Pursuant to Rule 424B5
Registration No. 333-45458
Prospectus Supplement dated July 10, 2003 (to Prospectus dated July 10, 2003)
$295,013,000 (APPROXIMATE)
ACE SECURITIES CORP. HOME EQUITY LOAN TRUST, SERIES 2003-TC1
ASSET BACKED PASS-THROUGH CERTIFICATES
ACE SECURITIES CORP.
Depositor
OCWEN FEDERAL BANK FSB
Servicer
WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION
Master Servicer
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YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-8 IN THIS
PROSPECTUS SUPPLEMENT.
This prospectus supplement may be used to offer and sell the Offered
Certificates only if accompanied by the prospectus.
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OFFERED CERTIFICATES The trust created for the Series 2003-TC1
certificates will hold a pool of fixed-rate and
adjustable-rate, one- to four-family, residential
first lien mortgage loans. The trust will issue six
classes of Offered Certificates. You can find a list
of these classes, together with their initial
certificate principal balances and pass-through
rates, in the table below. Credit enhancement for
all of the Offered Certificates will be provided in
the form of subordination, overcollateralization and
a primary mortgage insurance policy issued by
Mortgage Guaranty Insurance Corporation. In
addition, the Class A-1 Certificates and Class A-2
Certificates may benefit from a series of interest
rate cap payments pursuant to two separate cap
agreements which are intended partially to mitigate
interest rate risk.
INITIAL CERTIFICATE
CLASS PRINCIPAL BALANCE(1) PASSTHROUGH RATE
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A-1......................... $ 209,312,000 One-Month LIBOR + 0.31%(2)(3)
A-2......................... $ 59,017,000 One-Month LIBOR + 0.39%(2)(3)
M-1......................... $ 11,860,000 One-Month LIBOR + 0.75%(2)(3)
M-2......................... $ 9,636,000 One-Month LIBOR + 1.95%(2)(3)
M-3......................... $ 2,965,000 One-Month LIBOR + 2.60%(2)(3)
M-4......................... $ 2,223,000 One-Month LIBOR + 3.75%(2)(3)
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(1) Approximate.
(2) The pass-through rate for each class of Offered Certificates will be
subject to the applicable Net WAC Pass-Through Rate as described in this
prospectus supplement under "Description of the Certificates-Pass-Through
Rates."
(3) After the optional termination date, the margins applicable to the Class
A-1 Certificates and Class A-2 Certificates will increase by 100% and the
margins applicable to the Class M-1, Class M-2, Class M-3 and Class M-4
Certificates will increase by 50%.
The certificates offered by this prospectus supplement will be purchased by
Deutsche Bank Securities Inc. from the Depositor, and are being offered by
Deutsche Bank Securities Inc. from time to time for sale to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates will be approximately 100% of their initial Certificate Principal
Balance before deducting expenses.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
DEUTSCHE BANK SECURITIES
1
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
We provide information to you about the Offered Certificates in two separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general information,
some of which may not apply to this series of certificates; and
o this prospectus supplement, which describes the specific terms of
this series of certificates.
Ace Securities Corp.'s principal offices are located at 6525 Morrison Blvd.,
Suite 318, Charlotte, North Carolina 28211, and its telephone number is
704-365-0569.
Table of Contents
Prospectus Supplement
SUMMARY OF PROSPECTUS SUPPLEMENT.............................................S-1
RISK FACTORS.................................................................S-8
USE OF PROCEEDS.............................................................S-15
THE MORTGAGE POOL...........................................................S-15
YIELD ON THE CERTIFICATES...................................................S-46
DESCRIPTION OF THE CERTIFICATES.............................................S-60
THE ORIGINATORS.............................................................S-84
THE SERVICER................................................................S-85
THE MASTER SERVICER.........................................................S-88
THE TRUSTEE.................................................................S-89
THE SECURITIES ADMINISTRATOR................................................S-89
THE CUSTODIAN...............................................................S-90
THE CREDIT RISK MANAGER.....................................................S-90
POOLING AND SERVICING AGREEMENT.............................................S-90
CAP AGREEMENTS AND THE CAP PROVIDER.........................................S-94
FEDERAL INCOME TAX CONSEQUENCES.............................................S-98
METHOD OF DISTRIBUTION.....................................................S-100
SECONDARY MARKET...........................................................S-101
LEGAL OPINIONS.............................................................S-101
RATINGS....................................................................S-101
LEGAL INVESTMENT...........................................................S-102
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS..................................S-102
ANNEX I......................................................................I-1
2
(This Page Intentionally Left Blank)
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SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is a very broad overview of the certificates offered
by this prospectus supplement and the accompanying prospectus and does not
contain all of the information that you should consider in making your
investment decision. To understand the terms of the Offered Certificates,
carefully read this entire prospectus supplement and the entire accompanying
prospectus.
Title of Series............ ACE Securities Corp. Home Equity Loan Trust, Series
2003-TC1, Asset Backed Pass-Through Certificates.
Cut-off Date............... July 1, 2003.
Closing Date............... On or about July 15, 2003.
Depositor.................. Ace Securities Corp., a Delaware corporation. SEE
"THE DEPOSITOR" IN THE PROSPECTUS.
Originators................ Town & Country Credit Corporation, a Delaware
corporation and Ameriquest Mortgage Company, a
Delaware corporation. SEE "THE ORIGINATORS" IN THIS
PROSPECTUS SUPPLEMENT.
Master Servicer............ Wells Fargo Bank Minnesota, National Association.
Servicer................... Ocwen Federal Bank FSB. SEE "THE SERVICER" IN THIS
PROSPECTUS SUPPLEMENT.
Trustee.................... Bank One National Association, a national banking
association, will be the trustee of the trust. SEE
"THE TRUSTEE" IN THIS PROSPECTUS SUPPLEMENT.
Securities Administrator... Wells Fargo Bank Minnesota, National Association, a
national banking association, will be the securities
administrator. SEE "THE SECURITIES ADMINISTRATOR" IN
THIS PROSPECTUS SUPPLEMENT.
Custodian.................. Wells Fargo Bank Minnesota, National Association, a
national banking association. SEE "THE CUSTODIAN" IN
THIS PROSPECTUS SUPPLEMENT.
Distribution Dates......... Distributions on the Offered Certificates will be
made on the 25th day of each month, or, if that day
is not a business day, on the next succeeding
business day, beginning in August 2003.
Primary Mortgage Insurer... Mortgage Guaranty Insurance Corporation, a Wisconsin
stock insurance corporation ("MGIC"). Certain of the
mortgage loans are covered by primary mortgage
insurance provided by MGIC, which may provide
limited protection to the trust in the event such
mortgage loans default. SEE "THE MORTGAGE
POOL--MORTGAGE GUARANTY INSURANCE CORPORATION" IN
THIS PROSPECTUS SUPPLEMENT.
Credit Risk Manager........ The Murrayhill Company, a Colorado corporation. SEE
"THE CREDIT RISK MANAGER" IN THIS PROSPECTUS
SUPPLEMENT.
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S-1
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Offered Certificates....... Only the certificates listed on the cover of this
prospectus supplement are being offered by this
prospectus supplement. Each class of Offered
Certificates will have the initial certificate
principal balance and pass through rate set forth or
described in the table appearing on the cover of
this prospectus supplement.
THE TRUST
The Depositor will establish a trust with respect to the certificates under the
pooling and servicing agreement dated as of the Cut-off Date among the
Depositor, the Servicer, the Master Servicer, the Securities Administrator and
the Trustee. There are nine classes of certificates representing the trust. SEE
"DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust. In general, distributions of interest and principal, if
applicable, on the Offered Certificates will be made only from payments received
in connection with the mortgage loans.
THE MORTGAGE LOANS
References to percentages of the mortgage loans under this section are
calculated based on the aggregate principal balance of the mortgage loans as of
the Cut-off Date.
The trust will contain approximately 1,764 conventional, one- to four-family,
adjustable-rate and fixed-rate mortgage loans secured by first liens on
residential real properties (the "Mortgage Loans").
For purposes of calculating interest and principal distributions on (i) the
Class A-1 Certificates and (ii) the Class A-2 Certificates (collectively, the
"Class A Certificates"), the Mortgage Loans have been divided into two loan
groups, designated as the "Group I Mortgage Loans" and the "Group II Mortgage
Loans." The Group I Mortgage Loans consist of fixed-rate and adjustable-rate
mortgage loans with principal balances at origination that conform to agency
loan limits. The Group II Mortgage Loans consist of fixed-rate and
adjustable-rate mortgage loans with principal balances at origination that may
or may not conform to agency loan limits.
The Class A-1 Certificates represent interests in the Group I Mortgage Loans.
The Class A-2 Certificates represent interests in the Group II Mortgage Loans.
The Class M-1, Class M-2, Class M-3 and Class M-4 Certificates (collectively,
the "Mezzanine Certificates") represent interests in all of the Mortgage Loans.
The Group I Mortgage Loans consist of 1,489 mortgage loans and have an aggregate
principal balance of approximately $231,283,449 as of the Cut- off Date. The
Group I Mortgage Loans have original terms to maturity of not greater than
approximately 30 years and have the following characteristics as of the Cut-off
Date:
Range of mortgage rates: 5.500% to 13.500%.
Weighted average mortgage rate: 8.013%.
Range of gross margins: 3.950% to 6.750%.
Weighted average gross margin: 6.005%.
Range of minimum mortgage rates: 5.799% to 13.500%.
Weighted average minimum mortgage rate: 8.180%.
Range of maximum mortgage rates: 11.799% to 19.500%.
Weighted average maximum mortgage rate: 14.180%.
Weighted average remaining term
to stated maturity: 348 months.
Range of principal balances: $39,494 to $379,371.
Average principal balance: $155,328.
Range of original loan-to-value ratios: 21.06% to 95.00%.
Weighted average original loan-to value ratio: 80.14%.
Weighted average next adjustment date: March 22, 2005.
The Group II Mortgage Loans consist of 275 mortgage loans and have an aggregate
principal balance of approximately $65,211,794 as of the Cut-off Date. The Group
II Mortgage Loans have original terms to maturity of not greater than
approximately 30 years and have the following characteristics as of the Cut-off
Date:
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S-2
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Range of mortgage rates: 5.500% to 11.500%.
Weighted average mortgage rate: 7.374%.
Range of gross margins: 4.750% to 6.750%.
Weighted average gross margin: 5.918%.
Range of minimum mortgage rates: 5.990% to 11.000%.
Weighted average minimum mortgage rate: 7.571%.
Range of maximum mortgage rates: 11.990% to 17.000%.
Weighted average maximum mortgage rate: 13.571%
Weighted average remaining term
to stated maturity: 347 months.
Range of principal balances: $39,295 to $725,965.
Average principal balance: $237,134.
Range of original loan-to-value ratios: 38.46% to 95.00%.
Weighted average original loan-to value ratio: 83.49%.
Weighted average next adjustment date: March 9, 2005.
The Mortgage Loans in the aggregate have a principal balance of approximately
$296,495,244 as of the Cut-off Date and have the following characteristics as of
the Cut-off Date:
Range of mortgage rates: 5.500% to 13.500%.
Weighted average mortgage rate: 7.872%.
Range of gross margins: 3.950% to 6.750%.
Weighted average gross margin: 5.995%.
Range of minimum mortgage rates: 5.799% to 13.500%.
Weighted average minimum mortgage rate: 8.107%.
Range of maximum mortgage rates: 11.799% to 19.500%.
Weighted average maximum mortgage rate: 14.107%.
Weighted average remaining term
to stated maturity: 348 months.
Range of principal balances: $39,295 to $725,965.
Average principal balance: $168,081.
Range of original loan-to-value ratios: 21.06% to 95.00%.
Weighted average original loan-to value ratio: 80.88%.
Weighted average next adjustment date: March 20, 2005.
The mortgage rate on each adjustable-rate Mortgage Loan will adjust on its
semi-annual adjustment date to equal the sum of (A) Six-Month LIBOR (as defined
herein) and (B) the related gross margin, subject to periodic and lifetime
limitations, as described under "The Mortgage Pool" in this prospectus
supplement. SEE ALSO "THE MORTGAGE POOL-THE INDEX" IN THIS PROSPECTUS
SUPPLEMENT.
The first adjustment date on the adjustable-rate Mortgage Loans will occur only
after an initial period of approximately two years from the date of origination,
as more fully described under "The Mortgage Pool" in this prospectus supplement.
FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE LOANS, SEE "THE MORTGAGE POOL"
IN THIS PROSPECTUS SUPPLEMENT.
THE CERTIFICATES
OFFERED CERTIFICATES. The Class A Certificates and the Mezzanine Certificates
are the only classes of certificates offered by this prospectus supplement. The
Offered Certificates will have the characteristics shown in the table on the
cover of this prospectus supplement and as described in this prospectus
supplement.
The pass-through rate on each class of Offered Certificates is variable and will
be calculated for each Distribution Date as described below and under
"Description of the Certificates- Pass-Through Rates" in this prospectus
supplement. The pass-through rate on each class of Offered Certificates is a
rate per annum based on one-month LIBOR plus an applicable spread, subject to a
rate cap calculated based on the weighted average mortgage rate of the mortgage
loans, less the fee rates payable to the Servicer, the Credit Risk Manager, the
Master Servicer and the rate at which the premium payable to MGIC is calculated
(collectively, the "Administrative Costs") and adjusted for the actual number of
days in the interest accrual period. The initial spread relating to the Class
A-1 Certificates is 0.31% per annum. The initial spread relating to the Class
A-2 Certificates is 0.39% per annum. The initial spread relating to the Class
M-1 Certificates is 0.75% per annum. The initial spread relating to the Class
M-2 Certificates is 1.95% per annum. The initial spread relating to the Class
M-3 Certificates
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S-3
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is 2.60% per annum. The initial spread relating to the Class M-4 Certificates is
3.75% per annum. Each spread is subject to increase as more fully described
under "Description of the Certificates-Pass-Through Rates" in this prospectus
supplement.
The Offered Certificates will be sold by the Depositor to Deutsche Bank
Securities Inc. (the "Underwriter") on the Closing Date.
The Offered Certificates will be represented initially by one or more global
certificates registered in the name of a nominee of the Depository Trust Company
in the United States, or of Clearstream and the Euroclear System (each, as
defined herein), in Europe in minimum denominations of $25,000 and integral
multiples of $1.00 in excess of the minimum denominations. SEE "DESCRIPTION OF
THE CERTIFICATES-BOOK-ENTRY CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
CLASS CE CERTIFICATES. The Class CE Certificates are not offered by this
prospectus supplement. The Class CE Certificates will have an initial
certificate principal balance of approximately $1,482,144, which is equal to the
initial overcollateralization required by the pooling and servicing agreement.
The Class CE Certificates initially evidence an interest of approximately 0.50%
in the trust.
CLASS P CERTIFICATES. The Class P Certificates are not offered by this
prospectus supplement. The Class P Certificates will have an initial certificate
principal balance of $100 and will not be entitled to distributions in respect
of interest. The Class P Certificates will be entitled to all prepayment charges
received in respect of the Mortgage Loans.
CLASS R CERTIFICATES. The Class R Certificates or Residual Certificates, which
are not offered by this prospectus supplement, represent the residual interests
in the trust.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Offered
Certificates consists of subordination and overcollateralization, each as
described in this section and under "Description of the Certificates-Credit
Enhancement" and "-Overcollateralization Provisions" in this prospectus
supplement and the MGIC PMI Policy as described under "The Mortgage
Pool--Mortgage Guaranty Insurance Corporation" in this prospectus supplement. In
addition, the Class A-1 Certificates and the Class A- 2 Certificates will each
have the benefit of a cap agreement provided by The Royal Bank of Scotland plc
("Cap Provider") as described under "The Cap Agreements and the Cap Provider" in
this prospectus supplement.
EXCESS INTEREST. The Mortgage Loans bear interest each month in an amount that
in the aggregate is expected to exceed the amount needed to distribute monthly
interest on the Offered Certificates and to pay certain fees and expenses of the
trust. Any excess interest from the Mortgage Loans each month will be available
to absorb realized losses on the Mortgage Loans and to maintain or restore
overcollateralization at required levels.
SUBORDINATION. The rights of the holders of the Mezzanine Certificates and Class
CE Certificates to receive distributions will be subordinated, to the extent
described in this prospectus supplement, to the rights of the holders of the
Class A Certificates.
In addition, to the extent described under "Description of the
Certificates--Allocation of Losses; Subordination" in this prospectus
supplement,
o the rights of the holders of the Class M-2, Class M-3, Class M-4 and
Class CE Certificates will be subordinated to the rights of the
holders of the Class M-1 Certificates;
o the rights of the holders of the Class M-3, Class M-4 and Class CE
Certificates will be subordinated to the rights of the holders of the
Class M-2 Certificates;
o the rights of the holders of the Class M-4 Certificates and Class CE
Certificates will be subordinated to the rights of the holders of the
Class M-3 Certificates; and
o the rights of the holders of the Class CE Certificates will be
subordinated to the rights of the holders of the Class M-4
Certificates.
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S-4
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Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates in respect of interest and principal and to afford
the more senior certificates protection against realized losses on the Mortgage
Loans, as described under "Description of the Certificates--Allocation of
Losses; Subordination" in this prospectus supplement.
OVERCOLLATERALIZATION. The aggregate principal balance of the Mortgage Loans as
of the Cut-off Date will exceed the aggregate certificate principal balance of
the Class A Certificates, the Mezzanine Certificates and the Class P
Certificates on the Closing Date by approximately $1,482,144, which is equal to
the initial Certificate Principal Balance of the Class CE Certificates. This
amount represents approximately 0.50% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date, and is the initial amount of
overcollateralization required to be provided by the mortgage pool under the
pooling and servicing agreement. SEE "DESCRIPTION OF THE
CERTIFICATES-OVERCOLLATERALIZATION PROVISIONS" IN THIS PROSPECTUS SUPPLEMENT.
CAP AGREEMENTS. For each Distribution Date occurring on or after the
Distribution Date in February 2004 up to and including the Distribution Date in
January 2008, the Class A-1 Certificates will have the benefit of a cap
agreement which is intended partially to mitigate interest rate risk. The cap
agreement relating to the Class A-1 Certificates requires the Cap Provider to
make a cap payment in an amount equal to the product of:
(1) the excess, if any, of one-month LIBOR over a specified strike rate
for the related Distribution Date (provided, however, that if one-month LIBOR
exceeds 11.00% the payment due will be calculated as if one- month LIBOR were
11.00%);
(2) the related scheduled notional amount, which is based on the expected
amortization of the Group I Mortgage Loans; and
(3) a fraction, the numerator of which is the actual number of days
elapsed from the previous Distribution Date to but excluding the current
Distribution Date (or, for the first Distribution Date, the actual number of
days elapsed from the Closing Date to but excluding the first Distribution
Date), and the denominator of which is 360.
For each Distribution Date occurring on or prior to the Distribution Date in
January 2006, the Class A-2 Certificates will have the benefit of a cap
agreement which is intended partially to mitigate interest rate risk. The cap
agreement relating to the Class A-2 Certificates requires the Cap Provider to
make a cap payment in an amount equal to the product of:
(1) the excess, if any, of one-month LIBOR over a specified strike rate
for the related Distribution Date (provided, however, that if one-month LIBOR
exceeds 11.00% the payment due will be calculated as if one- month LIBOR were
11.00%);
(2) the related scheduled notional amount, which is based on the expected
amortization of the Group II Mortgage Loans; and
(3) a fraction, the numerator of which is the actual number of days
elapsed from the previous Distribution Date to but excluding the current
Distribution Date (or, for the first Distribution Date, the actual number of
days elapsed from the Closing Date to but excluding the first Distribution
Date), and the denominator of which is 360.
Cap payments, if any, made by the Cap Provider will be deposited into a reserve
fund and will be available for distribution on the Class A-1 Certificates and
the Class A-2 Certificates, as applicable, in respect of any interest shortfall
amounts resulting from the application of the applicable rate cap, to the
limited extent described herein. SEE "DESCRIPTION OF THE CERTIFICATES" AND "THE
CAP AGREEMENTS AND THE CAP PROVIDER" IN THIS PROSPECTUS SUPPLEMENT.
THE MGIC PMI POLICY. Approximately 76.92% of the mortgage loans will be insured
by an insurance policy issued by MGIC. This policy will be referred to herein as
the MGIC PMI Policy. The MGIC PMI Policy will provide only limited protection
against losses on defaulted mortgage loans, and will provide limited protection
only with respect to those mortgage loans which are covered by the MGIC PMI
policy. SEE "DESCRIPTION OF THE CERTIFICATES--MORTGAGE" GUARANTY
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S-5
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INSURANCE CORPORATION" IN THIS PROSPECTUS SUPPLEMENT.
ALLOCATION OF LOSSES. If, on any Distribution Date, there is not sufficient
excess interest or overcollateralization (represented by the Class CE
Certificates) to absorb realized losses on the Mortgage Loans as described under
"Description of the Certificates--Overcollateralization Provisions" in this
prospectus supplement, then realized losses on the Mortgage Loans will be
allocated to the Class M-4, Class M-3, Class M-2 and Class M-1 Certificates, in
that order. The pooling and servicing agreement does not permit the allocation
of realized losses on the Mortgage Loans to the Class A Certificates; however,
investors in the Class A Certificates should realize that under certain loss
scenarios, there will not be enough principal and interest on the Mortgage Loans
to pay the Class A Certificates all interest and principal amounts to which
these certificates are then entitled. SEE "DESCRIPTION OF THE CERTIFICATES
- --ALLOCATION OF LOSSES; SUBORDINATION" IN THIS PROSPECTUS SUPPLEMENT.
Once realized losses are allocated to the Mezzanine Certificates, their
certificate principal balances will be permanently reduced by the amount so
allocated and no amounts will be distributable with respect to such written down
amounts on that Distribution Date or on any future Distribution Date.
P&I ADVANCES
The Servicer is required to advance delinquent payments of principal and
interest on the Mortgage Loans, subject to the limitations described under
"Description of the Certificates--P&I Advances" in this prospectus supplement.
The successor servicer (which may be the Trustee or the Master Servicer) will be
obligated to make any required delinquency advance if the Servicer fails in its
obligation to do so, to the extent provided in the pooling and servicing
agreement. The Servicer or the successor servicer, as the case may be, is
entitled to be reimbursed for these advances, and therefore these advances are
not a form of credit enhancement. SEE "DESCRIPTION OF THE CERTIFICATES--P&I
ADVANCES" IN THIS PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF THE
SECURITIES--ADVANCES IN RESPECT OF DELINQUENCIES" IN THE PROSPECTUS.
OPTIONAL TERMINATION
At its option and subject to certain conditions, the Class CE Certificateholder
(provided it is not an affiliate of the mortgage loan seller) may purchase all
of the Mortgage Loans in the mortgage pool, together with any properties in
respect of the Mortgage Loans acquired on behalf of the trust, and thereby
effect termination and early retirement of the certificates, after the aggregate
principal balance of the Mortgage Loans (and properties acquired in respect of
the Mortgage Loans), remaining in the trust has been reduced to less than 10% of
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date.
SEE "POOLING AND SERVICING AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT
AND "DESCRIPTION OF THE SECURITIES--TERMINATION" IN THE PROSPECTUS.
FEDERAL INCOME TAX CONSEQUENCES
Multiple elections will be made to treat designated portions of the trust as
real estate mortgage investment conduits for federal income tax purposes. SEE
"MATERIAL FEDERAL INCOME TAX CONSIDERATIONS--REMICS--CHARACTERIZATION OF
INVESTMENTS IN REMIC SECURITIES" IN THE PROSPECTUS.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, SEE "FEDERAL INCOME TAX CONSEQUENCES" IN
THIS PROSPECTUS SUPPLEMENT AND "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" IN
THE PROSPECTUS.
RATINGS
It is a condition to the issuance of the certificates that the Offered
Certificates receive the following ratings from Standard & Poor's, a division of
The McGraw-Hill Companies, Inc. ("S&P"), Fitch Ratings ("Fitch") and Moody's
Investors Service, Inc. ("Moody's"):
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S-6
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Offered
Certificates S&P Fitch Moody's
------------ --- ----- -------
Class A-1 AAA AAA Aaa
Class A-2 AAA AAA Aaa
Class M-1 AA AA Aa2
Class M-2 A A A2
Class M-3 A- A- A3
Class M-4 BBB+ BBB+ Baa1
A security rating does not address the frequency of prepayments on the Mortgage
Loans or the corresponding effect on yield to investors. SEE "YIELD ON THE
CERTIFICATES" AND "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND "YIELD
CONSIDERATIONS" IN THE PROSPECTUS.
LEGAL INVESTMENT
The Class A Certificates and the Class M-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"), for so long as they are rated not lower than
the second highest rating category by one or more nationally recognized
statistical rating organizations and therefore, will be legal investments for
those entities to the extent provided in SMMEA and applicable state laws. The
Class M-2, Class M-3 and Class M-4 Certificates will not constitute "mortgage
related securities" for purposes of SMMEA. SEE "LEGAL INVESTMENT" IN THIS
PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
It is expected that the Offered Certificates may be purchased by a pension or
other employee benefit plan subject to the Employee Retirement Income Security
Act of 1974 or Section 4975 of the Internal Revenue Code of 1986, as amended
(the "Code") so long as certain conditions are met. A fiduciary of an employee
benefit plan must determine that the purchase of a certificate is consistent
with its fiduciary duties under applicable law and does not result in a
nonexempt prohibited transaction under applicable law. SEE "CONSIDERATIONS FOR
BENEFIT PLAN INVESTORS" IN THIS PROSPECTUS SUPPLEMENT AND "ERISA CONSIDERATIONS"
IN THE PROSPECTUS.
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S-7
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CONSIDER CAREFULLY, IDENTIFIES
SIGNIFICANT RISKS ASSOCIATED WITH AN INVESTMENT IN THE CERTIFICATES.
THE MORTGAGE LOANS WERE UNDERWRITTEN TO STANDARDS WHICH DO NOT CONFORM TO THE
STANDARDS OF FANNIE MAE OR FREDDIE MAC.
The underwriting standards of the originators are intended to assess the
ability and willingness of the mortgagor to repay the debt and to evaluate the
adequacy of the property as collateral for the mortgage loan. The originators
consider, among other things, a mortgagor's credit history, repayment ability
and debt service-to-income ratio, as well as the value, type and use of the
mortgaged property. As further described in this prospectus supplement, the
underwriting standards of the originators do not conform to Fannie Mae and
Freddie Mac guidelines.
In addition, mortgage loans originated by the originators generally bear
higher rates of interest than mortgage loans originated in accordance with
Fannie Mae and Freddie Mac guidelines and may experience rates of delinquency,
foreclosure and bankruptcy that are higher, and that may be substantially
higher, than those experienced by mortgage loans underwritten in accordance with
Fannie Mae and Freddie Mac guidelines.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Mortgage Loans than on mortgage loans originated in accordance with
Fannie Mae and Freddie Mac guidelines. No assurance can be given that the values
of the related mortgaged properties have remained or will remain at the levels
in effect on the dates of origination of the related Mortgage Loans. SEE "THE
MORTGAGE POOL--UNDERWRITING STANDARDS" IN THIS PROSPECTUS SUPPLEMENT.
MORTGAGE LOANS WITH HIGH LOAN-TO-VALUE RATIOS LEAVE THE RELATED MORTGAGOR WITH
LITTLE OR NO EQUITY IN THE RELATED MORTGAGED PROPERTY.
Approximately 56.79% of the Group I Mortgage Loans and approximately 66.36%
of the Group II Mortgage Loans, in each case, by aggregate principal balance as
of the Cut-off Date, had a loan-to-value ratio at origination in excess of 80%.
No Mortgage Loan had a loan-to-value ratio exceeding 95.00% at origination.
An overall decline in the residential real estate market, a rise in
interest rates over a period of time and the condition of a mortgaged property,
as well as other factors, may have the effect of reducing the value of the
mortgaged property from the appraised value at the time the Mortgage Loan was
originated. If there is a reduction in value of the mortgaged property, the
loan-to-value ratio may increase over what it was at the time the Mortgage Loan
was originated. Such an increase may reduce the likelihood of liquidation or
other proceeds being sufficient to satisfy the Mortgage Loan, and any losses to
the extent not covered by the credit enhancement may affect the yield to
maturity of your certificates. There can be no assurance that the value of a
mortgaged property estimated in any appraisal or review is equal to the actual
value of that mortgaged property at the time of that appraisal or review.
Investors should note that the values of the mortgaged properties may be
insufficient to cover the outstanding principal balance of the Mortgage Loans.
There can be no assurance that the loan-to-value ratio of any Mortgage Loan
determined at any time after origination will be less than or equal to its
loan-to-value ratio at origination.
THE MORTGAGE LOANS ARE CONCENTRATED IN THE STATE OF CALIFORNIA, WHICH MAY
PRESENT A GREATER RISK OF LOSS RELATING TO THESE MORTGAGE LOANS.
Approximately 38.46% of the Group I Mortgage Loans and approximately 57.94%
of the Group II Mortgage Loans, in each case, by aggregate principal balance as
of the Cut-off Date, are secured by mortgaged properties located in the State of
California. Approximately $1,760,703 of the Mortgage Loans,
S-8
by aggregate principal balance as of the Cut-off Date, are located in a single
California zip code, which is the largest concentration of Mortgage Loans in a
single California zip code. If the California residential real estate market
should experience an overall decline in property values after the dates of
origination of the Mortgage Loans, the rates of delinquencies, foreclosures,
bankruptcies and losses on the Mortgage Loans may increase over historical
levels of comparable type loans, and may increase substantially. In addition,
properties located in California may be more susceptible than homes located in
other parts of the country to certain types of uninsured hazards, such as
earthquakes, as well as floods, mudslides and other natural disasters.
THE MEZZANINE CERTIFICATES WILL BE MORE SENSITIVE TO LOSSES ON THE MORTGAGE
LOANS THAN THE CLASS A CERTIFICATES BECAUSE THEY ARE SUBORDINATE TO THE CLASS A
CERTIFICATES.
The weighted average lives of, and the yields to maturity on, the Class
M-1, the Class M-2, Class M-3 and Class M-4 Certificates will be progressively
more sensitive, in that order, to the rate and timing of mortgagor 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 assumed by an
investor in these certificates, the actual yield to maturity of these
certificates may be lower than the yield anticipated by the holder based on such
assumption. The timing of losses on the Mortgage Loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the mortgage pool are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity. Realized losses on the Mortgage Loans, to the
extent they exceed the amount of excess interest and overcollateralization
following distributions of principal on the related Distribution Date, will
reduce the certificate principal balance of the Mezzanine Certificate then
outstanding with the lowest payment priority. As a result of such reductions,
less interest will accrue on such class of Mezzanine Certificates than would
otherwise be the case. Once a realized loss is allocated to a Mezzanine
Certificate, no amounts will be distributable with respect to such written down
amount.
THE MEZZANINE CERTIFICATES GENERALLY WILL NOT BE ENTITLED TO RECEIVE PRINCIPAL
PAYMENTS UNTIL AUGUST 2006 WHICH MAY RESULT IN A GREATER RISK OF LOSS RELATING
TO THESE CERTIFICATES.
Unless the certificate principal balance of the Class A Certificates has
been reduced to zero, the Mezzanine Certificates will not be entitled to any
principal distributions until at least August 2006 or a later date as provided
in this prospectus supplement or during any period in which delinquencies on the
Mortgage Loans exceed the levels set forth under "Description of the
Certificates--Principal Distributions on the Class A Certificates and Mezzanine
Certificates" in this prospectus supplement. As a result, the weighted average
lives of the Mezzanine Certificates will be longer than would be the case if
distributions of principal were allocated among all of the certificates at the
same time. As a result of the longer weighted average lives of the Mezzanine
certificates, the holders of these certificates have a greater risk of suffering
a loss on their investments. Further, because such certificates might not
receive any principal if the delinquency levels set forth under "Description of
the Certificates--Principal Distributions on the Class A Certificates and
Mezzanine Certificates" in this prospectus supplement are exceeded, it is
possible for such certificates to receive no principal distributions on a
particular Distribution Date even if no losses have occurred on the mortgage
pool.
THE CERTIFICATES WILL BE LIMITED OBLIGATIONS SOLELY OF THE TRUST FUND AND NOT OF
ANY OTHER PARTY.
The Offered Certificates will not represent an interest in or obligation of
the depositor, the servicer, the master servicer, the securities administrator,
the originators, the trustee or any of their respective affiliates. Neither the
certificates nor the underlying Mortgage Loans will be guaranteed or insured by
any governmental agency or instrumentality, or by the depositor, the servicer,
the originators, the trustee or any of their respective affiliates. Proceeds of
the assets included in the trust will be the sole source of payments on the
Offered Certificates, and there will be no recourse to the depositor, the
servicer, the originator, the master servicer, the securities administrator, the
trustee or any other entity in the event that these proceeds are insufficient or
otherwise unavailable to make all payments provided for under the Offered
Certificates.
S-9
THE DIFFERENCE BETWEEN THE PASS-THROUGH RATES ON THE CLASS A CERTIFICATES AND
MEZZANINE CERTIFICATES AND THE MORTGAGE RATES ON THE MORTGAGE LOANS MAY RESULT
IN INTEREST SHORTFALLS ON SUCH CERTIFICATES.
The yield to maturity on the Class A Certificates and the Mezzanine
Certificates may be affected by the resetting of the mortgage rates on the
adjustable-rate Mortgage Loans included in the mortgage pool on their related
adjustment dates. In addition, because the mortgage rate for each
adjustable-rate Mortgage Loan included in the mortgage pool is based on
Six-Month LIBOR plus a fixed percentage amount, such rate could be higher than
prevailing market interest rates, and this may result in an increase in the rate
of prepayments on such Mortgage Loans after their adjustments. Finally, the
mortgage rates on the adjustable-rate Mortgage Loans are based on Six-Month
LIBOR while the pass-through rates on the Class A Certificates and the Mezzanine
Certificates are based on one-month LIBOR. Consequently, the application to such
certificates of the rate cap, which is equal to the weighted average coupon on
the Mortgage Loans, net of certain fees of the trust, could adversely affect the
yield to maturity on such Certificates. In addition, the rate cap will decrease
if Mortgage Loans with relatively high mortgage rates prepay at a faster rate
than Mortgage Loans with relatively low mortgage rates.
If the pass-through rates on the Class A Certificates or the Mezzanine
Certificates are limited for any Distribution Date, the resulting interest
shortfalls may be recovered by the holders of these certificates on the same
Distribution Date or on future Distribution Dates on a subordinated basis to the
extent that on such Distribution Date or future Distribution Dates there are
available funds remaining after certain other distributions on the Offered
Certificates and the payment of certain fees and expenses of the trust. SEE
"YIELD ON THE CERTIFICATES--SPECIAL YIELD CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT.
THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES AND
THE MEZZANINE CERTIFICATES WILL BE AFFECTED BY PREPAYMENT SPEEDS AND BY THE
PRIORITY OF PAYMENT ON SUCH CERTIFICATES.
The rate and timing of distributions allocable to principal on the Class A
Certificates and the Mezzanine Certificates will depend, in general, on the rate
and timing of principal payments (including prepayments and collections upon
defaults, liquidations and repurchases) on the Mortgage Loans and the allocation
thereof to pay principal on such certificates as described in "Description of
the Certificates--Principal Distributions on the Class A Certificates and the
Mezzanine Certificates" in this prospectus supplement. As is the case with
mortgage pass-through certificates generally, the Offered Certificates are
subject to substantial inherent cash-flow uncertainties because the Mortgage
Loans may be prepaid at any time. However, with respect to approximately 91.36%
of the Mortgage Loans, by aggregate principal balance of the Mortgage Loans as
of the Cut-off Date, a prepayment may subject the related mortgagor to a
prepayment charge. A prepayment charge may or may not act as a deterrent to
prepayment of the related Mortgage Loan. SEE "THE MORTGAGE POOL" IN THIS
PROSPECTUS SUPPLEMENT.
Generally, when prevailing interest rates are increasing, prepayment rates
on mortgage loans tend to decrease; a decrease in the prepayment rates on the
Mortgage Loans will result in a reduced rate of return of principal to investors
in the Class A Certificates and the Mezzanine Certificates at a time when
reinvestment at such higher prevailing rates would be desirable. Conversely,
when prevailing interest rates are declining, prepayment rates on mortgage loans
tend to increase; an increase in the prepayment rates on the Mortgage Loans will
result in a greater rate of return of principal to investors in the Class A
Certificates and Mezzanine Certificates at a time when reinvestment at
comparable yields may not be possible.
Distributions of principal will be made to the holders of the Mezzanine
Certificates according to the priorities described in this prospectus
supplement. The timing of commencement of principal distributions and the
weighted average life of each such class of certificates will be affected by the
rates of prepayment on the Mortgage Loans experienced both before and after the
commencement of principal distributions on such classes. For further information
regarding the effect of principal prepayments on the weighted average lives of
the Offered Certificates, SEE "YIELD ON THE CERTIFICATES" IN THIS PROSPECTUS
S-10
SUPPLEMENT, INCLUDING THE TABLE ENTITLED "PERCENT OF INITIAL CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT
ASSUMPTION."
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON A VARIETY OF
FACTORS.
The yield to maturity on the Offered Certificates will depend on:
o the applicable pass-through rate thereon;
o the applicable purchase price;
o the rate and timing of principal payments (including prepayments and
collections upon defaults, liquidations and repurchases) and the
allocation thereof to reduce the certificate principal balance of the
Mezzanine Certificates; and
o the rate, timing and severity of realized losses on the Mortgage
Loans; adjustments to the mortgage rates on the adjustable-rate
Mortgage Loans included in the mortgage pool, the amount of excess
interest generated by the Mortgage Loans and the allocation to the
Offered Certificates of certain interest shortfalls.
In general, if the Class A Certificates and the Mezzanine Certificates are
purchased at a premium and principal distributions thereon occur at a rate
faster than anticipated at the time of purchase, the investor's actual yield to
maturity will be lower than that assumed at the time of purchase. Conversely, if
the Class A Certificates and the Mezzanine Certificates are purchased at a
discount and principal distributions thereon occur at a rate slower than that
anticipated at the time of purchase, the investor's actual yield to maturity
will be lower than that originally assumed.
The proceeds to the Depositor from the sale of the Offered Certificates
were determined based on a number of assumptions, including a prepayment
assumption of 28% CPR with respect to the adjustable rate Mortgage Loans and
100% PPC with respect to the fixed rate Mortgage Loans as described in this
prospectus supplement under "Yield on the Certificates" and weighted average
lives corresponding thereto. No representation is made that the Mortgage Loans
will prepay at such rate or at any other rate. The yield assumptions for the
Offered Certificates will vary as determined at the time of sale.
THE YIELD TO MATURITY ON THE MEZZANINE CERTIFICATES WILL BE PARTICULARLY
SENSITIVE TO THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS.
The multiple class structure of the Mezzanine Certificates causes the yield
of these classes to be particularly sensitive to changes in the rates of
prepayment of the Mortgage Loans. Because distributions of principal will be
made to the holders of such certificates according to the priorities described
in this prospectus supplement, the yield to maturity on such classes of
certificates will be sensitive to the rates of prepayment on the Mortgage Loans
experienced both before and after the commencement of principal distributions on
such classes. The yield to maturity on such classes of certificates will also be
extremely sensitive to losses due to defaults on the Mortgage Loans (and the
timing thereof), to the extent these losses are not covered by excess cashflow
otherwise payable to the Class CE Certificates or to a class of Mezzanine
Certificates with a lower payment priority. Furthermore, as described in this
prospectus supplement, the timing of receipt of principal and interest by the
Mezzanine Certificates may be adversely affected by losses even if these classes
of certificates do not ultimately bear such loss.
THE YIELD ON THE CERTIFICATES WILL BE ADVERSELY AFFECTED IF MGIC FAILS TO MAKE
PAYMENTS UNDER THE MGIC PMI POLICY.
If MGIC is unable to make the payments required of it under the MGIC PMI
Policy a reduction of distributions on the Class A Certificates and Mezzanine
Certificates may occur. In addition, as described
S-11
under "The Mortgage Pool--Mortgage Guaranty Insurance Corporation" in this
prospectus supplement, MGIC will not make payments under the MGIC PMI Policy,
unless the conditions precedent required under the MGIC PMI Policy have been
met. Any failure by MGIC to make payments under the MGIC PMI Policy could
adversely affect the yield on the Class A Certificates and Mezzanine
Certificates.
VIOLATION OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES ON THE MORTGAGE LOANS
AND YOUR CERTIFICATES.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosure, and require licensing of the originator. In
addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the Mortgage Loans.
The Mortgage Loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the mortgagors
regarding the terms of the Mortgage Loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer
Credit Protection Act, in the extension of credit;
o the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the mortgagor's credit experience;
o the Depository Institutions Deregulation and Monetary Control Act of
1980, which preempts certain state usury laws; and
o the Alternative Mortgage Transaction Parity Act of 1982, which
preempts certain state lending laws which regulate alternative
mortgage transactions.
Violations of certain provisions of these federal and state laws may limit
the ability of the servicer to collect all or part of the principal of or
interest on the Mortgage Loans and in addition could subject the trust to
damages and administrative enforcement. In particular, the applicable
originator's failure to comply with certain requirements of the Federal
Truth-in-Lending Act, as implemented by Regulation Z, could subject the trust to
monetary penalties, and result in the mortgagors' rescinding the Mortgage Loans
against the trust. In addition to federal law, some states have enacted, or may
enact, laws or regulations that prohibit inclusion of some provisions in
Mortgage Loans that have interest rates or origination costs in excess of
prescribed levels, and require that mortgagors be given certain disclosures
prior to the consummation of the Mortgage Loans and restrict the servicer's
ability to foreclose in response to the mortgagor's default. The applicable
originator's failure to comply with these laws could subject the trust to
significant monetary penalties, could result in the mortgagors rescinding the
Mortgage Loans against the trust and/or limit the servicer's ability to
foreclose upon the related mortgaged property in the event of a mortgagor's
default.
The mortgage loan seller will represent that, as of the Closing Date, each
Mortgage Loan is in compliance with applicable federal and state laws and
regulations. In the event of a breach of such representation, the mortgage loan
seller will be obligated to cure such breach or repurchase or replace the
affected Mortgage Loan in the manner described in the prospectus. If the
mortgage loan seller is unable or otherwise fails to satisfy such obligations,
the yield on the Offered Certificates may be materially and adversely affected.
S-12
INTEREST GENERATED BY THE MORTGAGE LOANS MAY BE INSUFFICIENT TO MAINTAIN OR
RESTORE OVERCOLLATERALIZATION.
The Mortgage Loans are expected to generate more interest than is needed to
pay interest owed on the Offered Certificates and to pay certain fees and
expenses of the trust. Any remaining interest generated by the Mortgage Loans
will then be used to absorb losses that occur on the Mortgage Loans. After these
financial obligations of the trust are covered, available excess interest
generated by the Mortgage Loans will be used to maintain or restore the
overcollateralization. We cannot assure you, however, that enough excess
interest will be generated to maintain or restore the required level of
overcollateralization. The factors described below will affect the amount of
excess interest that the Mortgage Loans will generate:
o Every time a Mortgage Loan is prepaid in full, excess interest may be
reduced because such Mortgage Loan will no longer be outstanding and
generating interest or, in the case of a partial prepayment, will be
generating less interest.
o Every time a Mortgage Loan is liquidated or written off, excess
interest may be reduced because such Mortgage Loan will no longer be
outstanding and generating interest.
o If the rates of delinquencies, defaults or losses on the Mortgage
Loans are higher than expected, excess interest will be reduced by the
amount necessary to compensate for any shortfalls in cash available to
make required distributions on the Offered Certificates.
o The adjustable-rate Mortgage Loans have mortgage rates that adjust
less frequently than, and on the basis of an index that is different
from the index used to determine, the pass-through rates on the
Offered Certificates, and the fixed-rate Mortgage Loans have mortgage
rates that do not adjust. As a result, the pass-through rates on the
Offered Certificates may increase relative to mortgage rates on the
Mortgage Loans, requiring that a greater portion of the interest
generated by the Mortgage Loans be applied to cover interest on such
certificates.
INTEREST PAYMENTS ON THE MORTGAGE LOANS MAY BE INSUFFICIENT TO PAY INTEREST ON
YOUR CERTIFICATES.
When a Mortgage Loan is prepaid in full, the mortgagor is charged interest
only up to the date on which payment is made, rather than for an entire month.
This may result in a shortfall in interest collections available for payment on
the next Distribution Date. The servicer is required to cover a portion of the
shortfall in interest collections that are attributable to prepayments in full
on the Mortgage Loans, but only up to the servicing fee for the related interest
accrual period. If the credit enhancement is insufficient to cover this
shortfall in excess of the amount the servicer covers, you may incur a loss. In
addition, the servicer will not cover shortfalls in interest collections due to
bankruptcy proceedings or the application of the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended, or the Relief Act or similar state or local
laws.
On any Distribution Date, any shortfalls resulting from the application of
the Relief Act or similar state or local laws and any prepayment interest
shortfalls to the extent not covered by compensating interest paid by the
servicer will be allocated, first, to the Class CE Certificates, second, to the
Class M-4 Certificates, third, to the Class M-3 Certificates, fourth, to the
Class M-2 Certificates, fifth, to the Class M-1 Certificates and sixth, to the
Class A Certificates, on a PRO RATA basis based on their respective senior
interest distribution amounts for such Distribution Date before such reduction.
The holders of the offered certificates will be entitled to reimbursement for
any such interest shortfalls but only to the extent of available funds and in
the order of priority set forth under "Description of the Certificates--
Overcollateralization Provisions." If these shortfalls are allocated to the
Offered Certificates
S-13
the amount of interest paid to those certificates will be reduced, adversely
affecting the yield on your investment.
THE LIQUIDITY OF YOUR CERTIFICATES MAY BE LIMITED.
The Underwriter has no obligation to make a secondary market in the classes
of Offered Certificates. There is therefore no assurance that a secondary market
will develop or, if it develops, that it will continue. Consequently, you may
not be able to sell your certificates readily or at prices that will enable you
to realize your desired yield. The market values of the certificates are likely
to fluctuate; these fluctuations may be significant and could result in
significant losses to you.
The secondary markets for asset-backed securities have experienced periods
of illiquidity and can be expected to do so in the future. Illiquidity can have
a severely adverse effect on the prices of securities that are especially
sensitive to prepayment, credit or interest rate risk, or that have been
structured to meet the investment requirements of limited categories of
investors.
THE RETURN ON YOUR CERTIFICATES COULD BE REDUCED BY SHORTFALLS DUE TO THE
APPLICATION OF THE RELIEF ACT.
The Relief Act and similar state or local laws provide relief to mortgagors
who enter active military service and to mortgagors in reserve status who are
called to active military service after the origination of their mortgage loans.
The ongoing military operations of the United States in Iraq and Afghanistan
have caused an increase in the number of citizens in active military duty,
including those citizens previously in reserve status. Under the Relief Act the
interest rate applicable to a mortgage loan for which the related mortgagor is
called to active military service will be reduced from the percentage stated in
the related mortgage note to 6.00%. This interest rate reduction and any
reduction provided under similar state or local laws could result in an interest
shortfall because neither the master servicer nor the servicer will be able to
collect the amount of interest which otherwise would be payable with respect to
such Mortgage Loan if the Relief Act or similar state or local law was not
applicable thereto. This shortfall will not be paid by the mortgagor on future
due dates or advanced by the master servicer or the servicer and, therefore,
will reduce the amount available to pay interest to the certificateholders on
subsequent Distribution Dates. We do not know how many Mortgage Loans in the
mortgage pool have been or may be affected by the application of the Relief Act
or similar state or local law.
POSSIBLE REDUCTION OR WITHDRAWAL OF RATINGS ON THE OFFERED CERTIFICATES.
Each rating agency rating the Offered Certificates may change or withdraw
its initial ratings at any time in the future if, in its judgment, circumstances
warrant a change. No person is obligated to maintain the ratings at their
initial levels. If a rating agency reduces or withdraws its rating on one or
more classes of the Offered Certificates, the liquidity and market value of the
affected certificates is likely to be reduced.
SUITABILITY OF THE OFFERED CERTIFICATES AS INVESTMENTS.
The Offered Certificates are not suitable investments for any investor that
requires a regular or predictable schedule of monthly payments or payment on any
specific date. The Offered Certificates are complex investments that should be
considered only by investors who, either alone or with their financial, tax and
legal advisors, have the expertise to analyze the prepayment, reinvestment,
default and market risk, the tax consequences of an investment and the
interaction of these factors.
ALL CAPITALIZED TERMS USED IN THIS PROSPECTUS SUPPLEMENT WILL HAVE THE
MEANINGS ASSIGNED TO THEM UNDER "DESCRIPTION OF THE CERTIFICATES--GLOSSARY" OR
IN THE PROSPECTUS UNDER "INDEX OF DEFINED TERMS."
S-14
USE OF PROCEEDS
Deutsche Bank AG New York Branch (the "Mortgage Loan Seller"), will sell
the Mortgage Loans to Ace Securities Corp. (the "Depositor") and the Depositor
will convey the Mortgage Loans to the trust fund in exchange for and
concurrently with the delivery of the certificates. Net proceeds from the sale
of the Offered Certificates will be applied by the Depositor to the purchase of
the Mortgage Loans from the Mortgage Loan Seller. Such net proceeds, together
with the Class CE Certificates and Class P Certificates, will represent the
purchase price to be paid by the Depositor to the Mortgage Loan Seller for the
Mortgage Loans. The Mortgage Loans were previously purchased by the Mortgage
Loan Seller directly from Town & Country Credit Corporation and Ameriquest
Mortgage Company (collectively, the "Originators").
THE MORTGAGE POOL
GENERAL
The pool of mortgage loans (the "Mortgage Pool") will consist of
approximately 1,764 conventional, one- to four-family, adjustable-rate and
fixed-rate mortgage loans (the "Mortgage Loans") secured by first liens on
residential real properties (the "Mortgaged Properties") and having an aggregate
principal balance as of the Cut-off Date of approximately $296,495,244 after
application of scheduled payments due on or before the Cut-off Date whether or
not received and subject to a permitted variance of plus or minus 5%. The
Mortgage Loans have original terms to maturity of not greater than approximately
30 years. For purposes of calculating interest and principal distributions on
the Class A Certificates, the Mortgage Loans have been divided into two loan
groups, designated as the "Group I Mortgage Loans" and the "Group II Mortgage
Loans." The Group I Mortgage Loans consist of 1,489 fixed-rate and
adjustable-rate mortgage loans having an aggregate principal balance as of the
Cut-off Date of approximately $231,283,449, after application of scheduled
payments due on or before the Cut-off Date whether or not received, and subject
to a permitted variance of plus or minus 5%. The principal balances of the Group
I Mortgage Loans at origination conformed to agency loan limits. The Group II
Mortgage Loans consist of 275 fixed- rate and adjustable-rate mortgage loans
having an aggregate principal balance as of the Cut-off Date of approximately
$65,211,794, after application of scheduled payments due on or before the
Cut-off Date whether or not received, and subject to a permitted variance of
plus or minus 5%. The principal balances of the Group II Mortgage Loans at
origination may or may not conform to agency loan limits.
All of the Mortgage Loans provide for level monthly payments in an amount
sufficient fully to amortize the Mortgage Loans over their terms or, in the case
of adjustable rate Mortgage Loans, monthly payments will be adjusted to an
amount that will fully amortize such Mortgage Loans over their terms.
The Mortgage Loans are secured by first mortgages or deeds of trust or
other similar security instruments creating first liens on residential
properties. The Mortgaged Properties consist of attached, detached or
semi-detached, one to four-family dwelling units, townhouses, individual
condominium units, individual units in planned unit developments and
manufactured housing.
References to percentages of the Mortgage Loans, unless otherwise noted,
are calculated based on the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date.
The mortgage rate (the "Mortgage Rate") on each Mortgage Loan is the per
annum rate of interest specified in the related mortgage note as reduced by
application of the Relief Act or similar state or local laws and bankruptcy
adjustments. Approximately 33.28% of the Mortgage Loans are fixed-rate mortgage
loans and approximately 66.72% of the Mortgage Loans are adjustable-rate
mortgage loans. The adjustable-rate mortgage loans are referred to herein as
"ARM Loans". All of the ARM Loans provide for semi-annual adjustment to the
Mortgage Rates applicable thereto based on Six-Month LIBOR (as described below).
The first adjustment with respect to any Mortgage Loan will not occur until
after an
S-15
initial period of two years from the date of origination thereof (each, a
"Delayed First Adjustment Mortgage Loan"). In connection with each Mortgage Rate
adjustment, the ARM Loans have corresponding adjustments to their monthly
payment amount, in each case on each applicable adjustment date (each such date,
an "Adjustment Date"). On each Adjustment Date, the Mortgage Rate on each ARM
Loan will be adjusted to equal the sum, rounded to the nearest multiple of
0.125%, of the related Index (as described below) and a fixed percentage amount
(the "Gross Margin") for that ARM Loan specified in the related mortgage note.
The Mortgage Rate on each ARM Loan, however, including each Delayed First
Adjustment Mortgage Loan, will not increase or decrease by more than the initial
periodic rate cap (the "Periodic Rate Cap") specified in the related mortgage
note, which is equal to 2.00% per annum, on the initial Adjustment Date or
increase or decrease by more than the subsequent periodic rate cap (the
"Subsequent Periodic Rate Cap") specified in the related Note, which is equal to
1.00%, on any subsequent Adjustment Date and will not exceed a specified maximum
mortgage rate (the "Maximum Mortgage Rate") over the life of the ARM Loan or be
less than a specified minimum mortgage rate (the "Minimum Mortgage Rate") over
the life of the ARM Loan. Effective with the first monthly payment due on each
ARM Loan after each related Adjustment Date, the monthly payment amount will be
adjusted to an amount that will fully amortize the outstanding principal balance
of the related ARM Loan over its remaining term and pay interest at the Mortgage
Rate as so adjusted. Due to the application of the Periodic Rate Caps and the
Maximum Mortgage Rates, the Mortgage Rate on each ARM Loan, as adjusted on any
related Adjustment Date, may be less than the sum of the related Index,
calculated as described in this prospectus supplement, and the related Gross
Margin. See "--The Index" in this prospectus supplement. None of the ARM Loans
permit the related mortgagor to convert the adjustable Mortgage Rate thereon to
a fixed Mortgage Rate.
In general, the Mortgage Loans have scheduled monthly payments due on the
first day of the month (with respect to each Mortgage Loan, the "Due Date").
Each Mortgage Loan will contain a customary "due-on-sale" clause which provides
that the Mortgage Loan must be repaid at the time of a sale of the related
Mortgaged Property or assumed by a creditworthy purchaser of the related
Mortgaged Property.
Approximately 91.36% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment charge (a "Prepayment Charge") in limited
circumstances on certain prepayments as provided in the related mortgage note.
Each such Mortgage Loan provides for payment of a Prepayment Charge on certain
partial prepayments and all prepayments in full made within three years from the
date of origination of the Mortgage Loan, as provided in the related mortgage
note. The amount of the Prepayment Charge is as provided in the related mortgage
note, but, in most cases, is equal to six months' interest on any amounts
prepaid in excess of 20% of the original principal balance of the related
Mortgage Loan in any 12 month period, as permitted by law. The holders of the
Class P Certificates will be entitled to all Prepayment Charges received on the
Mortgage Loans, and these amounts will not be available for distribution on
the other classes of certificates. Under the limited instances described under
the terms of the pooling and servicing agreement, Ocwen Federal Bank FSB (the
"Servicer") may waive the payment of any otherwise applicable Prepayment Charge.
Investors should conduct their own analysis of the effect, if any, that the
Prepayment Charges, and decisions by the Servicer with respect to the waiver of
the Prepayment Charges, may have on the prepayment performance of the Mortgage
Loans. The Depositor makes no representation as to the effect that the
Prepayment Charges, and decisions by the Servicer with respect to the waiver of
the Prepayment Charges, may have on the prepayment performance of the Mortgage
Loans.
None of the Mortgage Loans are buydown mortgage loans.
MORTGAGE LOAN CHARACTERISTICS
The average principal balance of the Mortgage Loans at origination was
approximately $168,649. No Mortgage Loan had a principal balance at origination
greater than approximately $727,500 or less than approximately $40,000. The
average principal balance of the Mortgage Loans as of the Cut-off Date was
S-16
approximately $168,081. No Mortgage Loan had a principal balance as of the
Cut-off Date greater than approximately $725,965 or less than approximately
$39,295.
The Mortgage Loans had Mortgage Rates as of the Cut-off Date ranging from
approximately 5.500% per annum to approximately 13.500% per annum, and the
weighted average Mortgage Rate was approximately 7.872% per annum. As of the
Cut-off Date, the ARM Loans had Gross Margins ranging from approximately 3.950%
to approximately 6.750%, Minimum Mortgage Rates ranging from approximately
5.799% per annum to approximately 13.500% per annum and Maximum Mortgage Rates
ranging from approximately 11.799% per annum to approximately 19.500% per annum.
As of the Cut-off Date, the weighted average Gross Margin was approximately
5.995%, the weighted average Minimum Mortgage Rate was approximately 8.107% per
annum and the weighted average Maximum Mortgage Rate was approximately 14.107%
per annum. The latest first Adjustment Date following the Cut-off Date on any
ARM Loan occurs on May 1, 2005 and the weighted average next Adjustment Date for
all of the ARM Loans following the Cut-off Date is March 20, 2005.
The weighted average loan-to-value ratio of the Mortgage Loans at
origination was approximately 80.88%. At origination, no Mortgage Loan had a
loan-to-value ratio greater than approximately 95.00% or less than approximately
21.06%.
The weighted average remaining term to stated maturity of the Mortgage
Loans was approximately 348 months as of the Cut-off Date. None of the Mortgage
Loans will have a first due date prior to March 1, 2003 or after June 1, 2003 or
will have a remaining term to stated maturity of less than 175 months or greater
than 358 months as of the Cut-off Date. The latest maturity date of any Mortgage
Loan is May 1, 2033.
As of the Cut-off Date, the weighted average FICO Score of the Mortgage
Loans is approximately 627. No Mortgage Loan had a FICO Score as of the Cut-off
Date greater than 809 or less than 500.
The Mortgage Loans are expected to have the following additional
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
COLLATERAL TYPE OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
COLLATERAL TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------- --------- ----------------- -----------------
Fixed Rate ............... 599 $ 98,667,055.99 33.28%
ARM ...................... 1,165 197,828,187.53 66.72
----- ---------------- ------
Total ............. 1,764 $ 296,495,243.52 100.00%
===== ================ ======
S-17
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE MORTGAGE OUTSTANDING AT OUTSTANDING AT
AT ORIGINATION ($) LOANS ORIGINATION ORIGINATION
- ---------------------------- --------- ----------------- -----------------
0.01 - 50,000.00 .... 14 $ 619,451.00 0.21%
50,000.01 - 100,000.00 .... 288 23,161,000.00 7.79
100,000.01 - 150,000.00 .... 562 70,929,146.00 23.84
150,000.01 - 200,000.00 .... 447 76,918,116.00 25.86
200,000.01 - 250,000.00 .... 221 48,671,103.00 16.36
250,000.01 - 300,000.00 .... 103 28,184,770.00 9.47
300,000.01 - 350,000.00 .... 59 19,113,100.00 6.42
350,000.01 - 400,000.00 .... 34 12,659,200.00 4.26
400,000.01 - 450,000.00 .... 18 7,730,950.00 2.60
450,000.01 - 500,000.00 .... 10 4,791,045.00 1.61
500,000.01 - 550,000.00 .... 1 500,670.00 0.17
550,000.01 - 600,000.00 .... 6 3,491,497.00 1.17
700,000.01 - 750,000.00 .... 1 727,500.00 0.24
----- --------------- -------
Total ................. 1,764 $297,497,548.00 100.00%
===== =============== =======
PRINCIPAL BALANCES OF THE MORTGAGE LOANS
AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE AS OF MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
THE CUTOFF DATE ($) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
0.01 - 50,000.00 .... 14 $ 614,100.76 0.21%
50,000.01 - 100,000.00 .... 296 23,871,193.67 8.05
100,000.01 - 150,000.00 .... 561 70,931,077.59 23.92
150,000.01 - 200,000.00 .... 446 76,812,802.48 25.91
200,000.01 - 250,000.00 .... 216 47,568,096.69 16.04
250,000.01 - 300,000.00 .... 103 28,144,836.87 9.49
300,000.01 - 350,000.00 .... 60 19,453,680.78 6.56
350,000.01 - 400,000.00 .... 32 11,922,696.46 4.02
400,000.01 - 450,000.00 .... 18 7,703,985.86 2.60
450,000.01 - 500,000.00 .... 11 5,268,235.64 1.78
550,000.01 - 600,000.00 .... 6 3,478,571.58 1.17
700,000.01 - 750,000.00 .... 1 725,965.14 0.24
----- ---------------- ------
Total ................. 1,764 $ 296,495,243.52 100.00%
===== ================ ======
S-18
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
California ................. 589 $ 126,725,063.38 42.74%
Minnesota .................. 307 45,970,974.86 15.50
Illinois ................... 211 32,424,966.94 10.94
Colorado ................... 156 25,890,824.71 8.73
Rhode Island ............... 123 19,659,382.79 6.63
Texas ...................... 131 12,436,613.93 4.19
Florida .................... 36 4,337,327.41 1.46
Massachusetts .............. 17 3,204,550.28 1.08
New Jersey ................. 14 2,266,256.02 0.76
Ohio ....................... 15 2,245,633.79 0.76
Michigan ................... 19 2,220,043.20 0.75
Iowa ....................... 23 2,134,917.86 0.72
New York ................... 8 2,068,342.43 0.70
Washington ................. 12 1,813,912.29 0.61
Maryland ................... 12 1,751,811.08 0.59
Connecticut ................ 11 1,555,652.87 0.52
Arizona .................... 9 1,386,665.44 0.47
Kansas ..................... 9 1,087,995.33 0.37
Pennsylvania ............... 9 1,056,786.06 0.36
Tennessee .................. 3 705,269.00 0.24
Missouri ................... 6 582,640.88 0.20
Maine ...................... 3 529,220.70 0.18
Wisconsin .................. 5 512,583.88 0.17
Oklahoma ................... 4 506,532.34 0.17
Indiana .................... 7 476,681.05 0.16
Nevada ..................... 3 471,901.22 0.16
Louisiana .................. 4 460,479.26 0.16
Oregon ..................... 3 374,099.13 0.13
Wyoming .................... 3 339,556.91 0.11
Kentucky ................... 2 281,324.77 0.09
Hawaii ..................... 3 267,689.47 0.09
District of Columbia ....... 1 254,655.95 0.09
New Mexico ................. 2 179,131.67 0.06
Utah ....................... 1 99,760.52 0.03
Mississippi ................ 1 92,178.81 0.03
Nebraska ................... 1 66,889.61 0.02
Montana .................... 1 56,927.68 0.02
----- ---------------- ------
Total: ........ 1,764 $ 296,495,243.52 100.00%
===== ================ ======
S-19
MORTGAGE RATES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
5.500 - 5.999 ............ 62 $ 13,487,285.47 4.55%
6.000 - 6.499 ............ 49 9,924,491.99 3.35
6.500 - 6.999 ............ 386 73,303,077.61 24.72
7.000 - 7.499 ............ 115 19,864,595.85 6.70
7.500 - 7.999 ............ 360 64,815,604.37 21.86
8.000 - 8.499 ............ 118 18,719,244.51 6.31
8.500 - 8.999 ............ 310 51,044,959.34 17.22
9.000 - 9.499 ............ 97 11,808,010.57 3.98
9.500 - 9.999 ............ 173 22,482,381.36 7.58
10.000 - 10.499 ............ 43 5,210,651.44 1.76
10.500 - 10.999 ............ 28 3,556,656.56 1.20
11.000 - 11.499 ............ 9 891,332.50 0.30
11.500 - 11.999 ............ 5 581,115.24 0.20
12.000 - 12.499 ............ 5 361,404.96 0.12
12.500 - 12.999 ............ 3 381,291.57 0.13
13.500 - 13.999 ............ 1 63,140.18 0.02
----- ---------------- ------
Total .................... 1,764 $ 296,495,243.52 100.00%
===== ================ ======
ORIGINAL TERM OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
180 months ................. 64 $ 6,175,095.33 2.08%
240 months ................. 83 11,934,255.94 4.03
360 months ................. 1,617 278,385,892.25 93.89
----- ---------------- ------
Total ............. 1,764 $ 296,495,243.52 100.00%
===== ================ ======
REMAINING TERM TO STATED MATURITY OF
THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
REMAINING TERM MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
TO STATED MATURITY LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
121 - 180 months ........... 64 $ 6,175,095.33 2.08%
181 - 240 months ........... 83 11,934,255.94 4.03
301 - 360 months ........... 1,617 278,385,892.25 93.89
----- ---------------- ------
Total ............. 1,764 $ 296,495,243.52 100.00%
===== ================ ======
S-20
MORTGAGED PROPERTY TYPES OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
Single Family Residence .... 1,453 $ 243,418,924.65 82.10%
Condominium ................ 109 18,639,468.86 6.29
PUD ........................ 113 18,407,738.60 6.21
2-4 Family ................. 88 15,868,922.42 5.35
Manufactured Housing ....... 1 160,188.99 0.05
----- ---------------- ------
Total ............. 1,764 $ 296,495,243.52 100.00%
===== ================ ======
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
ORIGINAL MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN-TO-VALUE RATIO (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- --------- ----------------- -----------------
Less than or equal to 50.00 ... 58 $ 6,533,156.43 2.20%
50.01 - 55.00 .............. 41 5,429,063.07 1.83
55.01 - 60.00 .............. 53 7,293,388.47 2.46
60.01 - 65.00 .............. 73 9,683,949.68 3.27
65.01 - 70.00 .............. 132 19,383,563.55 6.54
70.01 - 75.00 .............. 194 30,880,078.76 10.42
75.01 - 80.00 .............. 265 42,672,920.86 14.39
80.01 - 85.00 .............. 338 56,579,311.03 19.08
85.01 - 90.00 .............. 437 82,699,953.65 27.89
90.01 - 95.00 .............. 173 35,339,858.02 11.92
----- ---------------- ------
Total ...................... 1,764 $ 296,495,243.52 100.00%
===== ================ ======
LOAN PROGRAMS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PROGRAM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- --------- ----------------- -----------------
Full Documentation ............ 1,306 $ 212,944,556.35 71.82%
Stated Income Documentation ... 320 56,384,618.12 19.02
Limited / Lite Documentation .. 138 27,166,069.05 9.16
----- ---------------- ------
Total ................ 1,764 $ 296,495,243.52 100.00%
===== ================ ======
S-21
FICO SCORE FOR THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
FICO SCORE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
500 - 524 .................. 87 $ 11,579,838.16 3.91%
525 - 549 .................. 166 24,342,951.03 8.21
550 - 574 .................. 289 46,296,392.58 15.61
575 - 599 .................. 178 27,507,041.63 9.28
600 - 624 .................. 206 35,168,519.52 11.86
625 - 649 .................. 181 32,023,953.68 10.80
650 - 674 .................. 230 41,611,577.22 14.03
675 - 699 .................. 173 32,934,257.40 11.11
700 - 724 .................. 123 23,777,343.21 8.02
725 - 749 .................. 76 12,674,781.69 4.27
750 - 774 .................. 40 6,422,783.92 2.17
775 - 799 .................. 13 1,935,181.68 0.65
800 - 824 .................. 2 220,621.80 0.07
----- ---------------- ------
Total ............. 1,764 $ 296,495,243.52 100.00%
===== ================ ======
LOAN PURPOSE OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
Refinance - Cashout ........ 1,033 $ 164,017,180.54 55.32%
Refinance - Rate Term ...... 723 131,475,608.28 44.34
Purchase ................... 8 1,002,454.70 0.34
----- ---------------- ------
Total ............. 1,764 $ 296,495,243.52 100.00%
===== ================ ======
MORTGAGED PROPERTY OCCUPANCY STATUS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
Primary .................... 1,691 $ 285,608,516.29 96.33%
Non-Owner Occupied ......... 71 10,485,842.22 3.54
Second Home ................ 2 400,885.01 0.14
----- ---------------- ------
Total ...................... 1,764 $ 296,495,243.52 100.00%
===== ================ ======
The occupancy status of a Mortgaged Property is as represented by the mortgagor
in its loan application.
S-22
NEXT ADJUSTMENT DATES FOR THE ARM LOANS INCLUDED IN THE MORTGAGE POOL
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
NEXT ADJUSTMENT DATE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
February 2005 .............. 231 $ 43,099,894.09 21.79%
March 2005 ................. 227 40,304,754.50 20.37
April 2005 ................. 386 65,233,241.91 32.97
May 2005 ................... 321 49,190,297.03 24.87
----- ---------------- ------
Total: ............. 1,165 $ 197,828,187.53 100.00%
===== ================ ======
GROSS MARGINS OF THE ARM LOANS INCLUDED IN THE MORTGAGE POOL
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
3.500 - 3.999 ............ 1 $ 169,168.81 0.09%
4.500 - 4.999 ............ 42 7,458,345.06 3.77
5.000 - 5.499 ............ 96 18,611,714.48 9.41
5.500 - 5.999 ............ 154 26,222,080.14 13.25
6.000 - 6.499 ............ 643 111,902,183.82 56.57
6.500 - 6.999 ............ 229 33,464,695.22 16.92
----- ---------------- ------
Total ...................... 1,165 $ 197,828,187.53 100.00%
===== ================ ======
MAXIMUM MORTGAGE RATES OF THE ARM LOANS INCLUDED IN THE MORTGAGE POOL
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MAXIMUM MORTGAGE MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
11.500 - 11.999 ............ 38 $ 7,626,216.43 3.85%
12.000 - 12.499 ............ 21 4,416,943.37 2.23
12.500 - 12.999 ............ 152 31,813,003.20 16.08
13.000 - 13.499 ............ 63 11,835,263.30 5.98
13.500 - 13.999 ............ 266 48,784,954.72 24.66
14.000 - 14.499 ............ 102 16,105,232.21 8.14
14.500 - 14.999 ............ 261 43,694,679.77 22.09
15.000 - 15.499 ............ 82 9,798,381.26 4.95
15.500 - 15.999 ............ 119 15,959,917.41 8.07
16.000 - 16.499 ............ 31 3,861,017.48 1.95
16.500 - 16.999 ............ 16 2,432,085.47 1.23
17.000 - 17.499 ............ 4 577,956.49 0.29
17.500 - 17.999 ............ 3 343,126.24 0.17
18.000 - 18.499 ............ 4 267,314.43 0.14
18.500 - 18.999 ............ 2 248,955.57 0.13
19.500 - 19.999 ............ 1 63,140.18 0.03
----- ---------------- ------
Total ...................... 1,165 $ 197,828,187.53 100.00%
===== ================ ======
S-23
MINIMUM MORTGAGE RATES OF THE ARM LOANS INCLUDED IN THE MORTGAGE POOL
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MINIMUM MORTGAGE MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
5.500 - 5.999 ............ 38 $ 7,626,216.43 3.85%
6.000 - 6.499 ............ 21 4,416,943.37 2.23
6.500 - 6.999 ............ 152 31,813,003.20 16.08
7.000 - 7.499 ............ 63 11,835,263.30 5.98
7.500 - 7.999 ............ 266 48,784,954.72 24.66
8.000 - 8.499 ............ 102 16,105,232.21 8.14
8.500 - 8.999 ............ 261 43,694,679.77 22.09
9.000 - 9.499 ............ 82 9,798,381.26 4.95
9.500 - 9.999 ............ 119 15,959,917.41 8.07
10.000 - 10.499 ............ 31 3,861,017.48 1.95
10.500 - 10.999 ............ 16 2,432,085.47 1.23
11.000 - 11.499 ............ 4 577,956.49 0.29
11.500 - 11.999 ............ 3 343,126.24 0.17
12.000 - 12.499 ............ 4 267,314.43 0.14
12.500 - 12.999 ............ 2 248,955.57 0.13
13.500 - 13.999 ............ 1 63,140.18 0.03
----- ---------------- ------
Total ................... 1,165 $ 197,828,187.53 100.00%
===== ================ ======
INITIAL PERIODIC RATE CAPS OF THE ARM LOANS INCLUDED IN THE MORTGAGE POOL
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
INITIAL MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PERIODIC RATE CAP (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
2.000 ...................... 1,165 $ 197,828,187.53 100.00%
----- ---------------- ------
Total ............. 1,165 $ 197,828,187.53 100.00%
===== ================ ======
SUBSEQUENT PERIODIC RATE CAPS OF THE ARM LOANS INCLUDED IN THE MORTGAGE POOL
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
SUBSEQUENT MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PERIODIC RATE CAP (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
1.000 ...................... 1,165 $ 197,828,187.53 100.00%
----- ---------------- ------
Total ............. 1,165 $ 197,828,187.53 100.00%
===== ================ ======
S-24
LIFETIME RATE CAPS OF THE ARM LOANS INCLUDED IN THE MORTGAGE POOL
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LIFETIME RATE CAP (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
6.000 ...................... 1,165 $ 197,828,187.53 100.00%
----- ---------------- ------
Total ............. 1,165 $ 197,828,187.53 100.00%
===== ================ ======
PREPAYMENT PENALTY MONTHS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PREPAYMENT PENALTY MONTHS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
0 .......................... 201 $ 25,620,575.99 8.64%
12 ......................... 60 10,273,680.58 3.47
24 ......................... 53 12,344,818.54 4.16
30 ......................... 5 675,771.89 0.23
36 ......................... 1,445 247,580,396.52 83.50
----- ---------------- ------
Total ............. 1,764 $ 296,495,243.52 100.00%
===== ================ ======
MORTGAGE LOANS BY ORIGINATING INSTITUTION
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINATING INSTITUTION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
Ameriquest Mortgage Company 336 $ 50,755,196.88 17.12%
Town & Country
Credit Corporation ....... 1,428 245,740,046.64 82.88
----- ---------------- ------
Total ............. 1,764 $ 296,495,243.52 100.00%
===== ================ ======
S-25
GROUP I MORTGAGE LOAN CHARACTERISTICS
Approximately 24.79% of the Group I Mortgage Loans are fixed-rate mortgage
loans and approximately 75.21% of the Group I Mortgage Loans are ARM Loans (the
"Group I ARM Loans"). All of the Group I ARM Loans provide for semi-annual
adjustment to the Mortgage Rates applicable thereto based on Six-Month LIBOR.
The average principal balance of the Group I Mortgage Loans at origination
was approximately $155,831. No Group I Mortgage Loan had a principal balance at
origination greater than approximately $380,000 or less than approximately
$40,000. The average principal balance of the Group I Mortgage Loans as of the
Cut-off Date was approximately $155,328. No Group I Mortgage Loan had a
principal balance as of the Cut-off Date greater than approximately $379,371 or
less than approximately $39,494.
The Group I Mortgage Loans had Mortgage Rates as of the Cut-off Date
ranging from approximately 5.500% per annum to approximately 13.500% per annum,
and the weighted average Mortgage Rate was approximately 8.013% per annum. As of
the Cut-off Date, the Group I ARM Loans had Gross Margins ranging from
approximately 3.950% to approximately 6.750%, Minimum Mortgage Rates ranging
from approximately 5.799% per annum to approximately 13.500% per annum and
Maximum Mortgage Rates ranging from approximately 11.799% per annum to
approximately 19.500% per annum. As of the Cut-off Date, the weighted average
Gross Margin was approximately 6.005%, the weighted average Minimum Mortgage
Rate was approximately 8.180% per annum and the weighted average Maximum
Mortgage Rate was approximately 14.180% per annum. The latest first Adjustment
Date following the Cut-off Date on any Group I ARM Loan occurs in May 1, 2005
and the weighted average next Adjustment Date for all of the Group I ARM Loans
following the Cut-off Date is March 22, 2005.
The weighted average loan-to-value ratio of the Group I Mortgage Loans at
origination was approximately 80.14%. At origination, no Group I Mortgage Loan
had a loan-to-value ratio greater than approximately 95.00% or less than
approximately 21.06%.
The weighted average remaining term to stated maturity of the Group I
Mortgage Loans was approximately 348 months as of the Cut-off Date. None of the
Group I Mortgage Loans will have a first due date prior to March 1, 2003 or
after June 1, 2003, or will have a remaining term to stated maturity of less
than 175 months or greater than 358 months as of the Cut-off Date. The latest
maturity date of any Group I Mortgage Loan is May 1, 2033.
As of the Cut-off Date, the weighted average FICO Score of the Group I
Mortgage Loans is approximately 619. No Group I Mortgage Loan had a FICO Score
as of the Cut-off Date greater than 802 or less than 500.
The Group I Mortgage Loans are expected to have the following additional
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
COLLATERAL TYPE OF THE GROUP I MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
COLLATERAL TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
Fixed Rate ................. 385 $ 57,325,158.12 24.79%
ARM ........................ 1,104 173,958,291.30 75.21
----- ---------------- ------
Total ... 1,489 $ 231,283,449.42 100.00%
===== ================ ======
S-26
PRINCIPAL BALANCES OF THE GROUP I MORTGAGE LOANS AT ORIGINATION
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
AT ORIGINATION ($) LOANS ORIGINATION ORIGINATION
- ---------------------------- --------- ----------------- -----------------
0.01 - 50,000.00 .... 9 $ 397,151.00 0.17%
50,000.01 - 100,000.00 .... 257 20,650,450.00 8.90
100,000.01 - 150,000.00 .... 506 63,966,209.00 27.57
150,000.01 - 200,000.00 .... 392 67,557,416.00 29.12
200,000.01 - 250,000.00 .... 200 43,969,928.00 18.95
250,000.01 - 300,000.00 .... 96 26,288,570.00 11.33
300,000.01 - 350,000.00 .... 27 8,454,550.00 3.64
350,000.01 - 400,000.00 .... 2 748,000.00 0.32
----- ---------------- ------
Total ................. 1,489 $ 232,032,274.00 100.00%
===== ================ ======
PRINCIPAL BALANCES OF THE GROUP I MORTGAGE LOANS
AS OF THE CUT-OFF DATE
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE AS OF MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
THE CUT-OFF DATE ($) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
0.01 - 50,000.00 .... 9 $ 393,608.63 0.17%
50,000.01 - 100,000.00 .... 262 21,075,729.81 9.11
100,000.01 - 150,000.00 .... 507 64,148,299.64 27.74
150,000.01 - 200,000.00 .... 392 67,641,479.61 29.25
200,000.01 - 250,000.00 .... 195 42,888,886.74 18.54
250,000.01 - 300,000.00 .... 96 26,257,182.92 11.35
300,000.01 - 350,000.00 .... 26 8,131,640.33 3.52
350,000.01 - 400,000.00 .... 2 746,621.74 0.32
----- ---------------- ------
Total ................. 1,489 $ 231,283,449.42 100.00%
===== ================ ======
S-27
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
OF THE GROUP I MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
California ................. 463 $ 88,944,013.71 38.46%
Minnesota .................. 254 36,537,234.20 15.80
Illinois ................... 197 28,842,275.77 12.47
Colorado ................... 121 18,643,690.17 8.06
Rhode Island ............... 106 16,053,976.99 6.94
Texas ...................... 105 10,007,867.89 4.33
Florida .................... 35 4,169,026.68 1.80
Massachusetts .............. 17 3,204,550.28 1.39
New Jersey ................. 14 2,266,256.02 0.98
Michigan ................... 19 2,220,043.20 0.96
Iowa ....................... 23 2,134,917.86 0.92
New York ................... 8 2,068,342.43 0.89
Ohio ....................... 14 1,890,855.64 0.82
Maryland ................... 12 1,751,811.08 0.76
Washington ................. 11 1,675,649.02 0.72
Connecticut ................ 11 1,555,652.87 0.67
Arizona .................... 9 1,386,665.44 0.60
Kansas ..................... 9 1,087,995.33 0.47
Pennsylvania ............... 9 1,056,786.06 0.46
Missouri ................... 6 582,640.88 0.25
Maine ...................... 3 529,220.70 0.23
Wisconsin .................. 5 512,583.88 0.22
Oklahoma ................... 4 506,532.34 0.22
Indiana .................... 7 476,681.05 0.21
Nevada ..................... 3 471,901.22 0.20
Louisiana .................. 4 460,479.26 0.20
Oregon ..................... 3 374,099.13 0.16
Wyoming .................... 3 339,556.91 0.15
Kentucky ................... 2 281,324.77 0.12
Hawaii ..................... 3 267,689.47 0.12
District of Columbia ....... 1 254,655.95 0.11
Tennessee .................. 2 233,584.93 0.10
New Mexico ................. 2 179,131.67 0.08
Utah ....................... 1 99,760.52 0.04
Mississippi ................ 1 92,178.81 0.04
Nebraska ................... 1 66,889.61 0.03
Montana .................... 1 56,927.68 0.02
----- ---------------- ------
Total: ..................... 1,489 $ 231,283,449.42 100.00%
===== ================ ======
S-28
MORTGAGE RATES OF THE GROUP I MORTGAGE LOANS AS OF THE CUT-OFF DATE
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
5.500 - 5.999 ............ 50 $ 9,535,770.27 4.12%
6.000 - 6.499 ............ 38 6,357,277.66 2.75
6.500 - 6.999 ............ 285 48,516,174.69 20.98
7.000 - 7.499 ............ 84 13,986,577.79 6.05
7.500 - 7.999 ............ 304 49,584,764.08 21.44
8.000 - 8.499 ............ 109 16,932,625.59 7.32
8.500 - 8.999 ............ 288 45,373,848.76 19.62
9.000 - 9.499 ............ 92 11,026,874.41 4.77
9.500 - 9.999 ............ 157 20,291,020.31 8.77
10.000 - 10.499 ............ 40 4,817,137.10 2.08
10.500 - 10.999 ............ 24 3,165,116.29 1.37
11.000 - 11.499 ............ 5 414,006.72 0.18
11.500 - 11.999 ............ 4 476,419.04 0.21
12.000 - 12.499 ............ 5 361,404.96 0.16
12.500 - 12.999 ............ 3 381,291.57 0.16
13.500 - 13.999 ............ 1 63,140.18 0.03
----- ---------------- ------
Total ................... 1,489 $ 231,283,449.42 100.00%
===== ================ ======
ORIGINAL TERM OF THE GROUP I MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
180 months ................. 51 $ 4,942,492.87 2.14%
240 months ................. 64 8,811,805.14 3.81
360 months ................. 1,374 217,529,151.41 94.05
----- ---------------- ------
Total ............. 1,489 $ 231,283,449.42 100.00%
===== ================ ======
REMAINING TERM TO STATED MATURITY OF
THE GROUP I MORTGAGE LOANS AS OF THE CUT-OFF DATE
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
REMAINING TERM MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
TO STATED MATURITY LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
121 - 180 months ........... 51 $ 4,942,492.87 2.14%
181 - 240 months ........... 64 8,811,805.14 3.81
301 - 360 months ........... 1,374 217,529,151.41 94.05
----- ---------------- ------
Total ............. 1,489 $ 231,283,449.42 100.00%
===== ================ ======
S-29
MORTGAGED PROPERTY TYPES OF THE GROUP I MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------- --------- ----------------- -----------------
Single Family Residence .... 1,233 $ 190,925,207.08 82.55%
Condominium ................ 90 13,883,270.40 6.00
2-4 Family ................. 75 13,505,516.48 5.84
PUD ........................ 90 12,809,266.47 5.54
Manufactured Housing ....... 1 160,188.99 0.07
----- ---------------- ------
Total ............. 1,489 $ 231,283,449.42 100.00%
===== ================ ======
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP I MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
ORIGINAL MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN-TO-VALUE RATIO (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- --------- ----------------- -----------------
Less than or equal to 50.00 ... 51 $ 5,973,904.01 2.58%
50.01 - 55.00 .............. 37 4,929,424.60 2.13
55.01 - 60.00 .............. 45 6,051,531.44 2.62
60.01 - 65.00 .............. 67 9,003,167.18 3.89
65.01 - 70.00 .............. 117 16,200,667.19 7.00
70.01 - 75.00 .............. 169 25,439,771.48 11.00
75.01 - 80.00 .............. 221 32,340,037.32 13.98
80.01 - 85.00 .............. 291 46,102,137.97 19.93
85.01 - 90.00 .............. 372 63,034,714.89 27.25
90.01 - 95.00 .............. 119 22,208,093.34 9.60
----- ---------------- ------
Total ...................... 1,489 $ 231,283,449.42 100.00%
===== ================ ======
LOAN PROGRAMS OF THE GROUP I MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PROGRAM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- --------- ----------------- -----------------
Full Documentation ............ 1,125 $ 171,879,822.47 74.32%
Stated Income Documentation ... 258 40,902,203.90 17.68
Limited / Lite Documentation .. 106 18,501,423.05 8.00
----- ---------------- ------
Total ................ 1,489 $ 231,283,449.42 100.00%
===== ================ ======
S-30
FICO SCORE FOR THE GROUP I MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
FICO SCORE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
500 - 524 .................... 81 $ 10,485,921.34 4.53%
525 - 549 .................... 156 22,456,424.39 9.71
550 - 574 .................... 265 39,842,813.05 17.23
575 - 599 .................... 163 24,323,967.45 10.52
600 - 624 .................... 182 29,342,959.56 12.69
625 - 649 .................... 164 26,874,365.36 11.62
650 - 674 .................... 179 28,535,703.75 12.34
675 - 699 .................... 121 21,096,874.48 9.12
700 - 724 .................... 78 12,645,457.35 5.47
725 - 749 .................... 58 9,458,705.31 4.09
750 - 774 .................... 35 5,162,434.25 2.23
775 - 799 .................... 6 933,778.99 0.40
800 - 824 .................... 1 124,044.14 0.05
----- ---------------- ------
Total ............... 1,489 $ 231,283,449.42 100.00%
===== ================ ======
LOAN PURPOSE OF THE GROUP I MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
Refinance - Cashout .......... 887 $ 131,985,592.03 57.07%
Refinance - Rate Term ........ 595 98,379,032.03 42.54
Purchase ..................... 7 918,825.36 0.40
----- ---------------- ------
Total ............... 1,489 $ 231,283,449.42 100.00%
===== ================ ======
MORTGAGED PROPERTY OCCUPANCY STATUS OF THE GROUP I MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
Primary ...................... 1,430 $ 223,240,173.11 96.52%
Non-Owner Occupied ........... 57 7,642,391.30 3.30
Second Home .................. 2 400,885.01 0.17
----- ---------------- ------
Total ........................ 1,489 $ 231,283,449.42 100.00%
===== ================ ======
The occupancy status of a Mortgaged Property is as represented by the mortgagor
in its loan application.
S-31
NEXT ADJUSTMENT DATES FOR THE GROUP I ARM LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
ARM OUTSTANDING AS OF OUTSTANDING AS OF
NEXT ADJUSTMENT DATE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
February 2005 ................ 212 $ 35,688,800.67 20.52%
March 2005 ................... 212 34,600,082.69 19.89
April 2005 ................... 365 57,023,949.79 32.78
May 2005 ..................... 315 46,645,458.15 26.81
----- ---------------- ------
Total ............... 1,104 $ 173,958,291.30 100.00%
===== ================ ======
GROSS MARGINS OF THE GROUP I ARM LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
ARM OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
3.500 - 3.999 ................ 1 $ 169,168.81 0.10%
4.500 - 4.999 ................ 39 6,031,532.90 3.47
5.000 - 5.499 ................ 88 15,423,563.89 8.87
5.500 - 5.999 ................ 146 23,305,341.64 13.40
6.000 - 6.499 ................ 606 97,441,193.48 56.01
6.500 - 6.999 ................ 224 31,587,490.58 18.16
----- ---------------- ------
Total ................. 1,104 $ 173,958,291.30 100.00%
===== ================ ======
MAXIMUM MORTGAGE RATES OF THE GROUP I ARM LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
MAXIMUM MORTGAGE ARM OUTSTANDING AS OF OUTSTANDING AS OF
RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
11.500 - 11.999 .............. 35 $ 6,301,430.04 3.62%
12.000 - 12.499 .............. 20 3,818,661.20 2.20
12.500 - 12.999 .............. 133 24,451,930.06 14.06
13.000 - 13.499 .............. 58 10,026,348.54 5.76
13.500 - 13.999 .............. 244 40,555,397.03 23.31
14.000 - 14.499 .............. 101 15,605,910.43 8.97
14.500 - 14.999 .............. 253 40,432,754.18 23.24
15.000 - 15.499 .............. 82 9,798,381.26 5.63
15.500 - 15.999 .............. 118 15,505,776.95 8.91
16.000 - 16.499 .............. 31 3,861,017.48 2.22
16.500 - 16.999 .............. 16 2,432,085.47 1.40
17.000 - 17.499 .............. 3 246,062.24 0.14
17.500 - 17.999 .............. 3 343,126.24 0.20
18.000 - 18.499 .............. 4 267,314.43 0.15
18.500 - 18.999 .............. 2 248,955.57 0.14
19.500 - 19.999 .............. 1 63,140.18 0.04
----- ---------------- ------
Total .................... 1,104 $ 173,958,291.30 100.00%
===== ================ ======
S-32
MINIMUM MORTGAGE RATES OF THE GROUP I ARM LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
MINIMUM MORTGAGE ARM OUTSTANDING AS OF OUTSTANDING AS OF
RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
5.500 - 5.999 .............. 35 $ 6,301,430.04 3.62%
6.000 - 6.499 .............. 20 3,818,661.20 2.20
6.500 - 6.999 .............. 133 24,451,930.06 14.06
7.000 - 7.499 .............. 58 10,026,348.54 5.76
7.500 - 7.999 .............. 244 40,555,397.03 23.31
8.000 - 8.499 .............. 101 15,605,910.43 8.97
8.500 - 8.999 .............. 253 40,432,754.18 23.24
9.000 - 9.499 .............. 82 9,798,381.26 5.63
9.500 - 9.999 .............. 118 15,505,776.95 8.91
10.000 - 10.499 .............. 31 3,861,017.48 2.22
10.500 - 10.999 .............. 16 2,432,085.47 1.40
11.000 - 11.499 .............. 3 246,062.24 0.14
11.500 - 11.999 .............. 3 343,126.24 0.20
12.000 - 12.499 .............. 4 267,314.43 0.15
12.500 - 12.999 .............. 2 248,955.57 0.14
13.500 - 13.999 .............. 1 63,140.18 0.04
----- ---------------- ------
Total ..................... 1,104 $ 173,958,291.30 100.00%
===== ================ ======
INITIAL PERIODIC RATE CAPS OF THE GROUP I ARM LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
INITIAL ARM OUTSTANDING AS OF OUTSTANDING AS OF
PERIODIC RATE CAP (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
2.000 ........................ 1,104 $ 173,958,291.30 100.00%
----- ---------------- ------
Total ............... 1,104 $ 173,958,291.30 100.00%
===== ================ ======
SUBSEQUENT PERIODIC RATE CAPS OF THE GROUP I ARM LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
SUBSEQUENT ARM OUTSTANDING AS OF OUTSTANDING AS OF
PERIODIC RATE CAP (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
1.000 ........................ 1,104 $ 173,958,291.30 100.00%
----- ---------------- ------
Total ............... 1,104 $ 173,958,291.30 100.00%
===== ================ ======
S-33
LIFETIME RATE CAPS OF THE GROUP I ARM LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
ARM OUTSTANDING AS OF OUTSTANDING AS OF
LIFETIME RATE CAP (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
6.000 ........................ 1,104 $ 173,958,291.30 100.00%
----- ---------------- ------
Total ............... 1,104 $ 173,958,291.30 100.00%
===== ================ ======
PREPAYMENT PENALTY MONTHS OF THE GROUP I MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PREPAYMENT PENALTY MONTHS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
0 ............................ 161 $ 19,453,659.00 8.41%
12 ........................... 44 7,355,894.93 3.18
24 ........................... 39 7,094,629.35 3.07
30 ........................... 5 675,771.89 0.29
36 ........................... 1,240 196,703,494.25 85.05
----- ---------------- ------
Total ............... 1,489 $ 231,283,449.42 100.00%
===== ================ ======
GROUP I MORTGAGE LOANS BY ORIGINATING INSTITUTION
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINATING INSTITUTION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
Ameriquest Mortgage Company .. 332 $ 48,923,382.98 21.15%
Town & Country
Credit Corporation ......... 1,157 182,360,066.44 78.85
----- ---------------- ------
Total ............... 1,489 $ 231,283,449.42 100.00%
===== ================ ======
S-34
GROUP II MORTGAGE LOAN CHARACTERISTICS
Approximately 63.40% of the Group II Mortgage Loans are fixed-rate mortgage
loans and approximately 36.60% of the Group II Mortgage Loans are ARM Loans (the
"Group II ARM Loans"). All of the Group II ARM Loans provide for semi-annual
adjustment to the Mortgage Rates applicable thereto based on Six-Month LIBOR.
The average principal balance of the Group II Mortgage Loans at origination
was approximately $238,056. No Group II Mortgage Loan had a principal balance at
origination greater than approximately $727,500 or less than approximately
$40,000. The average principal balance of the Group II Mortgage Loans as of the
Cut-off Date was approximately $237,134. No Group II Mortgage Loan had a
principal balance as of the Cut-off Date greater than approximately $725,965 or
less than approximately $39,295.
The Group II Mortgage Loans had Mortgage Rates as of the Cut-off Date
ranging from approximately 5.500% per annum to approximately 11.500% per annum,
and the weighted average Mortgage Rate was approximately 7.374% per annum. As of
the Cut-off Date, the Group II ARM Loans had Gross Margins ranging from
approximately 4.750% to approximately 6.750%, Minimum Mortgage Rates ranging
from approximately 5.990% per annum to approximately 11.000% per annum and
Maximum Mortgage Rates ranging from approximately 11.990% per annum to
approximately 17.000% per annum. As of the Cut-off Date, the weighted average
Gross Margin was approximately 5.918%, the weighted average Minimum Mortgage
Rate was approximately 7.571% per annum and the weighted average Maximum
Mortgage Rate was approximately 13.571% per annum. The latest first Adjustment
Date following the Cut-off Date on any Group II ARM Loan occurs in May 1, 2005
and the weighted average next Adjustment Date for all of the Group II ARM Loans
following the Cut-off Date is March 9, 2005.
The weighted average loan-to-value ratio of the Group II Mortgage Loans at
origination was approximately 83.49%. At origination, no Group II Mortgage Loan
had a loan-to-value ratio greater than approximately 95.00% or less than
approximately 38.46%.
The weighted average remaining term to stated maturity of the Group II
Mortgage Loans was approximately 347 months as of the Cut-off Date. None of the
Group II Mortgage Loans will have a first due date prior to March 1, 2003 or
after June 1, 2003, or will have a remaining term to stated maturity of less
than 175 months or greater than 358 months as of the Cut-off Date. The latest
maturity date of any Group II Mortgage Loan is May 1, 2033.
As of the Cut-off Date, the weighted average FICO Score of the Group II
Mortgage Loans is approximately 656. No Group II Mortgage Loan had a FICO Score
as of the Cut-off Date greater than 809 or less than 520.
The Group II Mortgage Loans are expected to have the following additional
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
COLLATERAL TYPE OF THE GROUP II MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
COLLATERAL TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
Fixed Rate ................... 214 $ 41,341,897.87 63.40%
ARM .......................... 61 23,869,896.23 36.60
----- ---------------- ------
Total ..... 275 $ 65,211,794.10 100.00%
===== ================ ======
S-35
PRINCIPAL BALANCES OF THE GROUP II MORTGAGE LOANS AT ORIGINATION
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE MORTGAGE OUTSTANDING AT OUTSTANDING AT
AT ORIGINATION ($) LOANS ORIGINATION ORIGINATION
- ------------------------------ --------- ----------------- -----------------
0.01 - 50,000.00 ...... 5 $ 222,300.00 0.34%
50,000.01 - 100,000.00 ...... 31 2,510,550.00 3.83
100,000.01 - 150,000.00 ...... 56 6,962,937.00 10.64
150,000.01 - 200,000.00 ...... 55 9,360,700.00 14.30
200,000.01 - 250,000.00 ...... 21 4,701,175.00 7.18
250,000.01 - 300,000.00 ...... 7 1,896,200.00 2.90
300,000.01 - 350,000.00 ...... 32 10,658,550.00 16.28
350,000.01 - 400,000.00 ...... 32 11,911,200.00 18.19
400,000.01 - 450,000.00 ...... 18 7,730,950.00 11.81
450,000.01 - 500,000.00 ...... 10 4,791,045.00 7.32
500,000.01 - 550,000.00 ...... 1 500,670.00 0.76
550,000.01 - 600,000.00 ...... 6 3,491,497.00 5.33
700,000.01 - 750,000.00 ...... 1 727,500.00 1.11
----- ---------------- ------
Total ................... 275 $ 65,465,274.00 100.00%
===== ================ ======
PRINCIPAL BALANCES OF THE GROUP II MORTGAGE LOANS
AS OF THE CUT-OFF DATE
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE AS OF MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
THE CUT-OFF DATE ($) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
0.01 - 50,000.00 ...... 5 $ 220,492.13 0.34%
50,000.01 - 100,000.00 ...... 34 2,795,463.86 4.29
100,000.01 - 150,000.00 ...... 54 6,782,777.95 10.40
150,000.01 - 200,000.00 ...... 54 9,171,322.87 14.06
200,000.01 - 250,000.00 ...... 21 4,679,209.95 7.18
250,000.01 - 300,000.00 ...... 7 1,887,653.95 2.89
300,000.01 - 350,000.00 ...... 34 11,322,040.45 17.36
350,000.01 - 400,000.00 ...... 30 11,176,074.72 17.14
400,000.01 - 450,000.00 ...... 18 7,703,985.86 11.81
450,000.01 - 500,000.00 ...... 11 5,268,235.64 8.08
550,000.01 - 600,000.00 ...... 6 3,478,571.58 5.33
700,000.01 - 750,000.00 ...... 1 725,965.14 1.11
----- ---------------- ------
Total .................... 275 $ 65,211,794.10 100.00%
===== ================ ======
S-36
GEOGRAPHIC DISTRIBUTION
OF THE MORTGAGED PROPERTIES OF THE GROUP II MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
California ................... 126 $ 37,781,049.67 57.94%
Minnesota .................... 53 9,433,740.66 14.47
Colorado ..................... 35 7,247,134.54 11.11
Rhode Island ................. 17 3,605,405.80 5.53
Illinois ..................... 14 3,582,691.17 5.49
Texas ........................ 26 2,428,746.04 3.72
Tennessee .................... 1 471,684.07 0.72
Ohio ......................... 1 354,778.15 0.54
Florida ...................... 1 168,300.73 0.26
Washington ................... 1 138,263.27 0.21
----- ---------------- ------
Total .................. 275 $ 65,211,794.10 100.00%
===== ================ ======
MORTGAGE RATES OF THE GROUP II MORTGAGE LOANS AS OF THE CUT-OFF DATE
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
5.500 - 5.999 .............. 12 $ 3,951,515.20 6.06%
6.000 - 6.499 .............. 11 3,567,214.33 5.47
6.500 - 6.999 .............. 101 24,786,902.92 38.01
7.000 - 7.499 .............. 31 5,878,018.06 9.01
7.500 - 7.999 .............. 56 15,230,840.29 23.36
8.000 - 8.499 .............. 9 1,786,618.92 2.74
8.500 - 8.999 .............. 22 5,671,110.58 8.70
9.000 - 9.499 .............. 5 781,136.16 1.20
9.500 - 9.999 .............. 16 2,191,361.05 3.36
10.000 - 10.499 .............. 3 393,514.34 0.60
10.500 - 10.999 .............. 4 391,540.27 0.60
11.000 - 11.499 .............. 4 477,325.78 0.73
11.500 - 11.999 .............. 1 104,696.20 0.16
----- ---------------- ------
Total ..................... 275 $ 65,211,794.10 100.00%
===== ================ ======
ORIGINAL TERM OF THE GROUP II MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
180 months ................... 13 $ 1,232,602.46 1.89%
240 months ................... 19 3,122,450.80 4.79
360 months ................... 243 60,856,740.84 93.32
----- ---------------- ------
Total ............... 275 $ 65,211,794.10 100.00%
===== ================ ======
S-37
REMAINING TERM TO STATED MATURITY OF
THE GROUP II MORTGAGE LOANS AS OF THE CUT-OFF DATE
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
REMAINING TERM MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
TO STATED MATURITY LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
121 - 180 months ............. 13 $ 1,232,602.46 1.89%
181 - 240 months ............. 19 3,122,450.80 4.79
301 - 360 months ............. 243 60,856,740.84 93.32
----- ---------------- ------
Total ............... 275 $ 65,211,794.10 100.00%
===== ================ ======
MORTGAGED PROPERTY TYPES OF THE GROUP II MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
Single Family Residence ...... 220 $ 52,493,717.57 80.50%
PUD .......................... 23 5,598,472.13 8.59
Condominium .................. 19 4,756,198.46 7.29
2-4 Family ................... 13 2,363,405.94 3.62
----- ---------------- ------
Total ............... 275 $ 65,211,794.10 100.00%
===== ================ ======
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP II MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
ORIGINAL MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN-TO-VALUE RATIO (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ --------- ----------------- -----------------
Less than 50.00 .............. 7 $ 559,252.42 0.86%
50.01 - 55.00 ............. 4 499,638.47 0.77
55.01 - 60.00 ............. 8 1,241,857.03 1.90
60.01 - 65.00 ............. 6 680,782.50 1.04
65.01 - 70.00 ............. 15 3,182,896.36 4.88
70.01 - 75.00 ............. 25 5,440,307.28 8.34
75.01 - 80.00 ............. 44 10,332,883.54 15.85
80.01 - 85.00 ............. 47 10,477,173.06 16.07
85.01 - 90.00 ............. 65 19,665,238.76 30.16
90.01 - 95.00 ............. 54 13,131,764.68 20.14
----- ---------------- ------
Total ..................... 275 $ 65,211,794.10 100.00%
===== ================ ======
S-38
LOAN PROGRAMS OF THE GROUP II MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PROGRAM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- --------- ----------------- -----------------
Full Documentation ............ 181 $ 41,064,733.88 62.97%
Stated Income Documentation ... 62 15,482,414.22 23.74
Limited / Lite Documentation .. 32 8,664,646.00 13.29
----- ---------------- ------
Total ................ 275 $ 65,211,794.10 100.00%
===== ================ ======
FICO SCORE FOR THE GROUP II MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
FICO SCORE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- --------- ----------------- -----------------
500 - 524 ..................... 6 $ 1,093,916.82 1.68%
525 - 549 ..................... 10 1,886,526.64 2.89
550 - 574 ..................... 24 6,453,579.53 9.90
575 - 599 ..................... 15 3,183,074.18 4.88
600 - 624 ..................... 24 5,825,559.96 8.93
625 - 649 ..................... 17 5,149,588.32 7.90
650 - 674 ..................... 51 13,075,873.47 20.05
675 - 699 ..................... 52 11,837,382.92 18.15
700 - 724 ..................... 45 11,131,885.86 17.07
725 - 749 ..................... 18 3,216,076.38 4.93
750 - 774 ..................... 5 1,260,349.67 1.93
775 - 799 ..................... 7 1,001,402.69 1.54
800 - 824 ..................... 1 96,577.66 0.15
----- ---------------- ------
Total ................ 275 $ 65,211,794.10 100.00%
===== ================ ======
LOAN PURPOSE OF THE GROUP II MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- --------- ----------------- -----------------
Refinance - Rate Term ......... 128 $ 33,096,576.25 50.75%
Refinance - Cashout ........... 146 32,031,588.51 49.12
Purchase ...................... 1 83,629.34 0.13
----- ---------------- ------
Total ................ 275 $ 65,211,794.10 100.00%
===== ================ ======
S-39
MORTGAGED PROPERTY OCCUPANCY STATUS OF THE GROUP II MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- --------- ----------------- -----------------
Primary ....................... 261 $ 62,368,343.18 95.64%
Non-Owner Occupied ............ 14 2,843,450.92 4.36
----- ---------------- ------
Total ......................... 275 $ 65,211,794.10 100.00%
===== ================ ======
The occupancy status of a Mortgaged Property is as represented by the mortgagor
in its loan application.
NEXT ADJUSTMENT DATES FOR THE GROUP II ARM LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
ARM OUTSTANDING AS OF OUTSTANDING AS OF
NEXT ADJUSTMENT DATE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- --------- ----------------- -----------------
February 2005 ................. 19 $ 7,411,093.42 31.05%
March 2005 .................... 15 5,704,671.81 23.90
April 2005 .................... 21 8,209,292.12 34.39
May 2005 ...................... 6 2,544,838.88 10.66
----- ---------------- ------
Total ................ 61 $ 23,869,896.23 100.00%
===== ================ ======
GROSS MARGINS OF THE GROUP II ARM LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
ARM OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- --------- ----------------- -----------------
4.500 - 4.999 ................. 3 $ 1,426,812.16 5.98%
5.000 - 5.499 ................. 8 3,188,150.59 13.36
5.500 - 5.999 ................. 8 2,916,738.50 12.22
6.000 - 6.499 ................. 37 14,460,990.34 60.58
6.500 - 6.999 ................. 5 1,877,204.64 7.86
----- ---------------- ------
Total ................ 61 $ 23,869,896.23 100.00%
===== ================ ======
S-40
MAXIMUM MORTGAGE RATES OF THE GROUP II ARM LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
MAXIMUM MORTGAGE ARM OUTSTANDING AS OF OUTSTANDING AS OF
RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- --------- ----------------- -----------------
11.500 - 11.999 ............... 3 $ 1,324,786.39 5.55%
12.000 - 12.499 ............... 1 598,282.17 2.51
12.500 - 12.999 ............... 19 7,361,073.14 30.84
13.000 - 13.499 ............... 5 1,808,914.76 7.58
13.500 - 13.999 ............... 22 8,229,557.69 34.48
14.000 - 14.499 ............... 1 499,321.78 2.09
14.500 - 14.999 ............... 8 3,261,925.59 13.67
15.500 - 15.999 ............... 1 454,140.46 1.90
17.000 - 17.499 ............... 1 331,894.25 1.39
----- ---------------- ------
Total ...................... 61 $ 23,869,896.23 100.00%
===== ================ ======
MINIMUM MORTGAGE RATES OF THE GROUP II ARM LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
MINIMUM MORTGAGE ARM OUTSTANDING AS OF OUTSTANDING AS OF
RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- --------- ----------------- -----------------
5.500 - 5.999 ............... 3 $ 1,324,786.39 5.55%
6.000 - 6.499 ............... 1 598,282.17 2.51
6.500 - 6.999 ............... 19 7,361,073.14 30.84
7.000 - 7.499 ............... 5 1,808,914.76 7.58
7.500 - 7.999 ............... 22 8,229,557.69 34.48
8.000 - 8.499 ............... 1 499,321.78 2.09
8.500 - 8.999 ............... 8 3,261,925.59 13.67
9.500 - 9.999 ............... 1 454,140.46 1.90
11.000 - 11.499 ............... 1 331,894.25 1.39
----- ---------------- ------
Total ...................... 61 $ 23,869,896.23 100.00%
===== ================ ======
INITIAL PERIODIC RATE CAPS OF THE GROUP II ARM LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
ARM OUTSTANDING AS OF OUTSTANDING AS OF
INITIAL PERIODIC RATE CAP (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- --------- ----------------- -----------------
2.000 ......................... 61 $ 23,869,896.23 100.00%
----- ---------------- ------
Total ................ 61 $ 23,869,896.23 100.00%
===== ================ ======
S-41
SUBSEQUENT PERIODIC RATE CAPS OF THE GROUP II ARM LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
ARM OUTSTANDING AS OF OUTSTANDING AS OF
SUBSEQUENT PERIODIC RATE CAP (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- --------- ----------------- -----------------
1.000 ......................... 61 $ 23,869,896.23 100.00%
----- ---------------- ------
Total ................ 61 $ 23,869,896.23 100.00%
===== ================ ======
LIFETIME RATE CAPS OF THE GROUP II ARM LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
ARM OUTSTANDING AS OF OUTSTANDING AS OF
LIFETIME RATE CAP (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- --------- ----------------- -----------------
6.000 ......................... 61 $ 23,869,896.23 100.00%
----- ---------------- ------
Total ................ 61 $ 23,869,896.23 100.00%
----- ================ ======
PREPAYMENT PENALTY MONTHS OF THE GROUP II MORTGAGE LOANS
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PREPAYMENT PENALTY MONTHS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- --------- ----------------- -----------------
0 ............................. 40 $ 6,166,916.99 9.46%
12 ............................ 16 2,917,785.65 4.47
24 ............................ 14 5,250,189.19 8.05
36 ............................ 205 50,876,902.27 78.02
----- ---------------- ------
Total ................ 275 $ 65,211,794.10 100.00%
===== ================ ======
GROUP II MORTGAGE LOANS BY ORIGINATING INSTITUTION
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINATING INSTITUTION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- --------- ----------------- -----------------
Ameriquest Mortgage Company ... 4 $ 1,831,813.90 2.81%
Town & Country
Credit Corporation .......... 271 63,379,980.20 97.19
----- ---------------- ------
Total ................ 275 $ 65,211,794.10 100.00%
===== ================ ======
S-42
THE INDEX
As of any Adjustment Date, the index applicable to the determination of the
Mortgage Rate on each ARM Loan will generally be the average of the interbank
offered rates for six-month United States dollar deposits in the London market
as published in THE WALL STREET JOURNAL and as most recently available either
(i) as of the first business day 45 days prior to that Adjustment Date or (ii)
as of the first business day of the month preceding the month of the Adjustment
Date, as specified in the related mortgage note ("Six-Month LIBOR"). In the
event that the Index becomes unavailable or otherwise unpublished, the Servicer
will select a comparable alternative index over which it has no direct control
and which is readily verifiable.
UNDERWRITING STANDARDS
TOWN & COUNTRY CREDIT CORP. The information set forth in this section with
regard to the underwriting standards of Town & Country Credit Corp. ("Town &
Country") has been provided to the Depositor or compiled from information
provided to the Depositor by Town & Country. None of the Depositor, the Trustee,
the Servicer, the other Originator, the Mortgage Loan Seller, the Underwriter or
any of their respective affiliates has made any independent investigation of
this information or has made or will make any representation as to the accuracy
or completeness of this information.
Approximately 82.88% of the Mortgage Loans (the "Town & Country Mortgage
Loans"), which will be acquired on the Closing Date by the Depositor from the
Mortgage Loan Seller, were acquired by the Mortgage Loan Seller from Town &
Country prior to the Closing Date. All of the Town & Country Mortgage Loans were
originated or acquired by Town & Country in accordance with the underwriting
criteria described in this section.
All of the Town & Country Mortgage Loans were originated or acquired by
Town & Country generally in accordance with the underwriting guidelines (the
"Underwriting Guidelines") established by Town & Country with one of the
following income documentation types: "Full," "Limited (also known as "Fast
Trac") or "Stated Income." The Underwriting Guidelines are primarily intended to
evaluate the value and adequacy of the mortgaged property as collateral and are
also intended to consider the applicant's credit standing and repayment ability.
On a case by-case basis, Town & Country may determine that, based upon
compensating factors, a prospective applicant, not strictly qualifying under one
of the Risk Categories described below, warrants an exception to the
requirements set forth in the Underwriting Guidelines. Compensating factors may
include, but are not limited to, loan-to-value ratio, debt-to-income ratio, good
credit history, stable employment and time in residence at the applicant's
current address. It is expected that a substantial number of the Mortgage Loans
to be included in the Mortgage Pool will represent such underwriting exceptions.
The Underwriting Guidelines are less stringent than the standards generally
acceptable to Fannie Mae and Freddie Mac with regard to the property offered as
collateral and the applicant's credit standing and repayment ability. Applicants
who qualify under Town & Country's Underwriting Guidelines generally have
payment histories and debt ratios which would not satisfy Fannie Mae and Freddie
Mac underwriting guidelines and may have a record of major derogatory credit
items such as outstanding judgments or prior bankruptcies. The Underwriting
Guidelines establish the maximum permitted loan-to-value ratio for each loan
type based upon these and other risk factors.
All of the Town & Country Mortgage Loans are based on loan application
packages submitted by a prospective applicant. Each applicant completes an
application that includes information with respect to the applicant's
liabilities, income, credit history and employment history, as well as certain
other personal information.
Town & Country also obtains a credit report on each applicant from a credit
reporting company. The report typically contains the reported information
relating to such matters as credit history with local
S-43
and national merchants and lenders, installment debt payments and records of
default, bankruptcy, repossession and judgments.
During the underwriting process, Town & Country reviews and verifies the
loan applicant's sources of income (except under the Stated Income and
Limited/Fast Trac documentation programs, under which programs, such information
may not be independently verified), calculates the amount of income from all
such sources indicated on the loan application, reviews the credit history of
the applicant, calculates the debt-to-income ratio to determine the applicant's
ability to repay the loan, and reviews the mortgaged property for compliance
with the Underwriting Guidelines. The Underwriting Guidelines are applied in
accordance with all applicable federal and state laws and regulations and
requires (i) an appraisal of the mortgaged property which conforms to the
Uniform Standards of Professional Appraisal Practice standards, on forms
generally acceptable to Fannie Mae and Freddie Mac and (ii) an in-house review
of such appraisal. The Underwriting Guidelines permit loans with loan-to-value
ratios at origination of up to 95% and combined loan-to-value ratios at
origination of up to 100%. The maximum allowable loan-to-value ratio varies
based upon the income documentation, property type, creditworthiness, debt
service-to-income ratio of the applicant and the overall risks associated with
the loan decision.
A. INCOME DOCUMENTATION TYPES
FULL DOCUMENTATION. The Full documentation program is generally based upon
current year to date income documentation as well as the previous year's income
documentation (i.e., tax returns and/or W-2 forms). The documentation required
is specific to the applicant's sources of income. The applicant's employment
and/or business licenses are generally verified.
LIMITED/FAST TRAC DOCUMENTATION. The Limited/Fast Trac documentation
program is generally based on bank statements from the past twelve months
supported by additional documentation provided by the applicant or current year
to date documentation. The applicant's employment and/or business licenses are
generally verified.
STATED INCOME. The Stated Income residential loan program requires the
applicant's employment and income sources to be stated on the application. The
applicant's income as stated must be reasonable for the related occupation in
the loan underwriter's discretion. However, the applicant's income as stated on
the application is not independently verified. Verbal verification of employment
is generally obtained for salaried applicants.
B. PROPERTY REQUIREMENTS
Properties that are to secure mortgage loans are appraised by qualified
independent appraisers who are approved by Town & Country's in-house appraisal
department. Generally, properties below average standards in condition and
repair are not acceptable as security for mortgage loans under the Underwriting
Guidelines. Each appraisal includes a market data analysis based on recent sales
of comparable homes in the area and, where deemed appropriate, replacement cost
analysis based on the current cost of constructing a similar home. Every
independent appraisal is subject to review, prior to the loan funding, which
review may be conducted by a representative of Town & Country or a fee appraiser
and, depending upon the original principal balance and loan-to-value ratio of
the mortgaged property, may include a desk review of the original appraisal or a
drive-by review appraisal of the mortgaged property. Town & Country requires
that all mortgage loans have title insurance. Town & Country also requires that
fire and extended coverage casualty insurance be maintained on the secured
property in an amount equal to the lesser of the principal balance of the
mortgage loan and the replacement cost of the property, subject to any state
limitations.
S-44
C. RISK CATEGORIES
The Underwriting Guidelines have various risk categories which are used by
Town & Country to grade the likelihood that the mortgagor will satisfy the
repayment conditions of the mortgage loan. These risk categories establish the
maximum permitted loan to-value ratio and loan amount, given the occupancy
status of the mortgaged property and the mortgagor's credit history and debt
ratio. In general, higher credit risk mortgage loans are graded in categories
which permit higher debt ratios and more (or more recent) major derogatory
credit items such as outstanding judgments or prior bankruptcies; however, the
Underwriting Guidelines establish lower maximum loan-to-value ratios and lower
maximum loan amounts for loans graded in such categories.
The Underwriting Guidelines have the following categories and criteria for
grading the potential likelihood that an applicant will satisfy the repayment
obligations of a mortgage loan:
================================================================================
Credit Minimum Mortgage Lates Bankruptcy or Maximum Debt-to-
Grade FICO (Last 12 Months) Foreclosure Income Ratio LTV
- --------------------------------------------------------------------------------
8A 710 none none in the last 55% 95%
36 months
- --------------------------------------------------------------------------------
7A 680 none none in the last 55% 95%
36 months
- --------------------------------------------------------------------------------
6A 660 none none in the last 55% 90%
36 months
- --------------------------------------------------------------------------------
5A 640 none none in the last 55% 90%
36 months
- --------------------------------------------------------------------------------
4A 620 1 x 30 none in the last 55% 90%
36 months
- --------------------------------------------------------------------------------
3A 600 1 x 30 none in the last 55% 90%
36 months
- --------------------------------------------------------------------------------
2A 550 3 x 30 none in the last 55% 90%
24 months
- --------------------------------------------------------------------------------
A 550 1 x 60 none in the last 55% 90%
24 months
- --------------------------------------------------------------------------------
B 520 1 x 60 none in the last 55% 85%
12 months
- --------------------------------------------------------------------------------
C 500 1 x 120 not in currently 55% 75%
- --------------------------------------------------------------------------------
D 500 n/a must be dismissed 55% 60%
at closing
- --------------------------------------------------------------------------------
AMERIQUEST MORTGAGE COMPANY. Approximately 17.12% of the Mortgage Loans
(the "Ameriquest Mortgage Loans"), which will be acquired on the Closing Date by
the Depositor from the Mortgage Loan Seller, were acquired by the Mortgage Loan
Seller from Town & Country Credit Corporation prior to the Closing Date. All of
the Ameriquest Mortgage Loans were originated by Ameriquest substantially in
accordance with the underwriting criteria described above under "Town & Country
Credit Corporation" and sold by Ameriquest Mortgage Company to Town & Country
Credit Corporation prior to the Mortgage Loan Seller's purchase thereof.
ADDITIONAL INFORMATION CONCERNING THE MORTGAGE LOANS
The description in this prospectus supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted as of the
close of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the certificates,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
S-45
documentation or otherwise if the Depositor deems the removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the Mortgage Pool prior to the issuance of the
certificates unless including these mortgage loans would materially alter the
characteristics of the Mortgage Pool as described in this prospectus supplement.
The Depositor believes that the information set forth in this prospectus
supplement will be representative of the characteristics of the Mortgage Pool as
it will be constituted at the time the certificates are issued, although the
range of Mortgage Rates and maturities and other characteristics of the Mortgage
Loans may vary.
YIELD ON THE CERTIFICATES
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of the prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan, the
mortgagor is not charged interest on the amount of the prepayment for the month
in which the prepayment is made. In addition, the application of the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act") and similar
state or local laws to any Mortgage Loan could adversely affect, for an
indeterminate period of time, the ability of the Servicer to collect full
amounts of interest on such Mortgage Loans. The Servicer is obligated to pay
from its own funds only those interest shortfalls attributable to principal
prepayments by the mortgagors on the Mortgage Loans; provided, however that the
obligation of the Servicer to remit the amount of any shortfall in interest
resulting from a principal prepayment shall be limited to the Servicing Fee
payable to the Servicer for the related Due Period. Any interest shortfalls
attributable to voluntary principal prepayments required to be funded but not
funded by the Servicer are required to be paid by the Master Servicer, but only
to the extent that such amount does not exceed the Master Servicing Fee for the
related Mortgage Loans for the applicable Distribution Date. Accordingly, the
effect of (i) any principal prepayments on the Mortgage Loans, to the extent
that any resulting shortfall (a "Prepayment Interest Shortfall") exceeds any
payments by the Master Servicer or the Servicer from its own funds
("Compensating Interest") or (ii) any shortfalls resulting from the application
of the Relief Act or similar state or local laws, will be to reduce the
aggregate amount of interest collected that is available for distribution to
certificateholders. Any such shortfalls will be allocated among the certificates
as provided under "Description of the Certificates-Interest Distributions on the
Offered Certificates" and "-Overcollateralization Provisions" in this prospectus
supplement. See "Certain Legal Aspects of the Mortgage Loans-Soldiers' and
Sailors' Civil Relief Act of 1940" in the prospectus.
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Class A Certificates and the
Mezzanine Certificates, the aggregate amount of distributions on such
certificates and the yield to maturity of such certificates will be related to
the rate and timing of payments of principal on the Mortgage Loans. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans as they change from time to time to
accommodate changes in the Mortgage Rates and by the rate of principal
prepayments thereon (including for this purpose, payments resulting from
refinancings, liquidations of the Mortgage Loans due to defaults, casualties,
condemnations and repurchases, whether optional or required, by the Depositor or
the Mortgage Loan Seller). The Mortgage Loans may be prepaid by the mortgagors
at any time; however, as described under "The Mortgage Pool" in this prospectus
supplement, with respect to approximately 91.36% of the Mortgage Loans, by
aggregate principal balance of the Mortgage Loans as of the Cut-off Date, a
prepayment may subject the related mortgagor to a Prepayment Charge.
Prepayments, liquidations and repurchases of the Mortgage Loans will result
in distributions in respect of principal to the holders of the class or classes
of Offered Certificates then entitled to receive distributions that otherwise
would be distributed over the remaining terms of the Mortgage Loans. Since
S-46
the rates of payment of principal on the Mortgage Loans will depend on future
events and a variety of factors, no assurance can be given as to that rate or
the rate of principal prepayments. The extent to which the yield to maturity of
any class of Offered Certificates may vary from the anticipated yield will
depend upon the degree to which the Offered Certificates are purchased at a
discount or premium and the degree to which the timing of payments thereon is
sensitive to prepayments on the Mortgage Loans. Further, an investor should
consider, in the case of any Class A Certificate or Mezzanine Certificate
purchased at a discount, the risk that a slower than anticipated rate of
principal payments on the Mortgage Loans could result in an actual yield to the
investor that is lower than the anticipated yield. In the case of any such
certificate purchased at a premium, the risk that a faster than anticipated rate
of principal payments could result in an actual yield to the investor that is
lower than the anticipated yield. In general, the earlier prepayments of
principal are made on the Mortgage Loans, the greater the effect on the yield to
maturity of the Offered Certificates. As a result, the effect on an investors'
yield of principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Class A Certificates and the Mezzanine Certificates would not be fully
offset by a subsequent like reduction (or increase) in the rate of principal
payments.
It is highly unlikely that the Mortgage Loans will prepay at any constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate. Moreover, the timing of prepayments on the Mortgage Loans may
significantly affect the yield to maturity on the Offered Certificates, even if
the average rate of principal payments experienced over time is consistent with
an investor's expectation.
The rate of payments (including prepayments), on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment and refinancing would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans would be expected to decrease. Other factors affecting prepayment of
mortgage loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. The prepayment experience of the Delayed First Adjustment Mortgage
Loans may differ from that of the other Mortgage Loans. The Delayed First
Adjustment Mortgage Loans may be subject to greater rates of prepayments as they
approach their initial Adjustment Dates even if market interest rates are only
slightly higher or lower than the Mortgage Rates on the Delayed First Adjustment
Mortgage Loans as mortgagors seek to avoid changes in their monthly payments. In
addition, the existence of the applicable Periodic Rate Cap, Maximum Mortgage
Rate and Minimum Mortgage Rate may affect the likelihood of prepayments
resulting from refinancings. There can be no certainty as to the rate of
prepayments on the Mortgage Loans during any period or over the life of the
certificates. See "Yield Considerations" in the prospectus.
Because principal distributions are paid to certain classes of Offered
Certificates before other classes, holders of classes of Offered Certificates
having a later priority of payment bear a greater risk of losses than holders of
classes having earlier priorities for distribution of principal. This is because
the certificates having a later priority of payment will represent an increasing
percentage interest in the trust fund during the period prior to the
commencement of distributions of principal on these certificates. As described
under "Description of the Certificates--Principal Distributions on the Class A
Certificates and the Mezzanine Certificates" in this prospectus supplement,
prior to the Stepdown Date, all principal payments on the Mortgage Loans will be
allocated to the Class A Certificates. Thereafter, as further described in this
prospectus supplement, during certain periods, subject to certain delinquency
triggers described in this prospectus supplement, all principal payments on the
Mortgage Loans will be allocated among the Class A Certificates and all classes
of the Mezzanine Certificates in the priorities described under "Description of
the Certificates--Principal Distributions on the Class A Certificates and
Mezzanine Certificates" in this prospectus supplement.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years. In addition, default rates may be higher for
mortgage loans used to refinance an existing mortgage loan. In the event of a
mortgagor's default on a Mortgage Loan, there can be no assurance that recourse
S-47
will be available beyond the specific Mortgaged Property pledged as security for
repayment. See "The Mortgage Pool--Underwriting Standards" in this prospectus
supplement.
SPECIAL YIELD CONSIDERATIONS
The Mortgage Rates on approximately 33.28% of the Mortgage Loans, by
aggregate principal balance as of the Cut-off Date, are fixed and will not vary
with any Index. The Mortgage Rates on the ARM Loans adjust semi-annually based
upon Six-Month LIBOR subject to periodic and lifetime limitations and after an
initial period of two or three years with respect to Delayed First Adjustment
Mortgage Loans. The Pass-Through Rate on the Class A Certificates and the
Mezzanine Certificates adjusts monthly based upon One-Month LIBOR determined as
described under "Description of the Certificates--Calculation of One-Month
LIBOR" in this prospectus supplement, subject to the applicable Net WAC
Pass-Through Rate, with the result that increases in the Pass-Through Rates on
such certificates may be limited for extended periods in a rising interest rate
environment. Investors should note that all of the ARM Loans are Delayed First
Adjustment Mortgage Loans. The interest due on the Mortgage Loans during any Due
Period, net of the expenses of the trust may not equal the amount of interest
that would accrue at One-Month LIBOR plus the applicable spread on the Class A
Certificates and the Mezzanine Certificates during the related Interest Accrual
Period; however, any shortfall of this kind will be payable to the holders of
such certificates, but only to the extent and in the priority described under
"Description of the Certificates--Overcollateralization Provisions" in this
prospectus supplement. In addition, Six-Month LIBOR and One-Month LIBOR may
respond differently to economic and market factors. Thus, it is possible, for
example, that if both One-Month LIBOR and the related Index rise during the same
period, One-Month LIBOR may rise more rapidly than the Index, potentially
resulting in the application of the applicable Net WAC Pass-Through Rate on the
Offered Certificates, which would adversely affect the yield to maturity on such
certificates.
If the pass-through rate on the Class A Certificates or the Mezzanine
Certificates is limited by the applicable Net WAC Pass-Through Rate for any
Distribution Date, the resulting interest shortfalls, which are referred to
herein as "Net WAC Rate Carryover Amounts", may be recovered by the holders of
such certificates on such Distribution Date or on future Distribution Dates, to
the extent that on such Distribution Date or future Distribution Dates there are
any available funds remaining after certain other distributions on the Offered
Certificates and the payment of certain fees and expenses of the trust. The
ratings on the Class A Certificates and the Mezzanine Certificates will not
address the likelihood of any such recovery of such interest shortfalls by
holders of those certificates.
As described under "Description of the Certificates--Allocation of Losses;
Subordination," amounts otherwise distributable to holders of the Mezzanine
Certificates and the Class CE Certificates may be made available to protect the
holders of the Class A Certificates against interruptions in distributions due
to certain mortgagor delinquencies, to the extent not covered by P&I Advances.
Such delinquencies may affect the yield to investors in the Mezzanine
Certificates and, even if subsequently cured, will affect the timing of the
receipt of distributions by the holders of the Mezzanine Certificates. In
addition, the rate of delinquencies or losses will affect the rate of principal
payments on the Mezzanine Certificates. See "Description of the
Certificates--Principal Distributions on the Class A Certificates and Mezzanine
Certificates" in this prospectus supplement.
WEIGHTED AVERAGE LIVES
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of that
security will be repaid to the investor. The weighted average life of the Class
A Certificates and the Mezzanine Certificates will be influenced by the rate at
which principal on the Mortgage Loans is paid, which may be in the form of
scheduled payments or prepayments (including repurchases and prepayments of
principal by the mortgagor as well as amounts received by virtue of
condemnation, insurance or foreclosure with respect to the Mortgage Loans), and
the timing of these payments.
S-48
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment model used in this prospectus
supplement with respect to the adjustable rate Mortgage Loans assumes a
prepayment rate for the mortgage loans of 28% CPR. To assume 28% CPR or any
other CPR percentage is to assume that the stated percentage of the outstanding
principal balance of the pool is prepaid over the course of a year. The
prepayment model used in this prospectus supplement with respect to the fixed
rate Mortgage Loans assumes a prepayment rate of 100% PPC. To assume 100% PPC is
to assume (i) a per annum prepayment rate of 4% of the then outstanding
principal balance of the mortgage loans in the first month of the life of the
mortgage loans, (ii) an additional 19%/11 per annum in each month thereafter
through the eleventh month and (iii) a constant prepayment rate of 23% per annum
beginning in the twelfth month and in each month thereafter during the life of
the mortgage loans. No representation is made that the Mortgage Loans will
prepay in accordance with such prepayment models or any other rate. We refer to
each such prepayment model herein as a "Prepayment Assumption".
The tables entitled "Percent of Initial Certificate Principal Balance
Outstanding at the Specified Percentages of the Prepayment Assumption" indicate
the percentage of the initial Certificate Principal Balance of the Class A
Certificates and the Mezzanine Certificates that would be outstanding after each
of the dates shown at various percentages of CPR and PPC, and the corresponding
weighted average lives of these certificates. The tables are based on the
following assumptions (the "Modeling Assumptions"): (i) the Mortgage Pool
consists of 31 mortgage loans with the characteristics set forth below, (ii)
distributions on the certificates are received, in cash, on the 25th day of each
month, commencing in August 2003; (iii) the Mortgage Loans prepay at the
percentages of CPR and PPC indicated; (iv) no defaults or delinquencies occur in
the payment by mortgagors of principal and interest on the Mortgage Loans and no
shortfalls due to the application of the Relief Act or similar state or local
laws are incurred; (v) none of the Depositor, the Servicer or any other person
purchases from the trust fund any Mortgage Loan under any obligation or option
under the Pooling and Servicing Agreement, except as indicated in footnote two
in the tables; (vi) scheduled monthly payments on the Mortgage Loans are
received on the first day of each month commencing in August 2003, and are
computed prior to giving effect to any prepayments received in the prior month;
(vii) prepayments representing payment in full of individual Mortgage Loans are
received on the last day of each month commencing in July 2003, and include 30
days' interest thereon; (viii) the scheduled monthly payment for each Mortgage
Loan is calculated based on the assumed mortgage loan characteristics stated
below; (ix) the certificates are purchased on July 15, 2003; (x) Six-Month LIBOR
remains constant at 1.12% per annum and the gross mortgage rate on each ARM Loan
is adjusted according to the assumed mortgage loan characteristics; (xi)
One-Month LIBOR remains constant at 1.11% per annum; and (xii) the Class P
Certificates have a Certificate Principal Balance equal to zero.
S-49
ASSUMED GROUP I MORTGAGE LOAN CHARACTERISTICS
Gross Expense Maximum Minimum Initial Subsequent
Principal Remaining Mortgage Adjusted Gross Mortgage Mortgage Periodic Periodic Months to Adjustment
Balance Term Age Rate Mortgage Index Margin Rate Rate Rate Cap Rate Cap Next Frequency
($) (Months) (Months) (%) Rate Type (%) (%) (%) (%) (%) Adjustment (Months)
- --------------- --------- ------- -------- -------- --------- ------ -------- -------- -------- ---------- ---------- ----------
7,729,707.07 353 3 8.066 6.046 Six-Month 5.853 14.066 8.066 2.000 1.000 21 6
LIBOR
2,092,139.04 356 4 7.589 5.569 Six-Month 5.784 13.589 7.589 2.000 1.000 20 6
LIBOR
5,373,567.71 356 4 7.936 5.916 Six-Month 5.968 13.936 7.936 2.000 1.000 20 6
LIBOR
116,355,546.06 354 3 7.878 5.858 Six-Month 5.910 13.880 7.880 2.000 1.000 21 6
LIBOR
3,059,100.69 353 3 10.222 9.682 Six-Month 6.363 16.222 10.222 2.000 1.000 21 6
LIBOR
705,168.03 356 4 9.221 8.681 Six-Month 6.427 15.221 9.221 2.000 1.000 20 6
LIBOR
1,005,439.48 357 3 8.739 8.199 Six-Month 6.441 14.739 8.739 2.000 1.000 21 6
LIBOR
37,637,623.22 356 3 9.001 8.461 Six-Month 6.300 15.001 9.001 2.000 1.000 21 6
LIBOR
699,822.13 356 4 9.456 8.916 n/a n/a n/a n/a n/a n/a n/a n/a
350,369.26 212 4 8.775 8.235 n/a n/a n/a n/a n/a n/a n/a n/a
5,631,357.68 356 4 9.149 8.609 n/a n/a n/a n/a n/a n/a n/a n/a
688,286.37 201 5 8.210 7.670 n/a n/a n/a n/a n/a n/a n/a n/a
5,396,215.62 356 4 7.617 5.597 n/a n/a n/a n/a n/a n/a n/a n/a
2,218,444.23 211 4 7.861 5.841 n/a n/a n/a n/a n/a n/a n/a n/a
34,305,486.91 356 4 7.212 5.192 n/a n/a n/a n/a n/a n/a n/a n/a
8,035,175.92 218 4 7.161 5.141 n/a n/a n/a n/a n/a n/a n/a n/a
S-50
ASSUMED GROUP II MORTGAGE LOAN CHARACTERISTICS
Gross Expense Maximum Minimum Initial Subsequent
Principal Remaining Mortgage Adjusted Gross Mortgage Mortgage Periodic Periodic Months to Adjustment
Balance Term Age Rate Mortgage Index Margin Rate Rate Rate Cap Rate Cap Next Frequency
($) (Months) (Months) (%) Rate Type (%) (%) (%) (%) (%) Adjustment (Months)
- --------------- --------- ------- -------- -------- --------- ------ -------- -------- -------- ---------- ---------- ----------
367,776.60 356 4 6.990 4.970 Six-Month 6.250 12.990 6.990 2.000 1.000 20 6
LIBOR
3,586,913.40 356 4 7.191 5.171 Six-Month 5.880 13.191 7.191 2.000 1.000 20 6
LIBOR
9,959,783.01 356 4 7.590 5.570 Six-Month 5.898 13.590 7.590 2.000 1.000 20 6
LIBOR
471,684.07 358 2 6.750 6.210 Six-Month 5.250 12.750 6.750 2.000 1.000 22 6
LIBOR
474,264.69 356 4 6.500 5.960 Six-Month 4.750 12.500 6.500 2.000 1.000 20 6
LIBOR
1,055,643.75 357 3 6.941 6.401 Six-Month 5.591 12.941 6.941 2.000 1.000 21 6
LIBOR
7,953,830.71 356 4 7.942 7.402 Six-Month 6.097 13.942 7.942 2.000 1.000 20 6
LIBOR
1,514,459.91 356 4 7.584 7.044 n/a n/a n/a n/a n/a n/a n/a n/a
563,624.78 232 4 6.702 6.162 n/a n/a n/a n/a n/a n/a n/a n/a
6,334,741.22 356 4 7.328 6.788 n/a n/a n/a n/a n/a n/a n/a n/a
272,935.97 213 4 8.040 7.500 n/a n/a n/a n/a n/a n/a n/a n/a
2,583,107.82 356 4 8.128 6.108 n/a n/a n/a n/a n/a n/a n/a n/a
666,263.81 189 4 8.790 6.770 n/a n/a n/a n/a n/a n/a n/a n/a
26,554,535.66 356 4 7.140 5.120 n/a n/a n/a n/a n/a n/a n/a n/a
2,852,228.70 224 4 6.942 4.922 n/a n/a n/a n/a n/a n/a n/a n/a
S-51
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the tables entitled
"Percent of Initial Certificate Principal Balance Outstanding at the Specified
Percentages of the Prepayment Assumption". Any discrepancy may have an effect
upon the percentages of the initial Certificate Principal Balance outstanding,
and the weighted average lives, of the Class A Certificates and the Mezzanine
Certificates set forth in the tables. In addition, since the actual Mortgage
Loans will have characteristics that differ from those assumed in preparing the
tables and since it is not likely the level of Six-Month LIBOR or One-Month
LIBOR will remain constant as assumed, the Offered Certificates may mature
earlier or later than indicated by the tables. In addition, as described under
"Description of the Certificates-Principal Distributions on the Class A
Certificates and Mezzanine Certificates" in this prospectus supplement, the
occurrence of the Stepdown Date or a Trigger Event will have the effect of
accelerating or decelerating the amortization of the Class A Certificates and
the Mezzanine Certificates, affecting the weighted average lives of such
certificates. Based on the foregoing assumptions, the tables indicate the
weighted average lives of each class of Class A Certificates and Mezzanine
Certificates and set forth the percentages of the initial Certificate Principal
Balance of such certificates that would be outstanding after each of the
Distribution Dates shown, at various percentages of the Prepayment Assumption.
Neither the prepayment model used in this prospectus supplement nor any other
prepayment model or assumption purports to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Mortgage Loans. Variations in the
prepayment experience and the balance of the Mortgage Loans that prepay may
increase or decrease the percentages of initial Certificate Principal Balances,
and weighted average lives, shown in the following tables. These variations may
occur even if the average prepayment experience of all the Mortgage Loans equals
any of the specified percentages of the Prepayment Assumption.
S-52
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-1
---------
FIXED RATE MORTGAGE LOANS 0% PPC 55% PPC 100% PPC 125% PPC 155% PPC
ADJUSTABLE RATE MORTGAGE LOANS 0% CPR 15% CPR 28% CPR 35% CPR 45% CPR
- -------------------------------- ------ ------- ------- ------- -------
DISTRIBUTION DATE
Initial Percentage ............. 100% 100% 100% 100% 100%
July 25, 2004 .................. 99 84 71 64 54
July 25, 2005 .................. 98 69 48 38 26
July 25, 2006 .................. 97 57 32 22 11
July 25, 2007 .................. 95 47 25 17 10
July 25, 2008 .................. 94 39 18 11 6
July 25, 2009 .................. 92 33 13 8 3
July 25, 2010 .................. 90 28 10 5 2
July 25, 2011 .................. 89 23 7 3 1
July 25, 2012 .................. 87 20 5 2 0
July 25, 2013 .................. 85 16 4 1 0
July 25, 2014 .................. 82 14 3 1 0
July 25, 2015 .................. 80 11 2 0 0
July 25, 2016 .................. 77 9 1 0 0
July 25, 2017 .................. 74 8 1 0 0
July 25, 2018 .................. 71 6 0 0 0
July 25, 2019 .................. 67 5 0 0 0
July 25, 2020 .................. 64 4 0 0 0
July 25, 2021 .................. 60 3 0 0 0
July 25, 2022 .................. 56 3 0 0 0
July 25, 2023 .................. 52 2 0 0 0
July 25, 2024 .................. 47 2 0 0 0
July 25, 2025 .................. 43 1 0 0 0
July 25, 2026 .................. 38 1 0 0 0
July 25, 2027 .................. 34 0 0 0 0
July 25, 2028 .................. 29 0 0 0 0
July 25, 2029 .................. 23 0 0 0 0
July 25, 2030 .................. 17 0 0 0 0
July 25, 2031 .................. 11 0 0 0 0
July 25, 2032 .................. 4 0 0 0 0
July 25, 2033 .................. 0 0 0 0 0
Weighted Average Life
in Years (1) 19.09 5.43 2.95 2.28 1.66
Weighted Average Life
in Years (1)(2) 19.03 5.05 2.72 2.09 1.52
- ----------
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the certificate to the related Distribution Date,
(b) adding the results and (c) dividing the sum by the aggregate amount of
the distribution of principal described in clause (a) above.
(2) Assumes the Class CE Certificateholder exercises its option to purchase the
Mortgage Loans on the earliest possible Distribution Date on which it is
permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT.
S-53
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-2
---------
FIXED RATE MORTGAGE LOANS 0% PPC 55% PPC 100% PPC 125% PPC 155% PPC
ADJUSTABLE RATE MORTGAGE LOANS 0% CPR 15% CPR 28% CPR 35% CPR 45% CPR
- -------------------------------- ---- ---- ---- ---- ----
DISTRIBUTION DATE
Initial Percentage ............. 100% 100% 100% 100% 100%
July 25, 2004 .................. 99 86 74 68 60
July 25, 2005 .................. 97 72 53 43 32
July 25, 2006 .................. 96 60 36 26 16
July 25, 2007 .................. 95 49 28 20 13
July 25, 2008 .................. 93 41 21 14 8
July 25, 2009 .................. 91 35 16 10 5
July 25, 2010 .................. 89 30 12 7 3
July 25, 2011 .................. 87 25 9 4 2
July 25, 2012 .................. 85 21 6 3 1
July 25, 2013 .................. 83 18 5 2 0
July 25, 2014 .................. 80 15 3 1 0
July 25, 2015 .................. 78 13 3 1 0
July 25, 2016 .................. 75 11 2 0 0
July 25, 2017 .................. 72 9 1 0 0
July 25, 2018 .................. 68 7 1 0 0
July 25, 2019 .................. 65 6 0 0 0
July 25, 2020 .................. 61 5 0 0 0
July 25, 2021 .................. 57 4 0 0 0
July 25, 2022 .................. 53 3 0 0 0
July 25, 2023 .................. 49 3 0 0 0
July 25, 2024 .................. 44 2 0 0 0
July 25, 2025 .................. 41 2 0 0 0
July 25, 2026 .................. 37 1 0 0 0
July 25, 2027 .................. 32 1 0 0 0
July 25, 2028 .................. 27 0 0 0 0
July 25, 2029 .................. 22 0 0 0 0
July 25, 2030 .................. 17 0 0 0 0
July 25, 2031 .................. 11 0 0 0 0
July 25, 2032 .................. 5 0 0 0 0
July 25, 2033 .................. 0 0 0 0 0
Weighted Average Life
in Years (1) 18.65 5.76 3.26 2.56 1.95
Weighted Average Life
in Years (1)(2) 18.58 5.32 2.95 2.30 1.74
- ----------
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the certificate to the related Distribution Date,
(b) adding the results and (c) dividing the sum by the aggregate amount of
the distribution of principal described in clause (a) above.
(2) Assumes the Class CE Certificateholder exercises its option to purchase the
Mortgage Loans on the earliest possible Distribution Date on which it is
permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT.
S-54
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-1
---------
FIXED RATE MORTGAGE LOANS 0% PPC 55% PPC 100% PPC 125% PPC 155% PPC
ADJUSTABLE RATE MORTGAGE LOANS 0% CPR 15% CPR 28% CPR 35% CPR 45% CPR
- -------------------------------- ------ ------- ------- ------- -------
DISTRIBUTION DATE
Initial Percentage ............. 100% 100% 100% 100% 100%
July 25, 2004 .................. 100 100 100 100 100
July 25, 2005 .................. 100 100 100 100 100
July 25, 2006 .................. 100 100 100 100 100
July 25, 2007 .................. 100 100 58 40 24
July 25, 2008 .................. 100 88 42 27 14
July 25, 2009 .................. 100 75 31 18 7
July 25, 2010 .................. 100 63 22 12 1
July 25, 2011 .................. 100 53 16 6 0
July 25, 2012 .................. 100 45 12 1 0
July 25, 2013 .................. 100 37 8 0 0
July 25, 2014 .................. 100 31 2 0 0
July 25, 2015 .................. 100 26 0 0 0
July 25, 2016 .................. 100 22 0 0 0
July 25, 2017 .................. 100 18 0 0 0
July 25, 2018 .................. 100 15 0 0 0
July 25, 2019 .................. 100 12 0 0 0
July 25, 2020 .................. 100 10 0 0 0
July 25, 2021 .................. 100 7 0 0 0
July 25, 2022 .................. 100 3 0 0 0
July 25, 2023 .................. 100 0 0 0 0
July 25, 2024 .................. 100 0 0 0 0
July 25, 2025 .................. 94 0 0 0 0
July 25, 2026 .................. 85 0 0 0 0
July 25, 2027 .................. 75 0 0 0 0
July 25, 2028 .................. 64 0 0 0 0
July 25, 2029 .................. 52 0 0 0 0
July 25, 2030 .................. 39 0 0 0 0
July 25, 2031 .................. 25 0 0 0 0
July 25, 2032 .................. 10 0 0 0 0
July 25, 2033 .................. 0 0 0 0 0
Weighted Average Life
in Years (1) 25.97 9.63 5.39 4.53 4.09
Weighted Average Life
in Years (1)(2) 25.85 8.97 4.98 4.20 3.83
- ----------
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the certificate to the related Distribution Date,
(b) adding the results and (c) dividing the sum by the aggregate amount of
the distribution of principal described in clause (a) above.
(2) Assumes the Class CE Certificateholder exercises its option to purchase the
Mortgage Loans on the earliest possible Distribution Date on which it is
permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT.
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-2
---------
FIXED RATE MORTGAGE LOANS 0% PPC 55% PPC 100% PPC 125% PPC 155% PPC
ADJUSTABLE RATE MORTGAGE LOANS 0% CPR 15% CPR 28% CPR 35% CPR 45% CPR
- -------------------------------- ------ ------- ------- ------- -------
DISTRIBUTION DATE
Initial Percentage ............. 100% 100% 100% 100% 100%
July 25, 2004 .................. 100 100 100 100 100
July 25, 2005 .................. 100 100 100 100 100
July 25, 2006 .................. 100 100 100 100 100
July 25, 2007 .................. 100 100 58 40 24
July 25, 2008 .................. 100 88 42 27 8
July 25, 2009 .................. 100 75 31 15 0
July 25, 2010 .................. 100 63 22 5 0
July 25, 2011 .................. 100 53 12 0 0
July 25, 2012 .................. 100 45 5 0 0
July 25, 2013 .................. 100 37 0 0 0
July 25, 2014 .................. 100 31 0 0 0
July 25, 2015 .................. 100 26 0 0 0
July 25, 2016 .................. 100 21 0 0 0
July 25, 2017 .................. 100 15 0 0 0
July 25, 2018 .................. 100 10 0 0 0
July 25, 2019 .................. 100 5 0 0 0
July 25, 2020 .................. 100 1 0 0 0
July 25, 2021 .................. 100 0 0 0 0
July 25, 2022 .................. 100 0 0 0 0
July 25, 2023 .................. 100 0 0 0 0
July 25, 2024 .................. 100 0 0 0 0
July 25, 2025 .................. 94 0 0 0 0
July 25, 2026 .................. 85 0 0 0 0
July 25, 2027 .................. 75 0 0 0 0
July 25, 2028 .................. 64 0 0 0 0
July 25, 2029 .................. 52 0 0 0 0
July 25, 2030 .................. 39 0 0 0 0
July 25, 2031 .................. 25 0 0 0 0
July 25, 2032 .................. 1 0 0 0 0
July 25, 2033 .................. 0 0 0 0 0
Weighted Average Life
in Years (1) 25.92 9.29 5.15 4.28 3.72
Weighted Average Life
in Years (1)(2) 25.85 8.96 4.96 4.12 3.60
- ----------
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the certificate to the related Distribution Date,
(b) adding the results and (c) dividing the sum by the aggregate amount of
the distribution of principal described in clause (a) above.
(2) Assumes the Class CE Certificateholder exercises its option to purchase the
Mortgage Loans on the earliest possible Distribution Date on which it is
permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT.
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-3
---------
FIXED RATE MORTGAGE LOANS 0% PPC 55% PPC 100% PPC 125% PPC 155% PPC
ADJUSTABLE RATE MORTGAGE LOANS 0% CPR 15% CPR 28% CPR 35% CPR 45% CPR
- ------------------------------ ------ ------- -------- -------- --------
DISTRIBUTION DATE
Initial Percentage ............. 100% 100% 100% 100% 100%
July 25, 2004 .................. 100 100 100 100 100
July 25, 2005 .................. 100 100 100 100 100
July 25, 2006 .................. 100 100 100 100 100
July 25, 2007 .................. 100 100 58 40 3
July 25, 2008 .................. 100 88 42 10 0
July 25, 2009 .................. 100 75 19 0 0
July 25, 2010 .................. 100 63 0 0 0
July 25, 2011 .................. 100 53 0 0 0
July 25, 2012 .................. 100 45 0 0 0
July 25, 2013 .................. 100 34 0 0 0
July 25, 2014 .................. 100 21 0 0 0
July 25, 2015 .................. 100 9 0 0 0
July 25, 2016 .................. 100 0 0 0 0
July 25, 2017 .................. 100 0 0 0 0
July 25, 2018 .................. 100 0 0 0 0
July 25, 2019 .................. 100 0 0 0 0
July 25, 2020 .................. 100 0 0 0 0
July 25, 2021 .................. 100 0 0 0 0
July 25, 2022 .................. 100 0 0 0 0
July 25, 2023 .................. 100 0 0 0 0
July 25, 2024 .................. 100 0 0 0 0
July 25, 2025 .................. 94 0 0 0 0
July 25, 2026 .................. 85 0 0 0 0
July 25, 2027 .................. 75 0 0 0 0
July 25, 2028 .................. 64 0 0 0 0
July 25, 2029 .................. 52 0 0 0 0
July 25, 2030 .................. 37 0 0 0 0
July 25, 2031 .................. 6 0 0 0 0
July 25, 2032 .................. 0 0 0 0 0
July 25, 2033 .................. 0 0 0 0 0
Weighted Average Life
in Years (1) 25.69 8.45 4.65 3.85 3.34
Weighted Average Life
in Years (1)(2) 25.69 8.45 4.65 3.85 3.34
- ----------
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the certificate to the related Distribution Date,
(b) adding the results and (c) dividing the sum by the aggregate amount of
the distribution of principal described in clause (a) above.
(2) Assumes the Class CE Certificateholder exercises its option to purchase the
Mortgage Loans on the earliest possible Distribution Date on which it is
permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT.
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-4
---------
FIXED RATE MORTGAGE LOANS 0% PPC 55% PPC 100% PPC 125% PPC 155% PPC
ADJUSTABLE RATE MORTGAGE LOANS 0% CPR 15% CPR 28% CPR 35% CPR 45% CPR
- ------------------------------ ------ ------- ------- ------- -------
DISTRIBUTION DATE
Initial Percentage ............. 100% 100% 100% 100% 100%
July 25, 2004 .................. 100 100 100 100 100
July 25, 2005 .................. 100 100 100 100 100
July 25, 2006 .................. 100 100 100 100 100
July 25, 2007 .................. 100 100 29 0 0
July 25, 2008 .................. 100 81 3 0 0
July 25, 2009 .................. 100 58 0 0 0
July 25, 2010 .................. 100 38 0 0 0
July 25, 2011 .................. 100 22 0 0 0
July 25, 2012 .................. 100 8 0 0 0
July 25, 2013 .................. 100 0 0 0 0
July 25, 2014 .................. 100 0 0 0 0
July 25, 2015 .................. 100 0 0 0 0
July 25, 2016 .................. 100 0 0 0 0
July 25, 2017 .................. 100 0 0 0 0
July 25, 2018 .................. 100 0 0 0 0
July 25, 2019 .................. 100 0 0 0 0
July 25, 2020 .................. 100 0 0 0 0
July 25, 2021 .................. 100 0 0 0 0
July 25, 2022 .................. 100 0 0 0 0
July 25, 2023 .................. 100 0 0 0 0
July 25, 2024 .................. 100 0 0 0 0
July 25, 2025 .................. 91 0 0 0 0
July 25, 2026 .................. 75 0 0 0 0
July 25, 2027 .................. 58 0 0 0 0
July 25, 2028 .................. 39 0 0 0 0
July 25, 2029 .................. 19 0 0 0 0
July 25, 2030 .................. 0 0 0 0 0
July 25, 2031 .................. 0 0 0 0 0
July 25, 2032 .................. 0 0 0 0 0
July 25, 2033 .................. 0 0 0 0 0
Weighted Average Life
in Years (1) 24.40 6.63 3.71 3.26 3.11
Weighted Average Life
in Years (1)(2) 24.40 6.63 3.71 3.26 3.11
- ----------
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance of the certificate to the related Distribution Date,
(b) adding the results and (c) dividing the sum by the aggregate amount of
the distribution of principal described in clause (a) above.
(2) Assumes the Class CE Certificateholder exercises its option to purchase the
Mortgage Loans on the earliest possible Distribution Date on which it is
permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT.
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There is no assurance that prepayments of the Mortgage Loans included in
the Mortgage Pool will conform to any of the levels of the Prepayment Assumption
indicated in the immediately preceding tables, or to any other level, or that
the actual weighted average lives of the Class A Certificates and the Mezzanine
Certificates will conform to any of the weighted average lives set forth in the
immediately preceding tables. Furthermore, the information contained in the
tables with respect to the weighted average lives of the Class A Certificates
and the Mezzanine Certificates is not necessarily indicative of the weighted
average lives that might be calculated or projected under different or varying
prepayment assumptions.
The characteristics of the Mortgage Loans will differ from those assumed in
preparing the immediately preceding tables. In addition, it is unlikely that any
Mortgage Loan will prepay at any constant percentage until maturity or that all
of the Mortgage Loans will prepay at the same rate. The timing of changes in the
rate of prepayments may significantly affect the actual yield to maturity to
investors, even if the average rate of principal prepayments is consistent with
the expectations of investors.
YIELD SENSITIVITY OF THE MEZZANINE CERTIFICATES
If the Certificate Principal Balances of the Class CE, Class M-4, Class M-3
and Class M-2 Certificates have been reduced to zero, the yield to maturity on
the Class M-1 Certificates will become extremely sensitive to losses on the
Mortgage Loans (and the timing thereof) that are covered by subordination,
because the entire amount of any Realized Losses (to the extent not covered by
Net Monthly Excess Cashflow) will be allocated to the Class M-1 Certificates. If
the Certificate Principal Balances of the Class CE, Class M-4 and Class M-3
Certificates have been reduced to zero, the yield to maturity on the Class M-2
Certificates will become extremely sensitive to losses on the Mortgage Loans
(and the timing thereof) that are covered by subordination, because the entire
amount of any Realized Losses (to the extent not covered by Net Monthly Excess
Cashflow) will be allocated to the Class M-2 Certificates. If the Certificate
Principal Balances of the Class CE Certificates and Class M-4 Certificates have
been reduced to zero, the yield to maturity on the Class M-3 Certificates will
become extremely sensitive to losses on the Mortgage Loans (and the timing
thereof) that are covered by subordination, because the entire amount of any
Realized Losses (to the extent not covered by Net Monthly Excess Cashflow) will
be allocated to the Class M-3 Certificates. If the Certificate Principal Balance
of the Class CE Certificates has been reduced to zero, the yield to maturity on
the Class M-4 Certificates will become extremely sensitive to losses on the
Mortgage Loans (and the timing thereof) that are covered by subordination,
because the entire amount of any Realized Losses (to the extent not covered by
Net Monthly Excess Cashflow) will be allocated to the Class M-4 Certificates.
The initial undivided interests in the trust fund evidenced by the Class M-1,
Class M-2, Class M-3, Class M-4 and Class CE Certificates are approximately
4.00%, approximately 3.25%, approximately 1.00%, approximately 0.75% and
approximately 0.50%, respectively. Investors in the Mezzanine Certificates
should fully consider the risk that Realized Losses on the Mortgage Loans could
result in the failure of investors to fully recover their investments. In
addition, once Realized Losses have been allocated to the Mezzanine
Certificates, their Certificate Principal Balances will be permanently reduced
by the amounts so allocated. Therefore, the amounts of Realized Losses allocated
to the Mezzanine Certificates will no longer accrue interest, will not be
reinstated thereafter and no amounts in respect thereof will be distributable to
the holders of the Mezzanine Certificates.
Unless the Certificate Principal Balance of the Class A Certificates has
been reduced to zero, principal distributions on the Mezzanine Certificates will
only commence on or after the Stepdown Date and during periods in which a
Trigger Event is not in effect. As a result, the weighted average lives of the
Mezzanine Certificates will be longer than would otherwise be the case if
distributions of principal were allocated on a pro rata basis among all of the
Offered Certificates. As a result of the longer weighted average lives of the
Mezzanine Certificates, the holders of such certificates have a greater risk of
suffering a loss on their investments. For additional considerations relating to
the yield on the Mezzanine Certificates, see "Yield Considerations" in the
prospectus.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Ace Securities Corp. Home Equity Loan Trust, Series 2003-TC1, Asset
Backed Pass-Through Certificates will consist of nine classes of certificates,
designated as (i) the Class A-1 Certificates and Class A-2 Certificates
(together, the "Class A Certificates"); (ii) the Class M-1, Class M-2, Class M-3
and Class M-4, Certificates (the "Mezzanine Certificates"); (iii) the Class CE
Certificates (together with the Mezzanine Certificates, the "Subordinate
Certificates"); (iv) the Class P Certificates; and (v) the Class R Certificates
(also referred to herein as the "Residual Certificates"). Only the Class A
Certificates and the Mezzanine Certificates (collectively, the "Offered
Certificates") are offered by this prospectus supplement.
Distributions on the Offered Certificates will be made on the 25th day of
each month, or, if that day is not a business day, on the next succeeding
business day, beginning in August 2003 to the persons in whose names such
certificates are registered at the close of business on the Record Date. The
"Record Date" for the Class A Certificates and the Mezzanine Certificates is the
business day immediately preceding such Distribution Date, for so long as such
Certificates are held in book-entry form and the last business day of the month
immediately preceding the month in which the related Distribution Date occurs if
such certificates are held in physical form.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust fund consisting primarily of the Mortgage Pool of
conventional, one- to four-family, adjustable-rate and fixed- rate first lien
Mortgage Loans having original terms to maturity of not greater than
approximately 30 years. The Mortgage Loans have an aggregate principal balance
as of the Cut-off Date of approximately $296,495,244, subject to a permitted
variance as described under "The Mortgage Pool" in this prospectus supplement.
The Class A Certificates and the Mezzanine Certificates will have the
initial Certificate Principal Balance set forth in the table appearing on the
cover of this prospectus supplement. The Pass-Through Rates on the Offered
Certificates will be calculated for each Distribution Date as described under
"--Pass-Through Rates" below. The Class A Certificates evidence an initial
undivided interest of approximately 90.50% in the trust fund, the Class M-1,
Class M-2, Class M-3 and Class M-4 Certificates evidence initial undivided
interests of approximately 4.00%, approximately 3.25%, approximately 1.00% and
approximately 0.75%, respectively, in the trust fund and the Class CE
Certificates evidence an initial undivided interest of approximately 0.50% in
the trust fund.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (for so long as
they are registered in the name of the applicable depository or its nominee, the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Book-Entry Certificates ("Certificate Owners") will hold such certificates
through The Depository Trust Company ("DTC") in the United States, or
Clearstream Banking Luxembourg, formerly known as Cedelbank SA ("Clearstream"),
or the Euroclear System ("Euroclear") in Europe, if they are participants of
such systems ("Clearstream Participants" or "Euroclear Participants",
respectively), or indirectly through organizations which are Clearstream or
Euroclear Participants. The Book-Entry Certificates will be issued in one or
more certificates which equal the aggregate Certificate Principal Balance of
such Certificates and will initially be registered in the name of Cede & Co.,
the nominee of DTC. Clearstream and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Clearstreams' and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries, names on the books of DTC. Citibank, N.A. will act
as depositary for Clearstream, and JPMorgan Chase Bank will act as depository
for Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositories"). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations of $25,000.
Except as described below, no
S-60
Certificate Owner acquiring a Book-Entry Certificate (each, a "beneficial
owner") will be entitled to receive a physical certificate representing such
Certificate (a "Definitive Certificate"). Unless and until Definitive
Certificates are issued, it is anticipated that the only "Certificateholder" of
the Offered Certificates will be Cede & Co., as nominee of DTC. Certificate
Owners will not be Certificateholders as that term is used in the Pooling and
Servicing Agreement. Certificate Owners are only permitted to exercise their
rights indirectly through DTC and participants of DTC ("DTC Participants").
The Certificate 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
Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant and on
the records of Clearstream or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
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 DTC 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. DTC
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interest.
Certificate Owners 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, Certificate Owners who are not DTC Participants may
transfer ownership of Book-Entry Certificates only through DTC Participants and
indirect participants by instructing such DTC Participants and indirect
participants to transfer Book-Entry Certificates, by book-entry transfer,
through DTC for the account of the purchasers of such Book-Entry Certificates,
which account is maintained with their respective DTC 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 DTC Participants at DTC will be debited and credited. Similarly, the
DTC Participants and indirect participants will make debits or credits, as the
case may be, on their records on behalf of the selling and purchasing
Certificate Owners.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a DTC Participant
will be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Euroclear Participants or Clearstream Participants (each as defined
below) on such business day. Cash received in Clearstream or Euroclear as a
result of sales of securities by or through a Clearstream Participant or
Euroclear Participant to a DTC Participant will be received with value on the
DTC settlement date but will be available in the relevant Clearstream or
Euroclear cash account only as of the business day following the DTC settlement
date. For information with respect to tax documentation procedures relating to
the Certificates, see "Global Clearance and Settlement and Tax Documentation
Procedures-Certain U.S. Federal Income Tax Documentation Requirements" in Annex
I hereto.
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between Clearstream Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
S-61
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and, directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depository; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system, if the transaction
meets its settlement requirements, will deliver instructions to the Relevant
Depository 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 which is a New York-chartered limited purpose trust company, performs
services for its DTC 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 of
DTC, as in effect from time to time.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, was
incorporated in 1970 as a limited company under Luxembourg law. Clearstream is
owned by banks, securities dealers and financial institutions, and currently has
about 100 shareholders, including U.S. financial institutions or their
subsidiaries. No single entity may own more than five percent of Clearstream's
stock.
Clearstream is registered as a bank in Luxembourg, and as such is subject
to regulation by the Institute Monetaire Luxembourgeois, the Luxembourg Monetary
Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers 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 the Euroclear Operator (as defined below)
in Brussels to facilitate settlement of trades between systems. Clearstream
currently accepts over 70,000 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 3,000 customers located in over 60 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 a
custodial relationship with an account holder of Clearstream.
Euroclear 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
any of 29 currencies, including United States dollars. Euroclear includes
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 the Euroclear Bank S.A/N.V. (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other
S-62
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The 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 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. DTC will be responsible for
crediting the amount of such payments to the accounts of the applicable DTC
Participants in accordance with DTC's normal procedures. Each DTC Participant
will be responsible for disbursing such payments to the Certificate Owners of
the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the Certificate Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Certificate Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede & Co. Distributions with
respect to Certificates held through Clearstream or Euroclear will he 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 Depository. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
SEE "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS REMICS-TAXATION OF CERTAIN
FOREIGN INVESTORS" IN THE PROSPECTUS. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a Certificate Owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such 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 Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Pooling and Servicing Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such 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 Depository to effect such actions on its
behalf through DTC. DTC may take actions, at the direction of the related DTC
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 Certificate Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC or its nominee,
only if (a) DTC or the Depositor 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 is unable to locate a qualified successor, (b) the Depositor, at its
sole option, with the consent of the Trustee, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Default (as
defined in the Pooling and Servicing Agreement), Certificate Owners having
percentage interests aggregating not less than 51% of the Book-Entry
Certificates advise the Trustee and DTC through the Financial Intermediaries and
the DTC
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Participants in writing that the continuation of a book-entry system through DTC
(or a successor thereto) is no longer in the best interests of Certificate
Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to cause DTC to notify all
Certificate Owners of the occurrence of such event and the availability through
DTC of Definitive Certificates. Upon surrender by DTC of the global certificate
or certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Pooling and Servicing Agreement.
In the event any Definitive Certificates are issued, surrender of such
Definitive Certificates shall occur at the office designated from time to time
for such purposes by the certificate registrar. As of the Closing Date, the
certificate registrar designates its offices located at 1 Bank One Plaza, Mail
Suite IL1-0126, Chicago, Illinois 60670, and at 55 Water Street, 15th Floor, New
York, New York 10041 for this purpose.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among DTC
Participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
None of the Depositor, the Servicer, the Master Servicer, the Securities
Administrator or the Trustee will have any responsibility for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of the Book-Entry Certificates held by Cede & Co., as nominee for DTC,
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests or any transfers thereof.
PASS-THROUGH RATES
The pass-through rate (the "Pass-Through Rate") on the Class A-1
Certificates will be a rate per annum equal to the lesser of (i) One-Month LIBOR
plus 0.31% in the case of each Distribution Date through and including the
Distribution Date on which the aggregate principal balance of the Mortgage Loans
(and properties acquired in respect thereof) remaining in the trust fund is
reduced to less than 10% of the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date (the "Optional Termination Date"), or One-Month
LIBOR plus 0.62%, in the case of any Distribution Date thereafter and (ii) the
applicable Net WAC Pass-Through Rate for the Distribution Date.
The Pass-Through Rate on the Class A-2 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 0.39% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 0.78%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass-Through Rate for the Distribution Date.
The Pass-Through Rate on the Class M-1 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 0.75% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 1.125%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass-Through Rate for the Distribution Date.
The Pass-Through Rate on the Class M-2 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 1.95% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 2.925%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass-Through Rate for the Distribution Date.
The Pass-Through Rate on the Class M-3 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 2.60% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 3.90%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass-Through Rate for the Distribution Date.
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The Pass-Through Rate on the Class M-4 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 3.75% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 5.625%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass-Through Rate for the Distribution Date.
GLOSSARY
"ADMINISTRATION FEE RATE": With respect to each Mortgage Loan, the
Administration Fee Rate is equal to the sum of (i) the Master Servicer Fee Rate,
(ii) the Servicing Fee Rate, (iii) the rate at which the fee payable to the
Credit Risk Manager is calculated and (iv) the rate at which the premium payable
to MGIC is calculated, if applicable.
"AVAILABLE DISTRIBUTION AMOUNT": The Available Distribution Amount for any
Distribution Date is equal to the sum, net of amounts payable or reimbursable
therefrom to the Servicer, the Master Servicer, the Securities Administrator,
the Custodian or the Trustee, of an amount equal to (i) the aggregate amount of
scheduled monthly payments on the Mortgage Loans due on the related Due Date and
received on or prior to the related Determination Date; (ii) unscheduled
payments in respect of the Mortgage Loans (including prepayments, compensating
interest payments, insurance proceeds, liquidation proceeds and proceeds from
repurchases of and substitutions for the Mortgage Loans occurring during the
Prepayment Period) and (iii) all P&I Advances with respect to the Mortgage Loans
received for the Distribution Date.
"CERTIFICATE PRINCIPAL BALANCE": The Certificate Principal Balance of a
Class A Certificate or Mezzanine Certificate outstanding at any time represents
the then maximum amount that the holder of such certificate is entitled to
receive as distributions allocable to principal from the cash flow on the
Mortgage Loans and the other assets in the trust fund. The Certificate Principal
Balance of a Class A Certificate or any class of Mezzanine Certificates as of
any date of determination is equal to the initial Certificate Principal Balance
of such certificate reduced by the aggregate of (i) all amounts allocable to
principal previously distributed with respect to that certificate and (ii) any
reductions in the Certificate Principal Balance of such certificate deemed to
have occurred in connection with allocations of Realized Losses in the manner
described in this prospectus supplement. The Certificate Principal Balance of
the Class CE Certificates as of any date of determination is equal to the
excess, if any, of (i) the then aggregate principal balance of the Mortgage
Loans over (ii) the then aggregate Certificate Principal Balance of the Class A
Certificates, the Mezzanine Certificates and the Class P Certificates. The
Certificate Principal Balance of the Class P Certificates is equal to $100.
"CLASS A PRINCIPAL DISTRIBUTION AMOUNT": The Class A Principal Distribution
Amount is an amount equal to the sum of the Class A-1 Principal Distribution
Amount and the Class A-2 Principal Distribution Amount.
"CLASS A-1 ALLOCATION PERCENTAGE": For any Distribution Date is the
percentage equivalent of a fraction, the numerator of which is (x) the Group I
Principal Remittance Amount for such Distribution Date and the denominator of
which is (y) the Principal Remittance Amount for such Distribution Date.
"CLASS A-1 PRINCIPAL DISTRIBUTION AMOUNT": The Class A-1 Principal
Distribution Amount is an amount equal to the excess of (x) the Certificate
Principal Balance of the Class A-1 Certificates immediately prior to the
Distribution Date over (y) the lesser of (A) the product of (i) approximately
81.00% and (ii) the aggregate principal balance of the Group I Mortgage Loans as
of the last day of the related Due Period (after giving effect to scheduled
payments of principal due during the related Due Period, to the extent received
or advanced, and unscheduled collections of principal received during the
related Prepayment Period) and (B) the aggregate principal balance of the Group
I Mortgage Loans as of the last day of the related Due Period (after giving
effect to scheduled payments of principal due during the related Due Period, to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period) minus approximately $1,156,417.
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"CLASS A-2 ALLOCATION PERCENTAGE": For any Distribution Date is the
percentage equivalent of a fraction, the numerator of which is (x) the Group II
Principal Remittance Amount for such Distribution Date and the denominator of
which is (y) the Principal Remittance Amount for such Distribution Date.
"CLASS A-2 PRINCIPAL DISTRIBUTION AMOUNT": The Class A-2 Principal
Distribution Amount is an amount equal to the excess of (x) the Certificate
Principal Balance of the Class A-2 Certificates immediately prior to the
Distribution Date over (y) the lesser of (A) the product of (i) approximately
81.00% and (ii) the aggregate principal balance of the Group II Mortgage Loans
as of the last day of the related Due Period (after giving effect to scheduled
payments of principal due during the related Due Period, to the extent received
or advanced, and unscheduled collections of principal received during the
related Prepayment Period) and (B) the aggregate principal balance of the Group
II Mortgage Loans as of the last day of the related Due Period (after giving
effect to scheduled payments of principal due during the related Due Period, to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period) minus approximately $326,059.
"CLASS M-1 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-1 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of (i) the
Certificate Principal Balance of the Class A Certificates after taking into
account the payment of the Class A Principal Distribution Amount on the
Distribution Date and (ii) the Certificate Principal Balance of the Class M-1
Certificates immediately prior to the Distribution Date over (y) the lesser of
(A) the product of (i) approximately 89.00% and (ii) the aggregate principal
balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) and (B) the aggregate
principal balance of the Mortgage Loans as of the last day of the related Due
Period (after giving effect to scheduled payments of principal due during the
related Due Period, to the extent received or advanced, and unscheduled
collections of principal received during the related Prepayment Period) minus
approximately $1,482,476.
"CLASS M-2 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-2 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of (i) the
Certificate Principal Balance of the Class A Certificates after taking into
account the payment of the Class A Principal Distribution Amount on the
Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date and (iii) the Certificate Principal
Balance of the Class M-2 Certificates immediately prior to the Distribution Date
over (y) the lesser of (A) the product of (i) approximately 95.50% and (ii) the
aggregate principal balance of the Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus approximately $1,482,476.
"CLASS M-3 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-3 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of (i) the
Certificate Principal Balance of the Class A Certificates after taking into
account the payment of the Class A Principal Distribution Amount on the
Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date, (iii) the Certificate Principal
Balance of the Class M-2 Certificates after taking into account the payment of
the Class M-2 Principal Distribution Amount on the Distribution Date and (iv)
the Certificate Principal Balance of the Class M-3 Certificates immediately
prior to the Distribution Date over (y) the lesser of (A) the product of (i)
approximately 97.50% and (ii) the aggregate principal balance of the Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related
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Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) and (B) the aggregate
principal balance of the Mortgage Loans as of the last day of the related Due
Period (after giving effect to scheduled payments of principal due during the
related Due Period, to the extent received or advanced, and unscheduled
collections of principal received during the related Prepayment Period) minus
approximately $1,482,476.
"CLASS M-4 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-4 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of (i) the
Certificate Principal Balance of the Class A Certificates after taking into
account the payment of the Class A Principal Distribution Amount on the
Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date, (iii) the Certificate Principal
Balance of the Class M-2 Certificates after taking into account the payment of
the Class M-2 Principal Distribution Amount on the Distribution Date, (iv) the
Certificate Principal Balance of the Class M-3 Certificates after taking into
account the payment of the Class M-3 Principal Distribution Amount on the
Distribution Date and (v) the Certificate Principal Balance of the Class M-4
Certificates immediately prior to the Distribution Date over (y) the lesser of
(A) the product of (i) approximately 99.00% and (ii) the aggregate principal
balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) and (B) the aggregate
principal balance of the Mortgage Loans as of the last day of the related Due
Period (after giving effect to scheduled payments of principal due during the
related Due Period, to the extent received or advanced, and unscheduled
collections of principal received during the related Prepayment Period) minus
approximately $1,482,476.
"CREDIT ENHANCEMENT PERCENTAGE": The Credit Enhancement Percentage for any
Distribution Date is the percentage obtained by dividing (x) the aggregate
Certificate Principal Balance of the Subordinate Certificates by (y) the
aggregate principal balance of the Mortgage Loans, calculated after taking into
account distributions of principal on the Mortgage Loans and distribution of the
Principal Distribution Amount to the holders of the certificates then entitled
to distributions of principal on the Distribution Date.
"DETERMINATION DATE": The Determination Date with respect to any
Distribution Date will be the 15th day of the calendar month in which such
Distribution Date occurs or, if such 15th day is not a business day, the
business day immediately preceding such 15th day.
"DUE PERIOD": The Due Period with respect to any Distribution Date
commences on the second day of the month immediately preceding the month in
which the Distribution Date occurs and ends on the first day of the month in
which the Distribution Date occurs.
"EXPENSE ADJUSTED MORTGAGE RATE": The Expense Adjusted Mortgage Rate on any
Mortgage Loan is equal to the then applicable Mortgage Rate on the Mortgage Loan
minus the Administration Fee Rate.
"EXTRA PRINCIPAL DISTRIBUTION AMOUNT": The Extra Principal Distribution
Amount for any Distribution Date will be the lesser of (i) the Net Monthly
Excess Cashflow for such Distribution Date and (ii) the Overcollateralization
Increase Amount.
"GROUP I INTEREST REMITTANCE AMOUNT": The Group I Interest Remittance
Amount for any Distribution Date is that portion of the Available Distribution
Amount for such Distribution Date that represents interest received or advanced
on the Group I Mortgage Loans minus any amounts payable or reimbursable
therefrom to the Servicer, the Trustee, the Custodian, the Master Servicer or
the Securities Administrator.
"GROUP I PRINCIPAL DISTRIBUTION AMOUNT": The Group I Principal Distribution
Amount for any Distribution Date will be the sum of (i) the principal portion of
all scheduled monthly payments on the Group I Mortgage Loans due during the
related Due Period, whether or not received on or prior to the related
Determination Date; (ii) the principal portion of all proceeds received in
respect of the repurchase of a Group I Mortgage Loan (or, in the case of a
substitution, certain amounts representing a principal
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adjustment) as required by the Pooling and Servicing Agreement during the
related Prepayment Period; (iii) the principal portion of all other unscheduled
collections, including insurance proceeds, liquidation proceeds and all full and
partial principal prepayments, received during the related Prepayment Period, to
the extent applied as recoveries of principal on the Group I Mortgage Loans and
(iv) the Class A-1 Allocation Percentage of the amount of any
Overcollateralization Increase Amount for such Distribution Date MINUS (v) the
Class A-1 Allocation Percentage of the amount of any Overcollateralization
Reduction Amount for such Distribution Date minus any amounts payable or
reimbursable therefrom to the Servicer, the Trustee, the Custodian, the Master
Servicer or the Securities Administrator. In no event will the Group I Principal
Distribution Amount with respect to any Distribution Date be (x) less than zero
or (y) greater than the then outstanding aggregate Certificate Principal Balance
of the Class A Certificates and the Mezzanine Certificates.
"GROUP I PRINCIPAL REMITTANCE AMOUNT": The Group I Principal Remittance
Amount for any Distribution Date will be the sum of the amounts described in
clauses (i) through (iii) of the definition of Group I Principal Distribution
Amount net of any amounts payable or reimbursable therefrom to the Servicer, the
Trustee, the Custodian, the Master Servicer or the Securities Administrator.
"GROUP II INTEREST REMITTANCE AMOUNT": The Group II Interest Remittance
Amount for any Distribution Date is that portion of the Available Distribution
Amount for such Distribution Date that represents interest received or advanced
on the Group II Mortgage Loans minus any amounts payable or reimbursable to the
Servicer, the Trustee, the Custodian, the Master Servicer or the Securities
Administrator.
"GROUP II PRINCIPAL DISTRIBUTION AMOUNT": The Group II Principal
Distribution Amount for any Distribution Date will be the sum of (i) the
principal portion of all scheduled monthly payments on the Group II Mortgage
Loans due during the related Due Period, whether or not received on or prior to
the related Determination Date; (ii) the principal portion of all proceeds
received in respect of the repurchase of a Group II Mortgage Loan (or, in the
case of a substitution, certain amounts representing a principal adjustment) as
required by the Pooling and Servicing Agreement during the related Prepayment
Period; (iii) the principal portion of all other unscheduled collections,
including insurance proceeds, liquidation proceeds and all full and partial
principal prepayments, received during the related Prepayment Period, to the
extent applied as recoveries of principal on the Group II Mortgage Loans and
(iv) the Class A-2 Allocation Percentage of the amount of any
Overcollateralization Increase Amount for such Distribution Date MINUS (v) the
Class A-2 Allocation Percentage of the amount of any Overcollateralization
Reduction Amount for such Distribution Date minus any amounts payable or
reimbursable therefrom to the Servicer, the Trustee, the Custodian, the Master
Servicer or the Securities Administrator. In no event will the Group II
Principal Distribution Amount with respect to any Distribution Date be (x) less
than zero or (y) greater than the then outstanding aggregate Certificate
Principal Balance of the Class A Certificates and the Mezzanine Certificates.
"GROUP II PRINCIPAL REMITTANCE AMOUNT": The Group II Principal Remittance
Amount for any Distribution Date will be the sum of the amounts described in
clauses (i) through (iii) of the definition of Group II Principal Distribution
Amount net of any amounts payable or reimbursable therefrom to the Servicer, the
Trustee, the Custodian, the Master Servicer or the Securities Administrator.
"INTEREST ACCRUAL PERIOD": The Interest Accrual Period for the Class A
Certificates and the Mezzanine Certificates and any Distribution Date is the
period commencing on the Distribution Date of the month immediately preceding
the month in which such Distribution Date occurs (or, in the case of the first
period, commencing on the Closing Date), and ending on the day preceding such
Distribution Date. All distributions of interest on such certificates will be
based on a 360-day year and the actual number of days in the applicable Interest
Accrual Period.
"INTEREST CARRY FORWARD AMOUNT": The Interest Carry Forward Amount with
respect to any class of Offered Certificates and any Distribution Date is equal
to the amount, if any, by which the Interest Distribution Amount for that class
of certificates for the immediately preceding Distribution Date exceeded
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the actual amount distributed on the certificates in respect of interest on the
immediately preceding Distribution Date, together with any Interest Carry
Forward Amount with respect to the certificates remaining unpaid from the
previous Distribution Date, plus interest accrued thereon at the related
Pass-Through Rate on the certificates for the most recently ended Interest
Accrual Period.
"INTEREST DISTRIBUTION AMOUNT": The Interest Distribution Amount for the
Offered Certificates of any class on any Distribution Date is equal to interest
accrued during the related Interest Accrual Period on the Certificate Principal
Balance or Notional Balance of that class immediately prior to the Distribution
Date at the Pass-Through Rate for that class reduced (to not less than zero), in
the case of each such class, by the allocable share, if any, for that class of
Prepayment Interest Shortfalls to the extent not covered by Compensating
Interest paid by the Master Servicer or the Servicer and shortfalls resulting
from the application of the Relief Act or similar state or local laws.
"INTEREST REMITTANCE AMOUNT": The Interest Remittance Amount for any
Distribution Date is the sum of the Group I Interest Remittance Amount and the
Group II Interest Remittance Amount.
"NET MONTHLY EXCESS CASHFLOW": The Net Monthly Excess Cashflow for any
Distribution Date is equal to the sum of (i) any Overcollateralization Reduction
Amount and (ii) the excess of (x) the Available Distribution Amount for the
Distribution Date over (y) the sum for the Distribution Date of the aggregate of
the Senior Interest Distribution Amounts payable to the holders of the Class A
Certificates, the aggregate of the Interest Distribution Amounts payable to the
holders of the Mezzanine Certificates and the Principal Remittance Amount.
"NET WAC PASS-THROUGH RATE": The Net WAC Pass-Through Rate for any
Distribution Date and
(A) the Class A-1 Certificates, is a rate per annum (adjusted for the actual
number of days elapsed in the Interest Accrual Period) equal to the weighted
average of the Expense Adjusted Mortgage Rates on the then outstanding Group I
Mortgage Loans, weighted based on their Scheduled Principal Balances as of the
first day of the calendar month preceding the month in which the Distribution
Date occurs.
(B) the Class A-2 Certificates, is a rate per annum (adjusted for the actual
number of days elapsed in the Interest Accrual Period) equal to the weighted
average of the Expense Adjusted Mortgage Rates on the then outstanding Group II
Mortgage Loans, weighted based on their Scheduled Principal Balances as of the
first day of the calendar month preceding the month in which the Distribution
Date occurs.
(C) the Mezzanine Certificates, is a rate per annum (adjusted for the actual
number of days elapsed in the Interest Accrual Period) equal to the weighted
average of the Expense Adjusted Mortgage Rates of (i) the Group I Mortgage Loans
and (ii) the Group II Mortgage Loans, weighted in proportion to the results of
subtracting from the aggregate principal balance of each loan group the
Certificate Principal Balance of the related Class A Certificates.
"NET WAC RATE CARRYOVER AMOUNT": With respect to the Class A Certificates
and the Mezzanine Certificates and any Distribution Date on which the
Pass-Through Rate is limited to the applicable Net WAC Pass-Through Rate, an
amount equal to the sum of (i) the excess of (x) the amount of interest the
Class A Certificates or any Class of Mezzanine Certificates would have been
entitled to receive on such Distribution Date if the applicable Net WAC
Pass-Through Rate would not have been applicable to such Certificates on such
Distribution Date over (y) the amount of interest paid on such Distribution Date
at the applicable Net WAC Pass- Through Rate plus (ii) the related Net WAC Rate
Carryover Amount for the previous Distribution Date not previously distributed
together with interest thereon at a rate equal to the Pass-Through Rate for such
class of Certificates for the most recently ended Interest Accrual Period.
"OVERCOLLATERALIZATION AMOUNT": The Overcollateralization Amount as of any
Distribution Date is equal to the amount by which aggregate outstanding
principal balance of the Mortgage Loans immediately following the Distribution
Date exceeds the sum of the Certificate Principal Balances of the
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Class A Certificates, the Mezzanine Certificates and the Class P Certificates
after taking into account payment of the Principal Remittance Amount on the
related Distribution Date.
"OVERCOLLATERALIZATION INCREASE AMOUNT": An Overcollateralization Increase
Amount with respect to the Class A Certificates and the Mezzanine Certificates
and any Distribution Date is any amount of Net Monthly Excess Cashflow actually
applied as an accelerated payment of principal to the extent the Required
Overcollateralization Amount exceeds the Overcollateralization Amount.
"OVERCOLLATERALIZATION REDUCTION AMOUNT": An Overcollateralization
Reduction Amount for any Distribution Date is the amount by which the
Overcollateralization Amount exceeds the Required Overcollateralization Amount
limited to the Principal Remittance Amount. The Overcollateralization Reduction
Amount is equal to zero when a Trigger Event is in effect.
"PREPAYMENT PERIOD": The Prepayment Period with respect to any Distribution
Date is the period commencing on the 16th day of the month prior to the month in
which the related Distribution Date occurs and ending on the 15th day of the
month in which such Distribution Date occurs.
"PRINCIPAL DISTRIBUTION AMOUNT": The Principal Distribution Amount for any
Distribution Date is the sum of the Group I Principal Distribution Amount and
the Group II Principal Distribution Amount.
"PRINCIPAL REMITTANCE AMOUNT": The Principal Remittance Amount for any
Distribution Date is the sum of the Group I Principal Remittance Amount and the
Group II Principal Remittance Amount.
"REQUIRED OVERCOLLATERALIZATION AMOUNT": Shall mean the amount described in
the Pooling and Servicing Agreement which initially shall be approximately
$1,482,476.
"SCHEDULED PRINCIPAL BALANCE": The Scheduled Principal Balance of any
Mortgage Loan as of any date of determination is equal to the principal balance
of the Mortgage Loan as of the Cut-off Date, after application of all scheduled
principal payments due on or before the Cut-off Date, whether or not received,
reduced by (i) the principal portion of all monthly payments due on or before
the date of determination, whether or not received; (ii) all amounts allocable
to unscheduled principal that were received prior to the calendar month in which
the date of determination occurs and (iii) any Bankruptcy Loss occurring as a
result of a Deficient Valuation that was incurred prior to the calendar month in
which the date of determination occurs.
"SENIOR INTEREST DISTRIBUTION AMOUNT": The Senior Interest Distribution
Amount for any Distribution Date is equal to the Interest Distribution Amount
for such Distribution Date for the Class A Certificates and the Interest Carry
Forward Amount, if any, for such Distribution Date for the Class A Certificates.
"STEPDOWN DATE": The Stepdown Date is the earlier to occur of (i) the later
to occur of (x) the Distribution Date occurring in August 2006 and (y) the first
Distribution Date on which the Credit Enhancement Percentage calculated for this
purpose only after taking into account distributions of principal on the
Mortgage Loans, but prior to any distribution of the Principal Distribution
Amount to the holders of the certificates then entitled to distributions of
principal on the Distribution Date), is greater than or equal to approximately
19.00% and (ii) the first Distribution Date on which the Certificate Principal
Balance of the Class A Certificates has been reduced to zero.
"TRIGGER EVENT": With respect to any Distribution Date, a Trigger Event is
in effect if (x) the percentage obtained by dividing (i) the principal amount of
Mortgage Loans delinquent 60 days or more (including Mortgage Loans in
foreclosure and REO) by (ii) the aggregate principal balance of the Mortgage
Loans, in each case, as of the last day of the previous calendar month exceeds
16.50% or (y) the aggregate amount of Realized Losses incurred since the Cut-off
Date through the last day of the related Due Period divided by the aggregate
principal balance of the Mortgage Loans as of the Cut-off exceeds the applicable
percentages set forth below with respect to such Distribution Date:
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DISTRIBUTION DATE PERCENTAGE
August 2006 to July 2007 1.60%, plus 1/12 of 0.50% for each month
after August 2006
August 2007 to July 2008 2.10%, plus 1/12 of 0.30% for each month
after August 2007
August 2008 to July 2009 2.40%, plus 1/12 of 0.25% for each month
after August 2008
August 2009 and thereafter 2.65%
INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES
Holders of the Offered Certificates will be entitled to receive on each
Distribution Date, interest distributions in an aggregate amount equal to
interest accrued during the related Interest Accrual Period on the Certificate
Principal Balances thereof at the then-applicable Pass-Through Rates thereon, in
the priorities set forth below.
(A) On each Distribution Date, the Group I Interest Remittance Amount will
be distributed in the following order of priority.
FIRST, to the holders of the Class A-1 Certificates, the Senior
Interest Distribution Amount allocable to the Class A-1 Certificates; and
SECOND, to the holders of the Class A-2 Certificates, the Senior
Interest Distribution Amount for the Class A-2 Certificates, to the extent
remaining unpaid after the distributions of the Group II Interest Remittance
Amount as set forth in clause (B) below.
(B) On each Distribution Date, the Group II Interest Remittance Amount
will be distributed in the following order of priority:
FIRST, to the holders of the Class A-2 Certificates, the Senior
Interest Distribution Amount allocable to the Class A-2 Certificates; and
SECOND, to the holders of the Class A-1 Certificates, the Senior
Interest Distribution Amount for the Class A-1 Certificates, to the extent
remaining unpaid after the distributions of the Group I Interest Remittance
Amount as set forth in clause (A) above.
(C) On each Distribution Date, following the distributions of interest to
the holders of the Class A Certificates, any Group I Interest Remittance Amount
and any Group II Interest Remittance Amount remaining will be distributed in the
following order of priority:
FIRST, to the holders of the Class M-1 Certificates, the Interest
Distribution Amount allocable to the Class M-1 Certificates;
SECOND, to the holders of the Class M-2 Certificates, the Interest
Distribution Amount allocable to the Class M-2 Certificates;
THIRD, to the holders of the Class M-3 Certificates, the Interest
Distribution Amount allocable to the Class M-3 Certificates; and
FOURTH, to the holders of the Class M-4 Certificates, the Interest
Distribution Amount allocable to the Class M-4 Certificates.
On any Distribution Date, any shortfalls resulting from the application of
the Relief Act or any similar state or local law and any Prepayment Interest
Shortfalls to the extent not covered by Compensating Interest paid by the
Servicer or the Master Servicer will be allocated FIRST, to Net Monthly Excess
Cashflow according to the priorities set forth under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement,
SECOND, to the Class M-4
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Certificates, THIRD, to the Class M-3 Certificates, FOURTH, to the Class M-2
Certificates, FIFTH, to the Class M-1 Certificates, and SIXTH, to the Class A
Certificates on a PRO RATA basis based on their respective Senior Interest
Distribution Amounts before such reduction. The holders of the Offered
Certificates will be entitled to reimbursement for any of these interest
shortfalls, subject to available funds, in the priorities described under
"--OVERCOLLATERALIZATION PROVISIONS" in this prospectus supplement.
With respect to any Distribution Date, to the extent that the aggregate
Interest Distribution Amount exceeds the Interest Remittance Amount, a shortfall
in interest distributions on one or more classes of Offered Certificates will
result and payments of Interest Carry Forward Amounts to the Offered
Certificates will be made. The Interest Carry Forward Amount with respect to the
Class A Certificates, if any, is distributed as part of the Senior Interest
Distribution Amount on each Distribution Date. The Interest Carry Forward Amount
with respect to the Mezzanine Certificates, if any, may be carried forward to
succeeding Distribution Dates and, subject to available funds, will be
distributed in the manner set forth in "--OVERCOLLATERALIZATION PROVISIONS" in
this prospectus supplement.
Except as otherwise described in this prospectus supplement, on any
Distribution Date, distributions of the Interest Distribution Amount for a class
of certificates will be made in respect of that class of certificates, to the
extent provided in this prospectus supplement, on a PARI PASSU basis, based on
the Certificate Principal Balance of the certificates of each class.
CALCULATION OF ONE-MONTH LIBOR
With respect to each Interest Accrual Period (other than the initial
Interest Accrual Period) and the Class A Certificates and the Mezzanine
Certificates, on the second business day preceding such Interest Accrual Period,
(each such date, an "Interest Determination Date"), the Securities Administrator
will determine One-Month LIBOR for such Interest Accrual Period. With respect to
the initial Interest Accrual Period, on the Closing Date, the Securities
Administrator will determine One-Month LIBOR for such Interest Accrual Period
based on information available on the second business day preceding the Closing
Date (the related "Interest Determination Date"). "One Month LIBOR" means, as of
any Interest Determination Date, the London interbank offered rate for one-month
U.S. dollar deposits which appears on Telerate Page 3750 (as defined herein) as
of 11:00 a.m. (London time) on such date. If such rate does not appear on
Telerate Page 3750, the rate for that day will be determined on the basis of the
offered rates of the Reference Banks (as defined herein) for one-month U.S.
dollar deposits, as of 11:00 a.m. (London time) on such Interest Determination
Date. The Securities Administrator will request the principal London office of
each of the Reference Banks to provide a quotation of its rate. If on such
Interest Determination Date two or more Reference Banks provide such offered
quotations, One-Month LIBOR for the related Interest Accrual Period shall be the
arithmetic mean of such offered quotations (rounded upwards if necessary to the
nearest whole multiple of 0.0625%). If on such Interest Determination Date fewer
than two Reference Banks provide such offered quotations, One-Month LIBOR for
the related Interest Accrual Period shall be the higher of (x) One-Month LIBOR
as determined on the previous Interest Determination Date and (y) the Reserve
Interest Rate (as defined herein).
As used in this section, "business day" means a day on which banks are open
for dealing in foreign currency and exchange in London; "Telerate Page 3750"
means the display page currently so designated on the Dow Jones Telerate Capital
Markets Report (or such other page as may replace that page on that service for
the purpose of displaying comparable rates or prices); "Reference Banks" means
leading banks selected by the Securities Administrator and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market (i)
with an established place of business in London, (ii) which have been designated
as such by the Securities Administrator and (iii) not controlling, controlled
by, or under common control with, the Depositor or the Securities Administrator,
and "Reserve Interest Rate" shall be the rate per annum that the Securities
Administrator determines to be either (i) the arithmetic mean (rounded upwards
if necessary to the nearest whole multiple of 0.0625%) of the one-month U.S.
dollar lending rates which New York City banks selected by the Securities
Administrator are quoting on the relevant Interest Determination Date to the
principal London offices of leading banks in the London interbank market or (ii)
in the event that the Securities Administrator can determine no such arithmetic
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mean, the lowest one-month U.S. dollar lending rate which New York City banks
selected by the Securities Administrator are quoting on such Interest
Determination Date to leading European banks.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Securities Administrator and the Securities Administrator's calculation of
the rate of interest applicable to the Class A Certificates and the Mezzanine
Certificates for the related Interest Accrual Period shall (in the absence of
manifest error) be final and binding.
PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES AND MEZZANINE CERTIFICATES
On each Distribution Date, the Principal Distribution Amount will be
distributed to the holders of the Class A Certificates and Mezzanine
Certificates then entitled to principal distributions. In no event will the
Principal Distribution Amount with respect to any Distribution Date be (i) less
than zero or (ii) greater than the then outstanding aggregate Certificate
Principal Balance of the Class A Certificates and Mezzanine Certificates.
(A) On each Distribution Date (i) prior to the Stepdown Date or (ii) on
which a Trigger Event is in effect, distributions in respect of principal to the
extent of the Group I Principal Distribution Amount will be made in the
following amounts and order of priority:
FIRST, to the holders of the Class A-1 Certificates, until the
Certificate Principal Balance of the Class A-1 Certificates has been reduced to
zero; and
SECOND, to the holders of the Class A-2 Certificates, after taking
into account the distribution of the Group II Principal Distribution Amount as
described below, until the Certificate Principal Balance thereof has been
reduced to zero.
(B) On each Distribution Date (i) prior to the Stepdown Date or (ii) on
which a Trigger Event is in effect, distributions in respect of principal to the
extent of the Group II Principal Distribution Amount will be made in the
following amounts and order of priority:
FIRST, to the holders of the Class A-2 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and
SECOND, to the holders of the Class A-1 Certificates, after taking
into account the distribution of the Group I Principal Distribution Amount as
described above, until the Certificate Principal Balance thereof has been
reduced to zero.
(C) On each Distribution Date (i) prior to the Stepdown Date or (ii) on
which a Trigger Event is in effect, distributions in respect of principal to the
extent of the sum of the Group I Principal Distribution Amount and the Group II
Principal Distribution Amount remaining undistributed for such Distribution Date
will be made in the following amounts and order of priority:
FIRST, to the holders of the Class M-1 Certificates, until the
Certificate Principal Balance of the Class M-1 Certificates has been reduced to
zero;
SECOND, to the holders of the Class M-2 Certificates, until the
Certificate Principal Balance of the Class M-2 Certificates has been reduced to
zero;
THIRD, to the holders of the Class M-3 Certificates, until the
Certificate Principal Balance of the Class M-3 Certificates has been reduced to
zero; and
FOURTH, to the holders of the Class M-4 Certificates, until the
Certificate Principal Balance of the Class M-4 Certificates has been reduced to
zero.
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(D) On each Distribution Date (i) on or after the Stepdown Date and (ii)
on which a Trigger Event is not in effect, distributions in respect of principal
to the extent of the Group I Principal Distribution Amount will be made in the
following amounts and order of priority:
FIRST, to the holders of the Class A-1 Certificates, the Class A-1
Principal Distribution Amount, until the Certificate Principal Balance of the
Class A-1 Certificates has been reduced to zero;
SECOND, to the extent of the portion, if any, of the Class A-1
Principal Distribution Amount remaining undistributed pursuant to clause FIRST
above, to the holders of the Class A-2 Certificates, after taking into account
the distribution of the Group II Principal Distribution Amount, as described
herein, until the Certificate Principal Balance thereof has been reduced to
zero; and
THIRD, to the holders of the Class A-2 Certificates, after taking into
account the distribution of the Group II Principal Distribution Amount, as
described herein, up to an amount equal to the amount, if any, of the Class A-2
Principal Distribution Amount remaining unpaid on such Distribution Date, until
the Certificate Principal Balance thereof has been reduced to zero.
(E) On each Distribution Date (i) on or after the Stepdown Date and (ii)
on which a Trigger Event is not in effect, distributions in respect of principal
to the extent of the Group II Principal Distribution Amount will be made in the
following amounts and order of priority:
FIRST, to the holders of the Class A-2 Certificates, the Class A-2
Principal Distribution Amount, until the Certificate Principal Balance thereof
has been reduced to zero;
SECOND, to the extent of the portion, if any, of the Class A-2
Principal Distribution Amount remaining undistributed pursuant to clause FIRST
above, to the holders of the Class A-1 Certificates, after taking into account
the distribution of the Group I Principal Distribution Amount, as described
herein, until the Certificate Principal Balance thereof has been reduced to
zero; and
THIRD, to the holders of the Class A-1 Certificates, after taking into
account the distribution of the Group I Principal Distribution Amount, as
described herein, up to an amount equal to the amount, if any, of the Class A-1
Principal Distribution Amount remaining unpaid on such Distribution Date until
the Certificate Principal Balance thereof has been reduced to zero.
(F) On each Distribution Date (i) on or after the Stepdown Date and (ii)
on which a Trigger Event is not in effect, distributions in respect of principal
to the extent of the Principal Distribution Amount remaining undistributed for
such Distribution Date will be made in the following amounts and order of
priority:
FIRST, to the holders of the Class M-1 Certificates, the lesser of (x)
the excess of (i) the Principal Distribution Amount over (ii) the amount
distributed to the holders of the Class A Certificates under (D) and (E) above,
and (y) the Class M-1 Principal Distribution Amount, shall be distributed to the
holders of the Class M-1 Certificates, until the Certificate Principal Balance
of the Class M-1 Certificates has been reduced to zero;
SECOND, to the holders of the Class M-2 Certificates, the lesser of
(x) the excess of (i) the Principal Distribution Amount over (ii) the sum of the
amounts distributed to the holders of the Class A Certificates under (D) and (E)
above and to the holders of the Class M-1 Certificates under clause FIRST above,
and (y) the Class M-2 Principal Distribution Amount, shall be distributed to the
holders of the Class M-2 Certificates, until the Certificate Principal Balance
of the Class M-2 Certificates has been reduced to zero;
THIRD, to the holders of the Class M-3 Certificates, the lesser of (x)
the excess of (i) the Principal Distribution Amount over (ii) the sum of the
amounts distributed to the holders of the Class A Certificates under (D) and (E)
above, to the holders of the Class M-1 Certificates under clause FIRST above
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and to the holders of the Class M-2 Certificates under clause SECOND above, and
(y) the Class M-3 Principal Distribution Amount, shall be distributed to the
holders of the Class M-3 Certificates, until the Certificate Principal Balance
of the Class M-3 Certificates has been reduced to zero; and
FOURTH, to the holders of the Class M-4 Certificates, the lesser of
(x) the excess of (i) the Principal Distribution Amount over (ii) the sum of the
amounts distributed to the holders of the Class A Certificates under (D) and (E)
above, to the holders of the Class M-1 Certificates under clause FIRST above, to
the holders of the Class M-2 Certificates under clause SECOND above and to the
holders of the Class M-3 Certificates under clause THIRD above, and (y) the
Class M-4 Principal Distribution Amount, shall be distributed to the holders of
the Class M-4 Certificates, until the Certificate Principal Balance of the Class
M-4 Certificates has been reduced to zero.
The allocation of distributions in respect of principal to the Class A
Certificates on each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event has occurred, will have the effect of accelerating the
amortization of the Class A Certificates while, in the absence of Realized
Losses, increasing the respective percentage interest in the principal balance
of the Mortgage Loans evidenced by the Mezzanine Certificates. Increasing the
respective percentage interest in the trust fund of the Mezzanine Certificates
relative to that of the Class A Certificates is intended to preserve the
availability of the subordination provided by the Mezzanine Certificates.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Class
A Certificates consists of subordination, as described in this section, the MGIC
PMI Policy as described under "The Mortgage Pool--Mortgage Guaranty Insurance
Corporation" in this prospectus supplement and overcollateralization, as
described under "--Overcollateralization Provisions" in this prospectus
supplement.
The rights of the holders of the Subordinate Certificates to receive
distributions will be subordinated, to the extent described in this section, to
the rights of the holders of the Class A Certificates. This subordination is
intended to enhance the likelihood of regular receipt by the holders of the
Class A Certificates of the full amount of their scheduled monthly payments of
interest and principal and to afford holders of the Class A Certificates
protection against Realized Losses.
The protection afforded to the holders of the Class A Certificates by means
of the subordination of the Subordinate Certificates will be accomplished by (i)
the preferential right of the holders of the Class A Certificates to receive on
any Distribution Date, prior to distribution on the Subordinate Certificates,
distributions in respect of interest and principal, subject to available funds
and (ii) if necessary, the right of the holders of the Class A Certificates to
receive future distributions of amounts that would otherwise be payable to the
holders of the Subordinate Certificates.
In addition, (i) the rights of the holders of the Class M-1 Certificates
will be senior to the rights of holders of the Class M-2, Class M-3, Class M-4
and Class CE Certificates, (ii) the rights of the holders of the Class M-2
Certificates will be senior to the rights of the holders of the Class M-3, Class
M-4 and Class CE Certificates, (iii) the rights of the holders of the Class M-3
Certificates will be senior to the rights of the holders of the Class M-4
Certificates and Class CE Certificates and (iv) the rights of the holders of the
Class M-4 Certificates will be senior to the rights of the holders of the Class
CE Certificates. This subordination is intended to enhance the likelihood of
regular receipt by the holders of more senior certificates of distributions in
respect of interest and principal and to afford these holders protection against
Realized Losses.
MORTGAGE GUARANTY INSURANCE CORPORATION
Mortgage Guaranty Insurance Corporation ("MGIC"), a Wisconsin corporation
with its principal offices in Milwaukee, Wisconsin, is a monoline private
mortgage insurance company and a wholly-owned subsidiary of MGIC Investment
Corporation. MGIC is licensed in 50 states and the District of Columbia to
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offer such insurance and is approved as a private mortgage insurer by Fannie Mae
and Freddie Mac. MGIC is rated "AA+" by S&P, "AA+" by Fitch and "Aa2" by Moody's
with respect to its insurer financial strength. The rating agency issuing the
insurer financial strength rating can withdraw or change its rating at any time.
As of March 31, 2003, MGIC reported on a statutory accounting basis, assets of
approximately $5,827,619,000, policyholders' surplus of approximately
$1,444,520,000 and a statutory contingency reserve of approximately
$3,451,076,000. As of March 31, 2003, MGIC reported direct primary insurance in
force of approximately $195.7 billion and direct pool risk in force of
approximately $5.9 billion. An Annual Statement for MGIC for the year ended
December 31, 2002, prepared on the Convention Form prescribed by the National
Association of Insurance Commissioners, is available upon written request to the
Depositor. For further information regarding MGIC, investors are directed to
MGIC Investment Corporation's periodic reports filed with the United States
Securities and Exchange Commission, which are publicly available.
THE MGIC PMI POLICY. Approximately 76.92% of the mortgage loans, by
aggregate principal balance of the Mortgage Loans as of the Cut-off Date, will
be insured by MGIC, pursuant to a primary mortgage insurance policy. This policy
is referred to in this prospectus supplement as the MGIC PMI Policy and the
mortgage loans covered by the MGIC PMI Policy are referred to in this prospectus
supplement as the PMI Mortgage Loans. The insured under the MGIC PMI Policy is
the Trustee. The amount of coverage provided by the MGIC PMI Policy, which is
also referred to below as the "insured percentage of the claim," varies on a
loan-by-loan basis, based upon the original loan-to-value ratio of the mortgage
loan, with the actual coverage amounts ranging from 1% to 48%.
The MGIC PMI Policy is required to remain in force with respect to each PMI
Mortgage Loan until:
o the principal balance of the PMI Mortgage Loan is paid in full;
o the principal balance of the PMI Mortgage Loan has amortized down to a
level that results in a loan-to-value ratio for the mortgage loan of
45% or less, provided, however, that no coverage of any PMI Mortgage
Loan under the MGIC PMI Policy is required where prohibited by
applicable law; or
o any event specified in the MGIC PMI Policy occurs that allows for the
termination of the MGIC PMI Policy by MGIC.
The MGIC PMI Policy may not be assigned or transferred without the prior
written consent of MGIC. MGIC has given consent for the assignment of coverage
on individual loans from the Trustee to the Mortgage Loan Seller or related
Originator in connection with any Mortgage Loan repurchased or substituted for
by the Mortgage Loan Seller or the applicable Originator.
The MGIC PMI Policy generally requires that delinquencies on any PMI
Mortgage Loan must be reported to MGIC within four months of default, and
appropriate proceedings to obtain title to the property securing the PMI
Mortgage Loan must be commenced within six months of default. The MGIC PMI
Policy under which the PMI Mortgage Loans are insured contains provisions
substantially as follows: (i) for the insured to present a claim, the insured
must have acquired, and tendered to MGIC, good and merchantable title to the
property securing the PMI Mortgage Loan, free and clear of all liens and
encumbrances, including, but not limited to, any right of redemption by the
mortgagor unless such acquisition of good and merchantable title is excused
under the terms of the MGIC PMI Policy; (ii) a claim generally includes unpaid
principal, accrued interest to the date of such tender to MGIC by the insured,
and certain expenses; (iii) when a claim is presented MGIC will have the option
of either (A) paying the claim in full, taking title to the property securing
the PMI Mortgage Loan, and arranging for its sale or (B) paying the insured
percentage of the claim and with the insured retaining title to the property
securing the PMI Mortgage Loan; (iv) claims generally must be filed within 60
days after the insured has acquired good and merchantable title to the property
securing the PMI Mortgage Loan; and (v) a claim generally must be paid within
180 days after the claim is filed by the insured.
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No payment for a loss will be made under the MGIC PMI Policy unless the
property securing the PMI Mortgage Loan is in the same physical condition as
when the PMI Mortgage Loan was originally insured, except for reasonable wear
and tear, and unless premiums on the standard homeowner's insurance policy, real
estate taxes and foreclosure protection and preservation expenses have been
advanced by or on behalf of the insured.
Unless approved in writing by MGIC, the Servicer may not make any change in
the terms of a PMI Mortgage Loan, including the borrowed amount, interest rate,
term or amortization schedule of the PMI Mortgage Loan, except as specifically
permitted by the terms of the PMI Mortgage Loan; nor make any change in the
property or other collateral securing the PMI Mortgage Loan; nor release any
mortgagor under the PMI Mortgage Loan from liability. If a PMI Mortgage Loan is
assumed with the insured's approval, MGIC's liability for coverage of the PMI
Mortgage Loan under the MGIC PMI Policy generally will terminate as of the date
of such assumption, unless MGIC has approved the assumption in writing.
The MGIC PMI Policy specifically excludes coverage of:
o any claim resulting from a default existing at the inception of
coverage or occurring after lapse or cancellation of coverage;
o certain claims where an environmental condition existed at the
inception of coverage, whether or not known by the person or persons
submitting the application for coverage of the PMI Mortgage Loan;
o any claim involving a PMI Mortgage Loan which is for the purchase of
the mortgaged property, and for which the mortgagor did not make a
down payment as described in the application for coverage;
o any claim, if the mortgage, deed of trust or other similar instrument
did not provide the insured at origination with a first lien on the
property securing the PMI Mortgage Loan;
o certain claims involving or arising out of any breach by the insured
of its obligations under, or its failure to comply with the terms of,
the MGIC PMI Policy or of its obligations as imposed by operation of
law;
o any claim when, as of the date of such claim, construction of the
property securing the PMI Mortgage Loan is not completed in accordance
with the construction plan and specifications upon which the appraisal
of the property at origination of the PMI Mortgage Loan was based;
o certain claims where fraud or misrepresentation by the insured
materially contributed to the default resulting in such claim or
increased the loss;
o certain claims where negligence by the insured was material to either
the acceptance of the risk or the hazard assumed by MGIC materially
contributed to the default resulting in such claim or increased the
loss;
o certain claims occurring when the Servicer, at time of default or
thereafter, is not approved in writing or in a list published by MGIC;
and
o certain claims where, at any time after the inception of coverage,
physical damage to the property securing the PMI Mortgage Loan occurs
or manifests itself.
In issuing the MGIC PMI Policy, MGIC has relied upon certain information
and data regarding the PMI Mortgage Loans furnished to MGIC by the Depositor.
The MGIC PMI Policy will not insure against a loss sustained by reason of a
default arising from or involving certain matters, including (i) fraud or
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negligence in the origination or servicing of the PMI Mortgage Loans, including,
but not limited to, misrepresentation by the borrower, lender, or certain other
persons involved in the origination of the PMI Mortgage Loan or the application
for insurance; (ii) failure to construct a property securing a PMI Mortgage Loan
in accordance with specified plans; or (iii) physical damage to a property
securing a PMI Mortgage Loan.
The preceding description of the MGIC PMI Policy is only a brief outline
and does not purport to summarize or describe all of the provisions, terms and
conditions of the MGIC PMI Policy. For a more complete description of these
provisions, terms and conditions, reference is made to the MGIC PMI Policy, a
copy of which is available upon request from the Trustee.
OVERCOLLATERALIZATION PROVISIONS
The weighted average Expense Adjusted Mortgage Rate for the Mortgage Loans
is expected to be higher than the weighted average of the Pass-Through Rates on
the Offered Certificates, thus generating excess interest collections which, in
the absence of Realized Losses, will not be necessary to fund interest
distributions on the Offered Certificates. Additional excess interest will be
generated by the portion of the Mortgage Pool represented by the
Overcollateralization Amount. The Pooling and Servicing Agreement requires that,
on each Distribution Date, the Net Monthly Excess Cashflow, if any, be applied
on the related Distribution Date as an accelerated payment of principal on the
class or classes of Offered Certificates then entitled to receive distributions
in respect of principal, but only to the limited extent described in this
section.
With respect to any Distribution Date, any Net Monthly Excess Cashflow (or,
in the case of clause FIRST below, the Net Monthly Excess Cashflow exclusive of
any Overcollateralization Reduction Amount) shall be paid as follows:
FIRST, to the holders of the class or classes of certificates then entitled
to receive distributions in respect of principal, in an amount equal to any
Extra Principal Distribution Amount, payable to such holders in accordance with
the priorities set forth under "--ALLOCATION OF EXTRA PRINCIPAL DISTRIBUTION
AMOUNT" below;
SECOND, to the holders of the Class M-1 Certificates, in an amount equal to
the Interest Carry Forward Amount allocable to the Class M-1 Certificates;
THIRD, to the holders of the Class M-2 Certificates, in an amount equal to
the Interest Carry Forward Amount allocable to the Class M-2 Certificates;
FOURTH, to the holders of the Class M-3 Certificates, in an amount equal to
the Interest Carry Forward Amount allocable to the Class M-3 Certificates;
FIFTH, to the holders of the Class M-4 Certificates, in an amount equal to
the Interest Carry Forward Amount allocable to the Class M-4 Certificates;
SIXTH, concurrently to the holders of the Class A Certificates, in an
amount equal to such certificates' allocated share of any Prepayment Interest
Shortfalls on the related Mortgage Loans to the extent not covered by
Compensating Interest paid by the Master Servicer or the Servicer and any
shortfalls resulting from the application of the Relief Act or similar state or
local law or the bankruptcy code with respect to the related Mortgage Loans;
SEVENTH, to the holders of the Class M-1 Certificates, in an amount equal
to the Class M-1 Certificates' allocated share of any Prepayment Interest
Shortfalls on the Mortgage Loans to the extent not covered by Compensating
Interest paid by the Master Servicer or the Servicer and any shortfalls
resulting from the application of the Relief Act or similar state or local law
or the bankruptcy code with respect to the Mortgage Loans;
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EIGHTH, to the holders of the Class M-2 Certificates, in an amount equal to
the Class M-2 Certificates' allocated share of any Prepayment Interest
Shortfalls on the Mortgage Loans to the extent not covered by Compensating
Interest paid by the Master Servicer or the Servicer and any shortfalls
resulting from the application of the Relief Act or similar state or local law
or the bankruptcy code with respect to the Mortgage Loans;
NINTH, to the holders of the Class M-3 Certificates, in an amount equal to
the Class M-3 Certificates' allocated share of any Prepayment Interest
Shortfalls on the Mortgage Loans to the extent not covered by Compensating
Interest paid by the Master Servicer or the Servicer and any shortfalls
resulting from the application of the Relief Act or similar state or local law
or the bankruptcy code with respect to the Mortgage Loans;
TENTH, to the holders of the Class M-4 Certificates, in an amount equal to
the Class M-4 Certificates' allocated share of any Prepayment Interest
Shortfalls on the Mortgage Loans to the extent not covered by Compensating
Interest paid by the Master Servicer or the Servicer and any shortfalls
resulting from the application of the Relief Act or similar state or local law
or the bankruptcy code with respect to the Mortgage Loans;
ELEVENTH, to the Reserve Fund (the "Reserve Fund") established in
accordance with the terms of the Pooling and Servicing Agreement the amount by
which the sum of the Net WAC Rate Carryover Amounts, if any, with respect to the
Class A-1 Certificates and the Class A-2 Certificates exceeds the sum of any
amounts received by the Trustee with respect to the Cap Agreements since the
prior Distribution Date and any amounts in the Reserve Fund that were not
distributed on prior Distribution Dates;
TWELFTH, to the holders of the Class CE Certificates as provided in the
Pooling and Servicing Agreement; and
THIRTEENTH, to the holders of the Residual Certificates, any remaining
amounts; provided that if such Distribution Date is the Distribution Date
immediately following the expiration of the latest prepayment charge term or any
Distribution Date thereafter, then any such remaining amounts will be
distributed first, to the holders of the Class P Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and second, to
the holders of the Residual Certificates.
On each Distribution Date, the Trustee will deposit all amounts received
with respect to the Cap Agreements in the Reserve Fund. On each Distribution
Date, after making the distributions required under "Interest Distributions on
the Offered Certificates", "Principal Distributions on the Class A Certificates
and Mezzanine Certificates" and after the distribution of the Net Monthly Excess
Cashflow as described above, the Trustee will withdraw from the Reserve Fund the
amounts on deposit therein (which shall include any payments received under the
Cap Agreements) and distribute such amounts to the Class A Certificates and the
Mezzanine Certificates in respect of any Net WAC Rate Carryover Amounts due to
each such class in the following manner and order of priority:
(A) any amounts received by the Trustee on account of the Cap Agreement
relating to the Class A-1 Certificates will be distributed to the holders of the
Class A-1 Certificates in respect of the related Net WAC Rate Carryover Amount
for such Distribution Date;
(B) any amounts received by the Trustee on account of the Cap Agreement
relating to the Class A-2 Certificates will be distributed to the holders of the
Class A-2 Certificates in respect of the related Net WAC Rate Carryover Amount
for such Distribution Date;
(C) any amounts deposited in the Reserve Fund from the Net Monthly Excess
Cashflow will be distributed:
FIRST, concurrently (i) to the holders of the Class A-1 Certificates,
the related Net WAC Rate Carryover Amount for such Distribution Date to the
extent not paid pursuant to clause (A) above and (ii)
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to the holders of the Class A-2 Certificates, the related Net WAC Rate Carryover
Amount for such Distribution Date to the extent not paid pursuant to clause (B)
above, on a PRO RATA basis based on the entitlement of each such class;
SECOND, to the holders of the Class M-1 Certificates, the related Net
WAC Rate Carryover Amount for such Distribution Date;
THIRD, to the holders of the Class M-2 Certificates, the related Net
WAC Rate Carryover Amount for such Distribution Date;
FOURTH, to the holders of the Class M-3 Certificates, the related Net
WAC Rate Carryover Amount for such Distribution Date; and
FIFTH, to the holders of the Class M-4 Certificates, the related Net
WAC Rate Carryover Amount for such Distribution Date.
As of the Closing Date, the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date will exceed the sum of the aggregate Certificate
Principal Balances of the Class A Certificates, the Mezzanine Certificates and
the Class P Certificates by an amount equal to approximately $1,482,144, which
is equal to the initial Certificate Principal Balance of the Class CE
Certificates. This amount represents approximately 0.50% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date, which is the
initial amount of overcollateralization required to be provided by the Mortgage
Pool under the Pooling and Servicing Agreement. Under the Pooling and Servicing
Agreement the Overcollateralization Amount is required to be maintained at the
"Required Overcollateralization Amount." In the event that Realized Losses are
incurred on the Mortgage Loans, such Realized Losses may result in an
overcollateralization deficiency since the Realized Losses will reduce the
principal balance of the Mortgage Loans without a corresponding reduction to the
aggregate Certificate Principal Balances of the Class A Certificates and the
Mezzanine Certificates. In the event of an overcollateralization deficiency, the
Pooling and Servicing Agreement requires the payment from Net Monthly Excess
Cashflow, subject to available funds, of an amount equal to the
overcollateralization deficiency, which shall constitute a principal
distribution on the Class A Certificates and the Mezzanine Certificates in
reduction of the Certificate Principal Balances of the Class A Certificates and
the Mezzanine Certificates. This has the effect of accelerating the amortization
of the Offered Certificates relative to the amortization of the Mortgage Loans,
and of increasing the Overcollateralization Amount.
On and after the Stepdown Date and provided that a Trigger Event is not in
effect the Required Overcollateralization Amount may be permitted to decrease
("step down"), to a level equal to approximately 1.00% of the then current
aggregate outstanding principal balance of the Mortgage Loans (after giving
effect to principal payments to be distributed on the related Distribution
Date), subject to a floor of approximately $1,482,476. In the event that the
Required Overcollateralization Amount is permitted to step down on any
Distribution Date, the Pooling and Servicing Agreement provides that a portion
of the principal which would otherwise be distributed to the holders of the
Class A Certificates and the Mezzanine Certificates on the related Distribution
Date shall be distributed to the holders of the Class CE Certificates pursuant
to the priorities set forth above.
With respect to each Distribution Date, the Overcollateralization Reduction
Amount, after taking into account all other distributions to be made on the
related Distribution Date, shall be distributed as Net Monthly Excess Cashflow
pursuant to the priorities set forth above. This has the effect of decelerating
the amortization of the Offered Certificates relative to the amortization of the
Mortgage Loans, and of reducing the Overcollateralization Amount. However, if on
any Distribution Date a Trigger Event is in effect, the Required
Overcollateralization Amount will not be permitted to step down on the related
Distribution Date.
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ALLOCATION OF EXTRA PRINCIPAL DISTRIBUTION AMOUNT
On each Distribution Date (a) prior to the Stepdown Date or (b) on which a
Trigger Event is in effect, the Extra Principal Distribution Amount shall be
distributed FIRST, to the Class A Certificates, until the Certificate Principal
Balances of the Class A Certificates have been reduced to zero; SECOND, to the
Class M-1 Certificates, until the Certificate Principal Balance of the Class M-1
Certificates has been reduced to zero; THIRD, to the Class M-2 Certificates,
until the Certificate Principal Balance of the Class M-2 Certificates has been
reduced to zero; FOURTH, to the Class M-3 Certificates, until the Certificate
Principal Balance of the Class M-3 Certificates has been reduced to zero and
FIFTH, to the Class M-4 Certificates, until the Certificate Principal Balance of
the Class M-4 Certificates has been reduced to zero.
On each Distribution Date (a) on or after the Stepdown Date and (b) on
which a Trigger Event is not in effect, the holders of the Class A Certificates
and each class of Mezzanine Certificates shall be entitled to receive
distributions in respect of principal to the extent of the Extra Principal
Distribution Amount in the following amounts and order of priority.
FIRST, (a) the lesser of (x) the Group I Principal Distribution Amount and
(y) the Class A-1 Principal Distribution Amount, shall be distributed to the
holders of the Class A-1 Certificates, until the Certificate Principal Balance
of the Class A-1 Certificates has been reduced to zero and (b) the lesser of (x)
the Group II Principal Distribution Amount and (y) the Class A-2 Principal
Distribution Amount, shall be distributed to the holders of the Class A-2
Certificates, until the Certificate Principal Balance of the Class A-2
Certificates has been reduced to zero;
SECOND, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the amount distributed to the holders of the Class A
Certificates under clause FIRST above, and (y) the Class M-1 Principal
Distribution Amount, shall be distributed to the holders of the Class M-1
Certificates, until the Certificate Principal Balance of the Class M-1
Certificates has been reduced to zero;
THIRD, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amounts distributed to the holders of the Class
A Certificates under clause FIRST above and to the holders of the Class M-1
Certificates under clause SECOND above, and (y) the Class M-2 Principal
Distribution Amount, shall be distributed to the holders of the Class M-2
Certificates, until the Certificate Principal Balance of the Class M-2
Certificates has been reduced to zero;
FOURTH, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amounts distributed to the holders of the Class
A Certificates under clause FIRST above, to the holders of the Class M-1
Certificates under clause SECOND above and to the holders of the Class M-2
Certificates under clause THIRD above, and (y) the Class M-3 Principal
Distribution Amount, shall be distributed to the holders of the Class M-3
Certificates, until the Certificate Principal Balance of the Class M-3
Certificates has been reduced to zero; and
FIFTH, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amounts distributed to the holders of the Class
A Certificates under clause FIRST above, to the holders of the Class M-1
Certificates under clause SECOND above, to the holders of the Class M-2
Certificates under clause THIRD above and to the holders of the Class M-3
Certificates under clause FOURTH above and (y) the Class M-4 Principal
Distribution Amount, shall be distributed to the holders of the Class M-4
Certificates, until the Certificate Principal Balance of the Class M-4
Certificates has been reduced to zero.
ALLOCATION OF LOSSES; SUBORDINATION
With respect to any defaulted Mortgage Loan that is finally liquidated
through foreclosure sale, disposition of the related Mortgaged Property (if
acquired on behalf of the certificateholders by deed in lieu of foreclosure or
otherwise), the amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, if any, plus interest thereon through the
last day of the month in which the related Mortgage Loan was finally liquidated,
after application of all amounts recovered (net of amounts
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reimbursable to the Servicer for P&I Advances, servicing advances and other
related expenses, including attorneys' fees) towards interest and principal
owing on the Mortgage Loan. The amount of loss realized and any Bankruptcy
Losses are referred to in this prospectus supplement as "Realized Losses." In
the event that amounts recovered in connection with the final liquidation of a
defaulted Mortgage Loan are insufficient to reimburse the Servicer for P&I
Advances and servicing advances, these amounts may be reimbursed to the Servicer
out of any funds in the collection account prior to any remittance to the
Trustee of funds for distribution on the certificates.
Any Realized Losses on the Mortgage Loans will be allocated on any
Distribution Date: FIRST, to Net Monthly Excess Cashflow, SECOND, to the Class
CE Certificates, until the Certificate Principal Balance of the Class CE
Certificates has been reduced to zero, THIRD, to the Class M-4 Certificates,
until the Certificate Principal Balance of the Class M-4 Certificates has been
reduced to zero, FOURTH, to the Class M-3 Certificates until the Certificate
Principal Balance of the Class M-3 Certificates has been reduced to zero, FIFTH,
to the Class M-2 Certificates, until the Certificate Principal Balance of the
Class M-2 Certificates has been reduced to zero and SIXTH, to the Class M-1
Certificates until the Certificate Principal Balance of the Class M-1
Certificates has been reduced to zero.
The Pooling and Servicing Agreement does not permit the allocation of
Realized Losses to the Class A Certificates or the Class P Certificates.
Investors in the Class A Certificates should note that although Realized Losses
cannot be allocated to the Class A Certificates, under certain loss scenarios
there will not be enough principal and interest on the Mortgage Loans to pay the
Class A Certificates all interest and principal amounts to which they are then
entitled.
Once Realized Losses have been allocated to the Mezzanine Certificates,
such amounts with respect to these certificates will no longer accrue interest
nor will such amounts be reinstated thereafter.
Any allocation of a Realized Loss to a Mezzanine Certificate will be made
by reducing the Certificate Principal Balance of that Mezzanine Certificate by
the amount so allocated as of the Distribution Date in the month following the
calendar month in which the Realized Loss was incurred. Notwithstanding anything
to the contrary described in this prospectus supplement, in no event will the
Certificate Principal Balance of any Mezzanine Certificate be reduced more than
once in respect of any particular amount both (i) allocable to the Mezzanine
Certificate in respect of Realized Losses and (ii) payable as principal to the
holder of the certificate from Net Monthly Excess Cashflow.
A "Bankruptcy Loss" is a Deficient Valuation or a Debt Service Reduction.
With respect to any Mortgage Loan, a "Deficient Valuation" is a valuation by a
court of competent jurisdiction of the Mortgaged Property in an amount less than
the then outstanding indebtedness under the Mortgage Loan, which valuation
results from a proceeding initiated under the United States Bankruptcy Code. A
"Debt Service Reduction" is any reduction in the amount which a mortgagor is
obligated to pay on a monthly basis with respect to a Mortgage Loan as a result
of any proceeding initiated under the United States Bankruptcy Code, other than
a reduction attributable to a Deficient Valuation.
P&I ADVANCES
Subject to the limitations set forth in the following paragraph, the
Servicer will be obligated to advance or cause to be advanced on or before each
Determination Date its own funds, or funds in the collection account that are
not included in the Available Distribution Amount for the Distribution Date. The
amount of the Servicer's advance will be equal to the aggregate of all scheduled
payments of principal and interest, net of the Servicing Fee, that were due
during the related Due Period on the Mortgage Loans and that were delinquent on
the related Determination Date, plus amounts representing assumed payments not
covered by any current net income on the Mortgaged Properties acquired by
foreclosure or deed in lieu of foreclosure. With respect to any balloon payment
which is not made when due, the Servicer will advance an assumed monthly payment
that would have been due on the related due date based on the original principal
amortization schedule for such balloon loan. These advances are referred to in
this prospectus supplement as "P&I Advances".
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P&I Advances are required to be made only to the extent they are deemed by
the Servicer to be recoverable from related late collections, insurance proceeds
or liquidation proceeds. The purpose of making the P&I Advances is to maintain a
regular cash flow to the certificateholders, rather than to guarantee or insure
against losses. The Servicer will not be required to make any P&I Advances with
respect to reductions in the amount of the monthly payments on the Mortgage
Loans due to bankruptcy proceedings or the application of the Relief Act or
similar state or local laws.
All P&I Advances will be reimbursable to the Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which the unreimbursed P&I Advance was made. In addition, any P&I Advances
previously made in respect of any Mortgage Loan that are deemed by the Servicer
to be nonrecoverable from related late collections, insurance proceeds or
liquidation proceeds may be reimbursed to the Servicer out of any funds in the
collection account prior to the distributions on the certificates. In addition,
the Servicer may withdraw from the collection account funds that were not
included in the Available Distribution Amount for the preceding Distribution
Date to reimburse itself for P&I Advances previously made. In the event that the
Servicer fails in its obligation to make any required P&I Advance, the successor
Servicer (which may be the Trustee or the Master Servicer), will be obligated to
make the P&I Advance on the Distribution Date for which the Servicer was
required to make such P&I Advance, to the extent required in the Pooling and
Servicing Agreement.
The Pooling and Servicing Agreement provides that the Servicer may enter
into a facility with any person which provides that such person may fund P&I
Advances or servicing advances, although no such facility shall reduce or
otherwise affect the Servicer's obligation to fund such P&I Advances or
servicing advances. Any P&I Advances or servicing advances funded by an
advancing person will be reimbursed to the advancing person in the same manner
as reimbursements would be made to the Servicer.
The Pooling and Servicing Agreement also provides that the Servicer may
pledge its servicing rights under the Pooling and Servicing Agreement to one or
more lenders. Upon an Event of Default by the Servicer under the Pooling and
Servicing Agreement, the Master Servicer may terminate the Servicer and the
Master Servicer will, or under certain circumstances, the Servicer or its
designee may, appoint a successor servicer. In any event, the successor servicer
must meet the requirements for successor servicers under the Pooling and
Servicing Agreement (including receipt of confirmation from each rating agency
that the appointment of such successor servicer would not lead to a
qualification, downgrade or withdrawal of the ratings then assigned to the
offered certificates).
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Securities Administrator will make available
to each holder of a certificate, a statement (and, at its option, any additional
files containing the same information in an alternative format) available each
month via the Securities Administrator's internet website. Assistance in using
the website can be obtained by calling the Securities Administrator's customer
service desk at (301) 815-6600. Parties that are unable to use the above
distribution options are entitled to have a paper copy mailed to them via first
class mail by calling the Securities Administrator's customer service desk and
indicating such. The Securities Administrator shall have the right to change the
way such statements are distributed in order to make such distribution more
convenient and/or more accessible to the above parties and the Securities
Administrator shall provide timely and adequate notification to all above
parties regarding any such changes.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will, upon written request, prepare and deliver to
each holder of a Certificate of record during the previous calendar year a
statement containing information necessary to enable Certificateholders to
prepare their tax returns. Such statements will not have been examined and
reported upon by an independent public accountant.
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THE ORIGINATORS
TOWN & COUNTRY CREDIT CORPORATION
Town & Country Credit Corporation provided the information set forth in the
following paragraphs. None of the Depositor, the Trustee, Master Servicer, the
Servicer, the other Originator, the Mortgage Loan Seller, the Securities
Administrator or the Underwriter, or any of their respective affiliates has made
or will make any representation as to the accuracy or completeness of such
information.
Town & Country Credit Corporation (sometimes referred to herein as "Town &
Country," or the "Originator"), a Delaware corporation, is a specialty finance
company engaged in the business of originating, purchasing and selling sub-prime
mortgage loans secured by one-to-four family residences. As of March 31, 2003,
Town & Country had 39 origination offices (consisting of 18 offices located in
California, 5 offices located in each of Colorado, Minnesota, Illinois and Texas
and 1 office located in Rhode Island).
LENDING ACTIVITIES AND LOAN SALES. Town & Country Credit Corporation
currently originates real estate loans through its network of retail offices.
Town & Country also participates in secondary market activities by originating
and selling mortgage loans on a whole loan basis utilizing sales agreements,
which provide for the transfer of servicing rights.
Town & Country's primary lending activity is funding loans to enable
mortgagors to purchase or refinance residential real property, which loans are
secured by first liens on the related real property. Town & Country's
single-family real estate loans are predominantly "conventional non-conforming"
mortgage loans, meaning that they are not insured by the Federal Housing
Administration or partially guaranteed by the U.S. Department of Veterans
Affairs.
RETAIL ORIGINATIONS. The following table summarizes Town & Country's
originated one-to-four family residential mortgage loan origination and sales
activity for the periods shown below.
TWELVE MONTHS ENDING ||
DECEMBER 31, ||
============================== ||
||
2001 2002 || MARCH 31, 2003
------------ ------------ || --------------
||
Originations $506,666,367 $854,010,224 || $311,525,345
||
Sales $462,402,528 $835,481,064 || $292,423,948
AMERIQUEST MORTGAGE COMPANY
Ameriquest Mortgage Company provided the information set forth in the
following paragraphs. None of the Depositor, the Trustee, Master Servicer, the
Servicer, the other Originator, the Mortgage Loan Seller, the Securities
Administrator or the Underwriter, or any of their respective affiliates have
made or will make any representation as to the accuracy or completeness of such
information.
Ameriquest Mortgage Company (sometimes referred to herein as "Ameriquest,"
or the "Originator"), a Delaware corporation, is a specialty finance company
engaged in the business of originating, purchasing and selling retail and
wholesale sub-prime mortgage loans secured by one- to four-family residences.
Ameriquest's mortgage business was begun in 1979 as a savings and loan
association and later as a federal savings bank. In 1994 Ameriquest ceased
depository operations to focus entirely on its mortgage banking business. In May
1997, Ameriquest sold its wholesale operations and reorganized its retail
lending and servicing operations under the name of "Ameriquest Mortgage Company"
(the "Reorganization"). In September of 1997 Ameriquest created a separate
retail lending subsidiary, Town
S-84
& Country Credit Corporation (described above under "-Town & Country Credit
Corporation"). Approximately 17.12% of the Mortgage Loans, by aggregate
principal balance as of the Cut-off Date, were originated by Ameriquest, all of
which were sold to Town & Country Credit Corporation.
THE SERVICER
OCWEN FEDERAL BANK FSB
The information set forth in the following paragraphs has been provided by
Ocwen Federal Bank FSB. None of the Depositor, the Mortgage Loan Seller, the
Originators, the Trustee, the Master Servicer, the Securities Administrator or
the Underwriter or any of their respective affiliates has made or will make any
representation as to the accuracy or completeness of this information.
Ocwen Federal Bank FSB is a federally chartered savings bank with its home
office in Fort Lee, New Jersey, its servicing operations in Orlando, Florida and
its corporate offices in West Palm Beach, Florida. Ocwen Federal Bank FSB is a
wholly owned subsidiary of Ocwen Financial Corporation, a public financial
services holding company ("OCN") headquartered in West Palm Beach, Florida.
OCN's primary businesses are the servicing, special servicing and resolution of
nonconforming, subperforming and nonperforming residential and commercial
mortgage loans for third parties, as well as providing loan servicing technology
and business-to-business e-commerce solutions for the mortgage and real estate
industries.
Ocwen Federal Bank FSB is rated "SQ1" as a primary servicer of subprime
loans and as a special servicer by Moody's Investors Service, Inc., is rated as
a "Strong" residential subprime servicer and residential special servicer by
Standard & Poor's and has an "RPS2" rating as a subprime servicer and an "RSS2"
rating as special servicer from Fitch Ratings. In addition, Ocwen Federal Bank
FSB is an approved Freddie Mac and Fannie Mae seller/servicer. As of March 31,
2003, Ocwen Federal Bank FSB provided servicing for residential mortgage loans
with an aggregate unpaid principal balance of approximately $30.2 billion,
substantially all of which are being serviced for third parties.
As of March 31, 2003, OCN had approximately $1.242 billion in assets,
approximately $939.5 million in liabilities and approximately $302.5 million in
equity. As of March 31, 2003, Ocwen Federal Bank FSB's core capital ratio was
approximately 13.46% and its total risk-based capital ratio was approximately
19.61%, as measured by the Office of Thrift Supervision. For the quarter ended
March 31, 2003, OCN's net loss was approximately $8.4 million, down from an
approximate net loss of $10.0 million reported for the quarter ended December
31, 2002. OCN reported approximately $216.8 million of cash and cash equivalents
as of March 31, 2003, up from approximately $192.2 million as of December 31,
2002. On August 14, 2002, Standard and Poor's lowered its long term credit
rating on Ocwen Financial Corporation and Ocwen Federal Bank FSB to B- and B+,
respectively.
The following tables set forth, for the non-conforming credit mortgage loan
servicing portfolio serviced by Ocwen Federal Bank FSB, certain information
relating to the delinquency, foreclosure, REO and loss experience with respect
to such mortgage loans (including loans in foreclosure in Ocwen Federal Bank
FSB's servicing portfolio (which portfolio does not include mortgage loans that
are subserviced by others)) at the end of the indicated periods. The indicated
periods of delinquency are based on the number of days past due on a contractual
basis. No mortgage loan is considered delinquent for these purposes until it is
one month past due on a contractual basis.
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DELINQUENCY AND FORECLOSURES
(DOLLARS IN THOUSANDS)
AS OF AS OF
DECEMBER 31, 2000 DECEMBER 31, 2001
---------------------------------------------- ---------------------------------------------
Percent Percent
By Percent By By Percent By
By No. Dollar By No. Dollar By No. Dollar By No. Dollar
of Loans Amount of Loans Amount of Loans Amount of Loans Amount
-------- ----------- ------- ------- ------- ----------- ------- -------
Total Portfolio ................ 87,846 $ 7,436,096 100.00% 100.00% 186,955 $17,422,016 100.00% 100.00%
Period of Delinquency(1)
30-59 Days ..................... 4,654 $ 383,087 5.30% 5.15% 8,520 $ 719,620 4.56% 4.13%
60-89 Days ..................... 2,164 $ 178,911 2.46% 2.41% 3,755 $ 324,753 2.01% 1.86%
90 Days or more ................ 14,119 $ 1,192,144 16.07% 16.03% 22,709 $ 1,896,796 12.15% 10.89%
------- ----------- ------- ------- ------- ----------- ------- -------
Total Delinquent Loans ......... 20,937 $ 1,754,142 23.83% 23.59% 34,984 $ 2,941,169 18.71% 16.88%
======= =========== ======= ======= ======= =========== ======= =======
Loans in Foreclosure(2) ........ 6,015 $ 530,414 6.85% 7.13% 10,286 $ 908,884 5.50% 5.22%
AS OF AS OF
DECEMBER 31, 2002 MARCH 31, 2003
---------------------------------------------- ---------------------------------------------
Percent Percent
By Percent By By Percent By
By No. Dollar By No. Dollar By No. Dollar By No. Dollar
of Loans Amount of Loans Amount of Loans Amount of Loans Amount
-------- ----------- ------- ------- ------- ----------- ------- -------
Total Portfolio ................ 229,335 $26,356,007 100.00% 100.00% 222,978 $25,248,125 100.00% 100.00%
Period of Delinquency(1)
30-59 Days ..................... 8,483 $ 858,552 3.70% 3.26% 6,556 $ 693,187 2.94% 2.75%
60-89 Days ..................... 3,718 $ 393,762 1.62% 1.49% 3,066 $ 339,412 1.38% 1.34%
90 Days or more ................ 19,823 $ 1,820,509 8.64% 6.91% 20,992 $ 1,970,614 9.41% 7.80%
------- ----------- ------- ------- ------- ----------- ------- -------
Total Delinquent Loans ......... 32,024 $ 3,072,823 13.96% 11.66% 30,614 $ 3,003,213 13.73% 11.89%
======= =========== ======= ======= ======= =========== ======= =======
Loans in Foreclosure(2) ........ 4,342 $ 436,557 1.89% 1.66% 9,524 $ 1,015,300 4.27% 4.02%
- ----------
(1) Includes 18,559 loans totaling $1,581,233 for March 31, 2003 which were
delinquent at the time of transfer to Ocwen.
(2) Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
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REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
AS OF AS OF AS OF AS OF
DECEMBER 31, 2000 DECEMBER 31, 2001 DECEMBER 31, 2002 MARCH 31, 2003
--------------------- ----------------------- ----------------------- -----------------------
By By By No. By By No. By
By No. Dollar By No. Dollar of Dollar of Dollar
of Loans Amount of Loans Amount Loans Amount Loans Amount
------ ---------- ------- ----------- ------- ----------- ------- -----------
Total Portfolio ........ 87,846 $7,436,096 186,955 $17,422,016 229,335 $26,356,007 222,978 $25,248,125
Foreclosed Loans(1) .... 2,982 $ 236,264 3,983 $ 301,782 3,484 $ 285,598 3,925 $ 329,968
Foreclosure Ratio(2) ... 3.39% 3.18% 2.13% 1.73% 1.52% 1.08% 1.76% 1.31%
- ----------
(1) For the purposes of these tables, "Foreclosed Loans" means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by Ocwen.
(2) The "Foreclosure Ratio" is equal to the aggregate principal balance or
number of Foreclosed Loans divided by the aggregate principal balance, or
number, as applicable, of mortgage loans in the total portfolio at the end
of the indicated period.
LOAN GAIN/(LOSS) EXPERIENCE
(DOLLARS IN THOUSANDS)
AS OF AS OF AS OF AS OF
DECEMBER 31, 2000 DECEMBER 31, 2001 DECEMBER 31, 2002 MARCH 31, 2003
----------------- ----------------- ----------------- --------------
Total Portfolio(1)................. $7,436,096 $17,422,016 $26,356,007 $25,248,125
Net Gains/(Losses)(2)(3)........... $(282,261) $(266,262) $(275,036) $(231,211)
Net Gains/(Losses) as a
Percentage of Total Portfolio...... (3.80)% (1.53)% (1.04)% (0.92)%
- ----------
(1) "Total Portfolio" on the date stated above is the principal balance of the
mortgage loans outstanding on the last day of the period.
(2) "Net Gains/(Losses)" are actual gains or losses incurred on liquidated
properties and shortfall payoffs for the preceding one year period. Gains
or losses on liquidated properties are calculated as net sales proceeds
less unpaid principal at the time of payoff. Shortfall payoffs are
calculated as the difference between principal payoff amount and unpaid
principal at the time of payoff.
(3) Includes $(144,166) as of March 31, 2003 of losses attributable to loans
which were delinquent as of the time of transfer to Ocwen.
While the above delinquency, foreclosure, real estate owned and loss
experiences reflect Ocwen's experiences for the periods indicated, no assurance
can be given that the delinquency, foreclosure, real estate owned and loss
experiences on the Mortgage Loans in the Mortgage Pool will be similar.
Accordingly, this information should not be considered to reflect the credit
quality of the Mortgage Loans included in the Mortgage Pool, or as a basis of
assessing the likelihood, amount or severity of losses on the mortgage loans.
The statistical data in the tables is based on all of the loans in Ocwen's
relevant servicing portfolio. The Mortgage Loans in the Mortgage Pool may, in
general, be more recently originated than, and are likely to have other
characteristics which distinguish them from, the majority of the mortgage loans
in Ocwen's servicing portfolio.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will provide customary servicing functions with respect to the
Mortgage Loans. Among other things, the Servicer is obligated under some
circumstances to make P&I Advances with respect to the Mortgage Loans. In
managing the liquidation of defaulted mortgage loans, the Servicer will have
sole discretion to take such action in maximizing recoveries to the
certificateholders including,
S-87
without limitation, selling defaulted mortgage loans and REO properties as
described in the Pooling and Servicing Agreement.
The principal compensation to be paid to the Servicer in respect of the
servicing activities performed by the Servicer will be a servicing fee
calculated at a rate set forth in the Pooling and Servicing Agreement with
respect to each Mortgage Loan on the Scheduled Principal Balance of each such
Mortgage Loan (the "Servicing Fee Rate"). As additional servicing compensation,
the Servicer is entitled to retain all assumption fees, late payment charges,
and other miscellaneous servicing fees in respect of the Mortgage Loans (with
the exception of Prepayment Charges, which will be distributed to the holders of
the Class P Certificates), to the extent collected from mortgagors, together
with any interest or other income earned on funds held in the collection account
and any escrow accounts. The Servicer is entitled to retain any Prepayment
Interest Excess (as defined in the pooling and servicing agreement) with respect
to the Mortgage Loans.
In general, the Servicer is obligated to offset any Prepayment Interest
Shortfall on any Distribution Date, with Compensating Interest on such
Distribution Date; provided that the Servicer is only required to pay
Compensating Interest up to its servicing fee. The Servicer is obligated to pay
insurance premiums and other ongoing expenses associated with the Mortgage Loans
incurred by the Servicer in connection with its responsibilities under the
Pooling and Servicing Agreement and is entitled to reimbursement for these
expenses as provided in the Pooling and Servicing Agreement. See "Description of
the Agreements-Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements-Retained Interest, Servicing Compensation and
Payment of Expenses" in the prospectus for information regarding expenses
payable by the Servicer.
THE MASTER SERVICER
GENERAL
The information set forth in the following paragraph has been provided by
the Master Servicer. None of the Depositor, the Originators, the Mortgage Loan
Seller, the Servicer, the Trustee, the Underwriter or any of their respective
affiliates has made or will make any representation as to the accuracy or
completeness of the information.
Wells Fargo Bank Minnesota, National Association, is a national banking
association, with its master servicing offices located at 9062 Old Annapolis
Road, Columbia, Maryland 21045 Attention: ACE 2003-TC1. Wells Fargo Bank
Minnesota, National Association is engaged in the business of master servicing
single family residential mortgage loans secured by properties located in all 50
states and the District of Columbia.
Primary servicing of the Mortgage Loans will be provided by the Servicer in
accordance with the terms and conditions of the Pooling and Servicing Agreement.
The Servicer will be responsible for the servicing of the Mortgage Loans, and
the Master Servicer will be required to monitor the performance of the Servicer
under the Pooling and Servicing Agreement. In the event of a default by the
Servicer under the Pooling and Servicing Agreement, under certain circumstances
specified therein the Master Servicer will either appoint a successor servicer
or assume primary servicing obligations for the Mortgage Loans itself.
MASTER SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect of
its master servicing activities for the certificates will be a master servicing
fee calculated at a rate set forth in the Pooling and Servicing Agreement on the
Scheduled Principal Balance of each such Mortgage Loan (the "Master Servicing
Fee Rate") together with any interest or other income earned on funds held in
the Distribution Account.
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In the event that the Servicer fails to pay the amount of any Prepayment
Interest Shortfall required to be paid on any Distribution Date, the Master
Servicer shall pay such amount up to the master servicing fee payable to the
Master Servicer on such Distribution Date.
THE TRUSTEE
Bank One National Association will be the Trustee under the Pooling and
Servicing Agreement. The Depositor and the Master Servicer may maintain other
banking relationships in the ordinary course of business with the Trustee. The
Trustee's corporate trust office is located at 1 Bank One Plaza, Mail Suite
IL1-0126, Chicago, Illinois 60670, Attention: ACE Securities Corp., Home Equity
Loan Trust, Series 2003-TC1 or at such other address as the Trustee may
designate from time to time.
The Master Servicer will pay the Trustee the trustee's fee in respect of
its obligations under the Pooling and Servicing Agreement. The Pooling and
Servicing Agreement will provide that the Trustee and any director, officer,
employee or agent of the Trustee will be indemnified by the trust and will be
held harmless against any loss, liability, expense or cost including, without
limitation, attorneys fees and expenses (not including expenses and
disbursements incurred or made by the Trustee in the ordinary course of the
Trustee's performance in accordance with the provisions of the Pooling and
Servicing Agreement) incurred by the Trustee in connection with any pending or
threatened legal action or arising out of or in connection with the acceptance
or administration of its obligations and duties which has a high probability of
being filed under the Pooling and Servicing Agreement, the Certificates, the Cap
Agreements or the Custodial Agreement, other than any loss, liability or expense
(i) resulting from a breach of the Servicer's obligations and duties under the
Pooling and Servicing Agreement (for which the Trustee receives indemnity from
the Servicer) or (ii) incurred by reason of willful misfeasance, bad faith or
negligence in the performance of the Trustee's duties under the Pooling and
Servicing Agreement, the Certificates, the Cap Agreements or the Custodial
Agreement or by reason of reckless disregard, of the Trustee's obligations and
duties under the Pooling and Servicing Agreement, the Certificates, the Cap
Agreements or the Custodial Agreement.
THE SECURITIES ADMINISTRATOR
Wells Fargo Bank Minnesota, National Association, as the Securities
Administrator under the Pooling and Servicing Agreement, will perform certain
securities and tax administration services for the Trust for so long as it is
the Master Servicer. The Securities Administrator's corporate trust office is
located at 9062 Old Annapolis Road, Columbia, Maryland 21045, Attention: ACE
Securities Corp., Home Equity Loan Trust, Series 2003-TC1 or at such other
address as the Securities Administrator may designate from time to time.
The Securities Administrator may resign at any time including at such time
as the Master Servicer is removed or terminated, in which event the Trustee will
be obligated to appoint a successor Securities Administrator. The Trustee may
also remove the Securities Administrator if the Securities Administrator ceases
to be eligible to continue as such under the Pooling and Servicing Agreement or
if the Securities Administrator becomes incapable of acting, bankrupt, insolvent
or if a receiver or public officer takes charge of the Securities Administrator
or its property, or if the Master Servicer is terminated or removed. Upon such
resignation or removal of the Securities Administrator, the Trustee will be
entitled to appoint a successor Securities Administrator. The Securities
Administrator may also be removed at any time by the holders of certificates
evidencing ownership of not less than 51% of the trust. Any resignation or
removal of the Securities Administrator and appointment of a successor
Securities Administrator will not become effective until acceptance of the
appointment by the successor Securities Administrator. The Securities
Administrator and the Master Servicer will be indemnified by the Trust Fund for
certain expenses as provided in the Pooling and Servicing Agreement.
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THE CUSTODIAN
The mortgage loan files with respect to the Mortgage Loans, will be held by
Wells Fargo Bank Minnesota, National Association, a national banking
association, pursuant to a custodial agreement to be entered into among Bank One
National Association, as Trustee, Wells Fargo Bank Minnesota, National
Association, in its capacity as custodian, and the Servicer. For additional
information about Wells Fargo Bank Minnesota, National Association see "The
Master Servicer" in this prospectus supplement.
THE CREDIT RISK MANAGER
The Murrayhill Company, as credit risk manager for the trust (the "Credit
Risk Manager") will monitor the performance of, and make recommendations to the
Servicer regarding certain delinquent and defaulted Mortgage Loans and will
report to the Depositor on the performance of such Mortgage Loans, pursuant to a
Credit Risk Management Agreement to be entered into by the Credit Risk Manager
and the Servicer on or prior to the Closing Date. The Credit Risk Manager will
rely upon mortgage loan data that is provided to it by the Servicer in
performing its advisory and monitoring functions. The Credit Risk Manager will
be entitled to receive a "Credit Risk Manager's Fee" until the termination of
the trust or until its removal by a vote of at least 66 2/3% of the
Certificateholders. Such fee will be paid by the trust and will be equal to a
per annum percentage of the then current aggregate principal balance of the
Mortgage Loans.
POOLING AND SERVICING AGREEMENT
GENERAL
The certificates will be issued under the Pooling and Servicing Agreement
(the "Pooling and Servicing Agreement"), dated as of July 1, 2003 among the
Depositor, the Servicer, the Master Servicer, the Securities Administrator and
the Trustee, a form of which is filed as an exhibit to the registration
statement. A Current Report on Form 8-K relating to the certificates containing
a copy of the Pooling and Servicing Agreement as executed will be filed by the
Depositor with the Securities and Exchange Commission ("SEC") within fifteen
days of the initial issuance of the certificates. The trust fund created under
the Pooling and Servicing Agreement will consist of (i) all of the Depositor's
right, title and interest in the Mortgage Loans, the related mortgage notes,
mortgages and other related documents; (ii) all payments on or collections in
respect of the Mortgage Loans due after the Cut-off Date, together with any
proceeds of the Mortgage Loans; (iii) any Mortgaged Properties acquired on
behalf of certificateholders by foreclosure or by deed in lieu of foreclosure,
and any revenues received on these mortgaged properties; (iv) the rights of the
Trustee under all insurance policies required to be maintained under the Pooling
and Servicing Agreement; (v) the rights of the Depositor under the Mortgage Loan
Purchase Agreement; (vi) the Reserve Fund and any amounts on deposit in the
Reserve Fund from time to time and any proceeds thereof and (vii) the Cap
Agreements. Reference is made to the prospectus for important information in
addition to that set forth in this prospectus supplement regarding the trust
fund, the terms and conditions of the Pooling and Servicing Agreement and the
Offered Certificates. The Depositor will provide to a prospective or actual
certificate holder without charge, on written request, a copy, without exhibits,
of the Pooling and Servicing Agreement. Requests should be addressed to 6525
Morrison Blvd., Suite 318, Charlotte, North Carolina 28211.
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, the Depositor will transfer to the trust all of its
right, title and interest in and to each Mortgage Loan, the related mortgage
note, mortgage, assignment of mortgage in recordable form to the Trustee and
other related documents (collectively, the "Related Documents"), including all
scheduled payments with respect to each such Mortgage Loan due after the Cut-off
Date. The Trustee, concurrently with such transfer, will deliver the
certificates to the Depositor. Each Mortgage Loan
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transferred to the trust will be identified on a schedule (the "Mortgage Loan
Schedule") delivered to the Trustee and the Servicer pursuant to the Pooling and
Servicing Agreement. The Mortgage Loan Schedule will include information such as
the principal balance of each Mortgage Loan as of the Cut-off Date, its Mortgage
Rate as well as other information with respect to each Mortgage Loan.
The Pooling and Servicing Agreement will require that, within the time
period specified therein, the Depositor will deliver or cause to be delivered to
the Trustee (or the Custodian, as the Trustee's agent for such purpose) the
mortgage notes endorsed to the Trustee on behalf of the certificateholders and
the Related Documents. In lieu of delivery of original mortgages or mortgage
notes, if such original is not available or lost, the Depositor may deliver or
cause to be delivered true and correct copies thereof, or, with respect to a
lost mortgage note, a lost note affidavit. The assignments of mortgage are
generally required to be recorded by or on behalf of the Depositor in the
appropriate offices for real property records.
On or prior to the Closing Date, the Trustee or the Custodian on its behalf
will review the Mortgage Loans and the Related Documents pursuant to the Pooling
and Servicing Agreement and if any Mortgage Loan or Related Document is found to
be defective in any material respect and such defect is not cured within 90 days
following notification thereof to the Mortgage Loan Seller by the Trustee or the
Servicer, the Mortgage Loan Seller will be obligated either to (i) substitute
for such Mortgage Loan a Qualified Substitute Mortgage Loan; however, such
substitution is permitted only within two years of the Closing Date and may not
be made unless an opinion of counsel is provided to the effect that such
substitution will not disqualify any of the REMICs (as defined in the Pooling
and Servicing Agreement) as a REMIC or result in a prohibited transaction tax
under the Code; or (ii) purchase such Mortgage Loan at a price (the "Purchase
Price") equal to the outstanding principal balance of such Mortgage Loan as of
the date of purchase, plus all accrued and unpaid interest thereon, computed at
the Mortgage Rate through the end of the calendar month in which the purchase is
effected, plus the amount of any unreimbursed P&I Advances and servicing
advances made by the Servicer plus all costs and damages incurred by the trust
and the Trustee in connection with such Mortgage Loan prior to such purchase.
The Purchase Price will be required to be remitted to the Servicer for deposit
in the Collection Account (as defined herein) for remittance to the Trustee
prior to the next succeeding Distribution Date after such obligation arises. The
obligation of the Mortgage Loan Seller to repurchase or substitute for a Deleted
Mortgage Loan (as defined herein) is the sole remedy regarding any defects in
the Mortgage Loans and Related Documents available to the certificateholders.
In connection with the substitution of a Qualified Substitute Mortgage
Loan, the Mortgage Loan Seller will be required to remit to the Servicer for
deposit in the Collection Account for remittance to the Trustee prior to the
next succeeding Distribution Date after such obligation arises an amount (the
"Substitution Shortfall Amount") equal to the excess of the principal balance of
the related Deleted Mortgage Loan over the principal balance of such Qualified
Substitute Mortgage Loan.
A "Qualified Substitute Mortgage Loan" is a mortgage loan substituted for a
Deleted Mortgage Loan which must, on the date of such substitution, (i) have an
outstanding principal balance (or in the case of a substitution of more than one
Mortgage Loan for a Deleted Mortgage Loan, an aggregate principal balance), not
in excess of the principal balance of the Deleted Mortgage Loan; (ii) have a
Mortgage Rate not less than the Mortgage Rate of the Deleted Mortgage Loan and
not more than 1% in excess of the Mortgage Rate of such Deleted Mortgage Loan;
(iii) have a Maximum Mortgage Rate and Minimum Mortgage Rate not less than the
respective rate for the Deleted Mortgage Loan and have a Gross Margin equal to
or greater than the Deleted Mortgage Loan; (iv) have the same Due Date as the
Deleted Mortgage Loan; (v) have a remaining term to maturity not more than one
year earlier and not later than the remaining term to maturity of the Deleted
Mortgage Loan; (vi) comply with each representation and warranty as to the
Mortgage Loans set forth in the Mortgage Loan Purchase Agreement (deemed to be
made as of the date of substitution); (vii) be of the same or better credit
quality as the Mortgage Loan being replaced; (viii) be a first lien on the
related mortgaged property and (ix) satisfy certain other conditions specified
in the Pooling and Servicing Agreement.
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The Mortgage Loan Seller will make certain representations and warranties
as to the accuracy in all material respects of certain information furnished to
the Trustee with respect to each Mortgage Loan. In addition, the Mortgage Loan
Seller will represent and warrant, as of the Closing Date, that, among other
things: (i) at the time of transfer to the Depositor, the Mortgage Loan Seller
has transferred or assigned all of its right, title and interest in each
Mortgage Loan and the Related Documents, free of any lien; (ii) each Mortgage
Loan complied, at the time of origination, in all material respects with
applicable state and federal laws including, but not limited to, predatory
lending laws; (iii) the Mortgage Loans are not subject to the requirements of
the Home Ownership and Equity Protection Act of 1994 and no Mortgage Loan is
classified and/or defined as a "high cost", "covered" or "predatory" loan under
any other federal, state or local law or ordinance or regulation including, but
not limited to, the States of Georgia or North Carolina, or the City of New
York; (iv) no proceeds from any Mortgage Loan were used to purchase single
premium credit insurance policies as part of the origination of, or as a
condition to closing, such Mortgage Loan; (v) no Mortgage Loan originated on or
prior to October 1, 2002 has a Prepayment Charge that is applicable during a
period longer than five years after its date of origination and no Mortgage Loan
originated after October 1, 2002 has a Prepayment Charge that is applicable
during a period longer than three years after its date of origination; and (vi)
with respect to each Group I Mortgage Loan, to the best of the Mortgage Loan
Seller's knowledge, any prior servicer has accurately and fully reported its
mortgagor credit files to each of the credit repositories in a timely manner.
Upon discovery of a breach of any such representation and warranty which
materially and adversely affects the interests of the certificateholders in the
related Mortgage Loan and Related Documents, the Mortgage Loan Seller will have
a period of 90 days after the earlier of discovery or receipt of written notice
of the breach to effect a cure; provided, however that any breach of the
representations and warranties set forth in clauses (ii), (iii), (iv), (v) and
(vi) above with respect to any [Group I] Mortgage Loan shall be deemed to
materially and adversely affect the interests of the certificateholders in the
related [Group I] Mortgage Loan. If the breach cannot be cured within the 90-day
period, the Mortgage Loan Seller will be obligated to (i) substitute for such
Deleted Mortgage Loan a Qualified Substitute Mortgage Loan or (ii) purchase such
Deleted Mortgage Loan from the trust. The same procedure and limitations that
are set forth above for the substitution or purchase of Deleted Mortgage Loans
as a result of deficient documentation relating thereto will apply to the
substitution or purchase of a Deleted Mortgage Loan as a result of a breach of a
representation or warranty in the Mortgage Loan Purchase Agreement that
materially and adversely affects the interests of the certificateholders.
Mortgage Loans required to be transferred to the Mortgage Loan Seller as
described in the preceding paragraphs are referred to as "Deleted Mortgage
Loans."
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT
AND DISTRIBUTION ACCOUNT
The Servicer will establish and maintain or cause to be maintained a
separate trust account (the "Collection Account") for the benefit of the
certificateholders. The Collection Account will be an Eligible Account (as
defined in the Pooling and Servicing Agreement). Upon receipt by the Servicer of
amounts in respect of the Mortgage Loans (excluding amounts representing the
Servicing Fee or other servicing compensation, reimbursement for P&I Advances
and servicing advances and insurance proceeds to be applied to the restoration
or repair of a Mortgaged Property or similar items), the Servicer will deposit
such amounts in the Collection Account. Amounts so deposited may be invested in
Permitted Investments (as defined in the Pooling and Servicing Agreement)
maturing no later than one Business Day prior to the date on which the amount on
deposit therein is required to be remitted to the Trustee. All investment income
on funds in the Collection Account shall be for the benefit of the Servicer.
The Trustee will establish an account (the "Distribution Account") into
which will be deposited amounts remitted to it by the Servicer for distribution
to certificateholders on a Distribution Date and payment of certain fees and
expenses of the trust. The Distribution Account will be an Eligible Account.
Amounts on deposit therein may be invested in Permitted Investments maturing on
or before the Business Day prior to the related Distribution Date unless such
Permitted Investments are invested in investments managed or advised by the
Trustee or an affiliate thereof, in which case such Permitted investments may
mature on the related Distribution Date.
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EVENTS OF DEFAULT
Upon the occurrence of events of default described under "Description of
the Agreements-Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements-Events of Default under the Agreement" and
"-Rights Upon Events of Default under the Agreements" in the prospectus, the
Servicer may be removed as the Servicer of the Mortgage Loans in accordance with
the terms of the Pooling and Servicing Agreement. As further described in the
Pooling and Servicing Agreement, immediately upon the removal of the Servicer
after the occurrence of an Event of Default, the successor Servicer (which may
be the Master Servicer) will become the successor to the Servicer under the
Pooling and Servicing Agreement; provided, however that, under certain
circumstances, the Servicer or its designee may designate a successor Servicer
if it has been terminated as Servicer under the Pooling and Servicing Agreement.
Any successor Servicer appointed by the Servicer or its designee must qualify as
a successor Servicer under the Pooling and Servicing Agreement and be approved
by the Rating Agencies (by written confirmation that such appointment of a
successor Servicer would not result in the reduction or withdrawal of the rating
of any outstanding class of certificates). Any proceeds received in connection
with the appointment of a successor Servicer shall be the property of the
terminated Servicer or its designee.
Any successor to the Servicer appointed under the Pooling and Servicing
Agreement must be a housing loan servicing institution, acceptable to each
rating agency, with a net worth at the time of the appointment of at least
$15,000,000. See "Description of the Agreements-Material Terms of the Pooling
and Servicing Agreements and Underlying Servicing Agreements-Events of Default
under the Agreement" and "-Rights Upon Events of Default under the Agreements"
in the prospectus.
VOTING RIGHTS
At all times, 98% of all voting rights will be allocated among the holders
of the Class A Certificates, the Mezzanine Certificates, and the Class CE
Certificates in proportion to the then outstanding Certificate Principal
Balances of their respective certificates, 1% of all voting rights will be
allocated to the holders of the Class P Certificates in proportion to the then
outstanding Certificate Principal Balances of their respective certificates and
1% of all voting rights will be allocated to the holders of the Residual
Certificates.
TERMINATION
The circumstances under which the obligations created by the Pooling and
Servicing Agreement will terminate in respect of the certificates are described
in "Description of the Securities-Termination" in the prospectus. The Class CE
Certificateholder will have the right to purchase all remaining Mortgage Loans
and any properties acquired in respect thereof and thereby effect early
retirement of the certificates on any Distribution Date following the Due Period
during which the aggregate principal balance of the Mortgage Loans and
properties acquired in respect thereof remaining in the trust fund at the time
of purchase is reduced to less than 10% of the aggregate principal balance of
the Mortgage Loans as of the Cut-off Date. In the event the Class CE
Certificateholder exercises the option, the purchase price payable in connection
with the option will be equal to the greater of par or the fair market value of
the Mortgage Loans and such properties, plus accrued interest for each Mortgage
Loan at the related Mortgage Rate to but not including the first day of the
month in which the repurchase price is distributed, together with all amounts
due and owing to the Trustee, the Servicer, the Master Servicer and the
Securities Administrator. In the event the Class CE Certificateholder exercises
this option, the portion of the purchase price allocable to the Offered
Certificates will be, to the extent of available funds, (i) 100% of the then
outstanding Certificate Principal Balance of the Offered Certificates, plus (ii)
one month's interest on the then outstanding Certificate Principal Balance of
the Offered Certificates at the then applicable Pass-Through Rate for the class,
plus (iii) any previously accrued but unpaid interest thereon to which the
holders of the Offered Certificates are entitled, together with the amount of
any Net WAC Rate Carryover Amounts. The holders of the Residual Certificates
shall pledge any amount received in a termination in excess of par to the
holders of the Class CE Certificates. In no event will the trust created by the
Pooling and Servicing
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Agreement continue beyond the expiration of 21 years from the death of the
survivor of the persons named in the Pooling and Servicing Agreement. See
"Description of the Securities-Termination" in the prospectus.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
As to any Mortgage Loan which is delinquent in payment by 90 days or more,
the Servicer or an affiliate of the Servicer may, at its option, purchase such
Mortgage Loan from the Trust at the Purchase Price for such Mortgage Loan, under
the circumstances described in the Pooling and Servicing Agreement.
CAP AGREEMENTS AND THE CAP PROVIDER
The Class A-1 Certificates and the Class A-2 Certificates will have the
benefit of an interest rate cap agreement (each, a "Cap Agreement") with respect
to the related Mortgage Loans. Each Cap Agreement will be documented pursuant to
a confirmation incorporating the terms and conditions of an ISDA Master
Agreement (Multicurrency-Cross Border), as supplemented by a schedule. Pursuant
to the Cap Agreement relating to the Class A-1 Certificates, The Royal Bank of
Scotland plc (together with any successor, the "Cap Provider") will agree to pay
to the Trustee for the benefit of the holders of the Class A-1 Certificates a
monthly payment in an amount equal to the product of:
(1) the excess, if any, of One-Month LIBOR over the strike rate for the
related Distribution Date (provided, however that if One-Month LIBOR exceeds
11.00% the payment due will be calculated as if One-Month LIBOR were 11.00%);
(2) the Group I Scheduled Notional Amount for the related Distribution
Date; and
(3) a fraction, the numerator of which is the actual number of days
elapsed from the previous Distribution Date to but excluding the current
Distribution Date (or, for the first Distribution Date, the actual number of
days elapsed from the Closing Date to but excluding the first Distribution
Date), and the denominator of which is 360.
The Group I Scheduled Notional Amount with respect to each Distribution
Date, which declines in accordance with the expected amortization of the Group I
Mortgage Loans, is set forth below.
GROUP I
SCHEDULED NOTIONAL
DISTRIBUTION DATE AMOUNT STRIKE RATE
----------------- ------------------ -----------
February 2004 $199,417,000 6.08%
March 2004 194,254,000 6.49
April 2004 189,134,000 6.07
May 2004 184,148,000 6.27
June 2004 179,294,000 6.06
July 2004 174,568,000 6.26
August 2004 169,965,000 6.05
September 2004 165,485,000 6.05
October 2004 161,122,000 6.24
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November 2004 156,874,000 6.04
December 2004 152,737,000 6.23
January 2005 148,710,000 6.03
February 2005 144,789,000 6.02
March 2005 140,970,000 6.66
April 2005 137,253,000 6.07
May 2005 133,634,000 7.45
June 2005 130,133,000 7.20
July 2005 126,724,000 7.42
August 2005 123,403,000 7.16
September 2005 120,170,000 7.14
October 2005 117,021,000 7.39
November 2005 113,955,000 7.67
December 2005 110,976,000 7.90
January 2006 108,076,000 7.62
February 2006 105,250,000 7.59
March 2006 102,499,000 8.38
April 2006 99,819,000 7.57
May 2006 97,210,000 8.31
June 2006 94,674,000 8.01
July 2006 92,204,000 8.24
August 2006 89,799,000 7.94
September 2006 87,456,000 7.91
October 2006 85,174,000 8.16
November 2006 82,952,000 8.33
December 2006 80,791,000 8.56
January 2007 78,687,000 8.25
February 2007 76,638,000 8.21
March 2007 74,641,000 9.05
April 2007 72,697,000 8.15
May 2007 70,803,000 8.82
June 2007 68,961,000 8.49
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July 2007 67,168,000 8.73
August 2007 65,420,000 8.40
September 2007 63,719,000 8.35
October 2007 62,061,000 8.59
November 2007 60,446,000 8.26
December 2007 58,873,000 8.49
January 2008 57,341,000 8.18
The Group I Cap Agreement will be effective as the Distribution Date in
February 2004 and will terminate after the Distribution Date in January 2008.
Pursuant to the Group Cap Agreement relating to the Class A-2 Certificate, the
Cap Provider will agree to pay to the Trustee for the benefit of the holders of
the Class A-2 Certificates and the Mezzanine Certificates a monthly payment in
an amount equal to the product of:
(1) the excess, if any, of One-Month LIBOR over the strike rate for the
related Distribution Date (provided, however that if One-Month LIBOR exceeds
11.00% the payment due will be calculated as if One-Month LIBOR were 11.00%);
(2) the Group II Scheduled Notional Amount for the related Distribution
Date; and
(3) a fraction, the numerator of which is the actual number of days
elapsed from the previous Distribution Date to but excluding the current
Distribution Date (or, for the first Distribution Date, the actual number of
days elapsed from the Closing Date to but excluding the first Distribution
Date), and the denominator of which is 360.
The Group II Scheduled Notional Amount with respect to each Distribution
Date, which declines in accordance with the expected amortization of the Group
II Mortgage Loans, is set forth below.
GROUP II
SCHEDULED
DISTRIBUTION DATE NOTIONAL AMOUNT STRIKE RATE
----------------- --------------- -----------
August 2003 $65,212,000 4.23%
September 2003 64,115,000 5.59
October 2003 62,974,000 5.77
November 2003 61,791,000 5.58
December 2003 60,566,000 5.76
January 2004 59,299,000 5.57
February 2004 57,994,000 5.57
March 2004 56,651,000 5.95
April 2004 55,272,000 5.56
May 2004 53,926,000 5.74
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June 2004 52,614,000 5.55
July 2004 51,333,000 5.73
August 2004 50,084,000 5.55
September 2004 48,865,000 5.54
October 2004 47,676,000 5.72
November 2004 46,515,000 5.54
December 2004 45,383,000 5.72
January 2005 44,278,000 5.53
February 2005 43,200,000 5.53
March 2005 42,149,000 6.11
April 2005 41,123,000 5.96
May 2005 40,125,000 6.17
June 2005 39,152,000 5.97
July 2005 38,202,000 6.15
August 2005 37,275,000 5.94
September 2005 36,371,000 5.93
October 2005 35,488,000 6.31
November 2005 34,628,000 6.10
December 2005 33,789,000 6.29
January 2006 32,970,000 6.08
The Group II Cap Agreement will terminate after the Distribution Date in
January 2006.
The Cap Agreements will be governed by and construed in accordance with the
laws of the State of New York. The obligations of the Cap Provider are limited
to those specifically set forth in the Cap Agreements.
The Cap Provider is a Scottish banking organization and a direct, wholly
owned subsidiary of The Royal Bank of Scotland Group plc ("RBS Group"), a
diversified financial services group engaged in a wide range of banking,
financial and finance related activities in the United Kingdom and
internationally. The Cap Provider currently has a long-term counterparty credit
rating of "AA-" from S&P and "Aa1" from Moody's and a short-term credit rating
of "A-1+" from S&P and "P-1" from Moody's.
Except for the information provided in the preceding paragraph, the Cap
Provider and RBS Group have not been involved in the preparation of, and do not
accept any responsibility for, this prospectus supplement or the accompanying
prospectus.
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FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Thacher Proffitt & Wood, counsel to the Depositor,
assuming compliance with the provisions of the Pooling and Servicing Agreement,
for federal income tax purposes, each of the REMICs established under the
Pooling and Servicing Agreement will qualify as a REMIC under the Code.
For federal income tax purposes (i) the Residual Certificates will
represent the "residual interests" in each REMIC elected by the trust and (ii)
the Offered Certificates (exclusive of any right of the holder of such
certificates to receive payments from the Reserve Fund in respect of Net WAC
Rate Carryover Amounts), the Class P Certificates and the Class CE Certificates
will represent the "regular interests" of, and will be treated as debt
instruments of, a REMIC. See "Material Federal Income Tax Considerations-REMICs"
in the prospectus.
For federal income tax purposes, the Class M-4 Certificates will, and the
other Offered Certificates will not, be treated as having been issued with
original issue discount. The prepayment assumption that will be used in
determining the rate of accrual of original issue discount, market discount and
premium, if any, for federal income tax purposes will be based on the assumption
that, subsequent to the date of any determination the fixed rate Mortgage Loans
will prepay at a rate equal to 100% PPC and the adjustable-rate Mortgage Loans
prepay at a rate equal to 28% CPR. No representation is made that the Mortgage
Loans will prepay at that rate or at any other rate. See "Material Federal
Income Tax Consideration-General" and "-REMICs-Taxation of Owners of Regular
Securities" in the prospectus.
The holders of the Offered Certificates will be required to include in
income interest on their certificates in accordance with the accrual method of
accounting.
The Internal Revenue Service (the "IRS") has issued original issue discount
regulations (the "OID Regulations") under sections 1271 to 1275 of the Code that
address the treatment of debt instruments issued with original issue discount,
Purchasers of the Offered Certificates should be aware that the OID Regulations
do not adequately address certain issues relevant to, or are not applicable to,
prepayable securities such as the Offered Certificates. In addition, there is
considerable uncertainty concerning the application of the OID Regulations to
REMIC Regular Certificates that provide for payments based on an adjustable rate
such as the Class A Certificates and the Mezzanine Certificates. Because of the
uncertainty concerning the application of Section 1272(a)(6) of the Code to such
certificates and because the rules of the OID Regulations relating to debt
instruments having an adjustable rate of interest are limited in their
application in ways that could preclude their application to such certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert that
the Offered Certificates should be treated as issued with original issue
discount or should be governed by the rules applicable to debt instruments
having contingent payments or by some other method not yet set forth in
regulations. Prospective purchasers of the Offered Certificates are advised to
consult their tax advisors concerning the tax treatment of such certificates.
In certain circumstances the OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, the holder of an Offered Certificate may
be able to select a method for recognizing original issue discount that differs
from that used by the Trust in preparing reports to the certificateholders and
the IRS.
If the method for computing original issue discount described above results
in a negative amount for any period with respect to a Certificateholder, the
amount of original issue discount allocable to that period would be zero and the
Certificateholder will be permitted to offset that negative amount only against
future original issue discount, if any, attributable to those Certificates.
Certain of the certificates may be treated for federal income tax purposes
as having been issued at a premium. Whether any holder of a certificate will be
treated as holding such certificate with amortizable bond premium will depend on
such certificateholders purchase price and the distributions
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remaining to be made on such certificate at the time of its acquisition by such
certificateholder. Holders of such certificates should consult their own tax
advisors regarding the possibility of making an election to amortize such
premium. See "Material Federal Income Tax Considerations- REMICs--Taxation of
Owners of Regular Securities" in the Prospectus.
Each holder of Class A or Mezzanine Certificate is deemed to own an
undivided beneficial ownership interest in a REMIC and the right to receive
payments from the Reserve Fund in respect of Net WAC Rate Carryover Amounts. The
Reserve Fund is not an asset of any REMIC.
The treatment of amounts received by a holder of Class A or Mezzanine
Certificate under that certificateholder's right to receive a Net WAC Rate
Carryover Amount will depend on the portion, if any, of the certificateholder's
purchase price allocable thereto. Under the REMIC Regulations, each holder of an
Offered Certificate must allocate its purchase price for such certificate
between its undivided interest in the regular interest of a REMIC and its
undivided interest in the right to receive payments from the Reserve Fund in
respect of Net WAC Rate Carryover Amounts in accordance with the relative, fair
market values of each property right. The Pooling and Servicing Agreement will
provide that the Securities Administrator is required to treat payments made to
the holders of the Class A Certificates and the Mezzanine Certificates with
respect to a Net WAC Rate Carryover Amount as includible in income based on the
regulations relating to notional principal contracts. The OID regulations
provide that the trust's allocation of the issue price is binding on all holders
unless the holder explicitly discloses on its tax return that its allocation is
different from the trust's allocation. For tax reporting purposes, the
Securities Administrator will be directed to treat the right to receive payments
from the Reserve Fund in respect of Net WAC Rate Carryover Amounts as having a
DE MINIMIS value. However, this assignment of value is not binding on the IRS
and the IRS could argue that a greater value should have been allocated to the
right to receive payments from the Reserve Fund in respect of Net WAC Rate
Carryover Amounts. If an argument of this kind were to be sustained, the Class A
Certificates and the Mezzanine Certificates could be viewed as having been
issued with original issue discount. Under the REMIC Regulations, the Trustee is
required to account for the REMIC Regular Interest and the right to receive
payments from the Reserve Fund in respect of Net WAC Rate Carryover Amounts as
discrete property rights. Holders of the Offered Certificates are advised to
consult their own tax advisors regarding the allocation of issue price, timing,
character and source of income and deductions resulting from the ownership of
the Offered Certificates. Treasury regulations have been promulgated under
Section 1275 of the Code generally providing for the integration of a
"qualifying debt instrument" with a hedge if the combined cash flows of the
components are substantially equivalent to the cash flows on a variable rate
debt instrument. However, these regulations specifically disallow integration of
debt instruments subject to Section 1272(a)(6) of the Code. Therefore, holders
of the Offered Certificates will be unable to use the integration method
provided for under these regulations with respect to the Offered Certificates.
Ownership of the right to Net WAC Rate Carryover Amounts will nevertheless
entitle the owner to amortize the separate price paid for the right to Net WAC
Rate Carryover Amounts under the regulations relating to notional principal
contracts if this right is treated as a "notional principal contract."
In the event that a certificateholder's right to receive Net WAC Rate
Carryover Amounts is characterized as a "Notional Principal Contract," upon the
sale of a Class A Certificate or Mezzanine Certificate the amount of the sale
allocated to the selling certificateholder's right to receive payments from the
Reserve Fund in respect of the Net WAC Rate Carryover Amounts would be
considered a "termination payment" under the regulations relating to Notional
Principal Contracts allocable to the related certificate. A certificateholder
will have gain or loss from a termination of the right to receive payments from
the Reserve Fund in respect of Net WAC Rate Carryover Amounts equal to (i) any
termination payment it received or is deemed to have received minus (ii) the
unamortized portion of any amount paid (or deemed paid) by the certificateholder
upon entering into or acquiring its interest in the right to receive payments
from the Reserve Fund in respect of Net WAC Rate Carryover Amounts.
Gain or loss realized upon the termination of the right to receive payments
from the Reserve Fund in respect of Net WAC Rate Carryover Amounts will
generally be treated as capital gain or loss. Moreover,
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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.
This paragraph applies to the Class A Certificates and the Mezzanine
Certificates exclusive of any rights in the Reserve Fund. The Offered
Certificates will be treated as assets described in Section 7701(a)(19)(C) of
the Code and "real estate assets" under Section 856(c)(4)(A) of the Code
generally in the same proportion that the assets of the trust would be so
treated. In addition, interest on the Offered Certificates will be treated as
"interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Code to the extent that the Offered Certificates are treated
as "real estate assets" under Section 856(c)(4)(A) of the Code. Moreover, the
Offered Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its startup day in
exchange for a regular or residual interest therein. However, as mentioned
above, no portion of a Class A or Mezzanine Certificateholder's basis or income
allocable to a Basis Risk Arrangement will qualify for such treatment. As a
result, those Certificates are not suitable investments for inclusion in another
REMIC. See "Pooling and Servicing Agreement--Termination" in this prospectus
supplement and "Material Federal Income Tax Considerations--
REMICs--Characterization of Investments in REMIC Securities" in the prospectus.
The holders of the Offered Certificates will be required to include in
income interest on their certificates in accordance with the accrual method of
accounting. As noted above, each holder of a Class A Certificate or a Mezzanine
Certificate will be required to allocate a portion of the purchase price paid
for such certificates to the right to receive payments from the Reserve Fund in
respect of Net WAC Rate Carryover Amounts. The value of the right to receive any
Net WAC Rate Carryover Amount is a question of fact which could be subject to
differing interpretations. Because Net WAC Rate Carryover Amounts are treated as
a separate right of the Class A Certificates and Mezzanine Certificates not
payable by the REMIC, this right will not be treated as a qualifying asset for
any certificateholder that is a mutual savings bank, domestic building and loan
association, real estate investment trust, or real estate mortgage investment
conduit and any amounts received from the reserve fund will not be qualifying
real estate income for real estate investment trusts.
For further information regarding federal income tax consequences of
investing in the Offered Certificates, see "Material Federal Income Tax
Considerations--REMICs" in the prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the amended and restated
underwriting agreement, dated as of July 8, 2002 and a terms agreement dated as
of July 15, 2003 (collectively, the "Underwriting Agreement"), among the
Underwriter and the Depositor, the Depositor has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase from the Depositor, the
Offered Certificates.
Distribution of the Offered Certificates will be made from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the Depositor, will be 100%
of the aggregate initial Certificate Principal Balance of the Class A
Certificates and the Mezzanine Certificates. In connection with the purchase and
sale of the Offered Certificates, the Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting discounts.
The Offered Certificates are offered subject to receipt and acceptance by
the Underwriter, to prior sale and to the Underwriter's right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Offered Certificates will be made
through the facilities of DTC, Clearstream and the Euroclear System on or about
the Closing Date. The Offered Certificates will be offered in Europe and the
United States of America.
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The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against those civil liabilities set forth in the Underwriting
Agreement, including liabilities under the Securities Act of 1933, as amended,
or will contribute to payments the Underwriter may be required to make in
respect of these liabilities.
SECONDARY MARKET
There is currently no secondary market for the Offered Certificates and
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 Underwriter
intends to establish a market in the Offered Certificates but it is not
obligated to do so. There can be no assurance that any additional information
regarding the Offered Certificates will be available through any other source.
In addition, the Depositor is not aware of any source through which price
information about the Offered Certificates will be available on an ongoing
basis. The limited nature of the information regarding the Offered Certificates
may adversely affect the liquidity of the Offered Certificates, even if a
secondary market for the Offered Certificates becomes available. The primary
source of information available to investors concerning the Offered Certificates
will be the monthly statements discussed herein under "Description of the
Certificates-Reports to Certificateholders" which will include information as to
the outstanding principal balance of the Offered Certificates and the status of
the applicable form of credit enhancement.
LEGAL OPINIONS
Legal matters relating to the Offered Certificates will be passed upon for
the Depositor and the Underwriter by Thacher Proffitt & Wood, New York, New
York.
RATINGS
It is a condition to the issuance of the certificates that the Class A
Certificates be rated "AAA" by Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. ("S&P"), "AAA" by Fitch Ratings ("Fitch") and "Aaa" by Moody's
Investors Service, Inc. ("Moody's"), that the Class M-1 Certificates be rated as
least "AA" by S&P, "AA" by Fitch and "Aa2" by Moody's, that the Class M-2
Certificates be rated at least "A" by S&P, "A" by Fitch and "A2" by Moody's,
that the Class M-3 Certificates be rated at least "A-" by S&P, "A-" by Fitch and
"A3" by Moody's and that the Class M-4 Certificates be rated at least "BBB+" by
S&P, "BBB+" by Fitch and "Baa1" by Moody's.
The ratings assigned to mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions to which
the certificateholders are entitled. The rating process addresses structural and
legal aspects associated with the certificates, including the nature of the
underlying mortgage loans. The ratings assigned to mortgage pass-through
certificates do not represent any assessment of the likelihood that principal
prepayments will be made by the mortgagors or the degree to which such
prepayments will differ from that originally anticipated. The ratings do not
address the possibility that certificateholders might suffer a lower than
anticipated yield due to non-credit events. In addition, the ratings on the
Class A Certificates and the Mezzanine Certificates do not address the
likelihood of receipt by the holders of such certificates of any amounts in
respect of Net WAC Rate Carryover Amounts.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Offered Certificates are subsequently lowered for any reason, no person or
entity is obligated to provide any additional credit support or credit
enhancement with respect to the Offered Certificates.
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The Depositor has not requested that any rating agency rate the Offered
Certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the Offered Certificates, or, if it
does, what rating would be assigned by any other rating agency. A rating on the
Offered Certificates by another rating agency, if assigned at all, may be lower
than the ratings assigned to the Offered Certificates as stated in this section.
LEGAL INVESTMENT
The Class A Certificatesand the Class M-1 Certificates will constitute
"mortgage related securities" for purposes of SMMEA for so long as they are
rated not lower than the second highest rating category by a rating agency, and,
therefore, will be legal investments for those entities to the extent provided
in SMMEA. SMMEA, however, provides for state limitation on the authority of
entities to invest in "mortgage related securities" provided that the
restrictive legislation was enacted prior to October 3, 1991. There are ten
states that have enacted legislation which overrides the preemption provisions
of SMMEA. The Class M-2 Certificates and the Class M-3 Certificates will not
constitute "mortgage related securities" for purposes of SMMEA.
The Depositor makes no representations as to the proper characterization of
any class of Offered Certificates for legal investment or other purposes, or as
to the ability of particular investors to purchase any class of Offered
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Offered Certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent any class of Offered Certificates constitutes a legal
investment or is subject to investment, capital or other restrictions. See
"Legal Investment" in the Prospectus.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "Plan"), or any insurance
company, whether through its general or separate accounts, or any other person
investing plan assets of a Plan, should carefully review with its legal advisors
whether the purchase or holding of Offered Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. The purchase or holding of the Offered Certificates by or on behalf
of, or with Plan assets of, a Plan may qualify for exemptive relief under the
Underwriters' Exemption, as currently in effect and as described under "ERISA
Considerations" in the prospectus. The Underwriters' Exemption relevant to the
Offered Certificates was granted by the Department of Labor as Prohibited
Transaction Exemption ("PTE") 94-84 and FAN 97-03E, as amended by PTE 97-34 at
62 F.R. 39021, PTE 2000-58 at 65 F.R. 67765 and PTE 2002-41 at 67 F.R. 54487.
The Underwriters' Exemption was amended by PTE 2002-41 to permit a trustee to be
affiliated with an underwriter despite the restriction in PTE 2000-58 to the
contrary. However, the Underwriters' Exemption contains a number of conditions
which must be met for the exemption to apply, including the requirements that
the Offered Certificates be rated at least "BBB-" (or its equivalent) by Fitch,
Moody's or S&P at the time of the Plan's purchase and that the investing Plan
must be an "accredited investor" as defined in Rule 501(a)(1) of Regulation D
under the Securities Act. A fiduciary of a Plan contemplating purchasing an
Offered Certificate must make its own determination that the conditions set
forth in the Underwriters' Exemption will be satisfied with respect to the
certificates.
Each beneficial owner of a Mezzanine Certificate or any interest therein
shall be deemed to have represented, by virtue of its acquisition or holding of
that certificate or interest therein, that either (i) it is not a plan investor,
(ii) it has acquired and is holding such Mezzanine Certificates in reliance on
the Underwriters' Exemption, and that it understands that there are certain
conditions to the availability of the Underwriters' Exemption, including that
the Mezzanine Certificates must be rated, at the time of purchase, not lower
than "BBB-" (or its equivalent) by Fitch, Moody's or S&P, or (iii) (1) it is an
insurance company,
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(2) the source of funds used to acquire or hold the certificate or interest
therein is an "insurance company general account," as such term is defined in
PTCE 95-60, and (3) the conditions in Sections I and III of PTCE 95-60 have been
satisfied.
If any Mezzanine Certificate or any interest therein is acquired or held in
violation of the conditions described in the preceding paragraph, the next
preceding permitted beneficial owner will be treated as the beneficial owner of
that Mezzanine Certificate, retroactive to the date of transfer to the purported
beneficial owner. Any purported beneficial owner whose acquisition or holding of
any such certificate or interest therein was effected in violation of the
conditions described in the preceding paragraph shall indemnify and hold
harmless the Depositor, the Trustee, the Servicer, the Master Servicer and the
Securities Administrator and the trust fund from and against any and all
liabilities, claims, costs or expenses incurred by those parties as a result of
that acquisition or holding.
Any fiduciary or other investor of Plan assets that proposes to acquire or
hold the Offered Certificates on behalf of or with Plan assets of any Plan
should consult with its counsel with respect to: (i) whether, with respect to
the Offered Certificates, the specific and general conditions and the other
requirements in the Underwriters' Exemption would be satisfied and (ii) the
potential applicability of the general fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Internal Revenue Code to the proposed investment. SEE "ERISA CONSIDERATIONS" IN
THE PROSPECTUS.
The sale of any of the Offered Certificates to a Plan is in no respect a
representation by the Depositor or the related underwriter that an investment in
the Offered Certificates meets all relevant legal requirements relating to
investments by Plans generally or any particular Plan, or that an investment in
the Offered Certificates is appropriate for Plans generally or any particular
Plan.
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ANNEX I
GLOBAL CLEARANCE AND SETTLEMENT AND DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered Certificates will be
offered globally (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, Clearstream or Euroclear. The Global Securities
will be tradable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle in
same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Clearstream and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to conventional eurobonds, except that there
will be no temporary global security and no "lock-up" or restricted period.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
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 sellers
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.
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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
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct the respective Depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
the actual number of days in such accrual period and a year assumed to consist
of 360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the respective Depositary of the DTC Participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Clearstream Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the Clearstream or Euroclear cash debt will be valued instead as
of the actual settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Clearstream Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Clearstream Participants
or Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CLEARSTREAM OR EUROCLEAR SELLER AND DTC PURCHASER. Due to
time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depository, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest
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accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the Clearstream Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the
Clearstream Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the Clearstream Participant or Euroclear
Participant have a line of credit with its respective clearing system and elect
to be in debt in anticipation of receipt of the sale proceeds in its account,
the back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Clearstream Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream or Euroclear and that purchase
Global Securities from DTC Participants For deliver to Clearstream Participants
or Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Clearstream or Euroclear for one day (until the
purchase side of the day trade is reflected in their Clearstream or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Clearstream or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Clearstream Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8BEN). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8BEN (Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding). If the information shown on
Form W-8BEN changes, a new Form W-8BEN must be filed within 30 days of such
change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income ineffectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM W-8BEN). Non-U.S. Persons that are Certificate Owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form W-8BEN
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(Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). Form W-8BEN may be filed by the Certificate Owners or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payers Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Certificate Owner of a
Global Security files by submitting the appropriate form to the person through
whom it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8BEN and Form W-8ECI are effective
until the third succeeding calendar year from the date such form is signed.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise), (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20,1996, and treated as United States persons prior to such
date, that elect to continue to be treated as United States persons will also be
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I-4
PROSPECTUS
Asset Backed Certificates
Asset Backed Notes
(Issuable in Series)
ACE Securities Corp.,
Depositor
THE TRUST FUNDS:
Each trust fund will be established to hold assets transferred to it by ACE
Securities Corp. The assets in each trust fund will generally consist of one or
more of the following:
o mortgage loans secured by one- to four-family residential properties;
o unsecured home improvement loans;
o manufactured housing installment sale contracts;
o mortgage pass-through securities issued or guaranteed by Ginne Mae,
Fannie Mae, or Freddie Mac; or
o previously issued asset-backed or mortgage-backed securities backed by
mortgage loans secured by residential properties or participations in
those types of loans.
The assets in your trust fund are specified in the prospectus supplement
for that particular trust fund, while the types of assets that may be included
in a trust fund, whether or not in your trust fund, are described in greater
detail in this prospectus.
THE SECURITIES:
ACE Securities Corp. will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
is own distinct designation. Each series will be issued in one or more classes
and will evidence beneficial ownership of, or be secured by, the assets in the
trust fund that the series relates to. A prospectus supplement for a series will
specify all of the terms of the series and of each of the classes in the series.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is July 10, 2003.
TABLE OF CONTENTS
DESCRIPTION OF THE TRUST FUNDS.................................................3
USE OF PROCEEDS...............................................................17
YIELD CONSIDERATIONS..........................................................17
THE DEPOSITOR.................................................................24
DESCRIPTION OF THE SECURITIES.................................................24
DESCRIPTION OF THE AGREEMENTS.................................................39
DESCRIPTION OF CREDIT SUPPORT.................................................63
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.......................................66
CERTAIN LEGAL ASPECTS OF THE CONTRACTS........................................80
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS....................................84
STATE AND OTHER TAX CONSIDERATIONS...........................................127
ERISA CONSIDERATIONS.........................................................127
LEGAL INVESTMENT.............................................................134
METHODS OF DISTRIBUTION......................................................136
ADDITIONAL INFORMATION.......................................................137
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..............................138
LEGAL MATTERS................................................................138
FINANCIAL INFORMATION........................................................138
RATING ....................................................................139
INDEX OF DEFINED TERMS.......................................................140
2
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each trust fund (the "Assets") will include some or
all of the following types of assets:
o mortgage loans on residential properties, which may include Home
Equity Loans, home improvement contracts and Land Sale Contracts (each
as defined in this prospectus);
o home improvement installment sales contracts or installment loans that
are unsecured called unsecured home improvement Loans;
o manufactured housing installment sale contracts or installment loan
agreements referred to as contracts;
o any combination of "fully modified pass-through" mortgage-backed
certificates guaranteed by the Government National Mortgage
Association ("Ginnie Mae"), guaranteed mortgage pass-through
securities issued by Fannie Mae ("Fannie Mae") and mortgage
participation certificates issued by the Federal Home Loan Mortgage
Corporation ("Freddie Mac") (collectively, "Agency Securities");
o previously issued asset-backed certificates, collateralized mortgage
obligations or participation certificates (each, and collectively,
"Mortgage Securities") evidencing interests in, or collateralized by,
mortgage loans or Agency Securities; or
o a combination of mortgage loans, unsecured home improvement loans,
contracts, Agency Securities and/or Mortgage Securities.
The mortgage loans will not be guaranteed or insured by ACE Securities
Corp. or any of its affiliates. The mortgage loans will be guaranteed or insured
by a governmental agency or instrumentality or other person only if and to the
extent expressly provided in the prospectus supplement. The depositor will
select each Asset to include in a trust fund from among those it has purchased,
either directly or indirectly, from a prior holder (an "Asset Seller"), which
may be an affiliate of the depositor and which prior holder may or may not be
the originator of that mortgage loan.
The Assets included in the trust fund for your series may be subject to
various types of payment provisions:
o "Level Payment Assets," which may provide for the payment of interest,
and full repayment of principal, in level monthly payments with a
fixed rate of interest computed on their declining principal balances;
o "Adjustable Rate Assets," which may provide for periodic adjustments
to their rates of interest to equal the sum of a fixed margin and an
index;
o "Buy Down Assets," which are Assets for which funds have been provided
by someone other than the related borrowers to reduce the borrowers'
monthly payments during the early period after origination of those
Assets;
o "Increasing Payment Assets," as described below;
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o "Interest Reduction Assets," which provide for the one-time reduction
of the interest rate payable on these Assets;
o "GEM Assets," which provide for (1) monthly payments during the first
year after origination that are at least sufficient to pay interest
due on these Assets, and (2) an increase in those monthly payments in
later years at a predetermined rate resulting in full repayment over a
shorter term than the initial amortization terms of those Assets;
o "GPM Assets," which allow for payments during a portion of their terms
which are or may be less than the amount of interest due on their
unpaid principal balances, and this unpaid interest will be added to
the principal balances of those Assets and will be paid, together with
interest on the unpaid interest, in later years;
o "Step-up Rate Assets" which provide for interest rates that increase
over time;
o "Balloon Payment Assets;"
o "Convertible Assets" which are Adjustable Rate Assets subject to
provisions pursuant to which, subject to limitations, the related
borrowers may exercise an option to convert the adjustable interest
rate to a fixed interest rate; and
o "Bi-weekly Assets," which provide for payments to be made by borrowers
on a bi-weekly basis.
An "Increasing Payment Asset" is an Asset that provides for monthly
payments that are fixed for an initial period to be specified in the prospectus
supplement and which increase thereafter (at a predetermined rate expressed as a
percentage of the monthly payment during the preceding payment period, subject
to any caps on the amount of any single monthly payment increase) for a period
to be specified in the prospectus supplement from the date of origination, after
which the monthly payment is fixed at a level-payment amount so as to fully
amortize the Asset over its remaining term to maturity. The scheduled monthly
payment for an Increasing Payment Asset is the total amount required to be paid
each month in accordance with its terms and equals the sum of (1) the borrower's
monthly payments referred to in the preceding sentence and (2) payments made by
the respective servicers pursuant to buy-down or subsidy agreements. The
borrower's initial monthly payments for each Increasing Payment Asset are set at
the level-payment amount that would apply to an otherwise identical Level
Payment Asset having an interest rate some number of percentage points below the
Asset Rate of that Increasing Payment Asset. The borrower's monthly payments on
each Increasing Payment Asset, together with any payments made on the Increasing
Payment Asset by the related servicers pursuant to buy-down or subsidy
agreements, will in all cases be sufficient to allow payment of accrued interest
on the Increasing Payment Asset at the related interest rate, without negative
amortization. A borrower's monthly payments on an Increasing Payment Asset may,
however, not be sufficient to result in any reduction of the principal balance
of that Asset until after the period when those payments may be increased.
The Notes or Certificates, as applicable, will be entitled to payment only
from the assets of the related trust fund and will not be entitled to payments
from the assets of any other trust fund established by the depositor. The assets
of a trust fund may consist of certificates representing beneficial ownership
interests in, or indebtedness of, another trust fund that contains the Assets,
if specified in the prospectus supplement.
4
MORTGAGE LOANS
GENERAL
Each mortgage loan will generally be secured by a lien on (1) a one- to
four-family residential property (including a manufactured home) or a security
interest in shares issued by a cooperative housing corporation (a "Single Family
Property") or (2) a primarily residential property that consists of five or more
residential dwelling units, referred to as a multifamily property, which may
include limited retail, office or other commercial space ("Multi Family
Property" and together with Single Family Property, "Mortgaged Properties"). The
mortgage loans will be secured by first and/or junior mortgages or deeds of
trust or other similar security instruments creating a first or junior lien on
Mortgaged Property.
The Mortgaged Properties may also include:
o Apartment buildings owned by cooperative housing corporations
("Cooperatives"); and
o Leasehold interests in properties, the title to which is held by third
party lessors. The term of these leaseholds will exceed the term of
the related mortgage note by at least five years or some other time
period specified in the prospectus supplement.
The principal balance of mortgage loans secured by Mortgaged Property
consisting of Multi Family Property or apartment buildings owned by
Cooperatives shall not exceed 5% of the principal balance of all mortgage
loans conveyed to the trust fund.
The mortgage loans may include:
o Closed-end and/or revolving home equity loans or balances of these
home equity loans ("Home Equity Loans");
o Secured home improvement installment sales contracts and secured
installment loan agreements, known as home improvement contracts; and
o Mortgage loans evidenced by contracts ("Land Sale Contracts") for the
sale of properties pursuant to which the borrower promises to pay the
amount due on the mortgage loans to the holder of the Land Sale
Contract with fee title to the related property held by that holder
until the borrower has made all of the payments required pursuant to
that Land Sale Contract, at which time fee title is conveyed to the
borrower.
The originator of each mortgage loan will have been a person other than the
depositor. The prospectus supplement will indicate if any originator is an
affiliate of the depositor. The mortgage loans will be evidenced by mortgage
notes secured by mortgages, deeds of trust or other security instruments (the
"Mortgages") creating a lien on the Mortgaged Properties. The Mortgaged
Properties will be located in any one of the fifty states, the District of
Columbia, Guam, Puerto Rico or any other territory of the United States. If
provided in the prospectus supplement, the mortgage loans may include loans
insured by the Federal Housing Administration (the "FHA") or partially
guaranteed by the Veteran's Administration (the "VA"). See "--FHA Loans and VA
Loans" below.
5
LOAN-TO-VALUE RATIO
The "Loan-to-Value Ratio" of a mortgage loan at any particular time is the
ratio (expressed as a percentage) of the then outstanding principal balance of
the mortgage loan to the Value of the related Mortgaged Property. The "Value" of
a Mortgaged Property, other than for Refinance Loans, is generally the lesser of
(a) the appraised value determined in an appraisal obtained by the originator at
origination of that loan and (b) the sales price for that property. "Refinance
Loans" are loans made to refinance existing loans. Unless otherwise specified in
the prospectus supplement, the Value of the Mortgaged Property securing a
Refinance Loan is the appraised value of the Mortgaged Property determined in an
appraisal obtained at the time of origination of the Refinance Loan. The value
of a Mortgaged Property as of the date of initial issuance of the related series
may be less than the Value at origination and will fluctuate from time to time
based upon changes in economic conditions and the real estate market.
PRIMARY MORTGAGE INSURANCE
Except in the case of high loan-to-value loans and as otherwise specified
in the related prospectus supplement, each mortgage loan having a loan-to-value
ratio at origination in excess of 80%, is required to be covered by a primary
mortgage guaranty insurance policy insuring against default on such mortgage
loan as to at least the principal amount thereof exceeding 75% of the value of
the mortgaged property at origination of the mortgage loan. This insurance must
remain in force at least until the mortgage loan amortizes to a level that would
produce a loan-to-value ratio lower than 80%. See "--Primary Mortgage Insurance
Policies".
MORTGAGE LOAN INFORMATION IN THE PROSPECTUS SUPPLEMENTS
Your prospectus supplement will contain information, as of the dates
specified in that prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to the mortgage loans,
including:
o the total outstanding principal balance and the largest, smallest and
average outstanding principal balance of the mortgage loans as of,
unless otherwise specified in that prospectus supplement, the close of
business on the first day of the month of formation of the related
trust fund (the "Cut-off Date");
o the type of property securing the mortgage loans;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the mortgage loans;
o the range of maturity dates of the mortgage loans;
o the range of the Loan-to-Value Ratios at origination of the mortgage
loans;
o the mortgage rates or range of mortgage rates and the weighted average
mortgage rate borne by the mortgage loans;
o the state or states in which most of the Mortgaged Properties are
located;
o information regarding the prepayment provisions, if any, of the
mortgage loans;
o for mortgage loans with adjustable mortgage rates ("ARM Loans"), the
index, the frequency of the adjustment dates, the range of margins
added to the index, and the
6
maximum mortgage rate or monthly payment variation at the time of any
adjustment of and over the life of the ARM Loan;
o information regarding the payment characteristics of the mortgage
loans, including balloon payment and other amortization provisions;
o the number of mortgage loans that are delinquent and the number of
days or ranges of the number of days those mortgage loans are
delinquent; and
o the material underwriting standards used for the mortgage loans.
If specific information respecting the mortgage loans is unknown to the
depositor at the time the Notes or Certificates, as applicable, are initially
offered, more general information of the nature described above will be provided
in the prospectus supplement, and specific information will be set forth in a
report that will be available to purchasers of the related Notes or
Certificates, as applicable, at or before the initial issuance of that Security
and will be filed as part of a Current Report on Form 8-K with the Securities
and Exchange Commission (the "Commission") within fifteen days after that
initial issuance. The characteristics of the mortgage loans included in a trust
fund will not vary by more than five percent (by total principal balance as of
the Cut-off Date) from the characteristics of the mortgage loans that are
described in the prospectus supplement.
The prospectus supplement will specify whether the mortgage loans include
(1) Home Equity Loans, which may be secured by Mortgages that are junior to
other liens on the related Mortgaged Property and/or (2) home improvement
contracts originated by a home improvement contractor and secured by a mortgage
on the related mortgaged property that is junior to other liens on the mortgaged
property. The home improvements purchased with the home improvement contracts
typically include replacement windows, house siding, roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods, solar heating panels,
patios, decks, room additions and garages. The prospectus supplement will
specify whether the home improvement contracts are FHA loans and, if so, the
limitations on any FHA insurance. In addition, the prospectus supplement will
specify whether the mortgage loans contain some mortgage loans evidenced by Land
Sale Contracts.
PAYMENT PROVISIONS OF THE MORTGAGE LOANS
All of the mortgage loans will provide for payments of principal, interest
or both, on due dates that occur monthly, quarterly or semi-annually or at some
other interval as is specified in the prospectus supplement or for payments in
another manner described in the prospectus supplement. Each mortgage loan may
provide for no accrual of interest or for accrual of interest on the mortgage
loan at a mortgage rate that is fixed over its term or that adjusts from time to
time, or that may be converted from an adjustable to a fixed mortgage rate or a
different adjustable mortgage rate, or from a fixed to an adjustable mortgage
rate, from time to time pursuant to an election or as otherwise specified in the
related mortgage note, in each case as described in the prospectus supplement.
Each mortgage loan may provide for scheduled payments to maturity or payments
that adjust from time to time to accommodate changes in the mortgage rate or to
reflect the occurrence of particular events or that adjust on the basis of other
methodologies, and may provide for negative amortization or accelerated
amortization, in each case as described in the prospectus supplement. Each
mortgage loan may be fully amortizing or require a balloon payment due on its
stated maturity date, in each case as described in the prospectus supplement.
Each mortgage loan may contain prohibitions on prepayment (a "Lockout Period"
and, the date of expiration thereof, a "Lock-out Date") or require payment of a
premium or a yield maintenance penalty (a "Prepayment Premium") in connection
with a prepayment, in each case as described in the prospectus supplement. If
the holders of any class or classes of Offered Notes or Offered Certificates, as
applicable, are entitled to all or a portion of any Prepayment Premiums
collected from the mortgage loans, the prospectus supplement will specify the
method or methods by which any of these amounts will be allocated. See
"--Assets" above.
7
REVOLVING CREDIT LINE LOANS
As more fully described in the prospectus supplement, the mortgage loans
may consist, in whole or in part, of revolving Home Equity Loans or balances of
these Home Equity Loans ("Revolving Credit Line Loans"). Interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of that loan. From time to time
before the expiration of the related draw period specified in a Revolving Credit
Line Loan, principal amounts on that Revolving Credit Line Loan may be drawn
down (up to a maximum amount as set forth in the prospectus supplement) or
repaid. If specified in the prospectus supplement, new draws by borrowers under
the Revolving Credit Line Loans will automatically become part of the trust fund
described in the prospectus supplement. As a result, the total balance of the
Revolving Credit Line Loans will fluctuate from day to day as new draws by
borrowers are added to the trust fund and principal payments are applied to
those balances and those amounts will usually differ each day, as more
specifically described in the prospectus supplement. Under some circumstances,
under a Revolving Credit Line Loan, a borrower may, during the related draw
period, choose an interest only payment option, during which the borrower is
obligated to pay only the amount of interest that accrues on the loan during the
billing cycle, and may also elect to pay all or a portion of the principal. An
interest only payment option may terminate at the end of the related draw
period, after which the borrower must begin paying at least a minimum monthly
portion of the average outstanding principal balance of the loan.
UNSECURED HOME IMPROVEMENT LOANS
The unsecured home improvement loans may consist of conventional unsecured
home improvement loans, unsecured installment loans and unsecured home
improvement loans that are FHA loans. Except as otherwise described in the
prospectus supplement, the unsecured home improvement loans will be fully
amortizing and will bear interest at a fixed or variable annual percentage rate.
UNSECURED HOME IMPROVEMENT LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS
Each prospectus supplement will contain information, as of the dates
specified in the prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to any unsecured home
improvement loans, including:
o the total outstanding principal balance and the largest, smallest and
average outstanding principal balance of the unsecured home
improvement loans as of the applicable cut-off date;
o the weighted average, by principal balance, of the original and
remaining terms to maturity of the unsecured home improvement loans;
o the earliest and latest origination date and maturity date of the
unsecured home improvements loans;
o the interest rates or range of interest rates and the weighted average
interest rates borne by the unsecured home improvement loans;
o the state or states in which most of the unsecured home improvement
loans were originated.
o information regarding the prepayment provisions, if any, of the
unsecured home improvement loans;
8
o with respect to the unsecured home improvement loans with adjustable
interest rates, called ARM unsecured home improvement loans, the
index, the frequency of the adjustment dates, the range of margins
added to the index, and the maximum interest rate or monthly payment
variation at the time of any adjustment thereof and over the life of
the ARM unsecured home improvement loan;
o information regarding the payment characteristics of the unsecured
home improvement loans;
o the number of unsecured home improvement loans that are delinquent and
the number of days or ranges of the number of days that unsecured home
improvement loans are delinquent; and
o the material underwriting standards used for the unsecured home
improvement loans.
If specific information respecting the unsecured home improvement loans is
unknown to the depositor at the time Notes or Certificates, as applicable, are
initially offered, more general information of the nature described above will
be provided in the prospectus supplement, and specific information will be set
forth in a report that will be available to purchasers of the related Notes or
Certificates, as applicable, at or before the initial issuance thereof and will
be filed as part of a Current Report on Form 8-K with the Commission within
fifteen days after the related initial issuance. The characteristics of the
unsecured home improvement loans included in a trust fund will not vary by more
than five percent, by total principal balance as of the cut-off date, from the
characteristics thereof that are described in the prospectus supplement.
CONTRACTS
GENERAL
To the extent provided in the prospectus supplement, each contract will be
secured by a security interest in a new or used manufactured home, called a
Manufactured Home. The contracts may include contracts that are FHA loans. The
method of computing the Loan-to-Value Ratio of a contract will be described in
the prospectus supplement.
CONTRACT INFORMATION IN PROSPECTUS SUPPLEMENTS
Each prospectus supplement relating to a trust fund whose assets include a
substantial proportion of contracts will contain certain information, as of the
dates specified in that prospectus supplement and to the extent then applicable
and specifically known to the depositor, with respect to any contracts,
including:
o the total outstanding principal balance and the largest, smallest and
average outstanding principal balance of the contracts as of the
applicable cut-off date;
o whether the manufactured homes were new or used as of the origination
of the related contracts;
o the weighted average, by principal balance, of the original and
remaining terms to maturity of the contracts;
o the range of maturity dates of the contracts;
o the range of the Loan-to-Value Ratios at origination of the contracts;
9
o the annual percentage rate on each contract, called a contract rate,
or range of contract rates and the weighted average contract rate
borne by the contracts;
o the state or states in which most of the manufactured homes are
located at origination;
o information regarding the prepayment provisions, if any, of the
contracts;
o for contracts with adjustable contract rates, referred to as ARM
contracts, the index, the frequency of the adjustment dates, and the
maximum contract rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM contract;
o the number of contracts that are delinquent and the number of days or
ranges of the number of days those contracts are delinquent;
o information regarding the payment characteristics of the contracts;
and
o the material underwriting standards used for the contracts.
If specific information respecting the contracts is unknown to the
depositor at the time the Notes or Certificates, as applicable, are initially
offered, more general information of the nature described above will be provided
in the prospectus supplement, and specific information will be set forth in a
report that will be available to purchasers of the related Notes or
Certificates, as applicable, at or before the initial issuance thereof and will
be filed as part of a Current Report on Form 8-K with the Commission within
fifteen days after the related initial issuance. The characteristics of the
contracts included in a trust fund will not vary by more than five percent (by
total principal balance as of the cut-off date) from the characteristics thereof
that are described in the prospectus supplement.
The information described above regarding the contracts in a trust fund may
be presented in the prospectus supplement in combination with similar
information regarding the mortgage loans in the trust fund.
PAYMENT PROVISIONS OF THE CONTRACTS
All of the contracts will provide for payments of principal, interest or
both, on due dates that occur monthly or at some other interval as is specified
in the prospectus supplement or for payments in another manner described in the
prospectus supplement. Each contract may provide for no accrual of interest or
for accrual of interest thereon at a contract rate that is fixed over its term
or that adjusts from time to time, or as otherwise specified in the prospectus
supplement. Each contract may provide for scheduled payments to maturity or
payments that adjust from time to time to accommodate changes in the contract
rate as otherwise described in the prospectus supplement.
AGENCY SECURITIES
The Agency Securities will consist of any combination of Ginnie Mae
certificates, Fannie Mae certificates and Freddie Mac certificates, which may
include Stripped Agency Securities, as described below.
GINNIE MAE
Ginnie Mae is a wholly-owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. Section 306(g) of Title
III of the Housing Act authorizes Ginnie Mae to guarantee the timely payment of
the principal of and interest on certificates
10
that are based on and backed by a pool of FHA loans, VA loans or by pools of
other eligible residential loans.
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts that may be
required to be paid under any guaranty under this subsection." To meet its
obligations under that guaranty, Ginnie Mae is authorized, under Section 306(d)
of the National Housing Act of 1934 (the "Housing Act"), to borrow from the
United States Treasury with no limitations as to amount, to perform its
obligations under its guarantee.
GINNIE MAE CERTIFICATES
Each Ginnie Mae certificate will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by an issuer approved by Ginnie
Mae or Fannie Mae as a seller- servicer of FHA loans or VA loans, except as
described below regarding Stripped Agency Securities (as defined below). The
loans underlying Ginnie Mae certificates may consist of FHA loans, VA loans and
other loans eligible for inclusion in loan pools underlying Ginnie Mae
certificates. Ginnie Mae certificates may be issued under either or both of the
Ginnie Mae I program and the Ginnie Mae II program, as described in the
prospectus supplement. If the trust fund includes Ginnie Mae certificates, your
prospectus supplement will include any material additional information regarding
the Ginnie Mae guaranty program, the characteristics of the pool underlying
those Ginnie Mae certificates, the servicing of the related pool, the payment of
principal and interest on Ginnie Mae certificates and other relevant matters
regarding the Ginnie Mae certificates.
Except as otherwise specified in the prospectus supplement or as described
below with respect to Stripped Agency Securities, each Ginnie Mae certificate
will provide for the payment, by or on behalf of the issuer, to the registered
holder of that Ginnie Mae certificate of monthly payments of principal and
interest equal to the holder's proportionate interest in the total amount of the
monthly principal and interest payments on each related FHA loan or VA loan,
minus servicing and guaranty fees totaling the excess of the interest on that
FHA loan or VA loan over the Ginnie Mae certificates' interest rate. In
addition, each payment to a holder of a Ginnie Mae certificate will include
proportionate pass-through payments to that holder of any prepayments of
principal of the FHA loans or VA loans underlying the Ginnie Mae certificate and
the holder's proportionate interest in the remaining principal balance in the
event of a foreclosure or other disposition of any related FHA loan or VA loan.
The Ginnie Mae certificates do not constitute a liability of, or evidence
any recourse against, the issuer of the Ginnie Mae certificates, the depositor
or any affiliates of the depositor, and the only recourse of a registered holder
(for example, the trustee) is to enforce the guaranty of Ginnie Mae.
Ginnie Mae will have approved the issuance of each of the Ginnie Mae
certificates included in a trust fund in accordance with a guaranty agreement or
contract between Ginnie Mae and the issuer of the Ginnie Mae certificates.
Pursuant to that agreement, that issuer, in its capacity as servicer, is
required to perform customary functions of a servicer of FHA loans and VA loans,
including collecting payments from borrowers and remitting those collections to
the registered holder, maintaining escrow and impoundment accounts of borrowers
for payments of taxes, insurance and other items required to be paid by the
borrower, maintaining primary hazard insurance, and advancing from its own funds
to make timely payments of all amounts due on the Ginnie Mae certificate, even
if the payments received by that issuer on the loans backing the Ginnie Mae
certificate are less than the amounts due. If the issuer is unable to make
payments on a Ginnie Mae certificate as they become due, it must promptly notify
Ginnie Mae and request Ginnie Mae to make that payment. Upon that notification
and request, Ginnie Mae will make those payments directly to the registered
holder of the Ginnie Mae certificate. In the event no payment is made by the
issuer and the issuer fails to notify and request Ginnie Mae to make that
payment, the registered holder of the Ginnie Mae certificate has recourse
against only Ginnie Mae to obtain that payment. The trustee or its nominee, as
registered
11
holder of the Ginnie Mae certificates included in a trust fund, is entitled to
proceed directly against Ginnie Mae under the terms of the guaranty agreement or
contract relating to the Ginnie Mae certificates for any amounts that are unpaid
when due under each Ginnie Mae certificate.
The Ginnie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above so long as the
Ginnie Mae certificates and underlying residential loans meet the criteria of
the rating agency or agencies. The Ginnie Mae certificates and underlying
residential loans will be described in the prospectus supplement.
FANNIE MAE
Fannie Mae is a federally chartered and stockholder-owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended (the "Charter Act"). Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder- owned and privately
managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market by purchasing mortgage
loans from lenders. Fannie Mae acquires funds to purchase loans from many
capital market investors, thus expanding the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas. In addition, Fannie Mae issues
mortgage-backed securities primarily in exchange for pools of mortgage loans
from lenders. Fannie Mae receives fees for its guaranty of timely payment of
principal and interest on its mortgage-backed securities.
FANNIE MAE CERTIFICATES
Fannie Mae certificates are Guaranteed Mortgage Pass-Through Certificates
typically issued pursuant to a prospectus that is periodically revised by Fannie
Mae. Fannie Mae certificates represent fractional undivided interests in a pool
of mortgage loans formed by Fannie Mae. Each mortgage loan must meet the
applicable standards of the Fannie Mae purchase program. Mortgage loans
comprising a pool are either provided by Fannie Mae from its own portfolio or
purchased pursuant to the criteria of the Fannie Mae purchase program. Mortgage
loans underlying Fannie Mae certificates included in a trust fund will consist
of conventional mortgage loans, FHA loans or VA loans. If the trust fund
includes Fannie Mae certificates, your prospectus supplement will include any
material additional information regarding the Fannie Mae program, the
characteristics of the pool underlying the Fannie Mae certificates, the
servicing of the related pool, payment of principal and interest on the Fannie
Mae certificates and other relevant matters about the Fannie Mae certificates.
Except as described below with respect to Stripped Agency Securities,
Fannie Mae guarantees to each registered holder of a Fannie Mae certificate that
it will distribute amounts representing that holder's proportionate share of
scheduled principal and interest at the applicable interest rate provided for by
that Fannie Mae certificate on the underlying mortgage loans, whether or not
received, and that holder's proportionate share of the full principal amount of
any prepayment or foreclosed or other finally liquidated mortgage loan, whether
or not the related principal amount is actually recovered.
The obligations of Fannie Mae under its guarantees are obligations solely
of Fannie Mae and are not backed by, nor entitled to, the full faith and credit
of the United States. If Fannie Mae were unable to satisfy those obligations,
distributions to the holders of Fannie Mae certificates would consist solely of
payments and other recoveries on the underlying loans and, accordingly, monthly
distributions to the holders of Fannie Mae certificates would be affected by
delinquent payments and defaults on those loans.
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Fannie Mae certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae certificates backed by
pools containing graduated payment mortgage loans or multifamily loans) are
available in book-entry form only. For a Fannie Mae certificate issued in
book-entry form, distributions on the Fannie Mae certificate will be made by
wire, and for a fully registered Fannie Mae certificate, distributions will be
made by check.
The Fannie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above, as long as the
Fannie Mae certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Certificates. The Fannie Mae certificates
and underlying mortgage loans will be described in the prospectus supplement.
FREDDIE MAC
Freddie Mac is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
"Freddie Mac Act"). Freddie Mac was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of Freddie Mac
currently consists of the purchase of first lien, conventional residential
mortgage loans or participation interests in those mortgage loans and the resale
of the mortgage loans so purchased in the form of mortgage securities, primarily
Freddie Mac certificates. Freddie Mac is confined to purchasing, so far as
practicable, mortgage loans and participation interests in mortgage loans which
it deems to be of the quality, type and class as to meet generally the purchase
standards imposed by private institutional mortgage investors.
FREDDIE MAC CERTIFICATES
Each Freddie Mac certificate represents an undivided interest in a pool of
residential loans that may consist of first lien conventional residential loans,
FHA loans or VA loans (the "Freddie Mac Certificate Group"). Each of these
mortgage loans must meet the applicable standards set forth in the Freddie Mac
Act. A Freddie Mac Certificate Group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another Freddie Mac Certificate Group. If the trust
fund includes Freddie Mac certificates, your prospectus supplement will include
any material additional information regarding the Freddie Mac guaranty program,
the characteristics of the pool underlying that Freddie Mac certificate, the
servicing of the related pool, payment of principal and interest on the Freddie
Mac certificate and any other relevant matters about the Freddie Mac
certificates.
Except as described below with respect to Stripped Agency Securities,
Freddie Mac guarantees to each registered holder of a Freddie Mac certificate
the timely payment of interest on the underlying mortgage loans to the extent of
the applicable interest rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
Freddie Mac Certificate Group represented by that Freddie Mac certificate,
whether or not received. Freddie Mac also guarantees to each registered holder
of a Freddie Mac certificate collection by that holder of all principal on the
underlying mortgage loans, without any offset or deduction, to the extent of
that holder's pro rata share of the principal, but does not, except if and to
the extent specified in the prospectus supplement, guarantee the timely payment
of scheduled principal. Pursuant to its guarantees, Freddie Mac also guarantees
ultimate collection of scheduled principal payments, prepayments of principal
and the remaining principal balance in the event of a foreclosure or other
disposition of a mortgage loan. Freddie Mac may remit the amount due on account
of its guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following the latest of
(1) foreclosure sale;
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(2) payment of the claim by any mortgage insurer; and
(3) the expiration of any right of redemption, but in any event no
later than one year after demand has been made upon the borrower for
accelerated payment of principal.
In taking actions regarding the collection of principal after default on
the mortgage loans underlying Freddie Mac certificates, including the timing of
demand for acceleration, Freddie Mac reserves the right to exercise its
servicing judgment for the mortgage loans in the same manner as for mortgage
loans that it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each borrower, and Freddie Mac has not adopted
servicing standards that require that the demand be made within any specified
period.
Freddie Mac certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of Freddie Mac under its
guarantee are obligations solely of Freddie Mac and are not backed by, nor
entitled to, the full faith and credit of the United States. If Freddie Mac were
unable to satisfy those obligations, distributions to holders of Freddie Mac
certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on those mortgage loans.
The Freddie Mac certificates included in a trust fund may have other
characteristics and terms, different from those described above, so long as the
Freddie Mac certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Notes or Certificates, as applicable. The
Freddie Mac certificates and underlying mortgage loans will be described in the
prospectus supplement.
STRIPPED AGENCY SECURITIES
The Ginnie Mae certificates, Fannie Mae certificates or Freddie Mac
certificates may be issued in the form of certificates ("Stripped Agency
Securities") that represent an undivided interest in all or part of either the
principal distributions (but not the interest distributions) or the interest
distributions (but not the principal distributions), or in some specified
portion of the principal or interest distributions (but not all of those
distributions), on an underlying pool of mortgage loans or other Ginnie Mae
certificates, Fannie Mae certificates or Freddie Mac certificates. Ginnie Mae,
Fannie Mae or Freddie Mac, as applicable, will guarantee each Stripped Agency
Security to the same extent as that entity guarantees the underlying securities
backing the Stripped Agency Securities or to the extent described above for a
Stripped Agency Security backed by a pool of mortgage loans, unless otherwise
specified in the prospectus supplement. If the trust fund includes Stripped
Agency Securities, your prospectus supplement will include any material
additional information regarding the characteristics of the assets underlying
the Stripped Agency Securities, the payments of principal and interest on the
Stripped Agency Securities and other relevant matters about the Stripped Agency
Securities.
MORTGAGE SECURITIES
The Mortgage Securities will represent beneficial interests in loans of the
type that would otherwise be eligible to be mortgage loans, unsecured home
improvement loans, contract or Agency Securities, or collateralized obligations
secured by mortgage loans, unsecured home improvement loans, contract or Agency
Securities. The Mortgage Securities will have been
(1) issued by an entity other than the depositor or its affiliates;
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(2) acquired in bona fide secondary market transactions from persons
other than the issuer of the Mortgage Securities or its affiliates; and
(3) (a) offered and distributed to the public pursuant to an
effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of those securities at the time of sale (nor an affiliate of the
issuer at any time during the preceding three months); provided a period of
two years elapsed since the later of the date the securities were acquired
from the issuer.
Although individual Underlying Loans may be insured or guaranteed by the
United States or an agency or instrumentality of the United States, they need
not be, and Mortgage Securities themselves will not be so insured or guaranteed.
Except as otherwise set forth in the prospectus supplement, Mortgage Securities
will generally be similar to Notes or Certificates, as applicable, offered under
this prospectus.
The prospectus supplement for the Notes or Certificates, as applicable, of
each series evidencing interests in a trust fund including Mortgage Securities
will include a description of the Mortgage Securities and any related credit
enhancement, and the related mortgage loans, unsecured home improvement loans,
contracts, or Agency Securities will be described together with any other
mortgage loans or Agency Securities included in the trust fund of that series.
As used in this prospectus, the terms "mortgage loans," unsecured home
improvement loans, contracts, include the mortgage loans, unsecured home
improvement loans, contracts, as applicable, underlying the Mortgage Securities
in your trust fund. References in this prospectus to advances to be made and
other actions to be taken by the master servicer in connection with the Assets
may include any advances made and other actions taken pursuant to the terms of
the applicable Mortgage Securities.
FHA LOANS AND VA LOANS
FHA loans will be insured by the FHA as authorized under the Housing Act,
and the United States Housing Act of 1937, as amended. One- to four-family FHA
loans will be insured under various FHA programs including the standard FHA
203-b programs to finance the acquisition of one- to four-family housing units
and the FHA 245 graduated payment mortgage program. The FHA loans generally
require a minimum down payment of approximately 5% of the original principal
amount of the FHA loan. No FHA loan may have an interest rate or original
principal balance exceeding the applicable FHA limits at the time of origination
of that FHA loan.
Mortgage loans, unsecured home improvement loans, contracts, that are FHA
loans are insured by the FHA (as described in the prospectus supplement, up to
an amount equal to 90% of the sum of the unpaid principal of the FHA loan, a
portion of the unpaid interest and other liquidation costs) pursuant to Title I
of the Housing Act.
There are two primary FHA insurance programs that are available for
multifamily loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD to
insure multifamily loans that are secured by newly constructed and substantially
rehabilitated multifamily rental projects. Section 244 of the Housing Act
provides for co-insurance of those loans made under Sections 221(d)(3) and
(d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term of this type
of multifamily loan may be up to 40 years and the ratio of the loan amount to
property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure multifamily loans
made for the purchase or refinancing of existing apartment projects that are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project and a dollar amount
per apartment unit
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established from time to time by HUD. In general the loan term may not exceed 35
years and a loan-to-value ratio refinancing of a project.
VA loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act"). The
Servicemen's Readjustment Act permits a veteran (or in some instances the spouse
of a veteran) to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchasers and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no VA loan will have an original principal
amount greater than five times the partial VA guarantee for that VA loan. The
maximum guarantee that may be issued by the VA under this program will be set
forth in the prospectus supplement.
PRE-FUNDING ACCOUNTS
To the extent provided in a prospectus supplement, a portion of the
proceeds of the issuance of Notes or Certificates, as applicable, may be
deposited into an account maintained with the trustee (a "Pre-Funding Account").
In that case, the depositor will be obligated to sell at a predetermined price
- -- and the trust fund for the related series of Notes or Certificates, as
applicable, will be obligated to purchase -- additional Assets (the "Subsequent
Assets") from time to time, and as frequently as daily, within the period (not
to exceed three months) specified in the prospectus supplement (the "Pre-Funding
Period") after the issuance of the Notes or Certificates, as applicable, having
a total principal balance approximately equal to the amount on deposit in the
Pre-Funding Account (the "Pre-Funded Amount") for that series on the date of its
issuance. The Pre-Funded Amount for a series will be specified in the prospectus
supplement, and will not in any case exceed 50% of the total initial Security
Balance of the related Notes or Certificates, as applicable. Any Subsequent
Assets will be required to satisfy specific eligibility criteria more fully set
forth in the prospectus supplement, which criteria will be consistent with the
eligibility criteria of the Assets initially included in the trust fund, subject
to those exceptions that are expressly stated in the prospectus supplement. In
addition, specific conditions must be satisfied before the Subsequent Assets are
transferred into the trust fund, for example, the delivery to the rating
agencies and to the trustee of any required opinions of counsel. See "ERISA
Considerations --Pre-Funding Accounts" for additional information regarding
Pre-Funding Accounts.
Except as set forth in the following sentence, the Pre-Funded Amount will
be used only to purchase Subsequent Assets. Any portion of the Pre-Funded Amount
remaining in the Pre-Funding Account at the end of the Pre-Funding Period will
be used to prepay one or more classes of Notes or Certificates, as applicable,
in the amounts and in the manner specified in the prospectus supplement. In
addition, if specified in the prospectus supplement, the depositor may be
required to deposit cash into an account maintained by the trustee (the
"Capitalized Interest Account") for the purpose of assuring the availability of
funds to pay interest on the Notes or Certificates, as applicable, during the
Pre-Funding Period. Any amount remaining in the Capitalized Interest Account at
the end of the Pre-Funding Period will be remitted as specified in the
prospectus supplement.
Amounts deposited in the Pre-Funding and Capitalized Interest Accounts will
be permitted to be invested, pending application, only in eligible investments
authorized by each applicable rating agency.
ACCOUNTS
Each trust fund will include one or more accounts, established and
maintained on behalf of the securityholders into which the person or persons
designated in the prospectus supplement will, to the extent described in this
prospectus and in the prospectus supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the trust
fund. This
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type of account may be maintained as an interest bearing or a non-interest
bearing account, and funds held in that account may be held as cash or invested
in some short-term, investment grade obligations, in each case as described in
the prospectus supplement. See "Description of the Agreements--Material Terms of
the Pooling and Servicing Agreements and Underlying Servicing
Agreements--Collection Account and Related Accounts."
CREDIT SUPPORT
If so provided in the prospectus supplement, partial or full protection
against some defaults and losses on the Assets in the related trust fund may be
provided to one or more classes of Notes or Certificates, as applicable, in the
related series in the form of subordination of one or more other classes of
Notes or Certificates, as applicable, in that series or by one or more other
types of credit support, for example, a letter of credit, insurance policy,
guarantee, reserve fund or another type of credit support, or a combination of
these (any of these types of coverage for the Notes or Certificates, as
applicable, of any series, is referred to generally as "credit support"). The
amount and types of coverage, the identification of the entity providing the
coverage (if applicable) and related information for each type of credit
support, if any, will be described in the prospectus supplement for a series of
Notes or Certificates, as applicable. See "Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the prospectus supplement, the trust fund may include
guaranteed investment contracts pursuant to which moneys held in the funds and
accounts established for the related series will be invested at a specified
rate. The trust fund may also include other agreements, for example, interest
rate swap agreements, interest rate cap or floor agreements, currency swap
agreements or similar agreements provided to reduce the effects of interest rate
or currency exchange rate fluctuations on the Assets or on one or more classes
of Notes or Certificates, as applicable. (Currency swap agreements might be
included in the trust fund if some or all of the Assets were denominated in a
non-United States currency.) The principal terms of any related guaranteed
investment contract or other agreement (any of these types of agreement, a "Cash
Flow Agreement"), including provisions relating to the timing, manner and amount
of payments under these documents and provisions relating to the termination of
these documents, will be described in the prospectus supplement for the related
series. In addition, the prospectus supplement will provide information with
respect to the borrower under any Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Notes or Certificates,
as applicable, will be applied by the depositor to the purchase of Assets, or
the repayment of the financing incurred in that purchase, and to pay for some of
the expenses incurred in connection with that purchase of Assets and sale of
Notes or Certificates, as applicable. The depositor expects to sell the Notes or
Certificates, as applicable, from time to time, but the timing and amount of
offerings of Notes or Certificates, as applicable, will depend on a number of
factors, including the volume of Assets acquired by the depositor, prevailing
interest rates, availability of funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
securityholder, the interest Rate of the Security, the receipt and timing of
receipt of distributions on the Security and the weighted average life of the
Assets in the related trust fund (which may be affected by prepayments,
defaults, liquidations or repurchases).
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INTEREST RATE
Notes or Certificates, as applicable, of any class within a series may have
fixed, variable or adjustable Interest Rates, which may or may not be based upon
the interest rates borne by the Assets in the related trust fund. The prospectus
supplement for any series will specify the Interest Rate for each class of Notes
or Certificates, as applicable, or, in the case of a variable or adjustable
Interest Rate, the method of determining the Interest Rate; the effect, if any,
of the prepayment of any Asset on the Interest Rate of one or more classes of
Notes or Certificates, as applicable; and whether the distributions of interest
on the Notes or Certificates, as applicable, of any class will be dependent, in
whole or in part, on the performance of any borrower under a Cash Flow
Agreement.
If specified in the prospectus supplement, the effective yield to maturity
to each holder of Notes or Certificates, as applicable, entitled to payments of
interest will be below that otherwise produced by the applicable Interest Rate
and purchase price of that Security because, while interest may accrue on each
Asset during a period (each, an "Accrual Period"), the distribution of that
interest will be made on a day that may be several days, weeks or months
following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Notes or Certificates, as applicable,
entitled to distributions of interest (or addition to the Security Balance of a
class of Accrual Securities) will be made by or on behalf of the trustee each
month on the date specified in the related prospectus supplement (each date, a
"Distribution Date"), and will include interest accrued during the Accrual
Period for that Distribution Date. As indicated above under "--Interest Rate,"
if the Accrual Period ends on a date other than the day before a Distribution
Date for the related series, the yield realized by the holders of those Notes or
Certificates, as applicable, may be lower than the yield that would result if
the Accrual Period ended on the day before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Notes or Certificates, as applicable, will be
affected by the rate of principal payments on the Assets (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities), including principal prepayments
resulting from both voluntary prepayments by the borrowers and involuntary
liquidations. The rate at which principal prepayments occur will be affected by
a variety of factors, including the terms of the Assets (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities), the level of prevailing interest
rates, the availability of mortgage credit and economic, demographic,
geographic, tax, legal and other factors.
In general, however, if prevailing interest rates fall significantly below
the interest rates on the Assets in a particular trust fund (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities), those assets are likely to be the
subject of higher principal prepayments than if prevailing rates remain at or
above the rates borne by those assets. However, you should note that some Assets
(or, in the case of Mortgage Securities and Agency Securities, the underlying
assets related to the Mortgage Securities and Agency Securities) may consist of
loans with different interest rates. The rate of principal payment on Mortgage
Securities will also be affected by the allocation of principal payments on the
underlying assets among the Mortgage Securities or Agency Securities and other
Mortgage Securities or Agency Securities of the same series. The rate of
principal payments on the Assets in the related trust fund (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities) is likely to be affected by the
existence of any Lock-out Periods and Prepayment Premium provisions of the
mortgage loans underlying or comprising those Assets, and by the extent to which
the servicer of any of these mortgage loans is able to enforce these
18
provisions. Mortgage loans with a Lock-out Period or a Prepayment Premium
provision, to the extent enforceable, generally would be expected to experience
a lower rate of principal prepayments than otherwise identical mortgage loans
without those provisions, with shorter Lock-out Periods or with lower Prepayment
Premiums.
Because of the depreciating nature of manufactured housing, which limits
the possibilities for refinancing, and because the terms and principal amounts
of manufactured housing contracts are generally shorter and smaller than the
terms and principal amounts of mortgage loans secured by site-built homes,
changes in interest rates have a correspondingly small effect on the amount of
the monthly payments on mortgage loans secured by site-built homes.
Consequently, changes in interest rates may play a smaller role in prepayment
behavior of manufactured housing contracts than they do in the prepayment
behavior of loans secured by mortgage on site-built homes. Conversely, local
economic conditions and some of the other factors mentioned above may play a
larger role in the prepayment behavior of manufactured housing contracts than
they do in the prepayment behavior of loans secured by mortgages on site-built
homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets (or, in
the case of Mortgage Securities and Agency Securities, the underlying assets
related to the Mortgage Securities and Agency Securities), the actual yield to
maturity will be lower than that so calculated. Conversely, if the purchaser of
a Security offered at a premium calculates its anticipated yield to maturity
based on an assumed rate of distributions of principal that is slower than that
actually experienced on the Assets (or, in the case of Mortgage Securities and
Agency Securities, the underlying assets related to the Mortgage Securities and
Agency Securities), the actual yield to maturity will be lower than that so
calculated. In either case, if so provided in the prospectus supplement for a
series of Notes or Certificates, as applicable, the effect on yield on one or
more classes of the Notes or Certificates, as applicable, of that series of
prepayments of the Assets in the related trust fund may be mitigated or
exacerbated by any provisions for sequential or selective distribution of
principal to those classes.
When a full prepayment is made on a mortgage loan or a contract, the
borrower is charged interest on the principal amount of the mortgage loan or a
contract so prepaid for the number of days in the month actually elapsed up to
the date of the prepayment or some other period specified in the prospectus
supplement. Generally, the effect of prepayments in full will be to reduce the
amount of interest paid in the following month to holders of Notes or
Certificates, as applicable, entitled to payments of interest because interest
on the principal amount of any mortgage loan or a contract so prepaid will be
paid only to the date of prepayment rather than for a full month. A partial
prepayment of principal is applied so as to reduce the outstanding principal
balance of the related mortgage loan or a contract as of its due date in the
month in which the partial prepayment is received or some other date as is
specified in the prospectus supplement.
The timing of changes in the rate of principal payments on the Assets (or,
in the case of Mortgage Securities and Agency Securities, the underlying assets
related to the Mortgage Securities and Agency Securities) may significantly
affect an investor's actual yield to maturity, even if the average rate of
distributions of principal is consistent with an investor's expectation. In
general, the earlier a principal payment is received on the mortgage loans and
distributed on a Security, the greater the effect on that investor's yield to
maturity. The effect on an investor's yield of principal payments occurring at a
rate higher (or lower) than the rate anticipated by the investor during a
particular period may not be offset by a similar decrease (or increase) in the
rate of principal payments at a later time.
The securityholder will bear the risk of not being able to reinvest
principal received from a Security at a yield at least equal to the yield on
that Security.
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PREPAYMENTS -- MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets included
in or comprising a trust fund and the rate at which payments are made from any
credit support or Cash Flow Agreement for the related series of Notes or
Certificates, as applicable, may affect the ultimate maturity and the weighted
average life of each class of that series. Prepayments on the mortgage loans or
contracts comprising or underlying the Assets in a particular trust fund will
generally accelerate the rate at which principal is paid on some or all of the
classes of the Notes or Certificates, as applicable, of the related series.
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, one or more classes of Notes or Certificates, as
applicable, may have a final scheduled Distribution Date, which is the date on
or before which the Security Balance of the class of Notes or Certificates, as
applicable, is scheduled to be reduced to zero, calculated on the basis of the
assumptions applicable to that series. Weighted average life refers to the
average amount of time that will elapse from the date of issue of a security
until each dollar of principal of that security will be repaid to the investor.
The weighted average life of a class of Notes or Certificates, as applicable, of
a series will be influenced by the rate at which principal on the Assets is paid
to that class, which may be in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes prepayments, in whole or in
part, and liquidations due to default).
In addition, the weighted average life of the Notes or Certificates, as
applicable, may be affected by the varying maturities of the Assets in a trust
fund. If any Assets in a particular trust fund have actual terms to maturity
less than those assumed in calculating final scheduled Distribution Dates for
the classes of Notes or Certificates, as applicable, of the related series, one
or more classes of these Notes or Certificates, as applicable, may be fully paid
before their respective final scheduled Distribution Dates, even in the absence
of prepayments. Accordingly, the prepayment experience of the Assets will, to
some extent, be a function of the mix of mortgage rates or contract rates and
maturities of the mortgage loans or contracts comprising or underlying those
Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model. CPR represents a
constant assumed rate of prepayment each month relative to the then outstanding
principal balance of a pool of loans for the life of those loans. SPA represents
an assumed rate of prepayment each month relative to the then outstanding
principal balance of a pool of loans. A prepayment assumption of 100% of SPA
assumes prepayment rates of 0.2% per annum of the then outstanding principal
balance of those loans in the first month of the life of the loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Starting in the thirtieth month and in each month thereafter during the life of
the loans, 100% of SPA assumes a constant prepayment rate of 6% per annum each
month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the mortgage
loans or contracts underlying or comprising the Assets.
The prospectus supplement for each series of Notes or Certificates, as
applicable, may contain tables, if applicable, setting forth the projected
weighted average life of each class of Offered Notes or Offered Certificates, as
applicable, of that series and the percentage of the initial Security Balance of
each class that would be outstanding on specified Distribution Dates based on
the assumptions stated in the prospectus supplement, including assumptions that
prepayments on the mortgage loans comprising or underlying the related Assets
are made at rates corresponding to various percentages of CPR, SPA or some other
standard specified in the prospectus supplement. These tables and assumptions
are intended to illustrate the sensitivity of the weighted average life of the
Notes or
20
Certificates, as applicable, to various prepayment rates and will not be
intended to predict or to provide information that will enable investors to
predict the actual weighted average life of the Notes or Certificates, as
applicable. It is unlikely that prepayment of any mortgage loans or contracts
comprising or underlying the Assets for any series will conform to any
particular level of CPR, SPA or any other rate specified in the prospectus
supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF ASSET
If specified in the prospectus supplement, a number of mortgage loans may
have balloon payments due at maturity (which, based on the amortization schedule
of those mortgage loans, may be a substantial amount), and because the ability
of a borrower to make a balloon payment typically will depend on its ability
either to refinance the loan or to sell the related Mortgaged Property, there is
a risk that a number of Balloon Payment Assets may default at maturity. The
ability to obtain refinancing will depend on a number of factors prevailing at
the time refinancing or sale is required, including real estate values, the
borrower's financial situation, prevailing mortgage loan interest rates, the
borrower's equity in the related Mortgaged Property, tax laws and prevailing
general economic conditions. Neither the depositor, the servicer, the master
servicer, nor any of their affiliates will be obligated to refinance or
repurchase any mortgage loan or to sell the Mortgaged Property except to the
extent provided in the prospectus supplement. In the case of defaults, recovery
of proceeds may be delayed by, among other things, bankruptcy of the borrower or
adverse conditions in the market where the property is located. To minimize
losses on defaulted mortgage loans, the servicer may modify mortgage loans that
are in default or as to which a payment default is reasonably foreseeable. Any
defaulted balloon payment or modification that extends the maturity of a
mortgage loan will tend to extend the weighted average life of the Notes or
Certificates, as applicable, and may thus lengthen the period of time elapsed
from the date of issuance of a Security until it is retired.
For some mortgage loans, including ARM Loans, the mortgage rate at
origination may be below the rate that would result if the index and margin
relating to the mortgage loan were applied at origination. For some contracts,
the contract rate may be stepped up during its terms or may otherwise vary or be
adjusted. Under the applicable underwriting standards, the borrower under each
mortgage loan or contract generally will be qualified on the basis of the
mortgage rate or contract rate or contract rate in effect at origination. The
repayment of any of these mortgage loans or contracts may therefore be dependent
on the ability of the borrower to make larger level monthly payments following
the adjustment of the mortgage rate or contract rate. In addition, some mortgage
loans may be subject to temporary buydown plans ("Buydown Mortgage Loans")
pursuant to which the monthly payments made by the borrower during the early
years of the mortgage loan will be less than the scheduled monthly payments on
the mortgage loan (the "Buydown Period"). The periodic increase in the amount
paid by the borrower of a Buydown Mortgage Loan during or at the end of the
applicable Buydown Period may create a greater financial burden for the
borrower, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default for the related mortgage loan.
The mortgage rates on some ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial mortgage rates are generally lower than the sum of
the applicable index at origination and the related margin over that index at
which interest accrues), the amount of interest accruing on the principal
balance of those mortgage loans may exceed the amount of the minimum scheduled
monthly payment on the mortgage loans. As a result, a portion of the accrued
interest on negatively amortizing mortgage loans may be added to the principal
balance of those mortgage loans and will bear interest at the applicable
mortgage rate. The addition of any deferred interest to the principal balance of
any related class or classes of Notes or Certificates, as applicable, will
lengthen the weighted average life of those Notes or Certificates, as
applicable, and
21
may adversely affect yield to holders of those Notes or Certificates, as
applicable, depending on the price at which those Notes or Certificates, as
applicable, were purchased. In addition, for some ARM Loans subject to negative
amortization, during a period of declining interest rates, it might be expected
that each minimum scheduled monthly payment on this type of mortgage loan would
exceed the amount of scheduled principal and accrued interest on the principal
balance of that mortgage loan, and since that excess will be applied to reduce
the principal balance of the related class or classes of Notes or Certificates,
as applicable, the weighted average life of those Notes or Certificates, as
applicable, will be reduced and may adversely affect yield to holders of those
Notes or Certificates, as applicable, depending on the price at which those
Notes or Certificates, as applicable, were purchased.
As may be described in the prospectus supplement, the related Agreement may
provide that all or a portion of the principal collected on or with respect to
the related mortgage loans may be applied by the related trustee to the
acquisition of additional Revolving Credit Line Loans during a specified period
(rather than used to fund payments of principal to securityholders during that
period) with the result that the related Notes or Certificates, as applicable,
possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any of these
interest-only or revolving periods may, upon the occurrence of particular events
to be described in the prospectus supplement, terminate before the end of the
specified period and result in the earlier than expected amortization of the
related Notes or Certificates, as applicable.
In addition, and as may be described in the prospectus supplement, the
related Agreement may provide that all or some of this collected principal may
be retained by the trustee (and held in specific temporary investments,
including mortgage loans) for a specified period before being used to fund
payments of principal to securityholders.
The result of the retention and temporary investment by the trustee of this
principal would be to slow the amortization rate of the related Notes or
Certificates, as applicable, relative to the amortization rate of the related
mortgage loans, or to attempt to match the amortization rate of the related
Notes or Certificates, as applicable, to an amortization schedule established at
the time the Notes or Certificates, as applicable, are issued. Any similar
feature applicable to any Notes or Certificates, as applicable, may end on the
occurrence of events to be described in the prospectus supplement, resulting in
the current funding of principal payments to the related securityholders and an
acceleration of the amortization of these Notes or Certificates, as applicable.
TERMINATION
If specified in the prospectus supplement, a series of Notes or
Certificates, as applicable, may be subject to optional early termination
through the repurchase of the Assets in the related trust fund by the party
specified in the prospectus supplement, on any date on which the total Security
Balance of the Notes or Certificates, as applicable, of that series declines to
a percentage specified in the prospectus supplement (generally not to exceed
10%) of the Initial Security Balance, under the circumstances and in the manner
set forth therein. In addition, if so provided in the prospectus supplement,
some classes of Notes or Certificates, as applicable, may be purchased or
redeemed in the manner set forth therein. See "Description of the Securities
- --Termination."
DEFAULTS
The rate of defaults on the Assets will also affect the rate, timing and
amount of principal payments on the Assets and thus the yield on the Notes or
Certificates, as applicable. In general, defaults on mortgage loans or contracts
are expected to occur with greater frequency in their early years. The rate of
default on mortgage loans that are refinance or limited documentation mortgage
loans, and on mortgage loans with high Loan-to-Value Ratios, may be higher than
for other types of mortgage loans. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the mortgage loans or contracts will
be affected by the general economic condition of the region of the
22
country in which the related Mortgaged Properties or manufactured homes are
located. The risk of delinquencies and loss is greater and prepayments are less
likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values.
FORECLOSURES
The number of foreclosures or repossessions and the principal amount of the
mortgage loans or contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the number and principal amount of
mortgage loans or contracts that are repaid in accordance with their terms will
affect the weighted average life of the mortgage loans or contracts comprising
or underlying the Assets and that of the related series of Notes or
Certificates, as applicable.
REFINANCING
At the request of a borrower, the servicer may allow the refinancing of a
mortgage loan or contract in any trust fund by accepting prepayments on the
mortgage loan and permitting a new loan secured by a mortgage on the same
property. In the event of that refinancing, the new loan would not be included
in the related trust fund and, therefore, that refinancing would have the same
effect as a prepayment in full of the related mortgage loan or contract. A
servicer may, from time to time, implement programs designed to encourage
refinancing. These programs may include modifications of existing loans, general
or targeted solicitations, the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. In addition,
servicers may encourage the refinancing of mortgage loans or contracts,
including defaulted mortgage loans or contracts, that would permit creditworthy
borrowers to assume the outstanding indebtedness of those mortgage loans or
contracts.
DUE-ON-SALE CLAUSES
Acceleration of mortgage payments as a result of transfers of underlying
Mortgaged Property is another factor affecting prepayment rates that may not be
reflected in the prepayment standards or models used in the relevant prospectus
supplement. A number of the mortgage loans comprising or underlying the Assets,
other than FHA loans and VA loans, may include "due-on-sale clauses" that allow
the holder of the mortgage loans to demand payment in full of the remaining
principal balance of the mortgage loans upon sale, transfer or conveyance of the
related Mortgaged Property.
For any mortgage loans, except as set forth in the prospectus supplement,
the servicer will generally enforce any due-on-sale clause to the extent it has
knowledge of the conveyance or proposed conveyance of the underlying Mortgaged
Property and it is entitled to do so under applicable law; provided, however,
that the servicer will not take any action in relation to the enforcement of any
due-on-sale provision that would adversely affect or jeopardize coverage under
any applicable insurance policy. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses" and "Description of the Agreements--Material Terms
of the Pooling and Servicing Agreements" and "Underlying Servicing
Agreements--Due-on-Sale Provisions."
The contracts, in general, prohibit the sale or transfer of the related
manufactured homes without the consent of the servicer and permit the
acceleration of the maturity of the contracts by the servicer upon any sale or
transfer that is not consented to. It is expected that the servicer will permit
most transfers of manufactured homes and not accelerate the maturity of the
related contracts. In some cases, the transfer may be made by a delinquent
borrower to avoid a repossession of the manufactured home. In the case of a
transfer of a manufactured home after which the servicer desires to accelerate
the maturity of related contract, the servicer's ability to do so will depend on
the enforceability under state law of the due-on-sale clause.
23
THE DEPOSITOR
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own and
sell mortgage loans and financial assets; to issue, acquire, own, hold and sell
securities and notes secured by or representing ownership interests in mortgage
loans and other financial assets, collections on the mortgage loans and related
assets; and to engage in any acts that are incidental to, or necessary, suitable
or convenient to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by Altamont
Holdings Corp., a Delaware corporation.
DESCRIPTION OF THE SECURITIES
GENERAL
The Asset-backed certificates (the "Certificates") of each series
(including any class of Certificates not offered by this prospectus) will
represent the entire beneficial ownership interest in the trust fund created
pursuant to the related Agreement. The Asset-backed notes (the "Notes," and
together with the Certificates, the "Securities"), will represent indebtedness
of the related trust fund and will be issued and secured pursuant to an
indenture. Each series of Notes or Certificates, as applicable, will consist of
one or more classes of Notes or Certificates, as applicable, that may:
o provide for the accrual of interest on the series of Notes or
Certificates, as applicable, based on fixed, variable or adjustable
rates;
o be senior ("Senior Notes" or "Senior Certificates," and collectively,
"Senior Securities") or subordinate ("Subordinate Notes" or
"Subordinate Certificates," and collectively, "Subordinate
Securities") to one or more other classes of Notes or Certificates, as
applicable, in respect of distributions on the Notes or Certificates,
as applicable;
o be entitled either to (A) principal distributions, with
disproportionately low, nominal or no interest distributions or (B)
interest distributions, with disproportionately low, nominal or no
principal distributions (collectively, "Strip Securities");
o provide for distributions of accrued interest on the series of Notes
or Certificates, as applicable, which begin only following the
occurrence of specific events, that as the retirement of one or more
other classes of Notes or Certificates, as applicable, of that series
(collectively, "Accrual Securities");
o provide for payments of principal as described in the prospectus
supplement, from all or only a portion of the Assets in that trust
fund, to the extent of available funds, in each case as described in
the prospectus supplement; and/or
o provide for distributions based on a combination of two or more
components of the Notes or Certificates, as applicable, with one or
more of the characteristics described in this paragraph including a
Strip Security component.
24
If specified in the prospectus supplement, distributions on one or more
classes of a series of Notes or Certificates, as applicable, may be limited to
collections from a designated portion of the Assets in the related trust fund
(each portion of the Assets, an "Asset Group"). Any of these classes may include
classes of Offered Notes or Offered Certificates, as applicable.
Each class of Notes or Certificates, as applicable, offered by this
prospectus and the related prospectus supplement (the "Offered Notes" and the
"Offered Certificates," respectively, and together, the "Offered Securities")
will be issued in minimum denominations corresponding to the Security Balances
or, in the case of some classes of Strip Securities, notional amounts or
percentage interests specified in the prospectus supplement. The transfer of any
Offered Notes or Offered Certificates, as applicable, may be registered and
those Notes or Certificates, as applicable, may be exchanged without the payment
of any service charge payable in connection with that registration of transfer
or exchange, but the depositor or the trustee or any agent of the depositor or
the trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. One or more classes of Notes or Certificates, as
applicable, of a series may be issued in fully registered, certificated form
("Definitive Notes" or "Definitive Certificates," and collectively, "Definitive
Securities") or in book-entry form ("Book-Entry Notes" or "Book-Entry
Certificates," and collectively, "Book-Entry Securities"), as provided in the
prospectus supplement. See "Description of the Securities--Book- Entry
Registration and Definitive Securities." Definitive Notes or Definitive
Certificates, as applicable, will be exchangeable for other Notes or
Certificates, as applicable, of the same class and series of a similar total
Security Balance, notional amount or percentage interest but of different
authorized denominations.
DISTRIBUTIONS
Distributions on the Notes or Certificates, as applicable, of each series
will be made by or on behalf of the trustee on each Distribution Date as
specified in the prospectus supplement from the Available Distribution Amount
for that series and that Distribution Date. Distributions (other than the final
distribution) will be made to the persons in whose names the Notes or
Certificates, as applicable, are registered at the close of business on, unless
a different date is specified in the prospectus supplement, the last business
day of the month preceding the month in which the Distribution Date occurs (the
"Record Date"), and the amount of each distribution will be determined as of the
close of business on the date specified in the prospectus supplement (the
"Determination Date"). All distributions for each class of Notes or
Certificates, as applicable, on each Distribution Date will be allocated pro
rata among the outstanding securityholders in that class or by random selection
or as described in the prospectus supplement. Payments will be made either by
wire transfer in immediately available funds to the account of a securityholder
at a bank or other entity having appropriate facilities for these payments, if
that securityholder has so notified the trustee or other person required to make
those payments no later than the date specified in the prospectus supplement
(and, if so provided in the prospectus supplement, holds Notes or Certificates,
as applicable, in the requisite amount specified in the prospectus supplement),
or by check mailed to the address of the person entitled to the payment as it
appears on the Security Register; provided, however, that the final distribution
in retirement of the Notes or Certificates, as applicable, will be made only
upon presentation and surrender of the Notes or Certificates, as applicable, at
the location specified in the notice to securityholders of that final
distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Notes or Certificates, as applicable, of each
series on each Distribution Date will be made from the Available Distribution
Amount described below, subject to the terms described in the prospectus
supplement. Generally, the "Available Distribution Amount" for each Distribution
Date equals the sum of the following amounts:
25
(1) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive, unless
otherwise specified in the prospectus supplement, of:
(a) all scheduled payments of principal and interest collected
but due on a date after the related Due Period (unless a different
period is specified in the prospectus supplement, a "Due Period" for
any Distribution Date will begin on the second day of the month in
which the immediately preceding Distribution Date occurs, or the
Cut-off Date in the case of the first Due Period, and will end on the
first day of the month of the related Distribution Date),
(b) all prepayments, together with related payments of the
interest thereon and related Prepayment Premiums, all proceeds of any
FHA insurance, VA Guaranty Policy or insurance policies to be
maintained for each Asset (to the extent that proceeds are not applied
to the restoration of the Asset or released in accordance with the
normal servicing procedures of a servicer, subject to the terms and
conditions applicable to the related Asset) (collectively, "Insurance
Proceeds"), all other amounts received and retained in connection with
the liquidation of Assets in default in the trust fund ("Liquidation
Proceeds"), and other unscheduled recoveries received after the
related Due Period, or other period specified in the prospectus
supplement,
(c) all amounts in the Collection Account that are due or
reimbursable to the depositor, the trustee, an Asset Seller, a
servicer, the master servicer or any other entity as specified in the
prospectus supplement or that are payable in respect of particular
expenses of the related trust fund, and
(d) all amounts received for a repurchase of an Asset from the
trust fund for defective documentation or a breach of representation
or warranty received after the related Due Period, or other period
specified in the prospectus supplement;
(2) if the prospectus supplement so provides, interest or investment
income on amounts on deposit in the Collection Account, including any net
amounts paid under any Cash Flow Agreements;
(3) all advances made by a servicer or the master servicer or any
other entity as specified in the prospectus supplement for that
Distribution Date;
(4) if and to the extent the prospectus supplement so provides,
amounts paid by a servicer or any other entity as specified in the
prospectus supplement with respect to interest shortfalls resulting from
prepayments during the related Prepayment Period; and
(5) to the extent not on deposit in the related Collection Account as
of the corresponding Determination Date, any amounts collected under, from
or in respect of any credit support for that Distribution Date.
As described below, unless otherwise specified in the prospectus
supplement, the entire Available Distribution Amount will be distributed among
the related Notes or Certificates, as applicable, (including any Notes or
Certificates, as applicable, not offered by this prospectus) on each
Distribution Date, and accordingly will be released from the trust fund and will
not be available for any future distributions.
The prospectus supplement for a series of Notes or Certificates, as
applicable, will describe any variation in the calculation or distribution of
the Available Distribution Amount for that series.
26
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Notes or Certificates, as applicable, (other than classes of
Strip Securities which have no Interest Rate) may have a different Interest
Rate, which will be a fixed, variable or adjustable rate at which interest will
accrue on that class or a component of that class (the "Interest Rate" in the
case of Certificates). The prospectus supplement will specify the Interest Rate
for each class or component or, in the case of a variable or adjustable Interest
Rate, the method for determining the Interest Rate. Interest on the Notes or
Certificates, as applicable, will be calculated on the basis of a 360-day year
consisting of twelve 30-day months unless the prospectus supplement specifies a
different basis.
Distributions of interest on the Notes or Certificates, as applicable, of
any class will be made on each Distribution Date (other than any class of
Accrual Securities, which will be entitled to distributions of accrued interest
starting only on the Distribution Date, or under the circumstances, specified in
the prospectus supplement, and any class of Strip Securities that are not
entitled to any distributions of interest) based on the Accrued Security
Interest for that class and that Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to that class on
that Distribution Date. Before any interest is distributed on any class of
Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on that class will instead be added to the Security Balance of
that class on each Distribution Date.
For each class of Notes or Certificates, as applicable, and each
Distribution Date (other than some classes of Strip Securities), "Accrued
Security Interest" will be equal to interest accrued during the related Accrual
Period on the outstanding Security Balance of the class of Notes or
Certificates, as applicable, immediately before the Distribution Date, at the
applicable Interest Rate, reduced as described below. Accrued Security Interest
on some classes of Strip Securities will be equal to interest accrued during the
related Accrual Period on the outstanding notional amount of the Strip Security
immediately before each Distribution Date, at the applicable Interest Rate,
reduced as described below, or interest accrual in the manner described in the
prospectus supplement. The method of determining the notional amount for a
particular class of Strip Securities will be described in the prospectus
supplement. Reference to notional amount is solely for convenience in some of
the calculations and does not represent the right to receive any distributions
of principal. Unless otherwise provided in the prospectus supplement, the
Accrued Security Interest on a series of Notes or Certificates, as applicable,
will be reduced in the event of prepayment interest shortfalls, which are
shortfalls in collections of interest for a full accrual period resulting from
prepayments before the due date in that accrual period on the mortgage loans or
contracts comprising or underlying the Assets in the trust fund for that series.
The particular manner in which these shortfalls are to be allocated among some
or all of the classes of Notes or Certificates, as applicable, of that series
will be specified in the prospectus supplement. The prospectus supplement will
also describe the extent to which the amount of Accrued Security Interest that
is otherwise distributable on (or, in the case of Accrual Securities, that may
otherwise be added to the Security Balance of) a class of Offered Notes or
Offered Certificates, as applicable, may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on the
mortgage loans or contracts comprising or underlying the Assets in the related
trust fund. Unless otherwise provided in the prospectus supplement, any
reduction in the amount of Accrued Security Interest otherwise distributable on
a class of Notes or Certificates, as applicable, by reason of the allocation to
that class of a portion of any deferred interest on the mortgage loans or
contracts comprising or underlying the Assets in the related trust fund will
result in a corresponding increase in the Security Balance of that class. See
"Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Notes or Certificates, as applicable, of each series, other than some
classes of Strip Securities, will have a "Security Balance" which, at any time,
will equal the then maximum amount that the holder will be entitled to receive
on principal out of the future cash flow on the Assets and
27
other assets included in the related trust fund. The outstanding Security
Balance of a Security will be reduced:
o to the extent of distributions of principal on that Security from time
to time and
o if and to the extent provided in the prospectus supplement, by the
amount of losses incurred on the related Assets.
The outstanding Security Balance of a Security:
o may be increased in respect of deferred interest on the related
mortgage loans, to the extent provided in the prospectus supplement
and
o in the case of Accrual Securities, will be increased by any related
Accrued Security Interest up until the Distribution Date on which
distributions of interest are required to begin.
If specified in the prospectus supplement, the initial total Security
Balance of all classes of Notes or Certificates, as applicable, of a series will
be greater than the outstanding total principal balance of the related Assets as
of the applicable Cut-off Date. The initial total Security Balance of a series
and each class of the series will be specified in the prospectus supplement.
Distributions of principal will be made on each Distribution Date to the class
or classes of Notes or Certificates, as applicable, in the amounts and in
accordance with the priorities specified in the prospectus supplement. Some
classes of Strip Securities with no Security Balance are not entitled to any
distributions of principal.
If specified in the related prospectus supplement, the trust fund may issue
notes or certificates, as applicable, from time to time and use proceeds of this
issuance to make principal payments with respect to a series.
REVOLVING PERIOD
The applicable prospectus supplement may provide that all or a portion of
the principal collections may be applied by the trustee to the acquisition of
subsequent Revolving Credit Line Loans during a specified period rather than
used to distribute payments of principal to securityholders during that period.
These notes or certificates, as applicable, would then possess an interest only
period, also commonly referred to as a "Revolving Period", which will be
followed by an "Amortization Period", during which principal will be paid. Any
interest only revolving period may terminate prior to the end of the specified
period and result in the earlier than expected principal repayment of the notes
or certificates, as applicable.
COMPONENTS
To the extent specified in the prospectus supplement, distribution on a
class of Notes or Certificates, as applicable, may be based on a combination of
two or more different components as described under "--General" above. To that
extent, the descriptions set forth under "Distributions of Interest on the
Securities" and "--Distributions of Principal of the Securities" above also
relate to components of the component class of Notes or Certificates, as
applicable. References in those sections to Security Balance may refer to the
principal balance, if any, of these components and reference to the Interest
Rate may refer to the Interest Rate, if any, on these components.
28
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT PREMIUMS
If so provided in the prospectus supplement, Prepayment Premiums that are
collected on the mortgage loans in the related trust fund will be distributed on
each Distribution Date to the class or classes of Notes or Certificates, as
applicable, entitled to the distribution as described in the prospectus
supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, consisting of one or more classes of Subordinate
Notes or Subordinate Certificates, as applicable, on any Distribution Date in
respect of which losses or shortfalls in collections on the Assets have been
incurred, the amount of those losses or shortfalls will be borne first by a
class of Subordinate Notes or Subordinate Certificates, as applicable, in the
priority and manner and subject to the limitations specified in the prospectus
supplement. See "Description of Credit Support" for a description of the types
of protection that may be included in a trust fund against losses and shortfalls
on Assets comprising that trust fund. The prospectus supplement for a series of
Notes or Certificates, as applicable, will describe the entitlement, if any, of
a class of Notes or Certificates, as applicable, whose Security Balance has been
reduced to zero as a result of distributions or the allocation of losses on the
related Assets to recover any losses previously allocated to that class from
amounts received on the Assets. However, if the Security Balance of a class of
Notes or Certificates, as applicable, has been reduced to zero as the result of
principal distributions, the allocation of losses on the Assets, an optional
termination or an optional purchase or redemption, that class will no longer be
entitled to receive principal distributions from amounts received on the assets
of the related trust fund, including distributions in respect of principal
losses previously allocated to that class.
ADVANCES IN RESPECT OF DELINQUENCIES
If so provided in the prospectus supplement, the servicer or another entity
described in the prospectus supplement will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds or
funds held in the related Collection Account that are not included in the
Available Distribution Amount for that Distribution Date, in an amount equal to
the total of payments of (1) principal (other than any balloon payments) and (2)
interest (net of related servicing fees and Retained Interest) that were due on
the Assets in that trust fund during the related Due Period and were delinquent
on the related Determination Date, subject to a good faith determination that
the advances will be reimbursable from Related Proceeds (as defined below). In
the case of a series of Notes or Certificates, as applicable, that includes one
or more classes of Subordinate Notes or Subordinate Certificates, as applicable,
and if so provided in the prospectus supplement, the servicer's (or another
entity's) advance obligation may be limited only to the portion of those
delinquencies necessary to make the required distributions on one or more
classes of Senior Notes or Senior Certificates, as applicable, and/or may be
subject to a good faith determination that advances will be reimbursable not
only from Related Proceeds but also from collections on other Assets otherwise
distributable on one or more classes of those Subordinate Notes or Subordinate
Certificates, as applicable. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Notes or Certificates,
as applicable, entitled to the payments, rather than to guarantee or insure
against losses. Advances of the servicer's (or another entity's) funds will be
reimbursable only out of related recoveries on the Assets (including amounts
received under any form of credit support) respecting which those advances were
made (as to any Assets, "Related Proceeds") and from any other amounts specified
in the prospectus supplement, including out of any amounts otherwise
distributable on one or more classes of Subordinate Notes or Subordinate
Certificates, as applicable, of that series; provided, however, that any advance
will be reimbursable from any amounts in the related Collection Account before
any distributions being made on the Notes
29
or Certificates, as applicable, to the extent that the servicer (or some other
entity) determines in good faith that that advance (a "Nonrecoverable Advance")
is not ultimately recoverable from Related Proceeds or, if applicable, from
collections on other Assets otherwise distributable on the Subordinate Notes or
Subordinate Certificates, as applicable. If advances have been made by the
servicer from excess funds in the related Collection Account, the servicer is
required to replace these funds in that Collection Account on any future
Distribution Date to the extent that funds in that Collection Account on that
Distribution Date are less than payments required to be made to securityholders
on that date. If specified in the prospectus supplement, the obligations of the
servicer (or another entity) to make advances may be secured by a cash advance
reserve fund, a surety bond, a letter of credit or another form of limited
guaranty. If applicable, information regarding the characteristics of and the
identity of any borrower on any surety bond will be set forth in the prospectus
supplement.
If and to the extent so provided in the prospectus supplement, the servicer
(or another entity) will be entitled to receive interest at the rate specified
in the prospectus supplement on its outstanding advances and will be entitled to
pay itself this interest periodically from general collections on the Assets
before any payment to securityholders or as otherwise provided in the related
Agreement and described in the prospectus supplement.
If specified in the prospectus supplement, the master servicer or the
trustee will be required to make advances, subject to specific conditions
described in the prospectus supplement, in the event of a servicer default.
REPORTS TO SECURITYHOLDERS
With each distribution to holders of any class of Notes or Certificates, as
applicable, of a series, the servicer, the master servicer or the trustee, as
provided in the prospectus supplement, will forward or cause to be forwarded to
each holder, to the depositor and to any other parties as may be specified in
the related Agreement, a statement containing the information specified in the
prospectus supplement, or if no information is specified in the prospectus
supplement, generally setting forth, in each case to the extent applicable and
available:
(1) the amount of that distribution to holders of Notes or
Certificates, as applicable, of that class applied to reduce the Security
Balance of the Notes or Certificates, as applicable;
(2) the amount of that distribution to holders of Notes or
Certificates, as applicable, of that class allocable to Accrued Security
Interest;
(3) the amount of that distribution allocable to Prepayment Premiums;
(4) the amount of related servicing compensation and any other
customary information as is required to enable securityholders to prepare
their tax returns;
(5) the total amount of advances included in that distribution, and
the total amount of unreimbursed advances at the close of business on that
Distribution Date;
(6) the total principal balance of the Assets at the close of
business on that Distribution Date;
(7) the number and total principal balance of mortgage loans in
respect of which
(a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent,
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(c) three or more scheduled payments are delinquent and
(d) foreclosure proceedings have begun;
(8) for any mortgage loan or contract liquidated during the related
Due Period, (a) the portion of the related liquidation proceeds payable or
reimbursable to a servicer (or any other entity) in respect of that
mortgage loan and (b) the amount of any loss to securityholders;
(9) with respect to collateral acquired by the trust fund through
foreclosure or otherwise (an "REO Property") relating to a mortgage loan or
contract and included in the trust fund as of the end of the related Due
Period, the date of acquisition;
(10) for each REO Property relating to a mortgage loan or contract and
included in the trust fund as of the end of the related Due Period,
(a) the book value,
(b) the principal balance of the related mortgage loan or
contract immediately following that Distribution Date
(calculated as if that mortgage loan or contract were still
outstanding taking into account limited modifications to the
terms of the mortgage loan specified in the Agreement),
(c) the total amount of unreimbursed servicing expenses and
unreimbursed advances in respect of the REO Property and
(d) if applicable, the total amount of interest accrued and
payable on related servicing expenses and related advances;
(11) for any REO Property sold during the related Due Period
(a) the total amount of sale proceeds,
(b) the portion of those sales proceeds payable or reimbursable
to the master servicer in respect of that REO Property or
the related mortgage loan or contract and
(c) the amount of any loss to securityholders in respect of the
related mortgage loan;
(12) the total Security Balance or notional amount, as the case may
be, of each class of Notes or Certificates, as applicable, (including any
class of Notes or Certificates, as applicable, not offered by this
prospectus) at the close of business on that Distribution Date, separately
identifying any reduction in that Security Balance due to the allocation of
any loss and increase in the Security Balance of a class of Accrual
Securities if any Accrued Security Interest has been added to that balance;
(13) the total amount of principal prepayments made during the related
Due Period;
(14) the amount deposited in the reserve fund, if any, on that
Distribution Date;
(15) the amount remaining in the reserve fund, if any, as of the close
of business on that Distribution Date;
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(16) the total unpaid Accrued Security Interest, if any, on each class
of Notes or Certificates, as applicable, at the close of business on that
Distribution Date;
(17) in the case of Notes or Certificates, as applicable, with a
variable Interest Rate, the Interest Rate applicable to that Distribution
Date, and, if available, the immediately succeeding Distribution Date, as
calculated in accordance with the method specified in the prospectus
supplement;
(18) in the case of Notes or Certificates, as applicable, with an
adjustable Interest Rate, for statements to be distributed in any month in
which an adjustment date occurs, the adjustable Interest Rate applicable to
that Distribution Date, if available, and the immediately succeeding
Distribution Date as calculated in accordance with the method specified in
the prospectus supplement;
(19) as to any series that includes credit support, the amount of
coverage of each instrument of credit support included as of the close of
business on that Distribution Date;
(20) during the Pre-Funding Period, the remaining Pre-Funded Amount
and the portion of the Pre-Funding Amount used to acquire Subsequent Assets
since the preceding Distribution Date;
(21) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account; and
(22) the total amount of payments by the borrowers of
(a) default interest,
(b) late charges and
(c) assumption and modification fees collected during the
related Due Period.
Within a reasonable period of time after the end of each calendar year, the
servicer, the master servicer or the trustee, as provided in the prospectus
supplement, will furnish to each securityholder of record at any time during the
calendar year the information required by the Code and applicable regulations
under the Code to enable securityholders to prepare their tax returns. See
"Description of the Securities--Book-Entry Registration and Definitive
Securities."
TERMINATION
The obligations created by the related Agreement for each series of Notes
or Certificates, as applicable, will terminate upon the payment to
securityholders of that series of all amounts held in the Collection Accounts or
by a servicer, the master servicer, if any, or the trustee and required to be
paid to them pursuant to that Agreement following the earlier of (1) the final
payment or other liquidation of the last Asset subject to the related Agreement
or the disposition of all property acquired upon foreclosure of any mortgage
loan or contract subject to the Agreement and (2) the purchase of all of the
assets of the trust fund by the party entitled to effect that termination, under
the circumstances and in the manner set forth in the prospectus supplement. In
no event, however, will the trust fund continue beyond the date specified in the
prospectus supplement. Written notice of termination of the Agreement will be
given to each securityholder, and the final distribution will be made only upon
presentation and surrender of the Notes or Certificates, as applicable, at the
location to be specified in the notice of termination.
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If specified in the prospectus supplement, a series of Notes or
Certificates, as applicable, may be subject to optional early termination
through the purchase of the Assets in the related trust fund by the party
specified in the prospectus supplement, under the circumstances and in the
manner set forth in the prospectus supplement. If so provided in the prospectus
supplement, upon the reduction of the Security Balance of a specified class or
classes of Notes or Certificates, as applicable, by a specified percentage, the
party specified in the prospectus supplement will solicit bids for the purchase
of all assets of the trust fund, or of a sufficient portion of those assets to
retire that class or classes or purchase that class or classes at a price set
forth in the prospectus supplement, in each case, under the circumstances and in
the manner set forth in the prospectus supplement. That price will at least
equal the outstanding Security Balances and any accrued and unpaid interest on
the Security Balances (including any unpaid interest shortfalls for prior
Distribution Dates). Any sale of the Assets of the trust fund will be without
recourse to the trust fund or the securityholders. Any purchase or solicitation
of bids may be made only when the total Security Balance of that class or
classes declines to a percentage of the Initial Security Balance of those Notes
or Certificates, as applicable, (not to exceed 10%) specified in the prospectus
supplement. In addition, if so provided in the prospectus supplement, some
classes of Notes or Certificates, as applicable, may be purchased or redeemed in
the manner set forth in the prospectus supplement at a price at least equal to
the outstanding Security Balance of each class so purchased or redeemed and any
accrued and unpaid interest on the Security Balance (including any unpaid
interest shortfalls for prior Distribution Dates).
OPTIONAL PURCHASES
Subject to the provisions of the applicable Agreement, the depositor, the
servicer or any other party specified in the prospectus supplement may, at that
party's option, repurchase any mortgage loan that is in default or as to which
default is reasonably foreseeable if, in the depositor's, the servicer's or any
other party's judgment, the related default is not likely to be cured by the
borrower or default is not likely to be averted, at a price equal to the unpaid
principal balance of the mortgage loan plus accrued interest on the mortgage
loan and under the conditions set forth in the prospectus supplement.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
GENERAL
If provided for in the prospectus supplement, one or more classes of the
Offered Notes or Offered Certificates, as applicable, of any series will be
issued as Book-Entry Notes or Book-Entry Certificates, as applicable, and each
of these classes will be represented by one or more single Notes or
Certificates, as applicable, registered in the name of a nominee for the
depository, The Depository Trust Company ("DTC") and, if provided in the
prospectus supplement, additionally through Clearstream Luxembourg, societe
anonyme ("Clearstream Luxembourg") or the Euroclear System ("Euroclear"). Each
class of Book-Entry Notes or Book-Entry Certificates, as applicable, will be
issued in one or more certificates or notes, as the case may be, that equal the
initial principal amount of the related class of Offered Notes or Offered
Certificates, as applicable, and will initially be registered in the name of
Cede & Co.
No person acquiring an interest in a Book-Entry Security (each, a
"Beneficial Owner") will be entitled to receive a Definitive Security, except as
set forth below under "-Definitive Securities." Unless and until Definitive
Notes or Definitive Certificates, as applicable, are issued for the Book-Entry
Notes or Book-Entry Certificates, as applicable, under the limited circumstances
described in the applicable prospectus supplement or this prospectus, all
references to actions by securityholders with respect to the Book-Entry Notes or
Book-Entry Certificates, as applicable, will refer to actions taken by DTC,
Clearstream Luxembourg or Euroclear upon instructions from their Participants
(as defined below), and all references in this prospectus to distributions,
notices, reports and statements to securityholders with respect to the
Book-Entry Notes or Book-Entry Certificates, as applicable, will refer
33
to distributions, notices, reports and statements to DTC, Clearstream Luxembourg
or Euroclear, as applicable, for distribution to Beneficial Owners by DTC in
accordance with the procedures of DTC and if applicable, Clearstream Luxembourg
and Euroclear.
Beneficial Owners will hold their Book-Entry Notes or Book-Entry
Certificates, as applicable, through DTC in the United States, or, if the
Offered Notes or Offered Certificates, as applicable, are offered for sale
globally, through Clearstream Luxembourg or Euroclear in Europe if they are
participating organizations ("Participants") of those systems. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include some other organizations. Indirect access to the
DTC, Clearstream Luxembourg and Euroclear systems also is available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
DTC
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). DTC was
created to hold securities for its Participants, some of which (and/or their
representatives) own DTC, and facilitate the clearance and settlement of
securities transactions between its Participants through electronic book-entry
changes in their accounts, thus eliminating the need for physical movement of
securities. In accordance with its normal procedures, DTC is expected to record
the positions held by each of its Participants in the Book-Entry Notes or
Book-Entry Certificates, as applicable, whether held for its own account or as a
nominee for another person. In general, beneficial ownership of Book-Entry Notes
or Book-Entry Certificates, as applicable, will be subject to the rules,
regulations and procedures governing DTC and its Participants as in effect from
time to time.
CLEARSTREAM LUXEMBOURG
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Berse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel International
decided to rename the companies in the group in order to give them a cohesive
brand name. The new brand name that was chosen is "Clearstream". With effect
from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This means
that there are now two entities in the corporate group headed by Clearstream
International which share the name "Clearstream Banking", the entity previously
named "Cedelbank" and the entity previously named "Deutsche Brse Clearing AG".
34
Clearstream, Luxembourg holds securities for its customers ("Clearstream,
Luxembourg Participants") and facilitates the clearance and settlement of
securities transactions between Clearstream, Luxembourg customers through
electronic book-entry changes in accounts of Clearstream, Luxembourg customers,
thereby eliminating the need for physical movement of certificates. Transactions
may be settled by Clearstream, Luxembourg in any of 36 currencies, including
United States Dollars. Clearstream, Luxembourg provides to its customers, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing.
Clearstream, Luxembourg also deals with domestic securities markets in over 30
countries through established depository and custodial relationships.
Clearstream, Luxembourg is registered as a bank in Luxembourg, and as such is
subject to regulation by the Commission de Surveillance du Secteur Financier,
"CSSF", which supervises Luxembourg banks. Clearstream, Luxembourg's customers
are world-wide financial institutions including underwriters, securities brokers
and dealers, banks, trust companies and clearing corporations. Clearstream,
Luxembourg's U.S. customers are limited to securities brokers and dealers, and
banks. Currently, Clearstream, Luxembourg has approximately 2,000 customers
located in over 80 countries, including all major European countries, Canada,
and the United States. Indirect access to Clearstream, Luxembourg is available
to other institutions that clear through or maintain a custodial relationship
with an account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has
established an electronic bridge with Morgan Guaranty Trust Company of New York
as the Operator of the Euroclear System (MGT/EOC) in Brussels to facilitate
settlement of trades between Clearstream, Luxembourg and MGT/EOC.
EUROCLEAR
Euroclear was created in 1968 to hold securities for its Participants and
to clear and settle transactions between its Participants through simultaneous
electronic book-entry delivery against payment, thus eliminating the need for
physical movement of securities and any risk from lack of simultaneous transfers
of securities and cash. Transactions may be settled in any of 32 currencies,
including United States dollars. Euroclear includes 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 the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative Corporation"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative Corporation. The Cooperative Corporation establishes policy
for Euroclear on behalf of its 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 Participant of Euroclear, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System, and is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The 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 securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
35
its Participants, and has no record of or relationship with persons holding
through Participants of Euroclear.
Clearstream Luxembourg and Euroclear will hold omnibus positions on behalf
of their Participants through customers' securities accounts in Clearstream
Luxembourg's and Euroclear's names on the books of their respective depositaries
which in turn will hold positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank will act as depositary for
Clearstream Luxembourg and The Chase Manhattan Bank will act as depositary for
Euroclear (individually the "Relevant Depositary" and collectively, the
"European Depositaries").
BENEFICIAL OWNERSHIP OF BOOK-ENTRY SECURITIES
Except as described below, no Beneficial Owner will be entitled to receive
a physical certificate representing a Certificate, or note representing a Note.
Unless and until Definitive Notes or Definitive Certificates, as applicable, are
issued, it is anticipated that the only "securityholder" of the Offered Notes or
Offered Certificates, as applicable, will be Cede & Co., as nominee of DTC.
Beneficial Owners will not be "Certificateholders" as that term is used in any
Agreement, nor "Noteholders" as that term is used in any indenture. Beneficial
Owners are only permitted to exercise their rights indirectly through
Participants, DTC, Clearstream Luxembourg or Euroclear, as applicable.
The Beneficial Owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Security will be recorded on the
records of DTC (or of a Participant that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a Participant of DTC and on
the records of Clearstream Luxembourg or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Notes or Offered Certificates, as applicable, from the
trustee through DTC and its Participants. While the Offered Notes or Offered
Certificates, as applicable, 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 Offered Notes or Offered Certificates, as applicable, and is required to
receive and transmit distributions of principal of, and interest on, the Offered
Notes or Offered Certificates, as applicable. Participants and Indirect
Participants with whom Beneficial Owners have accounts with respect to Offered
Notes or Offered Certificates, as applicable, are similarly required to make
book-entry transfers and receive and transmit distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess certificates or notes, the Rules provide a mechanism by which Beneficial
Owners will receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive certificates
or notes representing their respective interests in the Offered Notes or Offered
Certificates, as applicable, except under the limited circumstances described
below. Unless and until Definitive Notes or Definitive Certificates, as
applicable, are issued, Beneficial Owners who are not Participants may transfer
ownership of Offered Notes or Offered Certificates, as applicable, only through
Participants and Indirect Participants by instructing the Participants and
Indirect Participants to transfer Offered Notes or Offered Certificates, as
applicable, by book-entry transfer, through DTC for the account of the
purchasers of the Offered Notes or Offered Certificates, as applicable, which
account is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfer of ownership of Book-Entry
Notes or Book-Entry Certificates, as applicable, will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants
36
and Indirect Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Beneficial Owners.
Because of time zone differences, any credits of securities received in
Clearstream Luxembourg 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 Participants of Clearstream Luxembourg or Euroclear on that
business day. Cash received in Clearstream Luxembourg or Euroclear as a result
of sales of securities by or through a Participant of Clearstream Luxembourg or
Euroclear to a Participant of DTC will be received with value on the DTC
settlement date but will be available in the relevant Clearstream Luxembourg or
Euroclear cash account only as of the business day following settlement in DTC.
For information with respect to tax documentation procedures relating to the
Notes or Certificates, as applicable, see "Material Federal Income Tax
Considerations--Tax Treatment of Foreign Investors" in this prospectus and, if
the Book-Entry Notes or Book-Entry Certificates, as applicable, are globally
offered and the prospectus supplement so provides, see "Global Clearance,
Settlement and Tax Documentation Procedures--Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I to the prospectus supplement.
Transfers between Participants of DTC will occur in accordance with DTC
Rules. Transfers between Participants of Clearstream Luxembourg or Euroclear
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 Participants of
Clearstream Luxembourg or Euroclear, on the other, will be effected in DTC in
accordance with the DTC Rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, crossmarket transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in that system in accordance with its rules
and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to the Relevant Depositary to
take action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same day funds settlement applicable to DTC. Participants of
Clearstream Luxembourg or Euroclear may not deliver instructions directly to the
European Depositaries.
Distributions on the Book-Entry Notes or Book-Entry Certificates, as
applicable, will be made on each Distribution Date by the Trustee to DTC. DTC
will be responsible for crediting the amount of each distribution to the
accounts of the applicable Participants of DTC in accordance with DTC's normal
procedures. Each Participant of DTC will be responsible for disbursing the
distribution to the Beneficial Owners of the Book-Entry Notes or Book-Entry
Certificates, as applicable, 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
Notes or Book-Entry Certificates, as applicable, that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes or
Book-Entry Certificates, as applicable, may experience some delay in their
receipt of payments, because the distributions will be forwarded by the Trustee
to Cede & Co. Any distributions on Notes or Certificates, as applicable, held
through Clearstream Luxembourg or Euroclear will be credited to the cash
accounts of Participants of Clearstream Luxembourg or Euroclear 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 "Material
Federal Income Tax Considerations--REMICs--Taxation of Certain Foreign
Investors" in this prospectus. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a Beneficial
37
Owner to pledge Book-Entry Notes or Book-Entry Certificates, as applicable, to
persons or entities that do not participate in the depository system, or
otherwise take actions in respect of Book-Entry Notes or Book-Entry
Certificates, as applicable, may be limited due to the lack of physical
securities for the Book-Entry Notes or Book-Entry Certificates, as applicable.
In addition, issuance of the Book-Entry Notes or Book-Entry Certificates, as
applicable, in book-entry form may reduce the liquidity of the securities in the
secondary market since potential investors may be unwilling to purchase Notes or
Certificates, as applicable, for which they cannot obtain physical securities.
Monthly and annual reports will be provided to Cede & Co., as nominee of
DTC, and may be made available by Cede & Co. to Beneficial Owners upon request,
in accordance with the rules, regulations and procedures creating and affecting
the depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Notes or Book-Entry Certificates, as applicable, of Beneficial Owners
are credited.
Generally, DTC will advise the applicable trustee that unless and until
Definitive Notes or Definitive Certificates, as applicable, are issued, DTC will
take any action permitted to be taken by the holders of the Book-Entry Notes or
Book-Entry Certificates, as applicable, under the Agreement or indenture, as
applicable, only at the direction of one or more Financial Intermediaries to
whose DTC accounts the Book-Entry Notes or Book-Entry Certificates, as
applicable, are credited, to the extent that actions are taken on behalf of
Financial Intermediaries whose holdings include the Book-Entry Notes or
Book-Entry Certificates, as applicable. If the Book-Entry Notes or Book-Entry
Certificates, as applicable, are globally offered, Clearstream Luxembourg or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a securityholder under the Agreement or indenture, as applicable, on
behalf of a Participant of Clearstream Luxembourg or Euroclear only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect those actions on its behalf through DTC. DTC
may take actions, at the direction of the related Participants, with respect to
some Offered Notes or Offered Certificates, as applicable, that conflict with
actions taken with respect to other Offered Notes or Offered Certificates, as
applicable.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Book-Entry Notes or
Book-Entry Certificates, as applicable, among Participants of DTC, Clearstream
Luxembourg and Euroclear, they are under no obligation to perform or continue to
perform these procedures and the procedures may be discontinued at any time.
None of the depositor, any master servicer, any servicer, the trustee, any
securities registrar or paying agent or any of their affiliates will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Notes or Book-Entry
Certificates, as applicable, or for maintaining, supervising or reviewing any
records relating to those beneficial ownership interests.
DEFINITIVE SECURITIES
Notes or Certificates, as applicable, initially issued in book-entry form
will be issued as Definitive Notes or Definitive Certificates, as applicable, to
Beneficial Owners or their nominees, rather than to DTC or its nominee only
(1) if the depositor advises the trustee in writing that DTC is no longer
willing or able to properly discharge its responsibilities as
depository for the Notes or Certificates, as applicable, and the
depositor is unable to locate a qualified successor,
(2) if the depositor, at its option, elects to end the book-entry system
through DTC or
(3) in accordance with any other provisions described in the prospectus
supplement.
38
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Notes or Definitive Certificates, as
applicable, for the Beneficial Owners. Upon surrender by DTC of the security or
securities representing the Book-Entry Notes or Book-Entry Certificates, as
applicable, together with instructions for registration, the trustee will issue
(or cause to be issued) to the Beneficial Owners identified in those
instructions the Definitive Notes or Definitive Certificates, as applicable, to
which they are entitled, and thereafter the trustee will recognize the holders
of those Definitive Notes or Definitive Certificates, as applicable, as
securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC SECURITIES, FASIT SECURITIES, GRANTOR TRUST SECURITIES
Notes or Certificates, as applicable, representing interests in a trust
fund, or a portion of a trust fund, that the trustee will elect to have treated
as a real estate mortgage investment conduit under Sections 860A through 860G of
the Code ("REMIC Securities"), FASIT Securities (as defined in this prospectus),
or Grantor Trust Securities (as defined in this prospectus) will be issued, and
the related trust fund will be created, pursuant to a pooling and servicing
agreement or trust agreement (in either case, generally referred to in this
prospectus as the "pooling and servicing agreement") among the depositor, the
trustee and the sole servicer or master servicer, as applicable. The Assets of
that trust fund will be transferred to the trust fund and thereafter serviced in
accordance with the terms of the pooling and servicing agreement. In the event
there are multiple servicers of the Assets of that trust fund, or in the event
the Securities consist of Notes, each servicer will perform its servicing
functions pursuant to a related underlying servicing agreement.
SECURITIES THAT ARE PARTNERSHIP INTERESTS FOR TAX PURPOSES AND NOTES
Certificates, as applicable, that are intended to be treated as partnership
interests for tax purposes will be issued, and the related trust fund will be
created, pursuant to the pooling and servicing agreement or trust agreement.
A series of Notes issued by a trust fund that is intended to be treated as
a partnership or disregarded entity for tax purposes will be issued pursuant to
an indenture between the related trust fund and an indenture trustee named in
the prospectus supplement. The trust fund will be established either as a
statutory business trust under the law of the State of Delaware or as a common
law trust under the law of the State of New York pursuant to a trust agreement
between the depositor and an owner trustee specified in the prospectus
supplement relating to that series of Notes. The Assets securing payment on the
Notes will be serviced in accordance with a sale and servicing agreement or
servicing agreement.
MATERIAL TERMS OF THE POOLING AND SERVICING AGREEMENTS AND UNDERLYING SERVICING
AGREEMENTS
GENERAL
The following summaries describe the material provisions that may appear in
each pooling and servicing agreement, sale and servicing agreement or servicing
agreement (each an "Agreement"). The prospectus supplement for a series of Notes
or Certificates, as applicable, will describe any provision of the Agreement
relating to that series that materially differs from the description of those
provisions contained in this prospectus. The summaries do not purport to be
complete and are subject to, and are qualified by reference to, all of the
provisions of the Agreement for each trust fund and the description of those
provisions in the prospectus supplement. The
39
provisions of each Agreement will vary depending on the nature of the Notes or
Certificates, as applicable, to be issued under the Agreement and the nature of
the related trust fund. As used in this prospectus for any series, the term
"Security" refers to all of the Notes or Certificates, as applicable, of that
series, whether or not offered by this prospectus and by the prospectus
supplement, unless the context otherwise requires. A form of a pooling and
servicing agreement has been filed as an exhibit to the Registration Statement
of which this prospectus is a part. The depositor will provide a copy of the
pooling and servicing agreement (without exhibits) relating to any series of
Notes or Certificates, as applicable, without charge upon written request of a
securityholder of that series addressed to ACE Securities Corp., 6525 Morrison
Boulevard, Suite 318, Charlotte, North Carolina 28211, Attention: Elizabeth S.
Eldridge.
The servicer or master servicer and the trustee for any series of Notes or
Certificates, as applicable, will be named in the prospectus supplement. In the
event there are multiple servicers for the Assets in a trust fund, a master
servicer will perform some of the administration, calculation and reporting
functions for that trust fund and will supervise the related servicers pursuant
to a pooling and servicing agreement. For a series involving a master servicer,
references in this prospectus to the servicer will apply to the master servicer
where non-servicing obligations are described. If specified in the prospectus
supplement, a manager or administrator may be appointed pursuant to the pooling
and servicing agreement for any trust fund to administer that trust fund.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Notes or Certificates, as
applicable, the depositor will assign (or cause to be assigned) to the
designated trustee the Assets to be included in the related trust fund, together
with all principal and interest to be received on or with respect to those
Assets after the Cut-off Date, other than principal and interest due on or
before the Cut-off Date and other than any Retained Interest. The trustee will,
concurrently with that assignment, deliver the Notes or Certificates, as
applicable, to the depositor in exchange for the Assets and the other assets
comprising the trust fund for that series. Each Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. That schedule will
include detailed information to the extent available and relevant
(1) in respect of each mortgage loan included in the related trust
fund, including the city and state of the related Mortgaged Property and
type of that property, the mortgage rate and, if applicable, the applicable
index, margin, adjustment date and any rate cap information, the original
and remaining term to maturity, the original and outstanding principal
balance and balloon payment, if any, the Loan-to-Value Ratio as of the date
indicated and payment and prepayment provisions, if applicable, and
(2) in respect of each Contract included in the related trust fund,
including the outstanding principal amount and the Contract Rate; and
(3) in respect of each Mortgage Security and Agency Security, the
original and outstanding principal amount, if any, and the interest rate on
the Mortgage Security or Agency Security.
For each mortgage loan, except as otherwise specified in the prospectus
supplement, the depositor will deliver or cause to be delivered to the trustee
(or to the custodian hereinafter referred to) particular loan documents, which
will generally include the original mortgage note endorsed, without recourse, in
blank or to the order of the trustee, the original Mortgage (or a certified copy
of the original Mortgage) with evidence of recording indicated on the original
Mortgage and an assignment of the Mortgage to the trustee in recordable form.
However, a trust fund may include mortgage loans where the original mortgage
note is not delivered to the trustee if the depositor delivers to the trustee or
the custodian a copy or a duplicate original of the mortgage note, together with
an affidavit certifying that the original of the mortgage note has been lost or
destroyed. For those
40
mortgage loans, the trustee (or its nominee) may not be able to enforce the
mortgage note against the related borrower. The Asset Seller or other entity
specified in the prospectus supplement will be required to agree to repurchase,
or substitute for, each of these mortgage loans that is subsequently in default
if the enforcement thereof or of the related Mortgage is materially adversely
affected by the absence of the original mortgage note. The related Agreement
will generally require the depositor or another party specified in the
prospectus supplement to promptly cause each of these assignments of Mortgage to
be recorded in the appropriate public office for real property records, except
in the State of California or in other states where, in the opinion of counsel
acceptable to the trustee, recording is not required to protect the trustee's
interest in the related mortgage loan against the claim of any subsequent
transferee or any successor to or creditor of the depositor, the servicer, the
relevant Asset Seller or any other prior holder of the mortgage loan.
The trustee (or a custodian) will review the mortgage loan documents within
a specified period of days after receipt of the mortgage loan documents, and the
trustee (or a custodian) will hold those documents in trust for the benefit of
the securityholders. If any of these documents are found to be missing or
defective in any material respect, the trustee (or that custodian) will
immediately notify the servicer and the depositor, and the servicer will
immediately notify the relevant Asset Seller or other entity specified in the
prospectus supplement. If the Asset Seller cannot cure the omission or defect
within a specified number of days after receipt of that notice, then the Asset
Seller or other entity specified in the prospectus supplement will be obligated,
within a specified number of days of receipt of that notice, to either (1)
repurchase the related mortgage loan from the trustee at a price equal to the
sum of the unpaid principal balance of the mortgage loan, plus unpaid accrued
interest at the interest rate for that Asset from the date as to which interest
was last paid to the due date in the Due Period in which the relevant purchase
is to occur, plus servicing expenses that are payable to the servicer, or
another price as specified in the prospectus supplement (the "Purchase Price")
or (2) substitute a new mortgage loan. There can be no assurance that an Asset
Seller or other named entity will fulfill this repurchase or substitution
obligation, and neither the servicer nor the depositor will be obligated to
repurchase or substitute for that mortgage loan if the Asset Seller or other
named entity defaults on its obligation.
This repurchase or substitution obligation constitutes the sole remedy
available to the securityholders or the trustee for omission of, or a material
defect in, a constituent document. To the extent specified in the prospectus
supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for that Asset, the Asset Seller or other named
entity may agree to cover any losses suffered by the trust fund as a result of
that breach or defect.
Notwithstanding the preceding three paragraphs, the documents for Home
Equity Loans, home improvement contracts and unsecured home improvements loans
will be delivered to the trustee (or a custodian) only to the extent specified
in the prospectus supplement. Generally these documents will be retained by the
servicer, which may also be the Asset Seller. In addition, assignments of the
related Mortgages to the trustee will be recorded only to the extent specified
in the prospectus supplement.
For each contract, the servicer, which may also be the asset seller,
generally will maintain custody of the original contract and copies of documents
and instruments related to each contract and the security interest in the
manufactured home securing each contract. To give notice of the right, title and
interest of the trustee in the contracts, the depositor will cause UCC-1
financing statements to be executed by the related asset seller identifying the
depositor as secured party and by the depositor identifying the trustee as the
secured party and, in each case, identifying all contracts as collateral. The
contracts will be stamped or otherwise marked to reflect their assignment from
the depositor to the trust fund only to the extent specified in the prospectus
supplement. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of that assignment, the interest of the trustee in the contracts could be
defeated.
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While the contract documents will not be reviewed by the trustee or the
servicer, if the servicer finds that any document is missing or defective in any
material respect, the servicer will be required to immediately notify the
depositor and the relevant asset seller or other entity specified in the
prospectus supplement. If the asset seller or some other entity cannot cure the
omission or defect within a specified number of days after receipt of this
notice, then the asset seller or that other entity will be obligated, within a
specified number of days of receipt of this notice, to repurchase the related
contract from the trustee at the purchase price or substitute for that contract.
There can be no assurance that an asset seller or any other entity will fulfill
this repurchase or substitution obligation, and neither the servicer nor the
depositor will be obligated to repurchase or substitute for that contract if the
asset seller or any other entity defaults on its obligation. This repurchase or
substitution obligation constitutes the sole remedy available to the
securityholders or the trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the prospectus supplement, in
lieu of curing any omission or defect in the asset or repurchasing or
substituting for that asset, the asset seller may agree to cover any losses
suffered by the trust fund as a result of that breach or defect.
Mortgage Securities and Agency Securities will be registered in the name of
the trustee or its nominee on the books of the issuer or guarantor or its agent
or, in the case of Mortgage Securities and Agency Securities issued only in
book-entry form, through the depository with respect to the Mortgage Securities
and Agency Securities, in accordance with the procedures established by the
issuer or guarantor for registration of those certificates, and distributions on
those securities to which the trust fund is entitled will be made directly to
the trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
To the extent provided in the prospectus supplement the depositor will, for
each Asset, assign representations and warranties, as of a specified date (the
person making those representations and warranties, the "Warranting Party")
covering, by way of example, the following types of matters:
o the accuracy of the information set forth for that Asset on the
schedule of Assets appearing as an exhibit to the related Agreement;
o in the case of a mortgage loan, the existence of title insurance
insuring the lien priority of the mortgage loan and, in the case of a
contract, that the contract creates a valid first security interest in
or lien on the related manufactured home;
o the authority of the Warranting Party to sell the Asset;
o the payment status of the Asset;
o in the case of a mortgage loan, the existence of customary provisions
in the related mortgage note and Mortgage to permit realization
against the Mortgaged Property of the benefit of the security of the
Mortgage; and
o the existence of hazard and extended perils insurance coverage on the
Mortgaged Property or manufactured home.
Any Warranting Party shall be an Asset Seller or an affiliate of the Asset
Seller or any other person acceptable to the depositor and will be identified in
the prospectus supplement.
Representations and warranties made in respect of an Asset may have been
made as of a date before the applicable Cut-off Date. A substantial period of
time may have elapsed between that date and the date of initial issuance of the
related series of Notes or Certificates, as applicable, evidencing an interest
in that Asset. In the event of a breach of any of these representations or
warranties, the
42
Warranting Party will be obligated to reimburse the trust fund for losses caused
by that breach or either cure that breach or repurchase or replace the affected
Asset as described below. Since the representations and warranties may not
address events that may occur following the date as of which they were made, the
Warranting Party will have a reimbursement, cure, repurchase or substitution
obligation in connection with a breach of that representation and warranty only
if the relevant event that causes that breach occurs before that date. That
party would have no obligations if the relevant event that causes that breach
occurs after that date.
Each Agreement will provide that the servicer and/or trustee or another
entity identified in the prospectus supplement will be required to notify
promptly the relevant Warranting Party of any breach of any representation or
warranty made by it in respect of an Asset that materially and adversely affects
the value of that Asset or the interests in the prospectus supplement of the
securityholders. If the Warranting Party cannot cure that breach within a
specified period following the date on which that party was notified of that
breach, then the Warranting Party will be obligated to repurchase that Asset
from the trustee within a specified period from the date on which the Warranting
Party was notified of that breach, at the Purchase Price therefor. If so
provided in the prospectus supplement for a series, a Warranting Party, rather
than repurchase an Asset as to which a breach has occurred, will have the
option, within a specified period after initial issuance of that series of Notes
or Certificates, as applicable, to cause the removal of that Asset from the
trust fund and substitute in its place one or more other Assets, as applicable,
in accordance with the standards described in the prospectus supplement. If so
provided in the prospectus supplement for a series, a Warranting Party, rather
than repurchase or substitute an Asset as to which a breach has occurred, will
have the option to reimburse the trust fund or the securityholders for any
losses caused by that breach. This reimbursement, repurchase or substitution
obligation will constitute the sole remedy available to securityholders or the
trustee for a breach of representation by a Warranting Party.
Neither the depositor (except to the extent that it is the Warranting
Party) nor the servicer will be obligated to purchase or substitute for an Asset
if a Warranting Party defaults on its obligation to do so, and no assurance can
be given that the Warranting Parties will carry out those obligations with
respect to the Assets.
A servicer will make representations and warranties regarding its authority
to enter into, and its ability to perform its obligations under, the related
Agreement. A breach of any representation of the servicer that materially and
adversely affects the interests of the securityholders and which continues
unremedied for the number of days specified in the Agreement after the discovery
of the breach by the servicer or the receipt of written notice of that breach by
the servicer from the trustee, the depositor or the holders of Notes or
Certificates, as applicable, evidencing not less than 25% of the voting rights
or other percentage specified in the related Agreement, will constitute an Event
of Default under that Agreement. See "Events of Default" and "Rights Upon Event
of Default."
COLLECTION ACCOUNT AND RELATED ACCOUNTS
GENERAL. The servicer and/or the trustee will, as to each trust fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be an account or accounts
that either:
o are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC")
(to the limits established by the FDIC) and the uninsured deposits in
which are otherwise secured so that the securityholders have a claim
with respect to the funds in the Collection Account or a perfected
first priority security interest against any collateral securing those
funds that is superior to the claims of any other depositors or
general creditors of the institution with which the Collection Account
is maintained, or
43
o are maintained with a bank or trust company, and in a manner
satisfactory to the rating agency or agencies rating any class of
Notes or Certificates, as applicable, of that series.
Investment of amounts in the Collection Account is limited to United States
government securities and other investment grade obligations specified in the
Agreement ("Permitted Investments"). A Collection Account may be maintained as
an interest bearing or a non-interest bearing account and the funds held in the
Collection Account may be invested pending each succeeding Distribution Date in
short-term Permitted Investments. Any interest or other income earned on funds
in the Collection Account will, unless otherwise specified in the prospectus
supplement, be paid to the servicer or its designee as additional servicing
compensation. The Collection Account may be maintained with an institution that
is an affiliate of the servicer, if applicable, provided that that institution
meets the standards imposed by the rating agency or agencies. If permitted by
the rating agency or agencies, a Collection Account may contain funds relating
to more than one series of mortgage pass-through certificates and may contain
other funds respecting payments on mortgage loans belonging to the servicer or
serviced or master serviced by it on behalf of others.
DEPOSITS. A servicer or the trustee will deposit or cause to be deposited
in the Collection Account for one or more trust funds on a daily basis, or any
other period provided in the related Agreement, the following payments and
collections received, or advances made, by the servicer or the trustee or on its
behalf after the Cut-off Date (other than payments due on or before the Cut-off
Date, and exclusive of any amounts representing a Retained Interest), except as
otherwise provided in the Agreement:
(1) all payments on account of principal, including principal
prepayments, on the Assets;
(2) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion retained by a
servicer as its servicing compensation and net of any Retained Interest;
(3) Liquidation Proceeds and Insurance Proceeds, together with the
net proceeds on a monthly basis with respect to any Assets acquired for the
benefit of securityholders;
(4) any amounts paid under any instrument or drawn from any fund that
constitutes credit support for the related series of Notes or Certificates,
as applicable, as described under "Description of Credit Support;"
(5) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies;"
(6) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds--Cash Flow Agreements;"
(7) all proceeds of any Asset or, with respect to a mortgage loan,
property acquired in respect of the mortgage loan purchased by the
depositor, any Asset Seller or any other specified person as described
above under "--Assignment of Assets; Repurchases" and "--Representations
and Warranties; Repurchases," all proceeds of any defaulted mortgage loan
purchased as described below under "--Realization Upon Defaulted Assets,"
and all proceeds of any Asset purchased as described under "Description of
the Securities-- Termination;"
44
(8) any amounts paid by a servicer to cover interest shortfalls
arising out of the prepayment of Assets in the trust fund as described
below under "--Retained Interest; Servicing Compensation and Payment of
Expenses;"
(9) to the extent that any of these items do not constitute
additional servicing compensation to a servicer, any payments on account of
modification or assumption fees, late payment charges or Prepayment
Premiums on the Assets;
(10) all payments required to be deposited in the Collection Account
with respect to any deductible clause in any blanket insurance policy
described below under "--Hazard Insurance Policies;"
(11) any amount required to be deposited by a servicer or the trustee
in connection with losses realized on investments for the benefit of the
servicer or the trustee, as the case may be, of funds held in the
Collection Account; and
(12) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the
prospectus supplement.
WITHDRAWALS. A servicer or the trustee may, from time to time as provided
in the related Agreement, make withdrawals from the Collection Account for each
trust fund for any of the following purposes, except as otherwise provided in
the Agreement:
(1) to make distributions to the securityholders on each Distribution
Date;
(2) to reimburse a servicer for unreimbursed amounts advanced as
described under "Description of the Securities--Advances in Respect of
Delinquencies," which reimbursement is to be made out of amounts received
that were identified and applied by the servicer as late collections of
interest (net of related servicing fees and Retained Interest) on and
principal of the particular Assets for which the advances were made or out
of amounts drawn under any form of credit support with respect to those
Assets;
(3) to reimburse a servicer for unpaid servicing fees earned and
unreimbursed servicing expenses incurred with respect to Assets and
properties acquired in respect of the Assets, which reimbursement is to be
made out of amounts that represent Liquidation Proceeds and Insurance
Proceeds collected on the particular Assets and properties, and net income
collected on the particular properties, which fees were earned or expenses
were incurred or out of amounts drawn under any form of credit support for
those Assets and properties;
(4) to reimburse a servicer for any advances described in clause (2)
above and any servicing expenses described in clause (3) above which, in
the servicer's good faith judgment, will not be recoverable from the
amounts described in those clauses, which reimbursement is to be made from
amounts collected on other Assets or, if and to the extent so provided by
the related Agreement and described in the prospectus supplement, just from
that portion of amounts collected on other Assets that is otherwise
distributable on one or more classes of Subordinate Notes or Subordinate
Certificates, as applicable, if any, remain outstanding, and otherwise any
outstanding class of Notes or Certificates, as applicable, of the related
series;
(5) if and to the extent described in the prospectus supplement, to
pay a servicer interest accrued on the advances described in clause (2)
above and the servicing expenses described in clause (3) above while those
advances and servicing expenses remain outstanding and unreimbursed;
45
(6) to reimburse a servicer, the depositor, or any of their
respective directors, officers, employees and agents, as the case may be,
for expenses, costs and liabilities incurred by these parties, as and to
the extent described below under "--Certain Matters Regarding Servicers,
the Master Servicer and the Depositor;"
(7) if and to the extent described in the prospectus supplement, to
pay (or to transfer to a separate account for purposes of escrowing for the
payment of) the trustee's fees;
(8) to reimburse the trustee or any of its directors, officers,
employees and agents, as the case may be, for expenses, costs and
liabilities incurred by these parties, as and to the extent described below
under "--Certain Matters Regarding the Trustee;"
(9) to pay a servicer, as additional servicing compensation, interest
and investment income earned in respect of amounts held in the Collection
Account;
(10) to pay the person so entitled any amounts deposited in the
Collection Account that were identified and applied by the servicer as
recoveries of Retained Interest;
(11) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for
the benefit of securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise, which payments are to be made out of income
received on that property;
(12) if one or more elections have been made to treat the trust fund
or designated portions of the trust fund as a REMIC, to pay any federal,
state or local taxes imposed on the trust fund or its assets or
transactions, as and to the extent described under "Material Federal Income
Tax Considerations--REMICs--Taxes That May Be Imposed on the REMIC Pool" or
in the prospectus supplement, respectively;
(13) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a
defaulted mortgage loan or a property acquired in respect of a mortgage
loan in connection with the liquidation of that mortgage loan or property;
(14) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of securityholders;
(15) to pay for the costs of recording the related Agreement if that
recordation materially and beneficially affects the interests of
securityholders, provided that the payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any breach
of representation or warranty under the Agreement;
(16) to pay the person so entitled any amounts deposited in the
Collection Account in error, including amounts received on any Asset after
its removal from the trust fund whether by reason of purchase or
substitution as contemplated above under "--Assignment of Assets;
Repurchase" and "--Representations and Warranties; Repurchases" or
otherwise;
(17) to make any other withdrawals permitted by the related Agreement;
and
(18) to clear and terminate the Collection Account at the termination
of the trust fund.
OTHER COLLECTION ACCOUNTS. If specified in the prospectus supplement, the
Agreement for any series of Notes or Certificates, as applicable, may provide
for the establishment and maintenance of
46
a separate collection account into which the servicer will deposit on a daily
basis, or any other period as provided in the related Agreement, the amounts
described under "Deposits" above for one or more series of Notes or
Certificates, as applicable. Any amounts on deposit in any of these collection
accounts will be withdrawn from these collection accounts and deposited into the
appropriate Collection Account by a time specified in the prospectus supplement.
To the extent specified in the prospectus supplement, any amounts that could be
withdrawn from the Collection Account as described under "--Withdrawals" above
may also be withdrawn from any of these collection accounts. The prospectus
supplement will set forth any restrictions for any of these collection accounts,
including investment restrictions and any restrictions for financial
institutions with which any of these collection accounts may be maintained.
The servicer will establish and maintain with the indenture trustee an
account, in the name of the indenture trustee on behalf of the holders of Notes,
into which amounts released from the Collection Account for distribution to the
holders of Notes will be deposited and from which all distributions to the
holders of Notes will be made.
COLLECTION AND OTHER SERVICING PROCEDURES. The servicer is required to make
reasonable efforts to collect all scheduled payments under the Assets and will
follow or cause to be followed those collection procedures that it would follow
with respect to assets that are comparable to the Assets and held for its own
account, provided that those procedures are consistent with
(1) the terms of the related Agreement and any related hazard
insurance policy or instrument of credit support, if any,
included in the related trust fund described in this prospectus
or under "Description of Credit Support,"
(2) applicable law and
(3) the general servicing standard specified in the prospectus
supplement or, if no standard is so specified, its normal
servicing practices (in either case, the "Servicing Standard").
In connection, the servicer will be permitted in its discretion to waive any
late payment charge or penalty interest in respect of a late payment on an
Asset.
Each servicer will also be required to perform other customary functions of
a servicer of comparable assets, including maintaining hazard insurance policies
as described in this prospectus and in any prospectus supplement, and filing and
settling claims under these policies; maintaining, to the extent required by the
Agreement, escrow or impoundment accounts of borrowers for payment of taxes,
insurance and other items required to be paid by any borrower pursuant to the
terms of the Assets; processing assumptions or substitutions in those cases
where the servicer has determined not to enforce any applicable due-on-sale
clause; attempting to cure delinquencies; supervising foreclosures or
repossessions; inspecting and managing mortgaged properties or manufactured
homes under some circumstances; and maintaining accounting records relating to
the Assets. The servicer or any other entity specified in the prospectus
supplement will be responsible for filing and settling claims in respect of
particular Assets under any applicable instrument of credit support. See
"Description of Credit Support."
The servicer may agree to modify, waive or amend any term of any Asset in a
manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (1) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (2) in its judgment,
materially impair the security for the Asset or reduce the likelihood of timely
payment of amounts due on the Asset. The servicer also may agree to any
modification, waiver or amendment that would so affect or impair the payments
on, or the security for, an Asset if (1) in its judgment, a material default on
the Asset has occurred or a payment default is reasonably foreseeable and (2) in
47
its judgment, that modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Asset on a present value basis
than would liquidation. In the event of any modification, waiver or amendment of
any Asset, the servicer will furnish a copy of that modification, waiver or
amendment to the trustee (or its custodian).
In the case of multifamily loans, a borrower's failure to make required
mortgage loan payments may mean that operating income is insufficient to service
the mortgage loan debt, or may reflect the diversion of that income from the
servicing of the mortgage loan debt. In addition, a borrower under a multifamily
loan that is unable to make mortgage loan payments may also be unable to make
timely payment of all required taxes and otherwise to maintain and insure the
related Mortgaged Property. In general, the servicer will be required to monitor
any multifamily loan that is in default, evaluate whether the causes of the
default can be corrected over a reasonable period without significant impairment
of the value of related Mortgaged Property, initiate corrective action in
cooperation with the borrower if cure is likely, inspect the related Multifamily
Property and take those other actions as are consistent with the related
Agreement. A significant period of time may elapse before the servicer is able
to assess the success of servicer, can make the initial determination of
appropriate action, evaluate the success of corrective action, develop
additional initiatives, institute foreclosure proceedings and actually foreclose
may vary considerably depending on the particular multifamily loan, the
Multifamily Property, the borrower, the presence of an acceptable party to
assume the multifamily loan and the laws of the jurisdiction in which the
Multifamily Property is located.
REALIZATION UPON DEFAULTED ASSETS
Generally, the servicer is required to monitor any Asset that is in
default, initiate corrective action in cooperation with the borrower if cure is
likely, inspect the Asset and take any other actions as are consistent with the
Servicing Standard. A significant period of time may elapse before the servicer
is able to assess the success of that corrective action or the need for
additional initiatives.
Any Agreement relating to a trust fund that includes mortgage loans or
contracts may grant to the servicer and/or the holder or holders of some classes
of Notes or Certificates, as applicable, a right of first refusal to purchase
from the trust fund at a predetermined purchase price any mortgage loan or
contract as to which a specified number of scheduled payments under the
Agreement are delinquent. Any right of first refusal granted to the holder of an
Offered Security will be described in the prospectus supplement. The prospectus
supplement will also describe any similar right granted to any person if the
predetermined purchase price is less than the Purchase Price described above
under "--Representations and Warranties; Repurchases."
If specified in the prospectus supplement, the servicer may offer to sell
any defaulted mortgage loan or contract described in the preceding paragraph and
not otherwise purchased by any person having a right of first refusal with
respect to that defaulted mortgage loan or contract, if and when the servicer
determines, consistent with the Servicing Standard, so that a sale would produce
a greater recovery on a present value basis than would liquidation through
foreclosure, repossession or similar proceedings. The related Agreement will
provide that any offering be made in a commercially reasonable manner for a
specified period and that the servicer accept the highest cash bid received from
any person (including itself, an affiliate of the servicer or any
securityholder) that constitutes a fair price for that defaulted mortgage loan
or contract. If there is no bid that is determined to be fair, the servicer will
proceed with respect to that defaulted mortgage loan or contract as described
below. Any bid in an amount at least equal to the Purchase Price described above
under "--Representations and Warranties; Repurchases" will in all cases be
deemed fair.
The servicer, on behalf of the trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a mortgage loan by operation of law or otherwise and may at
any time repossess and realize upon any manufactured home, if that action is
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consistent with the Servicing Standard and a default on that mortgage loan or
contract has occurred or, in the servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a trust fund as to which
a REMIC election has been made, the servicer, on behalf of the trust fund, will
be required to sell the Mortgaged Property within three years from the close of
the calendar year of acquisition, unless (1) the Internal Revenue Service grants
an extension of time to sell that property or (2) the trustee receives an
opinion of independent counsel to the effect that the holding of the property by
the trust fund longer than three years after the close of the calendar year of
its acquisition will not result in the imposition of a tax on the trust fund or
cause the trust fund to fail to qualify as a REMIC under the Code at any time
that any Notes or Certificates, as applicable, are outstanding. Subject to the
foregoing, the servicer will be required to (A) solicit bids for any Mortgaged
Property so acquired in that manner as will be reasonably likely to realize a
fair price for that property and (B) accept the first (and, if multiple bids are
contemporaneously received, the highest) cash bid received from any person that
constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC provisions
of the Code (if a REMIC election has been made for the related trust fund) on
the ownership and management of any Mortgaged Property acquired on behalf of the
trust fund may result in the recovery of an amount less than the amount that
would otherwise be recovered. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure."
If recovery on a defaulted Asset under any related instrument of credit
support is not available, the servicer nevertheless will be obligated to follow
or cause to be followed those normal practices and procedures as it deems
necessary or advisable to realize upon the defaulted Asset. If the proceeds of
any liquidation of the property securing the defaulted Asset are less than the
outstanding principal balance of the defaulted Asset plus interest accrued on
the defaulted Asset at the applicable interest rate, plus the total amount of
expenses incurred by the servicer in connection with those proceedings and which
are reimbursable under the Agreement, the trust fund will realize a loss in the
amount of that difference. The servicer will be entitled to withdraw or cause to
be withdrawn from the Collection Account out of the Liquidation Proceeds
recovered on any defaulted Asset, before the distribution of those Liquidation
Proceeds to securityholders, amounts representing its normal servicing
compensation on the Security, unreimbursed servicing expenses incurred with
respect to the Asset and any unreimbursed advances of delinquent payments made
with respect to the Asset.
If any property securing a defaulted Asset is damaged the servicer is not
required to expend its own funds to restore the damaged property unless it
determines (1) that restoration will increase the proceeds to securityholders on
liquidation of the Asset after reimbursement of the servicer for its expenses
and (2) that its expenses will be recoverable by it from related Insurance
Proceeds or Liquidation Proceeds.
The pooling and servicing agreement will require the trustee, if it has not
received a distribution for any Mortgage Security or Agency Security by the
fifth business day after the date on which that distribution was due and payable
pursuant to the terms of that Agency Security, to request the issuer or
guarantor, if any, of that Mortgage Security or Agency Security to make that
payment as promptly as possible and legally permitted to take legal action
against that issuer or guarantor as the trustee deems appropriate under the
circumstances, including the prosecution of any claims in connection therewith.
The reasonable legal fees and expenses incurred by the trustee in connection
with the prosecution of this legal action will be reimbursable to the trustee
out of the proceeds of that action and will be retained by the trustee before
the deposit of any remaining proceeds in the Collection Account pending
distribution of the Collection Account to securityholders of the related series.
If the proceeds of any legal action are insufficient to reimburse the trustee
for its legal fees and expenses, the trustee will be entitled to withdraw from
the Collection Account an amount equal to its expenses, and the trust fund may
realize a loss in that amount.
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As servicer of the Assets, a servicer, on behalf of itself, the trustee and
the securityholders, will present claims to the borrower under each instrument
of credit support, and will take those reasonable steps as are necessary to
receive payment or to permit recovery under these instruments for defaulted
Assets.
If a servicer or its designee recovers payments under any instrument of
credit support for any defaulted Assets, the servicer will be entitled to
withdraw or cause to be withdrawn from the Collection Account out of those
proceeds, before distribution of the Collection Account to securityholders,
amounts representing its normal servicing compensation on that Asset,
unreimbursed servicing expenses incurred for the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset. See "Hazard
Insurance Policies" and "Description of Credit Support."
HAZARD INSURANCE POLICIES
MORTGAGE LOANS. Generally, each Agreement for a trust fund composed of
mortgage loans will require the servicer to cause the borrower on each mortgage
loan to maintain a hazard insurance policy (including flood insurance coverage,
if obtainable, to the extent the property is located in a federally designated
flood area, in an amount as is required under applicable guidelines) providing
for the level of coverage that is required under the related Mortgage or, if any
Mortgage permits its holder to dictate to the borrower the insurance coverage to
be maintained on the related Mortgaged Property, then the level of coverage that
is consistent with the Servicing Standard. That coverage will be in general in
an amount equal to the lesser of the principal balance owing on that mortgage
loan (but not less than the amount necessary to avoid the application of any
co-insurance clause contained in the hazard insurance policy) and the amount
necessary to fully compensate for any damage or loss to the improvements on the
Mortgaged Property on a replacement cost basis or any other amount specified in
the prospectus supplement. The ability of the servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent upon its being
named as an additional insured under any hazard insurance policy and under any
other insurance policy referred to below, or upon the extent to which
information in this regard is furnished by borrowers. All amounts collected by
the servicer under any of these policies (except for amounts to be applied to
the restoration or repair of the Mortgaged Property or released to the borrower
in accordance with the servicer's normal servicing procedures, subject to the
terms and conditions of the related Mortgage and mortgage note) will be
deposited in the Collection Account in accordance with the related Agreement.
The Agreement may provide that the servicer may satisfy its obligation to
cause each borrower to maintain a hazard insurance policy by the servicer's
maintaining a blanket policy insuring against hazard losses on the mortgage
loans. If the blanket policy contains a deductible clause, the servicer will be
required to deposit in the Collection Account from its own funds all sums that
would have been deposited in the Collection Account but for that clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the mortgage loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms of the policies are dictated by respective state
laws, and most of these policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and other kinds of uninsured
risks.
The hazard insurance policies covering the Mortgaged Properties securing
the mortgage loans will typically contain a coinsurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the
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improvements on the property to recover the full amount of any partial loss. If
the insured's coverage falls below this specified percentage, the coinsurance
clause generally provides that the insurer's liability in the event of partial
loss does not exceed the lesser of (1) the replacement cost of the improvements
less physical depreciation and (2) that proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement cost
of those improvements.
Each Agreement for a trust fund composed of mortgage loans will require the
servicer to cause the borrower on each mortgage loan to maintain all other
insurance coverage for the related Mortgaged Property as is consistent with the
terms of the related Mortgage and the Servicing Standard, which insurance may
typically include flood insurance (if the related Mortgaged Property was located
at the time of origination in a federally designated flood area).
Any cost incurred by the servicer in maintaining any insurance policy will
be added to the amount owing under the mortgage loan where the terms of the
mortgage loan so permit; provided, however, that the addition of that cost will
not be taken into account for purposes of calculating the distribution to be
made to securityholders. Those costs may be recovered by the servicer from the
Collection Account, with interest, as provided by the Agreement.
Under the terms of the mortgage loans, borrowers will generally be required
to present claims to insurers under hazard insurance policies maintained on the
related Mortgaged Properties. The servicer, on behalf of the trustee and
securityholders, is obligated to present or cause to be presented claims under
any blanket insurance policy insuring against hazard losses on Mortgaged
Properties securing the mortgage loans. However, the ability of the servicer to
present or cause to be presented those claims is dependent upon the extent to
which information in this regard is furnished to the servicer by borrowers.
CONTRACTS. Generally, the terms of the agreement for a trust fund composed
of contracts will require the servicer to maintain for each contract one or more
hazard insurance policies that provide, at a minimum, the same coverage as a
standard form fire and extended coverage insurance policy that is customary for
manufactured housing, issued by a company authorized to issue those policies in
the state in which the manufactured home is located, and in an amount that is
not less than the maximum insurable value of that manufactured home or the
principal balance due from the borrower on the related contract, whichever is
less; provided, however, that the amount of coverage provided by each hazard
insurance policy must be sufficient to avoid the application of any co-insurance
clause contained therein. When a manufactured home's location was, at the time
of origination of the related contract, within a federally designated special
flood hazard area, the servicer must cause flood insurance to be maintained,
which coverage must be at least equal to the minimum amount specified in the
preceding sentence or any lesser amount as may be available under the federal
flood insurance program. Each hazard insurance policy caused to be maintained by
the servicer must contain a standard loss payee clause in favor of the servicer
and its successors and assigns. If any borrower is in default in the payment of
premiums on its hazard insurance policy or policies, the servicer must pay those
premiums out of its own funds, and may add separately the premiums to the
borrower's obligation as provided by the contract, but may not add the premiums
to the remaining principal balance of the contract.
The servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained for each manufactured home, and must maintain, to the
extent that the related contract does not require the borrower to maintain a
hazard insurance policy for the related manufactured home, one or more blanket
insurance policies covering losses on the borrower's interest in the contracts
resulting from the absence or insufficiency of individual hazard insurance
policies. The servicer must pay the premium for that blanket policy on the basis
described therein and must pay any deductible amount for claims under that
policy relating to the contracts.
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FHA INSURANCE AND VA GUARANTEES
FHA loans will be insured by the FHA as authorized under the Housing Act.
Some FHA loans will be insured under various FHA programs including the standard
FHA 203(b) program to finance the acquisition of one- to four-family housing
units, the FHA 245 graduated payment mortgage program and the FHA Title I
Program. These programs generally limit the principal amount and interest rates
of the mortgage loans insured. The prospectus supplement for Notes or
Certificates, as applicable, of each series evidencing interests in a trust fund
including FHA loans will set forth additional information regarding the
regulations governing the applicable FHA insurance programs. Except as otherwise
specified in the prospectus supplement, the following describes FHA insurance
programs and regulations as generally in effect for FHA loans.
The insurance premiums for FHA loans are collected by lenders approved by
the Department of Housing and Urban Development ("HUD") or by the servicer and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to the United States of America or upon assignment of the defaulted
loan to the United States of America. For a defaulted FHA loan, the servicer is
limited in its ability to initiate foreclosure proceedings. When it is
determined, either by the servicer or HUD, that default was caused by
circumstances beyond the borrower's control, the servicer is expected to make an
effort to avoid foreclosure by entering, if feasible, into one of a number of
available forms of forbearance plans with the borrower. Those plans may involve
the reduction or suspension of regular mortgage payments for a specified period,
with those payments to be made on or before the maturity date of the mortgage,
or the recasting of payments due under the mortgage up to or, other than FHA
loans originated under the FHA Title I Program, beyond the maturity date. In
addition, when a default caused by those circumstances is accompanied by other
criteria, HUD may provide relief by making payments to the servicer in partial
or full satisfaction of amounts due under the FHA loan (which payments are to be
repaid by the borrower to HUD) or by accepting assignment of the loan from the
servicer. With some exceptions, at least three full monthly installments must be
due and unpaid under the FHA loan, and HUD must have rejected any request for
relief from the borrower before the servicer may initiate foreclosure
proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. To the extent specified in the prospectus supplement,
the servicer of each single family FHA loan will be obligated to purchase any
debenture issued in satisfaction of that FHA loan upon default for an amount
equal to the principal amount of that debenture.
Other than in relation to the FHA Title I Program, the amount of insurance
benefits generally paid by the FHA is equal to the entire unpaid principal
amount of the defaulted FHA loan adjusted to reimburse the servicer for some of
its costs and expenses and to deduct amounts received or retained by the
servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
servicer is compensated for no more than two-thirds of its foreclosure costs,
and is compensated for interest accrued and unpaid before that date but in
general only to the extent it was allowed pursuant to a forbearance plan
approved by HUD. When entitlement to insurance benefits results from assignment
of the FHA loan to HUD, the insurance payment includes full compensation for
interest accrued and unpaid to the assignment date. The insurance payment
itself, upon foreclosure of an FHA loan, bears interest from a date 30 days
after the borrower's first uncorrected failure to perform any obligation to make
any payment due under the mortgage and, upon assignment, from the date of
assignment to the date of payment of the claim, in each case at the same
interest rate as the applicable HUD debenture interest rate as described above.
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VA loans will be partially guaranteed by the VA under the Serviceman's
Readjustment Act (a "VA Guaranty Policy"). For a defaulted VA loan, the servicer
is, absent exceptional circumstances, authorized to announce its intention to
foreclose only when the default has continued for three months. Generally, a
claim for the guarantee is submitted after liquidation of the Mortgaged
Property.
The amount payable under the guarantee will be the percentage of the VA
loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guarantee will be equal to the unpaid principal amount of that VA loan,
interest accrued on the unpaid balance of that VA loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that those amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Each Agreement will require that the servicer obtain and maintain in effect
a fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination of these insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents of
the servicer. The related Agreement will allow the servicer to self-insure
against loss occasioned by the errors and omissions of the officers, employees
and agents of the servicer so long as the criteria set forth in the Agreement
are met.
DUE-ON-SALE CLAUSES
The mortgage loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
mortgage loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the servicer will not take any action in relation to the
enforcement of any due-on-sale clause that would:
o adversely affect or jeopardize coverage under any applicable insurance
policy or
o materially increase the risk of default or delinquency on, or
materially impair the security for, that mortgage loan.
Any fee collected by or on behalf of the servicer for entering into an
assumption agreement will be retained by or on behalf of the servicer as
additional servicing compensation. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses."
The contracts may also contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related mortgaged property, or
due-on-sale clauses. The servicer will generally permit that transfer so long as
the transferee satisfies the servicer's then applicable underwriting standards.
The purpose of those transfers is often to avoid a default by the transferring
borrower.
RETAINED INTEREST, SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The prospectus supplement for a series of Notes or Certificates, as
applicable, will specify whether there will be any Retained Interest in the
Assets, and, if so, the initial owner of this Retained Interest. If so, the
Retained Interest will be established on a loan-by-loan basis and will be
specified on an exhibit to the related Agreement. A "Retained Interest" in an
Asset represents a specified portion of the interest payable on the Asset. The
Retained Interest will be deducted from borrower payments as received and will
not be part of the related trust fund.
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The servicer's primary servicing compensation for a series of Notes or
Certificates, as applicable, will come from the periodic payment to it of a
portion of the interest payment on each Asset or any other amount specified in
the prospectus supplement. Since any Retained Interest and a servicer's primary
compensation are percentages of the principal balance of each Asset, those
amounts will decrease in accordance with the amortization of the Assets. The
prospectus supplement for a series of Notes or Certificates, as applicable,
evidencing interests in a trust fund that includes mortgage loans or contracts
may provide that, as additional compensation, the servicer may retain all or a
portion of assumption fees, modification fees, late payment charges or
Prepayment Premiums collected from borrowers and any interest or other income
that may be earned on funds held in the Collection Account or any account
established by a servicer pursuant to the Agreement.
The servicer may, to the extent provided in the prospectus supplement, pay
from its servicing compensation expenses incurred in connection with its
servicing and managing of the Assets, including payment of the fees and
disbursements of the trustee and independent accountants, payment of expenses
incurred in connection with distributions and reports to securityholders, and
payment of any other expenses described in the prospectus supplement. Some other
expenses, including expenses relating to defaults and liquidations on the Assets
and, to the extent so provided in the prospectus supplement, interest on these
expenses at the rate specified in the prospectus supplement may be borne by the
trust fund.
If and to the extent provided in the prospectus supplement, the servicer
may be required to apply a portion of the servicing compensation otherwise
payable to it in respect of any Due Period to interest shortfalls resulting from
the voluntary prepayment of any Assets in the related trust fund during that
period before their due dates.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets that include mortgage loans or contracts,
unless otherwise provided in the prospectus supplement, will provide that on or
before a specified date in each year, beginning with the first of these dates at
least six months after the related Cut-off Date, a firm of independent public
accountants will furnish a statement to the trustee to the effect that, on the
basis of the examination by that firm conducted substantially in compliance with
either the Uniform Single Attestation Program for Mortgage Bankers, the Audit
Program for Mortgages serviced for Freddie Mac or any other program used by the
servicer, the servicing by or on behalf of the servicer of mortgage loans under
agreements substantially similar to each other (including the related Agreement)
was conducted in compliance with the terms of those agreements or that program
except for any significant exceptions or errors in records that, in the opinion
of the firm, either the Audit Program for Mortgages serviced for Freddie Mac, or
paragraph 4 of the Uniform Single Attestation Program for Mortgage Bankers, or
any other program, requires it to report.
Each Agreement will also provide for delivery to the trustee, on or before
a specified date in each year, of an officer's certificate of the servicer to
the effect that the servicer has fulfilled its obligations under the Agreement
throughout the preceding calendar year or other specified twelve-month period.
CERTAIN MATTERS REGARDING SERVICERS, THE MASTER SERVICER AND THE DEPOSITOR
The servicer or master servicer under each Agreement will be named in the
prospectus supplement. The entities serving as servicer or master servicer may
be affiliates of the depositor and may have other normal business relationships
with the depositor or the depositor's affiliates. If applicable, reference in
this prospectus to the servicer will also be deemed to be to the master
servicer. Each Agreement will provide, in general, that:
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o The servicer may resign from its obligations and duties under the
Agreement only upon a determination that its duties under the
Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other
activities carried on by it, the other activities of the servicer so
causing that conflict being of a type and nature carried on by the
servicer at the date of the Agreement. No resignation will become
effective until the trustee or a successor servicer has assumed the
servicer's obligations and duties under the Agreement.
o Neither any servicer, the depositor nor any director, officer,
employee, or agent of a servicer or the depositor will be under any
liability to the related trust fund or securityholders for any action
taken, or for refraining from the taking of any action, in good faith
pursuant to the Agreement; provided, however, that neither a servicer,
the depositor nor any other person will be protected against any
breach of a representation, warranty or covenant made in the related
Agreement, or against any liability specifically imposed by the
Agreement, or against any liability that would otherwise be imposed by
reason of willful misfeasance, bad faith or gross negligence in the
performance of obligations or duties under the Agreement or by reason
of reckless disregard of obligations and duties under the Agreement.
o Any servicer, the depositor and any director, officer, employee or
agent of a servicer or the depositor will be entitled to
indemnification by the related trust fund and will be held harmless
against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Notes or Certificates,
as applicable; provided, however, that that indemnification will not
extend to any loss, liability or expense
(1) specifically imposed by that Agreement or otherwise incidental to
the performance of obligations and duties under the Agreement,
including, in the case of a servicer, the prosecution of an
enforcement action in respect of any specific mortgage loan or
mortgage loans or contract or contracts (except as any loss,
liability or expense will be otherwise reimbursable pursuant to
that Agreement);
(2) incurred in connection with any breach of a representation,
warranty or covenant made in that Agreement;
(3) incurred by reason of misfeasance, bad faith or gross negligence
in the performance of obligations or duties under the Agreement,
or by reason of reckless disregard of those obligations or
duties;
(4) incurred in connection with any violation of any state or federal
securities law; or
(5) imposed by any taxing authority if that loss, liability or
expense is not specifically reimbursable pursuant to the terms of
the related Agreement.
o Neither any servicer nor the depositor will be under any obligation to
appear in, prosecute or defend any legal action that is not incidental
to its respective responsibilities under the Agreement and which in
its opinion may involve it in any expense or liability. Any servicer
or the depositor may, however, in its discretion undertake any action
which it may deem necessary or desirable with respect to the Agreement
and the rights and duties of the parties to the Agreement and the
interests of the securityholders under the Agreement. In that event,
the legal expenses and costs of that action and any liability
resulting will be expenses, costs and liabilities of
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the securityholders, and the servicer or the depositor, as the case
may be, will be entitled to be reimbursed therefor and to charge the
Collection Account.
Any person into which the servicer or the depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the servicer or the depositor is a party, or any person succeeding to the
business of the servicer or the depositor, may be the successor of the servicer
or the depositor, as the case may be, under the terms of the related Agreement.
SPECIAL SERVICERS
If and to the extent specified in the prospectus supplement, a special
servicer (a "Special servicer") may be a party to the related Agreement or may
be appointed by the servicer or another specified party to perform specified
duties in respect of servicing the related mortgage loans that would otherwise
be performed by the servicer (for example, the workout and/or foreclosure of
defaulted mortgage loans). The rights and obligations of any Special servicer
will be specified in the prospectus supplement, and the servicer will be liable
for the performance of a Special servicer only if, and to the extent, set forth
in the prospectus supplement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Events of default under the related Agreement will generally include:
o any failure by the servicer to distribute or cause to be distributed
to securityholders, or to remit to the trustee for distribution to
securityholders, any required payment that continues after a grace
period, if any;
o any failure by the servicer duly to observe or perform in any material
respect any of its other covenants or obligations under the Agreement
that continues unremedied for 30 days after written notice of that
failure has been given to the servicer by the trustee or the
depositor, or to the servicer, the depositor and the trustee by
securityholders evidencing not less than 25% of the voting rights for
that series;
o any breach of a representation or warranty made by the servicer under
the Agreement that materially and adversely affects the interests of
securityholders and which continues unremedied for 30 days after
written notice of that breach has been given to the servicer by the
trustee or the depositor, or to the servicer, the depositor and the
trustee by the holders of Notes or Certificates, as applicable,
evidencing not less than 25% of the voting rights for that series; and
o some events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings and actions by or on behalf of
the servicer indicating its insolvency or inability to pay its
obligations.
Material variations to the foregoing events of default (other than to
shorten cure periods or eliminate notice requirements) will be specified in the
prospectus supplement. The trustee will, not later than the later of 60 days or
any other period specified in the prospectus supplement after the occurrence of
any event that constitutes or, with notice or lapse of time or both, would
constitute an event of default and five days after specific officers of the
trustee become aware of the occurrence of that event, transmit by mail to the
depositor and all securityholders of the applicable series notice of that
occurrence, unless that default has been cured or waived.
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RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENTS
So long as an event of default under an Agreement remains unremedied, the
depositor or the trustee may, and at the direction of holders of Notes or
Certificates, as applicable, evidencing not less than 51% (or any other
percentage specified in the Agreement) of the voting rights for that series, the
trustee will terminate all of the rights and obligations of the servicer under
the Agreement and in and to the mortgage loans (other than as a securityholder
or as the owner of any Retained Interest), whereupon the trustee will succeed to
all of the responsibilities, duties and liabilities of the servicer under the
Agreement (except that if the trustee is prohibited by law from obligating
itself to make advances regarding delinquent Assets, or if the prospectus
supplement so specifies, then the trustee will not be obligated to make those
advances) and will be entitled to similar compensation arrangements. If the
trustee is unwilling or unable so to act, it may or, at the written request of
the holders of Notes or Certificates, as applicable, entitled to at least 51%
(or any other percentage specified in the Agreement) of the voting rights for
that series, it must appoint, or petition a court of competent jurisdiction for
the appointment of, a loan servicing institution acceptable to the rating agency
with a net worth at the time of that appointment of at least $15,000,000 (or any
other amount specified in the Agreement) to act as successor to the servicer
under the Agreement. Pending that appointment, the trustee is obligated to act
in that capacity. The trustee and any successor servicer may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the servicer under the Agreement.
The holders of Notes or Certificates, as applicable, representing at least
66 2/3% (or any other percentage specified in the Agreement) of the voting
rights allocated to the respective classes of Notes or Certificates, as
applicable, affected by any event of default will be entitled to waive that
event of default; provided, however, that an Event of Default involving a
failure to distribute a required payment to securityholders described in clause
(1) under "Events of Default under the Agreements" may be waived only by all of
the securityholders. Upon any waiver of an event of default, that event of
default will cease to exist and will be deemed to have been remedied for every
purpose under the Agreement.
No securityholders will have the right under any Agreement to institute any
proceeding with respect to the Agreement unless that holder previously has given
to the trustee written notice of default and unless the holders of Notes or
Certificates, as applicable, evidencing not less than 25% (or any other
percentage specified in the Agreement) of the voting rights have made written
request upon the trustee to institute that proceeding in its own name as trustee
under the Agreement and have offered to the trustee reasonable indemnity, and
the trustee for 60 days (or any other number of days specified in the Agreement)
has neglected or refused to institute any proceeding. The trustee, however, is
under no obligation to exercise any of the trusts or powers vested in it by any
Agreement or to make any investigation of matters arising under the Agreement or
to institute, conduct or defend any litigation under the Agreement or in
relation to the Agreement at the request, order or direction of any of the
securityholders covered by that Agreement, unless those securityholders have
offered to the trustee reasonable security or indemnity against the costs,
expenses and liabilities that may be incurred.
The manner of determining the voting rights of a Security or class or
classes of Notes or Certificates, as applicable, will be specified in the
Agreement.
AMENDMENT
In general, each Agreement may be amended by the parties to it, without the
consent of any securityholders covered by the Agreement, to
(1) cure any ambiguity or mistake;
57
(2) correct, modify or supplement any provision in the Agreement that
may be inconsistent with any other provision in the Agreement or with the
prospectus supplement;
(3) make any other provisions with respect to matters or questions
arising under the Agreement that are not materially inconsistent with the
provisions of the Agreement; or
(4) comply with any requirements imposed by the Code; provided that,
in the case of clause (3), that amendment will not adversely affect in any
material respect the interests of any securityholders covered by the
Agreement as evidenced either by an opinion of counsel to that effect or
the delivery to the trustee of written notification from each rating agency
that provides, at the request of the depositor, a rating for the Offered
Notes or Offered Certificates, as applicable, of the related series to the
effect that that amendment or supplement will not cause that rating agency
to lower or withdraw the then current rating assigned to those Notes or
Certificates, as applicable.
In general, each Agreement may also be amended by the depositor, the
servicer, if any, and the trustee, with the consent of the securityholders
affected by the amendment evidencing not less than 51% (or any other percentage
specified in the Agreement) of the voting rights, for any purpose; provided,
however, no amendment may (1) reduce in any manner the amount of, or delay the
timing of, payments received or advanced on Assets that are required to be
distributed on any Security without the consent of the securityholder or (2)
reduce the consent percentages described in this paragraph without the consent
of all the securityholders covered by the Agreement then outstanding. However,
for any series of Notes or Certificates, as applicable, as to which a REMIC
election is to be made, the trustee will not consent to any amendment of the
Agreement unless it has first have received an opinion of counsel to the effect
that that amendment will not result in the imposition of a tax on the related
trust fund or, if applicable, cause the related trust fund to fail to qualify as
a REMIC, at any time that the related Notes or Certificates, as applicable, are
outstanding.
THE TRUSTEE
The trustee under each Agreement will be named in the prospectus
supplement. The commercial bank, national banking association, banking
corporation or trust company serving as trustee may have a banking relationship
with the depositor and its affiliates, with any servicer and its affiliates and
with any master servicer and its affiliates. To the extent consistent with its
fiduciary obligations as trustee, the trustee may delegate its duties to one or
more agents as provided in the Agreement.
DUTIES OF THE TRUSTEE
The trustee will make no representations as to the validity or sufficiency
of any Agreement, the Notes or Certificates, as applicable, or any Asset or
related document and is not accountable for the use or application by or on
behalf of any servicer of any funds paid to the master servicer or its designee
in respect of the Notes or Certificates, as applicable, or the Assets, or
deposited into or withdrawn from the Collection Account or any other account by
or on behalf of the servicer. If no Event of Default has occurred and is
continuing, the trustee is required to perform only those duties specifically
required under the related Agreement, as applicable. However, upon receipt of
the various certificates, reports or other instruments required to be furnished
to it, the trustee is required to examine those documents and to determine
whether they conform to the requirements of the Agreement.
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CERTAIN MATTERS REGARDING THE TRUSTEE
The trustee and any director, officer, employee or agent of the trustee
will be entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the trustee's
(1) enforcing its rights and remedies and protecting the interests of the
securityholders during the continuance of an Event of Default,
(2) defending or prosecuting any legal action in respect of the related
Agreement or series of Notes or Certificates, as applicable,
(3) being the mortgagee of record for the mortgage loans in a trust fund
and the owner of record for any Mortgaged Property acquired in respect
thereof for the benefit of securityholders, or
(4) acting or refraining from acting in good faith at the direction of the
holders of the related series of Notes or Certificates, as applicable,
entitled to not less than 25% (or any other percentage as is specified
in the related Agreement for any particular matter) of the voting
rights for that series;
provided, however, that this indemnification will not extend to any loss,
liability or expense that constitutes a specific liability of the trustee
pursuant to the related Agreement, or to any loss, liability or expense incurred
by reason of willful misfeasance, bad faith or negligence on the part of the
trustee in the performance of its obligations and duties under the Agreement, or
by reason of its reckless disregard of those obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the trustee
made in the Agreement.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice of its resignation to the depositor, the
servicer, if any, each rating agency, and all securityholders. Upon receiving
that notice of resignation, the depositor is required promptly to appoint a
successor trustee acceptable to the servicer, if any. If no successor trustee
has been so appointed and has accepted appointment within 30 days after the
giving of that notice of resignation, the resigning trustee may petition any
court of competent jurisdiction for the appointment of a successor trustee.
If at any time the trustee ceases to be eligible to continue as a trustee
under the related Agreement, or if at any time the trustee becomes incapable of
acting, or is adjudged bankrupt or insolvent, or a receiver of the trustee or of
its property is appointed, or any public officer takes charge or control of the
trustee or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation, or if a change in the financial condition of the
trustee has adversely affected or will adversely affect the rating on any class
of the Notes or Certificates, as applicable, then the depositor and/or a party
specified in the related Agreement may remove the trustee and appoint a
successor trustee acceptable to the master servicer, if any, according to the
terms of the related Agreement. Securityholders of any series entitled to at
least 51% (or any other percentage specified in the prospectus supplement) of
the voting rights for that series may at any time remove the trustee without
cause and appoint a successor trustee.
Any resignation or removal of the trustee and appointment of a successor
trustee will not become effective until acceptance of appointment by the
successor trustee.
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MATERIAL TERMS OF THE INDENTURE
GENERAL
The following summary describes the material provisions that may appear in
each indenture. The prospectus supplement for a series of Notes will describe
any provision of the indenture relating to that series that materially differs
from the description of that provision contained in this prospectus. The
summaries do not purport to be complete and are subject to, and are qualified by
reference to, all of the provisions of the indenture for a series of Notes. A
form of an indenture has been filed as an exhibit to the Registration Statement
of which this prospectus is a part. The depositor will provide a copy of the
indenture (without exhibits) relating to any series of Notes without charge upon
written request of a securityholder of that series addressed to ACE Securities
Corp., 6525 Morrison Boulevard, Suite 318, Charlotte, North Carolina 28211,
Attention: Elizabeth S. Eldridge.
EVENTS OF DEFAULT
Events of default under the indenture for each series of Notes will
generally include:
o a default for thirty days (or any other number of days specified in
the prospectus supplement) or more in the payment of any principal of
or interest on a Note of that series, to the extent specified in the
prospectus supplement;
o failure to perform any other covenant of the depositor or the trust
fund in the indenture that continues for a period of sixty days (or
any other number of days specified in the prospectus supplement or the
indenture) after notice of the failure is given in accordance with the
procedures described in the prospectus supplement;
o any representation or warranty made by the depositor or the trust fund
in the indenture or in any certificate or other writing delivered
pursuant to the indenture or in connection with the indenture with
respect to or affecting that series having been incorrect in a
material respect as of the time made, and that breach is not cured
within sixty days (or any other number of days specified in the
prospectus supplement) after notice of the breach is given in
accordance with the procedures described in the prospectus supplement;
o specified events of bankruptcy, insolvency, receivership or
liquidation of the trust fund; or
o any other event of default provided with respect to Notes of that
series.
If an event of default with respect to the Notes of any series at the time
outstanding occurs and is continuing, subject to and in accordance with the
terms of the indenture, either the indenture trustee or the holders of a
majority of the then total outstanding amount of the Notes of that series may
declare the principal amount (or, if the Notes of that series are Accrual
Securities, that portion of the principal amount as may be specified in the
terms of that series, as provided in the indenture) of all the Notes of that
series to be due and payable immediately. That declaration may, under some
circumstances, be rescinded and annulled by the securityholders of a majority in
total outstanding amount of the Notes of that series.
If, following an event of default with respect to any series of Notes, the
Notes of that series have been declared to be due and payable, the indenture
trustee may, in its discretion, notwithstanding that acceleration, elect to
maintain possession of the collateral securing the Notes of that series and to
continue to apply distributions on that collateral as if there had been no
declaration of acceleration if that collateral continues to provide sufficient
funds for the payment of
60
principal of and interest on the Notes of that series as they would have become
due if there had not been that declaration. In addition, the indenture trustee
may not sell or otherwise liquidate the collateral securing the Notes of a
series following an event of default, other than a default in the payment of any
principal or interest on any Note of that series for thirty days or more, unless
(1) the holders of 100% (or any other percentage specified in the
indenture) of the then total outstanding amount of the Notes of that series
consent to that sale;
(2) the proceeds of that sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the
outstanding Notes of that series at the date of that sale; or
(3) the indenture trustee determines that that collateral would not
be sufficient on an ongoing basis to make all payments on the Notes as
those payments would have become due if the Notes had not been declared due
and payable, and the indenture trustee obtains the consent of the holders
of 66 2/3% (or any other percentage specified in the indenture) of the then
total outstanding amount of the Notes of that series.
If so specified in the prospectus supplement, only holders of particular
classes of Notes will have the right to declare the Notes of that series to be
immediately due and payable in the event of a payment default, as described
above, and to exercise the remedies described above.
If the indenture trustee liquidates the collateral in connection with an
event of default involving a default for thirty days (or any other number of
days specified in the indenture) or more in the payment of principal of or
interest on the Notes of a series, the indenture provides that the indenture
trustee will have a prior lien on the proceeds of any liquidation for unpaid
fees and expenses. As a result, upon the occurrence of that event of default,
the amount available for distribution to the securityholders would be less than
would otherwise be the case. However, the indenture trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the indenture for the benefit of
the securityholders after the occurrence of that event of default.
To the extent provided in the prospectus supplement, in the event the
principal of the Notes of a series is declared due and payable, as described
above, the holders of any Notes issued at a discount from par may be entitled to
receive no more than an amount equal to the unpaid principal amount of the Notes
less the amount of the discount that is unamortized.
Subject to the provisions of the indenture relating to the duties of the
indenture trustee, in case an event of default occurs and continues for a series
of Notes, the indenture trustee will be under no obligation to exercise any of
the rights or powers under the indenture at the request or direction of any of
the securityholders of that series, unless those holders offer to the indenture
trustee security or indemnity satisfactory to it against the costs, expenses and
liabilities that might be incurred by it in complying with that request or
direction. Subject to those provisions for indemnification and some limitations
contained in the indenture, the holders of a majority of the then total
outstanding amount of the Notes of that series will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the indenture trustee or exercising any trust or power conferred on the
indenture trustee with respect to the Notes of that series, and the holders of a
majority of the then total outstanding amount of the Notes of that series may,
in some cases, waive any default with respect to the Notes, except a default in
the payment of principal or interest or a default in respect of a covenant or
provision of the indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of that series affected.
61
DISCHARGE OF INDENTURE
The indenture will be discharged, subject to the provisions of the
indenture, for a series of Notes (except for continuing rights specified in the
indenture) upon the delivery to the indenture trustee for cancellation of all
the Notes of that series or, with some limitations, upon deposit with the
indenture trustee of funds sufficient for the payment in full of all of the
Notes of that series.
With some limitations, the indenture will provide that, if specified for
the Notes of any series, the related trust fund will be discharged from any and
all obligations in respect of the Notes of that series (except for obligations
specified in the indenture including obligations relating to temporary Notes and
exchange of Notes, to register the transfer of or exchange Notes of that series,
to replace stolen, lost or mutilated Notes of that series, to maintain paying
agencies and to hold monies for payment in trust) upon the deposit with the
indenture trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which through the payment
of interest and principal in respect of the Notes in accordance with their terms
will provide money in an amount sufficient to pay the principal of and each
installment of interest on the Notes of that series on the maturity date for
those Notes and any installment of interest on those Notes in accordance with
the terms of the indenture and the Notes of that series. In the event of any
defeasance and discharge of Notes of that series, holders of Notes of that
series would be able to look only to that money and/or those direct obligations
for payment of principal and interest, if any, on their Notes until maturity.
INDENTURE TRUSTEE'S ANNUAL REPORT
The indenture trustee for each series of Notes will be required to mail
each year to all related securityholders a brief report, as provided in the
indenture, relating to its eligibility and qualification to continue as
indenture trustee under the related indenture, any amounts advanced by it under
the indenture, the amount, interest rate and maturity date of indebtedness owing
by that Trust to the applicable indenture trustee in its individual capacity,
the property and funds physically held by the indenture trustee in its capacity
as indenture trustee and any action taken by it that materially affects the
Notes and that has not been previously reported.
THE INDENTURE TRUSTEE
The indenture trustee for a series of Notes will be specified in the
prospectus supplement. The indenture trustee for any series may resign at any
time in accordance with the terms of the indenture, in which event the depositor
or the appropriate party designated in the indenture will be obligated to
appoint a successor trustee for that series. The depositor or the appropriate
party designated in the indenture may also remove any indenture trustee if that
indenture trustee ceases to be eligible to continue as the indenture trustee
under the related indenture, if that indenture trustee becomes insolvent or for
any other grounds specified in the indenture. In those circumstances the
depositor or the appropriate party designated in the indenture will be obligated
to appoint a successor trustee for the applicable series of Notes. Any
resignation or removal of the indenture trustee and appointment of a successor
trustee for any series of Notes does not become effective until acceptance of
the appointment by the successor trustee for that series.
The bank or trust company serving as indenture trustee may have a banking
relationship with the depositor or any of its affiliates, a servicer or any of
its affiliates or the master servicer or any of its affiliates. To the extent
consistent with its fiduciary obligations as indenture trustee, the indenture
trustee may delegate its duties to one or more agents as provided in the
indenture and the Agreement.
62
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Notes or Certificates, as applicable, credit support may
be provided for one or more classes of the series or the related Assets. Credit
support may be in the form of:
o the subordination of one or more classes of Notes or Certificates, as
applicable;
o letters of credit;
o insurance policies;
o guarantees;
o the establishment of one or more reserve funds; or
o any other method of credit support described in the prospectus
supplement, or any combination of the foregoing.
Any form of credit support may be structured so as to be drawn upon by more
than one series to the extent described in the prospectus supplement.
The coverage provided by any credit support will be described in the
prospectus supplement. Generally, that coverage will not provide protection
against all risks of loss and will not guarantee repayment of the entire
Security Balance of the Notes or Certificates, as applicable, and interest on
the Security Balance. If losses or shortfalls occur that exceed the amount
covered by credit support or that are not covered by credit support,
securityholders will bear their allocable share of deficiencies. Moreover, if a
form of credit support covers more than one series of Notes or Certificates, as
applicable, (each, a "Covered Trust"), securityholders evidencing interests in
any of those Covered Trusts will be subject to the risk that the credit support
will be exhausted by the claims of other Covered Trusts before that Covered
Trust receiving any of its intended share of that coverage.
If credit support is provided for one or more classes of Notes or
Certificates, as applicable, of a series, or the related Assets, the prospectus
supplement will include a description of
(a) the nature and amount of coverage under that credit support,
(b) any conditions to payment under the prospectus supplement not
otherwise described in this prospectus, (c) the conditions (if any)
under which the amount of coverage under that credit support may be
reduced and under which that credit support may be terminated or
replaced and
(d) the material provisions relating to that credit support.
Additionally, the prospectus supplement will set forth information with
respect to the obligor under any financial guaranty insurance policy, letter of
credit, guarantee or similar instrument of credit support, including
(1) a brief description of its principal business activities,
(2) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business,
63
(3) if applicable, the identity of regulatory agencies that exercise
primary jurisdiction over the conduct of its business and
(4) its total assets, and its stockholders' or policyholders' surplus, if
applicable, as of the date specified in the prospectus supplement.
SUBORDINATE SECURITIES
One or more classes of Notes or Certificates, as applicable, of a series
may be Subordinate Notes or Subordinate Certificates, as applicable, if
specified in the prospectus supplement. The rights of the holders of Subordinate
Notes or Subordinate Certificates, as applicable, to receive distributions of
principal and interest from the Collection Account on any Distribution Date will
be subordinated to those rights of the holders of Senior Notes or Senior
Certificates, as applicable. The subordination of a class may apply only in the
event of (or may be limited to) particular types of losses or shortfalls. The
prospectus supplement will set forth information concerning the amount of
subordination of a class or classes of Subordinate Notes or Subordinate
Certificates, as applicable, in a series, the circumstances in which that
subordination will be applicable and the manner, if any, in which the amount of
subordination will be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Notes or Certificates, as applicable,
of a series, credit support may be provided by cross-support provisions
requiring that distributions be made on Senior Notes or Senior Certificates, as
applicable, evidencing interests in one group of mortgage loans before
distributions on Subordinate Notes or Subordinate Certificates, as applicable,
evidencing interests in a different group of mortgage loans within the trust
fund. The prospectus supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying those provisions.
LIMITED GUARANTEE
If specified in the prospectus supplement for a series of Notes or
Certificates, as applicable, credit enhancement may be provided in the form of a
limited guarantee issued by a guarantor named in the prospectus supplement.
FINANCIAL GUARANTY INSURANCE POLICY OR SURETY BOND
Credit enhancement may be provided in the form of a financial guaranty
insurance policy or a surety bond issued by an insurer named in the policy or
surety bond, if specified in the prospectus supplement.
LETTER OF CREDIT
Alternative credit support for a series of Notes or Certificates, as
applicable, may be provided by the issuance of a letter of credit by the bank or
financial institution specified in the prospectus supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of credit
issued for a series of Notes or Certificates, as applicable, will be set forth
in the prospectus supplement relating to that series.
POOL INSURANCE POLICIES
If specified in the prospectus supplement relating to a series of Notes or
Certificates, as applicable, a pool insurance policy for the mortgage loans in
the related trust fund will be obtained. The pool insurance policy will cover
any loss (subject to the limitations described in the prospectus
64
supplement) by reason of default to the extent a related mortgage loan is not
covered by any primary mortgage insurance policy. The amount and principal terms
of any pool insurance coverage will be set forth in the prospectus supplement.
SPECIAL HAZARD INSURANCE POLICIES
A special hazard insurance policy may also be obtained for the related
trust fund, if specified in the prospectus supplement, in the amount set forth
in the prospectus supplement. The special hazard insurance policy will, subject
to the limitations described in the prospectus supplement, protect against loss
by reason of damage to Mortgaged Properties caused by hazards not insured
against under the standard form of hazard insurance policy for the respective
states, in which the Mortgaged Properties are located. The amount and principal
terms of any special hazard insurance coverage will be set forth in the
prospectus supplement.
BORROWER BANKRUPTCY BOND
Losses resulting from a bankruptcy proceeding relating to a borrower
affecting the mortgage loans in a trust fund for a series of Notes or
Certificates, as applicable, will, if specified in the prospectus supplement, be
covered under a borrower bankruptcy bond (or any other instrument that will not
result in a downgrading of the rating of the Notes or Certificates, as
applicable, of a series by the rating agency or agencies that rate that series).
Any borrower bankruptcy bond or any other instrument will provide for coverage
in an amount meeting the criteria of the rating agency or agencies rating the
Notes or Certificates, as applicable, of the related series, which amount will
be set forth in the prospectus supplement. The amount and principal terms of any
borrower bankruptcy coverage will be set forth in the prospectus supplement.
RESERVE FUNDS
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, deficiencies in amounts otherwise payable on those
Notes or Certificates, as applicable, or specific classes of Notes or
Certificates, as applicable, will be covered by one or more reserve funds in
which cash, a letter of credit, Permitted Investments, a demand note or a
combination of these will be deposited, in the amounts so specified in the
prospectus supplement. The reserve funds for a series may also be funded over
time by depositing a specified amount of the distributions received on the
related Assets as specified in the prospectus supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income on these amounts, if any, will be applied for the purposes,
in the manner, and to the extent specified in the prospectus supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Notes or Certificates, as applicable. If
specified in the prospectus supplement, reserve funds may be established to
provide limited protection against only some types of losses and shortfalls.
Following each Distribution Date amounts in a reserve fund in excess of any
amount required to be maintained in the reserve fund 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 Notes or
Certificates, as applicable.
Money deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the prospectus supplement. To the extent
specified in the prospectus supplement, any reinvestment income or other gain
from those investments will be credited to the related reserve fund for that
series, and any loss resulting from those investments will be charged to the
reserve fund. However, that income may be payable to any related servicer or
another service provider or other entity. To the extent specified in the
prospectus supplement, the reserve fund, if any, for a series will not be a part
of the trust fund.
65
Additional information concerning any reserve fund will be set forth in the
prospectus supplement, including the initial balance of the reserve fund, the
balance required to be maintained in the reserve fund, the manner in which the
required balance will decrease over time, the manner of funding the reserve
fund, the purposes for which funds in the reserve fund may be applied to make
distributions to securityholders and use of investment earnings from the reserve
fund, if any.
OVERCOLLATERALIZATION
If specified in the prospectus supplement, subordination provisions of a
trust fund may be used to accelerate to a limited extent the amortization of one
or more classes of Notes or Certificates, as applicable, relative to the
amortization of the related Assets. The accelerated amortization is achieved by
the application of excess interest to the payment of principal of one or more
classes of Notes or Certificates, as applicable. This acceleration feature
creates, for the Assets or groups of Assets, overcollateralization, which is the
excess of the total principal balance of the related Assets, or a group of
related Assets, over the principal balance of the related class or classes of
Notes or Certificates, as applicable. This acceleration may continue for the
life of the related Security, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to the provisions specified in the prospectus supplement, the limited
acceleration feature may cease, unless necessary to maintain the required level
of overcollateralization.
PRIMARY MORTGAGE INSURANCE POLICIES
The servicer will maintain or cause to be maintained with respect to each
mortgage loan, a primary mortgage insurance policy in accordance with the
underwriting standards described in the related prospectus supplement. Although
the terms and conditions of primary mortgage insurance policies differ, each
primary mortgage insurance policy will generally cover losses up to an amount
equal to the excess of the unpaid principal amount of a defaulted mortgage loan,
plus accrued and unpaid interest thereon and approved expenses, over a specified
percentage of the value of the related mortgaged property.
As conditions to the filing or payment of a claim under a primary mortgage
insurance policy, the insured will typically be required, in the event of
default by the borrower, to:
o advance or discharge (a) hazard insurance premiums and (b) as
necessary and approved in advance by the insurer, real estate taxes,
property protection and preservation expenses and foreclosure and
related costs,
o in the event of any physical loss or damage to the mortgaged
property,have the mortgaged property restored to at least its
condition at the effective date of the primary mortgage insurance
policy, ordinary wear and tear excepted, and
o tender to the insurer good and merchantable title to, and possession
of, the mortgaged property.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of legal aspects of loans secured by single-family or multi-family residential
properties. Because these legal aspects are governed primarily by applicable
state law (which laws may differ substantially), the summaries do not purport to
be complete nor to reflect the laws of any particular state, nor to encompass
the laws of all states in which the security for the mortgage loans is situated.
The summaries are qualified in their entirety by reference to the applicable
federal and state laws governing the mortgage loans. In this regard, the
following discussion does not fully reflect federal regulations for FHA loans
and VA
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loans. See "Description of The Trust Funds--FHA Loans and VA Loans,"
"Description of the Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements--FHA Insurance and VA Guarantees"
and "Description of the Trust Funds--Assets."
GENERAL
All of the mortgage loans are evidenced by a note or bond and secured by
instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending on
the prevailing practice and law in the state in which the Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are in this
prospectus collectively referred to as "mortgages." Any of the foregoing types
of mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to that instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties -a borrower (usually the owner of the subject
property) and a mortgagee (the lender). In contrast, a deed of trust is a
three-party instrument, among a trustor (the equivalent of a borrower), a
trustee to whom the mortgaged property is conveyed, and a beneficiary (the
lender) for whose benefit the conveyance is made. As used in this prospectus,
unless the context otherwise requires, "borrower" includes the trustor under a
deed of trust and a grantor under a security deed or a deed to secure debt.
Under a deed of trust, the borrower grants the property, irrevocably until
the debt is paid, in trust, generally with a power of sale as security for the
indebtedness evidenced by the related note. A deed to secure debt typically has
two parties. By executing a deed to secure debt, the grantor conveys title to,
as opposed to merely creating a lien upon, the subject property to the grantee
until the underlying debt is repaid, generally with a power of sale as security
for the indebtedness evidenced by the related mortgage note.
In case the borrower under a mortgage is a land trust, there would be an
additional party because legal title to the property is held by a land trustee
under a land trust agreement for the benefit of the borrower. At origination of
a mortgage loan involving a land trust, the borrower executes a separate
undertaking to make payments on the mortgage note. The mortgagee's authority
under a mortgage, the trustee's authority under a deed of trust and the
grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, some federal laws (including the Soldiers' and Sailors' Civil Relief
Act of 1940) and, in some cases, in deed of trust transactions, the directions
of the beneficiary.
The mortgages that encumber multifamily properties may contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while retaining a revocable license to collect the
rents for so long as there is no default. If the borrower defaults, the license
terminates and the lender is entitled to collect the rents. Local law may
require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
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INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, that instrument may encumber other interests in real property such as a
tenant's interest in a lease of land or improvements, or both, and the leasehold
estate created by that lease. An instrument covering an interest in real
property other than the fee estate requires special provisions in the instrument
creating that interest or in the mortgage, deed of trust, security deed or deed
to secure debt, to protect the mortgagee against termination of that interest
before the mortgage, deed of trust, security deed or deed to secure debt is
paid. The depositor, the Asset Seller or other entity specified in the
prospectus supplement will make representations and warranties in the Agreement
or representations and warranties will be assigned to the trustee for any
mortgage loans secured by an interest in a leasehold estate. Those
representation and warranties, if applicable, will be set forth in the
prospectus supplement.
COOPERATIVE LOANS
If specified in the prospectus supplement, the mortgage loans may also
consist of cooperative apartment loans ("Cooperative Loans") secured by security
interests in shares issued by a cooperative housing corporation (a
"Cooperative") and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the cooperatives'
buildings. The security agreement will create a lien upon, or grant a title
interest in, the property that it covers, the priority of which will depend on
the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. That lien or
title interest is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
Each Cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
in the building. The Cooperative is directly responsible for property management
and, in most cases, payment of real estate taxes, other governmental impositions
and hazard and liability insurance. If there is a blanket mortgage or mortgages
on the cooperative apartment building or underlying land, as is generally the
case, or an underlying lease of the land, as is the case in some instances, the
Cooperative, as property borrower, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the Cooperative's apartment building or obtaining of
capital by the Cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that Cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease.
If the Cooperative is unable to meet the payment obligations (1) arising
under a blanket mortgage, the mortgagee holding a blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements or (2) arising under its land lease, the holder of the
landlord's interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. Also, a 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 final payment
at maturity. The inability of the Cooperative to refinance a mortgage and its
consequent inability to make that final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreement. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender that financed the purchase by an individual tenant
stockholder of cooperative shares or, in the case of the mortgage loans, the
collateral securing the Cooperative Loans.
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The Cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing that 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 occupancy rights are financed through
a Cooperative Loan evidenced by a promissory note and secured by an assignment
of and a security interest in the occupancy agreement or proprietary lease and a
security interest in the related Cooperative shares. The lender generally takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or 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 "--Foreclosure--Cooperative
Loans" below.
LAND SALE CONTRACTS
Under an installment land sale contract for the sale of real estate (a
"land sale contract") the contract seller (hereinafter referred to as the
"contract lender") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the "contract
borrower") for the payment of the purchase price, plus interest, over the term
of the land sale contract. Only after full performance by the borrower of the
contract is the contract lender obligated to convey title to the real estate to
the purchaser. As with mortgage or deed of trust financing, during the effective
period of the land sale contract, the contract borrower is responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the contract lender under an
installment contract varies on a state-by-state basis depending on the extent to
which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to its terms. The terms of land sale contracts
generally provide that upon default by the contract borrower, the borrower loses
his or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The contract
lender in that situation does not have to foreclose to obtain title to the
property, although in some cases a quiet title action is in order if the
contract borrower has filed the land sale contract in local land records and an
ejectment action may be necessary to recover possession.
In a few states, particularly in cases of contract borrower default during
the early years of a land sale contract, the courts will permit ejectment of the
buyer and a forfeiture of his or her interest in the property. However, most
state legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under land sale contracts from the harsh consequences of forfeiture.
Under those statues, a judicial contract may be reinstated upon full payment of
the default amount and the borrower may have a post-foreclosure statutory
redemption right. In other states, courts in equity may permit a contract
borrower with significant investment in the property under a land sale contract
for the sale of real estate to share the proceeds of sale of the property after
the indebtedness is repaid or may otherwise refuse to enforce the forfeiture
clause. Nevertheless, generally speaking, the contract lender's procedures for
obtaining possession and clear title under a land sale contract for the sale of
real estate in a particular state are simpler and less time consuming and costly
than are the procedures for foreclosing and obtaining clear title to a mortgaged
property.
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FORECLOSURE
GENERAL
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures for the enforcement of a mortgage vary from state to
state. Two primary methods of foreclosing a mortgage are judicial foreclosure
and non-judicial foreclosure pursuant to a power of sale granted in the mortgage
instrument. There are several other foreclosure procedures available in some
states that are either infrequently used or available only in some limited
circumstances, such as strict foreclosure.
JUDICIAL FORECLOSURE
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Those sales are made in accordance with procedures that
vary from state to state.
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of mortgage defaults, to the extent that the
effect is perceived as harsh or unfair. Relying on those principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the 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 and
have required that lenders reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose if the
default under the mortgage is not monetary, e.g., the borrower failed to
maintain the mortgaged property adequately or the borrower executed a junior
mortgage on the mortgaged property. The exercise by the court of its equity
powers will depend on the individual circumstances of each case presented to it.
Finally, some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have upheld the reasonableness of
the notice provisions or have found that a public sale under a mortgage
providing for a power of sale does not involve sufficient state action to afford
constitutional protections to the borrower.
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NON-JUDICIAL FORECLOSURE/POWER OF SALE
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
borrower under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law.
In some states, before the sale, the trustee under a deed of trust must
record a notice of default and notice of sale and send a copy to the borrower
and to any other party who has recorded a request for a copy of a notice of
default and notice of sale. In addition, in some states the trustee must provide
notice to any other party having an interest of record in the real property,
including junior lienholders. A notice of sale must be posted in a public place
and, in most states, published for a specified period of time in one or more
newspapers. The borrower or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying the
entire actual amount in arrears (without acceleration) plus the expenses
incurred in enforcing the obligation. In other states, the borrower or the
junior lienholder is not provided a period to reinstate the loan, but has only
the right to pay off the entire debt to prevent the foreclosure sale. Generally,
the procedure for public sale, the parties entitled to notice, the method of
giving notice and the applicable time periods are governed by state law and vary
among the states. Foreclosure of a deed to secure debt is also generally
accomplished by a non-judicial sale similar to that required by a deed of trust,
except that the lender or its agent, rather than a trustee, is typically
empowered to perform the sale in accordance with the terms of the deed to secure
debt and applicable law.
PUBLIC SALE
A third party may be unwilling to purchase a mortgaged property at a public
sale because of the difficulty in determining the value of that property at the
time of sale, due to, among other things, redemption rights that may exist and
the possibility of physical deterioration of the property during the foreclosure
proceedings. For these reasons, it is common for the lender to purchase the
mortgaged property for an amount equal to or less than the underlying debt and
accrued and unpaid interest plus the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses that may be recovered
by a lender. Thereafter, subject to the borrower's right in some states to
remain in possession during a redemption period, if applicable, the lender will
become the owner of the property and have both the benefits and burdens of
ownership of the mortgaged property. For example, the lender will become
obligated to pay taxes, obtain casualty insurance and to make those repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending on
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Moreover, a lender commonly
incurs substantial legal fees and court costs in acquiring a mortgaged property
through contested foreclosure and/or bankruptcy proceedings. Generally, state
law controls the amount of foreclosure expenses and costs, including attorneys'
fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, if the foreclosure of a junior mortgage
triggers the enforcement of a "due-on-sale" clause contained in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgage to avoid its foreclosure. Accordingly, for those mortgage loans,
if any, that are junior mortgage loans, if the lender purchases the property the
lender's title will be subject to all senior mortgages, prior liens and specific
governmental liens.
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The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the borrower. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by those holders.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the borrower, and all persons who have an interest
in the property that is subordinate to the mortgage being foreclosed, from
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest that is subordinate to that of the foreclosing mortgagee have
an equity of redemption and may redeem the property by paying the entire debt
with interest. In addition, in some states, when a foreclosure action has begun,
the redeeming party must pay some of the costs of that action. Those having an
equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right that exists
before completion of the foreclosure, is not waivable by the borrower, must be
exercised before foreclosure sale and should be distinguished from the post-sale
statutory rights of redemption. In some states, after sale pursuant to a deed of
trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors
are given a statutory period in which to redeem the property from the
foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years from the close
of the calendar year of its acquisition. For a series of Notes or Certificates,
as applicable, for which an election is made to qualify the trust fund or a part
of the trust fund as a REMIC, the Agreement will permit foreclosed property to
be held for more than such three year period if the Internal Revenue Service
grants an extension of time within which to sell the property or independent
counsel renders an opinion to the effect that holding the property for that
additional period is permissible under the REMIC Provisions.
COOPERATIVE LOANS
The Cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and bylaws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by that tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by that
tenant-stockholder. The proprietary lease or occupancy agreement
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generally permit the Cooperative to terminate the lease or agreement in the
event a borrower fails to make payments or defaults in the performance of
covenants required under the proprietary lease or occupancy agreement.
Typically, the lender and the Cooperative enter into a recognition agreement
that establishes the rights and obligations of both parties in the event of a
default by the tenant-stockholder under the proprietary lease or occupancy
agreement will usually constitute a default under the security agreement between
the lender and the tenant-stockholder.
The recognition agreement generally provides that, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate that lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under that 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 on the
Cooperative Loan.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building that was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws that apply to tenants who elected to
remain in a building so converted.
JUNIOR MORTGAGES
Some of the mortgage loans may be secured by junior mortgages or deeds of
trust, that are subordinate to first or other senior mortgages or deeds of trust
held by other lenders. The rights of the trust fund as the holder of a junior
deed of trust or a junior mortgage are subordinate in lien and in payment to
those of the holder of the senior mortgage or deed of trust, including the prior
rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the borrower, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed
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of trust, the junior mortgagee's or junior beneficiary's lien will be
extinguished unless the junior lienholder satisfies the defaulted senior loan or
asserts its subordinate interest in a property in foreclosure proceedings. See
"--Foreclosure" above.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event of
a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the borrower or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends these sums, these sums will
generally have priority over all sums due under the junior mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed of
trust or a mortgagee under a mortgage 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 to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender.
Some states require the lender to exhaust the security afforded under a
mortgage by foreclosure in an attempt to satisfy the full debt before bringing a
personal action against the borrower. In some other states, the lender has the
option of bringing a personal action against the borrower on the debt without
first exhausting that security; however, in some of these states, the lender,
following judgment on the personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting that election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a judicial sale to the
excess of the outstanding debt over the fair market value of the property at the
time of the public sale. The purpose of these statutes is generally to prevent a
lender from obtaining a large deficiency judgment against the former borrower as
a result of low or no bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of a secured mortgage lender to realize upon its security. For example,
numerous statutory provisions under the United States Bankruptcy Code, 11 U.S.C.
Sections 101 et seq. (the "Bankruptcy Code"), may interfere with or affect the
ability of the secured mortgage lender to obtain payment of a mortgage loan, to
realize upon collateral and/or enforce a deficiency judgment. Under federal
bankruptcy law, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and often no interest or principal payments are made during
the course of the bankruptcy proceeding. In a case under the Bankruptcy Code,
the secured party is precluded from foreclosing without authorization from the
bankruptcy court. In addition, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 11 or Chapter 13 plan to cure a
monetary default in respect of a mortgage loan by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no foreclosure sale had
yet occurred) before the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction
74
have approved plans, based on the particular facts of the case, that affected
the curing of a mortgage loan default by paying arrearages over a number of
years.
If a mortgage loan is secured by property not consisting solely of the
debtor's principal residence, the Bankruptcy Code also permits that mortgage
loan to be modified. These modifications may include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
and reducing the lender's security interest to the value of the property, thus
leaving the lender in the position of a general unsecured creditor for the
difference between the value of the property and the outstanding balance of the
mortgage loan. Some courts have permitted these modifications when the mortgage
loan is secured both by the debtor's principal residence and by personal
property.
In the case of income-producing multifamily properties, federal bankruptcy
law may also have the effect of interfering with or affecting the ability of the
secured lender to enforce the borrower's assignment of rents and leases related
to the mortgaged property. Under Section 362 of the Bankruptcy Code, the lender
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue could be time-consuming, with resulting delays in
the lender's receipt of the rents.
Some tax liens arising under the Code may in some circumstances provide
priority over the lien of a mortgage or deed of trust. In addition, substantive
requirements are imposed upon mortgage lenders in connection with the
origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases this liability may affect assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. 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
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
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; and/or management of electrical
or other equipment containing polychlorinated biphenyls ("PCBs"). Failure to
comply with these laws and regulations may result in significant penalties,
including civil and criminal fines. Under the laws of some 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 that property are subordinated to the environmentally-related lien and,
in some states, even prior recorded liens are subordinated to these liens
("Superliens"). In the latter states, the security interest of the trustee in a
property that is subject to a Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in some states, a
secured party that takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property
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or undertakes particular types of activities that may constitute management of
the mortgaged property may become liable in some circumstances for the cleanup
costs of remedial action if hazardous wastes or hazardous substances have been
released or disposed of on the property. These cleanup costs may be substantial.
CERCLA imposes strict, as well as joint and several, liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to the contamination
on the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may be
held strictly, jointly and severally liable for environmental remediation and/or
damages at those off-site locations. Many states also have laws that are similar
to CERCLA. Liability under CERCLA or under similar state law could exceed the
value of the property itself as well as the total assets of the property owner.
Although some provisions of the Asset Conservation Act (as defined in this
prospectus) apply to trusts and fiduciaries, the law is somewhat unclear as to
whether and under what precise circumstances cleanup costs, or the obligation to
take remedial actions, could be imposed on a secured lender, such as the trust
fund. Under the laws of some states and under CERCLA, a lender may be liable as
an "owner or operator" for costs of addressing releases or threatened releases
of hazardous substances on a mortgaged property if that lender or its agents or
employees have "participated in the management" of the operations of the
borrower, even though the environmental damage or threat was caused by a prior
owner or current owner or operator or other third party. Excluded from CERCLA's
definition of "owner or operator" is a person "who without participating in the
management of ... [the] facility, holds indicia of ownership primarily to
protect his security interest" (the "secured-creditor exemption"). This
exemption for holders of a security interest such as a secured lender applies
only to the extent that a lender seeks to protect its security interest in the
contaminated facility or property. Thus, if a lender's activities begin to
encroach on the actual management of that facility or property, the lender faces
potential liability as an "owner or operator" under CERCLA. Similarly, when a
lender forecloses and takes title to a contaminated facility or property, the
lender may incur potential CERCLA liability in various circumstances, including
among others, when it holds the facility or property as an investment (including
leasing the facility or property to a third party), fails to market the property
in a timely fashion or fails to properly address environmental conditions at the
property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"), contains a
similar secured-creditor exemption for those lenders who hold a security
interest in a petroleum underground storage tank ("UST") or in real estate
containing a UST, or that acquire title to a petroleum UST or facility or
property on which a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if that 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 some circumstances the
secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in UNITED STATES V. FLEET FACTORS CORP. very narrowly construed
CERCLA's secured-creditor exemption. The court's opinion suggested that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
management of the facility were broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence 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 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.
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Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts to
provide guidance to lenders on the scope of activities that would trigger CERCLA
and/or RCRA liability. Until recently, these efforts have failed to provide
substantial guidance.
On September 28, 1996, however, Congress enacted, and on September 30,
1996, the President signed into law the Asset Conservation Lender Liability and
Deposit Insurance Protection Act of 1996 (the "Asset Conservation Act"). The
Asset Conservation Act was intended to clarify the scope of the secured creditor
exemption under both CERCLA and RCRA. The Asset Conservation Act more explicitly
defined the kinds of "participation in management" that would trigger liability
under CERCLA and specified activities that would not constitute "participation
in management" or otherwise result in a forfeiture of the secured-creditor
exemption before 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 specific regulatory clarifications of
the scope of the secured-creditor exemption for purposes of RCRA, 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 fund and occasion a loss to the trust fund and to securityholders in
some 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 that may impose liability
on "owners or operators" but do not incorporate the secured creditor exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property before the origination of the mortgage loan or
before foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
depositor nor any servicer makes any representations or warranties or assumes
any liability with respect to: environmental conditions of the Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from the Mortgaged Property; the impact on
securityholders of any environmental condition or presence of any substance on
or near the Mortgaged Property; or the compliance of any Mortgaged Property with
any environmental laws. In addition, no agent, person or entity otherwise
affiliated with the depositor is authorized or able to make any representation,
warranty or assumption of liability relative to any Mortgaged Property.
DUE-ON-SALE CLAUSES
The mortgage loans may contain due-on-sale clauses. These clauses generally
provide that the lender may accelerate the maturity of the loan if the borrower
sells, transfers or conveys the related Mortgaged Property. The enforceability
of due-on-sale clauses has been the subject of legislation or litigation in many
states and, in some cases, the enforceability of these clauses was limited or
denied. However, for some loans the Garn-St. Germain Depository Institutions Act
of 1982 (the "Garn-St. Germain Act") preempts state constitutional, statutory
and case law that prohibits the enforcement of due-on-sale clauses and permits
lenders to enforce these clauses in accordance with their terms, subject to
limited exceptions. Due-on-sale clauses contained in mortgage loans originated
by federal savings and loan associations of federal savings banks are fully
enforceable pursuant to regulations of the United States Federal Home Loan Bank
Board, as succeeded by the Office of Thrift Supervision, which preempt state law
restrictions on the enforcement of those clauses. Similarly,
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"due-on-sale" clauses in mortgage loans made by national banks and federal
credit unions are now fully enforceable pursuant to preemptive regulations of
the Comptroller of the Currency and the National Credit Union Administration,
respectively.
The Garn-St. Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, some transfers by operation of law, leases
of fewer than three years and the creation of a junior encumbrance. Regulations
promulgated under the Garn-St. Germain Act also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan pursuant to a due-on-sale
clause. The inability to enforce a "due-on-sale" clause may result in a mortgage
that bears an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may affect the average life of the
mortgage loans and the number of mortgage loans which may extend to maturity.
PREPAYMENT CHARGES
Under some state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if those loans are paid
before maturity. For Mortgaged Properties that are owner-occupied, it is
anticipated that prepayment charges may not be imposed for many of the mortgage
loans. The absence of a restraint on prepayment, particularly for fixed rate
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirement of those loans.
SUBORDINATE FINANCING
Where a borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risks, such as:
o The borrower may have difficulty repaying multiple loans. In addition,
if the junior loan permits recourse to the borrower (as junior loans
often do) and the senior loan does not, a borrower may be more likely
to repay sums due on the junior loan than those on the senior loan.
o Acts of the senior lender that prejudice the junior lender or impair
the junior lender's security may create a superior equity in favor of
the junior lender. For example, if the borrower and the senior lender
agree to an increase in the principal amount of or the interest rate
payable on the senior loan, the senior lender may lose its priority to
the extent any existing junior lender is harmed or the borrower is
additionally burdened.
o If the borrower defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior
lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender.
Moreover, the bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations will not apply to some types of residential first mortgage loans
originated by lenders after March 31, 1980. A similar federal statute was in
effect for mortgage loans made during the first three months of 1980. The Office
of Thrift Supervision is authorized to issue rules and regulations and to
publish interpretations governing implementation of Title V. The statute
authorized any state to reimpose interest rate limits by adopting,
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before April 1, 1983, a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Some
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1,
1980, are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges before origination of those
mortgage loans, any limitation under that state's usury law would not apply to
those mortgage loans.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no mortgage
loan originated after the date of that state action will be eligible for
inclusion in a trust fund unless (1) the mortgage loan provides for the interest
rate, discount points and charges as are permitted in that state or (2) the
mortgage loan provides that its terms will be construed in accordance with the
laws of another state under which the interest rate, discount points and charges
would not be usurious and the borrower's counsel has rendered an opinion that
the choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the borrower may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only for
the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thus permitting the borrower to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Those
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St. Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, before October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of those provisions. Some states have
taken that action.
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SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a borrower who enters military service after the
origination of the borrower's mortgage loan (including a borrower who was in
reserve status and is called to active duty after origination of the mortgage
loan) may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of the borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
borrowers who are members of the Army, Navy, Air Force, Marines, National Guard,
Reserves, Coast Guard and officers of the U.S. Public Health Service assigned to
duty with the military. Because the Relief Act applies to borrowers who enter
military service (including reservists who are called to active duty) after
origination of the related mortgage loan, no information can be provided as to
the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of the servicer to collect full amounts of interest
on some of the mortgage loans. Any shortfalls in interest collections resulting
from the application of the Relief Act would result in a reduction of the
amounts distributable to the holders of the related series of Notes or
Certificates, as applicable, and would not be covered by advances. These
shortfalls will be covered by the credit support provided in connection with the
Notes or Certificates, as applicable, only to the extent provided in the
prospectus supplement. In addition, the Relief Act imposes limitations that
would impair the ability of the servicer to foreclose on an affected mortgage
loan during the borrower's period of active duty status, and, under some
circumstances, during an additional three month period thereafter. Thus, if an
affected mortgage loan goes into default, there may be delays and losses
occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the contracts. Because these legal aspects
are governed primarily by applicable state law, which laws may differ
substantially, the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the contracts is situated. The summaries are qualified in their
entirety by reference to the appropriate laws of the states in which contracts
may be originated.
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GENERAL
As a result of the assignment of the contracts to the trustee, the trustee
will succeed collectively to all of the rights including the right to receive
payment on the contracts, of the obligee under the contracts. Each contract
evidences both
(a) the obligation of the borrower to repay the loan evidenced
thereby, and
(b) the grant of a security interest in the manufactured home to
secure repayment of the loan. Aspects of both features of the contracts are
described more fully below.
The contracts generally are "chattel paper" as defined in the UCC in effect
in the states in which the manufactured homes initially were registered.
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the agreement, the
servicer will transfer physical possession of the contracts to the trustee. In
addition, the servicer will make an appropriate filing of a UCC-1 financing
statement in the appropriate states to give notice of the trustee's ownership of
the contracts. The contracts will be stamped or marked otherwise to reflect
their assignment from the depositor to the trustee only if provided in the
prospectus supplement. Therefore, if, through negligence, fraud or otherwise, a
subsequent purchaser were able to take physical possession of the contracts
without notice of the assignment, the trustee's interest in contracts could be
defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The manufactured homes securing the contracts may be located in all 50
states, Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some nontitle states, perfection pursuant
to the provisions of the UCC is required. The asset seller may effect that
notation or delivery of the required documents and fees, and obtain possession
of the certificate of title, as appropriate under the laws of the state in which
any manufactured home securing a manufactured housing conditional sales contract
is registered. In the event the asset seller fails, due to clerical error, to
effect that notation or delivery, or files the security interest under the wrong
law, the asset seller may not have a first priority security interest in the
manufactured home securing a contract. As manufactured homes have become larger
and often have been attached to their sites without any apparent intention to
move them, courts in many states have held that manufactured homes, under some
circumstances, may become subject to real estate title and recording laws. As a
result, a security interest in a manufactured home could be rendered subordinate
to the interests of other parties claiming an interest in the home under
applicable state real estate law.
To perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a fixture filing
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located.
Substantially all of the contracts contain provisions prohibiting the borrower
from permanently attaching the manufactured home to its site. So long as the
borrower does not violate this agreement, a security interest in the
manufactured home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the security interest in the manufactured home. If, however, a manufactured
home is permanently attached to its site, other parties could obtain an interest
in the manufactured home that is prior to the security interest originally
retained by the asset seller and transferred to the depositor. For a series of
securities and if so described in the prospectus supplement, the servicer may be
required to perfect a security interest in the manufactured home under
applicable real estate laws. The warranting party will represent that as of the
date of the sale to the depositor it has obtained a
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perfected first priority security interest by proper notation or delivery of the
required documents and fees for substantially all of the manufactured homes
securing the contracts.
The depositor will cause the security interests in the manufactured homes
to be assigned to the trustee on behalf of the securityholders. The depositor or
the trustee will amend the certificates of title, or file UCC-3 statements, to
identify the trustee as the new secured party, and will deliver the certificates
of title to the trustee or note thereon the interest of the trustee only if
specified in the prospectus supplement. Accordingly, the asset seller, or other
originator of the contracts, will continue to be named as the secured party on
the certificates of title relating to the manufactured homes. In some states,
that assignment is an effective conveyance of the security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to servicer's rights as the secured party. However, in
some states, in the absence of an amendment to the certificate of title and the
new secured party succeeds to servicer's rights as the secured party. However,
in some states, in the absence of an amendment to the certificate of title, or
the filing of a UCC-3 statement, the assignment of the security interest in the
manufactured home may not be held effective or the security interest in the
manufactured home may not be held effective or the security interests may not be
perfected and in the absence of that notation or delivery to the trustee, the
assignment of the security interest in the manufactured home may not be
effective against creditors of the asset seller, or any other originator of the
contracts, or a trustee in bankruptcy of the asset seller, or any other
originator.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the manufactured home owner, or administrative
error by state recording officials, the notation of the lien of the asset
seller, or other originator of the Contracts, on the certificate of title or
delivery of the required documents and fees will be sufficient to protect the
securityholders against the rights or subsequent purchasers of a manufactured
home or subsequent lenders who take a security interest in the manufactured
home. If there are any manufactured homes as to which the security interest
assigned to the trustee is not perfected, that security interest would be
subordinate to, among others, subsequent purchasers for value of manufactured
homes and holders of perfected security interests. There also exists a risk in
not identifying the trustee as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the trustee could be
released.
If the owner of a manufactured home moves it to a state other than the
state in which the manufactured home initially is registered, under the laws of
most states the perfected security interest in the manufactured home would
continue for four months after the relocation and thereafter only if and after
the owner re-registers the manufactured home in that state. If the owner were to
relocate a manufactured home to another state and not re-register the
manufactured home in that state, and if steps are not taken to re-perfect the
trustee's security interest in that state, the security interest in the
manufactured home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a manufactured home;
accordingly, the servicer must surrender possession if it holds the certificate
of title to the manufactured home or, in the case of manufactured homes
registered in states that provide for notation of lien, the asset seller, or
other originator, would receive notice of surrender if the security interest in
the manufactured home is noted on the certificate of title. Accordingly, the
trustee would have the opportunity to re-perfect its security interest in the
manufactured home in the state of relocation. In states that do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing contracts, the servicer takes steps to effect re-perfection upon receipt
of notice of re-registration or information from the borrower as to relocation.
Similarly, when a borrower under a manufactured housing contract sells a
manufactured home, the servicer must surrender possession of the certificate of
title or, if it is noted as lienholder on the certificate of title, will receive
notice as a result of its lien noted thereon and accordingly will have an
opportunity to require satisfaction of the related manufactured housing
conditional sales contract before release of the lien. Under the Agreement, the
servicer is obligated to take those steps,
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at the servicer's expense, as are necessary to maintain perfection of security
interests in the manufactured homes.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority even over
a perfected security interest. The warranting party will represent in the
agreement that it has no knowledge of any of these liens for any manufactured
home securing payment on any contract. However, these liens could arise at any
time during the term of a contract. No notice will be given to the trustee or
securityholders if a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN THE MANUFACTURED HOMES
The servicer on behalf of the trustee, to the extent required by the
related agreement, may take action to enforce the trustee's security interest
with respect to contracts in default by repossession and resale of the
manufactured homes securing those defaulted contracts. So long as the
manufactured home has not become subject to the real estate law, a creditor can
repossess a manufactured home securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" or, in the absence of voluntary
surrender and the ability to repossess without breach of the peace, by judicial
process. The holder of a contract must give the debtor a number of days' notice,
which varies from 10 to 30 days depending on that state, before beginning any
repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial reasonableness in effecting that sale. The law in most
states also requires that the debtor be given notice of any sale before resale
of the unit so that the debtor may redeem at or before that resale. In the event
of repossession and resale of a manufactured home, the trustee would be entitled
to be paid out of the sale proceeds before the proceeds could be applied to the
payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the ability
of a lender to repossess and resell collateral or enforce a deficiency judgment.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
The terms of the Relief Act apply to a borrower on a Contract as described
for a borrower on a mortgage loan under "Certain Legal Aspects of Mortgage
Loans--Soldiers' and Sailors' Civil Act of 1940."
CONSUMER PROTECTION LAWS
The so-called Holder-in-Due-Course rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
that is the seller of goods which gave rise to the transaction, and some related
lenders and assignees, to transfer the contract free of notice of claims by the
debtor thereunder. The effect of this rule is to subject the assignee of the
contract to all claims and defenses that the debtor could assert against the
seller of goods. Liability under this rule is limited to amounts paid under a
contract; however, the borrower also may be able to assert the rule to set off
remaining amounts due as a defense against a claim brought by the trustee
against the borrower. Numerous other federal and state consumer protection laws
impose requirements applicable to the origination and lending pursuant to the
contracts, including the Truth in Lending Act, the Federal Trade Commission Act,
the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal
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Credit Opportunity Act, the Fair Debt Collection Practices Act and the Uniform
Consumer Credit Code. In the case of some of these laws, the failure to comply
with their provisions may affect the enforceability of the related contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES
The contracts, in general, prohibit the sale or transfer of the related
manufactured homes without the consent of the servicer and permit the
acceleration of the maturity of the contracts by the servicer upon any sale or
transfer that is not consented to. Generally, it is expected that the servicer
will permit most transfers of manufactured homes and not accelerate the maturity
of the related contracts. In some cases, the transfer may be made by a
delinquent borrower to avoid a repossession proceeding for a manufactured home.
In the case of a transfer of a manufactured home after which the servicer
desires to accelerate the maturity of the related contract, the servicer's
ability to do so will depend on the enforceability under state law of the
due-on-sale clauses applicable to the manufactured homes. Consequently, in some
states the servicer may be prohibited from enforcing a due-on-sale clause in
respect of some manufactured homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended (Title V), provides that, subject to the following
conditions, state usury limitations will not apply to any loan that is secured
by a first lien on certain kinds of manufactured housing.
The contracts would be covered if they satisfy certain conditions, among
other things, governing the terms of any prepayments, late charges and deferral
fees and requiring a 30-day notice period before instituting any action leading
to repossession of or foreclosure on the related unit.
Title V authorized any state to re-impose limitations on interest rates and
finance charges by adopting before April 1, 1983, a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted a similar law before the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The related asset seller will represent that all of the contracts comply with
applicable usury law.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion represents the opinion of Stroock & Stroock &
Lavan LLP as to the material federal income tax consequences of the purchase,
ownership and disposition of the Notes or Certificates, as applicable, offered
under this prospectus. This opinion assumes compliance with all provisions of
the Agreements pursuant to which the Notes or Certificates, as applicable, are
issued. This discussion is directed solely to securityholders that hold the
Notes or Certificates, as applicable, as capital assets within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"), and
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinions referred to
below, are based are subject to change or differing interpretations, which could
apply retroactively.
In addition to the federal income tax consequences described in this
prospectus, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and
84
disposition of the Notes or Certificates, as applicable. See "State and Other
Tax Considerations." The depositor recommends that securityholders consult their
own tax advisors concerning the federal, state, local or other tax consequences
to them of the purchase, ownership and disposition of the Notes or Certificates,
as applicable, offered under this prospectus.
The following discussion addresses securities of five general types:
o securities ("REMIC Securities") representing interests in a trust
fund, or a portion of a trust fund, that the trustee will elect to
have treated as a real estate mortgage investment conduit ("REMIC")
under Sections 860A through 860G (the "REMIC Provisions") of the Code;
o securities ("FASIT Securities") representing interests in a trust
fund, or a portion of a trust fund, that the trustee will elect to
have treated as a financial asset securitization investment trust
("FASIT") under Sections 860H through 860L (the "FASIT Provisions") of
the Code;
o securities ("Grantor Trust Securities") representing interests in a
trust fund (a "Grantor Trust Fund") as to which no election will be
made;
o securities ("Partnership Certificates") representing equity interests
in a trust fund (a "Partnership Trust Fund") which is treated as a
partnership for federal income tax purposes; and
o securities ("Debt Securities") representing indebtedness of a
Partnership Trust Fund or a trust fund which is disregarded as a
separate entity for federal income tax purposes.
The prospectus supplement for each series of Notes or Certificates, as
applicable, will indicate which of the foregoing treatments will apply to that
series and, if a REMIC election (or elections) will be made for the related
trust fund, will identify all "regular interests" and "residual interests" in
the REMIC or, if a FASIT election will be made for the related trust fund, will
identify all "regular interests" and "ownership interests" in the FASIT. For
purposes of this tax discussion,
(1) references to a "securityholder" or a "holder" are to the beneficial
owner of a Security,
(2) references to "REMIC Pool" are to an entity or portion thereof as to
which a REMIC election will be made and
(3) to the extent specified in the prospectus supplement, references to
"mortgage loans" include Contracts. Except to the extent specified in
the prospectus supplement, no REMIC election will be made for
Unsecured Home Improvement Loans.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271 through 1275 of the Code and
in the Treasury regulations promulgated thereunder (the "OID Regulations"), in
part upon the REMIC Provisions and the Treasury regulations promulgated
thereunder (the "REMIC Regulations"), and in part upon the FASIT Provisions.
Although the FASIT Provisions of the Code became effective on September 1, 1997,
the Treasury regulations issued with respect to those provisions are still in
proposed form only. Accordingly, the discussion herein does not address the
proposed FASIT regulations (which will be discussed in the related prospectus
supplement if and to the extent they are relevant) and definitive guidance
cannot be provided with respect to many aspects of the tax treatment of the
holders of FASIT Securities. In addition, the OID Regulations do not adequately
address some issues relevant to, and in some
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instances provide that they are not applicable to, securities such as the Notes
or Certificates, as applicable.
TAXABLE MORTGAGE POOLS
Corporate income tax can be imposed on the net income of some entities
issuing non-REMIC and non-FASIT debt obligations secured by real estate
mortgages ("Taxable Mortgage Pools"). Any entity other than a REMIC or a FASIT
(as defined in this prospectus) will be considered a Taxable Mortgage Pool if
(1) substantially all of the assets of the entity consist of debt
obligations and more than 50% of those obligations consist of "real
estate mortgages,"
(2) that entity is the borrower under debt obligations with two or more
maturities, and
(3) under the terms of the debt obligations on which the entity is the
borrower, payments on those obligations bear a relationship to
payments on the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
The depositor generally will structure offerings of non-REMIC and non-FASIT
Securities to avoid the application of the Taxable Mortgage Pool rules.
REMICS
CLASSIFICATION OF REMICS
For each series of REMIC Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Stroock & Stroock & Lavan LLP, the related trust fund (or each applicable
portion of the trust fund) will qualify as a REMIC and the REMIC Securities
offered with respect thereto will be considered to evidence ownership of
"regular interests" ("Regular Securities") or "residual interests" ("Residual
Securities") in the REMIC within the meaning of the REMIC Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a DE MINIMIS portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Securities) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant to
which the DE MINIMIS requirement will be met if at all times the total adjusted
basis of the nonqualified assets is less than 1% of the total 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 of "disqualified organizations" and must furnish applicable tax
information to transferors or agents that violate this requirement. The pooling
and servicing agreement for each series of REMIC Securities will contain
provisions meeting these requirements. See "--Taxation of Owners of Residual
Securities-Tax-Related Restrictions on Transfer of Residual
Securities--Disqualified Organizations" below.
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 purchased by the REMIC Pool
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within a three-month period thereafter pursuant to a fixed price contract in
effect on the Startup Day. Qualified mortgages include whole mortgage loans and,
generally, certificates of beneficial interest in a grantor trust that holds
mortgage loans and regular interests in another REMIC, such as lower-tier
regular interests in a tiered REMIC. The REMIC Regulations specify that loans
secured by timeshare interests, shares held by a tenant stockholder in a
cooperative housing corporation, and manufactured housing that qualifies as a
"single family residence" under Code Section 25(e)(10) can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage, which
is any property that would have been treated as a qualified mortgage if it were
transferred to the REMIC Pool on the Startup Day and that is received either:
(1) in exchange for any qualified mortgage within a three-month period
from the Startup Day; or
(2) in exchange for a "defective obligation" within a two-year period from
the Startup Day.
A "defective obligation" includes:
(1) a mortgage in default or as to which default is reasonably
foreseeable;
(2) a mortgage as to which a customary representation or warranty made at
the time of transfer to the REMIC Pool has been breached;
(3) a mortgage that was fraudulently procured by the borrower; and
(4) 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 (4) above that is not
sold or, if within two years of the Startup Day, exchanged, within 90 days of
discovery, ceases to be a qualified mortgage after that 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in that fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced "promptly and appropriately" as payments on the mortgage loans
are received. Foreclosure property is real property acquired by the REMIC Pool
in connection with the default or imminent default of a qualified mortgage and
generally may not be held for more than three taxable years after the taxable
year of acquisition unless extensions are granted by the Secretary of the
Treasury.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet specific requirements. All of the interests in a REMIC Pool
must be either of the following: (1) one or more classes of regular interests or
(2) a single class of residual interests on which distributions, if any, are
made pro rata.
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o 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. That 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.
o 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 for that 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, in the opinion of Stroock & Stroock & Lavan LLP, the
Regular Securities of a series will constitute one or more classes of regular
interests, and the Residual Securities for that series will constitute a single
class of residual interests for each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for that status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for that
year and thereafter. In that event, that entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Securities may not be accorded
the status or given the tax treatment described below. Although the Code
authorizes the Treasury Department to issue regulations providing relief in the
event of an inadvertent termination of REMIC status, none of these regulations
have been issued. Any relief provided, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
trust fund's income for the period in which the requirements for that status are
not satisfied. The pooling and servicing agreement for each REMIC Pool will
include provisions designed to maintain the trust fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any trust fund as
a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC SECURITIES
The REMIC Securities will be treated as "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
Pool underlying these Notes or Certificates, as applicable, would be so treated.
Moreover, if 95% or more of the assets of the REMIC Pool qualify for either of
the foregoing treatments at all times during a calendar year, the REMIC
Securities will qualify for the corresponding status in their entirety for that
calendar year.
If the assets of the REMIC Pool include Buydown Mortgage Loans, it is
possible that the percentage of those assets constituting "loans ... secured by
an interest in real property which is ... residential real property" for
purposes of Code Section 7701(a)(19)(C)(v) may be required to be reduced by the
amount of the related funds paid thereon (the "Buydown Funds"). No opinion is
expressed as to the treatment of those Buydown Funds because the law is unclear
as to whether the Buydown Funds represent an account held by the lender that
reduces the lender's investment in the mortgage loan. This reduction of a
holder's investment may reduce the assets qualifying for the 60%
88
of assets test for meeting the definition of a "domestic building and loan
association." Interest (including original issue discount) on the Regular
Securities and income allocated to the class of Residual Securities will be
interest described in Section 856(c)(3)(B) of the Code to the extent that the
Notes or Certificates, as applicable, are treated as "real estate assets" within
the meaning of Section 856(c)(4)(A) of the Code. In addition, the Regular
Securities generally will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its Startup Day in
exchange for regular or residual interests in the REMIC.
The assets of the REMIC Pool will include, in addition to mortgage loans,
payments on mortgage loans held pending distribution on the REMIC Securities and
property acquired by foreclosure held pending sale, and may include amounts in
reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the mortgage loans, or whether those assets (to the extent not invested in
assets described in the foregoing sections) otherwise would receive the same
treatment as the mortgage loans for purposes of all of the foregoing sections.
The REMIC Regulations do provide, however, that payments on mortgage loans held
pending distribution are considered part of the mortgage loans for purposes of
Section 856(c)(4)(A) of the Code. Furthermore, foreclosure property generally
will qualify as "real estate assets" under Section 856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES
For some series of REMIC Securities, two or more separate elections may be
made to treat designated portions of the related trust fund as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any of these
series of REMIC Securities, Stroock & Stroock & Lavan LLP will deliver its
opinion that, assuming compliance with all provisions of the related pooling and
servicing agreement, the Tiered REMICs will each qualify as a REMIC and the
respective REMIC Securities issued by each Tiered REMIC will be considered to
evidence ownership of Regular Securities or Residual Securities in the related
REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" under Section 7701 (a)(19)(C) of
the Code, and whether the income on those Notes or Certificates, as applicable,
is interest described in Section 856(c)(3)(B) of the Code, the Tiered REMICs
will be treated as one REMIC.
TAXATION OF OWNERS OF REGULAR SECURITIES
(1) General
Except as otherwise indicated herein, the Regular Securities will be
treated for federal income tax purposes as debt instruments that are issued by
the REMIC and not as beneficial interests in the REMIC or the REMIC's assets. In
general, interest, original issue discount, and market discount on a Regular
Security will be treated as ordinary income to a holder of the Regular Security
(the "Regular Securityholder"), and principal payments on a Regular Security
will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by that
Regular Securityholder.
Payments of interest on Regular Securities may be based on a fixed rate, a
variable rate as permitted by the REMIC Regulations, or may consist of a
specified portion of the interest payments on qualified mortgages where such
portion does not vary during the period the Regular Security is outstanding. The
definition of a variable rate for purposes of the REMIC Regulations is based on
the definition of a qualified floating rate for purposes of the rules governing
original issue discount set forth in the OID Regulations, with certain
modifications and permissible variations. See "--Variable
89
Rate Regular Securities" below for a discussion of the definition of a qualified
floating rate for purposes of the OID Regulations. In contrast to the OID
Regulations, for purposes of the REMIC Regulations, a qualified floating rate
does not include any multiple of a qualified floating rate (also excluding
multiples of qualified floating rates that themselves would constitute qualified
floating rates under the OID Regulations), and the characterization of a
variable rate that is subject to a cap, floor or similar restriction as a
qualified floating rate for purposes of the REMIC Regulations will not depend
upon the OID Regulations relating to caps, floors, and similar restrictions. See
"--Variable Rate Regular Securities" below for discussion of the OID Regulations
relating to caps, floors and similar restrictions. A qualified floating rate, as
defined above for purposes of the REMIC Regulations (a "REMIC qualified floating
rate"), qualifies as a variable rate for purposes of the REMIC Regulations if
such REMIC qualified floating rate is set at a "current rate" as defined in the
OID Regulations. In addition, a rate equal to the highest, lowest or an average
of two or more REMIC qualified floating rates qualifies as a variable rate for
REMIC purposes. A Regular Security may also have a variable rate based on a
weighted average of the interest rates on some or all of the qualified mortgages
held by the REMIC where each qualified mortgage taken into account has a fixed
rate or a variable rate that is permissible under the REMIC Regulations.
Further, a Regular Security may have a rate that is the product of a REMIC
qualified floating rate or a weighted average rate and a fixed multiplier, is a
constant number of basis points more or less than a REMIC qualified floating
rate or a weighted average rate, or is the product, plus or minus a constant
number of basis points, of a REMIC qualified floating rate or a weighted average
rate and a fixed multiplier. An otherwise permissible variable rate for a
Regular Security, described above, will not lose its character as such because
it is subject to a floor or a cap, including a "funds available cap" as that
term is defined in the REMIC Regulations. Lastly, a Regular Security will be
considered as having a permissible variable rate if it has a fixed or otherwise
permissible variable rate during one or more payment or accrual periods and
different fixed or otherwise permissible variable rates during other payment or
accrual periods.
(2) Original Issue Discount
Accrual Securities will be, and other classes of Regular Securities may be,
issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or Subclass of Regular Securities having original
issue discount generally must include original issue discount in ordinary income
for federal income tax purposes as it accrues, in accordance with a constant
yield method that takes into account the compounding of interest, in advance of
the receipt of the cash attributable to that income. The following discussion is
based in part on the "OID Regulations" and in part on the provisions of the Tax
Reform Act of 1986 (the "1986 Act"). Regular Securityholders should be aware,
however, that the OID Regulations do not adequately address some of the issues
relevant to prepayable securities, such as the Regular Securities. To the extent
that those issues are not addressed in the regulations, the Seller intends to
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 because of the
applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect on
the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors as to the discussion in the OID Regulations and
the appropriate method for reporting interest and original issue discount for
the Regular Securities.
Each Regular Security will be treated as a single installment obligation
for purposes of determining the original issue discount includible in a Regular
Securityholder's income. The total amount of original issue discount on a
Regular Security is the excess of the "stated redemption price at maturity" of
the Regular Security over its "issue price." The issue price of a Class of
Regular Securities offered pursuant to this prospectus generally is the first
price at which a substantial amount of that Class is sold to the public
(excluding bond houses, brokers and underwriters). Although unclear
90
under the OID Regulations, it is anticipated that the trustee will treat the
issue price of a Class as to which there is no substantial sale as of the issue
date or that is retained by the depositor as the fair market value of the Class
as of the issue date. The issue price of a Regular Security also includes any
amount paid by an initial Regular Securityholder for accrued interest that
relates to a period before the issue date of the Regular Security, unless the
Regular Securityholder 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 Security always
includes the original principal amount of the Regular Security, but generally
will not include distributions of interest if those 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 Security. Because there is no penalty or default remedy in the
case of nonpayment of interest for a Regular Security, it is possible that no
interest on any Class of Regular Securities will be treated as qualified stated
interest. However, except as provided in the following three sentences or in the
prospectus supplement, because the underlying mortgage loans provide for
remedies in the event of default, it is anticipated that the trustee will treat
interest for the Regular Securities as qualified stated interest. Distributions
of interest on an Accrual Security, or on other Regular Securities for which
deferred interest will accrue, will not constitute qualified stated interest, in
which case the stated redemption price at maturity of those Regular Securities
includes all distributions of interest as well as principal on the Regular
Securities. 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 Security is shorter than the
interval between subsequent Distribution Dates, the interest attributable to the
additional days will be included in the stated redemption price at maturity.
Under a DE MINIMIS rule, original issue discount on a Regular Security will
be considered to be zero if the original issue discount is less than 0.25% of
the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular Security is computed as the sum of the
amounts determined by multiplying the number of full years (i.e., rounding down
partial years) from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security. The
Conference Committee Report to the 1986 Act provides that the schedule of those
distributions should be determined in accordance with the assumed rate of
prepayment of the mortgage loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Securities. The
Prepayment Assumption for a series of Regular Securities will be set forth in
the prospectus supplement. Holders generally must report DE MINIMIS original
issue discount pro rata as principal payments are received, and that income will
generally be capital gain if the Regular Security is held as a capital asset.
Under the OID Regulations, however, Regular Securityholders may elect to accrue
all DE MINIMIS original issue discount as well as market discount and market
premium, under the constant yield method. See "--Election to Treat All Interest
Under the Constant Yield Method" below.
A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for each
day on which it holds the Regular Security, including the date of purchase but
excluding the date of disposition. The trustee will treat the monthly period
ending on the day before each Distribution Date as the accrual period. For each
Regular Security, a calculation will be made of the original issue discount that
accrues during each successive full accrual period (or shorter period from the
date of original issue) that ends on the day before the related Distribution
Date on the Regular Security. The Conference Committee Report to the 1986 Act
states that the rate of
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accrual of original issue discount is intended to be based on the Prepayment
Assumption. The original issue discount accruing in a full accrual period would
be the excess, if any, of:
(1) the sum of:
(a) the present value of all of the remaining distributions to
be made on the Regular Security as of the end of that accrual period
and
(b) the distributions made on the Regular Security during the
accrual period that are included in the Regular Security's stated
redemption price at maturity, over
(2) the adjusted issue price of the Regular Security at the beginning
of the accrual period.
The present value of the remaining distributions referred to in the preceding
sentence is calculated based on:
(1) the yield to maturity of the Regular Security at the issue
date; and
(2) the Prepayment Assumption.
For these purposes, the adjusted issue price of a Regular Security at the
beginning of any accrual period equals the issue price of the Regular Security,
increased by the total amount of original issue discount for the Regular
Security that accrued in all prior accrual periods and reduced by the amount of
distributions included in the Regular Security's stated redemption price at
maturity that were made on the Regular Security in those 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. For an initial accrual period shorter than a full accrual period, the
daily portions of original issue discount must be determined according to an
appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the mortgage loans that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. An increase in
prepayments on the mortgage loans for a series of Regular Securities can result
in both a change in the priority of principal payments for some Classes of
Regular Securities and either an increase or decrease in the daily portions of
original issue discount for those Regular Securities.
(3) Acquisition Premium
A purchaser of a Regular Security having original issue discount at a price
greater than its adjusted issue price but less than its stated redemption price
at maturity will be required to include in gross income the daily portions of
the original issue discount on the Regular Security reduced pro rata by a
fraction, the numerator of which is the excess of its purchase price over 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 that acquisition
premium under the constant yield method, as described below under the heading
"--Election to Treat All Interest Under the Constant Yield Method" below.
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(4) Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate. Under
the OID Regulations, interest is treated as payable at a qualified variable rate
if, generally, (1) the issue price does not exceed the original principal
balance by more than a specified amount, (2) it does not provide for any
principal payments that are contingent, within the meaning of the OID
Regulations, except as provided in (1), and (3) the interest compounds or is
payable at least annually at current values of
(a) one or more "qualified floating rates,"
(b) a single fixed rate and one or more qualified floating rates,
(c) a single "objective rate," or
(d) a single fixed rate and a single objective rate that is a "qualified
inverse floating rate."
A floating rate is a qualified floating rate if variations can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. A multiple of a qualified floating rate is considered a qualified
floating rate only if the rate is equal to either (a) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35 or (b) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35, increased or decreased by a fixed
rate. That rate may also be subject to a fixed cap or floor, or a cap or floor
that is not reasonably expected as of the issue date to affect the yield of the
instrument significantly. An objective rate is any rate (other than a qualified
floating rate) that is determined using a single fixed formula and that is based
on objective financial or economic information, provided that the information is
not (1) within the control of the issuer or a related party or (2) unique to the
circumstances of the issuer or a related party. However, an objective rate does
not include a rate if it is reasonably expected that the average value of such
rate during the first half of the Regular Security's term will be either
significantly less than or significantly greater than the average value of the
rate during the final half of the Regular Security's term. 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 qualified floating
rate; an inverse floating rate that is not a qualified inverse floating rate may
nevertheless be an objective rate. A Class of Regular Securities may be issued
under this prospectus that does not have a qualified variable rate under the
foregoing rules, for example, a Class that bears different rates at different
times during the period it is outstanding that it is considered significantly
"front-loaded" or "back-loaded" within the meaning of the OID Regulations. It is
possible that a Class may be considered to bear "contingent interest' within the
meaning of the OID Regulations. The OID Regulations, as they relate to the
treatment of contingent interest, are by their terms not applicable to Regular
Securities. However, if final regulations dealing with contingent interest for
Regular Securities apply the same principles as the OID Regulations, those
regulations may lead to different timing of income inclusion than would be the
case under the OID Regulations. Furthermore, application of those principles
could lead to the characterization of gain on the sale of contingent interest
Regular Securities as ordinary income. Investors should consult their tax
advisors regarding the appropriate treatment of any Regular Security that does
not pay interest at a fixed rate or qualified variable rate as described in this
paragraph.
The amount of original issue discount for a Regular Security bearing a
qualified variable rate of interest will accrue in the manner described above
under "--Original Issue Discount," with the yield to maturity and future
payments on that Regular Security generally to be determined by assuming that
interest will be payable for the life of the Regular Security based on the
initial rate (or, if different, the value of the applicable variable rate as of
the pricing date) for the relevant Class, if the Class bears interest at a
qualified floating rate or qualified inverse floating rate, or based on a fixed
rate which reflects the reasonably expected yield for the relevant Class, if the
Class bears interest at an objective rate (other than a qualified inverse
floating rate). Unless required otherwise by applicable final
93
regulations, it is anticipated that the trustee will treat interest, other than
variable interest on an interest-only or super-premium Class, as qualified
stated interest at the qualified variable rate. However, the qualified stated
interest allocable to an accrual period will be increased (or decreased) if the
interest actually paid during the accrual period exceed (or is less than) the
interest assumed to be paid under the rate just described.
(5) Market Discount
A subsequent purchaser of a Regular Security also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Security (1) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified stated
interest payments due on a Regular Security, or (2) in the case of a Regular
Security having original issue discount, is exceeded by the adjusted issue price
of that Regular Security at the time of purchase. The purchaser generally will
be required to recognize ordinary income to the extent of accrued market
discount on that Regular Security as distributions includible in the stated
redemption price at maturity of the Regular Security are received, in an amount
not exceeding that distribution. The 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
these regulations are issued, the market discount would accrue either (1) on the
basis of a constant interest rate, or (2) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for that period plus
the remaining interest as of the end of that period, or in the case of a Regular
Security issued with original issue discount, in the ratio of original issue
discount accrued for the relevant period to the sum of the original issue
discount accrued for that period plus the remaining original issue discount as
of the end of that period. The purchaser also generally will be required to
treat a portion of any gain on a sale or exchange of the Regular Security as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial distributions in reduction of
the stated redemption price at maturity were received. The purchaser will be
required to defer deduction of a portion of the excess of the interest paid or
accrued on indebtedness incurred to purchase or carry a Regular Security over
the interest distributable on the Regular Security. The deferred portion of the
interest expense in any taxable year generally will not exceed the accrued
market discount on the Regular Security for that 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 Security is
disposed of.
As an alternative to the inclusion of market discount in income on the
foregoing basis, the Regular Securityholder may elect to include market discount
in income currently as it accrues on all market discount instruments acquired by
the Regular Securityholder in that taxable year or thereafter, in which case the
interest deferral rule will not apply. See "--Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in which
that election may be deemed to be made. A person who purchases a Regular
Security at a price lower than the remaining amounts includible in the stated
redemption price at maturity of the security, but higher than its adjusted issue
price, does not acquire the Regular Security with market discount, but will be
required to report original issue discount, appropriately adjusted to reflect
the excess of the price paid over the adjusted issue price.
Market discount for a Regular Security 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 Security (or, in the case of a Regular Security having
original issue discount, the adjusted issue price of that Regular Security)
multiplied by the weighted average maturity of the Regular Security (presumably
determined as described above in the third paragraph under "--Original Issue
Discount" above) remaining after
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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 uncertainty exists with respect to many aspects of those rules.
Due to the substantial lack of regulatory guidance with respect to the market
discount rules, it is unclear how those rules will affect any secondary market
that develops for a particular Class of Regular Securities. Prospective
investors in Regular Securities should consult their own tax advisors regarding
the application of the market discount rules to the Regular Securities and the
elections to include market discount in income currently and to accrue market
discount on the basis of the constant yield method.
(6) Amortizable Premium
A Regular Security purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds that Regular Security as a "capital
asset" within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize the premium under a constant yield
method that reflects compounding based on the interval between payments on the
Regular Security. The election will apply to all taxable debt obligations
(including REMIC regular interests) acquired by the Regular Securityholder at a
premium held in that taxable year or thereafter, unless revoked with the
permission of the Internal Revenue Service. 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 as the
Regular Securities, although it is unclear whether the alternatives to the
constant interest method described above under "Market Discount" are available.
Amortizable bond premium generally will be treated as an offset to interest
income on a Regular Security, rather than as a separate deductible 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.
(7) Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to treat
all interest that accrues on the instrument using the constant yield method,
with none of the interest being treated as qualified stated interest. For
purposes of applying the constant yield method to a debt instrument subject to
this election, (1) "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
(2) 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, the holder is deemed to
have made elections to amortize bond premium currently as it accrues under the
constant yield method for all premium bonds held by the holder in the same
taxable year or thereafter. Alternatively, if the holder makes this election for
a debt instrument with market discount, the holder is deemed to have made
elections to report market discount income currently as it accrues under the
constant yield method for all 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.
95
(8) Treatment of Losses
Regular Securityholders will be required to report income for Regular
Securities on the accrual method of accounting, without giving effect to delays
or reductions in distributions attributable to defaults or delinquencies on the
mortgage loans, except to the extent it can be established that the losses are
uncollectible. Accordingly, the holder of a Regular Security, particularly a
Subordinate Security, may have income, or may incur a diminution in cash flow as
a result of a default or delinquency, but may not be able to take a deduction
(subject to the discussion below) for the corresponding loss until a subsequent
taxable year. In this regard, investors are cautioned that while they may
generally cease to accrue interest income if it reasonably appears that the
interest will be 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 Securityholders that are corporations or
that otherwise hold the Regular Securities in connection with a trade or
business should in general be allowed to deduct as an ordinary loss that loss
with respect to principal sustained during the taxable year on account of any
Regular Securities becoming wholly or partially worthless, and that, in general,
Regular Securityholders that are not corporations and do not hold the Regular
Securities in connection with a trade or business should be allowed to deduct as
a short-term capital loss any loss sustained during the taxable year on account
of a portion of any Regular Securities becoming wholly worthless. Although the
matter is not free from doubt, non-corporate Regular Securityholders should be
allowed a bad debt deduction at the time the principal balance of the Regular
Securities 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 those
losses only after all the mortgage loans remaining in the trust fund have been
liquidated or the applicable Class of Regular Securities has been otherwise
retired. The Internal Revenue Service could also assert that losses on the
Regular Securities are deductible based on some other method that may defer
those deductions for all holders, such as reducing future cashflow for purposes
of computing original issue discount. This may have the effect of creating
"negative" original issue discount that may be deductible only against future
positive original issue discount or otherwise upon termination of the Class.
Regular Securityholders are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained for
their Regular Securities. 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
Securities in connection with a trade or business. Special loss rules may be
applicable to banks and thrift institutions. These taxpayers are advised to
consult their tax advisors regarding the treatment of losses on Regular
Securities.
(9) Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular Security.
The adjusted basis of a Regular Security generally will equal the original cost
of the Regular Security to the seller, increased by any original issue discount
or market discount previously included in the seller's gross income for the
Regular Security and reduced by amounts included in the stated redemption price
at maturity of the Regular Security that were previously received by the seller,
by any amortized premium, and by any recognized losses.
Except as described above regarding market discount, and except as provided
in this paragraph, any gain or loss on the sale or exchange of a Regular
Security realized by an investor who
96
holds the Regular Security as a capital asset will be capital gain or loss and
will be long-term or short-term depending on whether the Regular Security has
been held for the long-term capital gain holding period (currently, more than
one year). That gain will be treated as ordinary income
(1) if a Regular Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Securityholder's net
investment in the conversion transaction at 120% of the appropriate
applicable federal rate in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income for any
prior disposition of property that was held as part of that transaction;
(2) in the case of a non-corporate taxpayer, to the extent that the
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
(3) to the extent that the 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 that Regular Security 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 the holder for that
Regular Security (the "110% yield rule").
In addition, gain or loss recognized from the sale of a Regular Security by
some banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c). Long-term capital gains of noncorporate
taxpayers generally are subject to a lower maximum tax rate than ordinary income
of those taxpayers for property held for more than one year, with further rate
reductions for property held for more than five years. Currently, the maximum
tax rate for corporations is the same for both ordinary income and capital
gains.
TAXATION OF OWNERS OF RESIDUAL SECURITIES
(1) 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 Securities ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in that quarter
and by allocating that daily portion among the Residual Holders in proportion to
their respective holdings of Residual Securities in the REMIC Pool on that day.
REMIC taxable income is generally determined in the same manner as the taxable
income of an individual using the accrual method of accounting, except that
(1) the limitations on deductibility of investment interest expense
and expenses for the production of income do not apply;
(2) all bad loans will be deductible as business bad debts; and
(3) the limitation on the deductibility of interest and expenses
related to tax- exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount income
and market discount income, if any, on the mortgage loans, reduced by
amortization of any premium on the mortgage loans, plus income from amortization
of issue premium, if any, on the Regular Securities, plus income on reinvestment
of cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the Regular Securities. The REMIC Pool's
deductions include interest
97
and original issue discount expense on the Regular Securities, servicing fees on
the mortgage loans, other administrative expenses of the REMIC Pool and realized
losses on the mortgage loans. The 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 Notes or Certificates, as applicable, of any class of the
related series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium for the mortgage loans, on the one hand, and the timing
of deductions for interest (including original issue discount) or income from
amortization of issue premium on the Regular Securities, on the other hand. If
an interest in the mortgage loans is acquired by the REMIC Pool at a discount,
and one or more of these mortgage loans is prepaid, the prepayment may be used
in whole or in part to make distributions in reduction of principal on the
Regular Securities, and the discount on the mortgage loans that is includible in
income may exceed the original issue discount deductions allowed with respect to
the Regular Securities. When there is more than one Class of Regular Securities
that distribute principal sequentially, this mismatching of income and
deductions is particularly likely to occur in the early years following issuance
of the Regular Securities when distributions in reduction of principal are being
made in respect of earlier Classes of Regular Securities to the extent that
those Classes are not issued with substantial discount or are issued at a
premium. If taxable income attributable to that mismatching is realized, in
general, losses would be allowed in later years as distributions on the later
maturing Classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later years as
a result of the fact that interest expense deductions, expressed as a percentage
of the outstanding principal amount of that series of Regular Securities, may
increase over time as distributions in reduction of principal are made on the
lower yielding Classes of Regular Securities, whereas, to the extent the REMIC
Pool consists of fixed rate mortgage loans, interest income for any particular
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 that mismatching or unrelated deductions against which
to offset that income, subject to the discussion of "excess inclusions" below
under "--Limitations on Offset or Exemption of REMIC Income." The timing of
mismatching of income and deductions described in this paragraph, if present for
a series of Notes or Certificates, as applicable, may have a significant adverse
effect upon a Residual Holder's after-tax rate of return.
A portion of the income of a Residual Holder may be treated unfavorably in
three contexts:
(1) it may not be offset by current or net operating loss deductions;
(2) it will be considered unrelated business taxable income to
tax-exempt entities; and
(3) it is ineligible for any statutory or treaty reduction in the 30%
withholding tax otherwise available to a foreign Residual Holder.
See "--Limitations on Offset or Exemption of REMIC Income" below. In addition, a
Residual Holder's taxable income during some periods may exceed the income
reflected by those Residual Holders for those periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Securities.
98
(2) Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Holder is limited to the adjusted basis of the Residual Security
as of the close of the quarter (or time of disposition of the Residual Security
if earlier), determined without taking into account the net loss for the
quarter. The initial adjusted basis of a purchaser of a Residual Security is the
amount paid for that Residual Security. The adjusted basis will be increased by
the amount of taxable income of the REMIC Pool reportable by the Residual Holder
and will be decreased (but not below zero), first, by a cash distribution from
the REMIC Pool and, second, by the amount of loss of the REMIC Pool reportable
by the Residual Holder. Any loss that is disallowed on account of this
limitation may be carried over indefinitely with respect to the Residual Holder
as to whom the loss was disallowed and may be used by the Residual Holder only
to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, if, in any year, cash distributions to a Residual
Holder exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its
Residual Security. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the Residual Holder (but
not below zero). If a Residual Security's basis is reduced to zero, any cash
distributions with respect to that Residual Security in any taxable year in
excess of its share of the REMIC's income would be taxable to the holder as gain
on the sale or exchange of its interest in the REMIC.
A Residual Security may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price of the residual interest
as zero rather than the negative amount for purposes of determining the REMIC
Pool's basis in its assets. The preamble to the REMIC Regulations states that
the Internal Revenue Service may provide future guidance on the proper tax
treatment of payments made by a transferor of the residual interest to induce
the transferee to acquire the interest, and Residual Holders should consult
their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Security is greater than the
corresponding portion of the REMIC Pool's basis in the mortgage loans, the
Residual Holder will not recover a portion of the basis until termination of the
REMIC Pool unless future Treasury regulations provide for periodic adjustments
to the REMIC income otherwise reportable by the holder. The REMIC Regulations
currently in effect do not so provide. See "--Treatment of Certain Items of
REMIC Income and Expense--Market Discount" below regarding the basis of mortgage
loans to the REMIC Pool and "--Sale or Exchange of a Residual Security" below
regarding possible treatment of a loss upon termination of the REMIC Pool as a
capital loss.
(3) Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the trustee will compute REMIC income and
expense in accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The depositor makes no representation as to the
specific method that will be used for reporting income with respect to the
mortgage loans and expenses for the Regular Securities, and different methods
could result in different timing or reporting of taxable income or net loss to
Residual Holders or differences in capital gain versus ordinary income.
ORIGINAL ISSUE DISCOUNT AND PREMIUM. Generally, the REMIC Pool's deductions
for original issue discount and income from amortization of premium will be
determined in the same manner as original issue discount income on Regular
Securities as described above under "Taxation of Owners of Regular
99
Securities Original Issue Discount" and "--Variable Rate Regular Securities,"
without regard to the DE MINIMIS rule described therein, and "--Amortizable
Premium."
MARKET DISCOUNT. The REMIC Pool will have market discount income in respect
of mortgage loans if, in general, the basis of the REMIC Pool in those mortgage
loans is exceeded by their unpaid principal balances. The REMIC Pool's basis in
those mortgage loans is generally the fair market value of the mortgage loans
immediately after the transfer of the mortgage loans to the REMIC Pool. The
REMIC Regulations provide that the basis is equal to the total of the issue
prices of all regular and residual interests in the REMIC Pool. The market
discount must be recognized currently as an item of ordinary income as it
accrues, rather than being included in income upon the sale of mortgage loans or
as principal on the mortgage loans is paid. Market discount income generally
should accrue in the manner described above under "--Taxation of Owners of
Regular Securities--Market Discount."
PREMIUM. Generally, if the basis of the REMIC Pool in the mortgage loans
exceeds the unpaid principal balances of the mortgage loans, the REMIC Pool will
be considered to have acquired those mortgage loans at a premium equal to the
amount of that excess. As stated above, the REMIC Pool's basis in mortgage loans
is generally the fair market value of the mortgage loans and is based on the
total of the issue prices of the regular and residual interests in the REMIC
Pool immediately after the transfer of the mortgage loans to the REMIC Pool. In
a manner analogous to the discussion above under "--Taxation of Owners of
Regular Securities Amortizable Premium," a person that holds a mortgage loan 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 borrowers on the mortgage loans are
expected to be individuals, Code Section 171 will not be available for premium
on mortgage loans originated on or before September 27, 1985. Premium for those
mortgage loans may be deductible in accordance with a reasonable method
regularly employed by the holder of those mortgage loans. The allocation of that
premium pro rata among principal payments should be considered a reasonable
method; however, the Internal Revenue Service may argue that the premium should
be allocated in a different manner, such as allocating the premium entirely to
the final payment of principal.
(4) 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
Security over the daily accruals for that quarterly period of (1) 120% of the
long-term applicable federal rate that would have applied to the Residual
Security (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (2) the adjusted issue price of the Residual Security at
the beginning of the quarterly period. For this purpose, the adjusted issue
price of a Residual Security at the beginning of a quarter is the issue price of
the Residual Security, plus the amount of those daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made with respect to the Residual Security before the beginning of
that quarterly period.
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 carry-forwards, 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 the
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax for persons who are not U.S. Persons
(as defined below under "--Tax-Related Restrictions on Transfer of Residual
100
Securities--Foreign Investors"), and the portion thereof attributable to excess
inclusions is not eligible for any reduction in the rate of withholding tax (by
treaty or otherwise). See "--Taxation of Certain Foreign Investors Residual
Securities" below. Finally, if a real estate investment trust or a regulated
investment company owns a Residual Security, a portion (allocated under Treasury
regulations yet to be issued) of dividends paid by the real estate investment
trust or regulated investment company could not be offset by net operating
losses of its shareholders, would constitute unrelated business taxable income
for tax-exempt shareholders, and would be ineligible for reduction of
withholding to persons who are not U.S. Persons.
Provisions governing the relationship between excess inclusions and the
alternative minimum tax provide that (i) alternative minimum taxable income for
a Residual Holder is determined without regard to the special rule, discussed
above, that taxable income cannot be less than excess inclusions, (ii) a
Residual Holder's alternative minimum taxable income for a taxable year cannot
be less than the excess inclusions for the year, and (iii) the amount of any
alternative minimum tax net operating loss deduction must be computed without
regard to any excess inclusions.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the Residual Securities is not
considered to be "significant," then the entire share of REMIC taxable income of
a Residual Holder may be treated as excess inclusions subject to the foregoing
limitations. This authority has not been exercised to date.
(5) Tax-Related Restrictions on Transfer of Residual Securities
DISQUALIFIED ORGANIZATIONS. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (1) the
present value of the total anticipated excess inclusions for that Residual
Security for periods after the transfer and (2) 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. That 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. That tax
generally would be imposed on the transferor of the Residual Security, 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 Security would in no
event be liable for the tax for a transfer if the transferee furnished to the
transferor an affidavit stating that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false. Under the REMIC Regulations, an
affidavit will be sufficient if the transferee furnishes (A) a social security
number, and states under penalties of perjury that the social security number is
that of the transferee, or (B) a statement under penalties of perjury that it is
not a disqualified organization.
"Disqualified Organization" means the United States, any state or political
subdivision of the United States, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing (provided,
that the term does not include an instrumentality if all of its activities are
subject to tax and a majority of its board of directors in not selected by any
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 531) that is exempt from taxation under the Code
unless the organization is subject to the tax on unrelated business income
imposed by Code Section 511.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income for a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an
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equity interest in that entity, then a tax is imposed on the entity equal to the
product of (1) the amount of excess inclusions that are allocable to the
interest in the Pass-Through Entity during the period that interest is held by
the Disqualified Organization, and (2) the highest marginal federal corporate
income tax rate. That 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 the tax if (1) it has received an affidavit from the record holder
stating, under penalties of perjury, that it is not a Disqualified Organization,
or providing the holder's taxpayer identification number and stating, under
penalties of perjury, that the social security number is that of the record
owner, and (2) during the period that person is the record holder of the
Residual Security, the Pass-Through Entity does not have actual knowledge that
the affidavit is false.
"Pass-Through Entity" means any regulated investment company, real estate
investment trust, common trust fund, partnership, trust or estate and
corporations operating on a cooperative basis. Except as may be provided in
Treasury regulations, any person holding an interest in a Pass-Through Entity as
a nominee for another will, with respect to that interest, be treated as a
Pass-Through Entity.
If an "electing large partnership" holds a Residual Security, all interests
in the electing large partnership are treated as held by Disqualified
Organizations for purposes of the tax imposed upon a Pass-Through Entity by
Section 860E(c) of the Code. The exception to this tax, otherwise available to a
Pass-Through Entity that is furnished particular affidavits by record holders of
interests in the entity and that does not know those affidavits are false, is
not available to an electing large partnership.
The pooling and servicing agreement for a series will provide that no legal
or beneficial interest in a Residual Security may be transferred or registered
unless (1) the proposed transferee furnished to the transferor and the trustee
an affidavit providing its taxpayer identification number and stating that the
transferee is the beneficial owner of the Residual Security and is not a
Disqualified Organization and is not purchasing the Residual Security on behalf
of a Disqualified Organization (i.e., as a broker, nominee or middleman) and (2)
the transferor provides a statement in writing to the trustee that it has no
actual knowledge that the affidavit is false. Moreover, the pooling and
servicing agreement will provide that any attempted or purported transfer in
violation of these transfer restrictions will be null and void and will vest no
rights in any purported transferee. Each Residual Security for a series will
bear a legend referring to those restrictions on transfer, and each Residual
Holder will be deemed to have agreed, as a condition of ownership of the
Residual Security, to any amendments to the related pooling and servicing
agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Seller or the
trustee may charge a fee for computing and providing that information.
NONECONOMIC RESIDUAL INTERESTS. The REMIC Regulations would disregard some
transfers of Residual Securities, in which case the transferor would continue to
be treated as the owner of the Residual Securities and thus would continue to be
subject to tax on its allocable portion of the net income of the REMIC Pool.
Under the REMIC Regulations, a transfer of a "noneconomic residual interest" (as
defined below) to a Residual Holder (other than a Residual Holder who is not a
U.S. Person as defined below under "--Foreign Investors") is disregarded to 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, (1) 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 (2) 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
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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 (1) 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, (2) the transferee represents to
the transferor that it understands that, as the holder of the non-economic
residual interest, the transferee may incur liabilities in excess of any cash
flows generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due, and (3) either
the formula test or the asset test (each as described below) is satisfied.
The formula test is satisfied if the present value of the anticipated tax
liabilities associated with holding the Residual Security does not exceed the
sum of the present values of (1) any consideration given to the transferee to
the acquire the Residual Security, (2) the expected future distributions on the
Residual Security, and (3) the anticipated tax savings associated with holding
the Residual Security as the REMIC generates losses. For purposes of this
calculation, the present values generally are calculated using a discount rate
equal to the applicable federal rate, and the transferee is assumed to pay tax
at the highest corporate rate of tax.
The asset test is satisfied if
1. at the time of the transfer of the Residual Security, and at the close
of each of the transferee's two fiscal years preceding the year of
transfer, the transferee's gross assets for financial reporting
purposes exceed $100 million and its net assets for financial
reporting purposes exceed $10 million,
2. the transferee is a taxable domestic C corporation, other than a RIC,
REIT, REMIC or Subchapter T cooperative (an "Eligible Corporation"),
that makes a written agreement that any subsequent transfer of the
Residual Security will be to another Eligible Corporation in a
transaction that satisfies the safe harbor described above, and the
transferor does not know, or have reason to know, that the transferee
will not honor such agreement, and
3. the facts and circumstances known to the transferor on or before the
date of transfer do not reasonably indicate that the taxes associated
with the Residual Security will not be paid.
For purposes of requirement (1), the gross and net assets of a transferee do not
include any obligations of a person related to the transferee or any other asset
if a principal purpose for holding or acquiring the asset is to permit the
transferee to satisfy the asset test. Further, requirement (2) will not be
treated as satisfied in the case of any transfer or assignment of the Residual
Security to a foreign branch of an Eligible Corporation or any other arrangement
by which the Residual Security is at any time subject to net tax by a foreign
country or possession of the United States.
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless the
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that (1) the future distributions on the Residual Security
will equal at least 30% of the anticipated excess inclusions after the transfer,
and (2) such
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amounts will be distributed at or after the time at which the excess inclusions
accrue and before the end of the next succeeding taxable year. A safe harbor in
the REMIC Regulations provides that the reasonable expectation requirement will
be satisfied if the above test would be met at all assumed prepayment rates for
the mortgage loans from 50 percent to 200 percent of the Prepayment Assumption.
If the non-U.S. Person transfers the Residual Security back to a U.S. Person,
the transfer will be disregarded and the foreign transferor will continue to be
treated as the owner unless arrangements are made so that the transfer does not
have the effect of allowing the transferor to avoid tax on accrued excess
inclusions.
The prospectus supplement relating to the Certificates of a series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which the transfer may be made. The term "U.S. Person"
means a citizen or resident of the United States, a corporation or partnership
(or other entity properly treated as a partnership or as a corporation for
federal income tax purposes) created or organized in or under the laws of the
United States or of any state (including, for this purpose, the District of
Columbia), an estate that is subject to U.S. federal income tax regardless of
the source of its income, or a trust if a court within the United States is able
to exercise primary supervision over the administration of 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, trusts in
existence on August 20, 1996, which are eligible to elect and do elect to be
treated as U.S. Persons).
(6) Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder will
recognize gain or loss equal to the excess, if any, of the amount realized over
the adjusted basis (as described above under "--Taxation of Owners of Residual
Securities--Basis and Losses") of the Residual Holder in the Residual Security
at the time of the sale or exchange.
Further, as described above under "--Taxation of Owners of Residual
Securities--Basis and Losses", if a Residual Security's basis is reduced to
zero, any cash distributions with respect to that Residual Security in any
taxable year in excess of its share of the REMIC's income for that year would be
taxable to the holder as gain on the sale or exchange of its interest in the
REMIC. If a Residual Holder has an adjusted basis in its Residual Security when
its interest in the REMIC Pool terminates, then it will recognize a capital loss
(assuming the Residual Security was held as a capital asset) at that time in an
amount equal to the remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (1) if a Residual Security is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the Residual Holder's net investment in the conversion transaction at
120% of the appropriate applicable federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income for any prior disposition of property that was held as a part of
that transaction or (2) in the case of a non-corporate taxpayer, to the extent
that the taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates. In addition,
gain or loss recognized from the sale of a Residual Security by some banks or
thrift institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
Except as provided in Treasury regulations yet to be issued, the wash sale
rules of Code Section 1091 will apply to dispositions of Residual Securities
where the seller of the Residual Security, during the period beginning six
months before the sale or disposition of the Residual Security and ending six
months after the sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual Security.
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(7) Mark to Market Regulations
Treasury regulations provide that a Residual Security acquired on or after
January 4, 1995 is not treated as a security and thus may not be marked to
market pursuant to Section 475 of the Code.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
(1) Prohibited Transactions
Income from 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:
(1) the disposition of a qualified mortgages other than for
(a) substitution for a defective (including a defaulted)
obligation within two years of the Startup Day (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;
(2) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold;
(3) the receipt of compensation for services; or
(4) the receipt of gain from disposition of cash flow investments
other than pursuant to a qualified liquidation.
Notwithstanding (1) and (4) above, it is not a prohibited transaction to
sell a qualified mortgage or cash flow investment held by a REMIC Pool to
prevent a default on Regular Securities as a result of a default on qualified
mortgages or to facilitate a clean-up call (generally, an optional termination
to save administrative costs when no more than a small percentage of the Notes
or Certificates, as applicable, is outstanding). The REMIC Regulations indicate
that the modification of a mortgage loan generally will not be treated as a
disposition if it is occasioned by a default or reasonably foreseeable default,
an assumption of the mortgage loan, the waiver of a due-on-sale or
due-on-encumbrance clause, or the conversion of an interest rate by a borrower
pursuant to the terms of a convertible adjustable rate mortgage loan.
(2) 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
(1) during the three months following the Startup Day,
(2) made to a qualified reserve fund by a Residual Holder,
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(3) in the nature of a guarantee,
(4) made to facilitate a qualified liquidation or clean-up call, and
(5) 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.
(3) Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" until the close of the third calendar year after the year
in which the REMIC Pool acquired that property, with possible extensions. 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.
(4) 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 that adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on that date, the REMIC Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular Securities
and Residual Holders within the 90-day period.
(5) 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 the 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. The master servicer will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, for the REMIC
Pool as agent of the Residual Holders holding the largest percentage interest in
the Residual Securities. If the Code or applicable Treasury regulations do not
permit the master servicer to act as tax matters person in its capacity as agent
of the Residual Holder, the Residual Holder or any other person specified
pursuant to Treasury regulations will be required to act as tax matters person.
The tax matters person generally has responsibility for overseeing and providing
notice to the other Residual Holders of administrative and judicial proceedings
regarding the REMIC Pool's tax affairs, although other holders of the Residual
Securities of the same series would be able to participate in those proceedings
in appropriate circumstances.
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(6) Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to some itemized deductions described in Code Section
67, to the extent that those itemized deductions, in total, do not exceed 2% of
the investor's adjusted gross income. In the case of a partnership that has 100
or more partners and elects to be treated as an "electing large partnership,"
70% of that partnership's miscellaneous itemized deductions will be disallowed,
although the remaining deductions will generally be allowed at the partnership
level and will not be subject to the 2% floor that would otherwise be applicable
to individual partners. 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 or (1) 3% of the excess, if any, of adjusted gross
income over $100,000 ($50,000 in the case of a married individual filing a
separate return) (subject to adjustment for inflation), or (2) 80% of the amount
of itemized deductions otherwise allowable for that year. In the case of a REMIC
Pool, those 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. Those investors who hold REMIC Securities either
directly or indirectly through pass-through entities may have their pro rata
share of those expenses allocated to them as additional gross income, but may be
subject to that limitation on deductions. In addition, those expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause those investors to be subject to significant additional tax liability.
Temporary Treasury regulations provide that the additional gross income and
corresponding amount of expenses generally are to be allocated entirely to the
holders of Residual Securities in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election. For a
REMIC Pool that would be classified as an investment trust in the absence of a
REMIC election or that is substantially similar to an investment trust, any
holder of a Regular Security that is an individual, trust, estate, or
pass-through entity also will be allocated its pro rata share of those expenses
and a corresponding amount of income and will be subject to the limitations or
deductions imposed by Code Sections 67 and 68, as described above. The
prospectus supplement will indicate if all those expenses will not be allocable
to the Residual Securities.
TAXATION OF CERTAIN FOREIGN INVESTORS
(1) Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (1) the interest is not effectively connected
with the conduct of a trade or business in the United States of the
securityholder, (2) the NonU.S. Person is not a "10-percent shareholder" within
the meaning of Code Section 871(h)(3)(B) or a controlled foreign corporation
described in Code Section 881 (c) (3) (C) and (3) that Non-U. S. Person complies
to the extent necessary with certain certification requirements, which generally
relate to the identity of the beneficial owner and the status of the beneficial
owner as a person that is a Non-U.S. person. Each Regular Securityholder should
consult its tax advisors regarding the tax documentation and certifications that
must be provided to secure the exemption from United States withholding taxes.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Regular Security by a Non-U.S. Person generally will be
exempt from United States federal income and withholding tax, provided that (i)
such gain is not effectively connected with the conduct of a trade or business
in the United States by the Non-U.S. Person and (ii) in the case of an
individual Non-U.S. Person, the Non-U.S. Person is not present in the United
States for 183 days or more in the taxable year.
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If the interest on the Regular Security is effectively connected with the
conduct of a trade or business within the United States by that Non-U.S. Person,
the Non-U.S. Person, although exempt from the withholding tax previously
discussed if the holder provides an appropriate statement establishing that such
income is so effectively connected, will be subject to United States federal
income tax at regular rates. Investors who are Non-U.S. Persons should consult
their own tax advisors regarding the specific tax consequences to them of owning
a Regular Security. The term "Non-U.S. Person" means any person who is not a
U.S. Person.
(2) Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Securities" above, but only to the extent that (1) the
mortgage loans were issued after July 18, 1984, and (2) the trust fund or
segregated pool of assets in the trust fund (as to which a separate REMIC
election will be made), to which the Residual Security relates, consists of
obligations issued in "registered form" within the meaning of Code Section 163
(f) (1). Generally, mortgage loans will not be, but regular interests in another
REMIC Pool will be, considered obligations issued in registered form.
Furthermore, Residual Holders will not be entitled to any exemption from the 30%
withholding tax (or lower treaty rate) to the extent of that portion of REMIC
taxable income that constitutes an "excess inclusion." See "--Taxation of Owners
of Residual Securities. Limitations on Offset or Exemption of REMIC Income"
above. 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 those Non-U.S. Persons, although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement
establishing that such income is so effectively connected, the amounts paid to
those Non-U.S. Persons will be subject to United States federal income tax at
regular rates. See "--Tax-Related Restrictions on Transfer of Residual
Securities--Foreign Investors" above concerning the disregard of 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 Securities.
(3) Backup Withholding
Distributions made on the REMIC Securities, and proceeds from the sale of
the REMIC Securities to or through certain brokers, may be subject to a "backup"
withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under some
circumstances, principal distributions) if the Holder fails to comply with
certain identification procedures, unless the Holder is otherwise an exempt
recipient under applicable provisions of the Code, and, if necessary,
demonstrates such status. Any amounts to be withheld from distribution on the
REMIC Securities would be refunded by the Internal Revenue Service or allowed as
a credit against the Regular Holder's federal income tax liability.
FASITs
CLASSIFICATION OF FASITS
For each series of FASIT Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Stroock & Stroock & Lavan LLP, the related trust fund (or each applicable
portion of the trust fund) will qualify as a FASIT. The trust fund will qualify
under the Code as a FASIT in which FASIT regular securities (the "FASIT Regular
Securities") and the ownership interest security (the "FASIT Ownership
Security") will constitute the "regular interests" and the "ownership interest,"
respectively, if
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(1) a FASIT election is in effect;
(2) tests concerning
(a) the composition of the FASIT's assets and
(b) the nature of the securityholders' interests in the FASIT
are met on a continuing basis; and
(3) the trust fund is not a regulated investment company as defined
in Section 851(a) of the Code.
A segregated pool of assets may also qualify as a FASIT.
(1) Asset Composition
In order for the trust fund to be eligible for FASIT status, substantially
all of the assets of the trust fund must consist of "permitted assets" as of the
close of the third month beginning after the closing date and at all times
thereafter. Permitted assets include:
(1) cash or cash equivalents;
(2) debt instruments with fixed terms that would qualify as regular
interests if issued by a REMIC as defined in Section 860D of the Code
(generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only type rate);
(3) foreclosure property;
(4) some hedging instruments (generally, interest and currency rate
swaps and credit enhancement contracts) that are reasonably required to
guarantee or hedge against the FASIT's risks associated with being the
obligor on FASIT interests;
(5) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments;
(6) FASIT regular interests; and
(7) REMIC regular interests.
Permitted assets do not include any debt instruments issued by the holder
of the FASIT's ownership interest or by any person related to that holder. A
debt instrument is a permitted asset only if the instrument is indebtedness for
federal income tax purposes, including regular interests in a REMIC or regular
interests issued by another FASIT, and it bears (1) fixed interest or (2)
variable interest of a type that relates to qualified variable rate debt (as
defined in Treasury regulations prescribed under section 860G(a)(1)(B)).
Permitted hedges include interest rate or foreign currency notional principal
contracts, letters of credit, insurance, guarantees against payment default and
similar instruments to be provided in regulations, and which are reasonably
required to guarantee or hedge against the FASIT's risks associated with being
the obligor on interests issued by the FASIT. Foreclosure property is real
property acquired by the FASIT in connection with the default or imminent
default of a debt instrument, provided the depositor had no knowledge or reason
to know as of the date the debt instrument was acquired by the FASIT that a
default had occurred or would occur.
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(2) Interests in a FASIT
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet specific requirements. All of the interests
in a FASIT must belong to either of the following:
(1) one or more classes of regular interests or
(2) a single class of ownership interest that is held by an Eligible
Corporation (as defined in this prospectus).
FASIT regular interests generally will be treated as debt for federal
income tax purposes. FASIT ownership interests generally will not treated as
debt for federal income tax purposes, but rather as representing rights and
responsibilities with respect to the taxable income or loss of the related
FASIT. The prospectus supplement for each Series of Notes or Certificates, as
applicable, will indicate which securities of the Series will be designated as
regular interests, and which, if any, will be designated as ownership interests.
A FASIT interest generally qualifies as a regular interest if:
(1) it is designated as a regular interest;
(2) it has a stated maturity no greater than thirty years;
(3) it entitles its holder to a specified principal amount;
(4) the issue price of the interest does not exceed 125% of its
stated principal amount;
(5) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%; and
(6) if it pays interest, this interest is payable at either:
(a) a fixed rate with respect to the principal amount of the
regular interest or
(b) a permissible variable rate with respect to the principal
amount.
Permissible variable rates for FASIT regular interests are the same as those for
REMIC regular interests. See "REMICs--Taxation of Owners of Regular
Securities--(1) General" for a discussion of permissible variable rates for
REMIC regular interests.
If an interest in a FASIT fails to meet one or more of the requirements set
out in clauses (3), (4), or (5) in the immediately preceding paragraph, but
otherwise meets all requirements to be treated as a FASIT, it may still qualify
as a type of regular interest known as a "high-yield interest." In addition, if
an interest in a FASIT fails to meet the requirement of clause (6), but the
interest payable on the interest consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the life of the
security, the interest will also qualify as a high-yield interest.
See "--Taxation of Owners of FASIT Regular Securities," "--Taxation of
Owners of High-Yield Interests" and "--Taxation of FASIT Ownership Securities"
below.
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(3) Consequences of Disqualification
If the trust fund fails to comply with one or more of the Code's ongoing
requirements for FASIT status during any taxable year, the Code provides that
it's FASIT status may be lost for that year and thereafter. If FASIT status is
lost, the treatment of the former FASIT and interests in the FASIT for U.S.
federal income tax purposes is uncertain. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good faith, final
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the FASIT's income for the period of time in which
the requirements for FASIT status are not satisfied.
TAXATION OF OWNERS OF FASIT REGULAR SECURITIES
(1) General
Payments received by holders of FASIT Regular Securities generally will be
accorded the same tax treatment under the Code as payments received on other
taxable debt instruments. Holders of FASIT Regular Securities must report income
from these Notes or Certificates, as applicable, under an accrual method of
accounting, even if they otherwise would have used the cash receipts and
disbursements method. Except in the case of FASIT Regular Securities issued with
original issue discount, interest paid or accrued on a FASIT Regular Security
generally will be treated as ordinary income to the Holder and a principal
payment on the security will be treated as a return of capital to the extent
that the securityholder's basis is allocable to that payment.
(2) Original Issue Discount; Market Discount; Acquisition Premium
FASIT Regular Securities issued with original issue discount or acquired
with market discount or acquisition premium generally will treat interest and
principal payments on these Notes or Certificates, as applicable, in the same
manner described for REMIC Regular Securities. See "--REMICs--Taxation of Owners
of Regular Securities" above.
(3) Sale or Exchange
If the FASIT Regular Securities are sold, the holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "--REMICs-- Taxation of Owners of Regular
Securities--Sale or Exchange of Regular Securities."
TAXATION OF OWNERS OF HIGH-YIELD INTERESTS
(1) General
The treatment of high-yield interests is intended to ensure that the return
on instruments issued by a FASIT yielding an equity-like return continues to
have a corporate level tax. Highyield interests are subject to special rules
regarding the eligibility of holders of this interest, and the ability of these
holders to offset income derived from their FASIT Security with losses.
High-yield interests may only be held by Eligible Corporations, other
FASITs, and dealers in securities who acquire such interests as inventory
(together, "Eligible Holders").
o An "Eligible Corporation" is a taxable domestic C corporation that
does not qualify as a regulated investment company, a real estate
investment trust, a REMIC, or a cooperative.
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If a securities dealer (other than an Eligible Corporation) initially
acquires a high-yield interest as inventory, but later begins to hold it for
investment, the dealer will be subject to an excise tax equal to the income from
the high-yield interest multiplied by the highest corporate income tax rate. In
addition, transfers of high-yield interests to a person that is not an Eligible
Holder will be disregarded for federal income tax purposes, and the transferor
will continue to be treated as the holder of the high-yield interest.
In addition, the FASIT Provisions contain an anti-abuse rule that imposes
corporate income tax on income derived from a FASIT Regular Interest that is
held by a pass-through entity (other than another FASIT) that issues debt or
equity securities backed by the FASIT Regular Interest and that have an original
yield to maturity that is both five percentage points above the applicable
federal rate and more than the yield on the FASIT Regular Interest. The excise
tax is limited to those arrangements that have a principal purpose of avoiding
the ownership restriction relating to high-yield interests.
(2) Treatment of Losses
The holder of a high-yield interest may not use non-FASIT current losses or
net operating loss carry-forwards or carrybacks to offset any income derived
from the high-yield interest, for either regular federal income tax purposes or
for alternative minimum tax purposes.
TAXATION OF FASIT OWNERSHIP SECURITY
(1) General
A FASIT Ownership Security represents the residual equity interest in a
FASIT. As such, the holder of a FASIT Ownership Security determines its taxable
income by taking into account all assets, liabilities, and items of income,
gain, deduction, loss, and credit of a FASIT. The holder, however, does not take
into account any item of income, gain or deduction allocable to a "prohibited
transaction" as discussed below. In general, the character of the income to the
holder of a FASIT Ownership Security will be the same as the character of the
income to the FASIT, except that any tax-exempt interest income taken into
account by the holder of a FASIT Ownership Security is treated as ordinary
income. In determining that taxable income, the holder of a FASIT Ownership
Security must determine the amount of interest, original issue discount, market
discount, and premium recognized with respect to each debt instrument held by
the FASIT according to a constant yield methodology and under an accrual method
of accounting. In addition, a holder of a FASIT Ownership Security is subject to
the same limitations on their ability to use losses to offset income from their
FASIT Regular Securities as are holders of high-yield interest. See "--Taxation
of Owners of High-Yield Interests" above.
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Security. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where
within six months before or after the disposition, the seller of the Security
acquires any other FASIT Ownership Security that is economically comparable to a
FASIT Ownership Security. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT Ownership Security
was required to be marked-to-market under Section 475 of the Code by the holder,
then Section 475 of the Code will continue to apply to these securities, except
that the amount realized under the mark-to-market rules cannot be less than the
securities' value determined after applying special valuation rules contained in
the FASIT Provisions. Those special valuation rules generally require that the
value of debt instruments that are not traded on an established securities
market be determined by calculating the present value of the reasonably expected
payments under the instrument using a discount rate of 120% of the applicable
federal rate, compounded semi-annually.
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(2) Prohibited Transaction
The holder of a FASIT Ownership Security is required to pay a penalty
excise tax equal to 100 percent of net income derived from:
(1) an asset that is not a permitted asset;
(2) any disposition of an asset other than a permitted disposition
(as described below);
(3) any income attributable to loans originated by the FASIT; and
(4) compensation for services (other than fees for a waiver,
amendment, or consent with respect to permitted assets other than
foreclosure property).
A permitted disposition is any disposition of any permitted asset:
(1) arising from complete liquidation of a class of regular interest;
(2) incident to the foreclosure, default (or imminent default) on the
asset;
(3) incident to the bankruptcy or insolvency of the FASIT;
(4) necessary to avoid a default on any indebtedness of the a FASIT
attributable to a default (or imminent default) on an asset of the FASIT;
(5) to facilitate a clean-up call; or
(6) to substitute a permitted debt instrument for another permitted
debt instrument or in order to reduce over-collateralization by
distributing a debt instrument contributed by the holder of the FASIT
Ownership Security to such holder, but only if a principal purpose of
acquiring the debt instrument which is disposed of was not the recognition
of gain (or the reduction of a loss) arising from an increase in its market
value after its acquisition by the FASIT.
Notwithstanding this rule, the holder of an Ownership Security may currently
deduct its losses incurred in prohibited transactions in computing its taxable
income for the year of the loss. A Series of Notes or Certificates, as
applicable, for which a FASIT election is made generally will be structured in
order to avoid application of the prohibited transactions tax.
(3) Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to the
same extent as holders of REMIC Securities.
GRANTOR TRUST FUNDS
CHARACTERIZATION. For each series of Grantor Trust Securities, Federal Tax
Counsel will deliver its opinion that the Grantor Trust Fund will not be
classified as an association taxable as a corporation and that the Grantor Trust
Fund will be classified as a grantor trust under subpart E, Part I of subchapter
J of the Code. In this case, beneficial owners of Grantor Trust Securities
(referred to in this Prospectus as "Grantor Trust Securityholders") will be
treated for federal income tax purposes as owners of a portion of the Grantor
Trust Fund's assets as described below.
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TAXATION OF GRANTOR TRUST SECURITYHOLDERS. Subject to the discussion below
under "Stripped Certificates" and "Subordinated Certificates," each Grantor
Trust Securityholder will be treated as the owner of a pro rata undivided
interest in the assets of the Grantor Trust Fund. Accordingly, and subject to
the discussion below of the recharacterization of the servicing fee, each
Grantor Trust Securityholder must include in income its pro rata share of the
interest and other income from the assets of the Grantor Trust Fund, including
any interest, original issue discount, market discount, prepayment fees,
assumption fees, and late payment charges with respect to the assets, and,
subject to limitations discussed below, may deduct its pro rata share of the
fees and other deductible expenses paid by the Grantor Trust Fund, at the same
time and to the same extent as these items would be included or deducted by the
Grantor Trust Securityholder if the Grantor Trust Securityholder held directly a
pro rata interest in the assets of the Grantor Trust Fund and received and paid
directly the amounts received and paid by the Grantor Trust Fund. Any amounts
received by a Grantor Trust Securityholder in lieu of amounts due with respect
to any asset of the Grantor Trust Fund because of a default or delinquency in
payment will be treated for federal income tax purposes as having the same
character as the payments they replace.
Each Grantor Trust Securityholder will be entitled to deduct its pro rata
share of servicing fees, prepayment fees, assumption fees, any loss recognized
upon an assumption and late payment charges retained by the servicer, provided
that these amounts are reasonable compensation for services rendered to the
Grantor Trust Fund. Grantor Trust Securityholders that are individuals, estates
or trusts will be entitled to deduct their share of expenses only to the extent
these expenses plus all other miscellaneous itemized deductions exceed two
percent of the Grantor Trust Securityholder's adjusted gross income, and will be
allowed no deduction for these expenses in determining their liabilities for
alternative minimum tax. In addition, Section 68 of the Code provides that the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds a prescribed threshold amount
will be reduced by the lesser of (1) 3% of the excess of adjusted gross income
over the specified threshold amount or (2) 80% of the amount of itemized
deductions otherwise allowable for the applicable taxable year. In the case of a
partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70% of the partnership's miscellaneous itemized
deductions will be disallowed, although the remaining deductions will generally
be allowed at the partnership level and will not be subject to the 2% floor that
would otherwise be applicable to individual partners.
The servicing compensation to be received by the servicer may be questioned
by the IRS as exceeding a reasonable fee for the services being performed in
exchange for the servicing compensation, and a portion of the servicing
compensation could be recharacterized as an ownership interest retained by the
servicer or other party in a portion of the interest payments to be made with
respect to the Grantor Trust Fund's assets. In this event, a certificate might
be treated as a Stripped Certificate subject to the stripped bond rules of
Section 1286 of the Code, and either the original issue discount or the market
discount rules. See the discussion below under "--Stripped Certificates". Except
as discussed below under "--Stripped Certificates" or "--Subordinated
Certificates," this discussion assumes that the servicing fees paid to the
servicer do not exceed reasonable servicing compensation.
A purchaser of a Grantor Trust Security will be treated as purchasing an
interest in each asset in the Grantor Trust Fund at a price determined by
allocating the purchase price paid for the certificate among all asset of the
Grantor Trust Fund in proportion to their fair market values at the time of the
purchase of the certificate. To the extent that the portion of the purchase
price of a Grantor Trust Security allocated to an asset of the Grantor Trust
Fund is less than or greater than the stated redemption price at maturity of the
asset, the interest in the asset will have been acquired at a discount or
premium. See "--Market Discount" and "--Premium," below.
The treatment of any discount on an asset of the Grantor Trust Fund will
depend on whether the discount represents original issue discount or market
discount. Except as indicated otherwise in
114
the applicable Prospectus Supplement, it is not expected that any asset of the
Grantor Trust Fund (other than a Stripped Agency Security or other instrument
evidencing ownership of specific interest and/or principal of a particular bond)
will have original issue discount (except as discussed below under "Stripped
Certificates" or "Subordinated Certificates"). For the rules governing original
issue discount, see "REMICs--Taxation of Owners of Regular Securities--Original
Issue Discount" above.
The information provided to Grantor Trust Securityholders will not include
information necessary to compute the amount of discount or premium, if any, at
which an interest in each asset of the Grantor Trust Fund is acquired.
MARKET DISCOUNT. A Grantor Trust Securityholder that acquires an undivided
interest in the Grantor Trust Fund's assets may be subject to the market
discount rules of Sections 1276 through 1278 to the extent an undivided interest
in an asset of the Grantor Trust Fund is considered to have been purchased at a
"market discount". For a discussion of the market discount rules under the Code,
see "REMICs--Taxation of Owners of Regular Securities--Market Discount" above.
As discussed above, to the extent an asset of the Grantor Trust Fund is a
Stripped Agency Security or other instrument evidencing ownership of specific
interest and/or principal of a particular bond, it will be subject to the rules
relating to original issue discount (in lieu of the rules relating to market
discount). See "REMICs--Taxation of Owners of Regular Securities--Original Issue
Discount" above.
PREMIUM. To the extent a Grantor Trust Securityholder is considered to have
purchased an undivided interest in an asset of the Grantor Trust Fund for an
amount that is greater than the stated redemption price at maturity of the
interest, the Grantor Trust Securityholder will be considered to have purchased
the interest in the asset with "amortizable bond premium" equal in amount to the
excess. For a discussion of the rules applicable to amortizable bond premium,
see "REMICs--Taxation of Owners of Regular Securities--Amortizable Premium"
above.
STATUS OF THE GRANTOR TRUST SECURITIES. Except for that portion of a trust
fund consisting of unsecured home improvement loans and except as qualified
below, a Grantor Trust Security owned by a:
o "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" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the
mortgage loans represented by that Grantor Trust Security is of the
type described in that section of the Code.
o real estate investment trust will be considered to represent "real
estate assets" within the meaning of Code Section 856(c)(4)(A) to the
extent that the assets of the related Grantor Trust Fund consist of
qualified assets, and interest income on those assets will be
considered "interest on obligations secured by mortgages on real
property" to that extent within the meaning of Code Section
856(c)(3)(B).
o REMIC will be considered to represent an "obligation (including any
participation or certificate of beneficial ownership therein) which is
principally secured by an interest in real property" within the
meaning of Code Section 860G(a)(3)(A) to the extent that the assets of
the related Grantor Trust Fund consist of "qualified mortgages" within
the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be characterized
in their entirety under the Code provisions cited in the first two bullet points
of the immediately preceding paragraph or whether the amount qualifying for that
treatment must be reduced by the amount of the Buydown Mortgage Funds. Further,
although it is not entirely clear, Grantor Trust Certificates that are Stripped
Certificates (as described below under "Stripped Certificates") should be
treated as qualifying under
115
the Code provisions cited in the bullet points above to the same extent as
Grantor Trust Certificates that are not Stripped Certificate. Grantor Trust
Securityholders are urged to consult their own tax advisors concerning the
characterization of the securityholder's investment for federal income tax
purposes.
STRIPPED CERTIFICATES. Some classes of certificates may be subject to the
stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates." In general, a
Stripped Certificate will be subject to the stripped bond rules where there has
been a separation of ownership of the right to receive some or all of the
principal payments on a mortgage loan held by the Grantor Trust Fund from
ownership of the right to receive some or all of the related interest payments.
Generally, where a separation has occurred, under the stripped bond rules of
Section 1286 of the Code, the holder of a right to receive a principal or
interest payment on the bond is required to accrue into income, on a constant
yield basis under rules governing original issue discount (see "REMICs Taxation
of Owners of Regular Securities--Original Issue Discount"), the difference
between the holder's initial purchase price for the right to receive principal
or interest, and the principal or interest payment to be received with respect
to that right. However, a holder of a Stripped Certificate will account for any
discount on the Stripped Certificate (other than an interest treated as a
"stripped coupon") as market discount rather than original issue discount if
either (i) the amount of original issue discount with respect to the Stripped
Certificate was treated as zero under the original issue discount DE MINIMIS
rule when the Stripped Certificate was stripped or (ii) no more than 100 basis
points (including any amount of servicing in excess of reasonable servicing) is
stripped off from the mortgage assets.
Certificates will constitute Stripped Certificates and will be subject to
these rules under various circumstances, including the following:
o if any servicing compensation is deemed to exceed a reasonable amount;
o if the company or any other party retains a retained yield with
respect to the assets held by the Grantor Trust Fund;
o if two or more classes of certificates are issued representing the
right to non-pro rata percentages of the interest or principal
payments on the Grantor Trust Fund's assets; or
o if certificates are issued which represent the right to interest-only
payments or principal-only payments.
The tax treatment of the Stripped Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the trustee intends to treat each Stripped Certificate as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Stripped Certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with the constant yield method
that takes into account the compounding of interest and this accrual of income
may be in advance of the receipt of any cash attributable to that income. See
"REMICs--Taxation of Owners of Regular Securities--Original Issue Discount"
above. For purposes of applying the original issue discount provisions of the
Code, the issue price of a Stripped Certificate will be the purchase price paid
by each holder of the Stripped Certificate and the stated redemption price at
maturity may include the aggregate amount of all payments to be made with
respect to the Stripped Certificate whether or not denominated as interest. The
amount of original issue discount with respect to a Stripped Certificate may be
treated as zero under the original issue discount DE MINIMIS rules described
above.
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SUBORDINATED CERTIFICATES. In the event the Grantor Trust Fund issues two
classes of Grantor Trust Securities that are identical except that one class is
a subordinate class, with a relatively high certificate pass-through rate, and
the other is a senior class, with a relatively low certificate pass-through rate
(referred to in this Prospectus as the "Subordinate Certificates" and "Senior
Certificates", respectively), the Grantor Trust Securityholders in the aggregate
will be deemed to have acquired the following assets: (1) the principal portion
of each mortgage loan plus a portion of the interest due on each mortgage loan
(the "Grantor Trust Fund Stripped Bond"), and (2) a portion of the interest due
on each mortgage loan equal to the difference between the Interest Rate on the
Subordinate Certificates and the Interest Rate on the Senior Certificates, if
any, which difference is then multiplied by the Subordinate Class Percentage
(the "Grantor Trust Fund Stripped Coupon"). The "Subordinate Class Percentage"
equals the initial aggregate principal amount of the Subordinate Certificates
divided by the sum of the initial aggregate principal amount of the Subordinate
Certificates and the Senior Certificates. The "Senior Class Percentage" equals
the initial aggregate principal amount of the Senior Certificates divided by the
sum of the initial aggregate principal amount of the Subordinate Certificates
and the Senior Certificates.
The Senior Certificateholders in the aggregate will own the Senior Class
Percentage of the Grantor Trust Fund Stripped Bond and accordingly each Senior
Certificateholder will be treated as owning its pro rata share of such asset.
The Senior Certificateholders will not own any portion of the Grantor Trust Fund
Stripped Coupon. The Subordinate Certificateholders in the aggregate own both
the Subordinate Class Percentage of the Grantor Trust Fund Stripped Bond plus
100% of the Grantor Trust Fund Stripped Coupon, if any, and accordingly each
Subordinate Certificateholder will be treated as owning its pro rata share in
both assets. The Grantor Trust Fund Stripped Bond will be treated as a "stripped
bond" and the Grantor Trust Fund Stripped Coupon will be treated as "stripped
coupons" within the meaning of Section 1286 of the Code.
Although not entirely clear, the interest income on the Subordinate
Certificates and the portion of the servicing fee allocable to such certificates
that does not constitute excess servicing will be treated by the Grantor Trust
Fund as qualified stated interest, assuming the interest with respect to the
mortgage loans held by the Grantor Trust Fund would otherwise qualify as
qualified stated interest. Accordingly, except to the extent modified below, the
income of the Subordinate Certificates will be reported in the same manner as
described generally above for holders of Senior Certificates.
If the Subordinate Certificateholders receive distribution of less than
their share of the Grantor Trust Fund's receipts of principal or interest (the
"Shortfall Amount") because of the subordination of the Subordinate
Certificates, holders of Subordinate Certificates would probably be treated for
federal income tax purposes as if they had
o received as distributions their full share of receipts;
o paid over to the Senior Certificateholders an amount equal to the
Shortfall Amount; and
o retained the right to reimbursement of the relevant amounts to the
extent these amounts are otherwise available as a result of
collections on the mortgage loans or amounts available from a reserve
account or other form of credit enhancement, if any.
Under this analysis,
o Subordinate Certificateholders would be required to accrue as current
income any interest income, original issue discount, or (to the extent
paid on assets of the Grantor Trust Fund) accrued market discount of
the Grantor Trust Fund that was a component of the Shortfall Amount,
even though that amount was in fact paid to the Senior
Certificateholders;
117
o a loss would only be allowed to the Subordinate Certificateholders
when their right to receive reimbursement of the Shortfall Amount
became worthless (i.e., when it becomes clear that amount will not be
available from any source to reimburse the loss); and
o reimbursement of the Shortfall Amount prior to a claim of
worthlessness would not be taxable income to Subordinate
Certificateholders because the amount was previously included in
income.
Those results should not significantly affect the inclusion of income for
Subordinate Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Subordinate Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount income.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The Treasury
Regulations relating to original issue discount permit a Grantor Trust
Securityholder to elect to accrue all interest, discount, including DE MINIMIS
market or original issue discount, reduced by any premium, in income as
interest, based on a constant yield method. If an election were to be made with
respect to an interest in a mortgage loan with market discount, the Grantor
Trust Securityholder would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that the Grantor Trust Securityholder acquires during the
year of the election or afterward. See "--Market Discount" above. Similarly, a
Grantor Trust Securityholder that makes this election for an interest in a
mortgage loan that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the Grantor Trust Securityholder owns at the
beginning of the first taxable year to which the election applies or acquires
afterward. See "--Premium" above. The election to accrue interest, discount and
premium on a constant yield method with respect to a Grantor Trust Security is
irrevocable.
PREPAYMENTS. The Taxpayer Relief Act of 1997 (the "1997 Act") contains a
provision requiring original issue discount on any pool of debt instruments the
yield on which may be affected by reason of prepayments be calculated taking
into account the Prepayment Assumption and requiring the discount to be taken
into income on the basis of a constant yield to assumed maturity taking account
of actual prepayments. The legislative history to the 1986 Act states that
similar rules apply with respect to market discount and amortizable bond premium
on debt instruments.
SALE OR EXCHANGE OF A GRANTOR TRUST SECURITY. Sale or exchange of a Grantor
Trust Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount realized, exclusive of amounts
attributable to accrued and unpaid interest (which will be treated as ordinary
income allocable to the related asset of the Grantor Trust Fund), and the
owner's adjusted basis in the Grantor Trust Security. The adjusted basis
generally will equal the seller's cost for the Grantor Trust Security, increased
by the original issue discount and any market discount included in the seller's
gross income with respect to the Grantor Trust Security, and reduced, but not
below zero, by any premium amortized by the seller and by principal payments on
the Grantor Trust Security previously received by the seller. The gain or loss
will, except as discussed below, be capital gain or loss to an owner for which
the assets of the Grantor Trust Fund represented by a Grantor Trust Security are
"capital assets" within the meaning of Section 1221. A capital gain or loss will
be long-term or short-term depending on whether or not the Grantor Trust
Security has been owned for the long-term capital gain holding period, currently
more than one year.
118
Notwithstanding the foregoing, any gain realized on the sale or exchange of
a Grantor Trust Security will be ordinary income to the extent of the seller's
interest in accrued market discount on Grantor Trust Fund assets not previously
taken into income. See "--Market Discount," above. Further, Grantor Trust
Securities will be "evidences of indebtedness" within the meaning of Section
582(c)(1), so that gain or loss recognized from the sale of a Grantor Trust
Security by a bank or thrift institution to which such section applied will be
treated as ordinary gain or loss.
FOREIGN INVESTORS IN GRANTOR TRUST SECURITIES. A holder of a Grantor Trust
Security who is not a "U.S. person" (as defined above at "REMICs--Tax Related
Restrictions on Transfer of Residual Securities--Foreign Investors") and is not
subject to federal income tax as a result of any direct or indirect connection
to the United States other than its ownership of a Grantor Trust Security
generally will not be subject to United States income or withholding tax in
respect of payments of interest or original issue discount on its Grantor Trust
Security to the extent attributable to debt obligations held by the Grantor
Trust Fund that were originated after July 18, 1984, provided that the Grantor
Trust Securityholder complies to the extent necessary with certain certification
requirements which generally relate to the identity of the beneficial owner and
the status of the beneficial owner as a person that is not a U.S. person.
Interest or original issue discount on a Grantor Trust Security attributable to
debt obligations held by the Grantor Trust Fund that were originated prior to
July 19, 1984 will be subject to a 30% withholding tax (unless such tax is
reduced or eliminated by an applicable tax treaty). All holders of Grantor Trust
Securities should consult their tax advisors regarding the tax documentation and
certifications that must be provided to secure any applicable exemptions from
United States withholding taxes.
Any capital gain realized on the sale or other taxable disposition of a
Grantor Trust Security by a Non-U.S. Person (as defined above at
"REMICs--Taxation of Certain Foreign Investors--Regular Securities") generally
will be exempt from United States federal income and withholding tax, provided
that (i) such gain is not effectively connected with the conduct of a trade or
business in the United States by the Non-U.S. Person and (ii) in the case of an
individual Non-U.S. Person, the Non-U.S. Person is not present in the United
States for 183 days or more in the taxable year.
If the interest, gain or income with respect to a Grantor Trust Security
held by a Non-U.S. Person is effectively connected with the conduct of a trade
or business in the United States by the Non-U.S. Person (although exempt from
the withholding tax previously discussed if the holder provides an appropriate
statement establishing that such income is so effectively connected), the holder
generally will be subject to United States federal income tax on the interest,
gain or income at regular federal income tax rates. In addition, if the Non-U.S.
Person is a foreign corporation, it may be subject to a branch profits tax equal
to 30% of its "effectively connected earnings and profits," within the meaning
of the Code, for the taxable year, as adjusted for certain items, unless it
qualifies for a lower rate under an applicable tax treaty (as modified by the
branch profits tax rules).
BACKUP WITHHOLDING. Distributions made on the Grantor Trust Securities and
proceeds from the sale of the Grantor Trust Securities will be subject to a
"backup" withholding tax of 31 % if, in general, the Grantor Trust
Securityholder fails to comply with particular identification procedures, unless
the holder is an exempt recipient under applicable provisions of the Code and,
if necessary, demonstrates such status. Any amounts so withheld would be
refunded by the IRS or allowable as a credit against the Grantor Trust
Securityholder's federal income tax.
PARTNERSHIP TRUST FUNDS AND DISREGARDED TRUST FUNDS
CLASSIFICATION OF TRUST FUNDS
For each series of Partnership Certificates or Debt Securities, Stroock &
Stroock & Lavan LLP will deliver its opinion that the trust fund will not be a
taxable mortgage pool or an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes. This opinion will
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be based on the assumption that the terms of the related Agreement and related
documents will be complied with, and on counsel's opinion that the nature of the
income of the trust fund will exempt it from the rule that some publicly traded
partnerships are taxable as corporations.
TAXATION OF DEBT SECURITYHOLDERS
The depositor will agree, and the securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
for each series of Debt Securities, Stroock & Stroock & Lavan LLP will deliver
its opinion that the Debt Securities will be classified as indebtedness for
federal income tax purposes. The discussion below assumes this characterization
of the Debt Securities is correct.
If, contrary to the opinion of counsel, the Internal Revenue Service
successfully asserted that the Debt Securities were not debt for federal income
tax purposes, the Debt Securities might be treated as equity interests in the
trust fund. If so treated, the trust fund might be treated as a publicly traded
partnership that would be taxable as a corporation unless it met particular
qualifying income tests, and the resulting taxable corporation would not be able
to reduce its taxable income by deductions for interest expense on Debt
Securities recharacterized as equity. Treatment of the Debt Securities as equity
interests in a partnership could have adverse tax consequences to some holders,
even if the trust fund were not treated as a publicly traded partnership taxable
as a corporation. For example, income allocable to foreign holders might be
subject to United States tax and United States tax return filing and withholding
requirements, income allocable to tax-exempt holders might constitute "unrelated
business taxable income" (if some, but not all, of the Debt Securities were
recharacterized as equity in a partnership), individual holders might be subject
to limitations on their ability to deduct their share of trust fund expenses,
and income from the trust fund's assets would be taxable to owners of Debt
Securities without regard to whether cash distributions are made to such owners
and without regard to the owners' method of tax accounting.
Debt Securities generally will be subject to the same rules of taxation as
Regular Securities issued by a REMIC, as described above, except that (1) income
reportable on Debt Securities is not required to be reported under the accrual
method unless the holder otherwise uses the accrual method and (2) the special
110% yield rule treating a portion of the gain on sale or exchange of a Regular
Security as ordinary income is inapplicable to Debt Securities. See "
REMICs--Taxation of Owners of Regular Securities" and "--Sale or Exchange of
Regular Securities."
Further, for federal income tax purposes, (i) Debt Securities held by a
thrift institution taxed as a domestic building and loan association will not
constitute "loans ... secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code; (ii) interest on Debt
Securities held by a real estate investment trust will not be treated as
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B); (iii) Debt
Securities held by a real estate investment trust will not constitute "real
estate assets" or "Government securities" within the meaning of Section
856(c)(4)(A) of the Code; (iv) Debt Securities held by a regulated investment
company will not constitute "Government securities" within the meaning of
Section 851(b)(3)(A)(i) of the Code; and (v) Debt Securities will not constitute
"qualified mortgages" with in the meaning of Section 860G(a)(3) of the Code for
REMICs.
TAXATION OF OWNERS OF PARTNERSHIP CERTIFICATES
(1) Treatment of the Trust Fund as a Partnership
The Partnership Trust Fund will agree, and the related owners of
Partnership Certificates ("Partnership Certificate Owners") will agree by their
purchase of Partnership Certificates, if there is
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more than one Partnership Certificate Owner, to treat the Partnership Trust Fund
as a partnership for purposes of federal and state income tax, franchise tax and
any other tax measured in whole or in part by income, with the assets of the
partnership being the assets held by the Partnership Trust Fund, the partners of
the partnership being the Partnership Certificate Owners, including, to the
extent relevant, the depositor in its capacity as recipient of distributions
from any reserve fund, and the Debt Securities, if any, being debt of the
partnership, and if there is one Partnership Certificate Owner, to treat the
Partnership Certificate Owner as the owner of the assets of the Partnership
Trust Fund and to treat the Partnership Trust Fund as a disregarded entity.
However, the proper characterization of the arrangement involving the
Partnership Trust Fund, the Partnership Certificates, the Debt Securities and
the depositor is not certain because there is no authority on transactions
closely comparable to that contemplated in this prospectus.
A variety of alternative characterizations are possible. For example,
because the Partnership Certificates have certain features characteristic of
debt, the Partnership Certificates might be considered debt of the Partnership
Trust Fund. Generally, provided such Partnership Certificates are issued at or
close to face value, any such characterization would not result in materially
adverse tax consequences to holders of Partnership Certificates as compared to
the consequences from treatment of the Partnership Certificates as equity in a
partnership, described below. The following discussion assumes that the
Partnership Certificates represent equity interests in a partnership. The
following discussion also assumes that all payments on the Partnership
Certificates are denominated in U.S. dollars, none of the Partnership
Certificates have Interest Rates which would qualify as contingent interest
under the Treasury regulations relating to original issue discount, and that a
series of securities includes a single class of Partnership Certificates. If
these conditions are not satisfied with respect to any given series of
Partnership Certificates, additional tax considerations with respect to such
Partnership Certificates will be disclosed in the applicable prospectus
supplement.
(2) Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to federal
income tax. Rather, each Partnership Certificate Owner will be required to take
into account separately the Partnership Certificate Owner's allocable share of
income, gains, losses, deductions and credits of the Partnership Trust Fund,
whether or not there is a corresponding cash distribution. Thus, cash basis
holders will in effect be required to report income from the Partnership
Certificates on the accrual basis and Partnership Certificate Owners may become
liable for taxes on Partnership Trust Fund income even if they have not received
cash from the Partnership Trust Fund to pay the taxes. The Partnership Trust
Fund's income will consist primarily of interest and finance charges earned on
the related mortgage loans, including appropriate adjustments for market
discount, original issue discount and bond premium, and any gain upon collection
or disposition of the mortgage loans.
The Partnership Trust Fund's deductions will consist primarily of interest
accruing with respect to the Debt Securities, servicing and other fees, and
losses or deductions upon collection or disposition of mortgage loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (i.e., the
Agreement and related documents). The Agreement will provide, in general, that
the Partnership Certificate Owners will be allocated taxable income of the
Partnership Trust Fund for each month equal to the sum of:
o the interest or other income that accrues on the Partnership
Certificates in accordance with their terms for the relevant month
including, as applicable, interest accruing at the related Partnership
Certificate Interest Rate for that month and interest on amounts
previously due on the Partnership Certificates but not yet
distributed;
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o any income of the Partnership Trust Fund attributable to discount on
the related mortgage loans that corresponds to any excess of the
principal amount of the Partnership Certificates over their initial
issue price;
o any prepayment premium payable to the Partnership Certificate Owners
for the applicable month; and
o any other amounts of income payable to the Partnership Certificate
Owners for the applicable month.
The allocation will be reduced by any amortization by the Partnership Trust Fund
of premium on mortgage loans that corresponds to any excess of the issue price
of Partnership Certificates over their principal amount. All remaining taxable
income of the Partnership Trust Fund will be allocated to the depositor. Losses
will generally be allocated in the manner in which they are borne.
Based on the economic arrangement of the parties, the foregoing approach
for allocating income of the Partnership Trust Fund should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to Partnership
Certificate Owners. Moreover, even under the foregoing method of allocation,
Partnership Certificate Owners may be allocated income equal to the entire
Partnership Certificate Interest Rate plus the other items described above, even
though the Partnership Trust Fund might not have sufficient cash to make current
cash distributions of the amount. In addition, because tax allocations and tax
reporting will be done on a uniform basis for all Partnership Certificate
Owners, but Partnership Certificate Owners may be purchasing Partnership
Certificates at different times and at different prices, Partnership Certificate
Owners may be required to report on their tax returns taxable income that is
greater or less than the amount reported to them by the Partnership Trust Fund.
Assuming Debt Securities are also issued, all or substantially all of the
taxable income allocated to a Partnership Certificate Owner that is a pension,
profit sharing or employee benefit plan or other tax-exempt entity, including an
individual retirement account, will constitute "unrelated business taxable
income" generally taxable to the holder under the Code.
An individual taxpayer's share of expenses of the Partnership Trust Fund,
including fees to the servicer, but not interest expense, would be miscellaneous
itemized deductions and thus deductible only to the extent such expenses plus
all other miscellaneous itemized deductions exceeds two percent of the
individual's adjusted gross income. An individual taxpayer will be allowed no
deduction for his share of expenses of the Partnership Trust Fund, other than
interest, in determining his liability for alternative minimum tax. In addition,
Section 68 of the Code provides that the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a prescribed threshold amount will be reduced by the lesser of (1) 3% of
the excess of adjusted gross income over the specified threshold amount or (2)
80% of the amount of itemized deductions otherwise allowable for the applicable
taxable year. Accordingly, deductions might be disallowed to the individual in
whole or in part and might result in the Partnership Certificate Owner being
taxed on an amount of income that exceeds the amount of cash actually
distributed to the holder over the life of the Partnership Trust Fund. In the
case of a partnership that has 100 or more partners and elects to be treated as
an "electing large partnership," 70% of that partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2%
floor that would otherwise be applicable to individual partners.
The Partnership Trust Fund intends to make all tax calculations relating to
income and allocations to Partnership Certificate Owners on an aggregate basis
to the extent relevant. If the IRS were to require that the calculations be made
separately for each mortgage loan, the calculations may result in some timing
and character differences under some circumstances.
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(3) Discount and Premium
The purchase price paid by the Partnership Trust Fund for the related
mortgage loans may be greater or less than the remaining principal balance of
the mortgage loans at the time of purchase. If so, the mortgage loans will have
been acquired at a premium or market discount, as the case may be. See
"REMICs--Taxation of Owners of Regular Securities--Acquisition Premium" and
"--Market Discount" above. As indicated above, the Partnership Trust Fund will
make this calculation on an aggregate basis, but it is possible that the IRS
might require that it be recomputed on a mortgage loan-by-mortgage loan basis.
Further, with respect to any asset of the Partnership Trust Fund that is a
Stripped Agency Security or other instrument evidencing ownership of specific
interest and/or principal of a particular bond, it will be subject to the rules
relating to original issue discount with respect to such security or instrument
(in lieu of the rules relating to market discount). See "REMICs--Taxation of
Owners of Regular Securities--Original Issue Discount" above.
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include any market
discount in income currently as it accrues over the life of the mortgage loans
or to offset any premium against interest income on the mortgage loans. As
indicated above, a portion of the market discount income or premium deduction
may be allocated to Partnership Certificate Owners.
(4) Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be deemed to
terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If a termination occurs under Section 708 of the Code, the
Partnership Trust Fund will be considered to contribute its assets to a new
Partnership Trust Fund, which would be treated as a new partnership, in exchange
for Partnership Certificates in the new Partnership Trust Fund. The original
Partnership Trust Fund will then be deemed to distribute the Partnership
Certificates in the new Partnership Trust Fund to each of the owners of
Partnership Certificates in the original Partnership Trust Fund in liquidation
of the original Partnership Trust Fund. The Partnership Trust Fund will not
comply with particular technical requirements that might apply when a
constructive termination occurs. As a result, the Partnership Trust Fund may be
subject to some tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Partnership Trust
Fund might not be able to comply with these requirements due to lack of data.
(5) Disposition of Partnership Certificates
Generally, capital gain or loss will be recognized on a sale of Partnership
Certificates in an amount equal to the difference between the amount realized
and the seller's tax basis in the Partnership Certificates sold. Any gain or
loss would be long-term capital gain or loss if the Partnership Certificate
Owner's holding period exceeded one year. A Partnership Certificate Owner's tax
basis in a Partnership Certificate will generally equal its cost, increased by
its share of Partnership Trust Fund income allocable to the Partnership
Certificate Owner and decreased by any distributions received or losses
allocated with respect to the Partnership Certificate. In addition, both the tax
basis in the Partnership Certificates and the amount realized on a sale of a
Partnership Certificate would include the Partnership Certificate Owner's share,
determined under Treasury Regulations, of the Debt Securities and other
liabilities of the Partnership Trust Fund. A Partnership Certificate Owner
acquiring Partnership Certificates at different prices will generally be
required to maintain a single aggregate adjusted tax basis in the Partnership
Certificates and, upon a sale or other disposition of some of the Partnership
Certificates, allocate a portion of the aggregate tax basis to the Partnership
Certificates sold, rather than maintaining a separate tax basis in each
Partnership Certificate for purposes of computing gain or loss on a sale of that
Partnership Certificate.
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If a Partnership Certificate Owner is required to recognize an aggregate
amount of income (not including income attributable to disallowed itemized
deductions described above) over the life of the Partnership Certificates that
exceeds the aggregate cash distributions with respect to the Partnership
Certificates, the excess will generally give rise to a capital loss upon the
retirement of the Partnership Certificates.
(6) Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will be
apportioned among the Partnership Certificate Owners in proportion to the
principal amount of Partnership Certificates owned by them as of the close of
the last day of that Due Period. As a result, a Partnership Certificate Owner
purchasing Partnership Certificates may be allocated tax items, which will
affect the purchaser's tax liability and tax basis, attributable to periods
before the actual transaction.
The use of a Due Period convention may not be permitted by existing
Treasury regulations. If a Due Period convention is not allowed, or only applies
to transfers of less than all of the partner's interest, taxable income or
losses of the Partnership Trust Fund might be reallocated among the Partnership
Certificate Owners. The Partnership Trust Fund's method of allocation between
transferors and transferees may be revised to conform to a method permitted by
future laws, regulations or other IRS guidance.
(7) Section 731 Distributions
In the case of any distribution to a Partnership Certificate Owner, no gain
will be recognized to that Partnership Certificate Owner to the extent that the
amount of any money distributed for that Partnership Certificate exceeds the
adjusted basis of that Partnership Certificate Owner's interest in the
Partnership Certificate. To the extent that the amount of money distributed
exceeds that Partnership Certificate Owner's adjusted basis, gain will be
currently recognized. In the case of any distribution to a Partnership
Certificate Owner, no loss will be recognized except upon a distribution in
liquidation of a Partnership Certificate Owner's interest. Any gain or loss
recognized by a Partnership Certificate Owner generally will be capital gain or
loss.
(8) Section 754 Election
In the event that a Partnership Certificate Owner sells its Partnership
Certificates at a profit (or loss), the purchasing Partnership Certificate Owner
will have a higher (or lower) basis in the Partnership Certificates than the
selling Partnership Certificate Owner had. The tax basis of the Partnership
Trust Fund's assets will not be adjusted to reflect that higher (or lower) basis
unless the Partnership Trust Fund were to file an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Partnership Trust Fund current does not
intend to make an election under Section 754 of the Code. As a result,
Partnership Certificate Owners might be allocated a greater or lesser amount of
Partnership Trust Fund income than would be appropriate based on their own
purchase price for Partnership Certificates.
(9) Administrative Matters
The trustee is required to keep or cause to be kept complete and accurate
books of the Partnership Trust Fund. The trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Partnership Trust Fund and will report each Partnership Certificate Owner's
allocable share of items of Partnership Trust Fund income and expense to
Partnership Certificate Owners and the IRS on Schedule K-1. The Partnership
Trust Fund will provide the Schedule K-1 information to nominees that fail to
provide the Partnership Trust Fund with the information
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statement described below and the nominees will be required to forward this
information to the beneficial owners of the Partnership Certificates. Generally,
holders must timely file tax returns that are consistent with the information
return filed by the Partnership Trust Fund or be subject to penalties unless the
holder notifies the IRS of all the inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Certificates as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing specific
information on the nominee, the beneficial owners and the Partnership
Certificates so held. The information includes (1) the name, address and
taxpayer identification number of the nominee and (2) as to each beneficial
owner
o the name, address and identification number of such person,
o whether such person is a United States person, a tax-exempt entity or
a foreign government, an international organization, or any wholly
owned agency or instrumentality of either of the foregoing, and
o particular information on Partnership Certificates that were held,
bought or sold on behalf of the person throughout the year.
In addition, brokers and financial institutions that hold Partnership
Certificates through a nominee are required to furnish directly to the
Partnership Trust Fund information as to themselves and their ownership of
Partnership Certificates. A clearing agency registered under Section 17A of the
Exchange Act is not required to furnish any information statement to the
Partnership Trust Fund. The information referred to above for any calendar year
must be furnished to the Partnership Trust Fund on or before the following
January 31. Nominees, brokers and financial institutions that fail to provide
the Partnership Trust Fund with the information described above may be subject
to penalties.
Unless another designation is made, the depositor will be designated as the
tax matters partner for each Partnership Trust Fund in the pooling and servicing
agreement and, as the tax matters partner, will be responsible for representing
the Partnership Certificate Owners in some specific disputes with the IRS. The
Code provides for administrative examination of a partnership as if the
partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before the later of three
years after the date on which the partnership information return is filed or the
last day for filing the return for the applicable year, determined without
regard to extensions. Any adverse determination following an audit of the return
of the Partnership Trust Fund by the appropriate taxing authorities could result
in an adjustment of the returns of the Partnership Certificate Owners, and,
under some circumstances, a Partnership Certificate Owner may be precluded from
separately litigating a proposed adjustment to the items of the Partnership
Trust Fund. An adjustment could also result in an audit of a Partnership
Certificate Owner's returns and adjustments of items not related to the income
and losses of the Partnership Trust Fund.
A special audit system exists for qualifying large partnerships that have
elected to apply a simplified flow-through reporting system under Sections 771
through 777 of the Code. Unless otherwise specified in the applicable prospectus
supplement, a Partnership Trust Fund will not elect to apply the simplified
flow-through reporting system.
(10) Taxation of Certain Foreign Partnership Certificate Owners
As used below, the term "Non-United States Owner" means a Partnership
Certificate Owner that is not a U.S. Person, as defined under "REMICs--Taxation
of Owners of Residual Securities--Tax Related Restrictions on Transfer of
Residual Securities-Foreign Investors," above.
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It is not clear whether the Partnership Trust Fund would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to Non-United States Owners because there is no
clear authority dealing with that issue under facts substantially similar to
those described in this Prospectus. Although it is not expected that the
Partnership Trust Fund would be engaged in a trade or business in the United
States for these purposes, the Partnership Trust Fund will withhold as if it
were so engaged in order to protect the Partnership Trust Fund from possible
adverse consequences of a failure to withhold. The Partnership Trust Fund
expects to withhold on the portion of its taxable income that is allocable to
Non-United States Owners pursuant to Section 1446 of the Code, as if the income
were effectively connected to a U.S. trade or business, at a rate of 35% for
Non-United States Owners that are taxable as corporations and 39.6% for all
other Non-United States Owners.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Partnership Trust Fund to change
its withholding procedures.
Each Non-United States Owner might be required to file a U.S. individual or
corporate income tax return on its share of the income of the Partnership Trust
Fund including, in the case of a corporation, a return in respect of the branch
profits tax. Assuming the Partnership Trust Fund is not engaged in a U.S. trade
or business, a Non-United States Owner would be entitled to a refund with
respect to all or a portion of taxes withheld by the Partnership Trust Fund if,
in particular, the Owner's allocable share of interest from the Partnership
Trust Fund constituted "portfolio interest" under the Code.
The interest, however, may not constitute "portfolio interest" if, among
other reasons, the underlying obligation is not in registered form or if the
interest is determined without regard to the income of the Partnership Trust
Fund, in the later case, the interest being properly characterized as a
guaranteed payment under Section 707(c) of the Code. If this were the case,
Non-United States Owners would be subject to a United States federal income and
withholding tax at a rate of 30 percent on the Partnership Trust Fund's gross
income, without any deductions or other allowances for costs and expenses
incurred in producing the income, unless reduced or eliminated pursuant to an
applicable treaty. In this case, a Non-United States Owner would only be
entitled to a refund for that portion of the taxes, if any, in excess of the
taxes that should have been withheld with respect to the interest.
(11) Backup Withholding
Distributions made on the Partnership Certificates and proceeds from the
sale of the Partnership Certificates will be subject to a "backup" withholding
tax of 31 % if, in general, the Partnership Certificate Owner fails to comply
with particular identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code and, if necessary,
demonstrates such status. Any amounts so withheld would be refunded by the IRS
or allowable as a credit against the Non-United States Owner's federal income
tax.
CONSEQUENCES FOR PARTICULAR INVESTORS
The federal tax discussions above may not be applicable depending on a
securityholder's particular tax situation. The depositor recommends that
prospective purchasers consult their tax advisors for the tax consequences to
them of the purchase, ownership and disposition of REMIC Securities, FASIT
Securities, Grantor Trust Securities, Partnership Certificates and Debt
Securities, including the tax consequences under state, local, foreign and other
tax laws and the possible effects of changes in federal or other tax laws.
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STATE AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Material
Federal Income Tax Considerations," potential investors should consider the
state and local tax consequences of the acquisition, ownership, and disposition
of the Notes or Certificates, as applicable, offered under this prospectus.
State tax law may differ substantially from the corresponding federal tax law,
and the discussion above does not purport to describe any aspect of the tax laws
of any state or other jurisdiction. Therefore, prospective investors should
consult their own tax advisors for the various tax consequences of investments
in the Notes or Certificates, as applicable, offered under this prospectus.
ERISA CONSIDERATIONS
GENERAL
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA should consider the fiduciary standards
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
in the context of the plan's particular circumstances before authorizing an
investment of a portion of such plan's assets in the Securities. Accordingly,
pursuant to Section 404 of ERISA, such fiduciary should consider among other
factors (i) whether the investment is for the exclusive benefit of plan
participants and their beneficiaries; (ii) whether the investment satisfies the
applicable diversification requirements; (iii) whether the investment is in
accordance with the documents and instruments governing the plan; and (iv)
whether the investment is prudent, considering the nature of the investment.
Fiduciaries of plans also should consider ERISA's prohibition on improper
delegation of control over, or responsibility for, plan assets.
In addition, employee benefit plans or other retirement arrangements
subject to ERISA, as well as individual retirement accounts, certain types of
Keogh plans not subject to ERISA but subject to Section 4975 of the Code, or any
entity (including insurance company separate or general accounts) whose
underlying assets include plan assets by reason of such plans, arrangements or
accounts investing in the entity (each, a "Plan") are prohibited from engaging
in a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 of ERISA and excise taxes and/or other
penalties are imposed upon such persons under ERISA and/or Section 4975 of the
Code unless an exemption applies. The depositor, underwriter, each master
servicer or other servicer, any insurer, the trustee, the indenture trustee and
certain of their affiliates might be considered "parties in interest" or
"disqualified persons" with respect to a Plan. If so, the acquisition, holding
or disposition of Securities by or on behalf of such Plan could be considered to
give rise to a "prohibited transaction" within the meaning of ERISA and the Code
unless a statutory, regulatory or administrative exception or exemption is
available.
ERISA CONSIDERATIONS RELATING TO CERTIFICATES
PLAN ASSETS
In 29 C.R.F ss.2510.3-101 (the "Plan Asset Regulations"), the U.S.
Department of Labor ("DOL") has defined what constitutes "plan assets" for
purposes of ERISA and Section 4975 of the Code. The Plan Asset Regulations
provide that if a Plan makes an investment in an "equity interest" in an entity,
an undivided portion of the assets of the entity will be considered the assets
of such Plan unless certain exceptions set forth in such Regulations apply. The
Certificates will be deemed an equity interest for purposes of the Plan Asset
Regulations, and the depositor can give no assurance that the Certificates will
qualify for any of the exceptions under the Plan Asset Regulations. As a result,
(i) a Plan may be deemed to have acquired an interest in the Assets of the trust
fund and not merely an interest in the Certificates, (ii) the fiduciary
investment standards of ERISA could apply to such Assets and (iii) transactions
occurring in the course of managing, operating and servicing the trust fund and
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its Assets might constitute prohibited transactions, unless a statutory,
regulatory or administrative exemption applies.
PROHIBITED TRANSACTION CLASS EXEMPTION 83-1
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which under certain conditions exempts from
the application of the prohibited transaction rules of ERISA and the excise tax
provisions of Section 4975 of the Code transactions involving a Plan in
connection with the operation of a "mortgage pool" and the purchase, sale and
holding of Certificates which are "mortgage pool pass-through certificates." A
"mortgage pool" is defined as a fixed investment pool consisting solely of
interest-bearing obligations secured by first or second mortgages or deeds of
trust on single-family residential property, property acquired in foreclosure
and undistributed cash. A "mortgage pool pass-through certificate" is defined as
a Certificate which represents a beneficial undivided interest in a mortgage
pool which entitles the holder to pass through payments of principal and
interest from the mortgage loans. PTCE 83-1 requires that: (i) the depositor and
the trustee maintain a system of insurance or other protection for the mortgage
loans, the property securing such mortgage loans and for indemnifying holders of
Certificates against reductions in pass-through payments due to defaults in loan
payments or property damage in an amount at least equal to the greater of (x) 1%
of the aggregate principal balance of the mortgage loans or (y) 1% of the
principal balance of the largest covered pooled mortgage loans; (ii) the trustee
may not be an affiliate of the depositor; and (iii) the payments made to, and
retained by, the depositor in connection with the trust fund, together with all
funds inuring to its benefit for administering the trust fund, represent no more
than "adequate consideration" for selling the mortgage loans, plus reasonable
compensation for services provided to the trust fund. In addition, PTCE 83-1
exempts the initial sale of Certificates to a Plan with respect to which the
depositor, the insurer, the master servicer or other servicer or the trustee is
a party in interest if the Plan does not pay more than fair market value for
such Certificates and the rights and interests evidenced by such Certificates
are not subordinated to the rights and interests evidenced by other Certificates
of the same pool.
PTCE 83-1 also exempts from the prohibited transaction rules any
transactions in connection with the servicing and operation of the mortgage
pool, provided that any payments made to the master servicer in connection with
the servicing of the trust fund are made in accordance with a binding agreement,
copies of which must be made available to prospective Plan investors. In the
case of any Plan with respect to which the depositor, the master servicer, the
insurer or the trustee is a fiduciary, PTCE 83-1 will only apply if, in addition
to the other requirements: (i) the initial sale, exchange or transfer of
Certificates is expressly approved by an independent fiduciary who has authority
to manage and control those Plan assets being invested in Certificates; (ii) the
Plan pays no more for the Certificates than would be paid in an arm's-length
transaction; (iii) no investment management, advisory or underwriting fee, sales
commission or similar compensation is paid to the depositor with regard to the
sale, exchange or transfer of Certificates to the Plan; (iv) the total value of
the Certificates purchased by such Plan does not exceed 25% of the amount issued
and (v) at least 50% of the aggregate amount of Certificates is acquired by
persons independent of the depositor, the trustee, the master servicer and the
insurer. Before purchasing Certificates, a fiduciary of a Plan should confirm
that the trust fund is a "mortgage pool," that the Certificates constitute
"mortgage pool pass-through certificates" and that the conditions set forth in
PTCE 83-1 would be satisfied. In addition to making its own determination as to
the availability of the exemptive relief provided in PTCE 83-1, the Plan
fiduciary should consider the availability of any other prohibited transaction
exemptions. The Plan fiduciary should also consider its general fiduciary
obligations under ERISA in determining whether to purchase any Certificates on
behalf of a Plan pursuant to PTCE 83-1.
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UNDERWRITER EXEMPTION
The DOL has granted to Deutsche Banc Alex. Brown Inc. an individual
exemption, Prohibited Transaction Exemption 94-84, and to Deutsche Morgan
Grenfell/C.J. Lawrence Inc., similar approval (FAN 97-03E), which were both
amended by Prohibited Transaction Exemption 97-34 ("PTE 97-34") and further
recently amended pursuant to Prohibited Transaction Exemption 2000-58 ("PTE
2000-58") (collectively, the "Exemption") which is applicable to Certificates
which meet its requirements whenever the underwriter or its affiliate is the
sole underwriter, manager or co-manager of an underwriting syndicate or is the
selling or placement agent. The Exemption generally exempts certain transactions
from the application of certain of the prohibited transaction provisions of
ERISA and the Code provided that the conditions set forth in the Exemption are
satisfied. These transactions include the servicing, managing and operation of
investment trusts holding fixed (generally non-revolving pools) of enumerated
categories of assets which include: single and multi-family residential mortgage
loans, home equity loans or receivables (including cooperative housing loans),
manufactured housing loans and guaranteed government mortgage pool certificates
and the purchase, sale and holding of Certificates which represent beneficial
ownership interests in the assets of such trusts.
GENERAL CONDITIONS OF EXEMPTION
The Exemption sets forth general conditions which must be satisfied for a
transaction involving the purchase, sale and holding of the Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by Plans must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
Assets held by the trust fund must be fully secured (other than one-to-four
family residential mortgage loans and home equity loans or receivables backing
certain types of Certificates, as described below). (Mortgage loans, loans,
obligations and receivables will be collectively referred to herein as
"loans."). Third, unless the Certificates are issued in "designated
transactions" (as described below) and are backed by fully-secured loans, they
may not be subordinated. Fourth, the Certificates at the time of acquisition by
the Plan must generally be rated in one of the three (or in the case of
designated transactions, four) highest generic rating categories by Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., Moody's
Investors Services, Inc. or Fitch, Inc. (each, a "Rating Agency"). Fifth, the
trustee and the indenture trustee generally cannot be affiliates of any member
of the "Restricted Group" which consists of any (i) underwriter as defined in
the Exemption, (ii) the depositor, (iii) the master servicer, (iv) each
servicer, (v) the insurer, (vi) the counterparty of any "interest rate swap" (as
described below) held as an Asset of the trust fund and (vii) any obligor with
respect to loans constituting more than 5% of the aggregate unamortized
principal balance of the loans held in the trust fund as of the date of initial
issuance of the Certificates. Sixth, the sum of all payments made to, and
retained by, such underwriters must represent 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 loans to the
related trust fund must represent not more than the fair market value of such
loans; and the sum of all payments made to, and retained by, the master servicer
and any servicer must represent not more than reasonable compensation for such
person's services under the Agreement and reimbursement of such person's
reasonable expenses in connection therewith. Seventh, (i) the investment pool
must consist only of assets of the type enumerated in the Exemption and which
have been included in other investment pools; (ii) Certificates evidencing
interests in such other investment pools must have been rated in one of the
three (or in the case of designated transactions, four) highest generic rating
categories by one of the Rating Agencies for at least one year prior to a Plan's
acquisition of Certificates; and (iii) Certificates evidencing interests in such
other investment pools must have been purchased by investors other than Plans
for at least one year prior to a Plan's acquisition of Certificates. Finally,
the investing Plan must be an accredited investor as defined in Rule 501(a)(1)
of Regulation D of the Commission under the Securities Act of 1933, as amended.
If Securities are being sold under the Exemptions, the depositor assumes that
only Plans which are accredited investors under the federal securities laws will
be permitted to purchase the Certificates.
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RECENT AMENDMENTS TO EXEMPTION
PTE 2000-58 (the "Amendment") recently amended the Exemption to make the
acquisition of Certificates by Plans in an initial offering or in a secondary
market transaction, the holding or transfer of Certificates and the servicing,
management and operation of the trust fund and its Assets on or after November
13, 2000 eligible for exemptive relief to a broader range of Certificates. Prior
to such amendment, the Exemption generally permitted Plans to purchase only
unsubordindated Certificates rated within the highest three generic rating
categories backed by secured collateral. Such Certificates had to be issued by a
trust fund which was a grantor trust, REMIC or a FASIT whose corpus could not
include certain types of Assets such as interest-rate swaps.
TYPES OF TRUST FUNDS
The Amendment has expanded the types of permitted trust funds to include
owner-trusts, as well as grantor trusts, REMICs and FASITs. Owner-trusts are
subject to certain restrictions in their governing documents to ensure that
their Assets may not be reached by the creditors of the depositor in the event
of bankruptcy or other insolvency and must provide certain legal opinions.
DESIGNATED TRANSACTIONS
In the case where the Certificates are backed by trust fund Assets which
are residential, home equity, manufactured housing or multi-family loans which
are described and defined in the Exemption as designated transactions
("Designated Transactions"), the Amendment permits the Certificates issued by
the trust fund in such transactions to be rated in one of the highest four
generic rating categories by a Rating Agency and/or to be subordinated. The
Assets will qualify for Designated Transaction treatment under the Exemption
unless otherwise specified in the prospectus supplement. In addition, one subset
of Designated Transactions, residential (one- to-four family) and home equity
loans, may be less than fully secured, provided that the rights and interests
evidenced by Certificates issued in such Designated Transactions are: (a) not
subordinated to the rights and interests evidenced by Securities of the same
trust fund; (b) such Certificates acquired by the Plan have received a rating
from a Rating Agency at the time of such acquisition that is in one of the two
highest generic rating categories; and (c) any loan included in the corpus or
Assets of the trust fund is secured by collateral whose fair market value on the
closing date of the Designated Transactions is at least equal to 80% of the sum
of: (i) the outstanding principal balance due under the loan which is held by
the trust fund and (ii) the outstanding principal balance(s) of any other
loan(s) of higher priority (whether or not held by the trust fund) which are
secured by the same collateral.
INSURANCE COMPANY GENERAL ACCOUNTS
In the event that Certificates do not meet the requirements of the
Exemption solely because they are Subordinate Certificates or fail to meet a
minimum rating requirement under the Exemption, certain Plans may be eligible to
purchase Certificates pursuant to Section III of Prohibited Transaction Class
Exemption 95-60 ("PTCE 95-60") which permits insurance company general accounts
as defined in PTCE 95-60 to purchase such Certificates if they otherwise meet
all of the other requirements of the Exemption.
PERMITTED ASSETS
The Amendment permits an interest-rate swap to be an Asset of a trust fund
which issues Certificates acquired by Plans in an initial offering or in the
secondary market on or after November 13, 2000 and clarifies the requirements
regarding yield supplement agreements. An interest-rate swap (or if purchased by
or on behalf of the trust fund) an interest-rate cap contract (collectively, a
"Swap" or "Swap Agreement") is a permitted trust fund Asset if it: (a) is an
"eligible Swap;" (b) is with an "eligible counterparty;" (c) is purchased by a
"qualified plan investor;" (d) meets certain additional
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specific conditions which depend on whether the Swap is a "ratings dependent
Swap" or a "non-ratings dependent Swap" and (e) permits the trust fund to make
termination payments to the Swap counterparty (other than currently scheduled
payments) solely from excess spread or amounts otherwise payable to the servicer
or depositor.
An "eligible Swap" is one which: (a) is denominated in U.S. dollars; (b)
pursuant to which the trust fund pays or receives, on or immediately prior to
the respective payment or distribution date for the class of Certificates to
which the Swap relates, a fixed rate of interest or a floating rate of interest
based on a publicly available index (E.G., LIBOR or the U.S. Federal Reserve's
Cost of Funds Index (COFI)), with the trust fund receiving such payments on at
least a quarterly basis and obligated to make separate payments no more
frequently than the counterparty, with all simultaneous payments being netted
("Allowable Interest Rate"); (c) has a notional amount that does not exceed
either: (i) the principal balance of the class of Certificates to which the Swap
relates, or (ii) the portion of the principal balance of such class represented
by obligations ("Allowable Notional Amount"); (d) is not leveraged (i.e.,
payments are based on the applicable notional amount, the day count fractions,
the fixed or floating rates permitted above, and the difference between the
products thereof, calculated on a one-to-one ratio and not on a multiplier of
such difference) ("Leveraged"); (e) has a final termination date that is either
the earlier of the date on which the issuer terminates or the related class of
Certificates are fully repaid and (f) does not incorporate any provision which
could cause a unilateral alteration in the interest rate requirements described
above or the prohibition against leveraging.
An "eligible counterparty" means a bank or other financial institution
which has a rating at the date of issuance of the Certificates, which is in one
of the three highest long-term credit rating categories or one of the two
highest short-term credit rating categories, utilized by at least one of the
Rating Agencies rating the Certificates; provided that, if a counterparty is
relying on its short-term rating to establish eligibility hereunder, such
counterparty must either have a long-term rating in one of the three highest
long-term rating categories or not have a long-term rating from the applicable
Rating Agency.
A "qualified plan investor" is a Plan or Plans where the decision to buy
such class of Certificates is made on behalf of the Plan by an independent
fiduciary qualified to understand the Swap transaction and the effect the Swap
would have on the rating of the Certificates and such fiduciary is either (a) a
"qualified professional asset manager" ("QPAM") under Prohibited Transaction
Class Exemption 84-14 ("PTCE 84-14") (see below), (b) an "in-house asset
manager" under Prohibited Transaction Class Exemption 96-23 ("PTCE 96-23") (see
below) or (c) has total assets (both Plan and non-Plan) under management of at
least $100 million at the time the Certificates are acquired by the Plan.
In "ratings dependent Swaps" (where the rating of a class of Certificates
is dependent on the terms and conditions of the Swap), the Swap Agreement must
provide that if the credit rating of the counterparty is withdrawn or reduced by
any Rating Agency below a level specified by the Rating Agency, the servicer
must, within the period specified under the Swap Agreement: (a) obtain a
replacement Swap Agreement with an eligible counterparty which is acceptable to
the Rating Agency and the terms of which are substantially the same as the
current Swap Agreement (at which time the earlier Swap Agreement must
terminate); or (b) cause the Swap counterparty to establish any
collateralization or other arrangement satisfactory to the Rating Agency such
that the then current rating by the Rating Agency of the particular class of
Certificates will not be withdrawn or reduced (and the terms of the Swap
Agreement must specifically obligate the counterparty to perform these duties
for any class of Certificates with a term of more than one year). In the event
that the servicer fails to meet these obligations, Plan certificateholders must
be notified in the immediately following periodic report which is provided to
certificateholders but in no event later than the end of the second month
beginning after the date of such failure. Sixty days after the receipt of such
report, the exemptive relief provided under the Exemption will prospectively
cease to be applicable to any class of Certificates held by a Plan which
involves such ratings dependent Swap.
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"Non-ratings dependent Swaps" (those where the rating of the Certificates
does not depend on the terms and conditions of the Swap) are subject to the
following conditions. If the credit rating of the counterparty is withdrawn or
reduced below the lowest level permitted above, the servicer will, within a
specified period after such rating withdrawal or reduction: (a) obtain a
replacement Swap Agreement with an eligible counterparty, the terms of which are
substantially the same as the current Swap Agreement (at which time the earlier
Swap Agreement must terminate); (b) cause the counterparty to post collateral
with the trust fund in an amount equal to all payments owed by the counterparty
if the Swap transaction were terminated; or (c) terminate the Swap Agreement in
accordance with its terms.
An "eligible yield supplement agreement" is any yield supplement agreement
or similar arrangement (or if purchased by or on behalf of the trust fund) an
interest rate cap contract to supplement the interest rates otherwise payable on
obligations held by the trust fund ("EYS Agreement"). If the EYS Agreement has a
notional principal amount and/or is written on an International Swaps and
Derivatives Association, Inc. (ISDA) form, the EYS Agreement may only be held as
an Asset of the trust fund with respect to Certificates purchased by Plans on or
after April 7, 1998 if it meets the following conditions: (a) it is denominated
in U.S. dollars; (b) it pays an Allowable Interest Rate; (c) it is not
Leveraged; (d) it does not allow any of these three preceding requirements to be
unilaterally altered without the consent of the trustee; (e) it is entered into
between the trust fund and an eligible counterparty and (f) it has an Allowable
Notional Amount.
PRE-FUNDING ACCOUNTS
The Exemption was amended by PTE 97-34 to extend exemptive relief to
Certificates issued in transactions using pre-funding accounts whereby a portion
of the loans backing the Certificates are transferred to the trust fund within a
specified period following the closing date ("DOL Pre-Funding Period") (see
below) instead of requiring that all such loans be either identified or
transferred on or before the closing date. The relief is effective for
transactions occurring on or after May 23, 1997 provided that the following
conditions are met. First, the ratio of the amount allocated to the Pre-Funding
Account to the total principal amount of the Certificates being offered
("Pre-Funding Limit") must not exceed twenty-five percent (25%). Second, all
loans transferred after the closing date (referred to here as "additional
loans") must meet the same terms and conditions for eligibility as the original
loans used to create the trust fund, which terms and conditions have been
approved by the Rating Agency. Third, the transfer of such additional loans to
the trust fund during the DOL Pre-Funding Period must not result in the
Certificates receiving a lower credit rating from the Rating Agency upon
termination of the DOL Pre-Funding Period than the rating that was obtained at
the time of the initial issuance of the Certificates by the trust fund. Fourth,
solely as a result of the use of pre-funding, the weighted average annual
percentage interest rate (the "average interest rate") for all of the loans in
the trust fund at the end of the DOL Pre-Funding Period must not be more than
100 basis points lower than the average interest rate for the loans which were
transferred to the trust fund on the closing date. Fifth, either: (i) the
characteristics of the additional loans must be monitored by an insurer or other
credit support provider which is independent of the depositor; or (ii) an
independent accountant retained by the depositor must provide the depositor with
a letter (with copies provided to the Rating Agency, the underwriter and the
trustee) stating whether or not the characteristics of the additional loans
conform to the characteristics described in the Prospectus, Prospectus
Supplement, Private Placement Memorandum ("Offering Documents") and/or the
Agreement. In preparing such letter, the independent accountant must use the
same type of procedures as were applicable to the loans which were transferred
as of the closing date. Sixth, the DOL Pre-Funding Period must end no later than
three months or 90 days after the closing date or earlier, in certain
circumstances, if the amount on deposit in the Pre-Funding Account is reduced
below the minimum level specified in the Agreement or an event of default occurs
under the Agreement. Seventh, amounts transferred to any Pre-Funding Account
and/or Capitalized Interest Account used in connection with the pre-funding may
be invested only in investments which are permitted by the Rating Agency and (i)
are direct obligations of, or obligations fully guaranteed as to timely payment
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of principal and interest by, the United States or any agency or instrumentality
thereof (provided that such obligations are backed by the full faith and credit
of the United States); or (ii) have been rated (or the obligor has been rated)
in one of the three highest generic rating categories by the Rating Agency
("Acceptable Investments"). Eighth, certain disclosure requirements must be met.
REVOLVING POOL FEATURES
The Exemption only covers Certificates backed by "fixed" pools of loans
which require that all the loans must be transferred to the trust fund or
identified at closing (or transferred within the DOL Pre-Funding Period, if
pre-funding meeting the conditions described above is used). Accordingly,
Certificates issued by trust funds which feature revolving pools of Assets will
not be eligible for a purchase by Plans. However, Securities which are Notes
backed by revolving pools of Assets may be eligible for purchase by Plans
pursuant to certain other prohibited transaction exemptions. See discussion
below in "ERISA Considerations Relating to Notes."
LIMITATIONS ON SCOPE OF THE EXEMPTION
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by ERISA and the Code in
connection with the initial acquisition, transfer or holding, and the
acquisition or disposition in the secondary market, of the Certificates by
Plans. However, no exemption is provided from the restrictions of ERISA for the
acquisition or holding of a Certificates on behalf of an "Excluded Plan" by any
person who is a fiduciary with respect to the assets of such Excluded Plan. For
those purposes, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group. Exemptive relief may also be provided for the acquisition,
holding and disposition of Certificates by Plans if the fiduciary or its
affiliate is the obligor with respect to 5% or less of the fair market value of
the Loans in the trust fund provided that: (i) the Plan is not an Excluded Plan,
(ii) each Plan's investment in each class of Certificates does not exceed 25% of
the outstanding Certificates in the class, (iii) after the Plan's acquisition of
the Certificates, no more than 25% of the assets over which the fiduciary has
investment authority are invested in Certificates of a trust containing assets
which are sold or serviced by the same entity and (iv) in the case of initial
issuance (but not secondary market transactions), at least 50% of each class of
Certificates and at least 50% of the aggregate interests in the trust fund are
acquired by persons independent of the Restricted Group.
ERISA CONSIDERATIONS RELATING TO NOTES
Under the Plan Asset Regulations, the Assets of the trust fund would be
treated as "plan assets" of a Plan for the purposes of ERISA and the Code only
if the Plan acquires an "equity interest" in the trust fund and none of the
exceptions contained in the Plan Asset Regulations is applicable. An equity
interest is defined under the Plan Asset Regulations as an interest other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Assuming that the Notes are treated as
indebtedness without substantial equity features for purposes of the Plan Asset
Regulations, then such Notes will be eligible for purchase by Plans. However,
without regard to whether the Notes are treated as an "equity interest" for such
purposes, the acquisition or holding of Notes by or on behalf of a Plan could be
considered to give rise to a prohibited transaction if the trust fund or any of
its affiliates is or becomes a party in interest or disqualified person with
respect to such Plan, or in the event that a Note is purchased in the secondary
market and such purchase constitutes a sale or exchange between a Plan and a
party in interest or disqualified person with respect to such Plan. There can be
no assurance that the trust fund or any of its affiliates will not be or become
a party in interest or a disqualified person with respect to a Plan that
acquires Notes.
The Amendment to the Exemption permits trust funds which are grantor
trusts, ownertrusts, REMICs or FASITs to issue Notes, as well as Certificates,
provided a legal opinion is received to the
133
effect that the noteholders have a perfected security interest in the trust
fund's Assets. The exemptive relief provided under the Exemption for any
prohibited transactions which could be caused as a result of the operation,
management or servicing of the trust fund and its Assets would not be necessary
with respect to Notes with no substantial equity features which are issued as
obligations of the trust fund. However, effective for the acquisition, holding
or transfer of Notes between a Plan and a party in interest which occurs on or
after November 13, 2000, the Exemption would provide prohibited transaction
exemptive relief, provided that the same conditions of the Exemption described
above relating to Certificates are met with respect to the Notes. The same
limitations of such exemptive relief relating to acquisitions of Certificates by
fiduciaries with respect to Excluded Plans would also be applicable to the Notes
as described herein in "LIMITATIONS ON SCOPE OF THE EXEMPTION."
In the event that the Exemption is not applicable to the Notes, one or more
other prohibited transactions exemptions may be available to Plans purchasing or
transferring the Notes depending in part upon the type of Plan fiduciary making
the decision to acquire the Notes and the circumstances under which such
decision is made. These exemptions include, but are not limited to, Prohibited
Transaction Class Exemption 90-1 (regarding investments by insurance company
pooled separate accounts), Prohibited Transaction Class Exemption 91-38
(regarding investments by bank collective investments funds), PTCE 84-14
(regarding transactions effected by "qualified professional asset managers"),
PTCE 95-60 (regarding investments by insurance company general accounts) and
PTCE 96-23 (regarding transactions effected by "in-house asset managers")
(collectively, the "Investor-Based Exemptions"). However, even if the conditions
specified in these Investor-Based Exemptions are met, the scope of the relief
provided under such Exemptions might or might not cover all acts which might be
construed as prohibited transactions.
EACH PROSPECTUS SUPPLEMENT WILL CONTAIN INFORMATION CONCERNING
CONSIDERATIONS RELATING TO ERISA AND THE CODE THAT ARE APPLICABLE TO THE RELATED
SECURITIES. BEFORE PURCHASING SECURITIES IN RELIANCE ON PTCE 83-1, THE
EXEMPTION, THE INVESTOR-BASED EXEMPTIONS OR ANY OTHER EXEMPTION, A FIDUCIARY OF
A PLAN SHOULD ITSELF CONFIRM THAT REQUIREMENTS SET FORTH IN SUCH EXEMPTION WOULD
BE SATISFIED.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO PURCHASE
SECURITIES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL WITH RESPECT
TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE CODE OF THE
ACQUISITION AND OWNERSHIP OF SUCH SECURITIES.
Governmental plans and church plans as defined in ERISA are not subject to
ERISA or Code Section 4975, although they may elect to be qualified under
Section 401 (a) of the Code and exempt from taxation under Section 501 (a) of
the Code and would then be subject to the prohibited transaction rules set forth
in Section 503 of the Code. In addition, governmental plans may be subject to
federal, state and local laws which are to a material extent similar to the
provisions of ERISA or a Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of an
investment in Securities under applicable fiduciary or other investment
standards and the need for the availability of any exemptive relief under any
Similar Law.
LEGAL INVESTMENT
The prospectus supplement will specify which classes of the Notes or
Certificates, as applicable, if any, will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA"). Generally, only classes of Offered Notes or Offered
Certificates, as applicable, that (1) are rated in one of the two highest rating
categories by one or more rating agencies and (2) are part of a series
representing interests in, or secured by, a trust fund consisting of loans
secured by first liens on real property and originated by particular types of
originators specified in SMMEA, will be "mortgage related securities" for
purposes of SMMEA.
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Those classes of Offered Notes or Offered Certificates, as applicable,
qualifying as "mortgage related securities" will constitute legal investments
for persons, trusts, corporations, partnerships, associations, business trusts
and business entities (including, but not limited to, state chartered savings
banks, commercial banks, savings and loan associations and insurance companies,
as well as trustees and state government employee retirement systems) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality of the United States
constitute legal investments for those entities. Pursuant to 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 some entities (in
particular, insurance companies) to invest in mortgage related securities
secured by liens on residential, or mixed residential and commercial,
properties, in most cases by requiring the affected investors to rely solely
upon existing state law, and not SMMEA.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in "mortgage related
securities" without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in these securities, and national
banks may purchase these 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 regulations that the applicable federal
regulatory authority may prescribe. In this connection, the Office of the
Comptroller of the Currency (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 general standards concerning "safety and soundness" and
retention of credit information in 12 C.F.R. ss.1.5), some "Type IV securities,"
defined in 12 C.F.R. ss.1.2(l) to include some "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" under some limited circumstances, other than stripped
mortgage related securities, residual interests in mortgage related securities,
and commercial mortgage related securities, unless the credit union has obtained
written approval from the NCUA to participate in the "investment pilot program"
described in 12 C.F.R. ss.703.140. Thrift institutions that are subject to the
jurisdiction of the Office of Thrift Supervision (the "OTS") should consider the
OTS' Thrift Bulletin 13a (December 1, 1998), "Management of Interest Rate Risk,
Investment Securities, and Derivatives Activities," before investing in any of
the Offered Notes or Offered Certificates, as applicable.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Investment Securities and
End-User Derivatives Activities" (the "1998 Policy Statement") of the Federal
Financial Institutions Examination Council ("FFIEC"), 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. The 1998 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.
If specified in the prospectus supplement, other classes of Offered Notes
or Offered Certificates, as applicable, offered pursuant to this prospectus will
not constitute "mortgage related securities" under SMMEA. The appropriate
characterization of those classes under various legal investment restrictions,
and thus the ability of investors subject to these restrictions to purchase
these Offered Notes or Offered Certificates, as applicable, may be subject to
significant interpretive uncertainties.
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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 Offered
Notes or Offered Certificates, as applicable, as some classes or subclasses may
be deemed unsuitable investments, or may otherwise be restricted, under those
rules, policies or guidelines (in some 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 that
may restrict or prohibit investment in securities that are not "interest
bearing" or "income paying," and with regard to any Offered Notes or Offered
Certificates, as applicable, issued in book-entry form, provisions that may
restrict or prohibit investments in securities that are issued in book-entry
form.
Except as to the status of some classes of Offered Notes or Offered
Certificates, as applicable, as "mortgage related securities," no representation
is made as to the proper characterization of the Offered Notes or Offered
Certificates, as applicable, for legal investment, financial institution
regulatory, or other purposes, or as to the ability of particular investors to
purchase any Offered Notes or Offered Certificates, as applicable, under
applicable legal investment restrictions. The uncertainties described above (and
any unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Offered Notes or Offered
Certificates, as applicable,) may adversely affect the liquidity of the Offered
Notes or Offered Certificates, as applicable.
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 Offered Notes or Offered
Certificates, as applicable, of any class constitute legal investments for them
or are subject to investment, capital or other restrictions, and, if applicable,
whether SMMEA has been overridden in any jurisdiction relevant to that investor.
METHODS OF DISTRIBUTION
The Notes or Certificates, as applicable, offered by this prospectus and by
the supplements to this prospectus will be offered in series. The distribution
of the Notes or Certificates, as applicable, may be effected from time to time
in one or more transactions, including negotiated transactions, at a fixed
public offering price or at varying prices to be determined at the time of sale
or at the time of commitment therefor. If specified in the prospectus
supplement, the Notes or Certificates, as applicable, will be distributed in a
firm commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Deutsche Banc Alex. Brown Inc. ("DBAB") acting as
underwriter with other underwriters, if any, named in the underwriting
agreement. In that event, the prospectus supplement may also specify that the
underwriters will not be obligated to pay for any Notes or Certificates, as
applicable, agreed to be purchased by purchasers pursuant to purchase agreements
acceptable to the depositor. In connection with the sale of the Notes or
Certificates, as applicable, underwriters may receive compensation from the
depositor or from purchasers of the Notes or Certificates, as applicable, in the
form of discounts, concessions or commissions. The prospectus supplement will
describe any compensation paid by the depositor.
Alternatively, the prospectus supplement may specify that the Notes or
Certificates, as applicable, will be distributed by DBAB acting as agent or in
some cases as principal with respect to Notes or Certificates, as applicable,
that it has previously purchased or agreed to purchase. If DBAB acts as agent in
the sale of Notes or Certificates, as applicable, DBAB will receive a selling
commission for each series of Notes or Certificates, as applicable, depending on
market conditions, expressed as a percentage of the total principal balance of
the related mortgage loans as of the Cut-off Date. The exact percentage for each
series of Notes or Certificates, as applicable, will be disclosed in the
prospectus supplement. To the extent that DBAB elects to purchase Notes or
Certificates, as
136
applicable, as principal, DBAB may realize losses or profits based upon the
difference between its purchase price and the sales price. The prospectus
supplement for any series offered other than through underwriters will contain
information regarding the nature of that offering and any agreements to be
entered into between the depositor and purchasers of Notes or Certificates, as
applicable, of that series.
The depositor will indemnify DBAB and any underwriters against particular
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments DBAB and any underwriters may be required to make in
respect of these civil liabilities.
In the ordinary course of business, DBAB and the depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the depositor's mortgage loans pending the sale
of those mortgage loans or interests in those mortgage loans, including the
Notes or Certificates, as applicable. DBAB performs management services for the
depositor.
The depositor anticipates that the Notes or Certificates, as applicable,
will be sold primarily to institutional investors. Purchasers of Notes or
Certificates, as applicable, including dealers, may, depending on the facts and
circumstances of those purchases, be deemed to be "underwriters" within the
meaning of the Securities Act of 1933 in connection with reoffers and sales by
them of Notes or Certificates, as applicable. Securityholders should consult
with their legal advisors in this regard before any reoffer or sale of Notes or
Certificates, as applicable.
As to each series of Notes or Certificates, as applicable, only those
classes rated in one of the four highest rating categories by any rating agency
will be offered by this prospectus. Any lower rated or unrated class may be
initially retained by the depositor, and may be sold by the depositor at any
time to one or more institutional investors.
ADDITIONAL INFORMATION
The Depositor has filed with the Commission a registration statement on
Form S-3 under the Securities Act of 1933, as amended, with respect to the Notes
or Certificates, as applicable, (the "Registration Statement"). This prospectus,
which forms a part of the Registration Statement, omits some of the information
contained in the Registration Statement pursuant to the rules and regulations of
the Commission. The Registration Statement and the exhibits to the Registration
Statement can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at Regional Offices in the following locations:
o Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and
o New York Regional Office, 7 World Trade Center, Suite 1300, New York,
New York 10048.
Copies of these materials can also be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
The Commission also maintains a site on the world wide web at
"http://www.sec.gov" at which users can view and download copies of reports,
proxy and information statements and other information filed electronically
through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system.
The Depositor has filed the Registration Statement, including all exhibits to
the Registration Statement, through the EDGAR system and therefore these
materials should be available by logging onto the Commission's web site. The
Commission maintains computer terminals providing access to the EDGAR system at
each of the offices referred to above.
137
Copies of the most recent Fannie Mae prospectus for Fannie Mae certificates
and Fannie Mae's annual report and quarterly financial statements as well as
other financial information are available from the Director of Investor
Relations of Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016
(202-752-7115). The Depositor did not participate in the preparation of Fannie
Mae's prospectus or its annual or quarterly reports or other financial
information and, accordingly, makes no representation as to the accuracy or
completeness of the information in those documents.
Copies of the most recent Offering Circular for Freddie Mac certificates as
well as Freddie Mac's most recent Information Statement and Information
Statement supplement and any quarterly report made available by Freddie Mac may
be obtained by writing or calling the Investor Inquiry Department of Freddie Mac
at 8200 Jones Branch Drive, McLean, Virginia 22102 (outside Washington, D.C.
metropolitan area, telephone 800-336-3672; within Washington, D.C. metropolitan
area, telephone 703-759-8160). The Depositor did not participate in the
preparation of Freddie Mac's Offering Circular, Information Statement or any
supplement to the Information Statement or any quarterly report of the
Information Statement and, accordingly, makes no representation as to the
accuracy or completeness of the information in those documents.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the trust fund referred
to in the prospectus supplement with the Commission pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, after the date of this prospectus and
prior to the termination of any offering of the Notes or Certificates, as
applicable, issued by that trust fund will be deemed to be incorporated by
reference in this prospectus and to be a part of this prospectus from the date
of the filing of those documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference in this prospectus will
be deemed to be modified or superseded for all purposes of this prospectus to
the extent that a statement contained in this prospectus (or in the prospectus
supplement) or in any other subsequently filed document that also is or is
deemed to be incorporated by reference modifies or replaces that statement. Any
statement so modified or superseded will not be deemed, except as so modified or
superseded, to constitute a part of this prospectus.
The Trustee on behalf of any trust fund will provide without charge to each
person to whom this prospectus is delivered, upon request, a copy of any or all
of the documents referred to above that have been or may be incorporated by
reference in this prospectus (not including exhibits to the information that is
incorporated by reference unless the exhibits are specifically incorporated by
reference into the information that this prospectus incorporates). Requests for
information should be directed to the corporate trust office of the Trustee
specified in the prospectus supplement.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
securityholders of an investment in the Notes or Certificates, as applicable, of
a series, will be passed upon for the depositor by Stroock & Stroock & Lavan
LLP, Washington, D.C., Sidley Austin Brown & Wood LLP, New York, NY and Thacher
Proffitt & Wood, New York, New York.
FINANCIAL INFORMATION
A new trust fund will be formed for each series of Notes or Certificates,
as applicable, and no trust fund will engage in any business activities or have
any assets or obligations before the issuance of the related series of Notes or
Certificates, as applicable. Accordingly, financial statements for a trust fund
will generally not be included in this prospectus or in the prospectus
supplement.
138
RATING
As a condition to the issuance of any class of Offered Notes or Offered
Certificates, as applicable, they must not be rated lower than investment grade;
that is, they must be rated in one of the four highest rating categories, by a
rating agency.
Ratings on mortgage pass-through certificates and mortgage-backed notes
address the likelihood of receipt by securityholders of all distributions on the
underlying mortgage loans. These ratings address the structural, legal and
issuer-related aspects associated with the Notes or Certificates, as applicable,
the nature of the underlying assets and the credit quality of the guarantor, if
any. Ratings on mortgage pass-through certificates, mortgage-backed notes and
other asset backed securities do not represent any assessment of the likelihood
of principal prepayments by borrowers or of the degree by which prepayments
might differ from those originally anticipated. As a result, securityholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped interest certificates in extreme cases might fail to recoup their
initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
139
INDEX OF DEFINED TERMS
1986 Act .....................................................................90
1997 Act ....................................................................118
1998 Policy Statement .......................................................135
Accrual Period ...............................................................18
Accrual Securities ...........................................................24
Accrued Security Interest ....................................................27
Adjustable Rate Assets ........................................................3
Agency Securities .............................................................3
Agreement ....................................................................39
ARM Loans .....................................................................6
Asset Conservation Act .......................................................77
Asset Group ..................................................................25
Asset Seller ..................................................................3
Available Distribution Amount ................................................25
Balloon Payment Assets ........................................................4
Bankruptcy Code ..............................................................74
Beneficial Owner .............................................................33
Bi-weekly Assets ..............................................................4
Book-Entry Securities ........................................................25
Buy Down Assets ...............................................................3
Buydown Funds ................................................................88
Buydown Mortgage Loans .......................................................21
Buydown Period ...............................................................21
Capitalized Interest Account .................................................16
Cash Flow Agreement ..........................................................17
CERCLA .......................................................................75
Certificates .................................................................24
Charter Act ..................................................................12
Code .........................................................................84
Collection Account ...........................................................43
Commission ....................................................................7
contract borrower ............................................................69
contract lender ..............................................................69
Convertible Assets ............................................................4
Cooperative ..................................................................68
Cooperative Corporation ......................................................35
Cooperative Loans ............................................................68
Cooperatives ..................................................................5
Covered Trust ................................................................63
CPR ..........................................................................20
Crime Control Act ............................................................80
Cut-off Date ..................................................................6
Definitive Securities ........................................................25
Determination Date ...........................................................25
Distribution Date ............................................................18
DTC ..........................................................................33
ERISA .......................................................................127
Euroclear ....................................................................33
Euroclear Operator ...........................................................35
European Depositaries ........................................................36
Exchange Act .................................................................34
Fannie Mae ....................................................................3
FASIT Ownership Security ....................................................108
FASIT Regular Securities ....................................................108
FDIC .........................................................................43
FHA ...........................................................................5
Freddie Mac ...................................................................3
Freddie Mac Act ..............................................................13
Freddie Mac Certificate Group ................................................13
Garn-St..Germain Act .........................................................77
GEM Assets ....................................................................4
Ginnie Mae ....................................................................3
GPM Assets ....................................................................4
Grantor Trust Fund Stripped Bond ............................................117
Grantor Trust Fund Stripped Coupon ..........................................117
Home Equity Loans .............................................................5
Housing Act ..................................................................11
HUD ..........................................................................52
Increasing Payment Asset ......................................................4
Increasing Payment Assets .....................................................3
Indirect Participants ........................................................34
Insurance Proceeds ...........................................................26
Interest Rate ................................................................27
Interest Reduction Assets .....................................................4
land sale contract ...........................................................69
Land Sale Contracts ...........................................................5
Level Payment Assets ..........................................................3
Liquidation Proceeds .........................................................26
Lock-out Date .................................................................7
Mortgaged Properties ..........................................................5
Mortgages .....................................................................5
Nonrecoverable Advance .......................................................30
Notes ........................................................................24
Offered Securities ...........................................................25
OID Regulations ..............................................................85
Participants .................................................................34
Partnership Certificate Owners ..............................................120
PCBs .........................................................................75
Permitted Investments ........................................................44
Pre-Funded Amount ............................................................16
Pre-Funding Account ..........................................................16
Pre-Funding Period ...........................................................16
Prepayment Premium ............................................................7
Purchase Price ...............................................................41
RCRA .........................................................................76
Record Date ..................................................................25
Regular Securities ...........................................................86
Regular Securityholder .......................................................89
Relief Act ...................................................................80
REMIC Regulations ............................................................85
REMIC Securities .............................................................39
REO Property .................................................................31
Residual Holders .............................................................97
Residual Securities ..........................................................86
140
Retained Interest ............................................................53
Revolving Credit Line Loans ...................................................8
RICO .........................................................................80
Rules ........................................................................36
Securities ...................................................................24
Security Balance .............................................................27
Senior Securities ............................................................24
Servicemen's Readjustment Act ................................................16
Servicing Standard ...........................................................47
Shortfall Amount ............................................................117
Single Family Property ........................................................5
SPA ..........................................................................20
Special servicer .............................................................56
Step-up Rate Assets ...........................................................4
Strip Securities .............................................................24
Stripped Agency Securities ...................................................14
Subordinate Securities .......................................................24
Subsequent Assets ............................................................16
Superliens ...................................................................75
Taxable Mortgage Pools .......................................................86
Terms and Conditions .........................................................35
Tiered REMICs ................................................................89
Title V ......................................................................78
Title VIII ...................................................................79
UCC ..........................................................................34
UST ..........................................................................76
VA ............................................................................5
VA Guaranty Policy ...........................................................53
Value .........................................................................6
Warranting Party .............................................................42
Yield Considerations .........................................................27
141
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$295,013,000 (APPROXIMATE)
ACE SECURITIES CORP.
DEPOSITOR
ACE SECURITIES CORP. HOME EQUITY LOAN
TRUST, SERIES 2003-TC1
ASSET BACKED PASS-THROUGH CERTIFICATES
PROSPECTUS SUPPLEMENT
DATED JULY 10, 2003
OCWEN FEDERAL BANK FSB
SERVICER
WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION
MASTER SERVICER
DEUTSCHE BANK SECURITIES
UNDERWRITER
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
We are not offering the certificates offered by this prospectus supplement in
any state where the offer is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates and with respect to their unsold
allotments or subscriptions. In addition, all dealers selling the Offered
Certificates, whether or not participating in this offering, may be required to
deliver a prospectus supplement and prospectus until 90 days after the date of
this prospectus supplement.
JULY 10, 2003