgage loans in Texas, delays
and increased losses may result in connection with foreclosures of these loans.
If a court were to find that any requirement of the Texas Home Equity Laws was
not complied with, the court could refuse to allow foreclosure to proceed,
declare the lien on the Mortgaged Property to be void, and/or require the
originating lender or the holder of the note to forfeit some or all principal
and interest of the related Mortgage Loan. Title insurance generally available
on these Mortgage Loans may exclude coverage for some of the risks described in
this paragraph.
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Servicemembers Civil Relief Act and Similar Laws
Generally, under the terms of the Servicemembers Civil Relief Act (the
"Relief Act"), a borrower who enters military service after the origination of
his or her Mortgage Loan, including a borrower who is a member of the National
Guard or is in reserve status at the time of the origination of the Mortgage
Loan and is later called to active duty, may not be charged interest, including
fees and charges, in excess of 6% per annum during the period of the borrower's
active duty status. In addition to adjusting the interest, the lender must
forgive this interest in excess of 6% per annum, unless a court or
administrative agency orders otherwise upon application of the lender. It is
possible that the Relief Act could have an effect, for an indeterminate period
of time, on the ability of the Servicer to collect full amounts of interest on
certain of the Mortgage Loans in a Trust Estate. Any shortfall in interest
collections resulting from the application of the Relief Act or any amendment
thereto could result in losses to the holders of the Certificates of the related
series. Further, the Relief Act imposes limitations which would impair the
ability of the Servicer to foreclose on an affected Mortgage Loan during the
borrower's period of active duty status. Thus, in the event that an affected
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the Mortgaged Property in a timely fashion. In
addition, the Relief Act provides broad discretion for a court to modify a
mortgage loan upon application of the mortgagor. Certain states have enacted
comparable legislation which may lead to the modification of a mortgage loan or
interfere with or affect the ability of the Servicer to timely collect payments
of principal and interest on, or to foreclose on, Mortgage Loans of borrowers in
these states who are active or reserve members of the armed services or national
guard. For example, California has extended legislation providing protection
substantially similar to that provided by the Relief Act to California national
guard members called up for active service by the Governor or President and
reservists called to active duty.
Environmental Considerations
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to a security
interest may be subject to federal, state, and local laws and regulations
relating to environmental protection. These laws may regulate, among other
things: emissions of air pollutants; discharges of wastewater or storm water;
generation, transport, storage or disposal of hazardous waste or hazardous
substances; operation, closure and removal of underground storage tanks; removal
and disposal of asbestos-containing materials; management of electrical or other
equipment containing polychlorinated biphenyls. Failure to comply with these
laws and regulations may result in significant penalties, including civil and
criminal fines. Under the laws of certain states, environmental contamination on
a property may give rise to a lien on the property to ensure the availability
and/or reimbursement of Cleanup Costs. Generally all subsequent liens on these
properties are subordinated to these environmental liens and, in some states,
even prior recorded liens are subordinated to such liens ("Superliens"). In the
latter states, the security interest of the Trustee in a property that is
subject to such a Superlien could be adversely affected. Environmental
contamination on a property is likely to have a negative impact on the value of
the property, which may lead to losses on the related series of Certificates.
Under the federal Comprehensive Environmental Response Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
certain types of activities that may constitute management of the mortgaged
property may become liable in certain circumstances for the costs of remedial
action ("Cleanup Costs") if hazardous wastes or hazardous substances have been
released or disposed of on the property. These Cleanup Costs may be substantial.
CERCLA imposes strict, as well as joint and several liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or
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contributed to contamination on the property. In addition, owners and operators
of properties that generate hazardous substances that are disposed of at other
"off-site" locations may held strictly, jointly and severally liable for
environmental remediation and/or damages at those off-site locations. Many
states also have laws that are similar to CERCLA. Liability under CERCLA or
under similar state law could exceed the value of the property itself as well as
the aggregate assets of the property owner.
The law is unclear as to whether and under what precise circumstances
Cleanup Costs, or the obligation to take remedial actions, could be imposed on a
secured lender such as the Trust Estate. Under the laws of some states and under
CERCLA, a lender may be liable as an "owner or operator" for costs of addressing
releases or threatened releases of hazardous substances on a mortgaged property
if the lender or its agents or employees have "participated in the management"
of the operations of the borrower, even though the environmental damage or
threat was caused by a prior owner or current owner or operator or other third
party. Excluded from CERCLA's definition of "owner or operator," is a person
"who without participating in the management of . . . [the] facility, holds
indicia of ownership primarily to protect his security interest" (the "CERCLA
Secured-Creditor Exemption"). This exemption for holders of a security interest
such as a secured lender applies only to the extent that a lender seeks to
protect its security interest in the contaminated facility or property. Thus, if
a lender's activities begin to encroach on the actual management of the facility
or property, the lender faces potential liability as an "owner or operator"
under CERCLA. Similarly, when a lender forecloses and takes title to a
contaminated facility or property, the lender may incur potential CERCLA
liability in various circumstances, including among others, when it holds the
facility or property as an investment (including leasing the facility or
property to a third party), fails to market the property in a timely fashion or
fails to properly address environmental conditions at the property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"), contains an
exemption similar to the CERCLA Secured-Creditor Exemption (the "RCRA
Secured-Creditor Exemption")for those lenders who hold a security interest in a
petroleum underground storage tank ("UST") or in real estate containing a UST,
or that acquire title to a petroleum UST or facility or property on which a UST
is located. As under CERCLA, a lender may lose its RCRA Secured-Creditor
Exemption and be held liable under RCRA as a UST owner or operator if the lender
or its employees or agents participate in the management of the UST. In
addition, if the lender takes title to or possession of the UST or the real
estate containing the UST, under certain circumstances the RCRA Secured-Creditor
Exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly construed
CERCLA's Secured-Creditor Exemption. The court's opinion suggested that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
management of the facility were broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence these decisions
could be inferred from the extent of its involvement in the facility's financial
management. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in In re Bergsoe Metal Corp., apparently disagreeing with, but not
expressly contradicting, the Fleet Factors court, held that a secured lender had
no liability absent "some actual management of the facility" on the part of the
lender.
Court decisions have taken varying views of the scope of the CERCLA
Secured-Creditor Exemption and the RCRA Secured-Creditor Exemption, leading to
administrative and legislative efforts to provide guidance to lenders on the
scope of activities that would trigger CERCLA and/or RCRA liability. Until
recently, these efforts have failed to provide substantial guidance.
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On September 30, 1996 the President signed into law (the Asset Conservation,
Lender Liability and Deposit Insurance Protection Act of 1996 (the "Asset
Conservation Act"). The Asset Conservation Act was intended to clarify the scope
of the secured creditor exemption under both CERCLA and RCRA. The Asset
Conservation Act more clearly defined the kinds of "participation in management"
that would trigger liability under CERCLA and specified certain activities that
would not constitute "participation in management" or otherwise result in a
forfeiture of the CERCLA Secured-Creditor Exemption prior to foreclosure or
during a workout period. The Asset Conservation Act also clarified the extent of
protection against liability under CERCLA in the event of foreclosure and
authorized certain regulatory clarifications of the scope of the RCRA
Secured-Creditor Exemption, similar to the statutory protections under CERCLA.
However, since the courts have not yet had the opportunity to interpret the new
statutory provisions, the scope of the additional protections offered by the
Asset Conservation Act is not fully defined. It also is important to note that
the Asset Conservation Act does not offer complete protection to lenders and
that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the Trust Estate and occasion a loss to the Trust Estate and to
Certificateholders in certain circumstances. The new secured creditor amendments
to CERCLA, also, would not necessarily affect the potential for liability in
actions by either a state or a private party under other federal or state laws
which may impose liability on "owners or operators" but do not incorporate the
CERCLA Secured-Creditor Exemption.
Traditionally, residential mortgage lenders have not taken steps to evaluate
whether hazardous wastes or hazardous substances are present with respect to any
mortgaged property prior to the origination of the mortgage loan or prior to
foreclosure or accepting a deed-in-lieu of foreclosure. Accordingly, at the time
the Mortgage Loans were originated these evaluations were not required, nor are
these evaluations required prior to foreclosure or accepting a deed-in-lieu of
foreclosure. Neither the Depositor nor any other entity makes any
representations or warranties or assumes any liability with respect to: the
environmental condition of a Mortgaged Property; the absence, presence or effect
of hazardous wastes or hazardous substances on any Mortgaged Property; any
casualty resulting from the presence or effect of hazardous wastes or hazardous
substances on, near or emanating from a Mortgaged Property; the impact on
Certificateholders of any environmental condition or presence of any substance
on or near a Mortgaged Property; or the compliance of any Mortgaged Property
with any environmental laws, nor is any agent, person or entity otherwise
affiliated with the Depositor authorized or able to make any representation,
warranty or assumption of liability relative to any Mortgaged Property. See "The
Mortgage Loan Programs--Representations and Warranties" and "Servicing of the
Mortgage Loans--Enforcement of "Due-on-Sale" Clauses; Realization Upon Defaulted
Mortgage Loans" above.
"Due-on-Sale" Clauses
The forms of note, mortgage and deed of trust relating to Mortgage Loans may
contain a "due-on-sale" clause permitting acceleration of the maturity of a loan
if the borrower transfers its interest in the property. In recent years, court
decisions and legislative actions placed substantial restrictions on the right
of lenders to enforce these clauses in many states. However, effective October
15, 1982, Congress enacted the Garn-St Germain Depository Institutions Act of
1982 (the "Garn Act") which purports to preempt state laws which prohibit the
enforcement of "due-on-sale" clauses by providing among other matters, that
"due-on-sale" clauses in certain loans (which loans may include the Mortgage
Loans) made after the effective date of the Garn Act are enforceable, within
certain limitations as set forth in the Garn Act and the regulations promulgated
thereunder. "Due-on-sale" clauses contained in mortgage loans originated by
federal savings and loan associations or federal savings banks are fully
enforceable
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pursuant to regulations of the OTS, as successor to the Federal Home Loan Bank
Board, which preempt state law restrictions on the enforcement of these clauses.
Similarly, "due-on-sale" clauses in mortgage loans made by national banks and
federal credit unions are now fully enforceable pursuant to preemptive
regulations of the Comptroller of the Currency and the National Credit Union
Administration, respectively.
The Garn Act created a limited exemption from its general rule of
enforceability for "due-on-sale" clauses in certain mortgage loans ("Window
Period Loans") which were originated by non-federal lenders and made or assumed
in certain states ("Window Period States") during the period, prior to October
15, 1982, in which that state prohibited the enforcement of "due-on-sale"
clauses by constitutional provision, statute or statewide court decision (the
"Window Period"). Though neither the Garn Act nor the OTS regulations actually
names the Window Period States, Freddie Mac has taken the position, in
prescribing mortgage loan servicing standards with respect to mortgage loans
which it has purchased, that the Window Period States were: Arizona, Arkansas,
California, Colorado, Georgia, Iowa, Michigan, Minnesota, New Mexico, Utah and
Washington. Under the Garn Act, unless a Window Period State took action by
October 15, 1985, the end of the Window Period, to further regulate enforcement
of "due-on-sale" clauses in Window Period Loans, "due-on-sale" clauses would
become enforceable even in Window Period Loans. Five of the Window Period States
(Arizona, Minnesota, Michigan, New Mexico and Utah) have taken actions which
restrict the enforceability of "due-on-sale" clauses in Window Period Loans
beyond October 15, 1985. The actions taken vary among these states.
By virtue of the Garn Act, a Servicer may generally be permitted to
accelerate any Mortgage Loan which contains a "due-on-sale" clause upon transfer
of an interest in the property subject to the mortgage or deed of trust. With
respect to any Mortgage Loan secured by a residence occupied or to be occupied
by the borrower, this ability to accelerate will not apply to certain types of
transfers, including (i) the granting of a leasehold interest which has a term
of three years or less and which does not contain an option to purchase; (ii) a
transfer to a relative resulting from the death of a borrower, or a transfer
where the spouse or children become an owner of the property in each case where
the transferee(s) will occupy the property; (iii) a transfer resulting from a
decree of dissolution of marriage, legal separation agreement or from an
incidental property settlement agreement by which the spouse becomes an owner of
the property; (iv) the creation of a lien or other encumbrance subordinate to
the lender's security instrument which does not relate to a transfer of rights
of occupancy in the property (provided that the lien or encumbrance is not
created pursuant to a contract for deed); (v) a transfer by devise, descent or
operation of law on the death of a joint tenant or tenant by the entirety; (vi)
a transfer into an inter vivos trust in which the borrower is the beneficiary
and which does not relate to a transfer of rights of occupancy; and (vii) other
transfers as set forth in the Garn Act and the regulations thereunder.
Regulations promulgated under the Garn Act also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan pursuant to a due-on-sale
clause. The extent of the effect of the Garn Act on the average lives and
delinquency rates of the Mortgage Loans cannot be predicted. See "Prepayment and
Yield Considerations."
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The OTS as successor to the
Federal Home Loan Bank Board is authorized to issue rules and regulations and to
publish interpretations governing implementation of Title V. The statute
authorized any state to reimpose interest rate limits by adopting before April
1, 1983, a law or constitutional provision which expressly rejects application
of the federal law. Fifteen states have adopted laws reimposing or reserving the
right to reimpose interest rate
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limits. In addition, even where Title V is not so rejected, any state is
authorized to adopt a provision limiting certain other loan charges.
The Depositor or other entity specified in the related prospectus supplement
will represent and warrant in the Pooling Agreement to the Trustee for the
benefit of Certificateholders that all Mortgage Loans are originated in full
compliance with applicable state laws, including usury laws. See "The Pooling
Agreement--Assignment of Mortgage Loans."
Enforceability of Certain Provisions
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under the Pooling Agreement, late charges and prepayment fees (to the
extent permitted by law and not waived by the Servicer) will be retained by the
Servicer as additional servicing compensation.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial remedies
that may be fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's judgment
and have required lenders to reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from temporary financial disability. In
some cases, courts have limited the right of lenders to foreclose if the default
under the mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second mortgage or
deed of trust affecting the property. In other cases, some courts have been
faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
the deeds of trust receive notices in addition to the statutorily-prescribed
minimum requirements. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that the sale by a trustee under a
deed of trust or under a mortgage having a power of sale does not involve
sufficient state action to afford constitutional protections to the borrower.
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FEDERAL INCOME TAX CONSEQUENCES
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The following discussion represents the opinion of Cadwalader, Wickersham &
Taft LLP as to the material federal income tax consequences of the purchase,
ownership and disposition of Certificates. The discussion below does not purport
to address all federal income tax consequences that may be applicable to
particular categories of investors, some of which may be subject to special
rules. The authorities on which this discussion is based are subject to change
or differing interpretations, and any change or interpretation could apply
retroactively. This discussion reflects the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as regulations
(the "REMIC Regulations") promulgated by the U.S. Department of the Treasury.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of Certificates.
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If a series of Certificates includes Exchangeable Certificates, each Class
of Exchangeable Certificates will represent beneficial ownership of one or more
interests in one or more REMIC regular interests. The related prospectus
supplement will specify whether each Class of Exchangeable Certificates
represents a proportionate or disproportionate interest in each underlying REMIC
regular interest. The Exchangeable Certificates will be created, sold and
administered pursuant to an arrangement that will be treated as a grantor trust
under subpart E, Part 1 of subchapter J of the Code. The tax treatment of
Exchangeable Certificates is discussed under "--Federal Income Tax Consequences
for Exchangeable Certificates" below.
For purposes of this discussion, where the applicable prospectus supplement
provides for a Fixed Retained Yield on the Mortgage Loans of a series of
Certificates, references to the Mortgage Loans will be deemed to refer to that
portion of the Mortgage Loans held by the Trust Estate that does not include the
Fixed Retained Yield. References to a "holder" or "Certificateholder" in this
discussion generally mean the Beneficial Owner of a Certificate.
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Federal Income Tax Consequences for REMIC Certificates
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General
With respect to a particular series of Certificates, an election may be made
to treat the Trust Estate or one or more segregated pools of assets in the Trust
Estate as one or more REMICs within the meaning of Code Section 860D. A Trust
Estate or a portion of a Trust Estate as to which a REMIC election will be made
will be referred to as a "REMIC Pool." For purposes of this discussion,
Certificates of a series as to which one or more REMIC elections are made are
referred to as "REMIC Certificates" and will consist of one or more Classes of
"Regular Certificates" and one Class of "Residual Certificates in the case of
each REMIC Pool. Qualification as a REMIC requires ongoing compliance with
certain conditions. For each series of REMIC Certificates, Cadwalader,
Wickersham & Taft LLP, counsel to the Depositor, has advised the Depositor that
in its opinion, assuming (i) the making of an appropriate election, (ii)
compliance with the Pooling Agreement, and (iii) compliance with any changes in
the law, including any amendments to the Code or applicable Treasury regulations
thereunder, each REMIC Pool will qualify as a REMIC. In such case, the Regular
Certificates will be considered to be "regular interests" in the REMIC Pool and
generally will be treated for federal income tax purposes as if they were newly
originated debt instruments, and the Residual Certificates will be considered to
be "residual interests" in the REMIC Pool. The prospectus supplement for each
series of Certificates will indicate whether one or more REMIC elections for the
related Trust Estate will be made, in which event references to "REMIC" or
"REMIC Pool" in this prospectus shall be deemed to refer to each REMIC Pool.
Status of REMIC Certificates
REMIC Certificates held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) in the same proportion that the assets of the
REMIC Pool would be treated as "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning of Code
Section 7701(a)(19)(C)(v) or as other assets described in Code Section
7701(a)(19)(C). REMIC Certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(4)(A),
and interest on the Regular Certificates and income with respect to Residual
Certificates will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Code
Section 856(c)(3)(B) in the same proportion that, for both purposes, the assets
of the REMIC Pool would be so treated. If at all times 95% or more of the assets
of the REMIC Pool qualify for each of the foregoing treatments, the REMIC
Certificates will qualify for the corresponding status in their
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entirety. For purposes of Code Section 856(c)(4)(A), payments of principal and
interest on the Mortgage Loans that are reinvested pending distribution to
holders of REMIC Certificates qualify for such treatment.
Where two REMIC Pools are a part of a tiered structure they will be treated
as one REMIC for purposes of the tests described above respecting asset
ownership of more or less than 95%. In addition, if the assets of the REMIC
include Buy-Down Loans, it is possible that the percentage of the assets
constituting "loans . . . secured by an interest in real property which is . . .
residential real property" for purposes of Code Section 7701(a)(19)(C)(v), may
be required to be reduced by the amount of the related Buy-Down Funds. REMIC
Certificates held by a regulated investment company will not constitute
"Government securities" within the meaning of Code Section 851(b)(3)(A)(i).
REMIC Certificates held by certain financial institutions will constitute an
"evidence of indebtedness" within the meaning of Code Section 582(c)(1).
Qualification as a REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Certificates) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor under which
the de minimis requirement will be met if at all times the aggregate adjusted
basis of the nonqualified assets is less than 1% of the aggregate adjusted basis
of all the REMIC Pool's assets. An entity that fails to meet the safe harbor may
nevertheless demonstrate that it holds no more than a de minimis amount of
nonqualified assets. A REMIC Pool also must provide "reasonable arrangements" to
prevent its residual interests from being held by "disqualified organizations"
or agents thereof and must furnish applicable tax information to transferors or
agents that violate this requirement. See "--Taxation of Residual
Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates--Disqualified Organizations."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is either purchased by the REMIC Pool within a three-month
period thereafter or represents an increase in the loan advanced to the obligor
under its original terms, in each case pursuant to a fixed price contract in
effect on the Startup Day. Qualified mortgages include whole mortgage loans,
such as the Mortgage Loans, and, generally, certificates of beneficial interest
in a grantor trust that holds mortgage loans, regular interests in another
REMIC, such as lower-tier regular interests in a tiered REMIC. The REMIC
Regulations specify that loans secured by timeshare interests and shares held by
a tenant stockholder in a cooperative housing corporation can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage, which
is any property that would have been treated as a qualified mortgage if it were
transferred to the REMIC Pool on the Startup Day and that is received either (i)
in exchange for any qualified mortgage within a three-month period thereafter or
(ii) in exchange for a "defective obligation" within a two-year period
thereafter. A "defective obligation" includes (i) a mortgage in default or as to
which default is reasonably foreseeable, (ii) a mortgage as to which a customary
representation or warranty made at the time of transfer to the REMIC Pool has
been breached, (iii) a mortgage that was fraudulently procured by the mortgagor,
and (iv) a mortgage that was not in fact principally secured by real property
(but only if the mortgage is disposed of within 90 days of discovery). A
Mortgage Loan that is "defective" as described in clause (iv) that is not sold
or, if within two years of the Startup Day, exchanged, within 90 days of
discovery, ceases to be a qualified mortgage after that 90-day period.
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Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies. In addition, a reserve fund
(limited to not more than 50% of the REMIC's initial assets) may be used to
provide a source of funds for the purchase of increases in the balances of
qualified mortgages pursuant to their terms. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in the reserve
fund for the year is derived from the sale or other disposition of property held
for less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced "promptly and appropriately" to the extent no longer required.
Foreclosure property is real property acquired by the REMIC Pool in connection
with the default or imminent default of a qualified mortgage and generally not
held beyond the close of the third calendar year following the year in which the
property is acquired with an extension that may be granted by the Internal
Revenue Service.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of regular interests or
(ii) a single class of residual interests on which distributions, if any, are
made pro rata. A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate, or consist of a specified, nonvarying portion of
the interest payments on qualified mortgages. A specified portion may consist of
a fixed number of basis points, a fixed percentage of the total interest, or a
qualified variable rate, inverse variable rate or difference between two fixed
or qualified variable rates on some or all of the qualified mortgages. The
specified principal amount of a regular interest that provides for interest
payments consisting of a specified, nonvarying portion of interest payments on
qualified mortgages may be zero. A residual interest is an interest in a REMIC
Pool other than a regular interest that is issued on the Startup Day and that is
designated as a residual interest. An interest in a REMIC Pool may be treated as
a regular interest even if payments of principal on the interest are
subordinated to payments on other regular interests or the residual interest in
the REMIC Pool, and are dependent on the absence of defaults or delinquencies on
qualified mortgages or permitted investments, lower than reasonably expected
returns on permitted investments, unanticipated expenses incurred by the REMIC
Pool or prepayment interest shortfalls. Accordingly, the Regular Certificates of
a series will constitute one or more classes of regular interests, and the
Residual Certificates for that series will constitute a single class of residual
interests on which distributions are made pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable year,
the Code provides that the entity will not be treated as a REMIC for that year
and thereafter. In this event, an entity with multiple classes of ownership
interests may be treated as a separate association taxable as a corporation
under Treasury regulations, and the Regular Certificates may be treated as
equity interests in that corporation. The Code, however, authorizes the Treasury
Department to issue regulations that address situations where failure to meet
one or more of the requirements for REMIC status occurs inadvertently and in
good faith, and disqualification of the REMIC Pool would occur absent regulatory
relief. Investors should be aware, however, that the Conference Committee Report
to the Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the
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REMIC Pool's income for the period of time in which the requirements for REMIC
status are not satisfied.
Taxation of Regular Certificates
General
In general, interest, Original Issue Discount, and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "Regular Certificateholder"), and principal payments on
a Regular Certificate will be treated as a return of capital to the extent of
the Regular Certificateholder's basis in the Regular Certificate allocable
thereto (other than accrued market discount not previously reported as income).
Regular Certificateholders must use the accrual method of accounting with regard
to Regular Certificates, regardless of the method of accounting they otherwise
use.
Original Issue Discount
Compound Interest Certificates will be, and other classes of Regular
Certificates may be, issued with "Original Issue Discount" within the meaning of
Code Section 1273(a). Holders of any Class of Regular Certificates having
Original Issue Discount generally must include Original Issue Discount in
ordinary income for federal income tax purposes as it accrues, in accordance
with a constant interest method that takes into account the compounding of
interest, in advance of receipt of the cash attributable to such income. The
following discussion is based in part on temporary and final Treasury
regulations (the "OID Regulations") under Code Sections 1271 through 1273 and
1275 and in part on the provisions of the 1986 Act. Regular Certificateholders
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Regular
Certificates. To the extent these issues are not addressed in the OID
Regulations, it is anticipated that the Trustee will apply the methodology
described in the Conference Committee Report to the 1986 Act. No assurance can
be provided that the Internal Revenue Service will not take a different position
as to those matters not currently addressed by the OID Regulations. Moreover,
the OID Regulations include an anti-abuse rule allowing the Internal Revenue
Service to apply or depart from the OID Regulations where necessary or
appropriate to ensure a reasonable tax result in light of the applicable
statutory provisions. A tax result will not be considered unreasonable under the
anti-abuse rule in the absence of a substantial effect on the present value of a
taxpayer's tax liability. Investors are advised to consult their own tax
advisors as to the this discussion and the appropriate method for reporting
interest and Original Issue Discount for the Regular Certificates.
Each Regular Certificate (except to the extent described below for a Regular
Certificate on which principal is distributed in a single installment or by lots
of specified principal amounts upon the request of a Certificateholder or by
random lot (a "Non-Pro Rata Certificate")) will be treated as a single
installment obligation for purposes of determining the Original Issue Discount
includible in a Regular Certificateholder's income. The total amount of Original
Issue Discount on a Regular Certificate is the excess of the "stated redemption
price at maturity" of the Regular Certificate over its "issue price." The issue
price of a Class of Regular Certificates offered pursuant to this prospectus
generally is the first price at which a substantial amount of the Class is sold
to the public (excluding bond houses, brokers and underwriters). Although
unclear under the OID Regulations, it is anticipated that the Trustee will treat
the issue price of a Class as to which there is no substantial sale as of the
issue date or that is retained by the Seller as the fair market value of that
Class as of the issue date. The issue price of a Regular Certificate also
includes any amount paid by an initial Regular Certificateholder for accrued
interest that relates to a period prior to the issue date of the Regular
Certificate, unless the Regular Certificateholder elects on its federal income
tax return to exclude that amount from the issue price and to recover it on the
first Distribution Date. The stated redemption price at maturity of a Regular
Certificate always includes the
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original principal amount of the Regular Certificate, but generally will not
include distributions of interest if such distributions constitute "qualified
stated interest." Under the OID Regulations, qualified stated interest generally
means interest payable at a single fixed rate or a qualified variable rate (as
described below) provided that the interest payments are unconditionally payable
at intervals of one year or less during the entire term of the Regular
Certificate. Because there is no penalty or default remedy in the case of
nonpayment of interest for a Regular Certificate, it is possible that no
interest on any Class of Regular Certificates will be treated as qualified
stated interest. However, except as provided in the following three sentences or
in the applicable prospectus supplement, because the underlying Mortgage Loans
provide for remedies in the event of default, it is anticipated that the Trustee
will treat interest on the Regular Certificates as qualified stated interest.
Distributions of interest on a Compound Interest Certificate, or on other
Regular Certificates for which deferred interest will accrue, will not
constitute qualified stated interest, in which case the stated redemption price
at maturity of these Regular Certificates includes all distributions of interest
as well as principal thereon. Likewise, it is anticipated that the Trustee will
treat an interest-only Class or a Class on which interest is substantially
disproportionate to its principal amount (a so-called "super-premium" Class) as
having no qualified stated interest. Where the interval between the issue date
and the first Distribution Date on a Regular Certificate is shorter than the
interval between subsequent Distribution Dates, the interest attributable to the
additional days will be included in the stated redemption price at maturity.
Under a de minimis rule, Original Issue Discount on a Regular Certificate
will be considered to be zero if the Original Issue Discount is less than 0.25%
of the stated redemption price at maturity of the Regular Certificate multiplied
by the weighted average maturity of the Regular Certificate. For this purpose,
the weighted average maturity of the Regular Certificate is computed as the sum
of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the Regular Certificate and the
denominator of which is the stated redemption price at maturity of the Regular
Certificate. The Conference Committee Report to the 1986 Act provides that the
schedule of such distributions should be determined in accordance with the
assumed rate of prepayment of the Mortgage Loans (the "Prepayment Assumption")
and the anticipated reinvestment rate, if any, relating to the Regular
Certificates. The Prepayment Assumption for a series of Regular Certificates
will be set forth in the applicable prospectus supplement. Holders generally
must report de minimis Original Issue Discount pro rata as principal payments
are received, and this income will be capital gain if the Regular Certificate is
held as a capital asset. Under the OID Regulations, however, Regular
Certificateholders may elect to accrue all de minimis Original Issue Discount as
well as market discount and market premium, under the constant yield method. See
"--Election to Treat All Interest Under the Constant Yield Method."
A Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the Original
Issue Discount on the Regular Certificate accrued during an accrual period for
each day on which it holds the Regular Certificate, including the date of
purchase but excluding the date of disposition. The Trustee will treat the
monthly period ending on the day before each Distribution Date as the accrual
period. For each Regular Certificate, a calculation will be made of the Original
Issue Discount that accrues during each successive full accrual period (or
shorter period from the date of original issue) that ends on the day before the
related Distribution Date on the Regular Certificate. The Conference Committee
Report to the 1986 Act states that the rate of accrual of Original Issue
Discount is intended to be based on the Prepayment Assumption. Other than as
discussed below for a Non-Pro Rata Certificate, the Original Issue Discount
accruing in a full accrual period would be the excess, if any, of (i) the sum of
(a) the present value of all of the remaining distributions to be made on the
Regular Certificate as of the end of that accrual period, and (b) the
distributions made on the Regular Certificate during the accrual period that are
included in the Regular Certificate's stated
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redemption price at maturity, over (ii) the adjusted issue price of the Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence is calculated
based on (i) the yield to maturity of the Regular Certificate at the issue date,
(ii) events (including actual prepayments) that have occurred prior to the end
of the accrual period, and (iii) the Prepayment Assumption. For these purposes,
the adjusted issue price of a Regular Certificate at the beginning of any
accrual period equals the issue price of the Regular Certificate, increased by
the aggregate amount of Original Issue Discount for the Regular Certificate that
accrued in all prior accrual periods and reduced by the amount of distributions
included in the Regular Certificate's stated redemption price at maturity that
were made on the Regular Certificate in prior periods. The Original Issue
Discount accruing during any accrual period (as determined in this paragraph)
will then be divided by the number of days in the period to determine the daily
portion of Original Issue Discount for each day in the period. If an initial
accrual period is shorter than a full accrual period, the daily portions of
Original Issue Discount must be determined according to an appropriate
allocation under any reasonable method.
Under the method described above, the daily portions of Original Issue
Discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans for a series of Regular
Certificates can result in both a change in the priority of principal payments
for certain Classes of Regular Certificates and either an increase or decrease
in the daily portions of Original Issue Discount for the Regular Certificates.
In the case of a Non-Pro Rata Certificate, it is anticipated that the
Trustee will determine the yield to maturity of such Certificate based upon the
anticipated payment characteristics of the Class as a whole under the Prepayment
Assumption. In general, the Original Issue Discount accruing on each Non-Pro
Rata Certificate in a full accrual period would be its allocable share of the
Original Issue Discount for the entire Class, as determined in accordance with
the preceding paragraph. However, in the case of a distribution in retirement of
the entire unpaid principal balance of any Non-Pro Rata Certificate (or portion
of this unpaid principal balance), (a) the remaining unaccrued Original Issue
Discount allocable to the Certificate (or to the portion) will accrue at the
time of the distribution, and (b) the accrual of Original Issue Discount
allocable to each remaining Certificate of the Class (or the remaining unpaid
principal balance of a partially redeemed Non-Pro Rata Certificate after a
distribution of principal has been received) will be adjusted by reducing the
present value of the remaining payments on the Class and the adjusted issue
price of the Class to the extent attributable to the portion of the unpaid
principal balance thereof that was distributed. The Depositor believes that the
foregoing treatment is consistent with the "pro rata prepayment" rules of the
OID Regulations, but with the rate of accrual of Original Issue Discount
determined based on the Prepayment Assumption for the Class as a whole.
Investors are advised to consult their tax advisors as to this treatment.
Acquisition Premium
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the Original Issue
Discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over the adjusted issue
price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively, a
subsequent purchaser may elect to treat all acquisition premium under the
constant yield method, as described below under the heading "--Election to Treat
All Interest Under the Constant Yield Method."
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Variable Rate Regular Certificates
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate if,
generally, (i) the issue price does not exceed the original principal balance by
more than a specified amount and (ii) the interest compounds or is payable at
least annually at current values of (a) one or more "qualified floating rates,"
(b) a single fixed rate and one or more qualified floating rates, (c) a single
"objective rate," or (d) a single fixed rate and a single objective rate that is
a "qualified inverse floating rate." A floating rate is a qualified floating
rate if variations in the rate can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds, where such rate
is subject to a fixed multiple that is greater than 0.65 but not more than 1.35.
A rate may also be increased or decreased by a fixed spread or subject to a
fixed cap or floor, or a cap or floor that is not reasonably expected as of the
issue date to affect the yield of the instrument significantly. An objective
rate is any rate (other than a qualified floating rate) that is determined using
a single fixed formula and that is based on objective financial or economic
information, provided that such information is not (i) within the control of the
issuer or a related party or (ii) unique to the circumstances of the issuer or a
related party. A qualified inverse floating rate is a rate equal to a fixed rate
minus a qualified floating rate that inversely reflects contemporaneous
variations in the cost of newly borrowed funds; an inverse floating rate that is
not a qualified inverse floating rate may nevertheless be an objective rate. A
Class of Regular Certificates may be issued under this prospectus that does not
have a variable rate under the foregoing rules, for example, a Class that bears
different rates at different times during the period it is outstanding such that
it is considered significantly "front-loaded" or "back-loaded" within the
meaning of the OID Regulations. It is possible that a Class like this may be
considered to bear "contingent interest" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to Regular Certificates. However, if
final regulations dealing with contingent interest with respect to Regular
Certificates apply the same principles as the OID Regulations, the final
regulations may lead to different timing of income inclusion than would be the
case under the OID Regulations for non-contingent debt instruments. Furthermore,
application of these principles could lead to the characterization of gain on
the sale of contingent interest Regular Certificates as ordinary income.
Investors should consult their tax advisors regarding the appropriate treatment
of any Regular Certificate that does not pay interest at a fixed rate or
variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Certificate (i) bearing a rate that
qualifies as a variable rate under the OID Regulations that is tied to current
values of a variable rate (or the highest, lowest or average of two or more
variable rates, including a rate based on the average cost of funds of one or
more financial institutions), or a positive or negative multiple of such a rate
(plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such a
rate that is subject to one or more caps or floors, or (ii) bearing one or more
such variable rates for one or more periods, or one or more fixed rates for one
or more periods, and a different variable rate or fixed rate for other periods,
qualifies as a regular interest in a REMIC. Accordingly, it is anticipated that
the Trustee will treat Regular Certificates that qualify as regular interests
under this rule in the same manner as obligations bearing a variable rate for
Original Issue Discount reporting purposes.
The amount of Original Issue Discount for a Regular Certificate bearing a
variable rate of interest will accrue in the manner described above under
"--Original Issue Discount," with the yield to maturity and future payments on
the Regular Certificate generally to be determined by assuming that interest
will be payable for the life of the Regular Certificate based on the initial
rate (or, if different, the value of the applicable variable rate as of the
pricing date) for the relevant Class. Unless required otherwise by applicable
final regulations, it is anticipated that the Trustee will treat this interest
as qualified stated interest, except for variable interest on an interest-only
or super-premium Class, which will be treated as non-qualified stated interest
includible in the stated redemption price at maturity. Ordinary income
111
reportable for any period will be adjusted based on subsequent changes in the
applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, it is anticipated that the Trustee will treat
Regular Certificates bearing an interest rate that is a weighted average of the
net interest rates on Mortgage Loans as having qualified stated interest, except
to the extent that initial "teaser" rates cause sufficiently "back-loaded"
interest to create more than de minimis Original Issue Discount. The yield on
these Regular Certificates for purposes of accruing Original Issue Discount will
be a hypothetical fixed-rate based on the fixed rates, in the case of fixed rate
Mortgage Loans, and initial "teaser rates" followed by fully indexed rates, in
the case of adjustable-rate Mortgage Loans. In the case of adjustable-rate
Mortgage Loans, the applicable index used to compute interest on the Mortgage
Loans in effect on the pricing date (or possibly the issue date) will be deemed
to be in effect beginning with the period in which the first weighted average
adjustment date occurring after the issue date occurs. Adjustments will be made
in each accrual period either increasing or decreasing the amount of ordinary
income reportable to reflect the actual Pass-Through Rate on these Regular
Certificates.
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these sections and the
principles applied by the OID Regulations in the context of Original Issue
Discount, "market discount" is the amount by which the purchaser's original
basis in the Regular Certificate (i) is exceeded by the then-current principal
amount of the Regular Certificate, or (ii) in the case of a Regular Certificate
having Original Issue Discount, is exceeded by the adjusted issue price of the
Regular Certificate at the time of purchase. Such purchaser generally will be
required to recognize ordinary income to the extent of accrued market discount
on the Regular Certificate as distributions includible in the stated redemption
price at maturity thereof are received, in an amount not exceeding any such
distribution. Such market discount would accrue in a manner to be provided in
Treasury regulations and should take into account the Prepayment Assumption. The
Conference Committee Report to the 1986 Act provides that until such regulations
are issued, this market discount would accrue either (i) on the basis of a
constant interest rate, or (ii) in the ratio of stated interest allocable to the
relevant period to the sum of the interest for such period plus the remaining
interest as of the end of such period, or in the case of a Regular Certificate
issued with Original Issue Discount, in the ratio of Original Issue Discount
accrued for the relevant period to the sum of the Original Issue Discount
accrued for the period plus the remaining Original Issue Discount as of the end
of the period. A purchaser also generally will be required to treat a portion of
any gain on a sale or exchange of the Regular Certificate as ordinary income to
the extent of the market discount accrued to the date of disposition under one
of the foregoing methods, less any accrued market discount previously reported
as ordinary income as partial distributions in reduction of the stated
redemption price at maturity were received. A purchaser will be required to
defer deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Certificate over the
interest distributable thereon. The deferred portion of the interest expense in
any taxable year generally will not exceed the accrued market discount on the
Regular Certificate for such year. Any deferred interest expense is, in general,
allowed as a deduction not later than the year in which the related market
discount income is recognized or the Regular Certificate is disposed of. As an
alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Certificateholder may elect to include market discount in
income currently as it accrues on all market discount instruments acquired by
the Regular Certificateholder in that taxable year or thereafter, in which case
the interest deferral rule will not apply. See "--Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in which
such election may be deemed to be made.
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By analogy to the OID Regulations, market discount on a Regular Certificate
will be considered to be zero if the market discount is less than 0.25% of the
remaining stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate
(determined as described above in the third paragraph under "--Original Issue
Discount") remaining after the date of purchase. It appears that de minimis
market discount would be reported in a manner similar to de minimis Original
Issue Discount. See "--Original Issue Discount" above. Treasury regulations
implementing the market discount rules have not yet been issued, and therefore
investors should consult their own tax advisors regarding the application of
these rules. Investors should also consult Revenue Procedure 92-67 concerning
the elections to include market discount in income currently and to accrue
market discount on the basis of the constant yield method.
Premium
A Regular Certificate purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Certificateholder holds the Regular Certificate as a
"capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize this premium
under the constant yield method. This election will apply to all debt
obligations acquired by the Regular Certificateholder at a premium held in that
taxable year or thereafter, unless revoked with the permission of the Internal
Revenue Service. Final Treasury regulations issued under Code Section 171 do not
by their terms apply to prepayable debt instruments such as the Regular
Certificates. However, the Conference Committee Report to the 1986 Act indicates
a Congressional intent that the same rules that apply to the accrual of market
discount on installment obligations will also apply to amortizing bond premium
under Code Section 171 on installment obligations such as the Regular
Certificates, although it is unclear whether the alternatives to the constant
interest method described above under "--Market Discount" are available.
Amortizable bond premium will be treated as an offset to interest income on a
Regular Certificate, rather than as a separate deduction item. See "--Election
to Treat All Interest Under the Constant Yield Method" below regarding an
alternative manner in which the Code Section 171 election may be deemed to be
made.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to this election, (i) "interest" includes stated interest, Original Issue
Discount, de minimis Original Issue Discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make this election on an instrument by instrument basis or for a
class or group of debt instruments. However, if the holder makes this election
for a debt instrument with amortizable bond premium or with market discount, the
holder is deemed to have made elections to amortize bond premium or to report
market discount income currently as it accrues under the constant yield method,
respectively, for all premium bonds held or market discount bonds acquired by
the holder in the same taxable year or thereafter. The election is made on the
holder's federal income tax return for the year in which the debt instrument is
acquired and is irrevocable except with the approval of the Internal Revenue
Service. Investors should consult their own tax advisors regarding the
advisability of making this election.
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Treatment of Losses
Regular Certificateholders will be required to report income on Regular
Certificates using the accrual method of accounting, without giving effect to
delays or reductions in distributions attributable to defaults or delinquencies
on the Mortgage Loans, except to the extent it can be established that these
amounts are uncollectible. Accordingly, the holder of a Regular Certificate,
particularly a Subordinate Certificate, may have income, or may incur a
diminution in cash flow as a result of a default or delinquency, but may not be
able to take a deduction (subject to the discussion below) for the corresponding
loss until a subsequent taxable year. In this regard, investors are cautioned
that while they may generally cease to accrue interest income if it reasonably
appears that the interest will be uncollectible, the Internal Revenue Service
may take the position that Original Issue Discount must continue to be accrued
in spite of its uncollectibility until the debt instrument is disposed of in a
taxable transaction or becomes worthless in accordance with the rules of Code
Section 166. To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that Regular Certificateholders that are corporations or
that otherwise hold the Regular Certificates in connection with a trade or
business should in general be allowed to deduct as an ordinary loss such loss
with respect to principal sustained during the taxable year on account of any of
their Regular Certificates becoming wholly or partially worthless, and that, in
general, Regular Certificateholders that are not corporations and do not hold
the Regular Certificates in connection with a trade or business should be
allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of a portion of any of their Regular Certificates
becoming wholly worthless. Although the matter is not free from doubt, these
non-corporate Regular Certificateholders should be allowed a bad debt deduction
at the time the principal balance of the Regular Certificates is reduced to
reflect losses resulting from any liquidated Mortgage Loans. The Internal
Revenue Service, however, could take the position that non-corporate holders
will be allowed a bad debt deduction to reflect such losses only after all the
Mortgage Loans remaining in the Trust Estate have been liquidated or the
applicable Class of Regular Certificates has been otherwise retired. The
Internal Revenue Service could also assert that losses on the Regular
Certificates are deductible based on some other method that may defer such
deductions for all holders, such as reducing future cash flow for purposes of
computing Original Issue Discount. This may have the effect of creating
"negative" Original Issue Discount which would be deductible only against future
positive Original Issue Discount or otherwise upon termination of the Class.
Regular Certificateholders are urged to consult their own tax advisors regarding
the appropriate timing, amount and character of any loss sustained with respect
to the Regular Certificates. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
non-corporate holders, the Internal Revenue Service may take the position that
losses attributable to accrued Original Issue Discount may only be deducted as
capital losses in the case of non-corporate holders who do not hold the Regular
Certificates in connection with a trade or business. Special loss rules are
applicable to banks and thrift institutions, including rules regarding reserves
for bad debts. Such taxpayers are advised to consult their tax advisors
regarding the treatment of losses on Regular Certificates.
Sale or Exchange of Regular Certificates
If a Regular Certificateholder sells or exchanges a Regular Certificate, the
Regular Certificateholder will recognize gain or loss equal to the difference,
if any, between the amount received and its adjusted basis in the Regular
Certificate. The adjusted basis of a Regular Certificate generally will equal
the cost of the Regular Certificate to the seller, increased by any Original
Issue Discount or market discount previously included in the seller's gross
income for the Regular Certificate and reduced by amounts included in the stated
redemption price at maturity of the Regular Certificate that were previously
received by the seller, by any amortized premium and by any recognized losses.
114
Except as described above relating to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate as
a capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Certificate has been held for the applicable
holding period (as described below). This gain will be treated as ordinary
income (i) if a Regular Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Regular Certificateholder's net investment in the
conversion transaction at 120% of the appropriate applicable federal rate under
Code Section 1274(d) in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with respect
to any prior disposition of property that was held as part of such transaction,
(ii) in the case of a non-corporate taxpayer, to the extent such taxpayer has
made an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates, or (iii) to the extent that such
gain does not exceed the excess, if any, of (a) the amount that would have been
includible in the gross income of the holder if its yield on such Regular
Certificate were 110% of the applicable federal rate as of the date of purchase,
over (b) the amount of income actually includible in the gross income of such
holder with respect to such Regular Certificate. In addition, gain or loss
recognized from the sale of a Regular Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss under Code Section
582(c). Long-term capital gains of certain non-corporate taxpayers generally are
subject to a lower maximum tax rate than ordinary income or short-term capital
gains of such taxpayers for property held for more than one year. The maximum
tax rate for corporations is the same with respect to both ordinary income and
capital gains.
Taxation of Residual Certificates
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Certificates ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in such quarter
and by allocating such daily portion among the Residual Holders in proportion to
their respective holdings of Residual Certificates in the REMIC Pool on such
day. REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting, except,
in addition to certain other adjustments, that (i) the limitations on
deductibility of investment interest expense and expenses for the production of
income do not apply, (ii) all bad loans will be deductible as business bad debts
and (iii) the limitation on the deductibility of interest and expenses related
to tax-exempt income will apply. The REMIC Pool's gross income includes
interest, Original Issue Discount income and market discount income, if any, on
the Mortgage Loans, reduced by amortization of any premium on the Mortgage
Loans, plus income from amortization of issue premium, if any, on the Regular
Certificates, plus income on reinvestment of cash flows and reserve assets, plus
any cancellation of indebtedness income upon allocation of realized losses to
the Regular Certificates. The REMIC Pool's deductions include interest and
Original Issue Discount expense on the Regular Certificates, servicing fees on
the Mortgage Loans, other administrative expenses of the REMIC Pool and realized
losses on the Mortgage Loans. The requirement that Residual Holders report their
pro rata share of taxable income or net loss of the REMIC Pool will continue
until there are no Certificates of any Class of the related series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest and Original Issue Discount or market discount income or
amortization of premium on the Mortgage Loans, on the one hand, and the timing
of deductions for interest (including Original Issue Discount) or income from
amortization of issue
115
premium on the Regular Certificates on the other hand. In the event that an
interest in the Mortgage Loans is acquired by the REMIC Pool at a discount, and
one or more Mortgage Loans is prepaid, the Residual Holder may recognize taxable
income without being entitled to receive a corresponding amount of cash because
(i) the prepayment may be used in whole or in part to make distributions in
reduction of principal on the Regular Certificates and (ii) the discount on the
Mortgage Loans which is includible in income may exceed the deduction allowed
upon these distributions on those Regular Certificates on account of any
unaccrued Original Issue Discount relating to those Regular Certificates. When
there is more than one Class of Regular Certificates that distribute principal
sequentially, this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Certificates when
distributions in reduction of principal are being made in respect of earlier
Classes of Regular Certificates to the extent that such Classes are not issued
with substantial discount or are issued at a premium. If taxable income
attributable to such a mismatching is realized, in general, losses would be
allowed in later years as distributions on the later maturing Classes of Regular
Certificates are made. Taxable income may also be greater in earlier years than
in later years because interest expense deductions, expressed as a percentage of
the outstanding principal amount of such a series of Regular Certificates, may
increase over time as distributions in reduction of principal are made on the
lower yielding Classes of Regular Certificates, whereas, to the extent the REMIC
Pool consists of fixed- rate Mortgage Loans, interest income with respect to any
given Mortgage Loan will remain constant over time as a percentage of the
outstanding principal amount of that loan. Consequently, Residual Holders must
have sufficient other sources of cash to pay any federal, state, or local income
taxes due as a result of this mismatching or unrelated deductions against which
to offset this income, subject to the discussion of "excess inclusions" below
under "--Limitations on Offset or Exemption of REMIC Income." The timing of this
mismatching of income and deductions described in this paragraph may have a
significant adverse effect upon a Residual Holder's after-tax rate of return. In
addition, a Residual Holder's taxable income during certain periods may exceed
the income reflected by the Residual Holder for these periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Certificates.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Holder is limited to the adjusted basis of the Residual
Certificate as of the close of the quarter (or time of disposition of the
Residual Certificate if earlier), determined without taking into account the net
loss for the quarter. The initial basis of a purchaser of a Residual Certificate
is the amount paid for the Residual Certificate. This basis will be increased by
the amount of taxable income of the REMIC Pool reportable by the Residual Holder
and will be decreased (but not below zero), first, by a cash distribution from
the REMIC Pool and, second, by the amount of loss of the REMIC Pool reportable
by the Residual Holder. Any loss that is disallowed on account of this
limitation may be carried over indefinitely for a Residual Holder as to whom
such loss was disallowed and may be used by this Residual Holder only to offset
any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of its
Residual Certificate as an offset to its share of the taxable income of the
related REMIC Pool. However, that taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. This recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Certificates over their life.
However, in view of the possible acceleration of the income of Residual Holders
described above under "--Taxation of REMIC Income," the period of time over
which such issue price is effectively amortized may be longer than the economic
life of the Residual Certificates.
116
A Residual Certificate may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price for this type of residual
interest as zero rather than the negative amount for purposes of determining the
REMIC Pool's basis in its assets. Regulations have been issued addressing the
federal income tax treatment of "inducement fees" received by transferees of
noneconomic residual interests. These regulations require inducement fees to be
included in income over a period reasonably related to the period in which a
Residual Certificate is expected to generate taxable income or net loss to its
holder. Under two safe harbor methods, inducement fees are permitted to be
included in income: (i) in the same amounts and over the same period that the
Residual Holder uses for financial reporting purposes, provided that this period
is not shorter than the period the related REMIC is expected to generate taxable
income or (ii) ratably over the remaining anticipated weighted average life of
all the regular and residual interests issued by the related REMIC, determined
based on actual distributions projected as remaining to be made on such
interests under the applicable prepayment assumption. If the Residual Holder
sells or otherwise disposes of the residual interest, any unrecognized portion
of the inducement fee generally is required to be taken into account at the time
of the sale or disposition. A prospective purchaser of a Residual Certificate
should consult with its tax counsel regarding the effect of these regulations.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of its basis until termination of the
REMIC Pool unless future Treasury regulations provide for periodic adjustments
to the REMIC income otherwise reportable by such holder. The REMIC Regulations
currently in effect do not provide for this outcome. See "--Treatment of Certain
Items of REMIC Income and Expense" and "--Market Discount" below regarding the
basis of Mortgage Loans to the REMIC Pool and "--Sale or Exchange of a Residual
Certificate" below regarding possible treatment of a loss upon termination of
the REMIC Pool as a capital loss.
Treatment of Certain Items of REMIC Income and Expense
It is anticipated that the Trustee will compute REMIC income and expense in
accordance with the Code and applicable regulations. However, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The Trustee makes no representation as to the
specific method that it will use for reporting income for the Mortgage Loans and
expenses with respect to the Regular Certificates and different methods could
result in different timing of reporting of taxable income or net loss to
Residual Holders or differences in capital gain versus ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's deductions
for Original Issue Discount and income from amortization of issue premium will
be determined in the same manner as Original Issue Discount income on Regular
Certificates as described above under "--Taxation of Regular
Certificates--Original Issue Discount" and "--Variable Rate Regular
Certificates," without regard to the de minimis rule described therein, and
"--Premium."
Market Discount. The REMIC Pool will have market discount income on the
Mortgage Loans if, in general, the basis of the REMIC Pool in the Mortgage Loans
is exceeded by their unpaid principal balances. The REMIC Pool's basis in the
Mortgage Loans is generally the fair market value of the Mortgage Loans
immediately after their transfer to the REMIC Pool. The REMIC Regulations
provide that this basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool. The accrued portion of this
market discount would be recognized currently as an item of ordinary income in a
manner similar to Original Issue Discount. Market discount income generally
should accrue in the manner described above under "--Taxation of Regular
Certificates--Market Discount."
117
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceed their unpaid principal balances, the REMIC Pool will be considered to
have acquired the Mortgage Loans at a premium equal to the amount of that
excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the fair
market value of the Mortgage Loans, based on the aggregate of the issue prices
of the regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "--Taxation of Regular Certificates--Premium," a person that holds a
Mortgage Loan as a capital asset under Code Section 1221 may elect under Code
Section 171 to amortize premium on Mortgage Loans originated after September 27,
1985 under the constant yield method. Amortizable bond premium will be treated
as an offset to interest income on the Mortgage Loans, rather than as a separate
deduction item. Because substantially all of the mortgagors on the Mortgage
Loans are expected to be individuals, Code Section 171 will not be available for
premium on Mortgage Loans originated on or prior to September 27, 1985. Premium
on these Mortgage Loans may be deductible in accordance with a reasonable method
regularly employed by the holder. The allocation of this premium pro rata among
principal payments should be considered a reasonable method; however, the
Internal Revenue Service may argue that this premium should be allocated in a
different manner, such as allocating this premium entirely to the final payment
of principal.
Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in determining the
federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Certificate over the daily accruals for this quarterly period of (i) 120% of the
long-term applicable federal rate that would have applied to the Residual
Certificate (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (ii) the adjusted issue price of the Residual Certificate
at the beginning of such quarterly period. For this purpose, the adjusted issue
price of a Residual Certificate at the beginning of a quarter is the issue price
of the Residual Certificate, plus the amount of daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made on the Residual Certificate prior to the beginning of the
quarterly period. Accordingly, the portion of the REMIC Pool's taxable income
that will be treated as excess inclusions will be a larger portion of the income
as the adjusted issue price of the Residual Certificates diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on the Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of such
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax for certain persons who are not U.S.
Persons (as defined below under "--Tax-Related Restrictions on Transfer of
Residual Certificates--Foreign Investors"), and the portion of that taxable
income attributable to excess inclusions is not eligible for any reduction in
the rate of withholding tax (by treaty or otherwise). See "--Taxation of Certain
Foreign Investors--Residual Certificates" below. Finally, if a real estate
investment trust or a regulated investment company owns a Residual Certificate,
a portion (allocated under Treasury regulations yet to be issued) of dividends
paid by the real estate investment trust or regulated investment company could
not be offset by net operating losses of its shareholders, would constitute
unrelated business taxable income for tax-exempt shareholders, and would be
ineligible for reduction of withholding to certain persons who are not U.S.
Persons.
There are three rules for determining the effect of excess inclusions on the
alternative minimum taxable income of a Residual Holder. First, alternative
minimum taxable income for a Residual Holder is
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determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Holder's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deduction must be computed without regard to any excess
inclusions.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions for the Residual
Certificate for periods after the transfer and (ii) the highest marginal federal
income tax rate applicable to corporations. The REMIC Regulations provide that
the anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under Code
Section 1274(d) as of the date of the transfer for a term ending with the last
calendar quarter in which excess inclusions are expected to accrue. This rate is
applied to the anticipated excess inclusions from the end of the remaining
calendar quarters in which they arise to the date of the transfer. Such a tax
generally would be imposed on the transferor of the Residual Certificate, except
that where the transfer is through an agent (including a broker, nominee or
other middleman) for a Disqualified Organization, the tax would instead be
imposed on the agent. However, a transferor of a Residual Certificate would in
no event be liable for the tax for a transfer if the transferee furnishes to the
transferor an affidavit stating that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false. The tax also may be waived by the
Internal Revenue Service if the Disqualified Organization promptly disposes of
the Residual Certificate and the transferor pays income tax at the highest
corporate rate on the excess inclusion for the period the Residual Certificate
is actually held by the Disqualified Organization.
In addition, if a Pass-Through Entity (as defined below) has excess
inclusion income on a Residual Certificate during a taxable year and a
Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on the Pass-Through Entity equal to the product of
(i) the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period the interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
This tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
this tax if it has received an affidavit from the record holder that it is not a
Disqualified Organization or stating the holder's taxpayer identification number
and, during the period the person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that the
affidavit is false.
If an Electing Large Partnership holds a Residual Certificate, all interests
in the Electing Large Partnership are treated as held by Disqualified
Organizations for purposes of the tax imposed upon a Pass-Through Entity by
Section 860E(c) of the Code. An exception to this tax, otherwise available to a
Pass-Through Entity that is furnished certain affidavits by record holders of
interests in the entity and that does not know the affidavits are false, is not
available to an Electing Large Partnership.
For these purposes, (i) "Disqualified Organization" means the United States,
any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code
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unless the organization is subject to the tax on unrelated business income
imposed by Code Section 511, (ii) "Pass-Through Entity" means any regulated
investment company, real estate investment trust, common trust fund,
partnership, trust or estate and certain corporations operating on a cooperative
basis, and (iii) an "Electing Large Partnership" means any partnership having
more than 100 members during the preceding tax year (other than certain service
partnerships and commodity pools), which elect to apply simplified reporting
provisions under the Code. Except as may be provided in Treasury regulations,
any person holding an interest in a Pass-Through Entity as a nominee for another
will, with respect to such interest, be treated as a Pass-Through Entity.
The Pooling Agreement for a series will provide that no legal or beneficial
interest in a Residual Certificate may be transferred or registered unless (i)
the proposed transferee furnishes to the Trustee an affidavit providing its
taxpayer identification number and stating that the transferee is the beneficial
owner of the Residual Certificate and is not a Disqualified Organization and is
not purchasing such Residual Certificate on behalf of a Disqualified
Organization (i.e., as a broker, nominee or middleman thereof) and (ii) the
transferor provides a statement in writing to the Trustee that it has no actual
knowledge that the affidavit is false. Moreover, the Pooling Agreement will
provide that any attempted or purported transfer in violation of these transfer
restrictions will be null and void and will vest no rights in any purported
transferee. Each Residual Certificate with respect to a series will bear a
legend referring to such restrictions on transfer, and each Residual Holder will
be deemed to have agreed, as a condition of ownership thereof, to any amendments
to the related Pooling Agreement required under the Code or applicable Treasury
regulations to effectuate the foregoing restrictions. Information necessary to
compute an applicable excise tax must be furnished to the Internal Revenue
Service and to the requesting party within 60 days of the request, and the
Sponsor or the Trustee may charge a fee for computing and providing such
information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a noneconomic residual
interest (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person, as defined below under "--Foreign Investors") is
disregarded for all federal income tax purposes if a significant purpose of the
transferor is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (x) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest federal corporate income tax rate in effect for the
year in which the transfer occurs, and (y) the transferor reasonably expects
that the transferee will receive distributions from the REMIC at or after the
time at which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes on each excess inclusion. The
anticipated excess inclusions and the present value rate are determined in the
same manner as set forth above under "--Disqualified Organizations." The REMIC
Regulations explain that a significant purpose to impede the assessment or
collection of tax exists if the transferor, at the time of the transfer, either
knew or should have known that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC. A safe harbor is
provided if (i) the transferor conducted, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and found
that the transferee historically had paid its debts as they came due and found
no significant evidence to indicate that the transferee would not continue to
pay its debts as they came due in the future, (ii) the transferee represents to
the transferor that it understands that, as the holder of the non-economic
residual interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the interest and that the transferee intends to pay
taxes associated with holding the residual interest as they become due, (iii)
the transferee represents to the transferor that it will not cause income from
the residual certificate to be attributable to a foreign permanent establishment
or fixed
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base (within the meaning of an applicable income tax treaty) of the transferee
or of any other person, and (iv) one of the two following tests is satisfied:
either
(a) the present value of the anticipated tax liabilities associated with
holding the noneconomic residual interest will not exceed the sum of:
(1) the present value of any consideration given to the transferee
to acquire the residual interest;
(2) the present value of the expected future distributions on the
residual interest; and
(3) the present value of the anticipated tax savings associated with
holding the residual interest as the REMIC generates losses; or
(b) (1)the transferee must be a domestic "C" corporation (other than a
corporation exempt from taxation or a regulated investment company or real
estate investment trust) that meets certain gross and net asset tests
(generally, $100 million of gross assets and $10 million of net assets for
the current year and the two preceding fiscal years);
(2) the transferee must agree in writing that any subsequent
transfer of the residual interest would be to an eligible "C"
corporation and would meet the requirement for a safe harbor transfer;
and
(3) the facts and circumstances known to the transferor on or before
the date of the transfer must not reasonably indicate that the taxes
associated with ownership of the residual interest will not be paid by
the transferee.
For purposes of the computation in clause (a), the transferee is assumed to
pay tax at the highest corporate rate of tax specified in the Code or, in
certain circumstances, the alternative minimum tax rate. Further, present values
generally are computed using a discount rate equal to the short-term Federal
rate set forth in Section 1274(d) of the Code for the month of the transfer and
the compounding period used by the transferee.
The Pooling Agreement for each series of Certificates will require the
transferee of a Residual Certificate to certify to the matters in requirements
(i) through (iii) above as part of the affidavit described above under
"--Disqualified Organizations." The Pooling Agreement will not require that
transfers of the Residual Certificates meet requirement (iv) above.
Consequently, those transfers may not meet the safe harbor. Persons considering
the purchase of the Residual Certificates of a series should consult their
advisors regarding the advisability of meeting the safe harbor in any transfer
of the Residual Certificates.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a Foreign Person will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a U.S. Person (as defined below), unless the
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Certificate is deemed to have tax
avoidance potential unless, at the time of the transfer, (i) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (ii) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and prior to the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Certificate back to a U.S.
Person, the transfer will be disregarded
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and the foreign transferor will continue to be treated as the owner unless
arrangements are made so that the transfer does not have the effect of allowing
the transferor to avoid tax on accrued excess inclusions.
The prospectus supplement relating to the Certificates of a series may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation or
partnership (unless, in the case of a partnership, Treasury regulations are
adopted that provide otherwise) created or organized in or under the laws of the
United States, any state or the District of Columbia, including an entity
treated as a corporation or partnership for federal income tax purposes, an
estate that is subject to United States federal income tax regardless of its
source, or a trust if a court within the United States is able to exercise
primary supervision over the administration of such trust, and one or more such
U.S. Persons have the authority to control all substantial decisions of such
trust (or, to the extent provided in applicable Treasury regulations, certain
trusts in existence on August 20, 1996 which are eligible to elect to be treated
as U.S. Persons).
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount realized
over the adjusted basis (as described above under "--Basis and Losses") of such
Residual Holder in such Residual Certificate at the time of the sale or
exchange. In addition to reporting the taxable income of the REMIC Pool, a
Residual Holder will have taxable income to the extent that any cash
distribution to it from the REMIC Pool exceeds such adjusted basis on that
Distribution Date. Such income will be treated as gain from the sale or exchange
of the Residual Certificate. It is possible that the termination of the REMIC
Pool may be treated as a sale or exchange of a Residual Holder's Residual
Certificate, in which case, if the Residual Holder has an adjusted basis in its
Residual Certificate remaining when its interest in the REMIC Pool terminates,
and if it holds its Residual Certificate as a capital asset under Code Section
1221, then it will recognize a capital loss at that time in the amount of such
remaining adjusted basis.
In addition, under temporary Treasury Regulations, effective generally for
partnership interests first acquired on or after August 1, 2006, a U.S.
partnership having a partner who is not a U.S. Person will be required to pay
withholding tax in respect of excess inclusion income allocable to such non-U.S.
partner, even if no cash distributions are made to such partner. Similar rules
apply to excess inclusion income allocable to non-U.S. Persons through certain
other pass-through entities.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. In addition, gain or loss recognized from the sale of a
Residual Certificate or termination of the REMIC Pool by certain banks or thrift
institutions will be treated as ordinary income or loss under Code Section
582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six months
after such sale or
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disposition, acquires (or enters into any other transaction that results in the
application of Code Section 1091) any residual interest in any REMIC or any
interest in a "taxable mortgage pool" (such as a non-REMIC owner trust) that is
economically comparable to a Residual Certificate.
Mark to Market Regulations
The Internal Revenue Service has issued final regulations (the "Mark to
Market Regulations") under Code Section 475 relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities of a dealer, except to the
extent that the dealer has specifically identified a security as held for
investment. The Mark to Market Regulations provide that, for purposes of this
mark-to-market requirement, a Residual Certificate is not treated as a security
and thus may not be marked to market.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include (i) the disposition of a qualified mortgage other than for (a)
substitution within two years of the Startup Day for a defective (including a
defaulted) obligation (or repurchase in lieu of substitution of a defective
(including a defaulted) obligation at any time) or for any qualified mortgage
within three months of the Startup Day, (b) foreclosure, default, or imminent
default of a qualified mortgage, (c) bankruptcy or insolvency of the REMIC Pool,
or (d) a qualified (complete) liquidation, (ii) the receipt of income from
assets that are not the type of mortgages or investments that the REMIC Pool is
permitted to hold, (iii) the receipt of compensation for services, or (iv) the
receipt of gain from disposition of cash flow investments other than pursuant to
a qualified liquidation. Notwithstanding (i) and (iv) of the preceding sentence,
it is not a prohibited transaction to sell REMIC Pool property to prevent a
default on Regular Certificates as a result of a default on qualified mortgages
or to facilitate a clean-up call (generally, an optional prepayment of the
remaining principal balance of a Class of Regular Certificates to save
administrative costs when no more than a small percentage of the Certificates is
outstanding). The REMIC Regulations indicate that the modification of a
qualified mortgage generally will not be treated as a disposition if it is
occasioned by a default or reasonably foreseeable default, an assumption of the
Mortgage Loan, the waiver of a due-on-sale or due-on-encumbrance clause, or the
conversion of an interest rate by a mortgagor pursuant to the terms of a
convertible adjustable-rate Mortgage Loan.
Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during the
three months following the Startup Day, (ii) made to a qualified reserve fund by
a Residual Holder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call, and (v) as otherwise permitted in
Treasury regulations yet to be issued. It is not anticipated that there will be
any contributions to the REMIC Pool after the Startup Day.
Net Income from Foreclosure Property
The REMIC Pool will be subject to federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure
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property" for a period not exceeding the close of the third calendar year after
the year in which the REMIC Pool acquired such property, with a possible
extension. Net income from foreclosure property generally means gain from the
sale of a foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust. It is not anticipated that the REMIC Pool will
have any taxable net income from foreclosure property.
Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC Pool's final tax return a date on which the adoption is deemed to occur,
and sells all of its assets (other than cash) within a 90-day period beginning
on such date, the REMIC Pool will not be subject to the prohibited transaction
rules on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all of the sale proceeds plus its cash (other than
amounts retained to meet claims) to holders of Regular Certificates and Residual
Holders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for a REMIC Pool's income tax return
is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return.
The Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual Holder for an
entire taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. A Servicer or the Master Servicer will be obligated
to act as "tax matters person," as defined in applicable Treasury regulations,
with respect to the REMIC Pool, in its capacity as either Residual Holder or
agent of the Residual Holders. If the Code or applicable Treasury regulations do
not permit a Servicer or the Master Servicer, as applicable, to act as tax
matters person in its capacity as agent of the Residual Holders, the Residual
Holder chosen by the Residual Holders or such other person specified pursuant to
Treasury regulations will be required to act as tax matters person.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation on certain itemized deductions described in Code Section 67, to the
extent that these itemized deductions, in the aggregate, do not exceed 2% of the
investor's adjusted gross income. In addition, Code Section 68 provides that
itemized deductions otherwise allowable for a taxable year of an individual
taxpayer will be reduced by the lesser of (i) 3% of the excess, if any, of
adjusted gross income over a statutory threshold amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for such year. These
limitations will be phased out and eliminated by 2010. In the case of a REMIC
Pool, these deductions may include deductions under Code Section 212 for the
Servicing Fee and all administrative and other expenses relating to the REMIC
Pool, or any similar expenses allocated to the REMIC Pool for a regular interest
it holds in another REMIC. Investors who hold REMIC Certificates either directly
or indirectly through certain pass-through entities may have their pro rata
share of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, these expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause investors to be subject to significant additional tax liability. Temporary
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to
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the holders of Residual Certificates in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election. However,
this additional gross income and limitation on deductions will apply to the
allocable portion of these expenses to holders of Regular Certificates, as well
as holders of Residual Certificates, where the Regular Certificates are issued
in a manner that is similar to pass-through certificates in a fixed investment
trust. All of these expenses generally will be allocable to the Residual
Certificates. In general, the allocable portion will be determined based on the
ratio that a REMIC Certificateholder's income, determined on a daily basis,
bears to the income of all holders of Regular Certificates and Residual
Certificates for a REMIC Pool. As a result, individuals, estates or trusts
holding REMIC Certificates (either directly or indirectly through a grantor
trust, partnership, S corporation, REMIC or certain other pass-through entities
described in the foregoing temporary Treasury regulations) may have taxable
income in excess of the interest income at the pass-through rate on Regular
Certificates that are issued in a single class or otherwise consistently with
fixed investment trust status or in excess of cash distributions for the related
period on Residual Certificates.
Taxation of Certain Foreign Investors
Regular Certificates
Interest, including Original Issue Discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or other
non-U.S. Persons, will be considered "portfolio interest" and, therefore,
generally will not be subject to 30% United States withholding tax, provided
that such non-U.S. Person (i) is not a "10-percent shareholder" (within the
meaning of Code Section 871(h)(3)(B)) of, or a controlled foreign corporation
(described in Code Section 881(c)(3)(C)) related to, the REMIC (or possibly one
or more mortgagors) and (ii) provides the Trustee, or the person who would
otherwise be required to withhold tax from such distributions under Code Section
1441 or 1442 with appropriate documentation, signed under penalties of perjury,
establishing an exemption from withholding. The appropriate documentation
includes IRS Form W-8BEN, if the non-U.S. Person is a corporation or individual
eligible for the benefits of the portfolio interest exemption or an exemption
based on a treaty; IRS Form W-8ECI if the non-U.S. Person is eligible for an
exemption on the basis of its income from the Regular Certificate being
effectively connected to a United States trade or business; IRS Form W-8BEN or
IRS Form W-8IMY if the non-U.S. Person is a trust, depending on whether such
trust is classified as the beneficial owner of the Regular Certificate; and IRS
Form W-8IMY, with supporting documentation as specified in the Treasury
regulations, required to substantiate exemptions from withholding on behalf of
its partners, if the non-U.S. Person is a partnership. An intermediary (other
than a partnership) must provide IRS Form W-8IMY, revealing all required
information, including its name, address, taxpayer identification number, the
country under the laws of which it is created, and certification that it is not
acting for its own account. A "qualified intermediary" must certify that it has
provided, or will provide, a withholding statement as required under Treasury
regulations Section 1.1441-1(e)(5)(v), but need not disclose the identity of its
account holders on its Form W-8IMY, and may certify its account holders' status
without including each beneficial owner's certification. A non-"qualified
intermediary" must additionally certify that it has provided, or will provide, a
withholding statement that is associated with the appropriate IRS Forms W-8 and
W-9 required to substantiate exemptions from withholding on behalf of its
beneficial owners. If any of the foregoing forms, or any other required
documentation is not provided, 30% withholding will apply. The term
"intermediary" means a person acting as a custodian, a broker, nominee or
otherwise as an agent for the beneficial owner of a Regular Certificate. A
"qualified intermediary" is generally a foreign financial institution or
clearing organization or a non-U.S. branch or office of a U.S. financial
institution or clearing organization that is a party to a withholding agreement
with the IRS.
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Residual Certificates
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Certificates" above, but only to the extent that (i) the
Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Estate or
segregated pool of assets in the Trust Estate (as to which a separate REMIC
election will be made), to which the Residual Certificate relates, consists of
obligations issued in "registered form" within the meaning of Code Section
163(f)(1). Generally, Mortgage Loans will not be, but regular interests in
another REMIC Pool will be, considered obligations issued in registered form.
Furthermore, a Residual Holder will not be entitled to any exemption from the
30% withholding tax (or lower treaty rate) to the extent of that portion of
REMIC taxable income that constitutes an "excess inclusion." See "--Taxation of
Residual Certificates--Limitations on Offset or Exemption of REMIC Income." If
the amounts paid to Residual Holders who are non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
these non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to these non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, these amounts generally will be taken into account
for purposes of withholding only when paid or otherwise distributed (or when the
Residual Certificate is disposed of) under rules similar to withholding upon
disposition of debt instruments that have Original Issue Discount. See
"--Taxation of Residual Certificates--Tax-Related Restrictions on Transfer of
Residual Certificates--Foreign Investors" above concerning the disregard of
certain transfers having "tax avoidance potential." Investors who are non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning Residual Certificates.
Backup Withholding
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 at the rate of 28% (increasing
to 31% after 2010) on "reportable payments" (including interest distributions,
Original Issue Discount, and, under certain circumstances, principal
distributions) unless the Regular Certificateholder is a U.S. Person and
provides IRS Form W-9 with the correct taxpayer identification number; is a
non-U.S. Person and provides IRS Form W-8BEN identifying the non-U.S. Person and
stating that the beneficial owner is not a U.S. Person; or can be treated as an
exempt recipient within the meaning of Treasury regulations Section
1.6049-4(c)(l)(ii). Any amounts to be withheld from distribution on the Regular
Certificates would be refunded by the IRS or allowed as a credit against the
Regular Certificateholder's federal income tax liability. Information reporting
requirements may also apply regardless of whether withholding is required.
Prospective investors are encouraged to consult their own tax advisors regarding
the application to them of information reporting.
Reporting Requirements
Reports of accrued interest, Original Issue Discount and information
necessary to compute the accrual of market discount will be made annually to the
Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
Regular Certificates or beneficial owners who own Regular Certificates through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Certificates (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person
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designated in Internal Revenue Service Publication 938 with respect to a
particular series of Regular Certificates. Holders through nominees must request
such information from the nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual Holders,
furnished annually, if applicable, to holders of Regular Certificates, and filed
annually with the Internal Revenue Service concerning Code Section 67 expenses
(see "Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Certificates and filed annually with the Internal Revenue Service concerning the
percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "Status of REMIC Certificates."
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Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made
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General
In the event that no election is made to treat a Trust Estate (or a
segregated pool of assets therein) with respect to a series of Certificates as a
REMIC, the Trust Estate will be classified as a grantor trust under subpart E,
Part 1 of subchapter J of the Code and not as an association taxable as a
corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Where there is no Fixed Retained Yield on the Mortgage Loans underlying
the Certificates of a series, and where the Certificates are not designated as
"Stripped Certificates," the holder of each Certificate in the series will be
treated as the owner of a pro rata undivided interest in the ordinary income and
corpus portions of the Trust Estate represented by its Certificate and will be
considered the beneficial owner of a pro rata undivided interest in each of the
Mortgage Loans, subject to the discussion below under "--Recharacterization of
Servicing Fees." Accordingly, the holder of a Certificate of a particular series
will be required to report on its federal income tax return its pro rata share
of the entire income from the Mortgage Loans represented by its Certificate,
including interest at the mortgage interest rate on such Mortgage Loans,
Original Issue Discount (if any), prepayment fees, assumption fees, and late
payment charges received by the Servicer, in accordance with such
Certificateholder's method of accounting. A Certificateholder generally will be
able to deduct its share of the Servicing Fee and all administrative and other
expenses of the Trust Estate in accordance with its method of accounting,
provided that these amounts are reasonable compensation for services rendered to
that Trust Estate. However, investors who are individuals, estates or trusts who
own Certificates, either directly or indirectly through certain pass-through
entities, will be subject to limitation with respect to certain itemized
deductions described in Code Section 67, including deductions under Code Section
212 for the Servicing Fee and all such administrative and other expenses of the
Trust Estate, to the extent that such deductions, in the aggregate, do not
exceed two percent of an investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over a statutory threshold amount or
(ii) 80% of the amount of itemized deductions otherwise allowable for such year.
These limitations will be phased out and eliminated by 2010. As a result,
investors holding Certificates, directly or indirectly through a pass-through
entity, may have aggregate taxable income in excess of the aggregate amount of
cash
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received on their Certificates relating to interest at the pass-through rate or
as discount income on their Certificates. In addition, these expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause investors to be subject to significant additional tax liability. Moreover,
where there is Fixed Retained Yield on the Mortgage Loans underlying a series of
Certificates or where the servicing fees are in excess of reasonable servicing
compensation, the transaction will be subject to the application of the
"stripped bond" and "stripped coupon" rules of the Code, as described below
under "--Stripped Certificates" and "--Recharacterization of Servicing Fees,"
respectively.
Tax Status
Cadwalader, Wickersham & Taft LLP has advised the Depositor that, except as
described below with respect to Stripped Certificates:
(i) A Certificate owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) will be considered to
represent "loans . . . secured by an interest in real property which is . .
. residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the Mortgage
Loans represented by that Certificate is of the type described in such
section of the Code.
(ii) A Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A) to the extent that the assets of the related Trust
Estate consist of qualified assets, and interest income on such assets will
be considered "interest on obligations secured by mortgages on real
property" to such extent within the meaning of Code Section 856(c)(3)(B).
(iii) A Certificate owned by a REMIC will be considered to represent an
"obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Trust Estate consist of "qualified mortgages"
within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buy-Down Loans may be characterized in their
entirety under the Code provisions cited in clauses (i) and (ii) of the
immediately preceding paragraph. There is indirect authority supporting
treatment of an investment in a Buy-Down Loan as entirely secured by real
property if the fair market value of the real property securing the loan exceeds
the principal amount of the loan at the time of issuance or acquisition, as the
case may be. There is no assurance that the treatment described above is
correct. Accordingly, Certificateholders are urged to consult their own tax
advisors concerning the effects of such arrangements on the characterization of
such Certificateholder's investment for federal income tax purposes.
Premium and Discount
Certificateholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon initial
acquisition of Certificates or thereafter.
Premium
The treatment of premium incurred upon the purchase of a Certificate will be
determined generally as described above under "--Federal Income Tax Consequences
for REMIC Certificates--Taxation of Residual Certificates--Treatment of Certain
Items of REMIC Income and Expense--Premium."
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Original Issue Discount
The Original Issue Discount rules of Code Sections 1271 through 1275 will be
applicable to a Certificateholder's interest in those Mortgage Loans as to which
the conditions for the application of those sections are met. Rules regarding
periodic inclusion of Original Issue Discount income are applicable to mortgages
of corporations originated after May 27, 1969, mortgages of noncorporate
mortgagors (other than individuals) originated after July 1, 1982, and mortgages
of individuals originated after March 2, 1984. Under the OID Regulations, such
Original Issue Discount could arise by the charging of points by the originator
of the mortgages in an amount greater than the statutory de minimis exception,
including a payment of points that is currently deductible by the borrower under
applicable Code provisions or, under certain circumstances, by the presence of
"teaser" rates on the Mortgage Loans. See "--Stripped Certificates" below
regarding Original Issue Discount on Stripped Certificates.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
Generally no prepayment assumption will be assumed for purposes of this accrual.
However, Code Section 1272 provides for a reduction in the amount of Original
Issue Discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued Original Issue
Discount, less prior payments of principal. Accordingly, if Mortgage Loans
acquired by a Certificateholder are purchased at a price equal to the then
unpaid principal amount of Mortgage Loans, no Original Issue Discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Loans (i.e., points) will be includible by the
holder.
Market Discount
Certificateholders also will be subject to the market discount rules to the
extent that the conditions for application of those sections are met. Market
discount on the Mortgage Loans will be determined and will be reported as
ordinary income generally in the manner described above under "--Federal Income
Tax Consequences for REMIC Certificates--Taxation of Regular
Certificates--Market Discount," except that the ratable accrual methods
described therein will not apply. Rather, the holder will accrue market discount
pro rata over the life of the Mortgage Loans, unless the constant yield method
is elected. Generally no prepayment assumption will be assumed for purposes of
this accrual.
Recharacterization of Servicing Fees
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of any excess would represent neither income
nor a deduction to Certificateholders. In this regard, there are no
authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of the
Certificate, the reasonableness of servicing compensation should be determined
on a weighted average or loan-by-loan basis. If a loan-by-loan basis is
appropriate, the likelihood that such amount would exceed reasonable servicing
compensation as to some of the Mortgage Loans would be increased. Internal
Revenue Service guidance indicates that a servicing fee in excess of reasonable
compensation ("excess servicing") will cause the Mortgage Loans to be treated
under the "stripped bond" rules. This guidance provides safe harbors for
servicing deemed to be reasonable and requires taxpayers to demonstrate that the
value of servicing fees in excess of these amounts is not greater than the value
of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
Servicer who receives a servicing fee in excess of such amounts would be viewed
as retaining an ownership interest in a portion of
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the interest payments on the Mortgage Loans. Under the rules of Code Section
1286, the separation of ownership of the right to receive some or all of the
interest payments on an obligation from the right to receive some or all of the
principal payments on the obligation would result in treatment of the Mortgage
Loans as "stripped coupons" and "stripped bonds." Subject to the de minimis rule
discussed below under "--Stripped Certificates," each stripped bond or stripped
coupon could be considered for this purpose as a non-interest bearing obligation
issued on the date of issue of the Certificates, and the Original Issue Discount
rules of the Code would apply to the holder thereof. While Certificateholders
would still be treated as owners of beneficial interests in a grantor trust for
federal income tax purposes, the corpus of the grantor trust could be viewed as
excluding the portion of the Mortgage Loans the ownership of which is attributed
to the Servicer, or as including this portion as a second class of equitable
interest. Applicable Treasury regulations treat this arrangement as a fixed
investment trust, since the multiple classes of trust interests should be
treated as merely facilitating direct investments in the trust assets and the
existence of multiple classes of ownership interests is incidental to that
purpose. In general, this recharacterization should not have any significant
effect upon the timing or amount of income reported by a Certificateholder,
except that the income reported by a cash method holder may be slightly
accelerated. See "--Stripped Certificates" below for a further description of
the federal income tax treatment of stripped bonds and stripped coupons.
Sale or Exchange of Certificates
Upon sale or exchange of a Certificate, a Certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale and
its aggregate adjusted basis in the Mortgage Loans and other assets represented
by the Certificate. In general, the aggregate adjusted basis will equal the
Certificateholder's cost for the Certificate, increased by the amount of any
income previously reported relating to the Certificate and decreased by the
amount of any losses previously reported for the Certificate and the amount of
any distributions received on the Certificate. Except as provided above relating
to market discount on any Mortgage Loans, and except for certain financial
institutions subject to the provisions of Code Section 582(c), any such gain or
loss generally would be capital gain or loss if the Certificate was held as a
capital asset. However, gain on the sale of a Certificate will be treated as
ordinary income (i) if a Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Certificateholder's net investment in the
conversion transaction at 120% of the appropriate applicable Federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. Long-term capital gains of certain noncorporate taxpayers
generally are subject to a lower maximum tax rate than ordinary income or
short-term capital gains of such taxpayers for property held more than one year.
The maximum tax rate for corporations is the same with respect to both ordinary
income and capital gains.
Stripped Certificates
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership of
the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Certificates that are subject to those rules will be referred to as "Stripped
Certificates." The Certificates will be subject to those rules if (i) the
Depositor or any of its affiliates retains (for its own account or for purposes
of resale), in the form
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of Fixed Retained Yield or otherwise, an ownership interest in a portion of the
payments on the Mortgage Loans, (ii) the Depositor or any of its affiliates is
treated as having an ownership interest in the Mortgage Loans to the extent it
is paid (or retains) servicing compensation in an amount greater than reasonable
consideration for servicing the Mortgage Loans (see "--Recharacterization of
Servicing Fees" above), and (iii) a Class of Certificates issued in two or more
Classes or subclasses representing the right to non-pro-rata percentages of the
interest and principal payments on the Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" for its pro rata share of all or a portion of the principal
payments on each Mortgage Loan and/or "stripped coupons" relating to its pro
rata share of all or a portion of the interest payments on each Mortgage Loan,
including the Stripped Certificate's allocable share of the servicing fees paid
to a Servicer, to the extent that these fees represent reasonable compensation
for services rendered. See the discussion above under "--Recharacterization of
Servicing Fees." Although not free from doubt, for purposes of reporting to
Stripped Certificateholders, the servicing fees will be allocated to the
Stripped Certificates in proportion to the respective entitlements to
distributions of each Class of Stripped Certificates for the related period or
periods. The holder of a Stripped Certificate generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under
"Federal Income Tax Consequences for Certificates as to Which No REMIC Election
Is Made--General," subject to the limitation described in that section.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an Original Issue Discount on the date that such
stripped interest is purchased. Although the treatment of Stripped Certificates
for federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Certificates are issued with respect to a
Mortgage Pool containing variable-rate Mortgage Loans, the Depositor has been
advised by counsel that (i) the Trust Estate will be treated as a grantor trust
under subpart E, Part I of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of Code
Section 7701(i), and (ii) each Stripped Certificate should be treated as a
single installment obligation for purposes of calculating Original Issue
Discount and gain or loss on disposition. This treatment is based on the
interrelationship of Code Section 1286, Code Sections 1272 through 1275, and the
OID Regulations. Although it is possible that computations with respect to
Stripped Certificates could be made in one of the ways described below under
"--Taxation of Stripped Certificates--Possible Alternative Characterizations,"
the OID Regulations state, in general, that two or more debt instruments issued
by a single issuer to a single investor in a single transaction should be
treated as a single debt instrument. Accordingly, for Original Issue Discount
purposes, all payments on any Stripped Certificates should be aggregated and
treated as though they were made on a single debt instrument. The Pooling
Agreement will require that the Trustee make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Certificate as a single debt instrument issued on the date it is purchased for
purposes of calculating any Original Issue Discount. In addition, under these
regulations, a Stripped Certificate that represents a right to payments of both
interest and principal may be viewed either as issued with Original Issue
Discount or market discount (as described below), at a de minimis Original Issue
Discount, or, presumably, at a premium. This treatment indicates that the
interest component of this type of Stripped Certificate would be treated as
qualified stated interest under the OID Regulations, assuming it is not an
interest-only or super-premium Stripped Certificate. Further, these final
regulations provide that the purchaser of this type of Stripped Certificate will
be required to account for any discount as market discount rather than Original
Issue Discount if either (i) the initial discount with respect to the Stripped
Certificate was treated as zero under the de minimis rule, or (ii) no more than
100 basis points in excess of reasonable servicing is stripped off the related
Mortgage Loans. Any such market discount would be reportable as described above
under
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"Federal Income Tax Consequences for REMIC Certificates--Taxation of Regular
Certificates--Market Discount," without regard to the de minimis rule therein,
assuming that a prepayment assumption is employed in this computation.
Status of Stripped Certificates
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as that
of the Mortgage Loans. Although the issue is not free from doubt, counsel has
advised the Depositor that Stripped Certificates owned by applicable holders
should be considered to represent "real estate assets" within the meaning of
Code Section 856(c)(4)(A), "obligation[s] . . . principally secured by an
interest in real property" within the meaning of Code Section 860G(a)(3)(A), and
"loans . . . secured by an interest in real property" within the meaning of Code
Section 7701(a)(19)(C)(v), and interest (including Original Issue Discount)
income attributable to Stripped Certificates should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), provided that in each case the Mortgage
Loans and interest on the Mortgage Loans qualify for such treatment. The
application of these Code provisions to Buy-Down Loans is uncertain. See "--Tax
Status" above.
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "--General," each
Stripped Certificate will be considered to have been issued at an Original Issue
Discount for Federal income tax purposes. Original issue discount with respect
to a Stripped Certificate must be included in ordinary income as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, which may be prior to the receipt of the cash
attributable to the related income. Based in part on the OID Regulations and the
amendments to the Original Issue Discount sections of the Code made by the 1986
Act, the amount of Original Issue Discount required to be included in the income
of a holder of a Stripped Certificate (referred to in this discussion as a
"Stripped Certificateholder") in any taxable year likely will be computed
generally as described above under "Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Original Issue Discount" and
"--Variable Rate Regular Certificates." However, with the apparent exception of
a Stripped Certificate qualifying as a market discount obligation as described
above under "--General," the issue price of a Stripped Certificate will be the
purchase price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments to be made on the
Stripped Certificate to the Stripped Certificateholder, presumably under the
Prepayment Assumption, other than qualified stated interest.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
Original Issue Discount will be either accelerated or decelerated and the amount
of such Original Issue Discount will be either increased or decreased depending
on the relative interests in principal and interest on each Mortgage Loan
represented by such Stripped Certificateholder's Stripped Certificate. While the
matter is not free from doubt, the holder of a Stripped Certificate should be
entitled in the year that it becomes certain (assuming no further prepayments)
that the holder will not recover a portion of its adjusted basis in the Stripped
Certificate to recognize a loss (which may be a capital loss) equal to such
portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Certificates will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as the
Stripped Certificates. However, if final regulations dealing with contingent
interest with respect to the Stripped Certificates apply the same principles as
the
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OID Regulations, these regulations may lead to different timing of income
inclusion than would be the case under the OID Regulations for non-contingent
debt instruments. Furthermore, application of these principles could lead to the
characterization of gain on the sale of contingent interest Stripped
Certificates as ordinary income. Investors should consult their tax advisors
regarding the appropriate tax treatment of Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates--Sale or Exchange of Regular Certificates." To the
extent that a subsequent purchaser's purchase price is exceeded by the remaining
payments on the Stripped Certificates, the subsequent purchaser will be required
for federal income tax purposes to accrue and report the excess as if it were
Original Issue Discount in the manner described above. It is not clear for this
purpose whether the assumed prepayment rate that is to be used in the case of a
Stripped Certificateholder other than an original Stripped Certificateholder
should be the Prepayment Assumption or a new rate based on the circumstances at
the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. When an investor
purchases more than one Class of Stripped Certificates, it is unclear whether
for federal income tax purposes these Classes of Stripped Certificates should be
treated separately or aggregated for purposes of the rules described above.
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates discussed above are not the only possible interpretations
of the applicable Code provisions. For example, the Stripped Certificateholder
may be treated as the owner of (i) one installment obligation consisting of the
Stripped Certificate's pro rata share of the payments attributable to principal
on each Mortgage Loan and a second installment obligation consisting of the
Stripped Certificate's pro rata share of the payments attributable to interest
on each Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there
are scheduled payments of principal and/or interest on each Mortgage Loan, or
(iii) a separate installment obligation for each Mortgage Loan, representing the
Stripped Certificate's pro rata share of payments of principal and/or interest
to be made on the Mortgage Loan. Alternatively, the holder of one or more
Classes of Stripped Certificates may be treated as the owner of a pro rata
fractional undivided interest in each Mortgage Loan to the extent that the
Stripped Certificate, or Classes of Stripped Certificates in the aggregate,
represent the same pro rata portion of principal and interest on each Mortgage
Loan, and a stripped bond or stripped coupon (as the case may be), treated as an
installment obligation or contingent payment obligation, as to the remainder.
Regulations regarding Original Issue Discount on stripped obligations make the
foregoing interpretations less likely to be applicable. The preamble to those
regulations states that they are premised on the assumption that an aggregation
approach is appropriate for determining whether Original Issue Discount on a
stripped bond or stripped coupon is de minimis, and solicits comments on
appropriate rules for aggregating stripped bonds and stripped coupons under Code
Section 1286.
Because of these possible varying characterizations of Stripped Certificates
and the resultant differing treatment of income recognition, Stripped
Certificateholders are urged to consult their own tax advisors regarding the
proper treatment of Stripped Certificates for federal income tax purposes.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Certificateholder or Stripped Certificateholder at any
time during such year, information (prepared on the basis described above) as is
necessary to enable Certificateholders to prepare their federal income tax
133
returns. Such information will include the amount of Original Issue Discount
accrued on Certificates held by persons other than Certificateholders exempted
from the reporting requirements. The amount required to be reported by the
Trustee may not be equal to the proper amount of Original Issue Discount
required to be reported as taxable income by a Certificateholder, other than an
original Certificateholder that purchased at the issue price. In particular, in
the case of Stripped Certificates, this reporting will be based upon a
representative initial offering price of each Class of Stripped Certificates.
The Trustee will also file Original Issue Discount information with the Internal
Revenue Service. If a Certificateholder fails to supply an accurate taxpayer
identification number or if the Secretary of the Treasury determines that a
Certificateholder has not reported all interest and dividend income required to
be shown on its federal income tax return, backup withholding may be required in
respect of any reportable payments, as described above under "--Federal Income
Tax Consequences for REMIC Certificates--Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Certificate evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or Original Issue Discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other non-U.S. persons ("Foreign
Persons") generally will be subject to 30% United States withholding tax, or
such lower rate as may be provided for interest by an applicable tax treaty.
Accrued Original Issue Discount recognized by the Certificateholder on the sale
or exchange of such a Certificate also will be subject to federal income tax at
the same rate.
Treasury regulations provide that interest or Original Issue Discount paid
by the Trustee or other withholding agent to a Foreign Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements, described above under "--Federal
Income Tax Consequences for REMIC Certificates--Taxation of Certain Foreign
Investors--Regular Certificates."
Reportable Transactions
Any Certificateholder that reports any item or items of income, gain,
expense, or loss in respect of a Certificate for tax purposes in an amount that
differs from the amount reported for book purposes by more than $10 million, on
a gross basis, in any taxable year may be subject to certain disclosure
requirements for "reportable transactions." Prospective investors should consult
their tax advisors concerning any possible tax return disclosure obligation with
respect to the Certificates.
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Federal Income Tax Consequences for Exchangeable Certificates
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Tax Status
The Exchangeable Certificates should be considered to represent "real estate
assets" within the meaning of Code Section 856(c)(5)(B) and assets described in
Code Section 7701(a)(19)(C). Original Issue Discount and interest accruing on
Exchangeable Certificates should be considered to represent "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B). Exchangeable
Certificates will be "qualified mortgages" under Code Section 860G(a)(3) for a
REMIC. Prospective investors should consult their own tax advisors regarding the
proper treatment of Exchangeable Certificates in respect of the above
discussion.
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Exchangeable Certificates Representing Proportionate Interests in Two or More
Exchangeable REMIC Certificates
The related prospectus supplement for a series will specify whether an
Exchangeable Certificate represents beneficial ownership of a proportionate
interest in two or more Exchangeable REMIC Certificates corresponding to that
Exchangeable Certificate. Each beneficial owner of such an Exchangeable
Certificate should account for its ownership interest in each Exchangeable REMIC
Certificate underlying that Exchangeable Certificate as described under
"--Federal Income Tax Consequences for REMIC Certificates." The beneficial owner
must allocate its basis among the underlying Exchangeable REMIC Certificates in
accordance with their relative fair market values as of the time of acquisition.
Similarly, on the sale of such Exchangeable Certificate, the beneficial owner
must allocate the amount received on the sale among the underlying Exchangeable
REMIC Certificates in accordance with their relative fair market values as of
the time of sale.
Exchangeable Certificates Representing Disproportionate Interests in
Exchangeable REMIC Certificates
The related prospectus supplement for a series will specify whether an
Exchangeable Certificate represents beneficial ownership of a disproportionate
interest in one or more Exchangeable REMIC Certificates corresponding to that
Exchangeable Certificate. The beneficial owner of such an Exchangeable
Certificate will be treated as owning, pursuant to Code Section 1286, "stripped
bonds" to the extent of its share of principal payments and "stripped coupons"
to the extent of its share of interest payments on such Exchangeable REMIC
Certificate. Under Code Section 1286, each beneficial owner of an Exchangeable
Certificate must treat the Exchangeable Certificate as a debt instrument
originally issued on the date the owner acquires it and having Original Issue
Discount equal to the excess, if any, of its "stated redemption price at
maturity" over the price paid by the owner to acquire it. The stated redemption
price at maturity for an Exchangeable Certificate is determined in the same
manner as described with respect to Regular Certificates under "--Federal Income
Tax Consequences for REMIC Certificates--Taxation of Regular
Certificates--Original Issue Discount."
Each beneficial owner of such an Exchangeable Certificate should calculate
Original Issue Discount and include it in ordinary income as it accrues, which
may be prior to the receipt of cash attributable to such income, in accordance
with a method analogous to that described with respect to a Regular Certificate
under "--Federal Income Tax Consequences for REMIC Certificates--Taxation of
Regular Certificates--Original Issue Discount." A beneficial owner should
determine its yield to maturity based on the purchase price for the Exchangeable
Certificate and on a schedule of payments projected using a prepayment
assumption, and then make periodic adjustments to take into account actual
prepayment experience. It is not clear whether the prepayment assumption a
beneficial owner should use to calculate Original Issue Discount would be one
determined at the time the Exchangeable Certificate is acquired or would be the
original prepayment assumption with respect to the underlying Exchangeable REMIC
Certificate.
While the matter is not free from doubt, if a beneficial owner acquires a
combination of Exchangeable Certificates in separate transactions which in the
aggregate represent a single Exchangeable REMIC Certificate, it appears that the
owner should account for each such Exchangeable Certificate separately, even if
it exchanges the Exchangeable Certificates for the underlying Exchangeable REMIC
Certificate. However, if a beneficial owner acquires such a combination in a
single transaction, it is possible that the beneficial owner's interests should
be aggregated, with the beneficial owner treated as owning the underlying
Exchangeable REMIC Certificate (regardless of whether it has exchanged the
Exchangeable Certificates for the underlying Exchangeable REMIC Certificate).
Accounting separately for the Exchangeable Certificates may lead to
significantly different accruals of interest and Original
135
Issue Discount than would be the case if the owner aggregated such interests.
Prospective investors should consult their own tax advisors as to the proper
treatment of an Exchangeable Certificate in either of these circumstances.
Sales, Exchanges and Other Dispositions of Exchangeable Certificates
If a beneficial owner exchanges one or more underlying Exchangeable REMIC
Certificates for one or more Exchangeable Certificates in the manner described
under "Description of the Certificates--Exchangeable REMIC Certificates and
Exchangeable Certificates" in this prospectus, the exchange will not be taxable.
Likewise, if a beneficial owner exchanges one or more Exchangeable Certificates
for the corresponding Exchangeable REMIC Certificate or Exchangeable REMIC
Certificates, the exchange will not be taxable.
Upon the sale, exchange or other disposition of an Exchangeable Certificate
other than an exchange described in the preceding paragraph, a beneficial owner
generally will recognize gain or loss equal to the difference between the amount
realized and the beneficial owner's adjusted basis or bases in the Exchangeable
REMIC Certificate or Exchangeable REMIC Certificates underlying the Exchangeable
Certificate. The adjusted basis of each such Exchangeable REMIC Certificates
will be determined as described above under "--Federal Income Tax Consequences
for REMIC Certificates--Taxation of Regular Certificates--Sale or Exchange of
Regular Certificates."
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ERISA CONSIDERATIONS
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General
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose certain requirements on those employee
benefit plans and arrangements to which they apply and on those persons who are
fiduciaries with respect to those employee benefit plans and arrangements. The
following is a general discussion of these requirements, and certain applicable
exceptions to and administrative exemptions from these requirements. For
purposes of this discussion, employee benefit plans and arrangements to which
both ERISA and the Code apply are referred to as "ERISA Plans." An individual
retirement account established under Code Section 408 (an "IRA") is an ERISA
Plan if the IRA is endorsed by or contributed to by the IRA participant's
employer or employee organization. Other IRAs, as well as certain employee
benefit plans covering only self-employed individuals (collectively, "Non-ERISA
Plans"), are not considered ERISA Plans, but these Non-ERISA Plans are subject
to ERISA-like requirements as well as the prohibited transaction provisions of
the Code. Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) (collectively, "Exempt Plans") are exempt from the provisions of Title I
of ERISA and the prohibited transaction provisions of the Code. Accordingly,
Exempt Plans also are not considered ERISA Plans, but these Exempt Plans may be
subject to the provisions and special requirements of other applicable federal,
state and local law. Exempt Plans, ERISA Plans and Non-ERISA Plans are
collectively referred to as "Benefit Plans."
Before purchasing any Certificates, an ERISA Plan fiduciary should consult
with its counsel and determine whether there exists any prohibition to its
purchase under the requirements of ERISA or the Code, whether prohibited
transaction exemptions such as PTE 83-1 or any individual administrative
exemption (as described below) applies, including whether the appropriate
conditions set forth therein would be met, or whether any statutory prohibited
transaction exemption is applicable, and further should consult the applicable
prospectus supplement relating to such series of Certificates.
136
Certain Requirements Under ERISA and the Code
General
In accordance with ERISA's general fiduciary standards, before investing in
a Certificate, an ERISA Plan fiduciary should determine whether to do so is
permitted under the governing ERISA Plan instruments and is appropriate for the
ERISA Plan in view of its overall investment policy and the composition and
diversification of its portfolio. An ERISA Plan fiduciary should especially
consider the ERISA requirement of investment prudence and the sensitivity of the
return on the Certificates to the rate of principal repayments (including
prepayments) on the Mortgage Loans, as discussed in "Prepayment and Yield
Considerations."
Parties in Interest/Disqualified Persons
Other provisions of ERISA (and corresponding provisions of the Code)
prohibit certain transactions involving the assets of an ERISA Plan and persons
who have certain specified relationships to the ERISA Plan (so-called "parties
in interest" within the meaning of ERISA or "disqualified persons" within the
meaning of the Code). The Depositor, the Master Servicer, any Servicer or the
Trustee or certain of their affiliates might be considered or might become
"parties in interest" or "disqualified persons" with respect to an ERISA Plan.
If so, the acquisition or holding of Certificates by or on behalf of the ERISA
Plan could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless an administrative exemption described below
or some other exemption is available.
Special caution should be exercised before the assets of an ERISA Plan
(including assets that may be held in an insurance company's separate or general
accounts where assets in such accounts may be deemed plan assets for purposes of
ERISA) are used to purchase a Certificate if, with respect to these assets, the
Depositor, any Servicer, the Master Servicer or the Trustee or an affiliate
thereof either: (a) has investment discretion with respect to the investment of
the assets of the ERISA Plan; or (b) has authority or responsibility to give, or
regularly gives, investment advice with respect to the assets for a fee and
pursuant to an agreement or understanding that this advice will serve as a
primary basis for investment decisions with respect to the assets and that the
advice will be based on the particular investment needs of the ERISA Plan.
Delegation of Fiduciary Duty
Further, if the assets included in a Trust Estate were deemed to constitute
assets of an ERISA Plan, it is possible that an ERISA Plan's investment in the
Certificates might be deemed to constitute a delegation, under ERISA, of the
duty to manage plan assets by the fiduciary deciding to invest in the
Certificates, and certain transactions involved in the operation of the Trust
Estate might be deemed to constitute prohibited transactions under ERISA and the
Code. Neither ERISA nor the Code define the term "plan assets."
The U.S. Department of Labor (the "DOL") has issued regulations (the "DOL
Regulations") concerning whether or not an ERISA Plan's assets would be deemed
to include an interest in the underlying assets of an entity (such as a Trust
Estate) for purposes of the reporting and disclosure and general fiduciary
responsibility provisions of ERISA, as well as for the prohibited transaction
provisions of ERISA and the Code, if the ERISA Plan acquires an "equity
interest" (such as a Certificate) in the entity.
Certain exceptions are provided in the DOL Regulations whereby an investing
ERISA Plan's assets would be deemed merely to include its interest in the
Certificates instead of being deemed to include an
137
interest in the assets of a Trust Estate. However, it cannot be predicted in
advance nor can there be any continuing assurance whether these exceptions may
be met, because of the factual nature of certain of the rules set forth in the
DOL Regulations. For example, one of the exceptions in the DOL Regulations
states that the underlying assets of an entity will not be considered "plan
assets" if less than 25% of the value of all classes of equity interests are
held by "benefit plan investors," which term is defined to include ERISA Plans,
Non-ERISA Plans and Exempt Plans and any entity whose assets include "plan
assets" by reason of benefit plan investments in such entity, but this exception
is tested immediately after each acquisition of an equity interest in the entity
whether upon initial issuance or in the secondary market.
Applicability to Non-ERISA Plans
Since Non-ERISA Plans are subject to the prohibited transaction provisions
of the Code, the discussion above with respect to "disqualified persons,"
prohibited transactions, delegation of fiduciary duty and plan assets applies to
Non-ERISA Plans as well as ERISA Plans.
Administrative Exemptions
Individual Administrative Exemptions.
Several underwriters of mortgage-backed securities have applied for and
obtained individual administrative prohibited transaction exemptions (each, an
"Underwriter's Exemption") which are in some respects broader than Prohibited
Transaction Class Exemption 83-1 (described below). These exemptions can only
apply to mortgage-backed securities which, among other conditions, are sold in
an offering with respect to which the underwriter serves as the sole or a
managing underwriter, or as a selling or placement agent. If an Underwriter's
Exemption might be applicable to a series of Certificates, the applicable
prospectus supplement will refer to such possibility.
Among the conditions that must be satisfied for an Underwriter's Exemption
to apply are the following:
(1) The acquisition of Certificates by an ERISA Plan is on terms
(including the price for the Certificates) that are at least as favorable
to the ERISA Plan as they would be in an arm's length transaction with an
unrelated party.
(2) The Certificates acquired by the ERISA Plan have received a rating
at the time of such acquisition that is one of the four highest generic
rating categories from any of Standard & Poor's, a division of The
McGraw-Hill Companies ("S&P"), Moody's Investors Service, Inc. ("Moody's"),
Fitch Ratings ("Fitch") or DBRS Limited or DBRS, Inc. (collectively,
"DBRS").
(3) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below) other than an underwriter.
(4) The sum of all payments made to and retained by the underwriter in
connection with the distribution of Certificates represents not more than
reasonable compensation for underwriting the Certificates. The sum of all
payments made to and retained by the Depositor pursuant to the assignment
of the Mortgage Loans to the Trust Estate represents not more than the fair
market value of such Mortgage Loans. The sum of all payments made to and
retained by the Servicer (and any other servicer) represents not more than
reasonable compensation for the person's services under the Pooling
Agreement and reimbursement of the person's reasonable expenses in
connection therewith.
138
(5) The ERISA Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the SEC under the
Securities Act.
The Trust Estate must also meet the following requirements:
(i) the assets of the Trust Estate must consist solely of assets of
the type that have been included in other investment pools in the
marketplace;
(ii) certificates in such other investment pools must have been rated
in one of the four highest rating categories of S&P, Moody's, Fitch or DBRS
for at least one year prior to the ERISA Plan's acquisition of the
Certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than ERISA Plans for at least
one year prior to any ERISA Plan's acquisition of the Certificates.
If the conditions to an Underwriter's Exemption are met, whether or not an
ERISA Plan's assets would be deemed to include an ownership interest in the
Mortgage Loans in a mortgage pool, the acquisition, holding and resale of the
Certificates by ERISA Plans would be exempt from certain of the prohibited
transaction provisions of ERISA and the Code.
Moreover, an Underwriter's Exemption can provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur if an
ERISA Plan fiduciary causes an ERISA Plan to acquire and hold Certificates in a
Trust Estate in which the fiduciary (or its affiliate) is an obligor on the
Mortgage Loans held in the Trust Estate provided that, among other requirements:
(i) in the case of an acquisition in connection with the initial issuance of
Certificates, at least fifty percent of each class of Certificates in which
ERISA Plans have invested is acquired by persons independent of the Restricted
Group (as defined below) and at least fifty percent of the aggregate interest in
the Trust Estate is acquired by persons independent of the Restricted Group;
(ii) the fiduciary (or its affiliate) is an obligor with respect to five percent
or less of the fair market value of the Mortgage Loans contained in the Trust
Estate; (iii) the ERISA Plan's investment in Certificates of any Class does not
exceed twenty-five percent of all of the Certificates of that Class outstanding
at the time of the acquisition and (iv) immediately after the acquisition no
more than twenty-five percent of the assets of the ERISA Plan with respect to
which such person is a fiduciary are invested in Certificates representing an
interest in one or more trusts containing assets sold or serviced by the same
entity.
An Underwriter's Exemption does not apply to ERISA Plans sponsored by the
Depositor, the underwriter specified in the applicable prospectus supplement,
the Master Servicer, the Trustee, any Servicer, any insurer with respect to the
Mortgage Loans, any obligor with respect to Mortgage Loans included in the Trust
Estate constituting more than five percent of the aggregate unamortized
principal balance of the assets in the Trust Estate, or any affiliate of any of
these parties (the "Restricted Group").
PTE 83-1
Prohibited Transaction Class Exemption 83-1 for Certain Transactions
Involving Mortgage Pool Investment Trusts ("PTE 83-1") permits certain
transactions involving the creation, maintenance and termination of certain
residential mortgage pools and the acquisition and holding of certain
residential mortgage pool pass-through certificates by ERISA Plans, whether or
not the ERISA Plan's assets would be deemed to include an ownership interest in
the mortgages in the mortgage pools, and whether or not such transactions would
otherwise be prohibited under ERISA or the Code.
139
The term "mortgage pool pass-through certificate" is defined in PTE 83-1 as
"a certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such a certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor." It appears that, for purposes of PTE 83-1, the
term "mortgage pool pass-through certificate" would include Certificates issued
in a single Class or in multiple Classes that evidence the beneficial ownership
of both a specified percentage of future interest payments (after permitted
deductions) and a specified percentage of future principal payments on a Trust
Estate.
However, it appears that PTE 83-1 does or might not apply to the purchase
and holding of (a) Certificates that evidence the beneficial ownership only of a
specified percentage of future interest payments (after permitted deductions) on
a Trust Estate or only of a specified percentage of future principal payments on
a Trust Estate, (b) Residual Certificates, (c) Certificates evidencing ownership
interests in a Trust Estate which includes Mortgage Loans secured by multifamily
residential properties or shares issued by cooperative housing corporations, or
(d) Certificates which are subordinated to other Classes of Certificates of such
series. Accordingly, unless exemptive relief other than PTE 83-1 applies, Plans
should not purchase any of these types of Certificates.
PTE 83-1 sets forth "general conditions" and "specific conditions" to its
applicability. Section II of PTE 83-1 sets forth the following general
conditions to the application of the exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans or the property
securing such loans, and for indemnifying certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments;
(ii) the existence of a pool trustee who is not an affiliate of the pool
sponsor; and (iii) a requirement that the sum of all payments made to and
retained by the pool sponsor, and all funds inuring to the benefit of the pool
sponsor as a result of the administration of the mortgage pool, must represent
not more than adequate consideration for selling the mortgage loans plus
reasonable compensation for services provided by the pool sponsor to the pool.
The system of insurance or protection referred to in clause (i) above must
provide such protection and indemnification up to an amount not less than the
greater of one percent of the aggregate unpaid principal balance of the pooled
mortgages or the unpaid principal balance of the largest mortgage in the pool.
It should be noted that in promulgating PTE 83-1 (and a predecessor exemption),
the DOL did not have under its consideration interests in pools of the exact
nature as some of the Certificates described in this prospectus.
Non-ERISA Plans and Exempt Plans
Although Non-ERISA Plans and Exempt Plans are not considered ERISA Plans for
purposes of the above discussion, Non-ERISA Plans are subject to the prohibited
transaction provisions of the Code, and both Non-ERISA Plans and Exempt Plans
may be subject to certain other ERISA-like requirements of applicable law.
Therefore, before purchasing any Certificates by or on behalf of a Non-ERISA
Plan or any Exempt Plan, the prospective purchaser should exercise special
caution and should consult with its legal counsel concerning the propriety and
implications of such investment under the Code or other applicable law.
Unrelated Business Taxable Income--Residual Certificates
The purchase of a Residual Certificate by an IRA or any employee benefit
plan qualified under Code Section 401(a) and exempt from taxation under Code
Section 501(a), including most varieties of Benefit Plans, may give rise to
"unrelated business taxable income" as described in Code Sections 511 through
515 and 860E. Further, prior to the purchase of Residual Certificates, a
prospective transferee may be required to provide an affidavit to a transferor
that it is not, nor is it purchasing a Residual Certificate on behalf of, a
"Disqualified Organization," which term as defined above includes certain
tax-exempt entities not subject to Code Section 511 such as certain governmental
plans, as discussed above under "Federal
140
Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates--Tax-Related Restrictions on
Transfer of Residual Certificates--Disqualified Organizations." In addition,
prior to the transfer of a Residual Certificate, the Trustee may require an
opinion of counsel to the effect that the transferee is not a Disqualified
Organization and that the transfer will not subject the Trustee, the Depositor,
the Master Servicer or any Servicer to additional obligations imposed by ERISA
or the Code.
Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is particularly important that potential
investors who are acting on behalf of a Benefit Plan or any other employee
benefit plan or arrangement consult with their counsel regarding the
consequences under ERISA, the Code or other applicable law of their acquisition
and ownership of Certificates.
The sale of Certificates to a Benefit Plan or any other employee benefit
plan or arrangement is in no respect a representation by the Depositor or the
applicable underwriter that this investment meets all relevant legal
requirements with respect to investments by employee benefit plans generally or
any particular plan or arrangement, or that this investment is appropriate for
employee benefit plans generally or any particular plan or arrangement.
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LEGAL INVESTMENT
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If specified in the related prospectus supplement, certain Classes of
Certificates will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended ("SMMEA").
Generally, the only Classes of Certificates offered pursuant to this prospectus
and the related prospectus supplement which will qualify as "mortgage related
securities" will be those that (i) are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating organization
and (ii) are part of a series representing interests in a Trust Estate
consisting of Mortgage Loans originated by certain types of originators
specified in SMMEA and secured by first liens on real estate. The appropriate
characterization of those Certificates not qualifying as "mortgage related
securities" for purposes of SMMEA ("Non-SMMEA Certificates") under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase those Certificates, may be subject to significant
interpretive uncertainties. Accordingly, all investors whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the Non-SMMEA
Certificates constitute legal investments for them.
Those Classes of Certificates qualifying as "mortgage related securities"
will constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, insurance companies, trustees and pension funds)
created pursuant to or existing under the laws of the United States or of any
state (including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation, to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any of its agencies or instrumentalities constitute
legal investments for those entities.
Under SMMEA, a number of states enacted legislation, on or before the
October 3, 1991 cut-off for those enactments, limiting to varying extents the
ability of certain entities (in particular, insurance companies) to invest in
"mortgage related securities" secured by liens on residential, or mixed
residential and commercial properties, in most cases by requiring the affected
investors to rely solely upon existing state law, and not SMMEA.
141
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in "mortgage related
securities" without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in those securities, and national
banks may purchase those securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
ss. 24 (Seventh), subject in each case to any regulations as the applicable
federal regulatory authority may prescribe. In this connection, the OCC has
amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell for
their own account, without limitation as to a percentage of the bank's capital
and surplus (but subject to compliance with certain general standards in 12
C.F.R. ss. 1.5 concerning "safety and soundness" and retention of credit
information) certain "Type IV securities," defined in 12 C.F.R. ss. 1.2(m) to
include certain "residential mortgage-related securities." As so defined,
"residential mortgage-related security" means, in relevant part, "mortgage
related security" within the meaning of SMMEA. The National Credit Union
Administration ("NCUA") has adopted rules, codified at 12 C.F.R. Part 703 which
permit federal credit unions to invest in "mortgage related securities," other
than stripped mortgage related securities (unless the credit union complies with
the requirements of 12 C.F.R ss. 703.16(e) for investing in those securities)
and residual interests in mortgage related securities, subject to compliance
with general rules governing investment policies and practices; however, credit
unions approved for the NCUA's "investment pilot program" under 12 C.F.R. ss.
703.19 may be able to invest in those prohibited forms of securities. The OTS
has issued Thrift Bulletin 13a (December 1, 1998), "Management of Interest Rate
Risk, Investment Securities, and Derivative Activities" and Thrift Bulletin 73a
(December 18, 2001), "Investing in Complex Securities," which thrift
institutions subject to the jurisdiction of the OTS should consider before
investing in any Certificates.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Investment Securities and
End-User Derivatives Activities" of the Federal Financial Institutions
Examination Council, which has been adopted by the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation, the OCC and
the OTS, effective May 26, 1998, and by the NCUA, effective October 1, 1998.
This policy statement sets forth general guidelines which depository
institutions must follow in managing risks (including market, credit, liquidity,
operational (transaction), and legal risks) applicable to all securities
(including mortgage pass-through securities and mortgage-derivative products)
used for investment purposes.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by those authorities before purchasing any of the
Certificates, as certain Classes may be deemed unsuitable investments, or may
otherwise be restricted, under those rules, policies or guidelines (in certain
instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying," and, with regard to any Certificates
issued in book-entry form, provisions which may restrict or prohibit investments
in securities which are issued in book-entry form.
Except as to the status of certain Classes of the Certificates as "mortgage
related securities," no representations are made as to the proper
characterization of the Certificates for legal investment purposes, financial
institution regulatory purposes, or other purposes, or as to the ability of
particular investors to purchase Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Certificates) may adversely affect the liquidity of the
Certificates.
142
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments or are subject to investment, capital or other restrictions and, if
applicable, whether SMMEA has been overridden in any jurisdiction relevant to
that investor.
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PLAN OF DISTRIBUTION
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The Certificates are being offered by this prospectus and the applicable
prospectus supplement in series through one or more of the methods described
below. The applicable prospectus supplement for each series will describe the
method of offering being utilized for that series and will state the public
offering or purchase price of each Class of Certificates of the series, or the
method by which the price is to be determined, and the net proceeds to the
Depositor from the sale of the Certificates.
The Certificates will be offered through the following methods from time to
time and offerings may be made concurrently through more than one of these
methods or an offering of a particular series of Certificates may be made
through a combination of two or more of these methods:
1. By negotiated firm commitment underwriting and public re-offering
by underwriters specified in the applicable prospectus supplement;
2. By placements by the Depositor with investors through dealers;
3. By direct placements by the Depositor with investors, in which
event the Depositor will be an underwriter with respect to the Certificates;
and
4. By inclusion as underlying securities backing another series of
mortgage pass-through certificates issued by an entity of which the
Depositor or an affiliate of the Depositor may act as the depositor. In the
event that the Depositor or an affiliate of the Depositor acts as depositor
with respect to the other series of mortgage pass-through certificates, the
Depositor or its affiliate will be an underwriter with respect to the
underlying securities.
If underwriters are used in a sale of any Certificates, those Certificates
will be acquired by the underwriters for their own account and may be resold
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment for sale. Firm
commitment underwriting and public reoffering by underwriters may be done
through underwriting syndicates or through one or more firms acting alone. The
specific managing underwriter or underwriters, if any, for the offer and sale of
a particular series of Certificates will be set forth on the cover of the
prospectus supplement applicable to the series and the members of the
underwriting syndicate, if any, will be named in the prospectus supplement. The
prospectus supplement will describe any discounts and commissions to be allowed
or paid by the Depositor to the underwriters, any other items constituting
underwriting compensation and any discounts and commissions to be allowed or
paid to the dealers. The obligations of the underwriters will be subject to
certain conditions precedent. The underwriters with respect to a sale of any
Class of Certificates will be obligated to purchase all the Certificates of the
Class if any are purchased. The Depositor, and, if specified in the applicable
prospectus supplement, an affiliate of the Depositor, will indemnify the
applicable underwriters against certain civil liabilities, including liabilities
under the Securities Act.
143
The prospectus supplement relating to any series of Certificates offered
other than through underwriters will contain information regarding the nature of
the offering and any agreements to be entered into between the Depositor and
dealers and/or the Depositor and purchasers of Certificates of the series.
Purchasers of Certificates, including dealers, may, depending on the facts
and circumstances of the purchases, be deemed to be "underwriters" within the
meaning of the Securities Act in connection with reoffers and sales by them of
Certificates. Certificateholders should consult with their legal advisors in
this regard prior to any reoffer or sale.
If specified in the prospectus supplement relating to a series of
Certificates, the Depositor or any of its affiliates may purchase some or all of
one or more Classes of Certificates of the series from the underwriter or
underwriters at a price specified or described in the prospectus supplement.
This party may then, from time to time, offer and sell, pursuant to this
prospectus, some or all of the Certificates it purchased directly, through one
or more underwriters to be designated at the time of the offering of the
Certificates or through dealers acting as agent and/or principal. Any of these
offerings may be restricted in the matter specified in the applicable prospectus
supplement. These transactions may be effected at market prices prevailing at
the time of sale, at negotiated prices or at fixed prices. The underwriters and
dealers participating in the purchaser's offering of Certificates may receive
compensation in the form of underwriting discounts or commissions from the
purchaser and these dealers may receive commissions from the investors
purchasing Certificates for whom they may act as agent (which discounts or
commissions will not exceed those customary in those types of transactions). Any
dealer that participates in the distribution of these Certificates will be an
"underwriter" within the meaning of the Securities Act, and any commissions and
discounts received by a dealer and any profit on the resale of these
Certificates by a dealer will be underwriting discounts and commissions under
the Securities Act.
- --------------------------------------------------------------------------------
USE OF PROCEEDS
- --------------------------------------------------------------------------------
The Depositor will apply the net proceeds of the sale of each series of
Certificates to the purchase of the Mortgage Loans represented by the
Certificates of the series from the Sponsor.
- --------------------------------------------------------------------------------
LEGAL MATTERS
- --------------------------------------------------------------------------------
The legality of, and certain federal income tax matters related to the
Certificates of a series, will be passed upon for the Depositor by Cadwalader,
Wickersham & Taft LLP, New York, New York.
- --------------------------------------------------------------------------------
RATING
- --------------------------------------------------------------------------------
It is a condition to the issuance of the Certificates of any series offered
pursuant to this prospectus and a prospectus supplement that they be rated in
one of the four highest categories by at least one nationally recognized
statistical rating organization (each, a "Rating Agency").
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning Rating
Agency.
144
- --------------------------------------------------------------------------------
REPORTS TO CERTIFICATEHOLDERS
- --------------------------------------------------------------------------------
The Trustee will prepare and forward to the Certificateholders of each
series statements containing information with respect to principal and interest
payments and the related Trust Estate, as described under "The Pooling
Agreement--Reports to Certificateholders." Copies of these statements will be
filed with the SEC through its EDGAR system located at "http://www.sec.gov"
under the name of the Trust as an exhibit to the Trust's monthly distribution
reports on Form 10-D for each series of Certificates for so long as the Trust is
subject to the reporting requirement of the Securities Exchange Act of 1934, as
amended. In addition, each party to the servicing function for a series of
Certificates (generally the Trustee and the Servicer (and any Master Servicer))
will furnish to the Trustee or Master Servicer, as applicable, the compliance
statements, Assessments of Compliance and Attestation Reports detailed under
"Servicing of the Mortgage Loans--Evidence as to Compliance." Copies of these
statements and reports will be filed with the SEC under the name of the Trust as
an exhibit to the Trust's annual statement on Form 10-K for each series of
Certificates.
- --------------------------------------------------------------------------------
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
- --------------------------------------------------------------------------------
The SEC allows the Depositor to "incorporate by reference" information it
files with the SEC, which means that the Depositor can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus.
Information that the Depositor files later with the SEC will automatically
update the information in this prospectus. In all cases, you should rely on the
later information rather than on any different information included in this
prospectus or the accompanying prospectus supplement. The Depositor incorporates
by reference any future monthly distribution reports on Form 10-D and any
current reports on Form 8-K filed by or on behalf of the Issuing Entity until
the termination of the offering of the related series of Certificates offered
hereby.
As a recipient of this prospectus, you may request a copy of any document
the Depositor incorporates by reference, except exhibits to the documents
(unless the exhibits are specifically incorporated by reference), at no cost, by
writing or calling the Depositor at 214 North Tryon Street, Mail Code
NC1-027-22-02, Charlotte, North Carolina 28255, Attention: Senior Vice
President, telephone number (704) 387 8239.
- --------------------------------------------------------------------------------
WHERE YOU CAN FIND MORE INFORMATION
- --------------------------------------------------------------------------------
The Depositor filed a registration statement relating to the Certificates
with the SEC. This prospectus is part of the registration statement, but the
registration statement includes additional information.
Copies of the registration statement and any other materials the Depositor
files with the SEC, including distribution reports on Form 10-D, annual reports
on Form 10-K, current reports on Form 8-K and amendments to these reports
(collectively, "Periodic Reports") may be read and copied at the SEC's Public
Reference Room at 100 F Street NE, Washington, D.C. 20549. Information
concerning the operation of the SEC's Public Reference Room may be obtained by
calling the SEC at (800) SEC-0330. The SEC also maintains a site on the World
Wide Web at "http://www.sec.gov" at which you can view and download copies of
reports, proxy and information statements and other information filed
electronically through the EDGAR system. The Depositor has filed the
registration statement, including all exhibits, and will file Periodic Reports
through the EDGAR system and therefore these materials should be available by
logging onto the SEC's Web site. The SEC maintains computer terminals
145
providing access to the EDGAR system at each of the offices referred to above.
Copies of any documents incorporated to this prospectus by reference will be
provided to each person to whom a prospectus is delivered upon written or oral
request directed to Banc of America Mortgage Securities, Inc. at 214 North Tryon
Street, Mail Code NC1-027-22-02, Charlotte, North Carolina 28255, Attention:
Senior Vice President, telephone number (704) 387 8239.
Copies of filed Periodic Reports relating to an Issuing Entity will also be
available on the applicable Trustee's website promptly after they are filed
through the EDGAR system (which many not be the same day) as described under
"Reports to Certificateholders" in the related prospectus supplement.
146
- --------------------------------------------------------------------------------
INDEX OF PROSPECTUS DEFINITIONS
- --------------------------------------------------------------------------------
1
100% LTV Program..............................................................37
1986 Act.....................................................................107
8
80/20 Program.................................................................37
9
97% LTV Program...............................................................37
A
Accelerated Processing Programs...............................................33
Accretion Directed Certificates...............................................57
Accrual Certificates..........................................................60
Actuarial Mortgage Loan.......................................................22
Advances......................................................................77
All-Ready Home................................................................33
ALTA..........................................................................35
Assessment of Compliance......................................................83
Asset Conservation Act.......................................................102
Attestation Report............................................................83
Auction Administrator.........................................................61
Auction Certificates..........................................................61
Auction Distribution Date.....................................................61
B
Balloon Loans.................................................................26
Balloon Period................................................................26
Bank of America...............................................................27
Bankruptcy Code...............................................................97
Bankruptcy Loss...............................................................51
Bankruptcy Loss Amount........................................................51
Beneficial Owners.............................................................40
Benefit Plans................................................................136
Book-Entry Certificates.......................................................40
BPP...........................................................................35
Buy-Down Fund.................................................................26
Buy-Down Loans................................................................26
C
Cash Flow Agreement...........................................................56
CERCLA.......................................................................100
CERCLA Secured-Creditor Exemption............................................101
Certificate Account...........................................................74
Certificateholders............................................................39
Certificates..................................................................38
Class.........................................................................38
Class Balance.................................................................49
Cleanup Costs................................................................100
Closing Date..................................................................39
Code.........................................................................104
Combination...................................................................62
Combined Loan-to-Value Ratio..................................................32
Companion Certificates........................................................57
Component.....................................................................57
Component Certificates........................................................57
Condominium Hotel Loan Program................................................37
Condominium Hotels............................................................21
Cooperatives..................................................................21
Credit Scores.................................................................29
Custom Mortgage Score.........................................................30
Cut-off Date..................................................................48
D
DBRS.........................................................................138
Debt-to-Income Ratio..........................................................31
Deferred Interest.............................................................24
Definitive Certificates.......................................................39
Deleted Mortgage Loan.........................................................85
Depositor.....................................................................28
Determination Date............................................................48
Disqualified Organization....................................................119
Distribution Date.............................................................48
DOL..........................................................................137
DOL Regulations..............................................................137
Due Date......................................................................23
E
Electing Large Partnership...................................................120
Eligible Custodial Account....................................................74
Eligible Investments..........................................................75
Eligible Substitute Mortgage Loan.............................................85
ERISA........................................................................136
ERISA Plans..................................................................136
Escrow Account................................................................79
Euroclear Operator............................................................42
European Depositaries.........................................................40
Excess Bankruptcy Losses......................................................51
Excess Fraud Losses...........................................................51
Excess Special Hazard Losses..................................................51
Exchangeable Certificates.....................................................58
147
Exchangeable Combination......................................................62
Exchangeable REMIC Certificates...............................................58
Exempt Plans.................................................................136
F
Financial Intermediary........................................................40
Fitch........................................................................138
Fixed Rate Certificates.......................................................60
Fixed Retained Yield..........................................................49
Floating Rate Certificates....................................................60
Foreclosure Profits...........................................................49
Foreign Persons..............................................................134
Fraud Loss....................................................................51
Fraud Loss Amount.............................................................51
G
Garn Act.....................................................................102
Graduated Pay Mortgage Loans..................................................25
Gross Margin..................................................................23
Growing Equity Mortgage Loans.................................................25
H
HOPA..........................................................................99
I
Indirect Participants.........................................................40
Insolvency Laws...............................................................97
Interest Only Certificates....................................................60
Interest Only Mortgage Loans..................................................24
Inverse Floating Rate Certificates............................................61
IRA..........................................................................136
Issuing Entity................................................................38
L
Liquidation Proceeds..........................................................75
Loan-to-Value Ratio...........................................................31
Lockout Certificates..........................................................58
M
Mark to Market Regulations...................................................123
Master Servicer...............................................................68
Master Servicer Custodial Account.............................................75
Master Servicing Fee..........................................................49
MERS..........................................................................84
Moody's......................................................................138
Mortgage File.................................................................84
Mortgage Interest Rate........................................................22
Mortgage Loans................................................................21
Mortgage Notes................................................................21
Mortgage Rewards..............................................................33
Mortgaged Properties..........................................................21
Mortgages.....................................................................21
N
NCUA.........................................................................142
Net Mortgage Interest Rate....................................................49
No Income No Asset Program....................................................37
No Ratio Loan Program.........................................................36
Non-ERISA Plans..............................................................136
Non-Pro Rata Certificate.....................................................108
Non-Resident Alien Loan Program...............................................37
Non-SMMEA Certificates.......................................................141
Non-U.S. Holder...............................................................46
Notional Amount Certificates..................................................58
O
OCC...........................................................................27
OID Regulations..............................................................108
Option ARM Mortgage Loans.....................................................24
Original Issue Discount......................................................108
OTS...........................................................................91
P
PAC Certificates..............................................................58
PaperSaver(R).................................................................33
Par Price.....................................................................61
Participants..................................................................40
Pass-Through Certificates.....................................................58
Pass-Through Entity..........................................................120
Pass-Through Rate.............................................................49
Paying Agent..................................................................77
Percentage Interest...........................................................48
Periodic Advance..............................................................77
Periodic Reports.............................................................145
Planned Amortization Certificates.............................................58
PMI...........................................................................99
Pool Distribution Amount......................................................48
Pooling Agreement.............................................................39
Prepayment Assumption........................................................109
Principal Only Certificates...................................................61
Product Guides................................................................30
PTE 83-1.....................................................................139
Purchase Price................................................................85
Q
Qualified Intermediary........................................................46
148
R
Rapid.........................................................................33
Rating Agency................................................................144
Ratio Strip Certificates......................................................59
RCRA.........................................................................101
RCRA Secured Creditor Exemption..............................................101
Record Date...................................................................39
Regular Certificateholder....................................................108
Regular Certificates..........................................................39
Related.......................................................................62
Relevant Depositary...........................................................40
Relief Act...................................................................100
REMIC.........................................................................39
REMIC Certificates...........................................................105
REMIC Combination.............................................................62
REMIC Pool...................................................................105
REMIC Regulations............................................................104
REO Property..................................................................78
Residual Certificate..........................................................39
Residual Holders.............................................................115
Restricted Group.............................................................139
Rules.........................................................................41
S
S&P..........................................................................138
Scheduled Amortization Certificates...........................................59
SEC...........................................................................23
Securities Act................................................................39
Senior Certificates...........................................................59
Sequential Pay Certificates...................................................59
Servicer......................................................................68
Servicer Custodial Account....................................................74
Servicing Advances............................................................77
Servicing Fee.................................................................49
Simple Interest Mortgage Loan.................................................22
SMMEA........................................................................141
Special Hazard Loss...........................................................51
Special Hazard Loss Amount....................................................51
Sponsor.......................................................................27
Standard Documentation Process................................................32
Standard Hazard Insurance Policy..............................................81
Startup Day..................................................................106
Stated Income Program.........................................................36
Stated Income, Stated Asset...................................................33
Stated Principal Balance......................................................85
Step Coupon Certificates......................................................61
Stripped Certificateholder...................................................132
Stripped Certificates........................................................130
Subordinate Certificates......................................................60
Subsidy Account...............................................................25
Subsidy Loans.................................................................25
Subsidy Payments..............................................................25
Substitution Adjustment Amount................................................85
Super Senior Certificates.....................................................60
Super Senior Support Certificates.............................................60
Superliens...................................................................100
Support Certificates..........................................................57
T
TAC Certificates..............................................................60
Targeted Amortization Certificates............................................60
Texas Home Equity Laws........................................................99
Tiered Payment Mortgage Loans.................................................25
Title V......................................................................103
Total Loan-to-Value Ratio.....................................................32
Trust.........................................................................38
Trust Estate..................................................................21
Trustee.......................................................................91
Trustee Fee...................................................................49
U
U.S. Person..................................................................122
U.S. Withholding Agent........................................................46
UCC...........................................................................95
Underlying Servicing Agreement................................................68
Underwriter's Exemption......................................................138
UST..........................................................................101
V
Variable Rate Certificates....................................................61
Voting Rights.................................................................88
W
Window Period................................................................103
Window Period Loans..........................................................103
Window Period States.........................................................103
149
[BANK OF AMERICA LOGO]
Banc of America Mortgage Securities, Inc.
Depositor
Bank of America, National Association
Sponsor and Servicer
Banc of America Alternative Loan Trust 2007-2
Issuing Entity
$393,967,243
(Approximate)
Mortgage Pass-Through
Certificates, Series 2007-2
---------------------
PROSPECTUS SUPPLEMENT
---------------------
The offered certificates are not being offered in any state where the offer is
not permitted.
The depositor does not claim the accuracy of the information in this prospectus
supplement and the accompanying prospectus as of any date other than the dates
stated on their respective covers.
Upon request, dealers will deliver a prospectus supplement and prospectus when
acting as underwriters of the offered certificates and with respect to their
unsold allotments or subscriptions. In addition, upon request, all dealers
selling the offered certificates will deliver a prospectus supplement and
prospectus until ninety days following the date of this prospectus supplement.
Banc of America Securities LLC
May 29, 2007