Filed Pursuant to Rule 424(b)(5)
Registration No. 333-109298
PROSPECTUS SUPPLEMENT DATED JUNE 17, 2004
(TO PROSPECTUS DATED NOVEMBER 12, 2003)
[WACHOVIA LOGO]
$1,000,000,000
WACHOVIA BANK, NATIONAL ASSOCIATION
SELLER AND SERVICER
WACHOVIA ASSET SECURITIZATION ISSUANCE, LLC 2004-HE1 TRUST
ISSUER
WACHOVIA ASSET SECURITIZATION ISSUANCE, LLC
DEPOSITOR
WACHOVIA ASSET SECURITIZATION ISSUANCE, LLC ASSET-BACKED NOTES, SERIES 2004-HE1
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YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-14 IN THIS
PROSPECTUS SUPPLEMENT AND ON PAGE 12 OF THE ACCOMPANYING PROSPECTUS.
The notes will not be insured or guaranteed by any governmental agency or
instrumentality.
The notes will represent debt obligations of the trust fund only and will not
represent interests in or obligations of any other entity.
The notes are not deposits or other obligations of Wachovia Bank, National
Association or any other bank and are not insured by the FDIC.
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THE TRUST:
o Will issue one class of notes and the certificates. Only the notes are
offered by this prospectus supplement and the accompanying prospectus. You
can find the principal balance, note rate and certain other characteristics
of the notes on page S-6 of this prospectus supplement.
o Will make payments on the notes and the certificates primarily from
collections on a pool of home equity revolving credit line loans.
CREDIT ENHANCEMENT WILL CONSIST OF:
o Excess interest, to the extent described in this prospectus supplement;
o Overcollateralization, to the extent described in this prospectus
supplement; and
o An irrevocable and unconditional financial guaranty insurance policy issued
by MBIA Insurance Corporation insuring the notes, which will protect holders
of the notes against certain shortfalls in amounts due to be distributed at
the times and to the extent described in this prospectus supplement.
[MBIA LOGO]
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS MAY BE USED BY
WACHOVIA SECURITIES, AN AFFILIATE OF THE DEPOSITOR, IN CONNECTION WITH OFFERS
AND SALES OF THE NOTES IN MARKET-MAKING TRANSACTIONS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE NOTES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS IS ACCURATE OR COMPLETE. IT IS ILLEGAL FOR ANYONE TO TELL YOU
OTHERWISE.
Delivery of the notes is expected to be made in book entry form on or about June
24, 2004. The notes will be offered in the United States and Europe.
WACHOVIA SECURITIES
ABN AMRO CITIGROUP
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
We tell you about the notes in two separate documents that progressively
provide more detail:
o the accompanying prospectus, which provides general information,
some of which may not apply to a particular series of securities,
including your notes; and
o this prospectus supplement, which describes the specific terms of
your notes and may be different from the information in the
prospectus.
We include cross-references in this prospectus supplement and in the
accompanying prospectus to captions in these materials where you can find
further related discussions. The Table of Contents on the following page
provides the pages on which these captions can be found.
If you require additional information, the mailing address of the
principal executive office of the depositor is Wachovia Asset Securitization
Issuance, LLC, One Wachovia Center, 301 South College Street, Suite D,
Charlotte, North Carolina 28288, and its telephone number is (704) 383-4634. For
other means of acquiring additional information about the depositor or the
notes, see "Where You can Find More Information," "Description of the
Securities--Reports to Securityholders" and "Incorporation of Certain
Information by Reference" in the attached prospectus.
S-2
TABLE OF CONTENTS
PAGE
SUMMARY......................................................................S-4
RISK FACTORS................................................................S-14
INTRODUCTION................................................................S-23
DESCRIPTION OF THE MORTGAGE LOANS...........................................S-23
General..............................................................S-23
Initial Mortgage Loans...............................................S-23
Initial Mortgage Loan Characteristics................................S-25
Terms of the Mortgage Loans..........................................S-34
The Funding Account; Conveyance of
Additional Balances and
Subsequent Mortgage Loans..........................................S-35
The Funding Account..................................................S-35
Purchase of Additional Balances......................................S-36
Subsequent Mortgage Loans............................................S-36
Underwriting Standards...............................................S-37
THE SELLER AND SERVICER.....................................................S-40
General..............................................................S-40
Delinquency and Loss Experience of
the Servicer's Portfolio...........................................S-41
Servicing and Other Compensation
and Payment of Expenses............................................S-42
THE ISSUER..................................................................S-42
THE OWNER TRUSTEE...........................................................S-43
THE INDENTURE TRUSTEE.......................................................S-43
THE PAYING AGENT............................................................S-43
THE ENHANCER................................................................S-44
Financial Information About the Enhancer.............................S-44
Financial Strength Ratings of the
Enhancer...........................................................S-46
THE YIELD MAINTENANCE AGREEMENT PROVIDER....................................S-46
DESCRIPTION OF THE SECURITIES...............................................S-47
General..............................................................S-47
Book-Entry Notes.....................................................S-47
Payments on the Notes................................................S-49
Interest Payments on the Notes.......................................S-49
Principal Payments on the Notes......................................S-50
Priority of Distributions............................................S-50
Optional Transfers of Mortgage Loans
to Holders of Certificates.........................................S-53
Overcollateralization................................................S-54
The Paying Agent.....................................................S-54
Maturity and Optional Redemption.....................................S-54
The Yield Maintenance Agreement......................................S-55
Glossary of Terms....................................................S-55
DESCRIPTION OF THE POLICY...................................................S-64
YIELD AND PREPAYMENT CONSIDERATIONS.........................................S-67
THE AGREEMENTS..............................................................S-73
The Purchase Agreement...............................................S-73
Purchase of Mortgage Loans.......................................S-73
Representations and Warranties...................................S-74
Review of Mortgage Loans.........................................S-75
The Servicing Agreement..............................................S-75
Principal Collections and Interest
Collections....................................................S-75
Collection and Other Servicing
Procedures.....................................................S-76
Realization Upon Defaulted Loans.................................S-77
Non-Recordation of
Assignments; Possession of
Mortgages......................................................S-78
Modification of Mortgage Loans...................................S-79
Servicing Default; Rights Upon
Servicing Default..............................................S-79
Evidence as to Compliance........................................S-80
Certain Matters Regarding the
Servicer.......................................................S-80
Amendment........................................................S-81
The Trust Agreement and the Indenture................................S-81
The Trust Fund...................................................S-81
Reports To Noteholders...........................................S-82
Certain Covenants................................................S-82
Events of Default; Rights Upon
Event of Default...............................................S-83
Amendment and Modification of
Trust Agreement and Indenture..................................S-85
Termination; Redemption of Notes.................................S-86
Certain Matters Regarding the
Indenture Trustee, the Paying
Agent and the Issuer...........................................S-86
USE OF PROCEEDS.............................................................S-86
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS..................................S-87
Status as Real Property Loans........................................S-87
Original Issue Discount..............................................S-88
Market Discount......................................................S-90
Premium..............................................................S-91
Realized Losses......................................................S-91
Sales of Notes.......................................................S-92
Backup Withholding...................................................S-92
Tax Treatment of Foreign Investors...................................S-93
New Withholding Regulations..........................................S-93
STATE AND OTHER TAX CONSEQUENCES............................................S-93
ERISA CONSIDERATIONS........................................................S-93
LEGAL INVESTMENT............................................................S-94
UNDERWRITING................................................................S-94
LEGAL MATTERS...............................................................S-95
RATINGS.....................................................................S-95
EXPERTS.....................................................................S-96
APPENDIX A..................................................................S-97
SCHEDULE I.................................................................S-102
S-3
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SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS.
Issuer or Trust Fund..............Wachovia Asset Securitization Issuance, LLC
2004-HE1 Trust.
Title of the offered securities...Wachovia Asset Securitization Issuance, LLC
Asset-Backed Notes, Series 2004-HE1.
Certificates......................Wachovia Asset Securitization Issuance, LLC
Asset-Backed Certificates, Series 2004-HE1.
The certificates are not offered by this
prospectus supplement.
Depositor.........................Wachovia Asset Securitization Issuance, LLC.
FOR MORE INFORMATION ON THE DEPOSITOR, WE
REFER YOU TO "THE DEPOSITOR" IN THE
ACCOMPANYING PROSPECTUS.
Seller and Servicer...............Wachovia Bank, National Association is the
originator and seller of the home equity
revolving credit line loans, or mortgage
loans, and will be the servicer of the
mortgage loans. The servicer will be obligated
to service the mortgage loans pursuant to the
servicing agreement to be dated as of the
closing date, among the servicer, the issuer
and the indenture trustee.
WE REFER YOU TO "THE AGREEMENTS--THE SERVICING
AGREEMENT" AND "THE SELLER AND
SERVICER--GENERAL" IN THIS PROSPECTUS
SUPPLEMENT FOR FURTHER INFORMATION ON THE
SELLER AND SERVICER.
Owner Trustee.....................Wilmington Trust Company.
WE REFER YOU TO "THE OWNER TRUSTEE" IN THIS
PROSPECTUS SUPPLEMENT FOR FURTHER INFORMATION
ON THE OWNER TRUSTEE.
Indenture Trustee.................U.S. Bank National Association.
WE REFER YOU TO "THE INDENTURE TRUSTEE" IN
THIS PROSPECTUS SUPPLEMENT FOR FURTHER
INFORMATION ON THE INDENTURE TRUSTEE.
Closing Date......................On or about June 24, 2004.
Cut-Off Date......................The opening of business on June 1, 2004.
Payment Date......................The 25th day of each month, or, if that day is
not a business day, the next business day,
beginning on July 26, 2004.
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S-4
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Scheduled final payment date......The payment date occurring in June 2034. The
actual final payment date could be
substantially earlier.
Form of securities................Book-entry.
SEE "DESCRIPTION OF THE SECURITIES--BOOK-ENTRY
NOTES" IN THIS PROSPECTUS SUPPLEMENT.
Minimum denominations.............$25,000 and integral multiples of $1,000 in
excess of that amount.
The Enhancer......................MBIA Insurance Corporation.
WE REFER YOU TO "THE ENHANCER" IN THIS
PROSPECTUS SUPPLEMENT FOR FURTHER INFORMATION.
The Yield Maintenance
Agreement Provider................Wachovia Bank, National Association.
The Paying Agent..................Wachovia Bank, National Association.
Legal Investment..................The notes will not be "mortgage related
securities" for purposes of the SMMEA.
SEE "LEGAL INVESTMENT" IN THIS PROSPECTUS
SUPPLEMENT AND "LEGAL INVESTMENT" IN THE
PROSPECTUS.
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S-5
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OFFERED NOTES
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NOTE INITIAL INITIAL RATING FINAL
CLASS RATE NOTE BALANCE (MOODY'S/S&P) PAYMENT DATE DESIGNATIONS
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A Variable $1,000,000,000 Aaa/AAA June 2034 Senior/
Variable Rate
Total Notes: $1,000,000,000
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OTHER INFORMATION:
o Due to losses and prepayments on the mortgage loans, the actual final
payment date may occur substantially earlier than the date listed above.
o On any payment date, the note rate for the notes will be equal to the
lesser of:
(1) LIBOR plus a margin of 0.22% per annum; and
(2) the net WAC rate.
o The net WAC rate will equal a fraction, expressed as a per annum rate, the
numerator of which is the sum of (i) the interest due on the mortgage
loans, less the sum of (a) the amount of the servicing fee on the mortgage
loans, (b) the amount of the premium on the policy, and (c) the pro rata
portion of interest attributable to additional balances represented by any
additional balance increase amount, and (ii) payments required to be made
under the yield maintenance agreement, if any, and the denominator of
which is the outstanding principal balance of the notes, as adjusted on
the basis of the actual number of days in the related interest period and
a 360-day year.
o On any payment date for which the note rate has been determined to be the
net WAC rate, the interest shortfall, if any, will be determined and will
be payable on such payment date or later payment dates, to the extent
funds are available for that purpose as described in this prospectus
supplement. These interest shortfalls will not be covered by the financial
guaranty insurance policy and may remain unpaid on the final payment date
for the notes. Through the payment date in March 2009, holders of the
notes will be entitled to payments made pursuant to the yield maintenance
agreement which will pay interest on a notional balance at a rate equal to
the excess, if any, of LIBOR over 16% per annum. On any payment date, the
notional balance will not exceed the outstanding principal balance of the
notes as of such payment date.
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S-6
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THE TRUST FUND
The depositor will establish the Wachovia Asset Securitization Issuance, LLC
2004-HE1 Trust, a Delaware statutory trust, to issue the notes. The assets of
the trust fund will include the mortgage loans and related assets.
THE MORTGAGE LOAN POOL
Unless we indicate otherwise, the statistical information we present in this
prospectus supplement is approximate and reflects the initial pool of mortgage
loans as of the cut-off date. The aggregate outstanding principal balance of the
mortgage loans as of the cut-off date is approximately $1,000,002,326.52.
The mortgage loans to be sold to the issuer will be adjustable rate home equity
revolving credit line loans evidenced by the related credit line agreements and
secured by the related mortgages or deeds of trust on residential properties.
The unpaid principal balance of a mortgage loan on any day will be equal to:
o its cut-off date balance, or, if applicable, its subsequent cut-off date
balance,
o PLUS any additional balances relating to that mortgage loan sold to the
issuer before that day,
o MINUS all collections credited against its principal balance in accordance
with the related mortgage loan since the cut-off date or, if applicable,
subsequent cut-off date.
The principal balance of a liquidated mortgage loan after the final recovery of
related liquidation proceeds, or earlier charge-off, will be zero.
As of the cut-off date, the mortgage loans had the following characteristics:
Number of loans 19,310
Aggregate principal balance $1,000,002,326.52
Average principal balance $51,786.76
Range of principal balances $4,990.30 to $2,109,753.00
Weighted average interest 4.094%
rate
Range of interest rates 1.750% to 8.750%
Weighted average fully 4.163%
indexed interest rate
Range of fully indexed 1.750% to 8.750%
interest rates
Weighted average maximum 17.707%
interest rate
Weighted average original 234 months
draw term
Weighted average remaining 216 months
draw term
o Approximately 59.78% and 1.29% of the mortgage loans (by aggregate
principal balance as of the cut-off date) are secured by second or third
mortgages or deeds of trust, respectively, and the remainder are secured
by first mortgages or deeds of trust.
SEE "DESCRIPTION OF THE MORTGAGE LOANS" IN THIS PROSPECTUS SUPPLEMENT.
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S-7
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LOAN RATE
The loan rate of each mortgage loan is the per annum interest rate required to
be paid by the mortgagor under the terms of the related credit line agreement.
Interest on each mortgage loan is computed daily and payable monthly on the
average daily outstanding principal balance of that mortgage loan. After any
initial teaser period, during which the loan rate may be a fixed or a discounted
variable rate for a period of generally twelve months, the loan rate on each
mortgage loan will be adjusted on each adjustment date to a rate equal to the
sum of an index and a fixed percentage specified in the related credit line
agreement, and is generally subject to a maximum loan rate over the life of the
mortgage loan specified in the related credit line agreement.
WE REFER YOU TO "DESCRIPTION OF THE MORTGAGE LOANS--MORTGAGE LOAN
CHARACTERISTICS" IN THIS PROSPECTUS SUPPLEMENT FOR FURTHER INFORMATION.
THE CERTIFICATES
The trust will also issue the Wachovia Asset Securitization Issuance, LLC
Asset-Backed Certificates, Series 2004-HE1, which will not be offered by this
prospectus supplement.
FUNDING ACCOUNT
An account designated the "funding account" will be set up with the indenture
trustee on the closing date for the benefit of the noteholders. On the first
business day prior to each payment date during the revolving period, the
servicer will deposit into the funding account (a) principal collections and (b)
on and after the payment date in October 2004, excess spread up to the amount
necessary to increase the overcollateralization amount to the
overcollateralization target amount as described in this prospectus supplement,
in each case, to the extent not used to purchase additional balances and/or
subsequent mortgage loans or used for other purposes on that payment date.
During the revolving period, funds on deposit in the funding account will be
used by the issuer to first purchase additional balances arising under the
mortgage loans in the trust and second to purchase subsequent mortgage loans
from the depositor. Any amounts remaining in the funding account at the end of
the revolving period, after giving effect to the purchase by the issuer of all
additional balances and/or subsequent mortgage loans, including any purchase on
the date on which the revolving period ends, and payments to the
certificateholders in respect of any additional balance increase amount, will be
paid to the noteholders as a payment of principal.
The mortgage loans acquired by the trust after the closing date will conform to
certain specified characteristics as described in this prospectus supplement.
WE REFER YOU TO "DESCRIPTION OF THE MORTGAGE LOANS--THE FUNDING ACCOUNT;
CONVEYANCE OF ADDITIONAL BALANCES AND SUBSEQUENT MORTGAGE LOANS" IN THIS
PROSPECTUS SUPPLEMENT FOR FURTHER INFORMATION.
PAYMENTS ON THE NOTES
On each monthly payment date, the paying agent will make distributions to the
holders of the notes. The amounts available for distribution will include:
o collections of monthly payments of principal and interest on the mortgage
loans, including prepayments and other unscheduled collections,
PLUS
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S-8
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o amounts from any payments made under the yield maintenance agreement,
PLUS
o amounts from any servicer advances,
PLUS
o amounts from any draws on the policy, for the purposes specified in the
policy,
MINUS
o the pro rata portion of interest attributable to additional balances
represented by any additional balance increase amount,
MINUS
o fees and expenses of the trust.
THE AGGREGATE AMOUNT OF SUCH MONTHLY COLLECTIONS IS DESCRIBED UNDER THE HEADING
"THE AGREEMENTS--THE SERVICING AGREEMENT--PRINCIPAL COLLECTIONS AND INTEREST
COLLECTIONS" IN THIS PROSPECTUS SUPPLEMENT.
Interest payments on the notes will be made monthly on each payment date,
beginning in July 2004, at the note rate described on page S-6 of this
prospectus supplement. Interest payments on the notes will accrue from the
preceding payment date, or, in the case of the first payment date, from the
closing date, through the day before that payment date, and will be calculated
on the basis of the actual number of days in that interest period and a 360-day
year. Interest on the notes will be paid on a PARI PASSU basis.
Payments to noteholders will be made from amounts available for distribution in
accordance with the following priority:
DURING THE REVOLVING PERIOD:
o from available interest collections, exclusive of the pro rata portion of
interest attributable to additional balances represented by any additional
balance increase amount, to pay to the enhancer the premium for the policy
and any unpaid premiums, with interest thereon, as provided in the
insurance agreement;
o from remaining available interest collections, exclusive of the pro rata
portion of interest attributable to additional balances represented by any
additional balance increase amount, and from payments received under the
yield maintenance agreement, to pay accrued and unpaid interest due on the
notes and from the pro rata portion of interest attributable to additional
balances represented by any additional balance increase amount, to pay to
the holders of the certificates, any accrued and unpaid interest due on
the additional balance increase amount;
o from net principal collections, to pay to the holders of the certificates,
the additional balance increase amount, if any;
o to deposit into the funding account remaining net principal collections;
o from any remaining amounts, to reimburse the enhancer for prior draws made
on the policy, with interest thereon, as provided in the insurance
agreement;
o on and after the payment date in October 2004, from excess spread, to
deposit into the funding account, the amount necessary to increase the
overcollateralization amount to the overcollateralization target amount;
o from any remaining excess spread, to pay to the holders of the
certificates, the
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S-9
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additional balance increase amount, if any;
o from any remaining amounts, to pay to the enhancer any amounts owed the
enhancer under the insurance agreement, with interest thereon;
o from any remaining excess spread, to pay to the holders of the notes, any
unpaid interest shortfalls on the notes due to the limitation on the note
rate by the net WAC rate, with interest thereon;
o from any remaining amounts, to pay to the indenture trustee or the paying
agent, as applicable, any unpaid amounts owed to such party under the
indenture; and
o to pay any remaining amount to the holders of the certificates.
DURING THE MANAGED AMORTIZATION PERIOD:
o from available interest collections, exclusive of the pro rata portion of
interest attributable to additional balances represented by any additional
balance increase amount, to pay to the enhancer the premium for the policy
and any unpaid premiums, with interest thereon, as provided in the
insurance agreement;
o from remaining available interest collections, exclusive of the pro rata
portion of interest attributable to additional balances represented by any
additional balance increase amount, and from payments received under the
yield maintenance agreement, to pay accrued and unpaid interest due on the
notes and from the pro rata portion of interest attributable to additional
balances represented by any additional balance increase amount, to pay to
the holders of the certificates, any accrued and unpaid interest due on
the additional balance increase amount;
o from net principal collections, to pay to the holders of the certificates,
the additional balance increase amount, if any;
o from any remaining amounts, to pay principal on the notes, on a pro rata
basis, in an amount equal to the principal distribution amount;
o from any remaining amounts, to reimburse the enhancer for prior draws made
on the policy, with interest thereon, as provided in the insurance
agreement;
o on and after the payment date in October 2004, from excess spread, to pay
principal on the notes, on a pro rata basis, in the amount necessary to
increase the overcollateralization amount to the overcollateralization
target amount;
o from any remaining excess spread, to pay to the holders of the
certificates, the additional balance increase amount, if any;
o from any remaining amounts, to pay to the enhancer any amounts owed the
enhancer under the insurance agreement, with interest thereon;
o from any remaining excess spread, to pay to the holders of the notes, any
unpaid interest shortfalls on the notes due to the limitation on the note
rate by the net WAC rate, with interest thereon;
o from any remaining amounts, to pay to the indenture trustee or the paying
agent, as applicable, any unpaid amounts owed to such party under the
indenture; and
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S-10
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o to pay any remaining amount to the holders of the certificates.
DURING THE RAPID AMORTIZATION PERIOD:
o from available interest collections, exclusive of the pro rata portion of
interest attributable to additional balances represented by any additional
balance increase amount, to pay to the enhancer the premium for the policy
and any unpaid premiums, with interest thereon, as provided in the
insurance agreement;
o from remaining available interest collections, exclusive of the pro rata
portion of interest attributable to additional balances represented by any
additional balance increase amount, and from payments received under the
yield maintenance agreement, to pay accrued and unpaid interest due on the
notes and from the pro rata portion of interest attributable to additional
balances represented by any additional balance increase amount, to pay to
the holders of the certificates, any accrued and unpaid interest due on
the additional balance increase amount;
o from any remaining amounts, to pay principal on the notes, on a pro rata
basis, in an amount equal to the principal distribution amount;
o from principal collections, to pay to the holders of the certificates, the
additional balance increase amount, if any;
o from any remaining amounts, to reimburse the enhancer for prior draws made
on the policy, with interest thereon, as provided in the insurance
agreement;
o on and after the payment date in October 2004, from excess spread, to pay
principal on the notes, on a pro rata basis, in the amount necessary to
increase the overcollateralization amount to the overcollateralization
target amount;
o from any remaining excess spread, to pay to the holders of the
certificates, the additional balance increase amount, if any;
o from any remaining amounts, to pay to the enhancer any amounts owed the
enhancer under the insurance agreement, with interest thereon;
o from any remaining excess spread, to pay to the holders of the notes, any
unpaid interest shortfalls on the notes due to the limitation on the note
rate by the net WAC rate, with interest thereon;
o from any remaining amounts, to pay to the indenture trustee or the paying
agent, as applicable, any unpaid amounts owed to such party under the
indenture; and
o to pay any remaining amount to the holders of the certificates.
The portion of principal collections available to be applied towards the payment
of principal on the notes will equal:
o at any time during the revolving period, zero;
o at any time during the managed amortization period, principal collections
on the mortgage loans for that payment date that are not used either to
acquire additional balances or pay any additional balance increase amount,
or that do not represent amounts which, under certain circumstances
described in this prospectus supplement and if applied toward the payment
of principal on the notes, would result in the
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S-11
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overcollateralization amount exceeding the overcollateralization target
amount; and
o at any time during the rapid amortization period, principal collections
for that payment date.
During the revolving period, principal collections will be applied to purchase
additional balances and/or subsequent mortgage loans, to the extent available,
and will also be applied to pay any amounts in respect of any additional balance
increase amount. During the managed amortization period, principal collections
will continue to be used to purchase additional balances, to the extent
available, and will also be applied to pay any amounts in respect of any
additional balance increase amount. Principal collections will not be applied to
acquire additional balances after the end of the managed amortization period.
In addition, on each payment date after the end of the revolving period, to the
extent of funds available for that purpose, holders of the notes will be
entitled to receive certain additional amounts in reduction of their note
balance, generally equal to amounts necessary to increase the
overcollateralization amount to the overcollateralization target amount, as
described in this prospectus supplement, and any unfunded liquidation loss
amounts.
The revolving period will be the period beginning on the closing date and ending
on the earliest of June 30, 2005, the occurrence of a managed amortization
event, or the occurrence of a rapid amortization event.
The managed amortization period will be the period beginning on the first day
following the end of the revolving period and ending on the earlier of June 30,
2007 and the occurrence of a rapid amortization event; and the rapid
amortization period will be the period beginning on the earlier of the first day
following the end of the managed amortization period and the occurrence of a
rapid amortization event, and ending upon the termination of the issuer. A
managed amortization event will be deemed to occur on any date on which the
amount on deposit in the funding account exceeds $40,000,000.
WE REFER YOU TO "DESCRIPTION OF THE SECURITIES--PRIORITY OF DISTRIBUTIONS" IN
THIS PROSPECTUS SUPPLEMENT FOR A DESCRIPTION OF EVENTS THAT WOULD CAUSE EITHER
OF THE AMORTIZATION PERIODS TO BEGIN.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the noteholders will consist
of:
o excess interest;
o overcollateralization; and
o the financial guaranty insurance policy.
WE REFER YOU TO "THE ENHANCER" AND "DESCRIPTION OF THE POLICY" IN THIS
PROSPECTUS SUPPLEMENT.
OPTIONAL REDEMPTION
A principal payment may be made to redeem the notes upon the exercise by the
servicer of its option to purchase the mortgage loans after the aggregate note
balance of the notes is reduced to an amount less than 10% of the initial
aggregate note balance of the notes. The purchase price payable by the servicer
for the mortgage loans will be the sum of:
o the aggregate outstanding principal balance of the mortgage loans, plus
accrued and unpaid interest thereon at the weighted average of the net
loan rates of the mortgage loans through the day preceding the payment
date of purchase, and the fair market value of real estate acquired by
foreclosure;
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S-12
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o an amount equal to any unpaid interest shortfalls on the notes due to the
net WAC rate plus accrued and unpaid interest on these interest
shortfalls; and
o all amounts due and owing the enhancer.
WE REFER YOU TO "DESCRIPTION OF THE SECURITIES--MATURITY AND OPTIONAL
REDEMPTION" IN THIS PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF THE
SECURITIES--TERMINATION; OPTIONAL PURCHASE OF MORTGAGE LOANS" IN THE ATTACHED
PROSPECTUS FOR FURTHER INFORMATION.
ERISA CONSIDERATIONS
The notes are eligible for purchase by pension, profit-sharing or other employee
benefit plans as well as individual retirement accounts and Keogh plans.
However, any fiduciary or other investor of assets of a plan that proposes to
acquire or hold the notes on behalf of or with assets of any plan should consult
with its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Internal Revenue Code of 1986, as amended, to the
proposed investment.
WE REFER YOU TO "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE
ATTACHED PROSPECTUS FOR FURTHER INFORMATION.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Orrick, Herrington & Sutcliffe LLP, special tax counsel to the
depositor, for federal income tax purposes, the notes will be characterized as
indebtedness, and neither the issuer, nor any portion of the issuer as created
and governed pursuant to the terms and conditions of the trust agreement, will
be characterized as an association, or a publicly traded partnership, taxable as
a corporation for federal income tax purposes, or as a "taxable mortgage pool"
within the meaning of Section 7701(i) of the Internal Revenue Code of 1986, as
amended. In addition, each noteholder, by its acceptance of a note, will agree
to treat that note as debt for federal, state and local tax purposes.
FOR FURTHER INFORMATION REGARDING MATERIAL INCOME TAX CONSIDERATIONS IN RESPECT
OF AN INVESTMENT IN THE NOTES, WE REFER YOU TO "MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS" AND "STATE AND OTHER TAX CONSEQUENCES" IN THIS PROSPECTUS
SUPPLEMENT AND "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" AND "STATE AND OTHER
TAX CONSEQUENCES" IN THE ATTACHED PROSPECTUS.
RATINGS
It is a condition to the issuance of the notes that they receive the ratings
shown on page S-6 of this prospectus supplement. 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. A security
rating does not address the frequency of prepayments of or draws on the mortgage
loans, the likelihood of the receipt of any amounts in respect of interest
shortfalls or any corresponding effect on the yield to investors.
The ratings will not address the likelihood that required payments will be made
by the provider of the yield maintenance agreement.
WE REFER YOU TO "YIELD AND PREPAYMENT CONSIDERATIONS" AND "RATINGS" IN THIS
PROSPECTUS SUPPLEMENT FOR FURTHER INFORMATION.
- --------------------------------------------------------------------------------
S-13
RISK FACTORS
THE NOTES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS. IN PARTICULAR,
YOU SHOULD NOT PURCHASE THE NOTES UNLESS YOU UNDERSTAND THE PREPAYMENT, CREDIT,
LIQUIDITY AND MARKET RISKS ASSOCIATED WITH THE NOTES.
THE NOTES ARE COMPLEX SECURITIES. YOU SHOULD POSSESS, EITHER ALONE OR
TOGETHER WITH AN INVESTMENT ADVISOR, THE EXPERTISE NECESSARY TO EVALUATE THE
INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS IN THE CONTEXT OF YOUR FINANCIAL SITUATION AND TOLERANCE FOR RISK.
YOU SHOULD CAREFULLY CONSIDER, AMONG OTHER THINGS, THE FOLLOWING FACTORS
IN CONNECTION WITH THE PURCHASE OF THE NOTES.
THE MORTGAGED PROPERTIES MIGHT Although the mortgage loans are secured by
NOT BE ADEQUATE SECURITY FOR THE liens on mortgaged properties, this
MORTGAGE LOANS. collateral may not give assurance of
repayment of the mortgage loans comparable
to the assurance of repayment that many
first lien lending programs provide, and the
mortgage loans, especially those with high
combined loan-to-value ratios, may have risk
of repayment characteristics more similar to
unsecured consumer loans.
Approximately 59.78% and 1.29% (by aggregate
principal balance as of the cut-off date) of
the initial mortgage loans are secured by
second and third mortgages, respectively,
that are subordinate to the rights of the
mortgagee under a senior mortgage or
mortgages. The proceeds from any
liquidation, insurance or condemnation
proceedings will be available to satisfy the
outstanding principal balance of these
mortgage loans only to the extent that the
claims of the senior mortgages have been
satisfied in full, including any related
foreclosure costs. If the servicer
determines that it would be uneconomical to
foreclose on the related mortgaged property,
the servicer may write off the entire
outstanding principal balance of the related
mortgage loan. These considerations will be
particularly applicable to mortgage loans
secured by second or third mortgages that
have high combined loan-to-value ratios
because, in these cases, the servicer is
more likely to determine that foreclosure
would be uneconomical. These losses will be
borne by the noteholders if the applicable
credit enhancement is insufficient to absorb
them.
Defaults on mortgage loans are generally
expected to occur with greater frequency in
their early years. The rate of default of
mortgage loans secured by junior mortgages
may be greater than that of mortgage loans
secured by senior mortgages on comparable
properties.
S-14
We cannot assure you that the values of the
mortgaged properties have remained or will
remain at their levels on the dates of
origination of the related mortgage loans.
If the residential real estate market
experiences an overall decline in value,
this could extinguish the value of the
interest of a junior mortgagee in the
mortgaged property before having any adverse
effect on the interest of the related senior
mortgagees.
DEPENDENCY ON THE As a result of the above considerations, the
CREDITWORTHINESS OF THE underwriting standards and procedures
MORTGAGORS. applicable to the mortgage loans, as well as
the repayment prospects of the mortgage
loans, may be more dependent on the
creditworthiness of the borrower and less
dependent on the adequacy of the mortgaged
property as collateral than would be the
case under many first lien lending programs.
Future adverse changes in the borrower's
economic circumstances may have a
significant effect on the likelihood of
repayment, since additional draws on the
mortgage loans may be made by the borrower
in the future up to the applicable credit
limit. Although the mortgage loans are
generally subject to provisions whereby the
servicer may reduce the applicable credit
limit as a result of a material adverse
change in the borrower's economic
circumstances, the servicer generally will
not monitor for these changes and may not
become aware of them until after the
borrower has defaulted. Under certain
circumstances, a borrower with a mortgage
loan may draw his entire credit limit in
response to personal financial needs
resulting from an adverse change in
circumstances.
Under the home equity program of the seller
relating to the mortgage loans, the seller
generally qualifies mortgagors based on an
assumed payment that reflects a loan rate
significantly lower than the related maximum
loan rate. The repayment of any mortgage
loan may thus be dependent on the ability of
the related mortgagor to make larger
interest payments if the loan rate of the
related mortgage loan is adjusted during the
life of the mortgage loan.
Future changes in a borrower's economic
circumstances may result from a variety of
unforeseeable personal factors, including
loss of employment, reduction in income,
illness and divorce. Any increase in
prevailing market interest rates may
adversely affect a borrower by increasing
debt service on the related mortgage loan or
other similar debt of the borrower. In
addition, changes in the payment terms of
any related senior mortgage loan may
adversely affect the borrower's ability to
pay principal and interest on the senior
mortgage loan. For example, these changes
may result if the senior mortgage loan is an
adjustable rate loan and the interest rate
on the loan increases, which may occur with
or without an increase in prevailing market
interest rates if the increase is due to the
phasing out of a reduced initial rate.
Specific information about these senior
mortgage loans, other than
S-15
the amount of these loans at origination of
the corresponding mortgage loan, is not
available, and we are not including it in
this prospectus supplement.
General economic conditions, both on a
national and regional basis, will also have
an impact on the ability of borrowers to
repay their mortgage loans. Certain
geographic regions of the United States from
time to time will experience weaker regional
economic conditions and housing markets,
and, as a result, will experience higher
rates of loss and delinquency than mortgage
loans generally. For example, a region's
economic condition and housing market may be
directly, or indirectly, adversely affected
by natural disasters or civil disturbances
such as earthquakes, hurricanes, wildfires,
floods, power shortages, eruptions or riots.
The economic impact and the impact on the
housing market of any of these types of
events may also be felt in areas beyond the
region immediately affected by the disaster
or disturbance. The mortgage loans may be
concentrated in these regions, and this
concentration may present risk
considerations in addition to those
generally present for similar
mortgage-backed securities without this
concentration. You should note that
approximately 20.44%, 20.39%, 13.98%, 12.14%
and 10.37% (by aggregate principal balance
as of the cut-off date) of the mortgage
loans are secured by mortgaged properties
located in the states of New Jersey,
Florida, Pennsylvania, North Carolina and
Virginia, respectively.
In addition, any change in the deductibility
for federal income tax purposes of interest
payments on home equity loans such as the
mortgage loans may also have an adverse
impact on the ability of borrowers to repay
their mortgage loans.
THE APPLICATION OF THE NET WAC The note rate on the notes will be a
RATE MAY REDUCE THE NOTE RATE ON floating rate based on LIBOR, generally
THE NOTES. limited by the net WAC rate, which will
equal for each payment date a fraction,
expressed as a per annum rate, the numerator
of which is the sum of (i) the interest due
on the mortgage loans, less the sum of (a)
the amount of the servicing fee on the
mortgage loans, (b) the amount of the
premium on the policy, and (c) the pro rata
portion of interest attributable to
additional balances represented by any
additional balance increase amount, and (ii)
payments required to be made under the yield
maintenance agreement, if any, and the
denominator of which is the outstanding
principal balance of the notes, as adjusted
on the basis of the actual number of days in
the related interest period and a 360-day
year. Because the net WAC rate is reduced to
account for interest on the additional
balance increase amount, which is paid to
the certificateholders, the net WAC rate
will be affected by the size of the
additional balance increase amount.
S-16
The loan rates of the mortgage loans adjust
based on the prime rate. As such, if LIBOR
rises and the prime rate decreases or does
not increase as fast as LIBOR, the holders
of the notes could receive interest at a
rate less than LIBOR plus the specified
margin due to these limitations on the note
rate. In addition, the weighted average loan
rate of the mortgage loans will change, and
may decrease over time due to scheduled
amortization of the mortgage loans, advances
made at reduced interest rates due to
promotional programs offered to mortgagors,
prepayments of mortgage loans, transfers to
the depositor of subsequent mortgage loans
and removal of mortgage loans by the seller
or servicer. We cannot assure you that the
weighted average loan rate of the mortgage
loans will not decrease after the date of
initial issuance of the notes.
The holders of the notes will be entitled to
recover interest shortfalls, in excess of
the net WAC rate, on any payment date from
excess cash flow, if any, available for that
purpose. No assurance can be given that
there will be excess cash flow available to
make such interest payments. The policy does
not cover any interest shortfalls on the
notes that result from an application of the
net WAC rate. The yield maintenance
agreement is intended to partially mitigate
the interest rate risk that could result
from limitations on the note rate by the
weighted average of the net loan rates on
the mortgage loans. The policy does not
cover any payments that are required to be
made under the yield maintenance agreement.
If payments are not made as required under
the yield maintenance agreement, those
amounts will only be paid if excess cash
flow is available for that purpose. The
yield maintenance agreement will terminate
after the payment date in March 2009.
YIELD AND PREPAYMENT The yield to maturity of the notes will
CONSIDERATIONS ON THE NOTES. depend on the rate and timing of principal
payments, including payments in excess of
required installments, prepayments,
refinancings or terminations, liquidations
and repurchases on the mortgage loans, the
rate and timing of draws on the related
mortgage loans, including due to promotional
programs offered to mortgagors and the price
you pay for your notes. This yield may be
adversely affected by a higher or lower than
anticipated rate of principal payments or
draws on the related mortgage loans. The
mortgage loans may be prepaid in full or in
part without penalty. The rate and timing of
defaults on the mortgage loans will also
affect the yield to maturity of the notes.
During the revolving period, if the
depositor does not sell enough additional
balances on the mortgage loans to the issuer
or does not purchase enough subsequent
mortgage loans, the issuer will not fully
apply amounts on deposit in the funding
account to the purchase of additional
balances on the mortgage loans or subsequent
mortgage loans by the end of the revolving
period. These remaining amounts,
S-17
after giving effect to the purchase by the
issuer of all additional balances and
subsequent mortgage loans, including any
purchase on the date on which the revolving
period ends, and payments to the
certificateholders in respect of any
additional balance increase amount, will be
paid to the holders of the notes on a pro
rata basis as principal on the first payment
date following the end of the revolving
period. SEE "YIELD AND PREPAYMENT
CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT.
LIMITATIONS ON THE REPURCHASE OR We cannot assure you that, at any particular
REPLACEMENT OF DEFECTIVE time, the seller will be able, financially
MORTGAGE LOANS BY THE SELLER. or otherwise, to repurchase or replace
defective mortgage loans as described in
this prospectus supplement. Events relating
to the seller and its operations could occur
that would adversely affect the financial
ability of the seller to repurchase
defective mortgage loans from the issuer,
including the termination of borrowing
arrangements that provide the seller with
funding for its operations, or the sale or
other disposition of all or any significant
portion of the seller's assets. If the
seller does not repurchase or replace a
defective mortgage loan, then the servicer,
on behalf of the issuer, will try to recover
the maximum amount possible with respect to
that defective mortgage loan, and any
resulting delay or loss will be borne by the
noteholders, to the extent that the credit
enhancement does not cover this delay or
loss.
MODIFICATION OF MORTGAGE LOANS In accordance with the servicing agreement,
BY THE SERVICER. the servicer may grant the request of a
mortgagor of a mortgage loan to either:
o change the interest rate payable on
the related mortgage loan;
o increase the credit limit on the
related mortgage loan above the limit
stated in the related credit line
agreement;
o refinance the existing senior lien or
place a new senior lien related to a
mortgage loan resulting in a CLTV
Ratio above the previous CLTV Ratio
for that loan; or
o make any other material modification
to the related mortgage loan.
provided, however, that without the consent
of the enhancer, the aggregate amount of
mortgage loans so modified may not exceed 5%
of the aggregate principal balance of the
mortgage loans as of the cut-off date.
Any material change to the characteristics
of a mortgage loan may affect the timing and
payments of amounts available from
collections in respect of that mortgage and
cause shortfalls or delays in payments to
noteholders. In addition, any decrease in
the interest rate on a mortgage loan will
have the effect of lowering the weighted
average loan rate of the mortgage loans and
may limit the note rate for the notes.
S-18
POSSIBLE VARIATIONS IN THE Each subsequent mortgage loan will satisfy
SUBSEQUENT MORTGAGE LOANS FROM the eligibility criteria referred to in this
THE INITIAL MORTGAGE LOANS. prospectus supplement at the time the
depositor transfers it to the issuer.
However, if acceptable to the enhancer, the
depositor may acquire subsequent mortgage
loans using credit criteria different from
those it applied to the initial mortgage
loans. As such, these subsequent mortgage
loans may be of a different credit quality
from the initial mortgage loans. Thus, after
the transfer of subsequent mortgage loans to
the issuer, the aggregate characteristics of
the mortgage loans that are part of the
trust estate may vary from those of the
initial mortgage loans. SEE "DESCRIPTION OF
THE MORTGAGE LOANS--THE FUNDING ACCOUNT;
CONVEYANCE OF ADDITIONAL BALANCES AND
SUBSEQUENT MORTGAGE LOANS" IN THIS
PROSPECTUS SUPPLEMENT.
LEGAL CONSIDERATIONS PRESENT The mortgage loans are secured by mortgages.
CERTAIN RISKS. With respect to mortgage loans that are
secured by first mortgages, the servicer
may, under certain circumstances, agree to a
new mortgage lien on the related mortgaged
property having priority over that mortgage.
Mortgage loans secured by second or third
mortgages are entitled to proceeds that
remain from the sale of the related
mortgaged property after any senior mortgage
loans and prior statutory liens have been
satisfied. If these proceeds are
insufficient to satisfy these senior loans
and prior liens in the aggregate, the
issuer, and accordingly, the noteholders
will bear the risk of delay in distributions
while the servicer obtains a deficiency
judgment, to the extent available in the
related state, against the related
mortgagor, and also bear the risk of loss if
the servicer cannot obtain or realize upon
that deficiency judgment. SEE "CERTAIN LEGAL
ASPECTS OF MORTGAGE LOANS" IN THE
PROSPECTUS.
CERTAIN MATTERS RELATED TO To the extent that the seller's transfer of
RECEIVERSHIP. the mortgage loans to the depositor is
deemed to constitute the creation of a
security interest in the mortgage loans in
favor of the depositor, and to the extent
such security interest was validly perfected
before the seller's insolvency and was not
taken in contemplation of insolvency of the
seller, or with the intent to hinder, delay
or defraud the seller or the creditors of
the seller, the Federal Deposit Insurance
Act, as amended by FIRREA, known as the
FDIA, provides that such security interest
should not be subject to avoidance by the
FDIC, as receiver or conservator for the
seller. Even if the FDIC cannot avoid a
legally enforceable and perfected security
interest, it may nonetheless repudiate such
security interest. If the FDIC did repudiate
an unavoidable security interest, it would
be liable for statutory damages provided in
the FDIA. Such damages are generally limited
to actual compensatory damages determined as
of the date the FDIC is appointed as
conservator or receiver.
S-19
In addition, if the FDIC were appointed as
receiver or conservator for the seller, the
FDIC would also have the power under the
FDIA to repudiate contracts, including the
seller's obligations under the purchase
agreement to repurchase certain mortgage
loans which do not conform to the seller's
representations and warranties. The
non-conforming mortgage loans could suffer
losses which could result in losses on the
notes.
In addition, in the case of an event of
default relating to the receivership,
conservatorship or insolvency of the
servicer, the receiver or conservator may
have the power either to terminate the
servicer and replace it with a successor
servicer or to prevent the termination of
the servicer and its replacement with a
successor servicer if no event of default
exists other than the receivership,
conservatorship or insolvency of the
servicer. Any interference with the
termination of the servicer or appointment
of a successor servicer could result in a
delay in payments to the holders of the
notes.
LIMITATIONS OF, AND THE POSSIBLE Credit enhancement will be provided for the
REDUCTION AND SUBSTITUTION OF, notes in the form of:
CREDIT ENHANCEMENT.
o excess interest collections from the
mortgage loans, if available;
o overcollateralization; and
o the policy, to the limited extent
described in this prospectus
supplement.
None of the seller, the depositor, the
servicer, the paying agent, the indenture
trustee or any of their respective
affiliates will be required to take any
other action to maintain, or have any
obligation to replace or supplement, this
credit enhancement or any rating of the
notes. To the extent that losses are
incurred on the mortgage loans that are not
covered by excess interest collections,
overcollateralization or the policy,
securityholders, including the holders of
the notes, will bear the risk of those
losses.
SOCIAL, ECONOMIC AND OTHER The ability of the issuer to purchase
FACTORS COULD AFFECT THE subsequent mortgage loans is largely
PURCHASE OF SUBSEQUENT MORTGAGE dependent upon whether mortgagors perform
LOANS. their payment and other obligations required
by the related mortgage loans in order that
those mortgage loans meet the specified
requirements for transfer on a subsequent
transfer date as a subsequent mortgage loan.
The performance by these mortgagors may be
affected as a result of a variety of social
and economic factors. Economic factors
include interest rates, unemployment levels,
the rate of inflation and consumer
perception of economic conditions generally.
However, we cannot predict whether or to
what extent economic or social factors will
affect the performance by the related
mortgagors and the availability of
subsequent mortgage loans.
S-20
LIMITED LIQUIDITY OF THE NOTES A secondary market for the notes may not
MAY LIMIT THE ABILITY TO SELL develop. Even if a secondary market does
THE NOTES OR REALIZE A DESIRED develop, it might not provide you with
YIELD. liquidity of investment or continue for the
life of the notes. Neither the underwriters
nor any other person will have any
obligation to make a secondary market in the
notes. Illiquidity means investors may be
unable to find a buyer for the notes readily
or at prices that will enable them to
realize a desired yield. Illiquidity can
have a severe adverse effect on the market
value of the notes.
THE LIMITED ASSETS OF THE TRUST The notes will be payable solely from the
FUND FOR MAKING PAYMENTS ON THE assets of the trust fund. There can be no
NOTES MAY BE INSUFFICIENT TO assurance that the market value of the
DISTRIBUTE ALL PAYMENTS DUE ON assets in the trust fund will be equal to or
THE NOTES. greater than the total principal amount of
the notes outstanding, plus accrued
interest. Moreover, if the assets of the
trust fund are ever sold, the sale proceeds
will be applied first to reimburse the
indenture trustee, paying agent, servicer
and enhancer for their unpaid fees and
expenses before any remaining amounts are
distributed to noteholders.
In addition, at the times specified in this
prospectus supplement, mortgage loans may be
released to the holders of the certificates.
Once released, those assets will no longer
be available to make payments to
noteholders.
You will have no recourse against the
depositor, the seller, the servicer, or any
of their affiliates, if any required
distribution on the notes is not made or for
any other default. The only obligations of
the seller with respect to the trust fund or
the notes would result from a breach of the
representations and warranties that the
seller makes concerning the trust assets.
THE RETURN ON YOUR NOTES COULD The Servicemembers Civil Relief Act,
BE REDUCED BY SHORTFALLS DUE TO formerly known as the Soldiers' and Sailors'
THE SERVICEMEMBERS CIVIL RELIEF Civil Relief Act of 1940, or Relief Act,
ACT provides relief to borrowers who enter
active military service and to borrowers in
reserve status who are called to active duty
after the origination of their mortgage
loan. The Relief Act provides generally that
a borrower who is covered by the Relief Act
may not be charged interest on a mortgage
loan in excess of 6% per annum during the
period of the borrower's active duty. Any
resulting interest shortfalls are not
required to be paid by the borrower at any
future time.
THE SERVICER IS NOT REQUIRED TO ADVANCE
THESE SHORTFALLS AS DELINQUENT PAYMENTS AND
THESE SHORTFALLS ARE NOT COVERED BY THE
POLICY.
Interest shortfalls on the mortgage loans
due to the application of the Relief Act or
similar legislation or regulations will not
be paid by excess interest or otherwise on
any payment date.
S-21
The Relief Act also limits the ability of
the servicer to foreclose on a mortgage loan
during the borrower's period of active duty
and, in some cases, during an additional
three month period thereafter. As a result,
there may be delays in payment and increased
losses on the mortgage loans.
We do not know how many mortgage loans have
been or may be affected by the application
of the Relief Act or similar legislation or
regulations. SEE "CERTAIN LEGAL ASPECTS OF
MORTGAGE LOANS--SOLDIERS' AND SAILORS' CIVIL
RELIEF ACT OF 1940 AND SIMILAR LAWS" IN THE
PROSPECTUS.
CONSEQUENCES OF OWNING LIMIT ON LIQUIDITY OF NOTES. Issuance of the
BOOK-ENTRY NOTES. offered notes in book-entry form may reduce
the liquidity of such notes in the secondary
trading market since investors may be
unwilling to purchase notes for which they
cannot obtain physical notes.
LIMIT ON ABILITY TO TRANSFER OR PLEDGE.
Since transactions in the book-entry notes
can be effected only through certain
depositories, participating organizations,
indirect participants and certain banks,
your ability to transfer or pledge a
book-entry note to persons or entities that
are not affiliated with these organizations
or otherwise to take actions in respect of
such notes, may be limited due to lack of a
physical note representing the book-entry
notes.
DELAYS IN PAYMENTS. You may experience some
delay in the receipt of payments on the
book-entry notes since the payments will be
forwarded by the paying agent to a
depository to credit the accounts of its
participants which will thereafter credit
them to your account either directly or
indirectly through indirect participants, as
applicable. SEE "DESCRIPTION OF THE
SECURITIES--BOOK-ENTRY NOTES" IN THIS
PROSPECTUS SUPPLEMENT.
S-22
INTRODUCTION
The trust fund will be formed under the trust agreement, to be dated as of
the closing date, between the depositor and the owner trustee. The issuer will
issue $1,000,000,000 of Wachovia Asset Securitization Issuance, LLC Asset-Backed
Notes, Series 2004-HE1. These notes will be issued under the indenture, to be
dated as of the closing date, between the issuer, the indenture trustee and the
paying agent. Under the trust agreement, the issuer will issue the Wachovia
Asset Securitization Issuance, LLC Asset-Backed Certificates, Series 2004-HE1.
The notes and the certificates are collectively referred to in this prospectus
supplement as the securities. Only the notes are offered by this prospectus
supplement.
On the closing date, the depositor will deposit into the trust fund a
group of mortgage loans that will constitute a mortgage pool. All of the initial
mortgage loans will be sold by the seller to the depositor, pursuant to a
mortgage loan purchase agreement, referred to in this prospectus supplement as
the purchase agreement. The depositor will then transfer the initial mortgage
loans to the trust pursuant to the trust agreement. The trust will be entitled
to all payments of principal and interest in respect of the mortgage loans
received on or after the cut-off date, other than amounts that relate to
additional balances that are not conveyed to the trust fund.
We have defined certain significant terms in the section titled
"Description of the Securities--Glossary of Terms" in this prospectus
supplement. Capitalized terms used in this prospectus supplement but not defined
in this prospectus supplement shall have the meanings assigned to them in the
accompanying prospectus.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The statistical information presented in this prospectus supplement
relates to the mortgage loans conveyed to the trust fund on the closing date, or
the initial mortgage loans. Unless otherwise indicated, all percentages set
forth in this prospectus supplement are approximate and are based upon the
aggregate principal balance of the initial mortgage loans as of the cut-off
date. The "principal balance" of a mortgage loan, other than a liquidated
mortgage loan, on any day is equal to the principal balance of that mortgage
loan as of the cut-off date or, in the case of a subsequent mortgage loan, the
related subsequent cut-off date, plus (1) any additional balances in respect of
that mortgage loan conveyed to the trust fund, minus (2) all collections
credited against the principal balance of that mortgage loan in accordance with
the related credit line agreement prior to that day. The "principal balance" of
a liquidated mortgage loan after final recovery of substantially all of the
related liquidation proceeds which the servicer reasonably expects to receive
will be zero. The mortgage loans will be Revolving Credit Line Loans (as
described in the accompanying prospectus).
Mortgage loans conveyed to the trust fund after the closing date, or
subsequent mortgage loans, will be selected using generally the same criteria as
that used to select the initial mortgage loans, and generally the same
representations and warranties will be made with respect thereto. See
"Description of the Mortgage Loans--The Funding Account; Conveyance of
Additional Balances and Subsequent Mortgage Loans" in this prospectus
supplement.
INITIAL MORTGAGE LOANS
All of the initial mortgage loans were originated by the seller, and were
originated generally in accordance with the underwriting standards of the
seller. Approximately 59.78% and 1.29% (by aggregate principal balance as of the
cut-off date) of the initial mortgage loans are secured by second or third
mortgages or deeds of trust, respectively, and the remainder are secured by
first mortgages or deeds
S-23
of trust. The mortgaged properties securing the initial mortgage loans consist
of residential properties. With respect to approximately 90.13% and 5.41% of the
initial mortgage loans (by aggregate principal balance as of the cut-off date),
the borrower represented at the time of origination that the related mortgaged
property would be owner occupied as a primary home or second home, respectively.
All percentages of the initial mortgage loans described in this prospectus
supplement are approximate percentages determined, except as otherwise
indicated, by the aggregate principal balance as of the cut-off date of the
initial mortgage loans.
The principal balance as of the cut-off date of the initial mortgage loans
is approximately $1,000,002,326.52. With respect to the initial mortgage loans:
o as of the cut-off date, no initial mortgage loan is 30 days or more
delinquent;
o the average principal balance as of the cut-off date is $51,786.76;
o the minimum principal balance as of the cut-off date is $4,990.30;
o the maximum principal balance as of the cut-off date is
$2,109,753.00;
o the lowest and the highest loan rate on the cut-off date are 1.750%
and 8.750% per annum, respectively;
o the weighted average loan rate on the cut-off date is 4.094% per
annum;
o the lowest and the highest fully indexed loan rate on the cut-off
date are 1.750% and 8.750% per annum, respectively;
o the weighted average fully indexed loan rate on the cut-off date is
4.163% per annum;
o the minimum and maximum CLTV Ratios as of the cut-off date are 4.00%
and 100.00%, respectively;
o the weighted average CLTV Ratio as of the cut-off date is 77.34%;
o all of the mortgage loans have original terms to maturity of not
greater than 40 years and no mortgage loan is scheduled to mature
later than May 20, 2044;
o no mortgage loan has a maximum loan rate lower than 16.000% per
annum;
o the latest scheduled draw term expiration is May 20, 2024; and
o with respect to 20.44%, 20.39%, 13.98%, 12.14% and 10.37% of the
initial mortgage loans, the related mortgaged properties are located
in the states of New Jersey, Florida, Pennsylvania, North Carolina
and Virginia, respectively.
As used in this prospectus supplement, a mortgage loan is considered to be
"30 to 59 days" or "30 or more days" delinquent when a payment due on any due
date remains unpaid as of the close of business on the next following monthly
due date. However, since the determination as to whether a mortgage loan falls
into this category is made as of the close of business on the last business day
of each month, a mortgage loan with a payment due on June 1 that remained unpaid
as of the close of business on June 30 would still be considered current as of
June 30. If that payment remained unpaid as of the close of business on July 31,
the mortgage loan would then be considered to be 30 to 59 days delinquent.
Delinquency information presented in this prospectus supplement as of the
cut-off date is determined and prepared as of the close of business on the last
business day immediately prior to the cut-off date.
S-24
INITIAL MORTGAGE LOAN CHARACTERISTICS
Set forth below is a description of certain characteristics of the initial
mortgage loans as of the cut-off date. Unless otherwise specified, all principal
balances of the initial mortgage loans are as of the cut-off date. All
percentages are approximate percentages by aggregate principal balance as of the
cut-off date (except as indicated otherwise) and may not sum to 100% due to
rounding.
CURRENT LOAN RATES
PERCENTAGE OF INITIAL
MORTGAGE LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CURRENT LOAN RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
1.501 to 2.000 1 $17,198.93 *
2.501 to 3.000 8 3,369,597.50 0.34%
3.001 to 3.500 620 40,157,032.66 4.02
3.501 to 4.000 12,523 711,639,791.44 71.16
4.001 to 4.500 2,709 113,073,446.35 11.31
4.501 to 5.000 2,528 106,080,271.21 10.61
5.001 to 5.500 569 17,936,363.72 1.79
5.501 to 6.000 180 5,317,718.70 0.53
6.001 to 6.500 142 1,979,761.13 0.20
6.501 to 7.000 28 366,242.23 0.04
7.001 to 7.500 1 21,491.01 *
8.501 to 9.000 1 43,411.64 *
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
============================================= ================== ========================= ======================
o The weighted average current loan rate of the initial mortgage loans as of
the cut-off date is approximately 4.094%.
* Less than 0.01% but greater than 0.00%.
S-25
JUNIOR RATIOS
PERCENTAGE OF
INITIAL
MORTGAGE LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF JUNIOR RATIOS (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ------------------ ------------------------- ---------------------
First Lien 5,669 $389,214,862.78 38.92%
0.01 to 10.00 501 8,573,044.27 0.86
10.01 to 20.00 3,040 87,273,099.37 8.73
20.01 to 30.00 3,033 117,361,796.29 11.74
30.01 to 40.00 2,292 107,769,780.10 10.78
40.01 to 50.00 1,651 93,288,747.34 9.33
50.01 to 60.00 1,078 69,227,454.06 6.92
60.01 to 70.00 734 46,857,133.15 4.69
70.01 to 80.00 611 39,712,851.84 3.97
80.01 to 90.00 421 24,963,125.30 2.50
90.01 to 100.00 280 15,760,432.02 1.58
- --------------------------------------------- ------------------ ------------------------- ---------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
============================================= ================== ========================= =====================
o The junior ratio of a mortgage loan is the ratio (expressed as a
percentage) of the credit limit of that mortgage loan to the sum of such
credit limit and the aggregate principal balance of any related senior
mortgage loans at origination of that mortgage loan.
o The weighted average junior ratio of the initial mortgage loans that are
secured by second or third liens on the mortgaged properties as of the
cut-off date is approximately 42.14%.
COMBINED LOAN-TO-VALUE RATIOS
PERCENTAGE OF INITIAL
MORTGAGE LOANS
RANGE OF COMBINED NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
0.01 to 10.00 33 $1,123,868.08 0.11%
10.01 to 20.00 219 8,432,328.59 0.84
20.01 to 30.00 436 19,139,694.17 1.91
30.01 to 40.00 684 34,853,928.49 3.49
40.01 to 50.00 887 48,408,421.22 4.84
50.01 to 60.00 1,194 66,342,143.09 6.63
60.01 to 70.00 1,651 96,894,647.33 9.69
70.01 to 80.00 2,463 164,572,518.12 16.46
80.01 to 90.00 8,199 401,875,408.58 40.19
90.01 to 100.00 3,544 158,359,368.85 15.84
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
============================================= ================== ========================= ======================
o The minimum and maximum combined loan-to-value ratios of the initial
mortgage loans as of the cut-off date are approximately 4.00% and 100.00%,
respectively, and the weighted average combined loan-to-value ratio of the
initial mortgage loans as of the cut-off date is approximately 77.34%.
S-26
PRINCIPAL BALANCES
PERCENTAGE OF
INITIAL
MORTGAGE LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF PRINCIPAL BALANCES ($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
0.01 to 50,000.00 13,056 $313,501,341.36 31.35%
50,000.01 to 75,000.00 2,522 155,569,074.34 15.56
75,000.01 to 100,000.00 1,871 166,083,682.14 16.61
100,000.01 to 150,000.00 910 112,485,729.28 11.25
150,000.01 to 200,000.00 421 73,242,710.64 7.32
200,000.01 to 250,000.00 243 54,782,695.93 5.48
250,000.01 to 300,000.00 82 22,670,328.90 2.27
300,000.01 to 400,000.00 101 34,705,379.66 3.47
400,000.01 to 500,000.00 59 27,151,042.77 2.72
500,000.01 to 600,000.00 15 8,331,133.39 0.83
600,000.01 to 700,000.00 8 5,079,411.71 0.51
700,000.01 to 800,000.00 1 735,643.42 0.07
800,000.01 to 900,000.00 4 3,445,146.58 0.34
900,000.01 to 1,000,000.00 5 4,872,862.16 0.49
1,000,000.01 to 1,100,000.00 1 1,036,393.67 0.10
1,100,000.01 to 1,200,000.00 2 2,342,560.69 0.23
1,200,000.01 to 1,300,000.00 2 2,474,076.03 0.25
1,300,000.01 to 1,400,000.00 1 1,345,234.22 0.13
1,400,000.01 to 1,500,000.00 2 2,929,526.43 0.29
1,500,000.01 to 1,600,000.00 1 1,582,715.17 0.16
1,600,000.01 to 1,700,000.00 1 1,615,238.72 0.16
1,900,000.01 to 2,000,000.00 1 1,910,646.31 0.19
2,100,000.01 to 2,200,000.00 1 2,109,753.00 0.21
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
============================================= ================== ========================= ======================
o The average principal balance of the initial mortgage loans as of the
cut-off date is approximately $51,786.76.
S-27
REMAINING DRAW TERM
PERCENTAGE OF
INITIAL
MORTGAGE LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
REMAINING DRAW TERM (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
31 to 35 1 $430,465.95 0.04%
81 to 85 2 101,365.81 0.01
86 to 90 301 15,965,192.53 1.60
96 to 100 15 1,060,322.44 0.11
101 to 105 64 3,485,115.81 0.35
106 to 110 163 11,624,442.31 1.16
111 to 115 140 8,097,537.19 0.81
116 to 120 94 8,455,030.40 0.85
206 to 210 8,079 384,532,701.86 38.45
211 to 215 7 340,321.86 0.03
216 to 220 342 13,185,307.42 1.32
221 to 225 1,613 83,988,786.89 8.40
226 to 230 3,408 181,803,803.86 18.18
231 to 235 3,204 180,640,772.27 18.06
236 to 240 1,877 106,291,159.92 10.63
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
============================================= ================== ========================= ======================
o The weighted average remaining draw term of the initial mortgage loans as
of the cut-off date is approximately 216 months.
CREDIT SCORES AS OF THE DATE OF ORIGINATION
PERCENTAGE OF
INITIAL
MORTGAGE LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CREDIT SCORES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
451 to 475 1 $31,630.98 *
476 to 500 11 383,203.10 0.04%
501 to 525 21 883,901.53 0.09
526 to 550 49 2,500,795.94 0.25
551 to 575 91 5,476,498.10 0.55
576 to 600 159 10,024,024.14 1.00
601 to 625 341 21,131,943.72 2.11
626 to 650 748 45,083,930.86 4.51
651 to 675 1,374 75,952,781.07 7.60
676 to 700 2,139 125,662,853.38 12.57
701 to 725 2,645 145,092,800.76 14.51
726 to 750 2,951 159,030,219.51 15.90
751 to 775 4,155 202,276,777.03 20.23
776 to 800 3,769 175,436,331.62 17.54
801 to 825 856 31,034,634.78 3.10
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
============================================= ================== ========================= ======================
o Of the initial mortgage loans with available credit scores, the weighted
average credit score at origination of those mortgage loans as of the
cut-off date is approximately 728.
* Less than 0.01% but greater than 0.00%.
S-28
DOCUMENTATION TYPE
PERCENTAGE OF
INITIAL
MORTGAGE LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
DOCUMENTATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------------- ------------------- --------------------- ----------------------
No Income Documentation Required 14,803 $535,583,212.22 53.56%
1 YTD Pay Stub or 2 Years Tax Returns 4,278 448,042,383.28 44.80
1 YTD Pay Stub and last W-2 or 2 Years Tax
Returns 229 16,376,731.02 1.64
- -------------------------------------------------- ------------------- --------------------- ----------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
================================================== =================== ===================== ======================
LOAN PURPOSE
PERCENTAGE OF
INITIAL
MORTGAGE LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
Debt Consolidation / Refinance 9,748 $537,081,971.36 53.71%
Other 5,591 261,114,792.96 26.11
Home Improvement 3,438 169,593,993.35 16.96
Purchase Money 533 32,211,568.85 3.22
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
============================================= ================== ========================= ======================
PROPERTY TYPE
PERCENTAGE OF
INITIAL
MORTGAGE LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
Single Family 17,818 $916,379,504.51 91.64%
Condominium 753 41,311,859.18 4.13
Multifamily 736 41,279,037.17 4.13
Agricultural Property with a Residence 3 1,031,925.66 0.10
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
============================================= ================== ========================= ======================
LIEN PRIORITY
PERCENTAGE OF
INITIAL
MORTGAGE LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
LIEN POSITION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
First 5,669 $389,214,862.78 38.92%
Second 13,266 597,850,312.56 59.78
Third 375 12,937,151.18 1.29
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
============================================= ================== ========================= ======================
S-29
GEOGRAPHICAL DISTRIBUTION
PERCENTAGE OF
INITIAL
MORTGAGE LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
LOCATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
New Jersey 3,382 $204,438,661.10 20.44%
Florida 3,708 203,877,629.63 20.39
Pennsylvania 2,967 139,829,430.34 13.98
North Carolina 2,804 121,432,453.47 12.14
Virginia 2,364 103,739,041.95 10.37
Georgia 1,150 60,548,469.94 6.05
New York 661 48,337,592.56 4.83
Connecticut 766 47,995,547.25 4.80
Maryland 714 32,103,912.26 3.21
South Carolina 623 27,790,400.59 2.78
District of Columbia 105 5,912,035.29 0.59
Delaware 22 1,874,051.44 0.19
Tennessee 15 823,430.55 0.08
Alabama 14 709,223.33 0.07
Massachusetts 11 486,945.24 0.05
West Virginia 2 75,453.32 0.01
Rhode Island 2 28,048.26 *
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
============================================= ================== ========================= ======================
* Less than 0.01% but greater than 0.00%.
FULLY INDEXED LOAN RATES
PERCENTAGE OF
INITIAL
MORTGAGE LOANS
RANGE OF FULLY INDEXED NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
LOAN RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
1.501 to 2.000 1 $17,198.93 *
2.501 to 3.000 8 3,369,597.50 0.34%
3.001 to 3.500 81 14,361,053.09 1.44
3.501 to 4.000 10,803 645,729,075.69 64.57
4.001 to 4.500 4,300 180,220,896.53 18.02
4.501 to 5.000 2,225 99,156,078.51 9.92
5.001 to 5.500 1,237 43,022,050.13 4.30
5.501 to 6.000 284 8,624,986.02 0.86
6.001 to 6.500 305 4,615,447.14 0.46
6.501 to 7.000 60 763,006.53 0.08
7.001 to 7.500 4 61,223.53 0.01
7.501 to 8.000 1 18,301.28 *
8.501 to 9.000 1 43,411.64 *
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
============================================= ================== ========================= ======================
o The weighted average fully indexed loan rate of the initial mortgage loans
as of the cut-off date is approximately 4.163%.
* Less than 0.01% but greater than 0.00%.
S-30
FULLY INDEXED GROSS MARGINS
PERCENTAGE OF
INITIAL
MORTGAGE LOANS
RANGE OF FULLY INDEXED NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
GROSS MARGINS (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
-2.499 to -2.000 1 $17,198.93 *
-1.499 to -1.000 8 3,369,597.50 0.34%
-0.999 to -0.500 81 14,361,053.09 1.44
-0.499 to 0.000 10,803 645,729,075.69 64.57
0.001 to 0.500 4,300 180,220,896.53 18.02
0.501 to 1.000 2,225 99,156,078.51 9.92
1.001 to 1.500 1,237 43,022,050.13 4.30
1.501 to 2.000 284 8,624,986.02 0.86
2.001 to 2.500 305 4,615,447.14 0.46
2.501 to 3.000 60 763,006.53 0.08
3.001 to 3.500 4 61,223.53 0.01
3.501 to 4.000 1 18,301.28 *
4.501 to 5.000 1 43,411.64 *
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
============================================= ================== ========================= ======================
o The weighted average fully indexed gross margin of the initial mortgage
loans as of the cut-off date is approximately 0.163% per annum.
* Less than 0.01% but greater than 0.00%.
CREDIT UTILIZATION RATES
PERCENTAGE OF
INITIAL
MORTGAGE LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CREDIT UTILIZATION RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
0.001 to 10.000 699 $6,889,459.36 0.69%
10.001 to 20.000 1,683 27,387,659.06 2.74
20.001 to 30.000 1,688 41,038,604.34 4.10
30.001 to 40.000 1,546 48,536,340.17 4.85
40.001 to 50.000 1,565 59,017,253.94 5.90
50.001 to 60.000 1,544 71,748,546.15 7.17
60.001 to 70.000 1,507 81,620,545.37 8.16
70.001 to 80.000 1,706 104,182,591.33 10.42
80.001 to 90.000 2,023 134,387,665.36 13.44
90.001 to 100.000 5,349 425,193,661.44 42.52
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
============================================= ================== ========================= ======================
o The average credit utilization rate based on the cut-off date credit limit
of the initial mortgage loans as of the cut-off date is approximately
58.47%.
S-31
CREDIT LIMITS
PERCENTAGE OF
INITIAL
MORTGAGE LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CREDIT LIMITS ($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
0.01 to 50,000.00 7,455 $165,649,258.02 16.56%
50,000.01 to 75,000.00 2,766 109,992,623.10 11.00
75,000.01 to 100,000.00 5,256 264,589,691.35 26.46
100,000.01 to 150,000.00 1,777 130,237,763.24 13.02
150,000.01 to 200,000.00 800 83,706,982.84 8.37
200,000.01 to 250,000.00 743 93,608,124.16 9.36
250,000.01 to 300,000.00 123 22,957,094.09 2.30
300,000.01 to 400,000.00 169 39,885,853.86 3.99
400,000.01 to 500,000.00 154 44,425,496.98 4.44
500,000.01 to 600,000.00 16 6,214,810.97 0.62
600,000.01 to 700,000.00 8 4,465,073.00 0.45
700,000.01 to 800,000.00 7 3,457,169.10 0.35
800,000.01 to 900,000.00 7 5,020,073.50 0.50
900,000.01 to 1,000,000.00 14 7,450,905.42 0.75
1,100,000.01 to 1,200,000.00 5 3,337,823.34 0.33
1,200,000.01 to 1,300,000.00 1 1,226,813.81 0.12
1,300,000.01 to 1,400,000.00 1 1,345,234.22 0.13
1,400,000.01 to 1,500,000.00 2 2,701,957.22 0.27
1,500,000.01 to 1,600,000.00 2 3,057,546.60 0.31
1,600,000.01 to 1,700,000.00 1 1,615,238.72 0.16
1,900,000.01 to 2,000,000.00 2 2,947,039.98 0.29
2,200,000.01 to 2,300,000.00 1 2,109,753.00 0.21
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
============================================= ================== ========================= ======================
o The average credit limit of the initial mortgage loans as of the cut-off
date is approximately $88,563.33.
S-32
TEASER EXPIRATION MONTH
PERCENTAGE OF
INITIAL
MORTGAGE LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
TEASER EXPIRATION MONTH MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
No Teaser/Teaser Expired 16,626 $894,369,617.71 89.44%
August 2004 338 12,033,062.45 1.20
September 2004 342 12,637,157.68 1.26
October 2004 250 11,486,457.24 1.15
November 2004 90 3,449,168.88 0.34
December 2004 279 11,015,062.86 1.10
January 2005 304 12,654,689.42 1.27
February 2005 232 9,907,962.36 0.99
March 2005 266 10,271,400.78 1.03
April 2005 359 13,154,305.37 1.32
May 2005 218 8,868,712.99 0.89
June 2005 6 154,728.78 0.02
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
============================================= ================== ========================= ======================
OCCUPANCY TYPE
PERCENTAGE OF
INITIAL
MORTGAGE LOANS
OCCUPANCY TYPE NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
(AS INDICATED BY BORROWER) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
Primary Residence 17,805 $901,258,363.58 90.13%
Non-Primary Residence 737 54,125,170.00 5.41
Rental Property 765 43,586,867.28 4.36
Agricultural Property 3 1,031,925.66 0.10
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
============================================= ================== ========================= ======================
ORIGINATION PERIOD
PERCENTAGE OF
INITIAL
MORTGAGE LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
ORIGINATION PERIOD MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
4th Quarter 2001 8,382 $400,599,260.20 40.06%
1st Quarter 2002 2 105,263.87 0.01
2nd Quarter 2002 11 463,534.27 0.05
3rd Quarter 2002 175 6,209,333.10 0.62
4th Quarter 2002 704 35,359,244.52 3.54
1st Quarter 2003 1,120 58,833,800.75 5.88
2nd Quarter 2003 2,158 119,268,900.28 11.93
3rd Quarter 2003 2,164 115,764,130.64 11.58
4th Quarter 2003 1,998 112,321,890.30 11.23
1st Quarter 2004 2,108 121,924,123.13 12.19
2nd Quarter 2004 488 29,152,845.46 2.92
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL: 19,310 $1,000,002,326.52 100.00%
============================================= ================== ========================= ======================
S-33
TERMS OF THE MORTGAGE LOANS
Interest on each mortgage loan is calculated based on the average daily
balance outstanding during the related billing cycle.
Each mortgage loan has a loan rate that is subject to adjustment on each
adjustment date, as specified in the related credit line agreement, to equal the
sum of:
o the index; and
o the gross margin;
provided, however, that the loan rate on each mortgage loan will in no event be
greater than the maximum loan rate.
The index for each mortgage loan is the "prime rate" established by the
financial institutions surveyed by and as published in the EASTERN EDITION of
THE WALL STREET JOURNAL in publishing its "Money Rates" table (or any
replacement thereof) or, if such rate is not available, a substitute rate
selected in accordance with the related credit line agreement.
In certain instances, the gross margins with respect to the mortgage loans
have been discounted based on specific employee status with the seller or its
subsidiaries at the time of origination of the mortgage loan, with an adjustment
in the event of a negative employment termination of the borrower (an adjustment
would be made on voluntary or involuntary termination, but would not be made for
non-continuation of employment based upon retirement, disability, severance,
etc.).
Each mortgage loan generally has a Draw Period of 20 years unless
restricted by state law. The related mortgagor for each mortgage loan may make a
draw at any time during the Draw Period. Mortgage loans that have a Repayment
Period following the Draw Period are not permitted to incur any advance during
the related Repayment Period.
If a balance is outstanding on a mortgage loan at the end of a Draw
Period, two repayment schedules determine the repayment process for the
outstanding balance on the mortgage loan, including accrued interest and other
fees. Mortgage loans that have an application date or were originated prior to
July 27th, 2001 (in the case of Pennsylvania) or October 26th, 2001 (in the case
of all other states), require a balloon payment of the outstanding balance owed
on the mortgage loan following the termination of the Draw Period. Originations
on or after the above dates provide for a variable repayment schedule (based
upon the outstanding balance and interest rate as more fully described below)
that follows the Draw Period.
Mortgagors are given a choice of two payment options during the Draw
Period. Option A requires a minimum monthly payment equal to the greater of (i)
the finance charge on the outstanding balance plus accrued but unpaid fees or
(ii) $50. Option B requires a minimum monthly payment of the greater of (i) 1.5%
of the outstanding balance or (ii) $50. The outstanding balance is due either as
a balloon payment or through a Repayment Period. Mortgage Loans with a Repayment
Period require the mortgagors to make a minimum monthly payment of the greater
of 2% of the outstanding balance or $50 until the outstanding balance is paid in
full; provided, that, in all states other than New York, on the specified final
maturity date thereof the minimum payment due will equal the entire outstanding
balance thereof.
The maximum amount of each draw with respect to any mortgage loan is equal
to the excess, if any, of the credit limit of that mortgage loan over the
outstanding principal balance under the related credit line agreement at the
time of such draw. Each mortgage loan may be prepaid in full or in part at any
time and without penalty, but with respect to each mortgage loan, the related
mortgagor will have the
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right during the related Draw Period to make a draw in the amount of any
prepayment theretofore made with respect to that mortgage loan. Each mortgagor
generally will have access to make draws by check, or in some cases by credit
card, subject to applicable law. Generally, the credit line agreement or
mortgage related to each mortgage loan will, subject to applicable law, contain
a customary "due-on-sale" clause.
As to each mortgage loan, the mortgagor's right to receive draws during
the Draw Period may be suspended, or the related credit limit may be reduced,
under a number of circumstances, including, but not limited to:
o a material adverse change in the mortgagor's financial
circumstances;
o a decline in the value of the mortgaged property significantly below
its appraised value at origination; or
o a payment default by the mortgagor.
However, generally such suspension or reduction will not affect the payment
terms for previously drawn balances. The servicer will have no obligation under
the servicing agreement to investigate as to whether any such circumstances have
occurred and may have no knowledge of them. Therefore, there can be no assurance
that any mortgagor's ability to receive draws will be suspended or reduced in
the event that the foregoing circumstances occur.
In the event of default under a mortgage loan, the mortgage loan may be
terminated and declared immediately due and payable in full. For this purpose, a
default includes, but is not limited to:
o the mortgagor's failure to make any payment as required;
o any action or inaction by the mortgagor that adversely affects the
mortgaged property or the rights in the mortgaged property; or
o fraud or material misrepresentation by a mortgagor in connection
with the mortgage loan.
None of the mortgage loans are insured by mortgage insurance policies
covering all or a portion of any losses on each loan, subject to certain
limitations.
THE FUNDING ACCOUNT; CONVEYANCE OF ADDITIONAL BALANCES AND SUBSEQUENT MORTGAGE
LOANS
THE FUNDING ACCOUNT
On the closing date, the indenture trustee will establish the Funding
Account for the benefit of the noteholders. On the first business day prior to
each payment date during the Revolving Period, the servicer will deposit
Principal Collections (to the extent not used to purchase additional balances,
subsequent mortgage loans or to pay amounts in respect of any Additional Balance
Increase Amount) and Excess Spread (to the extent not used to reimburse the
enhancer and, on and after the payment date in October 2004, up to the amount
necessary to increase the overcollateralization amount to the
overcollateralization target amount) into the Funding Account, and will apply
those amounts to purchase additional balances arising under mortgage loans
already included in the trust fund and to purchase subsequent mortgage loans
from the depositor, to the extent available.
On the payment date immediately succeeding the date on which the Revolving
Period ends, in the event that any amounts remain on deposit in the Funding
Account, after giving effect to the purchase by the issuer of all additional
balances and/or subsequent mortgage loans, including any purchased on the date
on which the Revolving Period ends, and payments to the certificateholders in
respect of any Additional Balance Increase Amount, those amounts will be
transferred to the Note Payment Account for distribution to the holders of the
notes on a pro rata basis as principal.
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PURCHASE OF ADDITIONAL BALANCES
During the Revolving Period, the servicer will first apply amounts in the
Funding Account, if any, to purchase additional balances created under the
mortgage loans. If amounts in the Funding Account are insufficient, the servicer
will next apply from Principal Collections in the Custodial Account and, if
Principal Collections are insufficient, on and after the payment date in October
2004, available Excess Spread in the Custodial Account up to the amount
necessary to increase the Overcollateralization Amount to the
Overcollateralization Target Amount, to purchase additional balances created
under the mortgage loans. However, Excess Spread on deposit in the Custodial
Account will not be permitted to be used to purchase additional balances if any
unreimbursed draws under the Policy are owed to the enhancer.
During the Managed Amortization Period, the servicer will first apply from
Principal Collections in the Custodial Account and, if Principal Collections are
insufficient, on and after the payment date in October 2004, available Excess
Spread in the Custodial Account up to the amount necessary to increase the
Overcollateralization Amount to the Overcollateralization Target Amount, to
purchase additional balances created under the mortgage loans. However, Excess
Spread on deposit in the Custodial Account will not be permitted to be used to
purchase additional balances if any unreimbursed draws under the Policy are owed
to the enhancer.
During the Rapid Amortization Period, no additional balances will be
purchased by the trust. With respect to collections in respect of additional
balances created under the mortgage loans during the Rapid Amortization Period,
the related Excluded Draw will be the property of the seller and not the
depositor or issuer and the related Excluded Amount will not constitute a part
of Principal Collections or Interest Collections.
All additional balances on the mortgage loans that arise prior to the
Rapid Amortization Period will be transferred from the seller to the depositor
in exchange for payment of the purchase price therefor. All additional balances
acquired by the depositor will be transferred to the issuer.
SUBSEQUENT MORTGAGE LOANS
The purchase agreement and the trust agreement permit the depositor and
the issuer, respectively, to acquire subsequent mortgage loans during the
Revolving Period. Accordingly, the statistical characteristics of the entire
pool of mortgage loans upon the acquisition of the subsequent mortgage loans may
vary somewhat from the statistical characteristics of the initial mortgage loans
as of the cut-off date as presented in this prospectus supplement.
Each subsequent mortgage loan will have been underwritten substantially in
accordance with the criteria set forth in this prospectus supplement under
"Description of the Mortgage Loans--Underwriting Standards." Subsequent mortgage
loans will be transferred to the issuer pursuant to subsequent transfer
agreements. In connection with the purchase of subsequent mortgage loans, on
each date subsequent mortgage loans are conveyed to the trust fund, or
subsequent transfer dates, the issuer will be required to pay to the depositor
from amounts on deposit in the Funding Account a cash purchase price of 100% of
the outstanding balance thereof. In each instance in which subsequent mortgage
loans are transferred to the trust fund pursuant to a subsequent transfer
agreement, the issuer will designate a cut-off date with respect to the
subsequent mortgage loans acquired on that date. Following each subsequent
transfer date, the aggregate principal balance of the mortgage loans will
increase by an amount equal to the aggregate principal balance of the subsequent
mortgage loans so acquired and the amount in the Funding Account will decrease
accordingly.
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Any conveyance of subsequent mortgage loans on a subsequent transfer date
is subject to certain conditions including, but not limited to:
(1) each subsequent mortgage loan must satisfy the representations and
warranties specified in the purchase agreement and in the related
subsequent transfer agreement;
(2) the depositor will select subsequent mortgage loans in a manner that
it reasonably believes is not adverse to the interests of the
holders of the notes or the enhancer; and
(3) as of each subsequent cut-off date, each subsequent mortgage loan
will satisfy the following criteria:
o the original stated term to maturity of the subsequent
mortgage loan will not exceed 480 months;
o the subsequent mortgage loan must have an outstanding
principal balance of at least $1,000 and no more than
$2,200,000 as of the subsequent cut-off date;
o the subsequent mortgage loan will be underwritten
substantially in accordance with the criteria set forth under
"Description of the Mortgage Loans--Underwriting Standards" in
this prospectus supplement;
o the subsequent mortgage loan shall not provide for negative
amortization; and
o following the purchase of the subsequent mortgage loan by the
issuer, the mortgage loans must have a weighted average loan
margin, a weighted average remaining term to maturity and a
weighted average CLTV Ratio at origination, as of each
respective subsequent cut-off date, which would not vary
materially from the initial mortgage loans.
In addition, the indenture trustee will not agree to any transfer of
subsequent mortgage loans without the approval of the enhancer and the rating
agencies, or approval parties, which approval shall not be unreasonably
withheld; provided, however that each approval party will provide notice of
approval or disapproval within 5 business days or the subsequent mortgage loans
will be deemed approved by such approval party. Subsequent mortgage loans with
characteristics materially varying from those set forth above may be purchased
by the issuer and included in the trust fund with the approval of the approval
parties; provided, however, that the addition of the subsequent mortgage loans
will not materially affect the aggregate characteristics of the entire pool of
mortgage loans.
UNDERWRITING STANDARDS
Applications for home equity lines of credit are received by the seller
primarily through four channels:
o Wachovia Bank Financial Center locations;
o Wachovia Direct Access (telephone and internet access);
o direct mail; and
o a concurrent cross-sell program with Wachovia Mortgage Corporation,
an affiliate of Wachovia Bank.
All of the mortgage loans will be originated by the seller. All of the
mortgage loans were underwritten generally in accordance with the seller's
underwriting standards. The following is a brief description of the underwriting
standards and procedures applicable to the mortgage loans.
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Generally, all consumer credit applications are processed on Wachovia's
Application Handling System, referred to in this prospectus supplement as AH,
which is a proprietary, on-line application processing and underwriting tool.
Home equity line of credit applications originated as part of the Wachovia
Mortgage Corporation concurrent cross-sell program are not entered into the AH
processing system, but are underwritten to substantially the same guidelines. At
the point-of-sale, the prospective borrower's pertinent information is entered
into AH. When all appropriate/required application information has been
captured, AH "background" processing will electronically obtain a credit report,
including, but not limited to a bureau score, calculate a custom credit score
and evaluate the application against the seller's current approved underwriting
standards. Some examples of the seller's current approved underwriting standards
are noted below:
o Borrowers must be a U. S. citizen or permanent resident alien;
o Borrowers are prohibited from having a bankruptcy or foreclosure
within the past 48 months;
o Judgments, collections, previous charge-offs and tax liens generally
must be paid if: greater than $2,500 for a single judgment, greater
than $7,500 for multiple judgments, and collections/repossessions
greater than $2,500, and all tax liens must be paid;
o Combined loan-to-value ratio may not exceed 100%;
o Maximum debt-to-income ratio generally may not exceed 50% as
calculated against the borrower's gross income; and
o Required stipulations, when applicable, including but not limited
to, income verification, valuation of collateral, property and flood
insurance requirements, etc.
The seller utilizes a zip code reference table to select the consumer
reporting agency that will provide the required credit report.
As indicated above, the borrower's credit application is scored to
determine eligibility. Two types of credit scores are employed in evaluating
each credit application.
o Bureau Score: The credit bureau score used is the traditional Fair
Isaac Credit Score (FICO) model in use at the three major consumer
reporting agencies.
o Custom Score: The seller uses six different Fair Isaac developed
custom scorecards in the home equity line of credit application
decision making process. The scorecards are segmented into
geographic regions and secondarily consider whether a banking
relationship exists. There are three geographic regions: (1)
Florida, (2) North Carolina, South Carolina and Georgia and (3)
Virginia, Maryland, Washington DC, New York, New Jersey,
Connecticut, Pennsylvania and Delaware. Within each geographic
region there is a further segmentation based upon banking
relationship. Those applicants with two or more banking
relationships with the seller (not including the loan application
under review) are considered bank customers and are scored
differently than those applicants with less than two relationships.
Loan applications taken prior to June 26, 2002, utilized a different
set of three Fair Isaac-developed custom scoring models. These
models were also segmented by geographic region and product type.
Extensive validation to ensure that each scorecard is demonstrably
and statistically sound has been and continues to be performed.
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The combination of bureau score and custom score is used in a matrix
fashion to determine the applicable credit grade. Any credit grade that has been
designated with an "A" has passed the seller's credit scoring standards. An
application with a credit grade of "A" may still be declined if other
underwriting standards are not met. Possible reasons for declining an
application include loan-to-value ratio, debt-to-income ratio, presence of a
bankruptcy or foreclosure within 48 months, or unacceptable collateral.
Applications will also be declined if the loan amount is greater than the
maximum or less than the minimum allowed. Any credit grade that has been
designated with a "D" has failed the seller's credit-scoring standard and will
receive a system recommended decline.
The credit grade is a measure of credit risk for that credit application.
It is used to determine loan parameters, including, but not limited to, maximum
loan-to-value and debt-to-income ratios. In addition, the credit grade
determines the risk-based pricing and the stipulations required to originate the
home equity line of credit. All system approved credit applications are
electronically forwarded to the seller's credit operational support sites for
processing and document preparation. The support sites gather all required
verifications including, but not limited to income verification, property
valuation, flood certification and title search.
Income documentation requirements are established according to credit
grade and loan amount.
- -----------------------------------------------------------------------------------------------------------
GRADE LOAN AMOUNT INCOME DOCUMENTATION REQUIREMENT
- -----------------------------------------------------------------------------------------------------------
A1, A3 Less than or equal to No income documentation required. (Includes self-employed
$100,000 applicants if self-employed 3 years or greater.)
-----------------------------------------------------------------------------------------
Greater than $100,000 or 1 pay stub supporting year-to-date income.
Self-Employed less than 3
years Self-Employed applicants: 2 year's tax returns.
- -----------------------------------------------------------------------------------------------------------
A4, A5 Less than or equal to No income documentation required. (Includes self-employed
$25,000 applicants if self-employed 3 years or greater.)
-----------------------------------------------------------------------------------------
Greater than $25,000 or 1 pay stub supporting year-to-date income.
Self-Employed less than 3
years Self-Employed applicants: 2 year's tax returns.
- -----------------------------------------------------------------------------------------------------------
D6, D7, OR D8 All loan amounts 1 pay stub supporting year-to-date income.
(IF OVERRIDDEN The most recent W-2 form.
TO AN APPROVAL)
Self-Employed applicants: 2 year's tax returns.
- -----------------------------------------------------------------------------------------------------------
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Property valuation methods are determined based on the credit limit and
loan purpose as noted below:
CREDIT LIMIT ACCEPTABLE VALUATION METHODOLOGY
- ------------------------------------------ ---------------------------------------------------------------
Less than or equal to $150,000............ Any of the following:
o Full Fannie Mae appraisal (including third party appraisals
less than twelve months old)
o Tax assessment valuation
o Electronic valuation
o Desk-top valuation
o Drive-by valuation
$150,001 to $250,000...................... All of the above except tax value
Greater than $250,000 and
all purchase money........................ Full Fannie Mae appraisal
Once all stipulations have been fulfilled, the operational support site
updates AH with the verified information and reprocesses the application through
AH background to ensure the decision is still a recommended approval. A loan
processor and/or underwriter reviews the application and all supporting
documentation prior to final approval and document preparation.
Exceptions to the applicable underwriting standards may occur on a
case-by-case basis. Such underwriting standards exceptions are tracked and
approved only by authorized employees. The seller employs a tiered override
authority process as a means of limiting and controlling exceptions to
underwriting standards and pricing requirements. These exception override levels
are embedded within the AH system. This tiering directs credit applications that
do not meet any of the above standards to employees with the appropriate level
of exception authority. Exceptions have been divided into four tiers. The level
of risk present in the exception will determine the appropriate exception
override authority needed for approval. As the risk increases, the required
exception override level increases while the number of employees with that
authority decreases. The highest level is limited to a small, controlled group.
THE SELLER AND SERVICER
GENERAL
Wachovia Bank is the originator and seller of all of the mortgage loans
and will be the servicer of the mortgage loans. Wachovia Bank is a direct
wholly-owned subsidiary of Wachovia Corporation, a North Carolina corporation
and a multi-bank holding company registered under the Bank Holding Company Act.
Wachovia Bank is engaged in general commercial banking business, offering a full
range of financial services to corporations and individuals. Wachovia Bank's
headquarters and its executive offices are located at 301 South College Street,
Charlotte, North Carolina 28288.
The notes do not represent an interest in or an obligation of the seller.
The seller's only obligations with respect to the notes will be pursuant to
certain limited representations and warranties made by the seller or as
otherwise provided in this prospectus supplement.
In its capacity as servicer, Wachovia Bank will be responsible for
servicing the mortgage loans in accordance with the terms of the servicing
agreement. The records and documents relating to the mortgage loans shall be
retained and maintained in trust by the servicer, except as otherwise provided
in the servicing agreement.
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Billing statements for mortgage loans are mailed monthly by the servicer.
The statement details the monthly activity on the related mortgage loan and
specifies the minimum payment due to the servicer and the available credit line.
Notice of changes in the applicable loan rate are provided by the servicer to
the mortgagor with those statements. All payments are due by the applicable due
date.
For information regarding collection and other servicing procedures,
including foreclosure procedures, see "The Servicing Agreement--Realization Upon
Defaulted Mortgage Loans" in this prospectus supplement. Servicing and
charge-off policies and collection practices may change over time in accordance
with the servicer's business judgment, changes in the servicer's portfolio of
real estate secured revolving credit line loans that it services for its
clients, and applicable laws and regulations, and other considerations.
DELINQUENCY AND LOSS EXPERIENCE OF THE SERVICER'S PORTFOLIO
The following tables summarize the delinquency and loss experience for all
home equity lines of credit loans originated by and serviced by Wachovia Bank.
The data presented in the following tables is for illustrative purposes only,
and there is no assurance that the delinquency and loss experience of the
mortgage loans in the mortgage pool will be similar to that set forth below.
HOME EQUITY LINE OF CREDIT LOANS
PORTFOLIO DELINQUENCY EXPERIENCE
===================================================================================================================
AT MAY 31, 2004 AT DECEMBER 31, 2003 AT DECEMBER 31, 2002
$ LOANS % BY $ $ LOANS % BY $ $ LOANS % BY $
------- ------ ------- ------ ------- ------
Number of Loans ......... 737,782 695,023 629,306
Total Portfolio ......... $24,529,452,218 100.00% $22,201,480,718 100.00% $17,514,190,567 100.00%
Period of
Delinquency:
30-59 Days ........... $ 34,465,822 0.14% $ 35,295,173 0.16% $ 38,021,206 0.22%
60-89 Days ........... $ 12,728,203 0.05% $ 16,299,783 0.07% $ 15,137,646 0.09%
90+ Days ............. $ 18,177,190 0.07% $ 21,040,346 0.09% $ 18,461,435 0.11%
Total Loans .......... $ 65,371,215 0.27% $ 72,635,302 0.33% $ 71,620,287 0.41%
Foreclosure ............. $ 25,915,219 0.11% $ 27,803,905 0.13% $ 27,569,164 0.16%
Foreclosed (REO
Property) ............... $ 8,695,954 0.04% $ 10,601,018 0.05% $ 7,475,177 0.04%
Total Loans in
Foreclosure ............. $ 34,611,173 0.14% $ 38,404,923 0.17% $ 35,044,341 0.20%
Total Delinquent
Loans ................... $ 99,982,388 0.41% $ 111,040,225 0.50% $ 106,664,628 0.61%
===================================================================================================================
S-41
PORTFOLIO LOSS AND FORECLOSURE EXPERIENCE
====================================================================================================================
AT MAY 31, 2004 AT DECEMBER 31, 2003 AT DECEMBER 31, 2002
$ LOANS % BY $ $ LOANS % BY $ $ LOANS % BY $
------- ------ ------- ------ ------- ------
Number of Loans ......... 737,782 695,023 629,306
Total Portfolio ......... $24,529,452,218 100.00% $22,201,480,718 100.00% $17,514,190,567 100.00%
Total Loans in
Foreclosure ............. $ 34,611,173 0.14% $ 38,404,923 0.17% $ 35,044,341 0.20%
Net Chargeoffs for
Period .................. $ 12,737,155 0.12%* $ 24,858,133 0.11% $ 18,900,000 0.11%
====================================================================================================================
* Annualized.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The servicing fee for each mortgage loan is payable out of the interest
payments on that mortgage loan. The servicing fee rate for each mortgage loan is
0.50% per annum. The compensation to the servicer consists of:
o the servicing fee payable to the servicer in respect of its
servicing activities; and
o other related compensation.
The servicer, or, if specified in the servicing agreement, the indenture
trustee on behalf of the trust fund and from funds available in the trust fund,
will pay or cause to be paid certain ongoing expenses associated with the trust
fund and incurred by it in connection with its responsibilities under the
servicing agreement, including, without limitation, payment of expenses incurred
in enforcing the obligations of the depositor or seller. If the servicer is not
the same person as, or an affiliate of, the depositor or the seller, the
servicer will be entitled to reimbursement of expenses incurred in enforcing the
obligations of the depositor or the seller under certain limited circumstances.
In addition, the servicer will be entitled to reimbursements for certain
expenses incurred by it in connection with liquidated mortgage loans and in
connection with the restoration of mortgaged properties, that right of
reimbursement being prior to the rights of noteholders to receive any related
liquidation proceeds, including insurance proceeds.
THE ISSUER
The Wachovia Asset Securitization Issuance, LLC 2004-HE1 Trust is a
statutory trust established under the laws of the State of Delaware, and will be
created and governed by the trust agreement, for the purposes described in this
prospectus supplement. The trust agreement will constitute the "governing
instrument" of the issuer under the laws of the State of Delaware relating to
statutory trusts. The issuer will not engage in any activity other than:
o acquiring and holding the mortgage loans and the other assets
comprising the trust fund and proceeds therefrom;
o issuing the notes and the certificates;
o making payments on the notes and the certificates; and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto or
connected therewith.
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The issuer's principal offices are at Rodney Square North, 1100 North
Market Street, Wilmington, Delaware 19890-0001, in care of Wilmington Trust
Company, as owner trustee.
THE OWNER TRUSTEE
Wilmington Trust Company will be the owner trustee under the trust
agreement. The owner trustee is a Delaware banking corporation, and its
principal offices are located in Wilmington, Delaware.
Neither the owner trustee nor any director, officer or employee of the
owner trustee will be under any liability to the issuer or the securityholders
for taking any action or for refraining from the taking of any action in good
faith pursuant to the trust agreement, or for errors in judgment; provided, that
none of the owner trustee or any director, officer or employee thereof will be
protected against any liability that would otherwise be imposed upon them by
reason of their willful malfeasance, bad faith or negligence in the performance
of their duties, or by reason of their reckless disregard of their obligations
and duties under the trust agreement. All persons into which the owner trustee
may be merged or with which it may be consolidated, or any entity resulting from
a merger or consolidation, will be the successor owner trustee under the trust
agreement.
The commercial bank or trust company serving as owner trustee may have
normal banking relationships with the depositor, the seller and/or their
respective affiliates.
The owner trustee may resign at any time, in which event the indenture
trustee will be obligated to appoint a successor owner trustee as set forth in
the trust agreement and the indenture. The indenture trustee may also remove the
owner trustee and shall do so upon the direction of the enhancer, so long as the
enhancer is not then in default under the Policy, and upon the direction of a
majority of the noteholders, if the enhancer is in default under the Policy, if
the owner trustee ceases to be eligible to continue as owner trustee under the
trust agreement or if the owner trustee becomes insolvent. Upon becoming aware
of such circumstances, the indenture trustee will be obligated to appoint a
successor owner trustee at the direction of the enhancer. Any resignation or
removal of the owner trustee and appointment of a successor owner trustee will
not become effective until acceptance of the appointment by the successor owner
trustee.
THE INDENTURE TRUSTEE
U.S. Bank National Association will act as indenture trustee for the notes
under the indenture. The depositor, the seller and the servicer may maintain
other banking relationships in the ordinary course of business with the
indenture trustee and its affiliates. The principal offices of the indenture
trustee are located at 60 Livingston Avenue, St. Paul, Minnesota 55107.
Under the indenture, the issuer, from cashflows in the priorities
described in this prospectus supplement, shall reimburse the indenture trustee
for all Trustee's Additional Expenses. The issuer is not required, however, to
reimburse any expense or indemnify against any loss, liability or expense
incurred by the indenture trustee through the indenture trustee's own willful
misconduct, negligence or bad faith.
THE PAYING AGENT
Wachovia Bank will act as initial paying agent for the notes under the
indenture. The paying agent is affiliated with the depositor, the seller and the
servicer. The principal offices of the paying agent are located at 401 South
Tryon Street - NC1179, Charlotte, North Carolina 28288.
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Under the indenture, the issuer, from cashflows in the priorities
described in this prospectus supplement, shall reimburse the paying agent for
the paying agent's extraordinary expenses. The issuer is not required, however,
to reimburse any expense or indemnify against any loss, liability or expense
incurred by the paying agent through the paying agent's own willful misconduct,
negligence or bad faith.
THE ENHANCER
The following information has been supplied by the enhancer for inclusion
in this prospectus supplement. Accordingly, the issuer, the depositor, the
seller, the servicer, the paying agent and the indenture trustee do not make any
representation as to the accuracy and completeness of this information. Neither
the enhancer nor any of its affiliates accepts any responsibility for the
accuracy or completeness of this prospectus supplement or any information or
disclosure contained in this prospectus supplement, or omitted from this
prospectus supplement, other than with respect to the accuracy of the
information regarding the Policy and the enhancer set forth under the headings
"Description of the Policy" and "The Enhancer" in this prospectus supplement.
Additionally, the enhancer makes no representations regarding the notes or the
advisability of investing in the notes.
THE ENHANCER
The enhancer is the principal operating subsidiary of MBIA Inc., a New
York Stock Exchange listed company. MBIA Inc. is not obligated to pay the debts
of or claims against the enhancer. The enhancer is domiciled in the State of New
York and licensed to do business in and is subject to regulation under the laws
of all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United
States and the Territory of Guam. The enhancer has three branches, one in the
Republic of France, one in the Republic of Singapore and the other in the
Kingdom of Spain. New York has laws prescribing minimum capital requirements,
limiting classes and concentrations of investments and requiring the approval of
policy rates and forms. State laws also regulate the amount of both the
aggregate and individual risks that may be insured, the payment of dividends by
the enhancer, changes in control and transactions among affiliates.
Additionally, the enhancer is required to maintain contingency reserves on its
liabilities in certain amounts and for certain periods of time.
FINANCIAL INFORMATION ABOUT THE ENHANCER
The following documents filed by MBIA Inc. with the Securities and
Exchange Commission are incorporated herein by reference:
o MBIA Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2003; and
o MBIA Inc.'s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2004.
Any documents filed by MBIA Inc. pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, after the date of this
prospectus supplement and prior to the termination of the offering of the
securities offered hereby shall be deemed to be incorporated by reference in
this prospectus supplement and to be a part hereof. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein, or
contained in this prospectus supplement, shall be deemed to be modified or
superseded for purposes of this prospectus supplement to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
prospectus supplement.
S-44
The consolidated financial statements of the enhancer, a wholly owned
subsidiary of MBIA Inc., and its subsidiaries as of December 31, 2003 and
December 31, 2002 and for each of the three years in the period ended December
31, 2003, prepared in accordance with generally accepted accounting principles,
included in the Annual Report on Form 10-K of MBIA Inc. for the year ended
December 31, 2003, and the consolidated financial statements of the enhancer and
its subsidiaries as of March 31, 2004 and for the three-month periods ended
March 31, 2004 and March 31, 2003 included in the Quarterly Report on Form 10-Q
of MBIA Inc. for the period ended March 31, 2004, are hereby incorporated by
reference into this prospectus supplement and shall be deemed to be a part
hereof.
All financial statements of the enhancer and its subsidiaries included in
documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, subsequent to the date of this
prospectus supplement and prior to the termination of the offering of the notes
shall be deemed to be incorporated by reference into this prospectus supplement
and to be a part hereof from the respective dates of filing those documents.
MBIA Inc. files annual, quarterly and special reports, information
statements and other information with the Securities and Exchange Commission
under File No. 1-9583. Copies of the Securities and Exchange Commission filings
including
o MBIA Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2003, and
o MBIA Inc.'s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2004
are available:
o over the Internet at the Securities and Exchange Commission's
web site at http://www.sec.gov;
o at the Securities and Exchange Commission's public reference
room in Washington, D.C.;
o over the Internet at MBIA, Inc.'s web site at
http://www.mbia.com; and
o at no cost, upon request to MBIA Insurance Corporation, 113
King Street, Armonk, New York 10504. The telephone number of
the enhancer is (914) 273-4545.
The tables below present selected financial information of the enhancer
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities and generally accepted accounting
principles:
STATUTORY ACCOUNTING PRACTICES
-----------------------------------------
DECEMBER 31, 2003 MARCH 31, 2004
----------------- --------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
Admitted Assets...................... $9,985 $10,372
Liabilities.......................... $6,270 $ 6,536
Capital and Surplus.................. $3,715 $ 3,836
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
-----------------------------------------
DECEMBER 31, 2003 MARCH 31, 2004
----------------- --------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
Assets............................... $13,559 $13,901
Liabilities.......................... $ 6,957 $ 7,111
Shareholder's Equity................ $ 6,602 $ 6,790
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FINANCIAL STRENGTH RATINGS OF THE ENHANCER
Moody's Investors Service, Inc. rates the financial strength of the
enhancer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc., rates the financial strength of the enhancer "AAA."
Fitch Ratings rates the financial strength of the enhancer "AAA."
Each rating of the enhancer should be evaluated independently. The ratings
reflect the respective rating agency's current assessment of the
creditworthiness of the enhancer and its ability to pay claims on its policies
of insurance. Any further explanation as to the significance of the above
ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the notes,
and the ratings may be subject to revision or withdrawal at any time by the
rating agencies. Any downward revision or withdrawal of any of the above ratings
may have an adverse effect on the market price of the notes. The enhancer does
not guaranty the market price of the notes nor does it guaranty that the ratings
on the notes will not be revised or withdrawn.
THE YIELD MAINTENANCE AGREEMENT PROVIDER
The information contained in this section relates to and has been obtained
from Wachovia Bank. It is furnished solely to provide limited information
regarding Wachovia Bank as the provider of the Yield Maintenance Agreement and
does not purport to be comprehensive. Information regarding Wachovia Bank is
qualified in its entirety by the detailed information appearing in the documents
and financial statements referenced below.
Wachovia Bank will be the provider of the Yield Maintenance Agreement.
Wachovia Bank is a subsidiary of Wachovia Corporation, the fourth largest bank
holding company in the United States, based on approximately $411 billion in
total assets as of March 31, 2004.
As of March 31, 2004, Wachovia Bank had total assets of approximately $364
billion, total net loans of approximately $179 billion, total deposits of
approximately $239 billion and stockholder's equity of approximately $32
billion.
On September 1, 2001, the former Wachovia Corporation merged into First
Union Corporation pursuant to the terms and conditions set forth in an Agreement
and Plan of Merger dated April 15, 2001. As a result, First Union Corporation
(as the surviving corporation) acquired control of the bank and non-bank
subsidiaries of the former Wachovia Corporation. Upon completion of the merger,
First Union Corporation was renamed Wachovia Corporation. On April 1, 2002, the
former Wachovia Bank, N.A. merged into First Union National Bank and the
surviving entity was renamed Wachovia Bank, National Association.
Wachovia Bank submits Consolidated Reports of Condition and Income for a
Bank With Domestic and Foreign Offices, or a call report, to the Federal Deposit
Insurance Corporation, or FDIC, on a quarterly basis. The publicly available
portions of any call report with respect to Wachovia Bank are on file with the
FDIC, and copies of the available portions of any call report may be obtained
from the FDIC, Disclosure Group, Room F518, 550 17th Street, N.W., Washington,
D.C. 20429, at prescribed rates.
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DESCRIPTION OF THE SECURITIES
GENERAL
The notes will be issued pursuant to the indenture. The certificates will
be issued pursuant to the trust agreement.
The following summaries describe certain provisions of the securities, the
indenture and the trust agreement. These summaries do not purport to be complete
and are subject to, and qualified in their entirety by reference to, the
provisions of the applicable agreements. Only the notes are being offered by
this prospectus supplement.
The notes will be secured by the trust fund, which will be pledged by the
issuer to the indenture trustee pursuant to the indenture. The trust fund will
consist of, without limitation:
o the mortgage loans, including all additional balances and any
subsequent mortgage loans;
o all amounts on deposit in the Custodial Account, the Note Payment
Account, the Distribution Account and the Funding Account;
o the Yield Maintenance Agreement;
o the Policy; and
o all proceeds of the foregoing.
Until the beginning of the Managed Amortization Period, subsequent
mortgage loans may be added to the trust fund. In addition, until the beginning
of the Rapid Amortization Period, additional balances are expected to be added
to the trust fund. Apart from the use of any funds in the Custodial Account and
the Funding Account and Excess Spread, as described in this prospectus
supplement, to acquire additional balances and/or subsequent mortgage loans,
none of the issuer, the paying agent or the indenture trustee are obligated to
fund any additional balances or subsequent mortgage loans.
BOOK-ENTRY NOTES
The notes will initially be issued as book-entry notes. Note Owners may
elect to hold their notes through The Depository Trust Company, or DTC, in the
United States, or Clearstream, Luxembourg or the Euroclear System in Europe if
they are Participants in those systems, or indirectly through organizations that
are Participants in those systems. The book-entry notes will be issued in one or
more securities that equal the Note Balance, and will initially be registered in
the name of Cede & Co., the nominee of DTC. Clearstream, Luxembourg and the
Euroclear System will hold omnibus positions on behalf of their Participants
through customers' securities accounts in the names of Clearstream, Luxembourg
and the Euroclear System 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. Investors may hold beneficial interests
in the book-entry notes in minimum denominations of $25,000 and in integral
multiples of $1,000 in excess thereof. Except as described below, no beneficial
owner will be entitled to receive a definitive note. Unless and until definitive
notes are issued, it is anticipated that the only "Holder" of the notes will be
Cede & Co., as nominee of DTC. Note Owners will not be "Holders" or
"Noteholders" as those terms are used in the indenture.
A beneficial owner's ownership of a book-entry note will be recorded on
the records of the Securities Intermediary that maintains that beneficial
owner's account for such purpose. In turn, the Securities Intermediary's
ownership of the book-entry notes will be recorded on the records of DTC, or of
a Participating firm that acts as agent for the Securities Intermediary, the
interest of which will in turn be
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recorded on the records of DTC, if the Note Owner's Securities Intermediary is
not a DTC Participant, and on the records of Clearstream, Luxembourg or the
Euroclear System, as appropriate.
Note Owners will receive all disbursements of principal of and interest on
the notes from the paying agent through DTC and DTC Participants. Except under
the circumstances described below, while the notes are outstanding, under the
DTC Rules, DTC is required to make book-entry transfers among Participants on
whose behalf it acts with respect to the notes and is required to receive and
transmit payments of principal of and interest on the notes. Participants and
indirect Participants with which Note Owners have accounts with respect to notes
are similarly required to make book-entry transfers and receive and transmit
payments on behalf of their respective Note Owners. Accordingly, although Note
Owners will not possess physical certificates, the DTC Rules provide a mechanism
by which Note Owners will receive payments and will be able to transfer their
interests.
Note Owners will not receive or be entitled to receive definitive notes
representing their respective interests in the notes, except under the limited
circumstances described below. Unless and until definitive notes are issued,
Note Owners that are not Participants may transfer ownership of their notes only
through Participants and indirect Participants by instructing the Participants
and indirect Participants to transfer the notes, by book-entry transfer, through
DTC for the account of the purchasers of the notes, which account is maintained
with the related Participants. Under the DTC Rules and in accordance with DTC's
normal procedures, transfers of ownership of the notes will be executed through
DTC, and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and indirect Participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Note Owners.
Under a book-entry format, Note Owners of the book-entry notes may
experience some delay in their receipt of payments, since such payments will be
forwarded by the paying agent to Cede & Co. Payments with respect to notes held
through Clearstream, Luxembourg or the Euroclear System will be credited to the
cash accounts of Clearstream, Luxembourg Participants or Euroclear System
Participants in accordance with the relevant system's rules and procedures, to
the extent received by the related Depositary. Such payments will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. Because DTC can only act on behalf of financial intermediaries, the
ability of a Note Owner to pledge book-entry notes to persons or entities that
do not participate in the Depositary system, or otherwise take actions in
respect of such book-entry notes, may be limited due to the lack of physical
certificates for such book-entry notes. In addition, the issuance of the notes
in book-entry form may reduce the liquidity thereof in the secondary market,
since certain potential investors may be unwilling to purchase securities for
which they cannot obtain physical certificates.
DTC has advised the indenture trustee that, unless and until definitive
notes are issued, DTC will take any action permitted to be taken by the holders
of the book-entry notes under the indenture only at the direction of one or more
financial intermediaries to the DTC accounts of which the book-entry notes are
credited, to the extent that such actions are taken on behalf of financial
intermediaries the holdings of which include such book-entry notes. Clearstream,
Luxembourg or the Euroclear System operator, as the case may be, will take any
other action permitted to be taken by Note Owners under the indenture on behalf
of a Clearstream, Luxembourg Participant or Euroclear System Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the related Depositary to effect such actions on its behalf through DTC.
Definitive notes will be issued to Note Owners or their nominees, rather
than to DTC, if:
o the depositor or a responsible officer of the indenture
trustee obtains actual knowledge that DTC is no longer
willing, qualified or able to properly discharge its
responsibilities
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as nominee and depository with respect to the book-entry notes
and the depositor or the indenture trustee is unable to locate
a qualified successor; or
o after the occurrence of an event of default, Note Owners
representing percentage interests aggregating at least a
majority of the Note Balance of the notes advise DTC through
the financial intermediaries and the DTC Participants in
writing that the continuation of the book-entry system through
DTC, or a successor thereto, is no longer in the best
interests of Note Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the indenture trustee will be required to notify all Note
Owners through DTC of the occurrence of such event and the availability of
definitive notes. Upon surrender by DTC of the global certificate or
certificates representing the book-entry notes and instructions for
re-registration, the issuer will issue and the indenture trustee will
authenticate, definitive notes, and thereafter the indenture trustee will
recognize the holders of those definitive notes as "Holders" and "Noteholders"
under the indenture.
Although DTC, Clearstream, Luxembourg and the Euroclear System have agreed
to the foregoing procedures in order to facilitate transfers of notes between
and among Participants of DTC, Clearstream, Luxembourg and the Euroclear System,
they will be under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. See "Risk
Factors--Book-Entry Registration" in this prospectus supplement and "Description
of the Securities--Book-Entry Registration and Form" in the prospectus.
PAYMENTS ON THE NOTES
Payments on the notes will be made by the paying agent on the 25th day of
each month, or if such day is not a business day, the next business day,
commencing on July 26, 2004. Payments on the notes will be made to the persons
in the names of which such notes are registered at the close of business on the
related Record Date. See "Description of the Securities--Book-Entry Registration
and Form" in the prospectus. Payments will be made by wire transfer to the
account of the person entitled thereto, which, in the case of book-entry notes,
will be DTC or its nominee, as it appears on the note register, in the amounts
calculated as described in this prospectus supplement on the related
Determination Date. However, the final payment in respect of the notes, if the
notes are no longer book-entry notes, will be made only upon presentation and
surrender thereof at the office or the agency of the paying agent specified in
the notice to noteholders of such final payment.
INTEREST PAYMENTS ON THE NOTES
Interest payments will be made on the notes, PARI PASSU, on each payment
date at the Note Rate for the related Interest Period. If the Note Rate is based
on the Net WAC Rate on any payment date, there will be Interest Shortfalls on
the notes. Any Interest Shortfall created thereby will accrue interest at the
Note Rate, as adjusted from time to time, and will be paid on subsequent payment
dates to the extent Excess Spread is available therefor. Interest Shortfalls
will not be covered by the Policy and may remain unpaid on the Final Payment
Date.
Interest payments on the notes will be reduced by any Relief Act
Shortfalls for the related Collection Period and the resulting shortfall will
not be covered by the Policy. Unlike Interest Shortfalls, Relief Act Shortfalls
will not accrue interest and will not be paid on subsequent payment dates, even
if funds are available therefor.
Interest for the notes will be calculated by the servicer on the basis of
the actual number of days in the related Interest Period and a 360-day year.
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For each payment date, LIBOR will be established by the servicer in the
manner provided for in the definition of LIBOR under "--Glossary of Terms"
below. The establishment of LIBOR as to each Interest Period by the servicer
will, in the absence of manifest error, be final and binding.
PRINCIPAL PAYMENTS ON THE NOTES
No principal will be payable on the notes during the Revolving Period,
since during this period Principal Collections will be used first to purchase
additional balances and/or subsequent mortgage loans and then to pay any
Additional Balance Increase Amount. On the payment date immediately succeeding
the date on which the Revolving Period ends, amounts remaining in the Funding
Account, after giving effect to the purchase by the issuer of all additional
balances and subsequent mortgage loans, including any purchase on the date on
which the Revolving Period ends, and payments to the certificateholders in
respect of any Additional Balance Increase Amount, will be applied as principal
payments on the notes, on a pro rata basis. On each payment date during the
Managed Amortization Period, principal will be payable on the notes, on a pro
rata basis, in an amount equal to Net Principal Collections for the related
Collection Period, less amounts paid to certificateholders in respect of any
Additional Balance Increase Amount and less any Overcollateralization Release
Amount. On each payment date during the Rapid Amortization Period, principal
will be payable on the notes, on a pro rata basis, in an amount equal to
Principal Collections for the related Collection Period. In addition, on each
payment date following the end of the Revolving Period and after the payment
date in October 2004, to the extent of funds available therefor, holders of the
notes will be entitled to receive certain additional amounts to be applied in
reduction of the Note Balance, on a pro rata basis, equal to amounts required to
be paid so that the Overcollateralization Amount equals the
Overcollateralization Target Amount, as described in this prospectus supplement,
together with any unfunded Liquidation Loss Amounts.
Principal payments on the notes on a payment date will be made on a pro
rata basis and will not exceed the outstanding Note Balance on that payment
date. On the Final Payment Date, principal will be due and payable on the notes
in an amount equal to the Note Balance remaining outstanding on that payment
date.
PRIORITY OF DISTRIBUTIONS
On each payment date, from amounts withdrawn from the Custodial Account
with respect to the mortgage loans (including any draw on the Policy for that
payment date, which will be used solely for the purposes specified in the
Policy, and any amounts required to be paid under the Yield Maintenance
Agreement), the following payments will be made in the following order of
priority:
DURING THE REVOLVING PERIOD:
o first, from Interest Collections (exclusive of the pro rata portion
of interest attributable to additional balances represented by any
Additional Balance Increase Amount), the amount of the premium for
the Policy to the enhancer, and any unpaid premium with interest
thereon, as provided in the Insurance Agreement;
o second, from any remaining Interest Collections (exclusive of the
pro rata portion of interest attributable to additional balances
represented by any Additional Balance Increase Amount), and from
payments received under the Yield Maintenance Agreement, to the Note
Payment Account, for payment to the holders of the notes, interest
for the related Interest Period at the Note Rate on the Note Balance
immediately prior to that payment date, other than any Interest
Shortfalls and reduced by any Relief Act Shortfalls during the
related Collection Period, and from that pro rata portion of
interest attributable
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to additional balances represented by any Additional Balance
Increase Amount, to pay to the holders of the certificates, interest
on the Additional Balance Increase Amount;
o third, from Net Principal Collections, to the Distribution Account,
for distribution to the holders of the certificates, an amount equal
to the Additional Balance Increase Amount;
o fourth, any remaining Net Principal Collections to the Funding
Account;
o fifth, from any remaining amounts, to the enhancer, to reimburse it
for prior draws made on the Policy, with interest thereon, as
provided in the Insurance Agreement;
o sixth, on and after the payment date in October 2004, from Excess
Spread, to the Funding Account, the amount necessary so that the
Overcollateralization Amount is not less than the
Overcollateralization Target Amount;
o seventh, from any remaining Excess Spread, to the Distribution
Account, for distribution to the holders of the certificates, an
amount equal to the Additional Balance Increase Amount;
o eighth, from any remaining amounts, to the enhancer, any other
amounts owed the enhancer pursuant to the Insurance Agreement,
together with interest thereon;
o ninth, from any remaining Excess Spread, to the Note Payment
Account, for payment to the holders of the notes, any Interest
Shortfalls on the notes for such payment date and for any payment
date not previously paid, together with interest thereon at the Note
Rate;
o tenth, from any remaining amounts, to (i) the indenture trustee, any
Trustee's Additional Expenses and any other amounts owing to the
indenture trustee and (ii) the paying agent, any amounts owing to
the paying agent, in each case to the extent remaining unpaid; and
o eleventh, any remaining amounts, to the Distribution Account, for
distribution to the holders of the certificates;
DURING THE MANAGED AMORTIZATION PERIOD:
o first, from Interest Collections (exclusive of the pro rata portion
of interest attributable to additional balances represented by any
Additional Balance Increase Amount), the amount of the premium for
the Policy to the enhancer, and any unpaid premium with interest
thereon, as provided in the Insurance Agreement;
o second, from any remaining Interest Collections (exclusive of the
pro rata portion of interest attributable to additional balances
represented by any Additional Balance Increase Amount), and from
payments received under the Yield Maintenance Agreement, to the Note
Payment Account, for payment to the holders of the notes, interest
for the related Interest Period at the Note Rate on the Note Balance
immediately prior to that payment date, other than any Interest
Shortfalls and reduced by any Relief Act Shortfalls during the
related Collection Period, and from that pro rata portion of
interest attributable to additional balances represented by any
Additional Balance Increase Amount, to pay to the holders of the
certificates, interest on the Additional Balance Increase Amount;
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o third, from Net Principal Collections, to the Distribution Account,
for distribution to the holders of the certificates, an amount equal
to the Additional Balance Increase Amount;
o fourth, from any remaining amounts, to the Note Payment Account, the
Principal Distribution Amount for payment to the holders of the
notes on a pro rata basis until the Note Balance has been reduced to
zero;
o fifth, from any remaining amounts, to the enhancer, to reimburse it
for prior draws made on the Policy, with interest thereon, as
provided in the Insurance Agreement;
o sixth, on and after the payment date in October 2004, from Excess
Spread, to the Note Payment Account, the amount necessary to be
applied on that payment date for payment as principal to the holders
of the notes, on a pro rata basis, so that the Overcollateralization
Amount is not less than the Overcollateralization Target Amount;
o seventh, from any remaining Excess Spread, to the Distribution
Account, for distribution to the holders of the certificates, an
amount equal to the Additional Balance Increase Amount;
o eighth, from any remaining amounts, to the enhancer, any other
amounts owed the enhancer pursuant to the Insurance Agreement,
together with interest thereon;
o ninth, from any remaining Excess Spread, to the Note Payment
Account, for payment to the holders of the notes, any Interest
Shortfalls on the notes for such payment date and for any payment
date not previously paid, together with interest thereon at the Note
Rate;
o tenth, from any remaining amounts, to (i) the indenture trustee, any
Trustee's Additional Expenses and any other amounts owing to the
indenture trustee and (ii) the paying agent, any amounts owing to
the paying agent, in each case to the extent remaining unpaid; and
o eleventh, any remaining amounts, to the Distribution Account, for
distribution to the holders of the certificates;
DURING THE RAPID AMORTIZATION PERIOD:
o first, from Interest Collections (exclusive of the pro rata portion
of interest attributable to additional balances represented by any
Additional Balance Increase Amount), the amount of the premium for
the Policy to the enhancer, and any unpaid premium with interest
thereon, as provided in the Insurance Agreement;
o second, from any remaining Interest Collections (exclusive of the
pro rata portion of interest attributable to additional balances
represented by any Additional Balance Increase Amount), and from
payments received under the Yield Maintenance Agreement, to the Note
Payment Account, for payment to the holders of the notes, interest
for the related Interest Period at the Note Rate on the Note Balance
immediately prior to that payment date, other than any Interest
Shortfalls and reduced by any Relief Act Shortfalls during the
related Collection Period, and from that pro rata portion of
interest attributable to additional balances represented by any
Additional Balance Increase Amount, to pay to the holders of the
certificates, interest on the Additional Balance Increase Amount;
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o third, from any remaining amounts, to the Note Payment Account, the
Principal Distribution Amount for payment to the holders of the
notes on a pro rata basis until the Note Balance has been reduced to
zero;
o fourth, from Principal Collections, to the Distribution Account, for
distribution to the holders of the certificates, an amount equal to
the Additional Balance Increase Amount;
o fifth, from any remaining amounts, to the enhancer, to reimburse it
for prior draws made on the Policy, with interest thereon, as
provided in the Insurance Agreement;
o sixth, on and after the payment date in October 2004, from Excess
Spread, to the Note Payment Account, the amount necessary to be
applied on that payment date for payment as principal to the holders
of the notes, on a pro rata basis, so that the Overcollateralization
Amount is not less than the Overcollateralization Target Amount;
o seventh, from any remaining Excess Spread, to the Distribution
Account, for distribution to the holders of the certificates, an
amount equal to the Additional Balance Increase Amount;
o eighth, from any remaining amounts, to the enhancer, any other
amounts owed the enhancer pursuant to the Insurance Agreement,
together with interest thereon;
o ninth, from any remaining Excess Spread, to the Note Payment
Account, for payment to the holders of the notes, any Interest
Shortfalls on the notes for such payment date and for any payment
date not previously paid, together with interest thereon at the Note
Rate;
o tenth, from any remaining amounts, to (i) the indenture trustee, any
Trustee's Additional Expenses and any other amounts owing to the
indenture trustee and (ii) the paying agent, any amounts owing to
the paying agent, in each case to the extent remaining unpaid; and
o eleventh, any remaining amounts, to the Distribution Account, for
distribution to the holders of the certificates;
PROVIDED, that on the Final Payment Date, the amount to be paid pursuant
to clause "third" above will be equal to the Note Balance immediately prior to
that payment date.
For purposes of the foregoing, the Note Balance on each payment date
during the Amortization Periods will be reduced by all Liquidation Loss Amounts
for that payment date, on a pro rata basis, but only to the extent that the
Liquidation Loss Amounts are not otherwise covered by payments made pursuant to
clauses fourth or sixth during the Managed Amortization Period or clauses third
or sixth during the Rapid Amortization Period, or by a draw on the Policy and
the Overcollateralization Amount for that payment date is zero. In the event of
any reduction of the Note Balance, the amount of the principal reductions
allocated to the notes will be payable to the noteholders on later payment dates
only to the extent of any Excess Spread remaining on those later payment dates.
OPTIONAL TRANSFERS OF MORTGAGE LOANS TO HOLDERS OF CERTIFICATES
Subject to the conditions specified in the servicing agreement, on any
payment date the issuer may, but will not be obligated to, direct the servicer
to remove certain mortgage loans from the trust fund without prior notice to
noteholders. Mortgage loans so designated will be removed only upon satisfaction
of certain conditions specified in the servicing agreement, including, among
other things, that:
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o as of the applicable payment date, after giving effect to the
removal of the applicable mortgage loans, the Overcollateralization
Amount will equal or exceed the Overcollateralization Target Amount;
o the mortgage loans to be removed are selected at random;
o the enhancer shall have certain approval rights as set forth in the
servicing agreement;
o notice of the removal of mortgage loans is given to the Rating
Agencies;
o transfers are limited to once a month; and
o transfers cannot exceed the outstanding Additional Balance Increase
Amount.
OVERCOLLATERALIZATION
The application of Excess Spread on and after the payment date in October
2004 to the Funding Account or the notes, as applicable, will continue until the
Overcollateralization Amount equals the Overcollateralization Target Amount, at
which point the application of Excess Spread to the Funding Account or the
notes, as applicable, will cease unless necessary on a later payment date to
increase the amount of overcollateralization to the target level. In addition,
the Overcollateralization Target Amount may be permitted to step down in the
future, in which case a portion of the Excess Spread will not be used to acquire
additional balances or subsequent mortgage loans or paid to the holders of the
notes but will instead be used for other purposes or distributed to the holders
of the certificates. In addition, on and after the Stepdown Date, and provided
the Stepdown Delinquency Test and Stepdown Cumulative Loss Test have been met,
some or all of the Net Principal Collections otherwise payable as principal on
the notes may not be paid to the extent such payment would result in the
Overcollateralization Amount exceeding the Overcollateralization Target Amount.
As a result of these mechanics, the weighted average lives of the notes will be
different than they would have been in the absence of these mechanics.
To the extent that the protection provided by the application of Excess
Spread and the availability of overcollateralization is exhausted and if
payments are not made under the Policy as required, noteholders may incur a loss
on their investments.
THE PAYING AGENT
The paying agent will have the power to withdraw funds from the Note
Payment Account for the purpose of making payments to the noteholders.
MATURITY AND OPTIONAL REDEMPTION
The notes will be payable in full on the Final Payment Date, to the extent
of the aggregate outstanding Note Balance on that date, if any. In addition, a
principal payment may be made in redemption of the notes upon the exercise by
the servicer of its option to purchase the related mortgage loans together with
the related assets of the trust fund. The servicer may exercise that option
after the aggregate outstanding Note Balance of the notes is reduced to an
amount less than 10% of the initial Note Balance. The purchase price of the
mortgage loans that are not REO Loans will be the sum of the outstanding
principal balance of the mortgage loans and accrued and unpaid interest thereon,
at the weighted average of the loan rates of the mortgage loans through the day
preceding the payment date on which the purchase occurs, together with all
amounts due and owing the enhancer with respect to the notes and any unpaid
Interest Shortfalls on the notes with interest thereon. The purchase price of
the REO Loans will be the sum of the fair market values of the REO Loans on the
payment date on which the purchase occurs. The purchase price paid by the
servicer will also include certain amounts owed by the seller of the mortgage
loans under the terms of the purchase agreement that remain unpaid on the date
of
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redemption. The servicer may not exercise this option to purchase the mortgage
loans unless the total purchase price will provide sufficient funds to pay the
outstanding principal balance of the notes, accrued and unpaid interest on the
notes in full, any unpaid Interest Shortfalls on the notes and interest thereon
and all amounts due and owing the enhancer under the insurance agreement.
THE YIELD MAINTENANCE AGREEMENT
The holders of the notes will benefit from any interest rate cap payments
made by Wachovia Bank, National Association pursuant to the Yield Maintenance
Agreement. The Yield Maintenance Agreement is intended to partially mitigate the
interest rate risk that could result from limitations on the Note Rate by the
Net WAC Rate on the mortgage loans.
On each payment date through and including the payment date in March 2009,
payments under the Yield Maintenance Agreement will be made based on a notional
amount equal to the Notional Balance of the Yield Maintenance Agreement for that
payment date and the positive excess, if any, of LIBOR over 16%. The Notional
Balance for the Yield Maintenance Agreement will not exceed the outstanding Note
Balance. Payments under the Yield Maintenance Agreement will be deposited into
the Note Payment Account on each payment date and will be used to make interest
payments on the notes not otherwise covered by Interest Collections and to cover
other amounts payable on the notes that are payable from Excess Spread, to the
extent available.
The Yield Maintenance Agreement will terminate after the payment date in
March 2009.
GLOSSARY OF TERMS
Below are abbreviated definitions of significant capitalized terms used in
this prospectus supplement. Capitalized terms used in this prospectus supplement
but not defined in this prospectus supplement shall have the meanings assigned
to them in the accompanying prospectus. The servicing agreement, indenture and
trust agreement may each contain more complete definitions of the terms used in
this prospectus supplement and reference should be made to those agreements for
a more complete understanding of these terms.
"Additional Balance Increase Amount" means (a) the excess, if any, of (i)
the aggregate principal amount of additional balances from the related
Collection Period and prior Collection Periods conveyed to the trust fund, over
(ii) Principal Collections and Excess Spread from the Funding Account and/or the
Custodial Account applied to purchase those additional balances minus (b)
amounts paid on previous payment dates to the holders of the certificates in
respect of any Additional Balance Increase Amount.
"Amortization Periods" means the Managed Amortization Period and the Rapid
Amortization Period.
"Appraised Value" means, with respect to any mortgage loan, the appraised
value of the related mortgaged property determined in the appraisal used in the
origination of that mortgage loan, which may have been obtained at an earlier
time, but in no event more than twelve months from origination; provided that if
the mortgage loan was originated simultaneously with a senior lien on the
related mortgaged property, the Appraised Value shall be the lesser of the
appraised value at the origination of the senior lien and the sales price for
the related mortgaged property.
"Clearstream, Luxembourg" means Clearstream Banking, SOCIETE ANONYME, 67
Bd Grande-Duchesse Charlotte, L-2967 Luxembourg.
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"CLTV Ratio" means, with respect to each mortgage loan, the ratio,
expressed as a percentage of:
(1) the sum of:
o the credit limit thereof; and
o any outstanding principal balance, at the origination of that
mortgage loan, of all other mortgage loans, if any, secured by
senior or subordinate liens on the related mortgaged property;
OVER
(2) the Appraised Value of that mortgage loan.
"Collection Period" means, with respect to any payment date, the calendar
month preceding the month of that payment date.
"Custodial Account" means the account established pursuant to the
servicing agreement for the deposit of amounts received on the mortgage loans.
"Deleted Loan" means a defective mortgage loan that has been removed from
the trust fund pursuant to the terms of the purchase agreement.
"Depositary" means The Depository Trust Company or DTC.
"Determination Date" means the 18th day of each month, or if the 18th day
is not a business day, the next succeeding business day.
"Distribution Account" means the account established pursuant to the trust
agreement for the deposit of amounts distributable to the holders of the
certificates.
"Draw Period" means, with respect to each mortgage loan, the period stated
in the related credit line agreement.
"DTC Rules" means the rules, regulations and procedures creating and
affecting DTC and its operations.
"Eligible Substitute Loan" means a mortgage loan substituted by the seller
for a Deleted Loan, which mortgage loan must, on the date of the substitution:
o have an outstanding principal balance, or in the case of a
substitution of more than one mortgage loan for a Deleted Loan, an
aggregate outstanding principal balance, not in excess of the
principal balance of the related Deleted Loan;
o have a loan rate, Net Loan Rate and, if applicable, gross margin no
lower than and not more than 1% in excess of the loan rate, Net Loan
Rate and gross margin, respectively, of the related Deleted Loan;
o have a CLTV Ratio at the time of substitution no higher than that of
the Deleted Loan at the time of substitution;
o have a remaining term to maturity not more than one year earlier and
not later than the remaining term to maturity of the Deleted Loan;
o comply with each representation and warranty as to the mortgage
loans set forth in the purchase agreement, deemed to be made as of
the date of substitution; and
o satisfy certain other conditions specified in the indenture.
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"Excess Spread" means, with respect to any payment date and without taking
into account any draws on the Policy for that payment date, the excess, if any,
of:
o Interest Collections (exclusive of the pro rata portion of interest
attributable to additional balances represented by any Additional
Balance Increase Amount) for the related Collection Period;
OVER
o the sum of:
(1) the premium for the Policy for the related payment date,
plus any unpaid premium from prior payment dates with
interest thereon; and
(2) the amounts paid on that payment date to the holders of
the notes in respect of interest at the Note Rate;
PLUS
o payments made under the Yield Maintenance Agreement, to the extent
not used to pay interest on the notes at the Note Rate.
"Excluded Amount" means, with respect to any payment date during the Rapid
Amortization Period: (i) the portion of the Principal Collections for each
Collection Period allocated to an Excluded Draw (Principal Collections are to be
applied first to the total balance conveyed to the trust with respect to such
mortgage loan and then to the additional balances on such mortgage loan retained
by the seller), and (ii) the pro rata portion (based on the relative principal
amounts held by the trust and by the seller) of Interest Collections allocable
to an Excluded Draw; provided, that the Excluded Amount with respect to any
Liquidation Loss Amount or Subsequent Recovery Amount, shall be the pro rata
portion (based on the relative principal amounts held by the trust and by the
seller) of losses on the related mortgage loans during the related Collection
Period attributable to Excluded Draws; provided further that, to the extent the
related credit line agreement or applicable law provides for a different
allocation, such other allocation shall control.
"Excluded Draw" means, any draw made by an obligor under any mortgage loan
during the Rapid Amortization Period, which shall not be transferred to the
issuer.
"Final Payment Date" means the payment date occurring in June 2034.
"Funding Account" means the account established by the indenture trustee
in its name designated the "funding account."
"Insurance Agreement" means the insurance agreement dated as of June 1,
2004, among the enhancer, the seller, the depositor, the servicer, the indenture
trustee, the paying agent, the owner trustee and the issuer.
"Interest Collections" means, with respect to any payment date, an amount
equal to the sum of:
o the amounts collected during the related Collection Period,
including the interest portion of Net Liquidation Proceeds, applied
to interest pursuant to the terms of the related credit line
agreements, exclusive of the Excluded Amount, reduced by the
servicing fees for that Collection Period, plus amounts in respect
of any optional servicer advance pursuant to the terms of the
servicing agreement; and
o the interest portion of:
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(1) the Repurchase Price for any Deleted Loans; and
(2) the cash purchase price paid in connection with any optional
purchase of the mortgage loans by the servicer.
"Interest Period" means, with respect to any payment date, the period from
the preceding payment date, or, in the case of the first payment date, from the
closing date, through the day preceding that payment date.
"Interest Shortfall" means, with respect to any payment date on which
LIBOR plus 0.22% per annum exceeds the Net WAC Rate, the sum of (a) the excess
of the amount of interest that would have accrued on the notes during the
related Interest Period had the Note Rate been equal to LIBOR plus 0.22% per
annum over the amount of interest that actually accrued on the notes during that
Interest Period at the Net WAC Rate; and (b) any amounts required to be paid
under the Yield Maintenance Agreement, which were not paid by the Yield
Maintenance Provider.
"Junior Ratio" means, with respect to each mortgage loan, the ratio,
expressed as a percentage, of the credit limit thereof, to the sum of:
o the credit limit of that mortgage loan; and
o the aggregate principal balance of any related senior mortgage loans
at origination of that mortgage loan.
"LIBOR" means, with respect to any Interest Period other than the first
Interest Period, a rate equal to the rate for United States dollar deposits for
one month that appears on the Telerate Screen Page 3750 as of 11:00 a.m.,
London, England time, on the second LIBOR Business Day prior to the first day of
that Interest Period. With respect to the first Interest Period, LIBOR means a
rate equal to the rate for United States dollar deposits for one month that
appears on the Telerate Screen Page 3750 as of 11:00 a.m., London, England time,
two LIBOR Business Days prior to the closing date. If no such rate appears on
any such date for determining LIBOR, LIBOR will be the Reference Bank Rate
determined by the servicer. If no Reference Bank Rate is available, LIBOR will
be LIBOR applicable to the preceding payment date.
"LIBOR Business Day" means any day other than:
o a Saturday or a Sunday; or
o a day on which banking institutions in the city of London, England
are required or authorized by law to be closed.
"Liquidation Loss Amount" means, with respect to any payment date and any
liquidated mortgage loan, the unrecovered principal balance of that liquidated
mortgage loan (excluding the Excluded Amount allocated thereto), at the end of
the related Collection Period in which that mortgage loan became a liquidated
mortgage loan, after giving effect to the Net Liquidation Proceeds in connection
with that liquidated mortgage loan.
"Managed Amortization Event" means the event deemed to occur on any date
on which the amount on deposit in the Funding Account exceeds $40,000,000.
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"Managed Amortization Period" means the period beginning on the day
following the end of the Revolving Period and ending on the earlier of:
o June 30, 2007; and
o the occurrence of a Rapid Amortization Event.
"Mortgage Loan File" means with respect to each mortgage loan, the
following:
(1) the related credit line agreement endorsed or assigned without
recourse in blank;
(2) the mortgage, or a copy of the mortgage certified by an officer of
the servicer for any mortgage not returned from the public recording
office, with evidence of recording indicated thereon; and
(3) if applicable, any riders or modifications to the credit line
agreement and mortgage, together with certain other documents at the
times as set forth in the related agreement.
"Net Liquidation Proceeds" means, with respect to any mortgage loan, the
proceeds, excluding amounts drawn on the Policy, received in connection with the
liquidation of that mortgage loan, whether through trustee's sale, foreclosure
sale or otherwise, reduced by related expenses (excluding the Excluded Amount),
but not including the portion, if any, of the amount of such recovery that
exceeds the portion of the principal balance of, plus accrued and unpaid
interest on, the mortgage loan at the end of the Collection Period immediately
preceding the Collection Period in which the mortgage loan became a liquidated
mortgage loan.
"Net Loan Rate" means, with respect to any payment date and any mortgage
loan, the loan rate of that mortgage loan as of the first day of the calendar
month in which the related Interest Period begins, net of the servicing fee
rate, adjusted to an effective rate reflecting the method by which interest is
calculated on the notes for the related Interest Periods.
"Net Principal Collections" means, with respect to any payment date, the
excess, if any, of Principal Collections for that payment date over the
aggregate amount of additional balances created during the related Collection
Period and subsequent mortgage loans purchased during the related Collection
Period, and conveyed to the issuer and paid for with amounts on deposit in the
Custodial Account.
"Net WAC Rate" means for each payment date, a fraction expressed as a per
annum rate, the numerator of which is the sum of (i) the interest due on the
mortgage loans, less the sum of (a) the amount of the servicing fee on the
mortgage loans, (b) the amount of the premium on the Policy and (c) the pro rata
portion of interest attributable to additional balances represented by any
Additional Balance Increase Amount, and (ii) payments required to be made under
the Yield Maintenance Agreement, if any, and the denominator of which is the
outstanding Note Balance, as adjusted on the basis of the actual number of days
elapsed in the related Interest Period and a 360-day year. The initial Net WAC
Rate is approximately 3.3527% per annum.
"Note Balance" means, with respect to any payment date, the initial
principal balance of the notes, reduced by all payments of principal of the
notes prior to the related payment date or reduction thereof by application of
Liquidation Loss Amounts.
"Note Owners" means Persons acquiring beneficial ownership interests in
the notes.
"Note Payment Account" means the account established pursuant to the
indenture for the deposit of amounts distributable to the holders of the notes.
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"Note Rate" means the lesser of (1) LIBOR plus a margin of 0.22% per annum
and (2) the Net WAC Rate.
On any payment date for which the Note Rate has been limited by the Net
WAC Rate, the Interest Shortfall created thereby will accrue interest at the
Note Rate, as adjusted from time to time, and will be paid on subsequent payment
dates to the extent funds are available therefor.
"Notional Balance" means, with respect to each payment date, the lesser
of:
(i) the amount set forth on Schedule I attached hereto for that
payment date; and
(ii) the Note Balance for that payment date.
"Optional Termination Date" means the first payment date on which the Note
Balance is less than 10% of the initial Note Balance.
"Overcollateralization Amount" means, with respect to any payment date,
the amount, if any, by which the sum of (a) the outstanding aggregate principal
balance of the mortgage loans (exclusive of the portion relating to any Excluded
Draw) and (b) the amount in the Funding Account, in each case as of the close of
business on the last day of the related Collection Period, exceeds the Note
Balance.
"Overcollateralization Release Amount" means:
o with respect to any payment date on or after the Stepdown Date
provided that the Stepdown Delinquency Test and Stepdown Cumulative
Loss Test each have been met, the lesser of (x) the Net Principal
Collections for such payment date and (y) the excess, if any, of (i)
the Overcollateralization Amount for such payment date, assuming
that 100% of the Net Principal Collections is applied as a principal
payment on the notes on such payment date, over (ii) the
Overcollateralization Target Amount for such payment date;
o with respect to any payment date on which either the Stepdown
Delinquency Test or the Stepdown Cumulative Loss Test has not been
met, zero; and
o with respect to any payment date occurring during the Rapid
Amortization Period, zero.
"Overcollateralization Target Amount" means, with respect to any payment
date on and after the payment date in October 2004 and prior to the Stepdown
Date, an amount equal to the sum of (i) 1.00% of the Note Balance as of the
closing date and (ii) 100% of the principal balances of all mortgage loans that
are 180 or more days contractually delinquent as of the last day of the related
Collection Period (including mortgage loans that are in foreclosure or are REO
Loans); and thereafter, means such greater or lesser amount as determined from
time to time pursuant to the terms of the indenture.
"Participants" means participants in DTC, Euroclear or Clearstream,
Luxembourg systems.
"Plan" means any pension, profit-sharing or other employee benefit plan
and arrangements as well as an individual retirement account and certain types
of Keogh Plans that are subject to ERISA or Section 4975 of the Internal Revenue
Code, including bank collective investment funds and insurance company general
and separate accounts in which those employee benefit plans and arrangements are
invested.
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"Policy" means the financial guaranty insurance policy, and any
endorsement thereto, provided by the enhancer with respect to the notes, dated
as of June 24, 2004.
"Preference Amount" means any amount previously distributed to a
noteholder on the notes that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance with a
final, non-appealable order of a court of competent jurisdiction.
"Principal Collections" means, with respect to any payment date, an amount
equal to the sum of:
o the amount collected during the related Collection Period, including
the principal portion of Net Liquidation Proceeds, applied to
principal pursuant to the terms of the related credit line
agreements and any Subsequent Recovery Amounts collected during the
related Collection Period, exclusive of the Excluded Amount; and
o the principal portion of the Repurchase Price for any Deleted Loans,
any amounts required to be deposited in the Custodial Account by the
seller pursuant to the purchase agreement; and the cash purchase
price paid in connection with any optional purchase of the mortgage
loans by the servicer.
"Principal Distribution Amount" means, with respect to any payment date:
o during the Managed Amortization Period, Net Principal Collections
less (i) amounts paid to certificateholders in respect of any
Additional Balance Increase Amount for that payment date and (ii)
any Overcollateralization Release Amount; and
o during the Rapid Amortization Period, Principal Collections;
PROVIDED, that on any payment date during the Amortization Periods, the
Principal Distribution Amount shall also include Excess Spread in an amount
equal to the aggregate Liquidation Loss Amounts, if any, but only to the extent
necessary to increase the Overcollateralization Amount to the
Overcollateralization Target Amount.
"Rapid Amortization Event" means the occurrence of any one of the
following events:
(1) the failure on the part of the seller:
o to make any payment or deposit required to be made under the
purchase agreement within three (3) business days after the
date the payment or deposit is required to be made; or
o to observe or perform in any material respect any other
covenants or agreements of the seller set forth in the
purchase agreement, which failure continues unremedied for a
period of sixty (60) days after written notice thereof to the
seller, and the failure materially and adversely affects the
interests of the enhancer or the securityholders; provided,
that a Rapid Amortization Event will not be deemed to occur if
the seller has repurchased or caused to be repurchased or
substituted for the related mortgage loans or all mortgage
loans, as applicable, during that period in accordance with
the provisions of the indenture;
(2) any representation or warranty made by the seller in the purchase
agreement shall prove to have been incorrect in any material respect
when made and shall continue to be incorrect in any material respect
for the related cure period specified in the servicing agreement
after written notice and as a result of which the interests of the
enhancer or the securityholders are materially and adversely
affected; provided, that a Rapid Amortization Event will not be
deemed to occur if the seller has repurchased or caused to
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be repurchased or substituted for the related mortgage loans or all
mortgage loans, as applicable, during that period in accordance with
the provisions of the indenture;
(3) the entry against the seller of a decree or order by a court or
agency or supervisory authority having jurisdiction in the premises
for the appointment of a trustee, conservator, receiver or
liquidator in any insolvency, conservatorship, receivership,
readjustment of debt, marshalling of assets and liabilities or
similar proceedings, or for the winding up or liquidation of its
affairs, and the continuance of any decree or order unstayed and in
effect for a period of sixty (60) consecutive days;
(4) the seller shall voluntarily submit to proceedings under any federal
or state bankruptcy, insolvency or other similar law or code
relating to the seller or relating to all or substantially all of
its property or the seller shall admit in writing its inability to
pay its debts generally as they become due, file a petition to take
advantage of any applicable insolvency or reorganization statute,
make an assignment for the benefit of its creditors or voluntarily
suspend payment of its obligations;
(5) the issuer becomes subject to regulation by the Securities and
Exchange Commission as an investment company within the meaning of
the Investment Company Act of 1940, as amended;
(6) a servicing default occurs and is unremedied under the servicing
agreement and a qualified successor servicer has not been appointed;
(7) the occurrence of a draw on the Policy and the failure of the
Enhancer to be reimbursed for such draw in accordance with the
Insurance Agreement, which failure continues unremedied for a period
of ninety (90) days after written notice to the servicer;
(8) the issuer is determined to be an association or a publicly traded
partnership taxable as a corporation for federal income tax
purposes;
(9) an event of default under the Insurance Agreement; or
(10) an event of default under the indenture that has occurred and
continues beyond the expiration of any applicable cure period.
In the case of any event described in (1), (2), (6) or (9), a Rapid
Amortization Event will be deemed to have occurred only if, after any applicable
grace period described in those clauses, any of the enhancer, the indenture
trustee, or securityholders evidencing not less than 51% of the Note Balance of
the securities (with the consent of the enhancer), by written notice to the
depositor, the servicer and the owner trustee, and to the indenture trustee, if
given by the securityholders or the enhancer, declare that a Rapid Amortization
Event has occurred as of the date of the notice. In the case of any event
described in clauses (3), (4), (5), (7), (8) or (10), a Rapid Amortization Event
will be deemed to have occurred without any notice or other action on the part
of the indenture trustee, the enhancer or the securityholders immediately upon
the occurrence of the event; provided, that any Rapid Amortization Event may be
waived and deemed of no effect with the consent of the enhancer and each Rating
Agency, subject to the satisfaction of any conditions to that waiver.
"Rapid Amortization Period" means the period beginning on the earlier of:
o the first day following the end of the Managed Amortization Period;
and
o the occurrence of a Rapid Amortization Event;
and ending upon the termination of the issuer.
"Rating Agencies" means Moody's Investors Service, Inc. and Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc.
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"Record Date" means, with respect to the notes and any payment date, the
close of business on the last business day preceding that payment date, and with
respect to the notes if such notes are no longer held in book-entry form, the
last day of the calendar month preceding that payment date.
"Reference Banks" means major banks in the London interbank market
selected by the paying agent as provided in the indenture.
"Reference Bank Rate" means, with respect to any Interest Period, as
follows: the arithmetic mean (rounded upwards, if necessary, to the nearest one
sixteenth of one percent) of the offered rates for United States dollar deposits
for one month which are offered by the Reference Banks as of 11:00 a.m., London,
England time, on the second LIBOR Business Day prior to the first day of such
Interest Period to prime banks in the London interbank market for a period of
one month in amounts approximately equal to the sum of the outstanding Note
Balance of the notes; provided, that at least two Reference Banks provide that
rate. If fewer than two offered rates appear, the Reference Bank Rate will be
the arithmetic mean of the rates quoted by one or more major banks in New York
City, selected by the servicer after consultation with the enhancer, as of 11:00
a.m., New York time, on that date for loans in U.S. Dollars to leading European
banks for a period of one month in amounts approximately equal to the Note
Balance of the notes. If no quotations can be obtained, the Reference Bank Rate
will be the Reference Bank Rate applicable to the preceding Interest Period.
"Relief Act Shortfalls" means current interest shortfalls resulting from
the application of the Servicemembers Civil Relief Act, formerly known as the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended.
"REO Loan" means a mortgage loan where title to the related mortgaged
property has been obtained by the indenture trustee or its nominee on behalf of
the noteholders.
"Repayment Period" means, with respect to each mortgage loan, the time
period stated in the related credit line agreement during which draws can no
longer be made.
"Repurchase Price" means, with respect to any mortgage loan, the amount
equal to the principal balance (exclusive of the Excluded Amount) of that
mortgage loan at the time of the removal, plus accrued and unpaid interest on
that principal balance to the date of removal.
"Revolving Period" means, with respect to the notes, the period beginning
on the closing date and ending on the earlier of:
o June 30, 2005; and
o the occurrence of a Managed Amortization Event or a Rapid
Amortization Event.
"Securities Intermediary" means, with respect to each Note Owner, the
brokerage firm, bank, thrift institution or other securities intermediary that
maintains that Note Owner's account.
"Stepdown Cumulative Loss Test" means, with respect to any date of
determination, a test that is met if the percentage of the cumulative losses on
the mortgage loans (exclusive of the pro rata portion thereof relating to any
Excluded Amount) as of such date of determination is less than the applicable
percentage of the aggregate principal balances of the mortgage loans as of the
closing date, such applicable percentage as determined from time to time
pursuant to the terms of the indenture.
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"Stepdown Date" means, the later to occur of:
o the thirty-first (31st) payment date; or
o the payment date on which the aggregate Note Balance immediately
prior to that payment date is less than or equal to 50% of the Note
Balance as of the closing date.
"Stepdown Delinquency Test" means, with respect to any date of
determination, a test that is met if the six-month rolling average sixty-day
delinquency rate (including mortgage loans that are in foreclosure or are REO
Loans) on the mortgage loans (exclusive of the pro rata portion relating to any
Excluded Draw) as of such date of determination is less than the applicable
amount as determined from time to time pursuant to the terms of the indenture.
"Subsequent Recovery Amount" means, as of any payment date, amounts
received by the servicer (net of any related servicing fees, recovery fees and
expenses permitted to be reimbursed pursuant to the servicing agreement) with
respect to a mortgage loan that was treated as a liquidated mortgage loan prior
to the related Collection Period, and that resulted in a Liquidation Loss
Amount.
"Teaser Rate" means, with respect to each mortgage loan with an adjustable
loan rate, an initial rate less than the sum of the related index and the
related gross margin, which is in effect generally during the first twelve
months of the term of that mortgage loan.
"Telerate Screen Page 3750" means the display page so designated on the
Bridge Telerate Capital Markets Report, or such other page as may replace page
3750 on such service for the purpose of displaying London interbank offered
rates of major banks, or, if such service is no longer offered, such other
service for displaying London interbank offered rates or comparable rates as may
be selected by the paying agent after consultation with the servicer.
"Trustee's Additional Expenses" means all reasonable out-of-pocket
expenses of the indenture trustee and all amounts owed to the indenture trustee
pursuant to the indemnity of the indenture trustee by the issuer for any and all
loss, liability or expense, including reasonable attorneys' fees and
disbursements, incurred by the indenture trustee in connection with the
administration of the trust estate and the performance of the indenture
trustee's duties.
"Trust Estate" means the mortgage loans included in the assets of the
issuer.
"Underwriting Agreement" means the underwriting agreement, dated the date
of this prospectus supplement, among Wachovia Capital Markets, LLC, ABN AMRO
Incorporated, Citigroup Global Markets Inc. and the depositor.
"Wachovia Bank" means Wachovia Bank, National Association.
"Yield Maintenance Agreement" means the yield maintenance agreement,
provided by Wachovia Bank, National Association, with respect to the notes,
dated as of June 24, 2004.
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DESCRIPTION OF THE POLICY
The following information has been supplied by the enhancer for inclusion
in this prospectus supplement. Neither the enhancer nor any of its affiliates
accepts any responsibility for the accuracy or completeness of this prospectus
supplement or any information or disclosure contained in this prospectus
supplement, or omitted from this prospectus supplement, other than with respect
to the accuracy of the information regarding the Policy and the enhancer set
forth under the headings "Description of the Policy" and "The Enhancer" in this
prospectus supplement. No representation is made by the depositor, the servicer,
the seller, the indenture trustee, the paying agent, the underwriter or any of
their affiliates as to the accuracy or completeness of the information in those
sections. Any capitalized term used in this section "Description of the Policy"
not otherwise defined in "Description of the Securities--Glossary of Terms"
shall have the meaning assigned to such term in the form of the Policy attached
to this prospectus supplement as Appendix A. Additionally, the enhancer makes no
representation regarding the notes or the advisability of investing in the
notes.
The enhancer, in consideration of the payment of a premium and subject to
the terms of the Policy, thereby unconditionally and irrevocably guarantees to
any noteholder that an amount equal to the Insured Payment will be received from
the enhancer by the indenture trustee or its successors, as indenture trustee
for the noteholders, on behalf of the noteholders, for distribution by the
paying agent, to each noteholder of that noteholder's proportionate share of the
Insured Payment.
The enhancer's obligations under the Policy, with respect to a particular
Insured Payment, will be discharged to the extent funds equal to the applicable
Insured Payment are received by the indenture trustee, whether or not those
funds are properly applied by the indenture trustee. Insured Payments will be
paid only at the time set forth in the Policy, and no accelerated Insured
Payments will be paid regardless of any acceleration of the notes, unless the
acceleration is at the sole option of the enhancer.
Notwithstanding the foregoing paragraph, the Policy will not cover
shortfalls, if any, attributable to the liability of the issuer or the trust
fund or the indenture trustee for withholding taxes, if any, including interest
and penalties in respect of any liability for withholding taxes, Interest
Shortfalls or Relief Act Shortfalls. In addition, the Policy does not cover any
payments required to be made under the Yield Maintenance Agreement.
The enhancer will pay any Insured Payment that is a Preference Amount on
the business day following receipt on a business day by the enhancer's fiscal
agent of the following:
o a certified copy of the order requiring the return of a preference
payment;
o an opinion of counsel satisfactory to the enhancer that the order is
final and not subject to appeal;
o an assignment in a form that is reasonably satisfactory to the
enhancer, irrevocably assigning to the enhancer all rights and
claims of the noteholder relating to or arising under the notes
against the debtor which made the preference payment or otherwise
with respect to the preference payment; and
o appropriate instruments to effect the appointment of the enhancer as
agent for the noteholder in any legal proceeding related to the
preference payment, which instruments are in a form satisfactory to
the enhancer;
provided that if these documents are received after 12:00 p.m., New York
time, on that business day, they will be deemed to be received on the following
business day. Payments by the enhancer will be disbursed to the receiver or the
trustee in bankruptcy named in the final order of the court exercising
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jurisdiction on behalf of the noteholder and not to any noteholder directly
unless the noteholder has returned principal or interest paid on the notes to
the receiver or trustee in bankruptcy, in which case that payment will be
disbursed to the indenture trustee for distribution to the noteholder upon
delivery of proof of such payment reasonably satisfactory to the enhancer.
The enhancer will pay any other amount payable under the Policy no later
than 12:00 p.m., New York time, on the later of the payment date on which the
related Deficiency Amount is due or the second business day following receipt in
New York, New York on a business day by U.S. Bank Trust National Association, as
fiscal agent for the enhancer or any successor fiscal agent appointed the
enhancer of a notice from the indenture trustee specifying the Insured Payment
which is due and owing on the applicable payment date, provided that if the
notice is received after 12:00 p.m., New York time, on that business day, it
will be deemed to be received on the following business day. If any notice
received by the enhancer's fiscal agent is not in proper form or is otherwise
insufficient for the purpose of making a claim under the Policy, it will be
deemed not to have been received by the enhancer's fiscal agent for the purposes
of this paragraph, and the enhancer or the fiscal agent, as the case may be,
will promptly so advise the indenture trustee and the indenture trustee may
submit an amended notice.
Insured Payments due under the Policy, unless otherwise stated in the
Policy, will be disbursed by the enhancer's fiscal agent to the indenture
trustee, on behalf of the noteholders, by wire transfer of immediately available
funds in the amount of the Insured Payment less, in respect of Insured Payments
related to Preference Amounts, any amount held by the indenture trustee for the
payment of the Insured Payment and legally available therefor.
The fiscal agent is the agent of the enhancer only and the fiscal agent
will in no event be liable to noteholders for any acts of the fiscal agent or
any failure of the enhancer to deposit or cause to be deposited sufficient funds
to make payments due under the Policy.
Subject to the terms of the indenture, the enhancer will be subrogated to
the rights of each noteholder to receive payments under the notes to the extent
of any payment by the enhancer under the Policy.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the meanings set forth in the indenture as of the date of
execution of the Policy, without giving effect to any subsequent amendment or
modification to the indenture unless the amendment or modification has been
approved in writing by the enhancer.
The Policy is not cancelable. The premium on the Policy is not refundable
for any reason including payment, or provision being made for payment, prior to
the maturity of the notes.
The Policy is being issued under and pursuant to, and will be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
THE INSURANCE PROVIDED BY THE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
No defenses, set-offs and counterclaims of any kind available to the
enhancer so as to deny payment of any amount due in respect of the Policy will
be valid. The enhancer will waive and agree not to assert any and all such
defenses, set-offs and counterclaims so as to deny payment of any amount due in
respect of the Policy, including, without limitation, any such rights acquired
by subrogation, assignment or otherwise.
A form of the Policy is attached to this prospectus supplement as Appendix
A.
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YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of a note will depend on the price paid by the
related noteholder for that note, the Note Rate, the rate and timing of
principal payments, including payments in excess of the monthly payment made by
the related mortgagor, prepayments in full or terminations, liquidations and
repurchases, on the mortgage loans and the rate and timing of draws on the
mortgage loans and the allocations thereof.
In general, if a note is purchased at a premium over its face amount and
payments of principal of such note occur at a rate faster than that assumed at
the time of purchase, the purchaser's actual yield to maturity will be lower
than that anticipated at the time of purchase. Conversely, if a note is
purchased at a discount from its face amount and payments of principal of such
note occur at a rate that is slower than that assumed at the time of purchase,
the purchaser's actual yield to maturity will be lower than originally
anticipated.
With respect to certain mortgage loans, the loan rate at origination may
be below the rate that would result from the sum of the then-applicable index
and gross margin. Under the Wachovia Bank underwriting guidelines, mortgagors
are generally qualified based on an assumed payment which reflects a rate
significantly lower than the maximum rate. The repayment of any mortgage loan
may thus be dependent on the ability of the borrower to make larger interest
payments following the adjustment of the loan rate.
For any mortgage loans secured by junior mortgages, any inability of the
mortgagor to pay off the balance thereof may also affect the ability of the
mortgagor to obtain refinancing at any time of any related senior mortgage loan,
thereby preventing a potential improvement in the mortgagor's circumstances.
Under the servicing agreement the servicer may be restricted or prohibited from
consenting to any refinancing of any related senior mortgage loan in some
circumstances, which in turn could adversely affect the mortgagor's
circumstances or result in a prepayment or default under the corresponding
junior mortgage loan.
In addition to the mortgagor's personal economic circumstances, a number
of factors, including homeowner mobility, job transfers, changes in the
mortgagor's housing needs, the mortgagor's net equity in the mortgaged property,
changes in the value of the mortgaged property, national and regional economic
conditions, enforceability of due-on-sale clauses, prevailing market interest
rates, servicing decisions, solicitations and the availability of mortgage
funds, seasonal purchasing and payment habits of borrowers or changes in the
deductibility for federal income tax purposes of interest payments on home
equity loans, may affect the rate and timing of principal payments on the
mortgage loans or draws on the mortgage loans. There can be no assurance as to
the rate of principal payments on the mortgage loans or draws on the mortgage
loans. The mortgage loans may be prepaid in full or in part without penalty. The
rate of principal payments and the rate of draws may fluctuate substantially
from time to time. Generally, mortgage loans secured by junior liens on the
mortgaged property are not viewed by borrowers as permanent financing. Due to
the unpredictable nature of both principal payments and draws on the mortgage
loans, the rates of principal payments net of draws on the mortgage loans may be
much more volatile than for typical first lien mortgage loans.
The yield to maturity of the notes, and the rate and timing of principal
payments on the mortgage loans or draws on the mortgage loans, may also be
affected by a wide variety of specific terms and conditions applicable to the
respective programs under which the mortgage loans were originated. For example,
the mortgage loans may provide for future draws to be made only in specified
minimum amounts, or alternatively may permit draws to be made by check in any
amount. A pool of mortgage loans including mortgage loans subject to the latter
provisions may be likely to remain outstanding longer
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with a higher aggregate principal balance than a pool of mortgage loans
including mortgage loans with the former provisions, because of the relative
ease of making new draws. Furthermore, the mortgage loans may provide for
interest rate changes on a daily or monthly basis, or may have gross margins
that may vary under certain circumstances over the term of the loan. In
extremely high market interest rate scenarios, notes backed by mortgage loans
including mortgage loans with adjustable rates subject to substantially higher
maximum rates than typically apply to adjustable rate first mortgage loans may
experience rates of default and liquidation substantially higher than those that
have been experienced on other adjustable rate mortgage loan pools.
As a result of the payment terms of the mortgage loans, there may be no
principal payments made with respect to the mortgage loans in any given month.
In addition, it is possible that the aggregate draws on mortgage loans may
exceed the aggregate payments with respect to principal on the mortgage loans
for the related period. During the Revolving Period and the Managed Amortization
Period all or a portion of the Principal Collections on the mortgage loans will
be reinvested in additional balances, as described in this prospectus
supplement, or, with respect to the Revolving Period, may be used to purchase
subsequent mortgage loans, or will be accumulated in a trust account pending
commencement of an amortization period with respect to the notes.
The servicing agreement permits the issuer, at its option, subject to the
satisfaction of certain conditions specified in the servicing agreement, to
direct the servicer to remove certain mortgage loans from the trust fund at any
time during the life of the trust fund, so long as after giving effect to the
removal of the applicable mortgage loans, the Overcollateralization Amount
equals or exceeds the Overcollateralization Target Amount. Removals of mortgage
loans may affect the rate at which principal is distributed to noteholders by
reducing the aggregate principal balance of the mortgage loans and thus the
amount of Principal Collections. See "Description of the Securities--Optional
Transfers of Mortgage Loans to Holders of Certificates" in this prospectus
supplement.
The mortgage loans generally will contain due-on-sale provisions
permitting the related mortgagee to accelerate the maturity of a mortgage loan
upon sale or certain transfers by the mortgagor of the underlying 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.
The extent to which mortgage loans are assumed by purchasers of the mortgaged
properties rather than prepaid by the related mortgagors in connection with the
sales of the mortgaged properties will affect the weighted average life of the
notes. See "The Servicing Agreement--Collection and Other Servicing Procedures"
in this prospectus supplement for a description of certain provisions of the
servicing agreement that may affect the prepayment experience on the mortgage
loans.
The servicer may allow the refinancing of a mortgage loan in the trust
fund by accepting prepayments for that mortgage loan and permitting a new loan
to the same borrower secured by a mortgage on the same property, which may be
originated by the servicer or by an unrelated entity. In the event of a
refinancing, the new loan would not be included in the trust fund and,
therefore, the refinancing would have the same effect as a prepayment in full of
the related mortgage loan. The servicer may, from time to time, implement
programs designed to encourage refinancing. These programs may include, without
limitation, modifications of existing loans, general or targeted solicitations,
the offering of pre-approved applications, reduced origination fees or closing
costs, or other financial incentives. Targeted solicitations may be based on a
variety of factors, including the credit of the borrower or the location of the
mortgaged property. In addition, the servicer may encourage refinancing of
mortgage loans, including defaulted mortgage loans, under which creditworthy
borrowers assume the outstanding indebtedness of the defaulted mortgage loans
which may be removed from the trust fund. As a result of these programs:
S-68
o the rate of principal prepayments of the mortgage loans may be
higher than would otherwise be the case; and
o in some cases, the average credit or collateral quality of the
mortgage loans remaining in the trust fund may decline.
Although the loan rates on the mortgage loans are subject to periodic
adjustments, the adjustments generally:
o will not increase the loan rates over a fixed maximum rate during
the life of any mortgage loan; and
o will be based on an index, which may not rise and fall consistently
with prevailing market interest rates, plus the related gross
margin, which may vary under certain circumstances, and which may be
different from margins being used at the time for newly originated
adjustable rate mortgage loans.
As a result, the loan rates on the mortgage loans at any time may not equal the
prevailing rates for similar, newly originated adjustable rate home equity
mortgage loans and accordingly the rate of principal payments, if any, and draws
on the mortgage loans may be lower or higher than would otherwise be
anticipated. There can be no certainty as to the rate of principal payments on
the mortgage loans or draws on the mortgage loans during any period or over the
life of the notes.
The servicer may encourage certain mortgagors to increase the amount of
draws made with respect to their mortgage loan by offering a lower interest rate
on draws than the current rate on the mortgage loan. A promotional rate will
apply only to draws made by qualified mortgagors during a certain period,
referred to as the promotional period. The promotional rate will apply for a
limited time, generally until twelve months after the end of the promotional
period. After that period, the interest rate applicable to the draws made during
the promotional period will be increased to the original mortgage rate. Any
principal payments by the related mortgagor on those mortgage loans will be
applied to the balances drawn during the promotional period first and then to
the remaining balances. As a result of this program, the amount of interest due
on these mortgage loans will be less than originally expected and could
adversely affect the amount of interest available to make payments on the notes.
No assurance can be given as to the amount of draws on the mortgage loans
that may be subject to the promotional rate.
With respect to the indices used in determining the Note Rate and the loan
rates of the mortgage loans, a number of factors affect the performance of each
index and may cause an index to move in a manner different from other indices.
To the extent that LIBOR may reflect changes in the general level of interest
rates less quickly than other indices, in a period of rising interest rates,
increases in the yield to the holders of the notes, which adjust based on LIBOR,
may occur later than that which would be produced by other indices, and in a
period of declining rates, the prime rate, which affects the interest rates on
the mortgage loans, may remain higher than other market interest rates, which
may result in a higher level of prepayments of the mortgage loans that adjust in
accordance with the prime rate than of mortgage loans which adjust in accordance
with other indices.
The Note Rates on the notes are subject to a cap equal to the Net WAC Rate
for the mortgage loans. Because the Net WAC Rate is reduced to account for
interest on the Additional Balance Increase Amount, which is paid to the
certificateholders, the Net WAC Rate will be affected by the size of the
Additional Balance Increase Amount. To the extent the Net WAC Rate becomes the
Note Rate, less interest will accrue on the notes than would otherwise be the
case if the Note Rate were not subject to a cap. The prepayment of mortgage
loans with higher mortgage rates will increase the likelihood that the
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notes will be subject to the Net WAC Rate. The holders of the notes will be
entitled to recover Interest Shortfalls on any payment date from excess cash
flow, if available. There can be no assurance that excess cash flow will be
available to pay any such amounts. The Policy does not cover any Interest
Shortfalls. The Yield Maintenance Agreement is intended to partially mitigate
the interest rate risk that could result from limitations on the Note Rate by
the weighted average of the Net WAC Rate on the mortgage loans. The Policy does
not cover any payments that are required to be made under the Yield Maintenance
Agreement. If payments are not made as required under the Yield Maintenance
Agreement, those amounts will only be paid if excess cash flow is available for
that purpose. The Yield Maintenance Agreement will terminate after the payment
date in March 2009.
The timing of changes in the rate of principal payments on a note may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments experienced over time is consistent with an
investor's expectation. In general, the earlier a payment of principal on a
note, the greater will be the effect on an investor's yield to maturity. As a
result, 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 the period
immediately following the issuance of the notes would not be fully offset by a
subsequent like reduction or increase in the rate of principal payments.
The rate and timing of defaults on the mortgage loans will also affect the
rate and timing of principal payments on the mortgage loans and thus the yield
on the notes. There can be no assurance as to the rate of losses or
delinquencies on any of the mortgage loans, however, the rate of losses and
delinquencies are likely to be higher than those of traditional first lien
mortgage loans, particularly in the case of mortgage loans with high CLTV Ratios
or low Junior Ratios. To the extent that any losses are incurred on any of the
mortgage loans that are not covered by the applicable credit enhancements,
holders of the notes will bear all risk of losses resulting from default by
mortgagors. Even where the Policy covers all losses incurred on the mortgage
loans, the effect of losses may be to increase prepayment rates on the mortgage
loans, thus reducing the weighted average life and affecting the yield to
maturity.
Amounts on deposit in the Funding Account may be used during the Revolving
Period to acquire additional balances and subsequent mortgage loans. In the
event that at the end of the Revolving Period any amounts on deposit in the
Funding Account have not been used to acquire additional balances or subsequent
mortgage loans, or to make payments to the certificateholders in respect of any
Additional Balance Increase Amount, the notes will be prepaid in part on the
following payment date.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor thereof of each dollar distributed in reduction of principal of
that security, assuming no losses. The weighted average life of the notes will
be influenced by, among other factors, the rate of principal payments and the
rate of draws on the mortgage loans.
The primary source of information available to investors concerning the
notes will be the monthly statements discussed in this prospectus supplement
under "Description of the Agreements--The Trust Agreement and the
Indenture--Reports to Noteholders," which will include information as to the
outstanding Note Balance. There can be no assurance that any additional
information regarding the notes will be available through any other source. In
addition, the depositor is not aware of any source through which price
information about the notes will be generally available on an ongoing basis. The
limited nature of information regarding the notes may adversely affect the
liquidity of the notes, even if a secondary market for the notes becomes
available.
The prepayment model used in this prospectus supplement, or prepayment
assumption, represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of mortgage loans. The prepayment
assumption model assumes the constant prepayment rate, or CPR, of
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the then outstanding principal balance of the mortgage loans specified. The
prepayment assumption does not purport to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the mortgage loans.
The tables set forth below are based on a CPR, a constant draw rate,
which, for purposes of the assumptions, is the amount of additional balances
drawn each month as an annualized percentage of the aggregate principal balance
of the mortgage loans outstanding at the beginning of that month, and optional
termination assumptions as indicated in the tables below and further assume that
the mortgage loans consist of mortgage loans having the following
characteristics:
ASSUMED CHARACTERISTICS
FULLY
GROSS ORIGINAL REMAINING INDEXED MAXIMUM MONTHS TO CREDIT UTILIZATION
LOAN BALANCE WAC TERM TERM MARGIN RATE TEASER RATE
NUMBER ($) (%) (MONTHS) (MONTHS) (%) (%) EXPIRATION (%)
1 25,833,399.08 3.5000 237 221 -0.5000 17.2068 0 68.8824
2 868,536,218.63 4.0935 234 214 0.0952 17.7192 0 57.8366
3 105,632,708.81 4.2476 237 231 0.6913 17.7307 7 61.7924
In addition, it was assumed that:
(1) payments are made in accordance with the description set forth in
this prospectus supplement under "Description of the
Securities--Priority of Distributions";
(2) payments on the notes will be made on the 25th day of each calendar
month regardless of the day on which the payment date actually
occurs, commencing in July 2004;
(3) the assumed scheduled maturity date, original term and remaining
term are modeling assumptions based on the draw terms of the
mortgage loans;
(4) no delinquencies or defaults occur;
(5) monthly draws and prepayments are calculated as set forth in the
tables below simultaneously, based on the prior month's ending
balance;
(6) the mortgage loans pay on the basis of 30 days in the related
accrual period and a 360-day year;
(7) no Rapid Amortization Event occurs;
(8) each mortgage loan is payable monthly;
(9) the closing date is June 24, 2004;
(10) LIBOR is equal to 1.25% per annum and the prime rate used for
calculating the interest rate on the mortgage loans is 4.00%; and
(11) the initial Note Balance is as set forth on page S-6 of this
prospectus supplement.
The actual characteristics and performance of the mortgage loans will
likely differ from the assumptions used in constructing the tables set forth
below, which are hypothetical in nature and are provided only to give a general
sense of how the principal cash flows might behave under varying prepayment and
draw scenarios. For example, it is very unlikely that the mortgage loans will
prepay and/or experience draws at a constant rate until maturity or that all
mortgage loans will prepay and/or experience draws at the same rate. Moreover,
the diverse remaining terms to stated maturity of the mortgage loans could
produce slower or faster principal distributions than indicated in the tables at
the various assumptions specified, even if the weighted average remaining terms
to stated maturity of the
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mortgage loans are as assumed. Any difference between these assumptions and the
actual characteristics and performance of the mortgage loans, or actual
prepayment experience, will affect the percentages of initial Note Balances
outstanding over time and the weighted average life of the notes. Neither the
CPR model 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 included in the mortgage pool. Variations in the actual
prepayment experience and the principal balances of the mortgage loans that
prepay may increase or decrease each weighted average life shown in the
following tables. These variations may occur even if the average prepayment
experience of all mortgage loans equals the CPR, as indicated.
PERCENTAGE OF INITIAL NOTE BALANCE(1)(2)
PAYMENT DATE PERCENTAGE OF BALANCE
- ---------------------------------------------------------------------------------------------------------------
CPR 10% 20% 30% 43% 50% 60% 70%
- ---------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100 100
June 2005 100 100 100 86 75 61 46
June 2006 100 100 100 74 57 37 21
June 2007 100 100 100 64 44 23 10
June 2008 82 62 57 31 17 6 1
June 2009 64 24 12 1 0 0 0
June 2010 46 0 0 0 0 0 0
June 2011 28 0 0 0 0 0 0
June 2012 10 0 0 0 0 0 0
June 2013 0 0 0 0 0 0 0
Weighted Average Life to
10% call (years)......................... 5.81 4.35 4.19 3.09 2.43 1.73 1.20
Weighted Average Life to
maturity (years)......................... 5.83 4.37 4.20 3.10 2.45 1.77 1.26
(1) Assumes (i) except where indicated, that no optional termination is
exercised and (ii) a CPR as disclosed above and a constant draw rate
of 34%.
(2) All percentages are rounded to the nearest 1%.
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THE AGREEMENTS
THE PURCHASE AGREEMENT
The mortgage loans to be transferred to the issuer by the depositor were
or will be purchased by the depositor from the seller pursuant to the mortgage
loan purchase agreement, referred to in this prospectus supplement as the
purchase agreement, dated as of the cut-off date, among the seller, the
depositor, the issuer and the indenture trustee. The following summary describes
certain terms of the purchase agreement. The summary does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
provisions of the purchase agreement. See "Description of the Agreements" in the
prospectus.
PURCHASE OF MORTGAGE LOANS
Under the purchase agreement, the seller has agreed to transfer and
assign, without recourse, to the depositor the initial mortgage loans and
related additional balances, and the Mortgage Loan Files. Pursuant to an
assignment by the depositor executed on the closing date, upon the transfer to
the depositor, the initial mortgage loans will be transferred, without recourse,
by the depositor to the issuer, as well as the depositor's rights in, to and
under the purchase agreement, which will include the obligation, except during
the Rapid Amortization Period, to purchase additional balances relating to the
initial mortgage loans. The owner trustee, on behalf of the trust fund, will,
concurrently with the assignment, grant a security interest in the trust fund to
the indenture trustee to secure the notes. Subsequent mortgage loans may also be
purchased by the depositor from the seller during the Revolving Period, pursuant
to subsequent transfer agreements as set forth in the purchase agreement. Upon
the transfer to the depositor, the subsequent mortgage loans will be
transferred, without recourse, by the depositor to the issuer, as well as the
depositor's rights in, to and under the applicable subsequent transfer agreement
with the seller (which will include the obligation, except during the Rapid
Amortization Period, to purchase additional balances relating to the subsequent
mortgage loans). The issuer will pay for these subsequent mortgage loans from
funds on deposit in the Funding Account. The purchase agreement will provide
that the subsequent mortgage loans must conform to certain specified
characteristics described above under "Description of the Mortgage Loans--The
Funding Account; Conveyance of Additional Balances and Subsequent Mortgage
Loans." For a general description of the seller, see "The Seller and Servicer"
in this prospectus supplement. The purchase price of the initial mortgage loans
is a specified amount payable by the depositor, as provided in the purchase
agreement. The purchase price paid for any subsequent mortgage loans by the
indenture trustee, at the direction of the issuer, from amounts on deposit in
the Funding Account shall be one hundred percent (100%) of the aggregate
principal balances of the subsequent mortgage loans as of the date so
transferred, as identified on the mortgage loan schedule attached to the related
subsequent transfer agreement provided by the depositor. The purchase price of
each additional balance is the amount of the related new advance and is payable
by the issuer, in cash, including withdrawals from the Funding Account and any
amount contributed or from payments to certificateholders in respect of the
Additional Balance Increase Amount, as provided in the purchase agreement and
the indenture.
The purchase agreement will require that, within a specified time period,
the seller will deliver to the servicer, as agent for the indenture trustee,
with respect to each mortgage loan and any modification or amendment thereto,
the related Mortgage Loan File.
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REPRESENTATIONS AND WARRANTIES
The seller will represent and warrant to the depositor that, among other
things, as of the closing date or, the related subsequent transfer date with
respect to any subsequent mortgage loans:
o the information set forth in a schedule of the related mortgage
loans is true and correct in all material respects as of the date or
dates respecting which the information is furnished;
o immediately prior to the sale of the initial mortgage loans to the
depositor and the subsequent mortgage loans to the issuer, the
seller was the sole owner and holder of the mortgage loans free and
clear of any and all liens and security interests;
o the purchase agreement constitutes a valid transfer and assignment
of all right, title and interest of the seller in and to the initial
mortgage loans or the subsequent mortgage loans, as applicable, and
the proceeds thereof;
o at the time it was made, each mortgage loan complied in all material
respects with all applicable local, state and federal laws,
including anti-predatory lending laws;
o as of the cut-off date, with respect to the initial mortgage loans,
or related subsequent cut-off date, with respect to any subsequent
mortgage loans, no mortgage loan is 30 days or more delinquent in
payment of principal and interest;
o to the best of the seller's knowledge, there is no delinquent
recording or other tax or fee or assessment lien against any related
mortgaged property;
o none of the mortgage loans are subject to the Home Ownership and
Equity Protection Act of 1994;
o none of the mortgage loans are "high cost home loans" under the
Georgia Fair Lending Act and no mortgage loans that are secured by
mortgaged property in Georgia and were originated between October 1,
2002 and March 7, 2003 are subject to the Georgia Fair Lending Act;
and
o none of the proceeds of any mortgage loan were used to purchase
single-premium credit life insurance policies.
The depositor will assign to the issuer all of its right, title and
interest in the purchase agreement and each subsequent transfer agreement,
insofar as the purchase agreement and each subsequent transfer agreement relates
to the representations and warranties made by the seller in respect of the
initial mortgage loans and the subsequent mortgage loans and any remedies
provided for with respect to any breach of the representations and warranties.
The representations and warranties of the seller will be assigned by the issuer
to the indenture trustee for the benefit of the noteholders and the enhancer,
and therefore a breach of the representations and warranties of the seller will
be enforceable on behalf of the trust. If the seller cannot cure a breach of any
representation or warranty made by it in respect of a mortgage loan which
materially and adversely affects the interests of the noteholders or the
enhancer in that mortgage loan, within 90 days after notice from the servicer,
the seller will be obligated to repurchase the mortgage loan at the Repurchase
Price.
As to any mortgage loan required to be purchased by the seller as provided
above, rather than purchase the mortgage loan, the seller may, at its sole
option, remove the Deleted Loan from the trust fund and substitute in its place
an Eligible Substitute Loan.
S-74
REVIEW OF MORTGAGE LOANS
Within 90 days following the delivery of a Mortgage Loan File to the
servicer, the servicer will review or cause to be reviewed the Mortgage Loan
File. If any Mortgage Loan File is found to be defective in any material respect
which may materially and adversely affect the value of the related mortgage loan
or the interests of the indenture trustee, as pledgee of the trust fund, the
securityholders or the enhancer in that mortgage loan and the defect is not
cured within 90 days following notification thereof to the seller and the issuer
by the servicer, the seller will be obligated under the purchase agreement to
deposit the Repurchase Price into the Custodial Account. In lieu of any deposit
into the Custodial Account, the seller may substitute an Eligible Substitute
Loan. Any purchase or substitution will result in the removal of the defective
mortgage loan from the trust fund. The obligation of the seller to remove a
Deleted Loan from the trust fund is the sole remedy regarding any defects in the
mortgage loans and Mortgage Loan Files available to the issuer, the
certificateholders, or the owner trustee on behalf of the certificateholders,
and the noteholders, or the indenture trustee on behalf of the noteholders,
against the seller. Any mortgage loan not so purchased or substituted for shall
remain in the trust fund.
THE SERVICING AGREEMENT
The following summary describes certain terms of the servicing agreement.
The summary does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the servicing agreement. See
"Description of the Agreements" in the prospectus.
All of the mortgage loans will initially be serviced by the servicer, but
may be subserviced by one or more subservicers designated by the servicer
pursuant to subservicing agreements between the servicer and any future
subservicers. For a general description of the servicer and its activities, and
certain information concerning the servicer's delinquency experience on
residential mortgage loans, see "The Seller and Servicer--Delinquency and Loss
Experience of the Servicer's Portfolio" in this prospectus supplement.
PRINCIPAL COLLECTIONS AND INTEREST COLLECTIONS
All collections on the mortgage loans will generally be allocated in
accordance with the related credit line agreements between amounts collected in
respect of interest and amounts collected in respect of principal and to the
extent not specified in the related credit line agreement, collections will
generally be applied first to interest and then to principal.
The servicer will be required to establish and maintain the Custodial
Account. On each Determination Date, the servicer will determine the aggregate
amounts required to be withdrawn from the Custodial Account and deposited into
the Note Payment Account, the Funding Account and/or the Distribution Account
prior to the close of business on the business day next succeeding each
Determination Date.
The servicer will make withdrawals from the Custodial Account, including
but not limited to the following, and deposit the withdrawn amounts as follows:
o to pay to itself or the seller various reimbursement amounts and
other amounts as provided in the servicing agreement (including any
amounts owed to the indenture trustee pursuant to the indenture);
o to the Funding Account, amounts required to be deposited therein;
o to the Distribution Account, amounts for distribution to the
certificateholders; and
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o to the Note Payment Account, an amount equal to the portion of
Principal Collections and Interest Collections required to be paid
to the holders of the notes on the business day prior to each
payment date.
COLLECTION AND OTHER SERVICING PROCEDURES
The servicer will make reasonable efforts to collect all payments called
for under the mortgage loans and will, consistent with the servicing agreement,
follow collection procedures which shall be normal and usual in its general
mortgage servicing activities with respect to mortgage loans comparable to the
mortgage loans included in the mortgage pool. Consistent with that standard, the
servicer may in its discretion waive any prepayment charge in connection with
the prepayment of a mortgage loan or extend the due dates for payments due on a
mortgage loan, provided that the insurance coverage for that mortgage loan or
any coverage provided by any alternative credit enhancement will not be
adversely affected by the waiver or the extension.
The servicer, at its option and in its sole discretion, may make advances
by depositing into the Custodial Account amounts representing installments of
principal and/or interest on any mortgage loan that is delinquent as of the end
of the related Collection Period if the servicer believes that the advances will
be recoverable from payments on, or other proceeds of, that mortgage loan. If
the servicer makes any optional advances of delinquent principal and/or
interest, the servicer shall be entitled to reimburse itself from collections on
the mortgage loans, or if those amounts are not sufficient, by withdrawing those
amounts from the Custodial Account prior to any distribution of amounts on
deposit therein to the noteholders.
In addition, in certain instances in which a mortgage loan is in default,
or if default is reasonably foreseeable, and if determined by the servicer to be
in the best interests of the enhancer and the noteholders, the servicer may
permit certain modifications of the mortgage loan or make forbearances on the
mortgage loan rather than proceeding with foreclosure or repossession, if
applicable. In making the determination, the loss that might result if the
mortgage loan were liquidated would be taken into account. Any modifications may
have the effect of reducing the loan rate or extending the final maturity date
of the mortgage loan. Any modified mortgage loan may remain in the trust fund,
and the reduction in collections resulting from the modification may result in
reduced distributions of interest, or other amounts, on, or may extend the final
maturity of, the notes. In addition, if a mortgage loan is in default or, in the
judgment of the servicer a default is reasonably foreseeable, the servicer may,
through modification, convert the mortgage loan into a fully amortizing home
equity loan.
In any case in which mortgaged property subject to a mortgage loan is
being conveyed by the mortgagor, the servicer shall in general be obligated, to
the extent it has knowledge of the conveyance, to exercise its rights to
accelerate the maturity of the mortgage loan under any due-on-sale clause
applicable thereto, but only if the exercise of those rights is permitted by
applicable law and only to the extent it would not adversely affect or
jeopardize coverage under any applicable credit enhancement arrangements. If the
servicer is prevented from enforcing the due-on-sale clause under applicable law
or if the servicer determines that it is reasonably likely that a legal action
would be instituted by the related mortgagor to avoid enforcement of the
due-on-sale clause, the servicer will enter into an assumption and modification
agreement with the person to whom the property has been or is about to be
conveyed, pursuant to which that person will become liable under the related
credit line agreement subject to certain specified conditions. The original
mortgagor may be released from liability on a mortgage loan if the servicer
shall have determined in good faith that the release will not adversely affect
the ability to make full and timely collections on the related mortgage loan.
Any fee collected by the servicer for entering into an
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assumption or substitution of liability agreement will be retained by the
servicer as additional servicing compensation. In connection with any
assumption, the loan rate borne by the related credit line agreement may not be
altered.
Mortgagors may, from time to time, request partial releases of the
mortgaged properties, easements, consents to alteration or demolition and other
similar matters. The servicer may approve such a request if it has determined,
exercising its good faith business judgment in the same manner as it would if it
were the owner of the related mortgage loan, that the approval will not
adversely affect the security for, and the timely and full collectibility of,
the related mortgage loan. Any fee collected by the servicer for processing the
request will be retained by the servicer as additional servicing compensation.
The servicer is required to maintain a fidelity bond and errors and
omissions policy with respect to its officers and employees and other persons
acting on behalf of the servicer in connection with its activities under the
servicing agreement.
The servicer may be subject to certain restrictions under the servicing
agreement with respect to the refinancing of a lien senior to a mortgage loan
secured by a lien on the related mortgaged property. In addition, if a mortgaged
property did not have a lien senior to the related mortgaged loan as of the
cut-off date, then the servicer may not consent to the placing of a lien senior
to the mortgage loan on the related mortgaged property.
REALIZATION UPON DEFAULTED LOANS
With respect to a mortgage loan secured by a lien on a mortgaged property
in default, the servicer will decide whether to foreclose upon the mortgaged
property or with respect to that mortgage loan, write off the principal balance
of the mortgage loan as a bad debt or take an unsecured note, provided, however,
that if the servicer has actual knowledge that any mortgaged property is
affected by hazardous or toxic wastes or substances and that the acquisition of
the mortgaged property would not be commercially reasonable, then the servicer
shall not cause the issuer or the indenture trustee to acquire title to that
mortgaged property in a foreclosure or similar proceeding. In connection with
that decision, the servicer will, following usual practices in connection with
senior and junior mortgage servicing activities or repossession and resale
activities, estimate the proceeds expected to be received and the expenses
expected to be incurred in connection with the foreclosure or repossession and
resale to determine whether a foreclosure proceeding or a repossession and
resale is appropriate. To the extent that a mortgage loan secured by a lien on a
mortgaged property is junior to another lien on the related mortgaged property,
following any default thereon, unless foreclosure proceeds for that mortgage
loan are expected to at least satisfy the related senior mortgage loan in full
and to pay foreclosure costs, it is likely that the mortgage loan will be
written off as bad debt with no foreclosure proceeding. See "Risk Factors--The
mortgaged properties might not be adequate security for the mortgage loans" in
this prospectus supplement. In the event that title to any mortgaged property is
acquired in foreclosure or by deed in lieu of foreclosure, the deed or
certificate of sale will be issued to the indenture trustee or to its nominee on
behalf of the noteholders. Notwithstanding any acquisition of title and
cancellation of the related mortgage loan, the REO Loan will be considered for
most purposes to be an outstanding mortgage loan held in the trust fund until
such time as the mortgage loan becomes a liquidated mortgage loan. Any income,
net of expenses and fees and other than gains described below, received by the
servicer on the related mortgaged property, prior to its disposition will be
deposited in the Custodial Account upon receipt and will be available at that
time for making payments to noteholders. The foregoing is subject to the proviso
that the servicer shall not be required to expend its own funds in connection
with any
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foreclosure or attempted foreclosure which is not completed or towards the
correction of any default on a related senior mortgage loan or restoration of
any property unless it shall determine that the expenditure will increase the
related Net Liquidation Proceeds.
With respect to a mortgage loan secured by a lien on a mortgaged property
in default, the servicer may pursue foreclosure, or similar remedies, subject to
any senior lien positions and certain other restrictions pertaining to junior
loans concurrently with pursuing any remedy for a breach of a representation and
warranty made by the seller or the depositor. However, the servicer is not
required to continue to pursue both remedies if it determines that one remedy is
more likely to result in a greater recovery. Upon the first to occur of final
liquidation and a repurchase or substitution pursuant to a breach of a
representation and warranty, the related mortgage loan will be removed from the
trust fund. The servicer may elect to treat a defaulted mortgage loan as having
been finally liquidated if substantially all amounts expected to be received in
connection therewith have been received. However, the servicer may continue to
pursue recovery on the mortgage loans. In that case, the servicer will continue
to be entitled to receive a servicing fee for that mortgage loan and any
additional liquidation expenses, including a customary recovery fee, relating to
that mortgage loan thereafter incurred will be reimbursable to the servicer from
any amounts otherwise payable to the noteholders, or may be offset by any
subsequent recovery related to that mortgage loan. Alternatively, for purposes
of determining the amount of related liquidation proceeds to be paid to
noteholders, the amount of any loss or the amount required to be drawn under any
applicable form of credit enhancement, the servicer may take into account
minimal amounts of additional receipts expected to be received, as well as
estimated additional liquidation expenses expected to be incurred in connection
with the defaulted mortgage loan.
NON-RECORDATION OF ASSIGNMENTS; POSSESSION OF MORTGAGES
Subject to the conditions described in the servicing agreement, the seller
will not be required to prepare or record assignments of the mortgages to the
indenture trustee in the real property records of the states in which the
related mortgaged properties are located. The seller will retain record title to
the mortgages on behalf of the indenture trustee and the securityholders.
Although the recordation of the assignments of those mortgages in favor of the
indenture trustee is not necessary to effect a transfer of the mortgage loans to
the indenture trustee, if the seller were to sell, assign, satisfy or discharge
any of those mortgage loans prior to recording the related assignment in favor
of the indenture trustee, the other parties to the sale, assignment,
satisfaction or discharge may have rights superior to those of the indenture
trustee. In some states, including Florida, Maryland and South Carolina, in the
absence of recordation of the assignments of the mortgages, the transfer to the
indenture trustee of the mortgage loans may not be effective against certain
creditors or purchasers from the seller or a trustee in bankruptcy thereof. If
those other parties, creditors or purchasers have rights to the mortgage loans
that are superior to those of the indenture trustee, securityholders could lose
the right to future payments of principal and interest to the extent that those
rights are not otherwise enforceable in favor of the indenture trustee under the
applicable mortgage documents.
The indenture trustee will not have physical possession of the mortgages
related to the mortgage loans in the trust. Instead, the seller, in its capacity
as servicer, will retain possession of the mortgages, and the mortgages will not
be stamped or otherwise marked to reflect the assignment to the depositor, then
to the owner trustee and then to the indenture trustee. If a subsequent
purchaser were able to take physical possession of the mortgages without
knowledge of those assignments, the interests of the indenture trustee in the
mortgages could be defeated. In that event, distributions to noteholders may be
adversely affected.
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MODIFICATION OF MORTGAGE LOANS
In accordance with the servicing agreement, the servicer may grant the
request of a mortgagor of a mortgage loan to either:
o change the interest rate payable on the related mortgage loan;
o increase the credit limit on the related mortgage loan above the
limit stated in the related credit line agreement;
o refinance the existing senior lien or place a new senior lien
related to a mortgage loan resulting in a CLTV Ratio above the
previous CLTV Ratio for that loan; or
o make any other material modification to the related mortgage loan.
provided, however, that without the consent of the enhancer, the aggregate
amount of mortgage loans so modified may not exceed 5% of the aggregate
principal balance of the mortgage loans as of the cut-off date. Mortgage loans
modified to reduce the interest rate payable on such mortgage loans in
connection with promotional programs offered to mortgagors will be disregarded
for purposes of the foregoing 5% threshold.
SERVICING DEFAULT; RIGHTS UPON SERVICING DEFAULT
A servicing default under the servicing agreement generally will include:
o any failure by the servicer to deposit to the Custodial Account, the
Funding Account, Distribution Account or the Note Payment Account,
any required payment which continues unremedied for three (3)
business days after the date upon which written notice of the
failure shall have been given to the servicer by the issuer or the
indenture trustee, or to the servicer, the issuer and the indenture
trustee by the enhancer;
o any failure by the servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
servicing agreement which continues unremedied for 60 days after the
date upon which written notice of the failure shall have been given
to the servicer by the issuer or the indenture trustee, or to the
servicer, the issuer and the indenture trustee by the enhancer;
o certain events of insolvency, bankruptcy, readjustment of debt,
marshalling of assets and liabilities or similar proceedings
regarding the servicer and certain actions by the servicer
indicating its insolvency or inability to pay its obligations; and
o certain other events relating to the servicer.
So long as a servicing default under the servicing agreement remains
unremedied, either the depositor, the enhancer, so long as it is not in default
of its payment obligations under the Policy, or, if the enhancer is in default
of its payment obligations under the Policy, the indenture trustee may, by
written notification to the servicer and to the issuer or the indenture trustee,
as applicable, terminate all of the rights and obligations of the servicer under
the servicing agreement, other than any right of the servicer as securityholder
and other than the right to receive servicing compensation and expenses for
servicing the mortgage loans during any period prior to the date of termination,
and reimbursement of other amounts the servicer is entitled to withdraw from the
Custodial Account, whereupon the indenture trustee, in accordance with the terms
of the servicing agreement, will succeed to all responsibilities, duties and
liabilities of the servicer under the servicing agreement, other than the
obligation of the servicer, as seller, to purchase mortgage loans under certain
circumstances, and will be entitled to similar compensation arrangements. In the
event that the indenture trustee would be obligated to succeed the servicer but
is
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unwilling so to act, it may appoint, or if it is unable so to act, it shall
appoint, or petition a court of competent jurisdiction for the appointment of an
approved mortgage servicing institution with a net worth of at least $10,000,000
to act as successor to the servicer under the servicing agreement, provided that
any successor servicer shall be acceptable to the enhancer, as evidenced by the
enhancer's prior consent; and provided further that the appointment of any
successor servicer will not result in the qualification, reduction or withdrawal
of the ratings assigned to the notes by the Rating Agencies, if determined
without regard to the Policy. Pending the appointment of a successor servicer,
the indenture trustee is obligated to act as servicer unless prohibited by law
from so acting. The indenture trustee and the successor servicer may agree upon
the servicing compensation to be paid, which compensation may not be greater
than the compensation paid to the initial servicer under the servicing
agreement.
EVIDENCE AS TO COMPLIANCE
The servicing agreement provides for delivery on or before a specified
date in each year, to the depositor, the enhancer, the paying agent and the
indenture trustee, of an annual statement signed by an officer of the servicer
to the effect that the servicer has fulfilled in all material respects the
minimum servicing standards set forth in the Uniform Single Attestation Program
for Mortgage Bankers throughout the preceding year or, if there has been a
material default in the fulfillment of any servicing obligation, the statement
shall specify each known default and the nature and status thereof. The
statement may be provided as a single form making the required statements as to
the servicing agreement along with other similar agreements.
The servicing agreement also provides that on or before a specified date
in each year, beginning on the first date that is at least a specified number of
months after the cut-off date, a firm of independent public accountants will
furnish a statement to the depositor, the enhancer, the paying agent and the
indenture trustee to the effect that, on the basis of an examination by that
firm conducted substantially in compliance with the standards established by the
American Institute of Certified Public Accountants, the servicing of mortgage
loans under the related agreements, including the servicing agreement, was
conducted substantially in compliance with the minimum servicing standards set
forth in the Uniform Single Attestation Program for Mortgage Bankers, to the
extent that procedures in the Uniform Single Attestation Program for Mortgage
Bankers are applicable to the servicing obligations set forth in the related
agreements, except for any significant exceptions or errors in records that
shall be reported in the statement.
Copies of the annual statement of an officer of the servicer may be
obtained by noteholders without charge upon written request to the servicer, at
the address indicated in the monthly statement to noteholders.
CERTAIN MATTERS REGARDING THE SERVICER
The servicing agreement provides that the servicer may not resign from its
obligations and duties under the servicing agreement except upon a determination
that performance of its obligations and duties is no longer permissible under
applicable law or except in connection with a permitted transfer of servicing.
No such resignation will become effective until the indenture trustee or a
successor servicer has assumed the servicer's obligations and duties under the
servicing agreement.
The servicing agreement also provides that, except as set forth below,
neither the servicer nor any director, officer, employee or agent of the
servicer will be under any liability to the trust fund or the noteholders for
any action taken or for refraining from the taking of any action in good faith
pursuant to the servicing agreement, or for errors in judgment; provided,
however, that neither the servicer nor any such person will be protected against
any liability which would otherwise be imposed by reason of willful
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misfeasance, bad faith or gross negligence in the performance of duties or by
reason of reckless disregard of obligations and duties thereunder. The servicing
agreement further provides that the servicer and any director, officer, employee
or agent of the servicer is entitled to indemnification by the trust fund and
will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the servicing agreement, other than
any loss, liability or expense incurred by reason of willful misfeasance, bad
faith or gross negligence in the performance of duties thereunder or by reason
of reckless disregard of obligations and duties thereunder. In addition, the
servicing agreement provides that the servicer will not be under any obligation
to appear in, prosecute or defend any legal or administrative action that is not
incidental to its respective duties under the servicing agreement and which in
its opinion may involve it in any expense or liability. The servicer may,
however, in its discretion undertake any action which it may deem necessary or
desirable with respect to the servicing agreement and the rights and duties of
the parties thereto and the interests of the noteholders thereunder. In that
event, the legal expenses and costs of the action and any liability resulting
from the action will be expenses, costs and liabilities of the trust fund and
the servicer will be entitled to be reimbursed out of funds otherwise payable to
noteholders.
Any person into which the servicer may be merged or consolidated, any
person resulting from any merger or consolidation to which the servicer is a
party or any person succeeding to the business of the servicer will be the
successor of the servicer under the servicing agreement, provided that resulting
entity meets the requirements set forth in the servicing agreement. In addition,
notwithstanding the prohibition on its resignation, the servicer may assign its
rights and delegate its duties and obligations under the servicing agreement to
any person satisfactory to the enhancer and meeting the requirements set forth
in the servicing agreement. In the case of any assignment, the servicer will be
released from its obligations under the servicing agreement, exclusive of
liabilities and obligations incurred by it prior to the time of the assignment.
AMENDMENT
The servicing agreement may be amended by the parties thereto, provided
that any amendment be accompanied by a letter from each Rating Agency that the
amendment will not result in the qualification, reduction or withdrawal of the
rating then assigned to the notes, if determined without regard to the Policy,
and provided further, that the consent of the enhancer, the paying agent and the
indenture trustee shall be obtained.
THE TRUST AGREEMENT AND THE INDENTURE
The following summary describes certain terms of the trust agreement and
the indenture. This summary does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the respective provisions of the
trust agreement and the indenture. See "Description of the Agreements" in the
prospectus.
THE TRUST FUND
Simultaneously with the issuance of the notes, the issuer will pledge the
trust fund to the indenture trustee as collateral for the notes. As pledgee of
the mortgage loans, the indenture trustee will be entitled to direct the issuer
in the exercise of all rights and remedies of the trust fund against the seller
under the purchase agreement and against the servicer under the servicing
agreement.
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REPORTS TO NOTEHOLDERS
The servicer will prepare and furnish to the indenture trustee pursuant to
the terms of the servicing agreement, and the indenture trustee or the paying
agent will make available to each holder of the notes and each Rating Agency,
the enhancer and the depositor, a report setting forth certain amounts relating
to the notes for each payment date, including, among other things:
(1) the amount of principal, if any, payable on that payment date to the
holders of the notes;
(2) the amount of interest payable on that payment date to the holders
of the notes and the amount, if any, of Interest Shortfalls;
(3) the Note Balance after giving effect to any payment of principal on
that payment date;
(4) the Principal Collections and Interest Collections for the related
Collection Period;
(5) the aggregate principal balance of the mortgage loans as of the end
of the preceding Collection Period;
(6) the balance of the Funding Account as of the end of the preceding
Collection Period;
(7) the aggregate principal balance of all subsequent mortgage loans
transferred pursuant to a subsequent transfer agreement since the
closing date;
(8) the Overcollateralization Amount as of the end of the preceding
Collection Period;
(9) the monthly CPR and draw rate for that payment date; and
(10) the amounts paid, if any, under the Policy and the Yield Maintenance
Agreement for that payment date.
In the case of information furnished pursuant to clauses (1) and (2) above, the
amounts will be expressed as a dollar amount per $25,000 in face amount of
notes.
The paying agent will make the reports to holders of the notes, and, at
its option, any additional files containing the same information in an
alternative format, available each month to holders of the notes, and other
parties to the indenture via the paying agent's internet website. The paying
agent's internet website shall initially be located at www.firstlinkabs.com.
Assistance in using the website can be obtained by calling the paying agent's
customer service desk at (800) 665-9359. The paying agent shall have the right
to change the way the reports to holders of the notes are distributed in order
to make the distribution more convenient and/or more accessible and the paying
agent shall provide timely and adequate notification to all above parties
regarding any changes.
CERTAIN COVENANTS
The indenture will provide that the issuer may not consolidate or merge
with or into any other entity, unless:
(1) the entity formed by or surviving the consolidation or merger is
organized under the laws of the United States, any state or the
District of Columbia;
(2) the surviving entity expressly assumes, by an indenture supplemental
to the indenture, the issuer's obligation to make due and punctual
payments upon the notes and the performance or observance of any
agreement and covenant of the issuer under the indenture;
(3) no event of default under the indenture shall have occurred and be
continuing immediately after the merger or consolidation;
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(4) the issuer has received consent of the enhancer and has been advised
that the ratings of the notes, without regard to the Policy, then in
effect would not be reduced or withdrawn by any Rating Agency as a
result of the merger or consolidation;
(5) any action that is necessary to maintain the lien and security
interest created by the indenture has been taken;
(6) the issuer has received an opinion of counsel to the effect that the
consolidation or merger would have no material adverse tax
consequence to the issuer or to any noteholder or certificateholder;
and
(7) the issuer has delivered to the indenture trustee an officer's
certificate and an opinion of counsel each stating that the
consolidation or merger and the supplemental indenture comply with
the indenture and that all conditions precedent, as provided in the
indenture, relating to the transaction have been complied with.
The issuer will not, among other things:
(1) except as expressly permitted by the indenture, sell, transfer,
exchange or otherwise dispose of any of the assets of the issuer;
(2) claim any credit on or make any deduction from the principal and
interest payable in respect of the notes, other than amounts
withheld under the Internal Revenue Code of 1986, as amended, or
applicable state law, or assert any claim against any present or
former holder of notes because of the payment of taxes levied or
assessed upon the issuer;
(3) permit the validity or effectiveness of the indenture to be impaired
or permit any person to be released from any covenants or
obligations with respect to the notes under the indenture except as
may be expressly permitted thereby; or
(4) permit any lien, charge, excise, claim, security interest, mortgage
or other encumbrance to be created on or extend to or otherwise
arise upon or burden the assets of the issuer or any part thereof,
or any interest therein or the proceeds thereof.
The issuer may not engage in any activity other than as specified under
"The Issuer" in this prospectus supplement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
For a description of the Events of Default under the indenture, please see
"Description of the Agreements--Material Terms of the Indenture--Events of
Default" in the prospectus.
If an event of default with respect to the notes at the time outstanding
occurs and is continuing, the indenture trustee, acting on the direction of the
enhancer, if the enhancer is not then in default under the Policy, or the
holders of notes representing a majority of the Note Balance, if the enhancer is
in default under the Policy, may declare all notes to be due and payable
immediately. Such declaration may, under certain circumstances, be rescinded and
annulled by the enhancer or the holders of notes representing a majority of the
Note Balance, with the consent of the enhancer.
If, following an event of default with respect to the notes, the notes
have been declared to be due and payable, the indenture trustee, acting on the
direction of the enhancer, if the enhancer is not then in default under the
Policy, or on the direction of at least 51% of the noteholders, if the enhancer
is in default under the Policy, notwithstanding any acceleration, may elect to
maintain possession of the collateral securing the notes and to continue to
apply payments on the collateral as if there had been no declaration
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of acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes as they would have become due
if there had not been a declaration.
In addition, the indenture trustee may not sell or otherwise liquidate the
collateral securing the notes following an event of default, unless:
o the enhancer, if the enhancer is not then in default under the
Policy, or all noteholders, if the enhancer is in default under the
Policy, consent to the sale;
o the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the
outstanding notes and to reimburse the enhancer at the date of the
sale; or
o the indenture trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the notes as
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 notes representing 66 2/3% of the then Note Balance
and the enhancer.
In the event that the indenture trustee liquidates the collateral in
connection with an event of default, 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 an event of default, the
amount available for payments to the noteholders 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 noteholders after the occurrence of an event of default.
In the event the principal of the notes 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 related note less the amount of the discount that is unamortized.
No noteholder generally will have any right under the indenture to
institute any proceeding with respect to the indenture unless:
(1) the holder previously has given to the indenture trustee written
notice of default and the continuance thereof;
(2) the holders of any note evidencing not less than 25% of the
aggregate percentage interests constituting that note:
o have made written request upon the indenture trustee to
institute the proceeding in its own name thereunder; and
o have offered to the indenture trustee reasonable indemnity;
(3) the indenture trustee has neglected or refused to institute any
proceeding for 60 days after receipt of the request and indemnity;
(4) the enhancer has given its consent to the proposed proceedings; and
(5) no direction inconsistent with the written request has been given to
the indenture trustee during the 60 day period by the holders of a
majority of the outstanding principal balances of that note, except
as otherwise provided for in the related agreement with respect to
the enhancer.
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However, the indenture trustee will be under no obligation to exercise any of
the trusts or powers vested in it by the indenture or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of the notes or the enhancer, unless the
noteholders or the enhancer have offered to the indenture trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
AMENDMENT AND MODIFICATION OF TRUST AGREEMENT AND INDENTURE
The trust agreement may be amended from time to time by the parties
thereto, with the consent of the enhancer, provided that any amendment be
accompanied by an opinion of counsel addressed to the owner trustee, the
indenture trustee, the paying agent and the enhancer to the effect that the
amendment:
o complies with the provisions of the trust agreement; and
o will not cause the trust fund to be subject to an entity level tax.
With the consent of the holders of a majority of the outstanding notes and
the enhancer, the issuer, the paying agent and the indenture trustee may execute
a supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the indenture, or modify, except as provided below, in any
manner the rights of the noteholders. However, without the consent of the holder
of each outstanding note affected thereby and the enhancer, no supplemental
indenture will:
(1) change the due date of any installment of principal of or interest
on any note or reduce the principal amount thereof, the interest
rate specified thereon or change any place of payment where or the
coin or currency in which any note or any interest thereon is
payable;
(2) impair the right to institute suit for the enforcement of certain
provisions of the indenture regarding payment;
(3) reduce the percentage of the Note Balance of the outstanding notes,
the consent of the holders of which is required for any supplemental
indenture or the consent of the holders of which is required for any
waiver of compliance with certain provisions of the indenture or of
certain defaults thereunder and their consequences as provided for
in the indenture;
(4) modify or alter the provisions of the indenture regarding the voting
of notes held by the issuer, the depositor or an affiliate of any of
them;
(5) decrease the percentage of the Note Balance required to amend the
sections of the indenture which specify the applicable percentage of
the Note Balance necessary to amend the indenture or certain other
related agreements;
(6) modify any of the provisions of the indenture in a manner as to
affect the calculation of the amount of any payment of interest or
principal due on any note, including the calculation of any of the
individual components of such calculation; or
(7) permit the creation of any lien ranking prior to or, except as
otherwise contemplated by the indenture, on a parity with the lien
of the indenture with respect to any of the collateral for the notes
or, except as otherwise permitted or contemplated in the indenture,
terminate the lien of the indenture on any collateral or deprive the
holder of any note of the security afforded by the lien of the
indenture.
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The issuer, the paying agent and the indenture trustee may also enter into
supplemental indentures, with the consent of the enhancer and without obtaining
the consent of the noteholders, for the purpose of, among other things, curing
any ambiguity or correcting or supplementing any provision in the indenture that
may be inconsistent with any other provision in the indenture.
TERMINATION; REDEMPTION OF NOTES
The obligations created by the trust agreement, other than certain limited
payment and notice obligations of the owner trustee and the depositor,
respectively, will terminate upon the payment to the related securityholders,
including the notes issued pursuant to the indenture, of all amounts held by the
servicer and required to be paid to the securityholders and the payment of all
amounts due and owing the enhancer under the insurance agreement following the
earliest of:
o the final distribution of all moneys or other property or proceeds
of the trust fund in accordance with the terms of the indenture and
the trust agreement;
o the Final Payment Date; or
o the purchase by the servicer of all mortgage loans pursuant to the
servicing agreement. See "Description of the Securities--Maturity
and Optional Redemption" in this prospectus supplement.
The indenture will be discharged, except with respect to certain
continuing rights specified in the indenture, upon the distribution to
noteholders of all amounts required to be distributed pursuant to the indenture
including, for as long as the notes are outstanding, all amounts payable under
the Policy.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE, THE PAYING AGENT AND THE ISSUER
None of the indenture trustee, the paying agent and any director, officer
or employee thereof will be under any liability to the issuer or the noteholders
for any action taken or for refraining from the taking of any action in good
faith pursuant to the indenture or for errors in judgment; provided, however,
that none of the indenture trustee, the paying agent and any director, officer
or employee thereof will be protected against any liability which would
otherwise be imposed by reason of willful malfeasance, bad faith or negligence
in the performance of duties or by reason of reckless disregard of obligations
and duties under the indenture. Subject to certain limitations set forth in the
indenture, the indenture trustee, the paying agent and any director, officer,
employee or agent thereof will be indemnified by the issuer and held harmless
against any loss, liability or expense incurred in connection with
investigating, preparing to defend or defending any legal action, commenced or
threatened, relating to the indenture other than any loss, liability or expense
incurred by reason of willful malfeasance, bad faith or negligence in the
performance of its duties under the indenture or by reason of reckless disregard
of its obligations and duties under the indenture. All persons into which the
indenture trustee or the paying agent may be merged or with which it may be
consolidated or any person resulting from any merger or consolidation will be
the successor of the indenture trustee or the paying agent under the indenture.
USE OF PROCEEDS
The proceeds from the sale of the notes will be used, together with the
transfer of the certificates, to purchase the initial mortgage loans from the
depositor. However, the depositor will not receive any proceeds from any sale of
the notes in market-making transactions by Wachovia Securities, an affiliate of
the depositor. See "Underwriting Standards" in this prospectus supplement.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of anticipated material federal
income tax consequences of the purchase, ownership and disposition of the notes
offered under this prospectus supplement and the accompanying prospectus. This
discussion has been prepared with the advice of Orrick, Herrington & Sutcliffe
LLP as counsel to the depositor.
This discussion is directed solely to noteholders that hold the notes as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended, and does not purport to discuss all federal income tax
consequences that may be applicable to particular categories of investors, some
of which may be subject to special rules, including banks, insurance companies,
foreign investors, tax-exempt organizations, dealers in securities or
currencies, mutual funds, real estate investment trusts, natural persons, cash
method taxpayers, S corporations, estates and trusts, investors that hold the
notes as part of a hedge, straddle or, an integrated or conversion transaction,
or holders whose "functional currency" is not the United States dollar. Also, it
does not address alternative minimum tax consequences or the indirect effects on
the holders of equity interests in a noteholder. Further, the authorities on
which this discussion, and the opinion referred to below, are based are subject
to change or differing interpretations, which could apply retroactively.
Taxpayers and preparers of tax returns should be aware that under applicable
Treasury regulations a provider of advice on specific issues of law is not
considered an income tax return preparer unless the advice:
o is given as to events that have occurred at the time the advice is
rendered and is not given as to the consequences of contemplated
actions; and
o is directly relevant to the determination of an entry on a tax
return.
Accordingly, taxpayers should consult their tax advisors and tax return
preparers regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed in this prospectus supplement
and/or the accompanying prospectus.
In addition to the federal income tax consequences described in this
prospectus supplement and the accompanying prospectus, potential investors
should consider the state and local tax consequences, if any, of the purchase,
ownership and disposition of the notes. See "State and Other Tax Consequences"
in this prospectus supplement. Noteholders are advised to consult their tax
advisors concerning the federal, state, local or other tax consequences to them
of the purchase, ownership and disposition of the notes offered under this
prospectus.
The notes will be characterized as indebtedness, and neither the issuer
nor any portion of the issuer will be characterized as an association, or a
publicly traded partnership, taxable as a corporation or as a taxable mortgage
pool within the meaning of Section 7701(i) of the Internal Revenue Code of 1986,
as amended.
The following discussion is based in part upon the rules governing
original issue discount that are described in Sections 1271-1273 and 1275 of the
Internal Revenue Code of 1986, as amended, and in the Treasury regulations
issued under these sections, referred to as the "OID Regulations." The OID
Regulations do not adequately address various issues relevant to, and in some
instances provide that they are not applicable to, securities such as the notes.
For purposes of this tax discussion, references to a "noteholder" or a "holder"
are to the beneficial owner of a note.
STATUS AS REAL PROPERTY LOANS
Notes held by 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 Internal Revenue
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Code of 1986, as amended; and notes held by a real estate investment trust will
not constitute "real estate assets" within the meaning of Section 856(c)(4)(A)
of the Internal Revenue Code of 1986, as amended, and interest on notes will not
be considered "interest on obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the Internal Revenue Code of 1986,
as amended.
ORIGINAL ISSUE DISCOUNT
The notes are expected to be treated as issued with original issue
discount. The original issue discount on a note will be the excess of its stated
redemption price at maturity over its issue price. The issue price of the notes
will be the first cash price at which a substantial amount of the notes are
sold, excluding sales to bond houses, brokers and underwriters, on the closing
date. If less than a substantial amount of the notes is sold for cash on or
prior to the closing date, the issue price the notes will be treated as the fair
market value of the notes on the closing date. Under the OID Regulations, the
stated redemption price of a note is equal to the total of all payments to be
made on the note other than "qualified stated interest." "Qualified stated
interest" includes interest that is unconditionally payable at least annually at
a single fixed rate, or in the case of a variable rate debt instrument, at a
"qualified floating rate" an "objective rate," a combination of a single fixed
rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that typically
does not operate in a manner that accelerates or defers interest payments on the
note. Interest on the notes is not expected to be treated as qualified stated
interest because interest accrued at a rate in excess of the rate described in
clause (2) of the definition of the Note Rate of the notes (limiting the rate to
the weighted average net loan rate or that rate minus 0.50%) could in high
interest rate periods cause the payment of interest to be deferred for a period
exceeding one year.
In the case of notes bearing adjustable note rates, the determination of
the total amount of original issue discount and the timing of the inclusion of
original issue discount will vary according to the characteristics of the notes.
In general terms original issue discount is accrued by treating the note rate of
the notes as fixed and making adjustments to reflect actual note rate payments.
If the accrued interest to be paid on the first payment date is computed
for a period that begins prior to the closing date, a portion of the purchase
price paid for a note will reflect the accrued interest. In those cases,
information returns to the noteholders and the IRS will be based on the position
that the portion of the purchase price paid for the interest accrued during
periods prior to the closing date is treated as part of the overall purchase
price of the note, and not as a separate asset the purchase price of which is
recovered entirely out of interest received on the next distribution date, and
that portion of the interest paid on the first distribution date in excess of
interest accrued for a number of days corresponding to the number of days from
the closing date to the first distribution date should be included in the stated
redemption price of the note. However, the OID Regulations state that all or
some portion of the accrued interest may be treated as a separate asset the cost
of which is recovered entirely out of interest paid on the first distribution
date. It is unclear how an election to do so would be made under the OID
Regulations and whether the election could be made unilaterally by a noteholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a note will be considered to be de minimis if it is
less than 0.25% of the stated redemption price of the note multiplied by its
weighted average maturity. For this purpose, the weighted average maturity of
the note is computed as the sum of the amounts determined, as to each payment
included in the stated redemption price of the note, by multiplying (1) the
number of complete years, rounding down for partial years, from the issue date
until the payment is expected to be made, possibly taking into account a
prepayment assumption, by (2) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of the note. Under the OID Regulations, original issue discount of only
a de minimis amount, other than de minimis original issue discount attributable
to a so-
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called "teaser" interest rate or an initial interest holiday, will be included
in income as each payment of stated principal is made, based on the product of
the total amount of the de minimis original issue discount and a fraction, the
numerator of which is the amount of the principal payment and the denominator of
which is the outstanding stated principal amount of the note. The OID
Regulations also would permit a noteholder to elect to accrue de minimis
original issue discount into income currently based on a constant yield method.
See "Material Federal Income Tax Considerations--Market Discount" in this
prospectus supplement for a description of the election under the OID
Regulations.
If original issue discount on a note is in excess of a de minimis amount,
the holder of the note must include in ordinary gross income the sum of the
"daily portions" of original issue discount for each day during its taxable year
on which it held the note, including the purchase date but excluding the
disposition date. In the case of an original holder of a note, the daily
portions of original issue discount will be determined as follows.
As to each "accrual period," that is, each period that ends on a date that
corresponds to a distribution date and begins on the first day following the
immediately preceding accrual period, or in the case of the first period, begins
on the closing date, a calculation will be made of the portion of the original
issue discount that accrued during this accrual period. The portion of original
issue discount that accrues in any accrual period will equal the excess, if any,
of (1) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the note, if any, in future
periods and (B) the distributions made on the note during the accrual period of
amounts included in the stated redemption price, over (2) the adjusted issue
price of the note at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated using a discount rate equal to the original yield to maturity of the
notes, and possibly assuming that distributions on the note will be received in
future periods based on the trust assets being prepaid at a rate equal to a
prepayment assumption. For these purposes, the original yield to maturity of the
note would be calculated based on its issue price and possibly assuming that
distributions on the note will be made in all accrual periods based on the trust
assets being prepaid at a rate equal to a prepayment assumption. The adjusted
issue price of a note at the beginning of any accrual period will equal the
issue price of the note, increased by the aggregate amount of original issue
discount that accrued on the note in prior accrual periods, and reduced by the
amount of any distributions made on the note in prior accrual periods of amounts
included in its stated redemption price. The original issue discount accruing
during any accrual period, computed as described above, will be allocated
ratably to each day during the accrual period to determine the daily portion of
original issue discount for that day. Although the issuer will calculate
original issue discount, if any, based on its determination of the accrual
periods, a noteholder may, subject to some restrictions, elect other accrual
periods.
A subsequent purchaser of a note that purchases the note at a price,
excluding any portion of the price attributable to accrued qualified stated
interest, less than its remaining stated redemption price will also be required
to include in gross income the daily portions of any original issue discount
relating to the note. However, each daily portion will be reduced, if the cost
is in excess of its "adjusted issue price," in proportion to the ratio that
excess bears to the aggregate original issue discount remaining to be accrued on
the note. The adjusted issue price of a note on any given day equals:
o the adjusted issue price, or, in the case of the first accrual
period, the issue price, of the note at the beginning of the accrual
period which includes that day, PLUS
o the daily portions of original issue discount for all days during
the accrual period prior to that day, LESS
o any principal payments made during the accrual period relating to
the note.
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MARKET DISCOUNT
A noteholder that purchases a note at a market discount, that is, assuming
the note is issued without original issue discount, at a purchase price less
than its remaining stated principal amount, will recognize gain upon receipt of
each distribution representing stated principal. In particular, under Section
1276 of the Internal Revenue Code of 1986, as amended, the noteholder, in most
cases, will be required to allocate the portion of each distribution
representing stated principal first to accrued market discount not previously
included in income, and to recognize ordinary income to that extent.
A noteholder may elect to include market discount in income currently as
it accrues rather than including it on a deferred basis in accordance with the
foregoing. If made, the election will apply to all market discount bonds
acquired by the noteholder on or after the first day of the first taxable year
to which the election applies. In addition, the OID Regulations permit a
noteholder to elect to accrue all interest, discount, including de minimis
market or original issue discount, and premium in income as interest, based on a
constant yield method. If this election were made for a note with market
discount, the noteholder would be deemed to have made an election to include
currently market discount in income for all other debt instruments having market
discount that the noteholder acquires during the taxable year of the election or
after that year, and possibly previously acquired instruments. Similarly, a
noteholder that made this election for a note that is acquired at a premium
would be deemed to have made an election to amortize bond premium for all debt
instruments having amortizable bond premium that the noteholder owns or
acquires. See "Material Federal Income Tax Considerations--Premium" in this
prospectus supplement. Each of these elections to accrue interest, discount and
premium for a note on a constant yield method would be irrevocable.
However, market discount for a note will be considered to be de minimis
for purposes of Section 1276 of the Internal Revenue Code of 1986, as amended,
if the market discount is less than 0.25% of the remaining principal amount of
the note multiplied by the number of complete years to maturity remaining after
the date of its purchase. In interpreting a similar rule for original issue
discount on obligations payable in installments, the OID Regulations refer to
the weighted average maturity of obligations, and it is likely that the same
rule will be applied for market discount, possibly taking into account a
prepayment assumption. If market discount is treated as de minimis under this
rule, it appears that the actual discount would be treated in a manner similar
to original issue discount of a de minimis amount. See "Material Federal Income
Tax Considerations--Original Issue Discount" in this prospectus supplement.
Section 1276(b)(3) of the Internal Revenue Code of 1986, as amended,
specifically authorizes the Treasury Department to issue regulations providing
for the method for accruing market discount on debt instruments, the principal
of which is payable in more than one installment. Until regulations are issued
by the Treasury Department, some rules described in the legislative history to
Section 1276 of the Internal Revenue Code of 1986, as amended, or the Committee
Report, apply. The Committee Report indicates that in each accrual period market
discount on notes should accrue, at the noteholder's option: (1) on the basis of
a constant yield method, or (2) in the case of a note issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the notes as of the
beginning of the accrual period. Moreover, any prepayment assumption used in
calculating the accrual of original issue discount is also used in calculating
the accrual of market discount. Because the regulations referred to in this
paragraph have not been issued, it is not possible to predict what effect these
regulations might have on the tax treatment of a note purchased at a discount in
the secondary market. Further, it is uncertain whether a prepayment assumption
would be required to be used for the notes if they were issued with original
issue discount.
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To the extent that notes provide for monthly or other periodic
distributions throughout their term, the effect of these rules may be to require
market discount to be includible in income at a rate that is not significantly
slower than the rate at which the discount would accrue if it were original
issue discount. Moreover, in any event a holder of a note typically will be
required to treat a portion of any gain on the sale or exchange of the note 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.
Further, under Section 1277 of the Internal Revenue Code of 1986, as
amended, a holder of a note may be required to defer a portion of its interest
deductions for the taxable year attributable to any indebtedness incurred or
continued to purchase or carry a note purchased with market discount. For these
purposes, the de minimis rule referred to in the third preceding paragraph
applies. Any deferred interest expense would not exceed the market discount that
accrues during that taxable year and is, in most cases, allowed as a deduction
not later than the year in which the market discount is includible in income. If
the holder elects to include market discount in income currently as it accrues
on all market discount instruments acquired by that holder in that taxable year
or after that year, the interest deferral rule described above will not apply.
PREMIUM
If a holder purchases a note for an amount greater than its remaining
principal amount, the holder will be considered to have purchased the note with
amortizable bond premium equal in amount to the excess, and may elect to
amortize the premium using a constant yield method over the remaining term of
the note and to offset interest otherwise to be required to be included in
income relating to that note by the premium amortized in that taxable year. If
this election is made, it will apply to all debt instruments having amortizable
bond premium that the holder owns or subsequently acquires. The OID Regulations
also permit noteholders to elect to include all interest, discount and premium
in income based on a constant yield method. See "Material Federal Income Tax
Considerations--Market Discount" in this prospectus supplement. The Committee
Report states that the same rules that apply to accrual of market discount,
which rules may require use of a prepayment assumption in accruing market
discount for notes without regard to whether the notes have original issue
discount, would also apply in amortizing bond premium under Section 171 of the
Internal Revenue Code of 1986, as amended. The use of an assumption that there
will be no prepayments may be required.
REALIZED LOSSES
Under Section 166 of the Internal Revenue Code of 1986, as amended, both
corporate and noncorporate holders of the notes that acquire those notes in
connection with a trade or business should be allowed to deduct, as ordinary
losses, any losses sustained during a taxable year in which their notes become
wholly or partially worthless as the result of one or more realized losses on
the trust assets. However, it appears that a noncorporate holder that does not
acquire a note in connection with a trade or business will not be entitled to
deduct a loss under Section 166 of the Internal Revenue Code of 1986, as
amended, until the holder's note becomes wholly worthless, that is, until its
outstanding principal balance has been reduced to zero, and that the loss will
be characterized as a short-term capital loss.
Each holder of a note will be required to accrue interest and original
issue discount for that note, without giving effect to any reductions in
distributions attributable to defaults or delinquencies on the trust assets
until it can be established that any reduction ultimately will not be
recoverable. As a result, the amount of taxable income reported in any period by
the holder of a note could exceed the amount of economic income actually
realized by the holder in that period. Although the holder of a note eventually
will recognize a loss or reduction in income attributable to previously accrued
and included income that,
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as the result of a realized loss, ultimately will not be realized, the law is
unclear as to the timing and character of the loss or reduction in income.
SALES OF NOTES
If a note is sold, the selling noteholder will recognize gain or loss
equal to the difference between the amount realized on the sale and its adjusted
basis in the note. The adjusted basis of a note, in most cases, will equal the
cost of that note to that noteholder, increased by the amount of any original
issue discount or market discount previously reported by the noteholder for that
note and reduced by any amortized premium and any principal payment received by
the noteholder. Except as provided in the following three paragraphs, any gain
or loss will be capital gain or loss, provided the note is held as a capital
asset, in most cases, property held for investment, within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended.
Gain recognized on the sale of a note by a seller who purchased the note
at a market discount will be taxable as ordinary income in an amount not
exceeding the portion of the discount that accrued during the period the note
was held by the holder, reduced by any market discount included in income under
the rules described in this prospectus supplement under "Material Federal Income
Tax Considerations--Market Discount" and "--Premium."
A portion of any gain from the sale of a note that might otherwise be
capital gain may be treated as ordinary income to the extent that the note is
held as part of a "conversion transaction" within the meaning of Section 1258 of
the Internal Revenue Code of 1986, as amended. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the taxpayer's
net investment in the transaction. The amount of gain so realized in a
conversion transaction that is recharacterized as ordinary income generally will
not exceed the amount of interest that would have accrued on the taxpayer's net
investment at 120% of the appropriate "applicable Federal rate," which rate is
computed and published monthly by the IRS, at the time the taxpayer enters into
the conversion transaction, subject to appropriate reduction for prior inclusion
of interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include any net capital
gain in total net investment income for the taxable year, for purposes of the
rule that limits the deduction of interest on indebtedness incurred to purchase
or carry property held for investment to a taxpayer's net investment income.
BACKUP WITHHOLDING
Payments of interest and principal, as well as payments of proceeds from
the sale of notes, may be subject to the "backup withholding tax" under Section
3406 of the Internal Revenue Code of 1986, as amended, if recipients of the
payments fail to furnish to the payor information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from the
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against the recipient's federal income tax. Furthermore,
penalties may be imposed by the IRS on a recipient of payments that is required
to supply information but that does not do so in the proper manner.
The issuer will report to the holders and to the IRS for each calendar
year the amount of any "reportable payments" during that year and the amount of
tax withheld, if any, relating to payments on the notes.
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TAX TREATMENT OF FOREIGN INVESTORS
Interest paid on a note to a nonresident alien individual, foreign
partnership or foreign corporation that has no connection with the United States
other than holding notes, known as nonresidents, will normally qualify as
portfolio interest and will be exempt from federal income tax, except, in
general, where (1) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (2) the recipient
is a controlled foreign corporation to which the issuer is a related person.
Upon receipt of appropriate ownership statements, the issuer normally will be
relieved of obligations to withhold tax from the interest payments. These
provisions supersede the generally applicable provisions of United States law
that would otherwise require the issuer to withhold at a 30% rate, unless this
rate were reduced or eliminated by an applicable tax treaty, on, among other
things, interest and other fixed or determinable, annual or periodic income paid
to nonresidents. For these purposes a noteholder may be considered to be related
to the issuer by holding a certificate or by having common ownership with any
other holder of a certificate or any affiliate of that holder.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new regulations referred to as the "New
Withholding Regulations," which revise procedures for complying with or
obtaining exemptions under to the withholding, backup withholding and
information reporting rules described above in the three preceding paragraphs.
Special rules are applicable to partnerships, estates and trusts and, in certain
circumstances, certifications as to foreign status and other matters may be
required from partners or beneficiaries thereof The New Withholding Regulations
are generally effective for payments made after December 31, 2000, subject to
transition rules. Prospective investors are urged to consult their tax advisors
regarding the procedure for obtaining an exemption from withholding under the
New Withholding Regulations.
STATE AND OTHER TAX CONSEQUENCES
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 offered by this prospectus supplement and the accompanying
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 tax advisors about the various tax
consequences of investments in the notes offered by this prospectus.
ERISA CONSIDERATIONS
The notes are eligible for purchase by any Plan. Any fiduciary or other
investor of Plan assets that proposes to acquire or hold the notes on behalf of
or with assets of any Plan should consult with its counsel with respect to the
potential applicability of the fiduciary responsibility provisions of ERISA and
the prohibited transaction provisions of ERISA and Section 4975 of the Internal
Revenue Code of 1986, as amended, to the proposed investment. See "ERISA
Considerations" in the prospectus.
Each purchaser of a note, by its acceptance of the note, shall be deemed
to have represented that the acquisition and holding of the note by the
purchaser does not constitute or give rise to a prohibited transaction under
Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as
amended, for which no statutory, regulatory or administrative exemption is
available. See "ERISA Considerations" in the prospectus.
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The notes may not be purchased with the assets of a Plan if the
underwriters, the depositor, the servicer, the indenture trustee, the owner
trustee, the enhancer, the paying agent or any of their affiliates:
o has investment or administrative discretion with respect to the Plan
assets;
o has authority or responsibility to give, or regularly gives,
investment advice regarding the Plan assets, for a fee and under an
agreement or understanding that the advice will serve as a primary
basis for investment decisions regarding the Plan assets and will be
based on the particular investment needs for the Plan; or
o unless United States Department of Labor ("DOL") Prohibited
Transaction Class Exemption 90-1, 91-38 or 95-60 applies, is an
employer maintaining or contributing to the Plan.
On January 5, 2000, the DOL published final regulations under Section
401(c) of ERISA. The final 401(c) Regulations took effect on July 5, 2001.
The sale of any of the notes to a Plan is in no respect a representation
by the issuer or the underwriters that the investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that the investment is appropriate for Plans generally or any
particular Plan.
LEGAL INVESTMENT
The notes will not constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984, as amended. The issuer
makes no representations as to the proper characterization of the note for legal
investment or other purposes, or as to the ability of particular investors to
purchase any notes under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of the notes. Accordingly, many
institutions with legal authority to invest in mortgage-related securities may
not be legally authorized to invest in the notes. No representation is made in
this prospectus supplement as to whether the notes constitute legal investments
for any entity under any applicable statute, law, rule, regulation or order.
Prospective purchasers are urged to consult with their counsel concerning the
status of the notes as legal investments for such purchasers prior to investing
in the notes. See "Legal Investment" in the prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, each underwriter has agreed to purchase, and the depositor has agreed
to sell to each underwriter, the principal amount of notes opposite its name in
the table below:
PRINCIPAL AMOUNT OF NOTES
WACHOVIA SECURITIES ABN AMRO INCORPORATED CITIGROUP GLOBAL MARKETS INC.
------------------- --------------------- -----------------------------
Class A notes ......... $850,000,000 $100,000,000 $50,000,000
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The distribution of the notes by the underwriters may be effected from
time to time in one or more negotiated transactions or otherwise, at varying
prices to be determined at the time of sale. Proceeds to the depositor from the
sale of the notes, before deducting expenses payable by the depositor, will be
approximately 99.78% of the Note Balance as of the closing date.
The depositor has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or contribute to payments the underwriters may be required to make in respect of
those liabilities.
The underwriters intend to make a secondary market in the notes, but have
no obligation to do so. There can be no assurance that a secondary market for
the notes will develop, or if it does develop, that it will provide holders of
the notes with liquidity of investment at any particular time or for the life of
the notes. The notes will not be listed on any securities exchange.
Upon receipt of a request by an investor who has received an electronic
prospectus supplement and prospectus from any underwriter or a request by that
investor's representative within the period during which there is an obligation
to deliver a prospectus supplement and prospectus, the depositor or the
applicable underwriter will promptly deliver, or cause to be delivered, without
charge, a paper copy of the prospectus supplement and prospectus.
Until 90 days from the date of this prospectus supplement, all dealers
effecting transactions in the notes, whether or not participating in this
distribution, may be required to deliver a prospectus supplement and prospectus.
This is in addition to the obligation of dealers to deliver a prospectus
supplement and prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
This prospectus supplement and the accompanying prospectus may be used by
Wachovia Securities, an affiliate of the depositor, in connection with offers
and sales related to market-making transactions in the notes. In these
market-making transactions, Wachovia Securities may act as a principal or an
agent. The sales will be at negotiated prices determined at the time of sale. As
used in this prospectus supplement, "Wachovia Securities" means Wachovia Capital
Markets, LLC.
LEGAL MATTERS
Certain legal matters with respect to the notes will be passed upon for
the depositor and the underwriters by Orrick, Herrington & Sutcliffe LLP, New
York, New York.
RATINGS
It is a condition to issuance of the notes that they be rated "Aaa" by
Moody's Investors Service, Inc., or Moody's, and "AAA" by Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc., or Standard &
Poor's. The depositor has not requested a rating on the notes by any rating
agency other than Moody's and Standard & Poor's. However, there can be no
assurance as to whether any other rating agency will rate the notes or, if it
does, what rating would be assigned by any other rating agency. Any rating on
the notes by another rating agency could be lower than the ratings assigned to
the notes by Moody's and Standard & Poor's. A securities rating addresses the
likelihood of the receipt by the holders of the notes of distributions on the
mortgage loans. The rating takes into consideration the structural and legal
aspects associated with the certificates and the notes, but does not address
Interest Shortfalls or the likelihood that payments will be made by the provider
of the Yield Maintenance Agreement. The ratings on the notes do not constitute
statements regarding the possibility that the holders of the notes might realize
a lower than anticipated yield. A securities rating is not a
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recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating organization. Each securities
rating should be evaluated independently of similar ratings on different
securities.
EXPERTS
The consolidated balance sheets of MBIA Inc. and subsidiaries and MBIA
Insurance Corporation and subsidiaries as of December 31, 2003 and December 31,
2002 and the related consolidated statements of income, changes in shareholder's
equity, and cash flows for each of the three years in the period ended December
31, 2003, incorporated by reference in this prospectus supplement, have been
incorporated herein in reliance on the report of PricewaterhouseCoopers LLP, an
independent registered public accounting firm, given on the authority of that
firm as experts in accounting and auditing.
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APPENDIX A
[FORM OF POLICY]
OBLIGATIONS: $1,000,000,000 POLICY NUMBER: [____]
Wachovia Asset Securitization Issuance, LLC
Asset-Backed Notes, Series 2004-HE1
MBIA Insurance Corporation (the "Insurer"), in consideration of the
payment of the premium and subject to the terms of this Note Guaranty Insurance
Policy (this "Policy"), hereby unconditionally and irrevocably guarantees to any
Owner that an amount equal to each full and complete Insured Payment will be
received from the Insurer by U.S. Bank National Association or its successors,
as indenture trustee for the Owners (the "Indenture Trustee"), on behalf of the
Owners, for distribution by the Indenture Trustee to each Owner of each Owner's
proportionate share of the Insured Payment. The Insurer's obligations hereunder
with respect to a particular Insured Payment shall be discharged to the extent
funds equal to the applicable Insured Payment are received by the Indenture
Trustee, whether or not such funds are properly applied by the Indenture
Trustee. Insured Payments shall be made only at the time set forth in this
Policy, and no accelerated Insured Payments shall be made regardless of any
acceleration of the Obligations, unless such acceleration is at the sole option
of the Insurer.
Notwithstanding the foregoing paragraph, this Policy does not cover
shortfalls, if any, attributable to the liability of the Issuer, the Trust
Estate or the Indenture Trustee for withholding taxes, if any (including
interest and penalties in respect of any such liability), Interest Shortfalls or
Relief Act Shortfalls. In addition, the Policy does not cover any payments
required to be made under the Yield Maintenance Agreement.
The Insurer will pay any Insured Payment that is a Preference Amount on
the Business Day following receipt on a Business Day by the Fiscal Agent (as
described below) of (a) a certified copy of the order requiring the return of a
preference payment, (b) an opinion of counsel satisfactory to the Insurer that
such order is final and not subject to appeal, (c) an assignment in such form as
is reasonably required by the Insurer, irrevocably assigning to the Insurer all
rights and claims of the Owner relating to or arising under the Obligations
against the debtor which made such preference payment or otherwise with respect
to such preference payment and (d) appropriate instruments to effect the
appointment of the Insurer as agent for such Owner in any legal proceeding
related to such preference payment, such instruments being in a form
satisfactory to the Insurer, provided that if such documents are received after
12:00 noon, New York City time, on such Business Day, they will be deemed to be
received on the following Business Day. Such payments shall be disbursed to the
receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Owner and not to any Owner directly
unless such Owner has returned principal or interest paid on the Obligations to
such receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
The Insurer will pay any other amount payable hereunder no later than
12:00 noon, New York City time, on the later of the Payment Date on which the
related Deficiency Amount is due or the second Business Day following receipt in
New York, New York on a Business Day by U.S. Bank Trust National Association, as
Fiscal Agent for the Insurer, or any successor fiscal agent appointed by the
Insurer (the "Fiscal Agent"), of a Notice (as described below), provided that if
such Notice is received after 12:00 noon, New York City time, on such Business
Day, it will be deemed to be received on the following Business Day. If any such
Notice received by the Fiscal Agent is not in proper form or is otherwise
insufficient for the purpose of making claim hereunder, it shall be deemed not
to have been received by the Fiscal Agent for purposes of this paragraph, and
the Insurer or the Fiscal Agent, as the
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case may be, shall promptly so advise the Indenture Trustee and the Indenture
Trustee may submit an amended Notice.
Insured Payments due hereunder, unless otherwise stated herein, will be
disbursed by the Fiscal Agent to the Indenture Trustee on behalf of the Owners
by wire transfer of immediately available funds in the amount of the Insured
Payment less, in respect of Insured Payments related to Preference Amounts, any
amount held by the Indenture Trustee for the payment of such Insured Payment and
legally available therefor.
The Fiscal Agent is the agent of the Insurer only, and the Fiscal Agent
shall in no event be liable to Owners for any acts of the Fiscal Agent or any
failure of the Insurer to deposit, or cause to be deposited, sufficient funds to
make payments due under this Policy.
Subject to the terms of the Agreement, the Insurer shall be subrogated to
the rights of each Owner to receive payments under the Obligations to the extent
of any payment by the Insurer hereunder.
As used herein, the following terms shall have the following meanings:
"AGREEMENT" means the indenture dated as of June 24, 2004, among Wachovia
Asset Securitization Issuance, LLC 2004-HE1 Trust, as Issuer, Wachovia Bank,
National Association, as paying agent and the Indenture Trustee, as indenture
trustee, without regard to any amendment or supplement thereto, unless such
amendment or supplement has been approved in writing by the Insurer.
"BUSINESS DAY" means any day other than (a) a Saturday or a Sunday (b) a
day on which the Insurer is closed or (c) a day on which banking institutions in
New York City or in the city in which the corporate trust office of the
Indenture Trustee under the Agreement is located are authorized or obligated by
law or executive order to close.
"DEFICIENCY AMOUNT" means, with respect to any payment date, the sum of
(i) the excess, if any, of (a) the accrued interest on the Obligations,
excluding any Relief Act Shortfalls, Interest Shortfalls and any amounts
required to be paid under the Yield Maintenance Agreement for such payment date,
at the Note Rate over (b) the amount available for interest distributions on the
Obligations on such payment date, including without limitation, from amounts on
deposit in the Note Payment Account; and (ii) the Guaranteed Principal Amount.
"FINAL PAYMENT DATE" means the payment date occurring in June 2034.
"GUARANTEED PRINCIPAL AMOUNT" means (i) with respect to any payment date
other than the Final Payment Date, the excess, if any, of (a) the Note Balance
as of such payment date, after taking into account all amounts available under
the Agreement to reduce the Note Balance or to increase the amount on deposit in
the Funding Account, over (b) the sum of (I) the Pool Balance as of the close of
business on the last day of the related Collection Period and (II) the amount on
deposit in the Funding Account as of the last day of the related Collection
Period; or (ii) with respect to the Final Payment Date, the Note Balance as of
the Final Payment Date, after giving effect to all other distributions of
principal on the Obligations on the Final Payment Date.
"INSURED PAYMENT" means (i) as of any Payment Date, any Deficiency Amount
and (ii) any Preference Amount.
"NOTICE" means the telephonic or telegraphic notice, promptly confirmed in
writing by facsimile substantially in the form of Exhibit A attached hereto, the
original of which is subsequently delivered by registered or certified mail,
from the Indenture Trustee specifying the Insured Payment which shall be due and
owing on the applicable Payment Date.
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"OWNER" means each noteholder (as defined in the Agreement) who, on the
applicable Payment Date, is entitled under the terms of the applicable
Obligations to payment thereunder.
"POOL BALANCE" means, with respect to any date, the aggregate principal
balance of all the mortgage loans as of such date.
"PREFERENCE AMOUNT" means any amount previously distributed to an Owner on
the Obligations that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time in accordance with a final
nonappealable order of a court having competent jurisdiction.
Capitalized terms used herein and not otherwise defined herein shall have
the respective meanings set forth in the Agreement as of the date of execution
of this Policy, without giving effect to any subsequent amendment to or
modification of the Agreement unless such amendment or modification has been
approved in writing by the Insurer.
Any notice hereunder or service of process on the Fiscal Agent may be made
at the address listed below for the Fiscal Agent or such other address as the
Insurer shall specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
THIS POLICY IS BEING ISSUED UNDER AND PURSUANT TO, AND SHALL BE CONSTRUED
UNDER, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT
OF LAWS PRINCIPLES THEREOF.
No defenses, set-offs and counterclaims of any kind available to the
Insurer so as to deny payment of any amount due in respect of this Policy will
be valid and the Insurer hereby waives and agrees not to assert any and all such
defenses, set-offs and counterclaims so as to deny payment of any amount due in
respect of this Policy, including, without limitation, any such rights acquired
by subrogation, assignment or otherwise.
The insurance provided by this Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
This Policy is not cancelable for any reason. The premium on this Policy
is not refundable for any reason, including payment, or provision being made for
payment, prior to maturity of the Obligations.
IN WITNESS WHEREOF, the Insurer has caused this Policy to be executed and
attested this [___] day of [______], [______].
MBIA Insurance Corporation
By___________________________
Title________________________
Attest:
By_______________________________
Secretary
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EXHIBIT A
TO NOTE GUARANTY INSURANCE
POLICY NUMBER: [____]
NOTICE UNDER NOTE GUARANTY
INSURANCE POLICY NUMBER: [____]
U.S. Bank Trust National Association, as Fiscal Agent
for MBIA Insurance Corporation
15th Floor
61 Broadway
New York, NY 10006
Attention: Municipal Registrar and
Paying Agency
MBIA Insurance Corporation
113 King Street
Armonk, NY 10504
The undersigned, a duly authorized officer of U.S. Bank National
Association, as indenture trustee (the "Indenture Trustee"), hereby certifies to
U.S. Bank Trust National Association (the "Fiscal Agent") and MBIA Insurance
Corporation (the "Insurer"), with reference to Note Guaranty Insurance Policy
Number: [_________] (the "Policy") issued by the Insurer in respect of the
$1,000,000,000 Wachovia Asset Securitization Issuance, LLC 2004-HE1 Trust,
Wachovia Asset Securitization Issuance, LLC Asset-Backed Notes, Series 2004-HE1,
Class A notes in an amount not to exceed $[_____] (the "Obligations"), that:
(a) the Indenture Trustee is the indenture trustee under the Indenture, dated
as of June 24, 2004, between Wachovia Asset Securitization Issuance, LLC
Asset-Backed Notes, Series 2004-HE1, as Issuer and Wachovia Bank, National
Association, as indenture trustee for the Owners and as paying agent;
(b) the amount due under clause (i) of the definition of Deficiency Amount for
any Payment Date occurring on [_________] (the "Applicable Payment Date")
is $[_________];
(c) the amount due under clause (ii) of the definition of Deficiency Amount
for the Applicable Payment Date is $[_________];
(d) the sum of the amounts listed in paragraphs (b) and (c) above is
$[________] (the "Deficiency Amount");
(e) the amount of previously distributed payments on the Obligations that is
recoverable and sought to be recovered as a voidable preference by a
trustee in bankruptcy pursuant to the Bankruptcy Code in accordance with a
final nonappealable order of a court having competent jurisdiction is
$[_________] (the "Preference Amount");
(f) the total Insured Payment due is $[_________], which amount equals the sum
of the Deficiency Amount and the Preference Amount;
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(g) the Indenture Trustee is making a claim under and pursuant to the terms of
the Policy for the dollar amount of the Insured Payment set forth in (d)
above to be applied to the payment of the Deficiency Amount for the
applicable Payment Date in accordance with the Agreement and for the
dollar amount of the Insured Payment set forth in (e) above to be applied
to the payment of any Preference Amount; and
(h) the Indenture Trustee directs that payment of the Insured Payment be made
to the following account by bank wire transfer of federal or other
immediately available funds in accordance with the terms of the Policy:
[INDENTURE TRUSTEE'S ACCOUNT NUMBER].
Any capitalized term used in this Notice and not otherwise defined herein
shall have the meaning assigned thereto in the Policy.
ANY PERSON WHO KNOWINGLY AND WITH INTENT TO DEFRAUD ANY INSURANCE COMPANY OR
OTHER PERSON FILES AN APPLICATION FOR INSURANCE OR STATEMENT OF CLAIM CONTAINING
ANY MATERIALLY FALSE INFORMATION, OR CONCEALS FOR THE PURPOSE OF MISLEADING,
INFORMATION CONCERNING ANY FACT MATERIAL THERETO, COMMITS A FRAUDULENT INSURANCE
ACT, WHICH IS A CRIME, AND SHALL ALSO BE SUBJECT TO A CIVIL PENALTY NOT TO
EXCEED FIVE THOUSAND DOLLARS AND THE STATED VALUE OF THE CLAIM FOR EACH SUCH
VIOLATION.
IN WITNESS WHEREOF, the Indenture Trustee has executed and delivered this
Notice under the Policy as of the [____] day of [_______], [___].
U.S. BANK NATIONAL ASSOCIATION, as
Indenture Trustee
By_________________________________
Title______________________________
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SCHEDULE I
SCHEDULED NOTIONAL SCHEDULED
PAYMENT DATE BALANCE PAYMENT DATE NOTIONAL BALANCE
------------ ------- ------------ ----------------
July 2004 $1,000,000,000.00 December 2006 $1,000,000,000.00
August 2004 1,000,000,000.00 January 2007 1,000,000,000.00
September 2004 1,000,000,000.00 February 2007 1,000,000,000.00
October 2004 1,000,000,000.00 March 2007 1,000,000,000.00
November 2004 1,000,000,000.00 April 2007 1,000,000,000.00
December 2004 1,000,000,000.00 May 2007 1,000,000,000.00
January 2005 1,000,000,000.00 June 2007 1,000,000,000.00
February 2005 1,000,000,000.00 July 2007 1,000,000,000.00
March 2005 1,000,000,000.00 August 2007 953,638,174.35
April 2005 1,000,000,000.00 September 2007 906,895,070.88
May 2005 1,000,000,000.00 October 2007 859,767,553.99
June 2005 1,000,000,000.00 November 2007 812,252,462.27
July 2005 1,000,000,000.00 December 2007 764,346,608.33
August 2005 1,000,000,000.00 January 2008 716,046,778.54
September 2005 1,000,000,000.00 February 2008 667,349,732.87
October 2005 1,000,000,000.00 March 2008 618,252,204.63
November 2005 1,000,000,000.00 April 2008 568,750,900.27
December 2005 1,000,000,000.00 May 2008 518,842,499.15
January 2006 1,000,000,000.00 June 2008 468,528,823.90
February 2006 1,000,000,000.00 July 2008 417,812,018.82
March 2006 1,000,000,000.00 August 2008 366,688,768.58
April 2006 1,000,000,000.00 September 2008 315,155,730.59
May 2006 1,000,000,000.00 October 2008 263,209,534.79
June 2006 1,000,000,000.00 November 2008 210,846,783.36
July 2006 1,000,000,000.00 December 2008 180,241,185.00
August 2006 1,000,000,000.00 January 2009 155,754,059.18
September 2006 1,000,000,000.00 February 2009 131,554,152.02
October 2006 1,000,000,000.00 March 2009 107,638,094.63
November 2006 1,000,000,000.00
Note: On any payment date, the Notional Balance will not exceed the
outstanding principal balance of the notes as of such payment date.
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PROSPECTUS
WACHOVIA ASSET SECURITIZATION ISSUANCE, LLC
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
MORTGAGE-BACKED NOTES
(ISSUABLE IN SERIES)
- --------------------------------------------------------------------------------
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 12 OF THIS
PROSPECTUS.
The securities of any series will not be insured or guaranteed by any
governmental agency or instrumentality other than as expressly described in the
prospectus supplement for that series.
The securities of each series will represent interests in, or will represent
debt obligations of, the related trust only and will not represent interests in
or obligations of any other entity.
This prospectus may be used to offer and sell any series of securities only if
accompanied by the prospectus supplement for that series.
The securities of each series are not deposits or other obligations of a bank
and are not insured by the FDIC.
- --------------------------------------------------------------------------------
EACH TRUST--
o will issue a series of asset-backed
certificates or asset-backed Tnotes that will
consist of one or more classes; and
o may own--
o a pool or pools of single family and/or
multifamily mortgage loans, which may
include sub-prime mortgage gloans, and are
secured by either first or junior liens on
one- to four-family residential properties
or primarily residential properties
consisting of five or more residential
dwelling units and which may include
limited retail, office or other commercial
space;
o a pool or pools of home improvement
installment sales contracts or installment
loans that are unsecured;
o a pool or pools of manufactured housing
installment sales contracts and
installment loan agreements secured by a
security interest in a new or used
manufactured home, and if indicated in the
accompanying prospectus supplement, by
real property; and
o other assets described in this prospectus
and the accompanying prospectus
supplement.
EACH SERIES OF SECURITIES--
o will represent ownership interest in the
related trust or will represent debt
obligations of the related trust;
o may be entitled to one or more of the other
types of credit support described in this
prospectus; and
o will be paid only from the assets of the
related trust.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THE SECURITIES
OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
November 12, 2003
TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN
THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS
SUPPLEMENT ............................................6
SUMMARY OF PROSPECTUS...................................7
RISK FACTORS...........................................12
Risks Associated with the Securities................12
Risks Associated with the Assets....................15
Violations of Federal Laws or State Laws May
Adversely Affect Ability to Collect on Loans
or Result in Losses ............................19
Market Values of Manufactured Homes May Increase
the Risk of Loss ...............................20
Risk of Loss May Be Greater on Unsecured Home
Improvement Loans ..............................20
Risks of Loss May Increase Due to Defective
Security Interest and Effects of Certain
Other Legal Aspects of the Contracts............20
DESCRIPTION OF THE TRUST FUNDS.........................21
Assets..............................................21
Mortgage Loans......................................23
General.........................................23
Loan-to-Value Ratio.............................24
Mortgage Loan Information in Prospectus
Supplements ....................................24
Payment Provisions of the Mortgage Loans........25
Revolving Credit Line Loans.....................26
Unsecured Home Improvement Loans....................27
Unsecured Home Improvement Loan Information
in Prospectus Supplements ....................27
Contracts...........................................28
General.........................................28
Contract Information in Prospectus Supplements..28
Payment Provisions of the Contracts.............29
Pre-Funding Account.................................29
Accounts............................................30
Credit Support......................................30
Cash Flow Agreements................................30
USE OF PROCEEDS........................................31
YIELD CONSIDERATIONS...................................31
General.............................................31
Pass-Through Rate and Interest Rate.................31
Timing of Payment of Interest.......................32
Payments of Principal; Prepayments..................32
Prepayments--Maturity and Weighted Average Life.....33
Other Factors Affecting Weighted Average Life.......35
Type of Asset...................................35
Termination.....................................36
Defaults........................................37
Foreclosures....................................37
Refinancing.....................................37
Due-on-Sale Clauses.............................37
THE DEPOSITOR..........................................38
DESCRIPTION OF THE SECURITIES..........................38
General.............................................38
Distributions.......................................40
Available Distribution Amount.......................40
Distributions of Interest on the Securities.........41
2
Distributions of Principal of the
Securities... ....................................42
Categories of Classes of Securities.................43
Components..........................................49
Distributions on the Securities of
Prepayment Premiums ..............................49
Allocation of Losses and Shortfalls.................49
Advances in Respect of Delinquencies................49
Reports to Securityholders..........................50
Termination; Optional Purchase of
Mortgage Loans 52
Optional Purchases..................................53
Definitive Form.....................................53
Book-Entry Registration and Form....................53
DESCRIPTION OF THE AGREEMENTS..........................58
Agreements Applicable to a Series...................58
REMIC Securities, FASIT
Securities, Grantor Trust Securities .........58
Securities That Are Partnership
Interests for Tax Purposes and Notes .........58
Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing
Agreements .......................................58
General.........................................58
Assignment of Assets; Repurchases...............59
Representations and Warranties; Repurchases.....61
Collection Account and Related Accounts.........63
Realization Upon Defaulted Assets...............68
Hazard Insurance Policies.......................70
Contracts.......................................71
Fidelity Bonds and Errors and
Omissions Insurance ..........................72
Due-on-Sale Provisions..........................72
Retained Interest; Servicing Compensation and
Payment of Expenses ..........................73
Evidence as to Compliance.......................73
Certain Matters Regarding
Servicers, the Master Servicer and the
Depositor ....................................74
Special Servicers...............................75
Events of Default under the Agreements..........75
Rights Upon Event of Default
under the Agreements .........................76
Amendment.......................................77
The Trustee.....................................78
Duties of the Trustee...........................78
Certain Matters Regarding the Trustee...........78
Resignation and Removal of the Trustee..........79
Material Terms of the Indenture.....................79
General.........................................79
Events of Default...............................80
Discharge of Indenture..........................82
Indenture Trustee's Annual Report...............82
The Indenture Trustee...........................83
DESCRIPTION OF CREDIT SUPPORT..........................83
General.............................................83
Subordinate Securities..............................84
Cross-Support Provisions............................84
Limited Guarantee...................................84
Financial Guaranty Insurance Policy or Surety Bond..85
Letter of Credit....................................85
Pool Insurance Policies.............................85
Special Hazard Insurance Policies...................85
Mortgagor Bankruptcy Bond...........................85
Reserve Funds.......................................85
3
Overcollateralization...............................86
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS................87
General.............................................87
Types of Mortgage Instruments.......................87
Interest in Real Property...........................88
Cooperative Loans...................................88
Land Sale Contracts.................................89
Foreclosure.........................................90
General.........................................90
Judicial Foreclosure............................90
Equitable Limitations on
Enforceability of Certain Provisions.........91
Non-Judicial Foreclosure/Power of Sale..........91
Public Sale.....................................92
Rights of Redemption............................93
Cooperative Loans...............................93
Junior Mortgages....................................94
Rights of Redemption................................95
Anti-Deficiency Legislation, the
Bankruptcy Code and Other Limitations
on Lenders .......................................96
Enforceability of Certain Provisions................97
Environmental Considerations........................98
Due-on-Sale Clauses................................100
Prepayment Charges.................................101
Subordinate Financing..............................102
Applicability of Usury Laws........................102
Alternative Mortgage Instruments...................103
Homeownership Act and Similar State Laws ..........103
Homeowners Protection Act of 1998..................104
Texas Home Equity Loans............................104
Soldiers' and Sailors' Civil Relief
Act of 1940 and Similar Laws ....................105
Forfeitures in Drug, RICO and
Money Laundering Violations .....................105
CERTAIN LEGAL ASPECTS OF THE CONTRACTS................106
General............................................106
Security Interests in the Manufactured Homes.......106
Enforcement of Security Interests
in Manufactured Homes ...........................108
Soldiers' and Sailors' Civil Relief Act
of 1940 and Similar Laws ........................109
Consumer Protection Laws...........................109
Transfers of Manufactured Homes;
Enforceability of Due-on-Sale Clauses ...........109
Applicability of Usury Laws........................110
FEDERAL INCOME TAX CONSEQUENCES.......................110
General............................................110
Taxable Mortgage Pools.........................111
REMICS.............................................112
Classification of REMICs.......................112
Characterization of
Investments in REMIC Securities .............114
Tiered REMIC Structures........................115
Taxation of Owners of Regular
Securities... ...............................115
Election to Treat All Interest
Under the Constant Yield Method .............122
Taxation of Owners of Residual Securities......125
Taxes That May Be Imposed on the REMIC Pool....134
Taxation of Certain Foreign Investors..........137
Grantor Trust Funds................................139
Classification of Grantor Trust Funds..........139
Standard Securities................................139
4
General........................................139
Tax Status.....................................141
Premium and Discount...........................141
Recharacterization of Servicing Fees...........142
Stripped Securities................................144
General........................................144
Status of Stripped Securities..................145
Taxation of Stripped Securities................146
Reporting Requirements and
Backup Withholding ..........................148
Taxation of Certain Foreign Investors..........148
Partnership Trust Funds............................148
Classification of
Partnership Trust Funds......................148
Characterization of Investments in
Partnership Securities and Debt Securities...149
Taxation of Debt Securityholders...............149
Taxation of Owners of Partnership Securities...149
STATE AND OTHER TAX CONSEQUENCES......................156
ERISA CONSIDERATIONS..................................156
LEGAL INVESTMENT......................................161
METHODS OF DISTRIBUTION...............................163
LEGAL MATTERS.........................................164
FINANCIAL INFORMATION.................................164
RATINGS...............................................164
WHERE YOU CAN FIND MORE INFORMATION...................165
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.....165
INDEX OF SIGNIFICANT DEFINITIONS......................167
5
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
Information is provided to you about the securities in two separate
documents that progressively provide more detail: (a) this prospectus, which
provides general information, some of which may not apply to a particular
series of securities, including your series, and (b) the accompanying
prospectus supplement, which will describe the specific terms of your series of
securities, including:
o the principal balances and/or interest rates of each class;
o the timing and priority of interest and principal payments;
o statistical and other information about the mortgage loans;
o information about credit enhancement, if any, for each class;
o the ratings for each class; and
o the method for selling the securities.
IF THE TERMS OF A PARTICULAR SERIES OF SECURITIES VARY BETWEEN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT, YOU SHOULD RELY ON THE
INFORMATION IN THE ACCOMPANYING PROSPECTUS SUPPLEMENT.
You should rely only on the information provided in this prospectus and
the accompanying prospectus supplement including the information incorporated
by reference. No one has been authorized to provide you with different
information. The securities are not being offered in any state where the offer
is not permitted. The depositor does not claim the accuracy of the information
in this prospectus or the accompanying prospectus supplement as of any date
other than the dates stated on their respective covers.
Cross-references are included in this prospectus and in the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The foregoing Table of Contents and the Table of Contents
included in the accompanying prospectus supplement provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Significant Definitions"
beginning on page 169 in this prospectus.
The depositor's principal executive office is located at 8739 Research
Drive, NC0121-Suite D, Charlotte, North Carolina 28288-0121 and the depositor's
telephone number is (704) 383-4634.
6
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SUMMARY OF PROSPECTUS
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making an
investment decision. Please read this entire prospectus and the accompanying
prospectus supplement carefully to understand all of the terms of a series of
certificates.
This summary provides an overview of certain information to aid your
understanding of the terms of the certificates or notes and is qualified by the
full description of this information in the prospectus and the prospectus
supplement.
RELEVANT PARTIES FOR EACH SERIES OF SECURITIES
TITLE OF Mortgage pass-through certificates and mortgage-backed notes
SECURITIES issuable in series.
DEPOSITOR Wachovia Asset Securitization Issuance, LLC, an wholly-owned
indirect subsidiary of Wachovia Corporation. The depositor is an
affiliate of Wachovia Capital Markets, LLC.
ISSUER With respect to each series of certificates and/or notes, the
trust fund to be formed pursuant to either a pooling and
servicing agreement or a trust agreement.
SERVICER The entity or entities named as servicer in the related
prospectus supplement. A servicer may be an affiliate of the
depositor.
MASTER The entity, if any, named as master servicer in the related
SERVICER prospectus supplement that will perform certain administration,
calculation and reporting functions with respect to the trust
fund and will supervise the servicers. The master servicer may
be an affiliate of the depositor.
TRUSTEE / The entity named as trustee or indenture trustee in the related
INDENTURE prospectus supplement.
TRUSTEE
RELEVANT DATES
CUT-OFF DATE The date specified in the related prospectus supplement.
CLOSING DATE The date when the certificates and/or notes of any series are
initially issued as specified in the related prospectus
supplement.
DISTRIBUTION The monthly, quarterly or other periodic date specified in the
DATE related prospectus supplement on which distributions will be
made to holders of the certificates and/or notes.
STATISTICAL The calendar day, if applicable, specified in the related
CALCULATION prospectus supplement.
DATE
---------------------
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7
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DESCRIPTION OF SECURITIES
Each series of certificates will be issued pursuant to a pooling and
servicing agreement and will include one or more classes representing an
ownership interest in a segregated pool of mortgage loans, unsecured home
improvement loans and/or manufactured housing installment sales contracts
and other assets of the trust fund. If a series of securities includes notes,
such notes will represent debt obligations of the related trust fund formed
pursuant to a trust agreement and will be secured by the assets of the trust
fund pursuant to an indenture. A class of securities will be entitled, to the
extent of funds available, to one of the following:
o principal and interest distributions;
o principal distributions, with no interest distributions;
o interest distributions, with no principal distributions; or
o such other distributions as are described in the applicable prospectus
supplement.
See "Description of the Securities" in this prospectus.
INTEREST DISTRIBUTIONS
With respect to each series of securities, interest on each class of
securities (other than a class of securities entitled to receive only
principal) will accrue during each period specified in the prospectus
supplement and will be distributed to the holders of the related classes of
securities on each distribution date in accordance with the particular terms of
each such class of securities. The terms of each such class of securities will
be described in the related prospectus supplement.
See "Description of the Securities -- Distributions of Interest on the
Securities" in this prospectus.
PRINCIPAL DISTRIBUTIONS
With respect to each series of securities, principal payments (including
prepayments) on the related mortgage loans, unsecured home improvement loans
and/or manufactured housing installment sales contracts will be distributed to
holders of the related securities or otherwise applied as described in the
related prospectus supplement on each distribution date. Distributions in
reduction of principal balance will be allocated among the classes of
securities of a series in the manner specified in the applicable prospectus
supplement.
See "Description of the Securities -- Distribution of Principal on the
Securities" in this prospectus.
DENOMINATIONS
Each class of securities of a series will be issued in the minimum
denominations set forth in the related prospectus supplement.
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8
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REGISTRATION OF THE SECURITIES
The securities will be issued either:
o in book-entry form initially held through DTC in the United States, or
Clearstream Banking or the Euroclear System, in Europe; or
o in fully registered, certificated form.
See "Description of the Securities -- General" and "-- Book-Entry
Registration and Definitive Securities" in this prospectus.
ASSETS OF THE TRUST
The trust related to each series will consist primarily of any of the
following assets:
o a segregated pool of single family and/or multifamily mortgage loans,
which may include sub-prime mortgage loans;
o home improvement installment sales contracts or installment loans that
are unsecured;
o manufactured housing installment sales contracts and installment loan
agreements; and
o certain other property.
You should refer to the applicable prospectus supplement for the precise
characteristics or expected characteristics of the assets and a description of
the other property, if any, included in a particular trust.
See "Description of the Trust Funds" in this prospectus.
OPTIONAL TERMINATION OF THE TRUST
The related prospectus supplement may provide that the party specified in
the related prospectus supplement may
o repurchase all of the assets in the trust fund and thereby cause early
retirement of the securities under the circumstances and in the manner
specified in the related prospectus supplement and
o repurchase a portion of such assets to retire specified class or classes
of securities under the circumstances and in the manner specified in the
related prospectus supplement.
See "Description of the Securities -- Termination" in this prospectus.
The yield on each class of securities of a series will be affected by,
among other things, the rate of payment of principal (including prepayments) on
the assets in the related trust and the timing of receipt of such payments.
See "Yield Considerations" in this prospectus.
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9
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PREFUNDING ACCOUNT
The related prospectus supplement may provide that the depositor deposit a
specified amount in a pre-funding account on the date the securities are
issued. In this case, the deposited funds may only be used to acquire the
additional assets for the trust during a set period after the initial issuance
of the securities. Any amounts remaining in the account at the end of the
period will be distributed as a prepayment of principal to the holders of the
related securities.
See "Description of the Trust Funds -- Prefunding Account" in this
prospectus.
CREDIT ENHANCEMENT
If so specified in the applicable prospectus supplement, the securities of
any series, or any one or more classes of a series, may be entitled to the
benefits of other types of credit enhancement, including but not limited to:
o letter of credit
o special hazard insurance policy
o reserve fund
o cash collateral account
o financial guaranty insurance policy
o mortgage pool insurance policy
o spread account
o overcollateralization
Credit support may also be provided by subordination. Any credit support
will be described in detail in the applicable prospectus supplement.
See "Description of Credit Support" in this prospectus.
RATINGS OF SECURITIES
The securities of any series will not be offered pursuant to this
prospectus and a prospectus supplement unless each offered security is rated in
one of the four highest rating categories by at least one nationally recognized
statistical rating agency.
o A security rating is not a recommendation to buy, sell or hold the
securities on any series and is subject to revision or withdrawal at any
time by the assigning rating agency.
o Ratings do not address credit risk and do not represent any assessment
of the likelihood or rate of principal prepayments.
See "Risk Factors -- Risks Associated with the Securities -- Ratings
Assigned to the Securities Will Have Limitations" and "Ratings" in this
prospectus.
TAX STATUS OF THE SECURITIES
The securities of each series offered will be either:
o regular interests and residual interests in a trust fund treated as a
REMIC;
o interests in a trust fund treated as a grantor trust;
o interests in a trust fund treated as a partnership;
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10
o debt obligations secured by assets of a trust fund; or
o regular interest or ownership interests in a trust fund treated as a
FASIT.
For additional information see "Federal Income Tax Consequences" in this
prospectus and "Certain Material Federal Income Tax Consequences" in the
prospectus supplement.
ERISA CONSIDERATIONS
If you are a fiduciary of any employee benefit plan or arrangement,
including an individual retirement account, subject to fiduciary responsibility
or prohibited transaction provisions of ERISA, you should carefully review with
your legal advisors whether the purchase or holding of securities could give
rise to a transaction that is prohibited or not otherwise permissible under
ERISA or other comparable rules or regulations.
For additional information see "ERISA Considerations" in this prospectus
and in the prospectus supplement.
LEGAL INVESTMENT
The applicable prospectus supplement will specify whether the class or
classes of securities offered will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended.
If your investment authority is subject to legal restrictions you should
consult your own legal advisors to determine whether and to what extent such
securities constitute a legal investment for you.
For additional information see "Legal Investment" in this prospectus and
in the prospectus supplement.
MATERIAL RISKS
You are urged to read "Risk Factors" in this prospectus and in the
prospectus supplement for a discussion of the material risks associated with an
investment in the securities.
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11
RISK FACTORS
You should consider, among other things, the following factors in
connection with the purchase of securities.
RISKS ASSOCIATED WITH THE SECURITIES
Securities May Not be Liquid. The liquidity of your securities may be
limited. You should consider that:
o a secondary market for the securities of any series may not develop, or
if it does, it may not provide you with liquidity of investment, or it
may not continue for the life of the securities of any series;
o issuance of any of the securities of any series in book-entry form may
reduce the liquidity of such securities in the secondary trading market
because investors may not be willing to purchase securities for which
they cannot obtain physical certificates or notes; and
o unless specified in the applicable prospectus supplement, the securities
will not be listed on any securities exchange.
The Depositor, the Master Servicer, the Servicer, the Trustee and, if
applicable, the Certificate Administrator Will Have Limited Obligations. No
class of securities of any series will be an interest in or obligation of the
depositor, the master servicer, the servicer, the trustee, the certificate
administrator (if applicable) or any of their affiliates. Unless otherwise
provided in the related prospectus supplement, the only obligations with
respect to any of the securities or the related assets will be:
o the servicer's and master servicer's servicing obligations under the
applicable agreement; and
o the obligation of the party making representations and warranties
regarding the assets of a trust, the seller of the assets of a trust,
either directly or indirectly, to the depositor or other entity specified
in the related prospectus supplement to purchase, or substitute a
substantially similar asset for any asset as to which there is defective
documentation or a breach of certain representations and warranties made
with respect to such asset.
Unless otherwise provided in the prospectus supplement, the securities and
the underlying assets will not be guaranteed or insured by any governmental
agency or instrumentality, or by the depositor, the master servicer, the
servicer, the trustee or any of their affiliates.
Credit Enhancement is Limited in Amount and Coverage. With respect to each
series of securities, credit enhancement may be provided in limited amounts to
cover certain types of losses on the underlying assets. Credit enhancement will
be provided in one or more of the forms referred to in this prospectus,
including, but not limited to: subordination of other classes
12
of securities of the same series; a letter of credit; a financial guaranty
insurance policy; a mortgage pool insurance policy; a special hazard insurance
policy; a reserve fund; a spread account; a cash collateral account; or other
type of credit enhancement. See "Description of Credit Support" in this
prospectus.
Regardless of the form of credit enhancement provided:
o the amount of coverage will be limited in amount and in most cases will
be subject to periodic reduction in accordance with a schedule or
formula;
o may provide only very limited coverage as to certain types of losses,
and may provide no coverage as to certain types of losses; and
o all or a portion of the credit enhancement for any series of securities
may be permitted to be reduced, terminated or substituted for, if each
applicable rating agency indicates that the then-current ratings will not
be adversely affected.
Rate of Prepayment on Assets May Adversely Affect Average Lives and Yields
on the Securities. The yield on the securities of each series will depend in
part on the rate of principal payment on the assets (including prepayments,
liquidations due to defaults and asset repurchases). Such yield may be adversely
affected, depending upon whether a particular security is purchased at a premium
or a discount, by a higher or lower than anticipated rate of prepayments on the
related assets. In particular:
o the yield on principal-only or interest-only securities will be
extremely sensitive to the rate of prepayments on the related assets; and
o the yield on certain classes of securities may be relatively more
sensitive to the rate of prepayments of specified assets than other
classes of securities.
The rate of prepayments on assets is influenced by a number of factors,
including:
o the prevailing mortgage market interest rates;
o local and national economic conditions;
o homeowner mobility; and
o the ability of the borrower to obtain financing.
In addition, your yield may be adversely affected by interest shortfalls
which may result from the timing of the receipt of prepayments or liquidations
to the extent that such interest shortfalls are not covered by aggregate
servicing fees or other mechanisms specified in the applicable prospectus
supplement. Your yield also will be adversely affected if losses on the assets
in the related trust are allocated to your securities and may be adversely
affected to the extent of unadvanced delinquencies on the assets in the related
trust. Classes of securities identified in the applicable prospectus supplement
as subordinated certificates or notes are more likely to be affected by
delinquencies and losses than other classes of securities.
See "Yield Considerations" in this prospectus.
13
Ratings Assigned to the Securities Will Have Limitations. The ratings
assigned to your securities will not:
o assess the likelihood that principal prepayments (including those caused
by defaults) on the related assets will be made, the degree to which the
rate of such prepayments might differ from that originally anticipated or
the likelihood of early optional termination or redemption of the series
of securities; and
o address the possibility that prepayments at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a security at a
significant premium might fail to recoup its initial investment under
certain prepayment scenarios.
In addition, the ratings of any series of securities by any applicable
rating agency may be lowered following the initial issuance of the securities.
The lowering of a rating on a series or class of securities may adversely
affect the market value of such securities and the liquidity of such
securities. The depositor or any of its affiliates will not have any obligation
to maintain any rating of any series of securities.
Book-Entry Securities May Experience Certain Problems. Since transactions
in the classes of securities of a Series issued in book-entry form can be
effected only through DTC, Clearstream Banking, the Euroclear System,
participating organizations, indirect participants and certain banks:
o you may experience delays in your receipts of payments of interest and
principal; and
o your ability to pledge such securities to persons or entities that do not
participate in the DTC, Clearstream Banking or the Euroclear System may be
limited due to the lack of a physical certificate.
See "Description of the Securities -- Book-Entry Registration and
Definitive Securities" in this prospectus.
Risk of Loss May Be Greater on Subordinated Securities. The rights of
holders of subordinated securities will be subordinate:
o to the rights of the servicer and any master servicer (to the extent of
their servicing fees, including any unpaid servicing fees with respect to
one or more prior due periods, and its reimbursement for certain
unreimbursed advances and unreimbursed liquidation expenses); and
o the holders of senior securities to the extent described in the related
prospectus supplement.
As a result of the foregoing, investors must be prepared to bear the risk
that they may be subject to delays in payment and may not recover their initial
investments in the subordinated securities. See "Description of Credit Support"
in this prospectus.
14
The yields on the subordinated securities may be extremely sensitive to
the loss experience of the related assets and the timing of any such losses. If
the actual rate and amount of losses experienced by the assets exceed the rate
and amount of such losses assumed by an investor, the yield to maturity on the
subordinated securities may be lower than anticipated.
RISKS ASSOCIATED WITH THE ASSETS
Mortgage Loans Secured by Multifamily Properties May Experience Greater
Rates of Delinquency and Foreclosure. The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an
income-producing property typically is directly related to the net operating
income derived from such property. If the net operating income of the property
is reduced (for example, if rental or occupancy rates decline or real estate
tax rates or other operating expenses increase), the borrower's ability to
repay the loan may be impaired. In addition, the concentration of default,
foreclosure and loss risk for a pool of mortgage loans secured by multifamily
properties may be greater than for a pool of mortgage loans secured by single
family properties of comparable aggregate unpaid principal balance because the
pool of mortgage loans secured by multifamily properties is likely to consist
of a smaller number of higher balance loans.
General Economic Conditions Affect Mortgage Loan Performance. General
economic conditions have an impact on the ability of borrowers to repay
mortgage loans. Loss of earnings, illness and other similar factors may lead to
an increase in delinquencies and bankruptcy filings by borrowers. In the event
of personal bankruptcy of a borrower under a mortgage loan, it is possible that
the holders of the related securities could experience a loss with respect to
such mortgagor's mortgage loan. In conjunction with a mortgagor's bankruptcy, a
bankruptcy court may suspend or reduce the payments of principal and interest
to be paid with respect to such mortgage loan, thus delaying the amount
received by the holders of the related securities with respect to such mortgage
loan. Moreover, if a bankruptcy court prevents the transfer of the related
mortgaged property to the related trust, any remaining balance on such mortgage
loan may not be recoverable.
Real Estate Market Conditions Affect Mortgage Loan Performance. An
investment in the securities which are secured by or represent interests in
mortgage loans may be affected by, among other things, a decline in real estate
values. There is no assurance that the values of the mortgaged properties will
remain at the levels existing on the dates of origination of the related
mortgage loans.
If the residential real estate market should experience an overall decline
in property values such that the outstanding balances of the mortgage loans
contained in a particular trust and any secondary financing on the mortgaged
properties, become equal to or greater than the value of the mortgaged
properties, delinquencies, foreclosures and losses could be higher than those
now generally experienced in the mortgage lending industry.
15
Geographic Concentration May Increase Rates of Loss and Delinquency.
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency on assets
generally. Any concentration of the assets relating to any series of securities
in such a region may present risk considerations in addition to those generally
present for similar asset-backed securities without such concentration.
See "The Mortgage Pool" in the related prospectus supplement for further
information regarding the geographic concentration of the assets underlying the
securities of any series.
Risk of Loss May Be Greater on Junior Mortgage Loans. Certain of the
mortgage loans underlying the securities of a series may be secured by
mortgages junior or subordinate to one or more other mortgages, and the related
more senior mortgages may not be included in the trust fund. Although little
data is available, the rate of default of second or more junior mortgage loans
may be greater than that of mortgage loans secured by senior liens on
comparable properties. A primary risk to holders of mortgage loans secured by
junior mortgages is the possibility that adequate funds will not be received in
connection with a foreclosure of the related senior mortgage to satisfy fully
both the senior mortgage and the mortgage that is junior or subordinate. In
such case, holders of the securities would bear:
o the risk of delay in distributions while a deficiency judgement against
the borrower is obtained; and
o the risk of loss if the deficiency judgment is not realized upon.
Moreover, deficiency judgments may not be available in certain
jurisdictions. In addition, a junior mortgagee may not foreclose on the
property securing a junior mortgage unless it forecloses subject to the more
senior mortgage.
In servicing junior mortgages, it is generally the servicer's and master
servicer's practice to advance funds to keep the senior mortgage current if the
mortgagor is in default thereunder. The servicer and master servicer intend to
advance such amounts in accordance with their normal servicing procedures, but
only to the extent that it determines such advances will be recoverable from
future payments and collections on that mortgage loan or otherwise. Such
practice may not be followed in servicing loans more junior than second
mortgages or may be modified at any time. The related trust will have no source
of funds to satisfy any senior mortgage or make payments due to any senior
mortgagee. The junior mortgages securing the mortgage loans are subject and
subordinate to any senior mortgage affecting the related mortgaged property,
including limitations and prohibitions which may be contained in such senior
mortgage upon subordinate financing.
Special Risks of Certain Assets. Certain assets that may be included in
the Trust may involve additional uncertainties not present in other types of
assets. Certain of the assets may provide for escalating or variable payments
that may be larger than the initial payment amount; however, the borrowers
under such assets are generally approved on the basis of the initial payment
amount and the borrower's income may not be sufficient to enable them to pay
the increased payment amounts. Therefore, in such cases the likelihood of
default may increase.
16
Certain of the assets underlying a series of securities may be delinquent
in respect of the payment of principal and interest. In addition, certain of
the mortgagors under the mortgage loans underlying a series of securities may
be subject to personal bankruptcy proceedings. Credit enhancement provided with
respect to a particular series of securities may not cover all losses related
to such mortgage loans. Prospective investors should consider the risk that the
inclusion in a trust of delinquent assets and mortgage loans with respect to
which the mortgagor is the subject of bankruptcy proceedings may cause the rate
of the defaults and prepayments on such assets to increase and, in turn, may
cause losses to exceed the available credit enhancement for such series and
affect the yield on the securities of such series. See "The Mortgage Pool" in
the related prospectus supplement.
Defaulted Mortgage Loans May Experience Delays in Liquidation. Even
assuming the mortgaged properties provide adequate security for the mortgage
loans underlying a series of securities, substantial delays could result in
connection with the liquidation of defaulted mortgage loans. This could result
in corresponding delays in the receipt of the related proceeds by the related
trust. See "Certain Legal Aspects of the Mortgage Loans -- Foreclosure," "--
Rights of Redemption" and "-- Anti-Deficiency Legislation, the Bankruptcy Code
and Other Limitations on Lenders" in this prospectus.
Liquidation Expenses May be Disproportionate. Liquidation expenses with
respect to defaulted assets do not vary directly with the outstanding principal
balance of the assets at the time of default. Therefore, assuming that the
servicer and master servicer took the same steps in realizing upon a defaulted
asset having a small remaining principal balance as they would in the case of a
defaulted asset having a large remaining principal balance, the amount realized
after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the small asset than would be the case with
the defaulted asset having a large remaining principal balance. Because the
average outstanding principal balance of the assets is small relative to the
size of the average outstanding principal balance of the loans in a typical
pool consisting only of conventional purchase-money mortgage loans, net
liquidation proceeds on liquidated assets may also be smaller as a percentage
of the principal balance of the assets than would be the case in a typical pool
consisting only of conventional purchase-money mortgage loans.
Defaults May Be More Likely on Newer Assets. Certain of the assets
underlying a series of securities may be recently originated as of the date of
the inclusion in the related trust fund. Although little data is available,
defaults on assets are generally expected to occur with greater frequency in
their early years.
Balloon Payment Assets May Have a Greater Default Risk at
Maturity. Certain of the underlying a series of securities may provide for a
lump-sum payment of the unamortized principal balance of the mortgage loan at
the maturity of the asset. See "The Mortgage Pool" in the related prospectus
supplement.
Because borrowers under this type of asset are required to make a
relatively large single payment upon maturity, it is possible that the default
risk associated with such assets is greater than that associated with
fully-amortizing mortgage loans. The ability of a mortgagor on this type of
asset to repay the mortgage loan upon maturity frequently depends upon the
mortgagor's ability:
17
o to refinance the asset, which will be affected by a number of factors,
including, without limitation, the level of mortgage rates available in
the primary mortgage market at the time, the mortgagor's equity in the
related mortgaged property, the financial condition of the mortgagor, the
condition of the mortgaged property, tax law, general economic conditions
and the general willingness of financial institutions and primary
mortgage bankers to extend credit; or
o to sell the related mortgaged property at a price sufficient to permit
the mortgagor to make the lump-sum payment.
Texas Home Equity Loans Have Significant Limitations. Certain of the
mortgage loans may be home equity loans secured by mortgaged properties located
in Texas. The Texas Constitution permits this type of loan, but significant
limitations were imposed on permitted terms, conditions and practices incident
to their creation. For example, these loans must be made without recourse for
personal liability against the homestead owner(s) or their spouse(s) (except in
the case of actual fraud on their part in obtaining the loan) and may be
foreclosed upon only by court order. Further, holders of these types of loans
face unique legal risks and uncertainties that they do not customarily confront
with equity take-out mortgages in other states. For example, if any of the
requirements that are addressed in the amendment to the Texas Constitution
(such as limitations on fees charged to the borrower, disclosures to the
borrower or matters to be provided for in the closing documents) are not met,
the lien may be invalid. There are also similar risks involved in servicing
these types of loans, such as the failure to comply with an obligation to the
borrower within a reasonable time after receiving notification from the
borrower, that can result in the forfeiture of all principal and interest due
on the mortgage loan.
Increased Risk of Loss if Assets are Delinquent. A portion of the assets
may be delinquent upon the issuance of the related securities. Credit
enhancement provided with respect to a particular series of securities may not
cover all losses related thereto. You should consider the risk that the
inclusion of such assets in the trust fund for a series may cause the rate of
defaults and prepayments on the assets to increase and, in turn, may cause
losses to exceed the available credit enhancement for such series and affect
the yield on the securities of such series.
Cash Flow Agreements are Subject to Counterparty Risk. The assets of a
trust fund may, if specified in the related prospectus supplement, include
agreements such as interest rate exchange agreements, interest rate cap or
floor agreements, currency exchange agreements or other similar agreements,
which will require the provider of such instrument or counterparty to make
payments to the trust fund under the circumstances described in the prospectus
supplement. To the extent that payments on the securities of the related series
depend in part on payments to be received under this type of agreement, the
ability of the trust fund to make payments on the securities will be subject to
the credit risk of the counterparty. The prospectus supplement for a series of
securities will describe any mechanism, such as the payment of any "breakage
fee," which may exist to facilitate the replacement of this type of agreement
upon the default of credit impairment of the related counterparty. However,
there can be no assurance that any such mechanism will result in the ability of
the servicer to obtain a replacement.
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Sub-Prime Mortgage Loans May Experience Greater Rates of Delinquency and
Foreclosure. If specified in the related prospectus supplement, all or a
portion of the mortgage loans may consist of sub-prime mortgage loans. A
sub-prime mortgage loan is a mortgage loan that is ineligible for purchase by
Fannie Mae or the Freddie Mac due to borrower credit characteristics, property
characteristics, loan documentation guidelines or other credit characteristics
that do not meet Fannie Mae or Freddie Mac underwriting guidelines. As a
consequence:
o delinquencies and foreclosures may be expected to be more likely with
respect to sub-prime mortgage loans than with respect to mortgage loans
originated in accordance with Fannie Mae or Freddie Mac underwriting
guidelines; and
o changes in the values of the mortgaged properties may have a greater
effect on the loss experience of sub-prime mortgage loans than on
mortgage loans originated in accordance with Fannie Mae or Freddie Mac
underwriting guidelines.
VIOLATIONS OF FEDERAL LAWS OR STATE LAWS MAY ADVERSELY AFFECT ABILITY TO
COLLECT ON LOANS OR RESULT IN LOSSES
There are various federal and state laws, public policies and principles
of equity that protect consumers. Among other things, these laws, policies and
principles:
o regulate interest rate and other charges;
o require certain disclosures;
o require licensing of mortgage loan originators;
o require the lender to provide credit counseling and/or make certain
affirmative determinations regarding the borrower's ability to replay the
mortgage loan;
o prohibit discriminatory lending practices;
o limit or prohibit certain mortgage loan features, such as prepayment
penalties or balloon payments;
o regulate the use of consumer credit information; and
o regulate debt collection practices.
Violation of certain provisions of these laws, policies and principles:
o may limit a servicer's ability to collect all or part of the principal
of or interest on the mortgage loans;
o may entitle the borrower to a refund of amounts previously paid; and
o could subject a servicer or the trust to damages and administrative
sanctions.
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The seller of the assets, either directly or indirectly, to the depositor
will generally be required to repurchase any mortgage loan which, at the time
of origination, did not comply with such federal and state laws or regulations,
however that remedy may not be adequate to fully compensate the related trust
fund.
See "Certain Legal Aspects of the Mortgage Loans" in this prospectus.
In addition, certain of the mortgage loans secured by mortgaged properties
located in Texas may be subject to the provisions of Texas laws which regulate
loans other than purchase money loans. These laws provide for certain
disclosure requirements, caps on allowable fees, required loan closing
procedures and other restrictions. Failure to comply with any requirement may
render the mortgage loan unenforceable and/or the lien on the mortgaged
property invalid. There are also similar risks involved in servicing such
mortgage loans (such as the failure to comply with an obligation to the
borrower within a reasonable time after receiving notification from the
borrower) that can result in the forfeiture of all principal and interest due
on the mortgage loan.
See "Certain Legal Aspects of the Mortgage Loans-Anti -- Deficiency
Legislation, the Bankruptcy Code and Other Limitations on Lenders," "-- Texas
Home Equity Loans" and "-- Homeowners Protection Act of 1998."
MARKET VALUES OF MANUFACTURED HOMES MAY INCREASE THE RISK OF LOSS
Manufactured homes generally depreciate in value. Thus investors should
expect that, as a general matter, the market value of any manufactured home
will be lower than the outstanding principal balance of the related installment
contract. As a result, investors must be prepared to bear the risk of loss
resulting from any delinquency or liquidation loss on the contracts in a trust
fund. See "Description of Credit Support" in this prospectus.
RISK OF LOSS MAY BE GREATER ON UNSECURED HOME IMPROVEMENT LOANS
The obligations of the borrower under any unsecured home improvement loan
included in a trust fund will not be secured by an interest in the related real
estate or any other property. In the event of a default, the trust fund will
have recourse only against the borrower's assets generally, along with all
other general unsecured creditors of the borrower. In a bankruptcy or
insolvency proceeding, the obligations of the borrower under an unsecured home
improvement loan may be discharged in their entirety. As a result, the trust
fund may suffer losses. In addition, a borrower on an unsecured home
improvement loan may not demonstrate the same degree of concern over
performance of the borrower's obligations as if such obligations were secured
by the real estate or other assets owned by such borrower.
RISKS OF LOSS MAY INCREASE DUE TO DEFECTIVE SECURITY INTEREST AND EFFECTS OF
CERTAIN OTHER LEGAL ASPECTS OF THE CONTRACTS
The seller of the assets, either directly or indirectly, to the depositor
will represent that a contract is secured by a security interest in a
manufactured home. Perfection of such security interests and the right to
realize upon the value of the manufactured homes as collateral for the contracts
are subject to a number of federal and state laws, including the Uniform
Commercial Code. The steps necessary to perfect the security interest in a
manufactured home will vary from state to state. Because of the expense and
administrative inconvenience involved, the servicer or
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the master servicer will not amend any certificates of title to change the
lienholder specified therein from the asset seller to the trustee and will not
deliver any certificate of title to the trustee or note thereon the trustee's
interest. Consequently, in some states, in the absence of such an amendment, the
assignment to the trustee of the security interest in the manufactured home may
not be effective or such security interest may not be perfected and, may not be
effective against creditors of the asset seller or a trustee in bankruptcy of
the asset seller.
In addition, numerous federal and state consumer protection laws impose
requirements on lending under installment sales contracts and installment loan
agreements and the failure by the lender or seller of goods to comply with such
requirements could give rise to liabilities of assignees for amounts due under
such agreements and claims by such assignees may be subject to set-off as a
result of such lender's or seller's noncompliance. These laws would apply to
the trustee as assignee of the contracts. The asset seller of the contracts
will warrant that each contract complies with all requirements of law and will
make certain warranties relating to the validity, subsistence, perfection and
priority of the security interest in each manufactured home securing a
contract. A breach of any such warranty that materially adversely affects any
contract would create an obligation of the asset seller to repurchase, or if
permitted by the applicable agreement, substitute for, such contract unless
such breach is cured. If the credit support is exhausted and recovery of
amounts due on the contracts is dependent on repossession and resale of
manufactured homes securing contracts that are in default, certain other
factors may limit the ability to realize upon the manufactured home or may
limit the amount realized by securityholders to less than the amount due. See
"Certain Legal Aspects of the Contracts."
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund (the "ASSETS") will include (i)
single family and/or multifamily mortgage loans, which may include sub-prime
mortgage loans (or certain balances thereof) (collectively, the "MORTGAGE
LOANS"), including without limitation, First Lien Mortgage Loans, Home Equity
Loans, Home Improvement Contracts and Land Sale Contracts, (ii) unsecured home
improvement loans ("UNSECURED HOME IMPROVEMENT LOANS"), (iii) manufactured
housing installment sale contracts or installment loan agreements (the
"CONTRACTS"), or (iv) a combination of Mortgage Loans, Unsecured Home
Improvement Loans and/or Contracts. The Mortgage Loans will not be guaranteed
or insured by the Depositor or any of its affiliates. The Mortgage Loans will
be guaranteed or insured by a governmental agency or instrumentality or other
person only if and to the extent expressly provided in the related prospectus
supplement. Each Asset will be selected by the Depositor for inclusion in a
Trust Fund from among those purchased, either directly or indirectly, from a
prior holder thereof (an "ASSET SELLER"), which may be an affiliate of the
Depositor and which prior holder may or may not be the originator of such
Mortgage Loan, Unsecured Home Improvement Loan or Contract.
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The Assets included in the Trust Fund for a Series may be subject to
various types of payment provisions. Such Assets may consist of:
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 (which may be rounded) 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 obligors to reduce the obligors'
monthly payments during the early period after origination of such
Assets;
o "INCREASING PAYMENT ASSETS," as described below;
o "INTEREST REDUCTION ASSETS," which provide for the one-time reduction of
the interest rate payable thereon;
o "GEM ASSETS," which provide for (a) monthly payments during the first
year after origination that are at least sufficient to pay interest due
thereon, and (b) an increase in such monthly payments in subsequent years
at a predetermined rate resulting in full repayment over a shorter term
than the initial amortization terms of such Assets;
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 the unpaid
principal balances thereof, and which unpaid interest will be added to
the principal balances of such Assets and will be paid, together with
interest thereon, in later years;
o "STEP-UP RATE ASSETS" which provide for interest rates that increase
over time;
o "BALLOON PAYMENT ASSETS" which are mortgage loans that are not fully
amortizing over their terms and, thus, will require a lump-sum payment at
their stated maturity;
o "INTEREST-ONLY ASSETS" which provide for the payment of interest at the
related interest rate, but no payment of principal, for a certain period
of time following the origination of the asset;
o "ADDITIONAL COLLATERAL ASSETS" which are assets that are either (i)
secured by a security interest in additional collateral (normally
securities) owned by the borrower or (ii) supported by a third party
guarantee (usually a parent of the borrower) which is in turn secured by
a security interest in collateral (usually securities) owned by such
guarantor;
o "CONVERTIBLE ASSETS" Which are Adjustable Rate Assets subject to
provisions pursuant to which, subject to certain limitations, the related
obligors may exercise an option to convert the adjustable interest rate
to a fixed interest rate; and
o "BI-WEEKLY ASSETS," which provide for obligor payments to be made on a
bi-weekly basis.
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An "INCREASING PAYMENT ASSET" is an Asset that provides for monthly
payments that are fixed for an initial period to be specified in the related
prospectus supplement and which increase thereafter (at a predetermined rate
expressed as a percentage of the monthly payment during the preceding payment
period, subject to any caps on the amount of any single monthly payment
increase) for a period to be specified in the related prospectus supplement
from the date of origination, after which the monthly payment is fixed at a
level-payment amount so as to fully amortize the Asset over its remaining term
to maturity. The scheduled monthly payment with respect to an Increasing
Payment Asset is the total amount required to be paid each month in accordance
with its terms and equals the sum of (1) the obligor's monthly payments
referred to in the preceding sentence and (2) in the case of certain Increasing
Payment Assets, payments made by the respective Servicers pursuant to buy-down
or subsidy agreements. The obligor's initial monthly payments for each
Increasing Payment Asset are set at the level-payment amount that would apply
to an otherwise identical Level Payment Asset having an interest rate a certain
number of percentage points below the Asset Rate of such Increasing Payment
Asset. The obligor's monthly payments on each Increasing Payment Asset,
together with any payments made thereon by the related Servicers pursuant to
buy-down or subsidy agreements, will in all cases be sufficient to allow
payment of accrued interest on such Increasing Payment Asset at the related
interest rate, without negative amortization. An obligor's monthly payments on
such an Asset may, however, not be sufficient to result in any reduction of the
principal balance of such Asset until after the period when such payments may
be increased.
The Securities will be entitled to payment only from the assets of the
related Trust Fund and will not be entitled to payments in respect of the
assets of any other trust fund established by the Depositor. If specified in
the related prospectus supplement, the assets of a Trust Fund will consist of
certificates representing beneficial ownership interests in, or indebtedness
of, another trust fund that contains the Assets.
MORTGAGE LOANS
General
Each Mortgage Loan will generally be secured by a lien on (i) a one-to
four-family residential property or a security interest in shares issued by a
cooperative housing corporation (a "SINGLE FAMILY PROPERTY" and the related
Mortgage Loan a "SINGLE FAMILY MORTGAGE LOAN") or (ii) a primarily residential
property which consists of five or more residential dwelling units, and which
may include limited retail, office or other commercial space (a "MULTIFAMILY
PROPERTY" and the related Mortgage Loan a "MULTIFAMILY MORTGAGE LOAN"). Single
Family Properties and Multifamily Properties are sometimes referred to herein
collectively as "Mortgaged Properties." To the extent specified in the related
prospectus supplement, the Mortgage Loans will be secured by first and/or
junior mortgages or deeds of trust or other similar security instruments
creating a first or junior lien on Mortgaged Property. The Mortgaged Properties
may include apartments owned by cooperative housing corporations
("COOPERATIVES"). The Mortgaged Properties may include leasehold interests in
properties, the title to which is held by third party lessors. The term of any
such leasehold shall exceed the term of the related mortgage note by at least
five years or such other time period specified in the related prospectus
supplement. The Mortgage Loans may include (i) fixed or adjustable rate
conventional mortgage loans which are secured by a first lien on one- to
four-family residential
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property ("FIRST LIEN MORTGAGE LOANS"), (ii) closed-end and/or revolving home
equity loans or certain balances thereof secured by first liens or junior liens
on one- to four- family residential property ("HOME EQUITY LOANS") and/or (iii)
secured home improvement installment sales contracts and secured installment
loan agreements ("HOME IMPROVEMENT CONTRACTS"). In addition, the Mortgage Loans
may include certain Mortgage Loans evidenced by contracts ("LAND SALE
CONTRACTS") for the sale of properties pursuant to which the mortgagor promises
to pay the amount due thereon to the holder thereof with fee title to the
related property held by such holder until the mortgagor has made all of the
payments required pursuant to such Land Sale Contract, at which time fee title
is conveyed to the mortgagor. The Originator of each Mortgage Loan will have
been a person other than the Depositor. The related prospectus supplement will
indicate if any person who originated the Mortgage Loans (each an "ORIGINATOR")
is an affiliate of the Depositor. The Mortgage Loans will be evidenced by
promissory notes (the "MORTGAGE NOTES") secured by mortgages, deeds of trust or
other security instruments (the "MORTGAGES") creating a lien on the Mortgaged
Properties.
Loan-to-Value Ratio
The "LOAN-TO-VALUE RATIO" of a Mortgage Loan at any given 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 with respect to Refinance Loans, is
generally the lesser of (a) the appraised value determined in an appraisal
obtained by the originator at origination of such loan and (b) the sales price
for such property. "REFINANCE LOANS" are loans made to refinance existing
loans. Unless otherwise set forth in the related prospectus supplement, the
Value of the Mortgaged Property securing a Refinance Loan is the appraised
value thereof 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 of Securities may be less than the Value at
origination and will fluctuate from time to time based upon changes in economic
conditions and the real estate market.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS
Each prospectus supplement will contain information, as of the dates
specified in such prospectus supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including:
o the aggregate outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Mortgage Loans as of the
applicable cut-off date (the "CUT-OFF DATE") specified in the prospectus
supplement,
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 earliest and latest origination date and maturity date of the
Mortgage Loans,
o the range of the Loan-to-Value Ratios at origination of the Mortgage
Loans,
24
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 with respect to the prepayment provisions, if any, of the
Mortgage Loans,
o with respect to 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 maximum Mortgage Rate or monthly
payment variation at the time of any adjustment thereof and over the life
of the ARM Loan,
o information regarding the payment characteristics of the Mortgage Loans,
including without limitation 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 such Mortgage Loans are delinquent and
o the material underwriting standards used for the Mortgage Loans.
If specific information respecting the Mortgage Loans is not known to the
Depositor at the time Securities are initially offered, more general
information of the nature described above will be provided in the prospectus
supplement, and specific information will be set forth in a report which will
be available to purchasers of the related Securities at or before the initial
issuance thereof and will be filed as part of a Current Report on Form 8-K with
the Securities and Exchange Commission (the "SEC") after such initial issuance.
Notwithstanding the foregoing, the characteristics of the Mortgage Loans
included in a Trust Fund will not vary by more than five percent (by aggregate
principal balance as of the Cut-off Date) from the characteristics thereof that
are described in the related prospectus supplement.
The related prospectus supplement will specify whether the Mortgage Loans
include (i) First Lien Mortgage Loans, (ii) Home Equity Loans, which may be
secured by Mortgages that are junior to other liens on the related Mortgaged
Property and/or (iii) 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 related prospectus supplement will specify
whether the Home Improvement Contracts are partially insured under Title I of
the National Housing Act of 1934 (the "NATIONAL HOUSING ACT") and, if so, the
limitations on such insurance. In addition, the related prospectus supplement
will specify whether the Mortgage Loans contain certain Mortgage Loans
evidenced by Land Sale Contracts.
PAYMENT PROVISIONS OF THE MORTGAGE LOANS
All of the Mortgage Loans will provide for payments of principal, interest
or both, on due dates that occur monthly, quarterly or semi-annually or at such
other interval as is specified in the related prospectus supplement or for
payments in another manner described in the related prospectus supplement. Each
Mortgage Loan may provide for no accrual of interest or for
25
accrual of interest thereon at an interest rate (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 on the related Mortgage Note, in each
case as described in the related prospectus supplement. Each Mortgage Loan may
provide for scheduled payments to maturity or payments that adjust from time to
time to accommodate changes in the Mortgage Rate or to reflect the occurrence of
certain 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 related prospectus supplement. Each Mortgage Loan may be fully
amortizing or require a balloon payment due on its stated maturity date, in each
case as described in the related prospectus supplement. Each Mortgage Loan may
contain prohibitions on prepayment (a "LOCK-OUT PERIOD" and, the date of
expiration thereof, a "LOCK-OUT DATE") or require payment of a premium or a
yield maintenance penalty (a "PREPAYMENT PREMIUM") in connection with a
prepayment, in each case as described in the related prospectus supplement. In
the event that holders of any Class or Classes of Offered Securities will be
entitled to all or a portion of any Prepayment Premiums collected in respect of
Mortgage Loans, the related prospectus supplement will specify the method or
methods by which any such amounts will be allocated. See "-- Assets" above.
REVOLVING CREDIT LINE LOANS
As more fully described in the related prospectus supplement, the Mortgage
Loans may consist, in whole or in part, of revolving Home Equity Loans or
certain balances thereof ("REVOLVING CREDIT LINE LOANS"). Interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of such loan. From time to time
prior to the expiration of the related draw period specified in a Revolving
Credit Line Loan, principal amounts on such Revolving Credit Line Loan may be
drawn down (up to a maximum amount as set forth in the related prospectus
supplement) or repaid. If specified in the related prospectus supplement, new
draws by borrowers under the Revolving Credit Line Loans will automatically
become part of the Trust Fund described in such prospectus supplement. As a
result, the aggregate balance of the Revolving Credit Line Loans will fluctuate
from day to day as new draws by borrowers are added to the Trust Fund and
principal payments are applied to such balances and such amounts will usually
differ each day, as more specifically described in the related prospectus
supplement. Under certain circumstances, under a Revolving Credit Line Loan, a
borrower may, during the related draw period, choose an interest only payment
option, during which the borrower is obligated to pay only the amount of
interest which accrues on the loan during the billing cycle, and may also elect
to pay all or a portion of the principal. An interest only payment option may
terminate at the end of the related draw period, after which the borrower must
begin paying at least a minimum monthly portion of the average outstanding
principal balance of the loan.
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UNSECURED HOME IMPROVEMENT LOANS
The Unsecured Home Improvement Loans may consist of conventional unsecured
home improvement loans and FHA insured unsecured home improvement loans. Except
as otherwise set forth in the related 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 such prospectus supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Unsecured Home
Improvement Loans, including:
o the aggregate outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Unsecured Home
Improvement Loans as of the applicable Cut-Off Date,
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 with respect to the prepayment provisions, if any, of the
Unsecured Home Improvement Loans,
o with respect to the Unsecured Home Improvement Loans with adjustable
interest rates ("ARM UNSECURED HOME IMPROVEMENT LOANS"), the index, the
frequency of the adjustment dates, the range of margins added to the
index, and the maximum interest rate or monthly payment variation at the
time of any adjustment thereof and over the life of the ARM Unsecured
Home Improvement Loan,
o information regarding the payment characteristics of the Unsecured Home
Improvement Loan,
o the number of Unsecured Home Improvement Loans that are delinquent and
the number of days or ranges of the number of days such Unsecured Home
Improvement Loans are delinquent and
o the material underwriting standards used for the Unsecured Home
Improvement Loans.
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If specific information respecting the Unsecured Home Improvement Loans is not
known to the Depositor at the time Securities are initially offered, more
general information of the nature described above will be provided in the
prospectus supplement, and specific information will be set forth in a report
which will be available to purchasers of the related Securities at or before
the initial issuance thereof and will be filed as part of a Current Report on
Form 8-K with the SEC after such initial issuance. Notwithstanding the
foregoing, the characteristics of the Unsecured Home Improvement Loans included
in a Trust Fund will not vary by more than five percent (by aggregate principal
balance as of the Cut-off Date) from the characteristics thereof that are
described in the related prospectus supplement.
CONTRACTS
GENERAL
To the extent provided in the related prospectus supplement, each Contract
will be secured by a security interest in a new or used manufactured home
(each, a "MANUFACTURED HOME"). Such prospectus supplement will specify the
states or other jurisdictions in which the Manufactured Homes are located as of
the related Cut-off Date. The method of computing the "LOAN-TO-VALUE RATIO" of
a Contract will be described in the related prospectus supplement.
CONTRACT INFORMATION IN PROSPECTUS SUPPLEMENTS
Each prospectus supplement will contain certain information, as of the
dates specified in such prospectus supplement and to the extent then applicable
and specifically known to the Depositor, with respect to the Contracts,
including:
o the aggregate 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 earliest and latest origination date and maturity date of the
Contracts,
o the range of the Loan-to-Value Ratios at origination of the Contracts,
o the Contract Rates 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 with respect to the prepayment provisions, if any, of the
Contracts,
28
o with respect to Contracts with adjustable Contract Rates ("ARM
CONTRACTS"), the index, the frequency of the adjustment dates, and the
maximum Contract Rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM Contract,
o the number of Contracts that are delinquent and the number of days or
ranges of the number of days such 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 not known to the Depositor
at the time Securities are initially offered, more general information of the
nature described above will be provided in the prospectus supplement, and
specific information will be set forth in a report which will be available to
purchasers of the related Securities at or before the initial issuance thereof
and will be filed as part of a Current Report on Form 8-K with the SEC after
such initial issuance. Notwithstanding the foregoing, the characteristics of
the Contracts included in a Trust Fund will not vary by more than five percent
(by aggregate principal balance as of the Cut-off Date) from the
characteristics thereof that are described in the related prospectus
supplement.
PAYMENT PROVISIONS OF THE CONTRACTS
All of the Contracts will provide for payments of principal, interest or
both, on due dates that occur monthly or at such other interval as is specified
in the related prospectus supplement or for payments in another manner
described in the prospectus supplement. Each Contract may provide for no
accrual of interest or for accrual of interest thereon at an annual percentage
rate (a "CONTRACT RATE") that is fixed over its term or that adjusts from time
to time, or as otherwise specified in the related 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 related prospectus supplement. See "-- Assets" above.
PRE-FUNDING ACCOUNT
To the extent provided in a prospectus supplement, a portion of the
proceeds of the issuance of Securities may be deposited into an account
maintained with the Trustee (a "PRE-FUNDING ACCOUNT"). In such event, the
Depositor will be obligated (subject only to the availability thereof) to sell
at a predetermined price, and the Trust Fund for the related Series of
Securities will be obligated to purchase (subject to the availability thereof),
additional Assets (the "SUBSEQUENT ASSETS") from time to time (as frequently as
daily) within the period (generally not to exceed three months) specified in
the related prospectus supplement (the "PRE-FUNDING PERIOD") after the issuance
of such Series of Securities having an aggregate principal balance
approximately equal to the amount on deposit in the Pre-Funding Account (the
"PRE-FUNDED AMOUNT") for such Series on the date of such issuance. The
Pre-Funded Amount with respect to a Series is not expected to exceed 25% of the
aggregate initial Security Balance of the related Securities. Any Subsequent
Assets will be required to satisfy certain eligibility criteria more fully set
forth in the applicable Agreement, which eligibility criteria will be
consistent with the
29
eligibility criteria of the Assets initially included in the Trust Fund, subject
to such exceptions as are expressly stated in the prospectus supplement. For
example, the Subsequent Assets will be subject to the same underwriting
standards, representations and warranties as the Assets initially included in
the Trust Fund.
Any portion of the Pre-Funded Amount remaining in the Pre-Funding Account
at the end of the Pre-Funding Period will be used to prepay one or more Classes
of Securities in the amounts and in the manner specified in the related
prospectus supplement. In addition, if specified in the related prospectus
supplement, the Depositor may be required to deposit cash into an account
maintained by the Trustee (the "CAPITALIZED INTEREST ACCOUNT") for the purpose
of assuring the availability of funds to pay interest with respect to the
Securities during the Pre-Funding Period. Any amount remaining in the
Capitalized Interest Account at the end of the Pre-Funding Period will be
remitted as specified in the related prospectus supplement.
ACCOUNTS
Each Trust Fund will include one or more accounts, established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related prospectus supplement will, to the extent described
herein and in such prospectus supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a
non-interest bearing account, and funds held therein may be held as cash or
invested in certain short-term, investment grade obligations, in each case as
described in the related prospectus supplement. See "Description of the
Agreements -- Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements -- Collection Account and Related Accounts."
CREDIT SUPPORT
If so provided in the related prospectus supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more Classes of Securities in the related
Series in the form of subordination of one or more other Classes of Securities
in such Series or by one or more other types of credit support, such as a
letter of credit, insurance policy, guarantee, reserve fund or another type of
credit support, or a combination thereof (any such coverage with respect to the
Securities of any Series, "CREDIT SUPPORT"). The amount and types of coverage,
the identification of the entity providing the coverage (if applicable) and
related information with respect to each type of Credit Support, if any, will
be described in the prospectus supplement for a Series of Securities. See "Risk
Factors -- Risks Associated with the Securities -- Credit Enhancement is
Limited in Amount and Coverage" and "Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the related 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 certain other agreements, such
as interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange 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 Securities.
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Currency exchange agreements might be included in the Trust Fund if some or all
of the Mortgage Loans were denominated in a non-United States currency. The
principal terms of any such guaranteed investment contract or other agreement
(any such agreement, a "CASH FLOW AGREEMENT"), including, without limitation,
provisions relating to the timing, manner and amount of payments thereunder and
provisions relating to the termination thereof, will be described in the
prospectus supplement for the related Series. In addition, the related
prospectus supplement will provide certain information with respect to the
obligor under any such Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Assets, or the repayment of the
financing incurred in such purchase, and to pay for certain expenses incurred
in connection with such purchase of Assets and sale of Securities. The
Depositor expects to sell the Securities from time to time, but the timing and
amount of offerings of Securities will depend on a number of factors, including
the volume of Assets acquired by the Depositor, prevailing interest rates,
availability of funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
holder of the Security (the "SECURITYHOLDER"), the Pass-Through Rate of the
Security, the receipt and timing of receipt of distributions on the Security
and the weighted average life of the Assets in the related Trust Fund (which
may be affected by prepayments, defaults, liquidations or repurchases). See
"Risk Factors -- Risks Associated with the Securities -- Rate of Prepayment on
Mortgage Loans May Adversely Affect Average Lives and Yields on the
Securities."
PASS-THROUGH RATE AND INTEREST RATE
Securities of any Class within a Series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
prospectus supplement with respect to any Series of Securities will specify the
Pass-Through Rate or interest rate for each Class of such Securities or, in the
case of a variable or adjustable Pass-Through Rate or interest rate, the method
of determining the Pass-Through Rate or interest rate; the effect, if any, of
the prepayment of any Asset on the Pass-Through Rate or interest rate of one or
more Classes of Securities; and whether the distributions of interest on the
Securities of any Class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
If so specified in the related prospectus supplement, the effective yield
to maturity to each holder of Securities entitled to payments of interest will
be below that otherwise produced by the applicable Pass-Through Rate or
interest rate and purchase price of such Security because, while interest may
accrue on each Asset during a certain period (each, an "ACCRUAL PERIOD"), the
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distribution of such interest will be made on a day which may be several days,
weeks or months following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities (or addition to the Security
Balance of a Class of Accrual Securities) on the monthly, quarterly or other
periodic date specified in the related prospectus supplement on which
distributions will be made to holders of Securities (a "DISTRIBUTION DATE")
will include interest accrued during the Accrual Period for such Distribution
Date. As indicated above under "-- Pass-Through Rate and 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 such Securities may be
lower than the yield that would result if the Accrual Period ended on such day
before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets, including principal prepayments on Mortgage
Loans and Contracts resulting from both voluntary prepayments by the borrowers
and involuntary liquidations. The rate at which principal prepayments occur on
the Mortgage Loans and Contracts will be affected by a variety of factors,
including, without limitation, the terms of the Mortgage Loans and Contracts,
the level of prevailing interest rates, the availability of mortgage credit and
economic, demographic, geographic, tax, legal and other factors. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Rates on the Mortgage Loans comprising or underlying the Assets in a particular
Trust Fund, such Mortgage Loans are likely to be the subject of higher principal
prepayments than if prevailing rates remain at or above the rates borne by such
Mortgage Loans. In this regard, it should be noted that certain Assets may
consist of Mortgage Loans with different Mortgage Rates. The rate of principal
payments on some or all of the Classes of Securities of a Series will correspond
to the rate of principal payments on the Assets in the related Trust Fund and is
likely to be affected by the existence of Lock-out Periods and Prepayment
Premium provisions of the Mortgage Loans underlying or comprising such Assets,
and by the extent to which the servicer of any such Mortgage Loan is able to
enforce such provisions. Mortgage Loans with a Lock-out Period or a Prepayment
Premium provision, to the extent enforceable, generally would be expected to
experience a lower rate of principal prepayments than otherwise identical
Mortgage Loans without such provisions, with shorter Lock-out Periods or 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 smaller
effect on the amount of the monthly payments on manufactured housing contracts
than on the amount of the monthly payments on mortgage loans secured by
site-built homes. Consequently, changes in interest rates may play a smaller
role in prepayment behavior of manufactured housing contracts than they do in
the prepayment behavior of loans secured by mortgage on site-built homes.
Conversely, local economic conditions and certain of the other factors mentioned
above may play a larger role in the prepayment behavior of manufactured housing
contracts than they do in the prepayment behavior of loans secured by mortgages
on site-built homes.
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If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that
is slower than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. In either case, if so provided
in the prospectus supplement for a Series of Securities, the effect on yield on
one or more Classes of the Securities of such Series of prepayments of the
Assets in the related Trust Fund may be mitigated or exacerbated by any
provisions for sequential or selective distribution of principal to such
Classes.
When a full prepayment is made on a Mortgage Loan or a Contract, the
obligor is charged interest on the principal amount of the Mortgage Loan or
Contract so prepaid for the number of days in the month actually elapsed up to
the date of the prepayment or such other period specified in the related
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
Securities entitled to payments of interest because interest on the principal
amount of any Mortgage Loan or Contract so prepaid will be paid only to the
date of prepayment rather than for a full month. A partial prepayment of
principal is applied so as to reduce the outstanding principal balance of the
related Mortgage Loan or Contract as of the Due Date in the month in which such
partial prepayment is received or such other date as is specified in the
related prospectus supplement.
The timing of changes in the rate of principal payments on the Assets may
significantly affect an investor's actual yield to maturity, even if the
average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Mortgage Loans and distributed on a Security, the greater the effect on such
investor's yield to maturity. The effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by the
investor during a given period may not be offset by a subsequent like decrease
(or increase) in the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest principal
received in respect of a Security at a yield at least equal to the yield on
such Security.
PREPAYMENTS -- MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets included
in or comprising a Trust Fund and the rate at which payments are made from any
Credit Support or Cash Flow Agreement for the related Series of Securities may
affect the ultimate maturity and the weighted average life of each Class of
such Series. Prepayments on the Mortgage Loans or Contracts comprising or
underlying the Assets in a particular Trust Fund will generally accelerate the
rate at which principal is paid on some or all of the Classes of the Securities
of the related Series.
If so provided in the prospectus supplement for a Series of Securities,
one or more Classes of Securities may have a final scheduled Distribution Date,
which is the date on or prior to which the stated principal amount (the
"SECURITY BALANCE") thereof is scheduled to be reduced to zero, calculated on
the basis of the assumptions applicable to such Series set forth therein.
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. The
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weighted average life of a Class of Securities of a Series will be influenced by
the rate at which principal on the Assets is paid to such Class, which may be in
the form of scheduled amortization or prepayments (for this purpose, the term
"PREPAYMENT" includes prepayments, in whole or in part, and liquidations due to
default).
In addition, the weighted average life of the Securities may be affected
by the varying maturities of the Assets in a Trust Fund. If any Assets in a
particular Trust Fund have actual terms to maturity less than those assumed in
calculating final scheduled Distribution Dates for the Classes of Securities of
the related Series, one or more Classes of such Securities may be fully paid
prior to their respective final scheduled Distribution Dates, even in the
absence of prepayments. Accordingly, the prepayment experience of the Assets
will, to some extent, be a function of the mix of Mortgage Rates or Contract
Rates and maturities of the Mortgage Loans or Contracts comprising or
underlying such Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment
model or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans for
the life of such loans. 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 such 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. Beginning 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 with respect to each Series of Securities may
contain tables, if applicable, setting forth the projected weighted average life
of each Class of Offered Securities of such Series and the percentage of the
initial Security Balance of each such Class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such prospectus
supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or such other standard specified in such
prospectus supplement. Such tables and assumptions are intended to illustrate
the sensitivity of the weighted average life of the Securities to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted average life of the
Securities. It is unlikely that prepayment of any Mortgage Loans or Contracts
comprising or underlying the Assets for any Series will conform to any
particular level of CPR, SPA or any other rate specified in the related
prospectus supplement.
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OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF ASSET
If so specified in the related prospectus supplement, a number of Mortgage
Loans may have balloon payments due at maturity (which may be a substantial
amount), and because the ability of a mortgagor to make a balloon payment
typically will depend upon its ability either to refinance the loan or to sell
the related Mortgaged Property, there is a risk that a number of Balloon
Payment Assets may default at maturity. The ability to obtain refinancing will
depend on a number of factors prevailing at the time refinancing or sale is
required, including, without limitation, real estate values, the mortgagor's
financial situation, prevailing mortgage loan interest rates, the mortgagor's
equity in the related Mortgaged Property, tax laws and prevailing general
economic conditions. Neither the Depositor, the Servicer, the Master Servicer
(if any), 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 related prospectus supplement. In the case of defaults,
recovery of proceeds may be delayed by, among other things, bankruptcy of the
mortgagor or adverse conditions in the market where the property is located. In
order to minimize losses on defaulted Mortgage Loans, the Servicer may, to the
extent and under the circumstances set forth in the related prospectus
supplement, be permitted to modify Mortgage Loans that are in default or as to
which a payment default is reasonably foreseeable. Any defaulted balloon
payment or modification that extends the maturity of a Mortgage Loan will tend
to extend the weighted average life of the Securities and may thereby lengthen
the period of time elapsed from the date of issuance of a Security until it is
retired.
With respect to certain Mortgage Loans, including ARM Loans, the Mortgage
Rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination. With respect to certain
Contracts, the Contract Rate may be "stepped up" during its term or may
otherwise vary or be adjusted. Under the applicable underwriting standards, the
mortgagor or obligor under each Mortgage Loan or Contract generally will be
qualified on the basis of the Mortgage Rate or Contract Rate in effect at
origination. The repayment of any such Mortgage Loan or Contract may thus be
dependent on the ability of the mortgagor or obligor to make larger level
monthly payments following the adjustment of the Mortgage Rate or Contract
Rate. In addition, certain Mortgage Loans may be subject to temporary buydown
plans ("BUYDOWN MORTGAGE LOANS") pursuant to which the monthly payments made by
the mortgagor during the early years of the Mortgage Loan will be less than the
scheduled monthly payments thereon (the "BUYDOWN PERIOD"). The periodic
increase in the amount paid by the mortgagor of a Buydown Mortgage Loan during
or at the end of the applicable Buydown Period may create a greater financial
burden for the mortgagor, who might not have otherwise qualified for a
mortgage, and may accordingly increase the risk of default with respect to the
related Mortgage Loan.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the applicable index at origination and the related margin over such index at
which interest accrues), the amount of interest accruing on the principal
balance of such Mortgage Loans may exceed the amount of the minimum scheduled
monthly payment thereon.
35
As a result, a portion of the accrued interest on negatively amortizing Mortgage
Loans may be added to the principal balance thereof and will bear interest at
the applicable Mortgage Rate. The addition of any such deferred interest to the
principal balance of any related Class or Classes of Securities will lengthen
the weighted average life thereof and may adversely affect yield to holders
thereof, depending upon the price at which such Securities were purchased. In
addition, with respect to certain ARM Loans subject to negative amortization,
during a period of declining interest rates, it might be expected that each
minimum scheduled monthly payment on such a Mortgage Loan would exceed the
amount of scheduled principal and accrued interest on the principal balance
thereof, and since such excess will be applied to reduce the principal balance
of the related Class or Classes of Securities, the weighted average life of such
Securities will be reduced and may adversely affect yield to holders thereof,
depending upon the price at which such Securities were purchased.
As may be described in the related prospectus supplement, the applicable
Agreement may provide that all or a portion of the principal collected on or
with respect to the related Mortgage Loans may be applied by the related
Trustee to the acquisition of additional Mortgage Loans during a specified
period (rather than used to fund payments of principal to Securityholders
during such period) with the result that the related securities possess an
interest-only period, also commonly referred to as a revolving period, which
will be followed by an amortization period. Any such interest-only or revolving
period may, upon the occurrence of certain events to be described in the
related prospectus supplement, terminate prior to the end of the specified
period and result in the earlier than expected amortization of the related
Securities.
In addition, and as may be described in the related prospectus supplement,
the related Agreement may provide that all or a portion of such collected
principal may be retained by the Trustee (and held in certain temporary
investments, including Mortgage Loans) for a specified period prior to being
used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related prospectus supplement, resulting in the current
funding of principal payments to the related Securityholders and an
acceleration of the amortization of such Securities.
TERMINATION
If so specified in the related prospectus supplement, a Series of
Securities may be subject to optional early termination through the repurchase
of the Assets in the related Trust Fund by the party specified therein, on any
date on which the aggregate principal balance of the Assets or the aggregate
Security Balance of the Securities of such Series declines to a percentage
specified in the related prospectus supplement (not to exceed 10%) of the
aggregate initial principal balance of such Assets or initial Security Balance
of such Securities, as the case may be, under the circumstances and in the
manner set forth therein. In addition, if so provided in the related prospectus
supplement, certain Classes of Securities may be purchased or redeemed in the
manner set forth therein. See "Description of the Securities -- Termination."
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DEFAULTS
The rate of defaults on the Assets will also affect the rate, timing and
amount of principal payments on the Assets and thus the yield on the
Securities. In general, defaults on mortgage loans or contracts are expected to
occur with greater frequency in their early years. The rate of default on
Mortgage Loans which are refinance or limited documentation mortgage loans, and
on Mortgage Loans with high Loan-to-Value Ratios, may be higher than for other
types of Mortgage Loans. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Mortgage Loans and Contracts will be affected
by the general economic condition of the region of the country in which the
related Mortgage Properties or Manufactured Homes are located. The risk of
delinquencies and loss is greater and prepayments are less likely in regions
where a weak or deteriorating economy exists, as may be evidenced by, among
other factors, increasing unemployment or falling property values.
FORECLOSURES
The number of foreclosures or repossessions and the principal amount of the
Mortgage Loans or Contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the number and principal amount of
Mortgage Loans or Contracts that are repaid in accordance with their terms will
affect the weighted average life of the Mortgage Loans or Contracts comprising
or underlying the Assets and that of the related Series of Securities.
REFINANCING
At the request of a mortgagor, the Servicer may allow the refinancing of a
Mortgage Loan or Contract in any Trust Fund by accepting prepayments thereon
and permitting a new loan secured by a mortgage on the same property. In the
event of such a refinancing, the new loan would not be included in the related
Trust Fund and, therefore, such refinancing would have the same effect as a
prepayment in full of the related Mortgage Loan or Contract. A Servicer may,
from time to time, implement programs designed to encourage refinancing. Such
programs may include, without limitation, modifications of existing loans,
general or targeted solicitations, the offering of pre-approved applications,
reduced origination fees or closing costs, or other financial incentives. In
addition, Servicers may encourage the refinancing of Mortgage Loans or
Contracts, including defaulted Mortgage Loans or Contracts, that would permit
creditworthy borrowers to assume the outstanding indebtedness of such Mortgage
Loans or Contracts.
DUE-ON-SALE CLAUSES
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
prospectus supplement. A number of the Mortgage Loans comprising or underlying
the Assets may include "due-on-sale clauses" that allow the holder of the
Mortgage Loans to demand payment in full of the remaining principal balance of
the Mortgage Loans upon sale, transfer or conveyance of the related Mortgaged
Property. With respect to any Mortgage Loans, except as set forth in the
related 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
37
do so under applicable law; provided, however, that the Servicer will not take
any action in relation to the enforcement of any due-on-sale provision which
would adversely affect or jeopardize coverage under any applicable insurance
policy. See "Certain Legal Aspects of Mortgage Loans -- Due-on-Sale Clauses" and
"Description of the Agreements -- Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements -- Due-on-Sale Provisions." The
Contracts, in general, prohibit the sale or transfer of the related Manufactured
Homes without the consent of the Servicer and permit the acceleration of the
maturity of the Contracts by the Servicer upon any such sale or transfer that is
not consented to. It is expected that the Servicer will permit most transfers of
Manufactured Homes and not accelerate the maturity of the related Contracts. In
certain cases, the transfer may be made by a delinquent obligor in order to
avoid a repossession of the Manufactured Home. In the case of a transfer of a
Manufactured Home after which the Servicer desires to accelerate the maturity of
the related Contract, the Servicer's ability to do so will depend on the
enforceability under state law of the "due-on-sale clause". See "Certain Legal
Aspects of the Contracts -- Transfers of Manufactured Homes; Enforceability of
Due-on-Sale Clauses."
THE DEPOSITOR
Wachovia Asset Securitization Issuance, LLC (the "DEPOSITOR") is an
indirect wholly-owned subsidiary of Wachovia Corporation and converted to a
limited liability company in the State of North Carolina on October 30, 2003.
The Depositor was formerly Wachovia Asset Securitization, Inc., a North Carolina
corporation formed on February 27, 1996. The principal executive offices of the
Depositor are located at 8739 Research Drive, NC0121-Suite D, Charlotte, North
Carolina 28288-0121. Its telephone number is (704) 383-4634.
The Depositor formerly was an indirect wholly-owned subsidiary of First
Union Corporation. On September 1, 2001, Wachovia Corporation was merged with
and into First Union Corporation with the later entity surviving. Upon
completion of the merger, the surviving entity changed its name to Wachovia
Corporation. As a result, the Depositor is now an indirect wholly-owned
subsidiary of Wachovia Corporation.
The Securities are not debt of the Depositor and the Depositor does not
have any obligation to make payments with respect to the Securities.
DESCRIPTION OF THE SECURITIES
GENERAL
The asset-backed certificates (the "CERTIFICATES") of a series (each, a
"SERIES") (including any Class of Certificates not offered hereby) will
represent the entire beneficial ownership interest in the trust fund (the
"TRUST" or the "TRUST FUND") created pursuant to the applicable Agreement. If a
Series of Securities includes asset-backed notes (the "NOTES" and, together
with the Certificates, the "SECURITIES"), such Notes will represent
indebtedness of the related Trust Fund and will be issued and secured pursuant
to an Indenture. Each Series of Securities will consist of one or more classes
(each, a "CLASS") of Securities that may:
38
o provide for the accrual of interest thereon based on fixed, variable or
adjustable rates;
o be senior (the "SENIOR CERTIFICATES" or the "SENIOR NOTES" and,
collectively, "SENIOR SECURITIES") or subordinate (the "SUBORDINATE
CERTIFICATES" or the "SUBORDINATE NOTES" and, collectively, "SUBORDINATE
SECURITIES") to one or more other Classes of Securities in respect of
certain distributions on the Securities;
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 thereon commencing only
following the occurrence of certain events, such as the retirement of one
or more other Classes of Securities of such Series (collectively,
"ACCRUAL SECURITIES");
o provide for payments of principal as described in the related prospectus
supplement, from all or only a portion of the Assets in such Trust Fund,
to the extent of available funds, in each case as described in the
related prospectus supplement; and/or
o provide for distributions based on a combination of two or more
components thereof with one or more of the characteristics described in
this paragraph including a Strip Security component.
If so specified in the related prospectus supplement, distributions on one or
more Classes of a Series of Securities may be limited to collections from a
designated portion of the Assets in the related Trust Fund (each such portion
of Assets, an "ASSET GROUP"). Any such Classes may include Classes of
Securities of a Series offered pursuant to this prospectus and a related
prospectus supplement (the "OFFERED SECURITIES").
Each Class of Offered Securities of a Series will be issued in minimum
denominations corresponding to the Security Balances or, in the case of certain
Classes of Strip Securities, notional amounts or percentage interests specified
in the related prospectus supplement. The transfer of any Offered Securities
may be registered and such Securities may be exchanged without the payment of
any service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more Classes of Securities of a Series may be issued in fully registered,
certificated form ("DEFINITIVE SECURITIES") or in book-entry form ("BOOK-ENTRY
SECURITIES"), as provided in the related prospectus supplement. See "Risk
Factors -- Risks Associated with the Securities -- Book-Entry Securities May
Experience Certain Problems" and "Description of the Securities -- Book-Entry
Registration and Definitive Securities." Definitive Securities will be
exchangeable for other Securities of the same Class and Series of a like
aggregate Security Balance, notional amount or percentage interest but of
different authorized denominations. See "Risk Factors -- Risks Associated with
the Securities -- Securities May Not be Liquid."
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DISTRIBUTIONS
Distributions on the Securities of each Series will be made by or on behalf
of the Trustee on each Distribution Date as specified in the related prospectus
supplement from the Available Distribution Amount for such Series and such
Distribution Date. Distributions (other than the final distribution) will be
made to the persons in whose names the Securities are registered at the close of
business on, unless a different date is specified in the related 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 related prospectus supplement (the "DETERMINATION DATE"). All
distributions with respect to each Class of Securities on each Distribution Date
will be allocated pro rata among the outstanding Securityholders in such Class
or by random selection or as described in the related prospectus supplement.
Payments will be made either by wire transfer in immediately available funds to
the account of a Securityholder at a bank or other entity having appropriate
facilities therefor, if such Securityholder has so notified the Trustee or other
person required to make such payments no later than the date specified in the
related prospectus supplement (and, if so provided in the related prospectus
supplement, holds Securities in the requisite amount specified therein), or by
check mailed to the address of the person entitled thereto as it appears on the
security register; provided, however, that the final distribution in retirement
of the Securities will be made only upon presentation and surrender of the
Securities at the location specified in the notice to Securityholders of such
final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each Series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related prospectus supplement.
Generally, the "AVAILABLE DISTRIBUTION AMOUNT" for each Distribution Date
equals the sum of the following amounts:
o the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected but due
on a date subsequent to the related Due Period (unless a different
period is specified in the related prospectus supplement, a "DUE PERIOD"
with respect to any Distribution Date will commence on the second day of
the month in which the immediately preceding Distribution Date occurs,
or the day after the Cut-off Date in the case of the first 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 insurance
policies to be maintained in respect of each Asset (to the extent such
proceeds are not applied to the restoration of the Asset or released in
accordance with the normal servicing procedures of a Servicer, subject
to the terms and conditions applicable to the related Asset)
(collectively, "INSURANCE PROCEEDS"), all other amounts received and
retained in connection with the liquidation of Assets in default in the
Trust Fund ("LIQUIDATION PROCEEDS"), and other unscheduled recoveries
received subsequent to the related Due Period,
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(c) all amounts in the Collection Account that are due or reimbursable
to the Depositor, the Trustee, an Asset Seller, a Servicer, the Master
Servicer or any other entity as specified in the related prospectus
supplement or that are payable in respect of certain expenses of the
related Trust Fund, and
(d) all amounts received for a repurchase of an Asset from the Trust
Fund for defective documentation or a breach of representation or
warranty received subsequent to the related Due Period;
o if the related prospectus supplement so provides, interest or investment
income on amounts on deposit in the Collection Account, including any net
amounts paid under any Cash Flow Agreements;
o all advances made by a Servicer or the Master Servicer (if any) or any
other entity as specified in the related prospectus supplement with
respect to such Distribution Date;
o if and to the extent the related prospectus supplement so provides,
amounts paid by a Servicer or any other entity as specified in the
related prospectus supplement with respect to interest shortfalls
resulting from prepayments during the related Prepayment Period; and
o to the extent not on deposit in the related Collection Account as of the
corresponding Determination Date, any amounts collected under, from or in
respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
The related prospectus supplement for a Series of Securities will describe
any variation in the calculation of the Available Distribution Amount for such
Series.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each Class of Securities (other than Classes of Strip Securities that have
no Pass-Through Rate or interest rate) may have a different Pass-Through Rate
or interest rate, which will be a fixed, variable or adjustable rate at which
interest will accrue on such Class or a Component thereof (the "PASS-THROUGH
RATE" in the case of Certificates). The related prospectus supplement will
specify the Pass-Through Rate or interest rate for each Class or Component or,
in the case of a variable or adjustable Pass-Through Rate or interest rate, the
method for determining the Pass-Through Rate or interest rate. Interest on the
Securities will be calculated on the basis of a 360-day year consisting of
twelve 30-day months unless the related prospectus supplement specifies a
different basis.
Distributions of interest in respect of the Securities of any Class will
be made on each Distribution Date (other than any Class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
prospectus supplement, and any Class of Strip Securities
41
that are not entitled to any distributions of interest) based on the
Accrued Security Interest for such Class and such Distribution Date, subject to
the sufficiency of the portion of the Available Distribution Amount allocable to
such Class on such Distribution Date. Prior to the time interest is
distributable on any Class of Accrual Securities, the amount of Accrued Security
Interest otherwise distributable on such Class will be added to the Security
Balance thereof on each Distribution Date. With respect to each Class of
Securities and each Distribution Date (other than certain Classes of Strip
Securities), "ACCRUED SECURITY INTEREST" will be equal to interest accrued
during the related Accrual Period on the outstanding Security Balance thereof
immediately prior to the Distribution Date, at the applicable Pass-Through Rate
or interest rate, reduced as described below. Accrued Security Interest on
certain Classes of Strip Securities will be equal to interest accrued during the
related Accrual Period on the outstanding notional amount thereof immediately
prior to each Distribution Date, at the applicable Pass-Through Rate or interest
rate, reduced as described below, or interest accrual in the manner described in
the related prospectus supplement. The method of determining the notional amount
for a certain Class of Strip Securities will be described in the related
prospectus supplement. Reference to notional amount is solely for convenience in
certain calculations and does not represent the right to receive any
distributions of principal. Unless otherwise provided in the related prospectus
supplement, the Accrued Security Interest on a Series of Securities 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
prior to the due date in such accrual period on the Mortgage Loans or Contracts
comprising or underlying the Assets in the Trust Fund for such Series. The
particular manner in which such shortfalls are to be allocated among some or all
of the Classes of Securities of that Series will be specified in the related
prospectus supplement. The related prospectus supplement will also describe the
extent to which the amount of Accrued Security Interest that is otherwise
distributable on (or, in the case of Accrual Securities, that may otherwise be
added to the Security Balance of) a Class of Offered Securities may be reduced
as a result of any other contingencies, including delinquencies, losses and
deferred interest on or in respect of the Mortgage Loans or Contracts comprising
or underlying the Assets in the related Trust Fund. Unless otherwise provided in
the related prospectus supplement, any reduction in the amount of Accrued
Security Interest otherwise distributable on a Class of Securities by reason of
the allocation to such Class of a portion of any deferred interest on the
Mortgage Loans or Contracts comprising or underlying the Assets in the related
Trust Fund will result in a corresponding increase in the Security Balance of
such Class. See "Risk Factors -- Risk Associated with the Securities -- Rate of
Prepayment on Assets May Adversely Affect Average Lives and Yields on the
Securities" and "Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than certain Classes of Strip
Securities, will have a Security Balance which, at any time, will equal the
then maximum amount that the holder will be entitled to receive in respect of
principal out of the future cash flow on the Assets and other assets included
in the related Trust Fund. The outstanding Security Balance of a Security will
be reduced to the extent of distributions of principal thereon from time to
time and, if and to the extent so provided in the related prospectus
supplement, by the amount of losses incurred in respect of the related Assets,
may be increased in respect of deferred interest on the related Mortgage Loans
to the extent provided in the related prospectus supplement and, in the case of
Accrual Securities prior to the Distribution Date on which distributions of
interest are required to
42
commence, will be increased by any related Accrued Security Interest. If so
specified in the related prospectus supplement, the initial aggregate Security
Balance of all Classes of Securities of a Series will be greater than the
outstanding aggregate principal balance of the related Assets as of the
applicable Cut-off Date. The initial aggregate Security Balance of a series and
each Class thereof will be specified in the related prospectus supplement.
Distributions of principal will be made on each Distribution Date to the Class
or Classes of Securities in the amounts and in accordance with the priorities
specified in the related prospectus supplement. Certain Classes of Strip
Securities with no Security Balance are not entitled to any distributions of
principal.
CATEGORIES OF CLASSES OF SECURITIES
The Securities of any Series may be comprised of one or more Classes. Such
Classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
prospectus supplement for a Series of Securities may identify the Classes which
comprise such Series by reference to the following categories or another
category specified in the applicable prospectus supplement.
CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
PRINCIPAL TYPES
ACCRETION DIRECTED CERTIFICATES OR
NOTES .................................. A Class of Certificates or Notes that receives principal
payments from amounts that would otherwise be distributed
as interest on specified Accrual Certificates or Notes. Such
principal payments may be in lieu of or in addition to
principal payments from principal receipts on the Assets for
the related Series.
COMPANION CERTIFICATES OR NOTES
(ALSO SOMETIMES REFERRED TO AS
"SUPPORT CERTIFICATES" OR
"SUPPORT NOTES") ....................... A Class of Certificates or Notes that is entitled to receive
principal payments on any Distribution Date only if
scheduled payments have been made on specified Planned
Amortization Certificates or Notes, Targeted Amortization
Certificates or Notes and/or Scheduled Amortization
Certificates or Notes.
COMPONENT CERTIFICATES OR NOTES ......... A Class of Certificates or Notes consisting of two or more
specified components (each, a "COMPONENT") as described in
the applicable prospectus supplement. The Components of a
Class of Component Certificates or Notes may have different
principal and/or interest payment characteristics but together
constitute a single
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Class and do not represent severable interests. Each Component
of a Class of Component Certificates or Notes may be identified
as falling into one or more of the categories in this chart.
LOCKOUT CERTIFICATES OR NOTES ........... A Class of Senior Certificates or Notes that is designed not to
participate in or to participate to a limited extent in (i.e., to
be "locked out" of), for a specified period, the receipt of
(1) principal prepayments on the Assets that are allocated
disproportionately to the Classes of Senior Certificates or
Notes of such Series as a group pursuant to a "shifting
interest" structure and/or (2) scheduled principal payments on
the Assets that are allocated to the Classes of Senior
Certificates or Notes as a group. A Class of Lockout
Certificates or Notes will typically not be entitled to receive,
or will be entitled to receive only a restricted portion of,
distributions or principal prepayments and/or scheduled
principal payments, as applicable, for a period of several
years, during which time all or a portion of such principal
payments that it would otherwise be entitled to receive in the
absence of a "lockout" structure will be distributed in
reduction of the principal balances of other Classes of Senior
Certificates or Notes. Lockout Certificates or Notes are
designed to minimize weighted average life volatility during
the lockout period.
NOTIONAL AMOUNT CERTIFICATES OR
NOTES .................................. A Class of Certificates or Notes having no principal balance
and bearing interest on the related notional amount. The
notional amount is used for purposes of the determination of
interest distributions.
PASS-THROUGH CERTIFICATES OR
NOTES .................................... A Class of Senior Securities that is entitled to receive all or a
specified percentage of the principal payments that are
distributable to the Senior Certificates or applicable group of
Senior Certificates or Notes (other than any Ratio Strip
Certificates or Notes) in the aggregate on a Distribution Date
and that is not designated as a Class of Sequential Pay
Certificates or Notes.
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PLANNED AMORTIZATION CERTIFICATES
OR NOTES (ALSO SOMETIMES
REFERRED TO AS A "PAC
CERTIFICATES" OR "PAC NOTES") ............ A Class of Certificates or Notes that is designed to receive
principal payments using a predetermined principal balance
schedule derived by assuming two constant prepayment rates
for the underlying Assets. These two rates are the endpoints
for the "structuring range" for the Class of Planned
Amortization Certificates or Notes. The Planned
Amortization Certificates or Notes in any Series of Securities
may be subdivided into different categories (e.g., Planned
Amortization Certificates or Notes I ("PAC I"), Planned
Amortization Certificates or Notes II ("PAC II") and so
forth) derived using different structuring ranges and/or
payment priorities. A Class of PAC Certificates or Notes is
designed to provide protection against volatility of weighted
average life if prepayments occur at a constant rate within the
structuring range.
RATIO STRIP CERTIFICATES OR NOTES ......... A Class of Certificates or Notes that is entitled to receive a
constant proportion, or "ratio strip," of the principal
payments on the underlying Assets.
SCHEDULED AMORTIZATION
CERTIFICATES OR NOTES (ALSO
SOMETIMES REFERRED TO AS
"SCHEDULED CERTIFICATES" OR
"SCHEDULED NOTES") ....................... A Class of Certificates or Notes that is designed to receive
principal payments using a predetermined principal balance
schedule but is not designated as a Class of Planned
Amortization Certificates or Notes or Targeted Amortization
Certificates or Notes. The schedule is derived by assuming
either two constant prepayment rates or a single constant
prepayment rate for the underlying Assets. In the former
case, the two rates are the endpoints for the "structuring
range" for the Scheduled Amortization Certificates or Notes
and such range generally is narrower than that for a Planned
Amortization Certificates or Notes. Typically, the Companion
Certificates or Notes for the applicable Series of Certificates
or Notes generally will represent a smaller percentage of the
Class of Scheduled Amortization Certificates or Notes than
Companion Certificates or Notes generally would represent in
relation to a Class of Planned Amortization Certificates or
Notes or Targeted Amortization Certificates or Notes. A
Class of
45
Scheduled Amortization Certificates or Notes is generally less
sensitive to weighted average life volatility as a result of
prepayments than a Class of Companion Certificates or Notes but
more sensitive than a Class of Planned Amortization Certificates
or Notes or Targeted Amortization Certificates or Notes.
SENIOR CERTIFICATES OR NOTES ........... A Class of Certificates or Notes that is entitled to receive
payments of principal and interest on each Distribution Date
prior to the Classes of Subordinated Securities.
SEQUENTIAL PAY CERTIFICATES OR
NOTES ................................. A Class of Certificates or Notes that is entitled to receive
principal payments in a prescribed sequence, that does not
have a predetermined principal balance schedule and that, in
most cases, is entitled to receive payments of principal
continuously from the first Distribution Date on which it
receives principal until it is retired. A Class of Sequential Pay
Certificates or Notes may receive principal payments
concurrently with one or more other Classes of Sequential
Pay Certificates or Notes. A single Class the is entitled to
receive principal payments before or after other Classes in
the same Series of Securities may be identified as a Class of
Sequential Pay Certificates or Notes.
SUBORDINATED CERTIFICATES OR
NOTES ................................. A Class of Certificates or Notes that is entitled to receive
payments of principal and interest on each Distribution Date
only after the Senior Securities and Classes of Subordinated
Securities with higher priority of distributions, if any, have
received their full principal and interest entitlements.
SUPER SENIOR CERTIFICATES OR
NOTES ................................. A Class of Senior Certificates or Notes that will not bear its
share of certain losses after the Classes of Subordinated
Certificates or Notes are no longer outstanding for so long as
one or more other specified Classes of Senior Certificates or
Notes are outstanding.
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SUPER SENIOR SUPPORT CERTIFICATES
OR NOTES .............................. A Class of Senior Certificates or Notes that bears certain
losses allocated to one or more Classes of Super Senior
Certificates or Notes after the Classes of Subordinated
Certificates or Notes are no longer outstanding.
TARGETED AMORTIZATION CERTIFICATES
OR NOTES (ALSO SOMETIMES
REFERRED TO AS A "TAC
CERTIFICATES" or "TAC NOTES") ......... A Class of Certificates or Notes that is designed to receive
principal payments using a predetermined principal balance
schedule derived by assuming a single constant prepayment
rate for the underlying Assets. A Class of TAC Certificates or
TAC Notes is designed to provide some protection against
shortening of weighted average life if prepayments occur at a
rate exceeding the assumed constant prepayment rate used to
derive the principal balances schedule of such Class of
Certificates or Notes.
INTEREST TYPES
ACCRUAL CERTIFICATES OR NOTES ............ A Class of Certificates or Notes that accretes the amount of
accrued interest otherwise distributable on such Class, which
amount will be added as principal to the principal balance of
such Class on each applicable Distribution Date. Such
accretion may continue until some specified event has
occurred or until such Accrual Certificates or Notes are
retired.
FIXED RATE CERTIFICATES OR NOTES ......... A Class of Certificates or Notes with an interest rate that is
fixed throughout the life of the Class.
FLOATING RATE CERTIFICATES OR
NOTES ................................... A Class of Certificates or Notes with an interest rate that
resets periodically based upon a designated index and that
varies directly with changes in such index.
47
INTEREST ONLY CERTIFICATES OR
NOTES ................................... A Class that is entitled to receive some or all of the interest
payments made on the Assets and little or no principal.
Interest Only Certificates or Notes have either no principal
balance, a nominal principal balance or a notional amount. A
nominal principal balance represents actual principal that will
be paid on the Certificates or Notes. It is referred to as
nominal since it is extremely small compared to other Classes.
A notional amount is the amount used as a reference to
calculate the amount of interest due on a Class of Interest
Only Certificates or Notes that is not entitled to any
distributions in respect of principal.
INVERSE FLOATING RATE CERTIFICATES
OR NOTES ................................ A Class of Certificates or Notes with an interest rate that
resets periodically based upon a designated index and that
varies inversely with changes in such index and with changes
in the interest rate payable on the related Class of Floating
Rate Certificates or Notes.
PREPAYMENT PREMIUM CERTIFICATES
OR NOTES ................................ A Class of Certificates or Notes that is only entitled to
penalties or premiums, if any, due in connection with a full or
partial prepayment of an Asset.
PRINCIPAL ONLY CERTIFICATES OR
NOTES ....................... A Class of Certificates or Notes that does not bear interest
and is entitled to receive only distributions in respect of
principal.
STEP COUPON CERTIFICATES OR
NOTES ....................... A Class of Certificates or Notes with a fixed interest rate that
is reduced to a lower fixed rate after a specific period of time.
The difference between the initial interest rate and the lower
interest rate will be supported by a reserve fund established
on the closing date.
VARIABLE RATE CERTIFICATES OR
NOTES ....................... A Class of Certificates or Notes with an interest rate that
resets periodically and is calculated by reference to the rate
or rates of interest applicable to the Assets.
48
COMPONENTS
To the extent specified in the related prospectus supplement, distribution
on a Class of Securities may be based on a combination of two or more different
Components as described under "-- General" above. To such extent, the
descriptions set forth under "-- Distributions of Interest on the Securities"
and "-- Distributions of Principal of the Securities" above also relate to
Components of such a Class of Securities. In such case, reference in such
sections to Security Balance and Pass-Through Rate or interest rate refer to
the principal balance, if any, of any such Component and the Pass-Through Rate
or interest rate, if any, on any such Component, respectively.
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT PREMIUMS
If so provided in the related 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 Securities
entitled thereto in accordance with the provisions described in such prospectus
supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the prospectus supplement for a Series of Securities
consisting of one or more Classes of Subordinate Securities, on any
Distribution Date in respect of which losses or shortfalls in collections on
the Assets have been incurred, the amount of such losses or shortfalls will be
borne first by a Class of Subordinate Securities in the priority and manner and
subject to the limitations specified in such prospectus supplement. See
"Description of Credit Support" for a description of the types of protection
that may be included in a Trust Fund against losses and shortfalls on Assets
comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any Series of Securities evidencing an interest in a Trust
Fund, if so provided in the related prospectus supplement, the Servicer or
another entity described therein will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds or
funds held in the Collection Account that are not included in the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Assets in such Trust Fund during the related Due Period and were delinquent
on the related Determination Date, subject to the Servicer's (or another
entity's) good faith determination that such advances will be reimbursable from
Related Proceeds (as defined below). In the case of a Series of Securities that
includes one or more Classes of Subordinate Securities and if so provided in the
related prospectus supplement, the Servicer's (or another entity's) advance
obligation may be limited only to the portion of such delinquencies necessary to
make the required distributions on one or more Classes of Senior Securities
and/or may be subject to the Servicer's (or another entity's) good faith
determination that such advances will be reimbursable not only from Related
Proceeds but also from collections on other Assets otherwise distributable on
one or more Classes of such Subordinate Securities. See "Description of Credit
Support."
49
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the Class or Classes of Securities entitled
thereto, rather than to guarantee or insure against losses. Advances of the
Servicer's (or another entity's) funds will be reimbursable only out of related
recoveries on the Assets, including amounts received under any form of Credit
Support, respecting which such advances were made (as to any Assets, "RELATED
PROCEEDS") and from any other amounts specified in the related prospectus
supplement, including out of any amounts otherwise distributable on one or more
Classes of Subordinate Securities of such Series; provided, however, that any
such advance will be reimbursable from any amounts in the Collection Account
prior to any distributions being made on the Securities to the extent that the
Servicer (or such other entity) shall determine in good faith that such advance
(a "NONRECOVERABLE ADVANCE") is not ultimately recoverable from Related
Proceeds or, if applicable, from collections on other Assets otherwise
distributable on such Subordinate Securities. If advances have been made by the
Servicer from excess funds in the Collection Account, the Servicer is required
to replace such funds in the Collection Account on any future Distribution Date
to the extent that funds in the Collection Account on such Distribution Date
are less than payments required to be made to Securityholders on such date. If
so specified in the related prospectus supplement, the obligations of the
Servicer (or another entity) to make advances may be secured by a cash advance
reserve fund, a surety bond, a letter of credit or another form of limited
guaranty. If applicable, information regarding the characteristics of, and the
identity of any obligor on, any such surety bond, will be set forth in the
related prospectus supplement.
If and to the extent so provided in the related prospectus supplement, the
Servicer (or another entity) will be entitled to receive interest at the rate
specified therein on its outstanding advances and will be entitled to pay
itself such interest periodically from general collections on the Assets prior
to any payment to Securityholders or as otherwise provided in the applicable
Agreement and described in such prospectus supplement.
If specified in the related prospectus supplement, the Master Servicer or
the Trustee will be required to make advances, subject to certain conditions
described in the prospectus supplement, in the event of a Servicer default.
REPORTS TO SECURITYHOLDERS
With each distribution to holders of any Class of Securities of a Series,
the Servicer, the Master Servicer or the Trustee, as provided in the related
prospectus supplement, will make available to each such holder, to the Depositor
and to such other parties as may be specified in the applicable Agreement, a
statement generally setting forth the information provided below or in lieu
thereof, such other information as may be described in the related prospectus
supplement, in each case to the extent applicable and available:
o the amount of such distribution to holders of Securities of such Class
applied to reduce the Security Balance thereof, separately, identifying
the aggregate amount of principal prepayments and Liquidation Proceeds
included therein;
o the amount of such distribution to holders of Securities of such Class
allocable to Accrued Security Interest;
50
o the amount of such distribution allocable to Prepayment Premiums;
o the amount of related servicing compensation and such other customary
information as is required to enable Securityholders to prepare their tax
returns;
o the aggregate amount of advances included in such distribution, and the
aggregate amount of unreimbursed advances at the close of business on
such Distribution Date;
o the aggregate principal balance of the Assets at the close of business
on such Distribution Date;
o the number and aggregate principal balance of Mortgage Loans or
Contracts in respect of which (a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent, (c) three or more scheduled
payments are delinquent and (d) foreclosure proceedings have been
commenced;
o with respect to collateral acquired by the Trust Fund through
foreclosure or otherwise (a "REO PROPERTY") relating to a Mortgage Loan
or Contract and included in the Trust Fund as of the end of the related
Due Period, the loan number, principal balance and date of acquisition
thereof;
o with respect to the REO Properties relating to Mortgage Loans or
Contracts and included in the Trust Fund as of the end of the related Due
Period, (a) the total number, (b) the aggregate principal balance of the
related Mortgage Loan or Contract immediately following such Distribution
Date (calculated as if such Mortgage Loan or Contract were still
outstanding taking into account certain limited modifications to the terms
thereof specified in the applicable Agreement) and (c) if available, the
aggregate market value;
o the aggregate Security Balance or notional amount, as the case may be,
of each Class of Securities (including any Class of Securities not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Security Balance due to the
allocation of any loss and increase in the Security Balance of a Class of
Accrual Securities in the event that Accrued Security Interest has been
added to such balance;
o the amount deposited in the reserve fund, if any, on such Distribution
Date;
o the amount remaining in the reserve fund, if any, as of the close of
business on such Distribution Date;
o the unpaid Accrued Security Interest, if any, on each Class of Securities
for such Distribution Date and any remaining unpaid Accrued Security
Interest at the close of business on such Distribution Date;
o the Pass-Through Rate or interest rate applicable to such Distribution
Date for each Class of Securities, as calculated in accordance with the
method specified in the related prospectus supplement;
51
o as to any Series which includes Credit Support, the amount of coverage
of each instrument of Credit Support included therein as of the close of
business on such Distribution Date;
o during the Pre-Funding Period, the remaining Pre-Funded Amount and the
portion of the Pre-Funding Amount used to acquire Subsequent Mortgage
Loans since the preceding Distribution Date; and
o during the Pre-Funding Period, the amount remaining in the Capitalized
Interest Account.
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 related
prospectus supplement, shall furnish to each Securityholder of record at any
time during the calendar year such information required by the Code and
applicable regulations thereunder to enable Securityholders to prepare their
tax returns. See "Description of the Securities -- Book-Entry Registration and
Definitive Securities."
TERMINATION; OPTIONAL PURCHASE OF MORTGAGE LOANS
The obligations created by the applicable Agreement for each Series of
Securities will terminate upon the payment to Securityholders of that Series of
all amounts held in the Collection Account or by a Servicer, the Master
Servicer, if any, or the Trustee and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all
property acquired upon foreclosure of any Mortgage Loan or Contract subject
thereto and (ii) the purchase of all of the assets of the Trust Fund by the
party entitled to effect such termination, under the circumstances and in the
manner set forth in the related prospectus supplement. In no event, however,
will the Trust Fund continue beyond the expiration of 21 years from the death
of the last survivor of certain persons named in the Agreement. Written notice
of termination of the applicable Agreement will be given to each
Securityholder, and the final distribution will be made only upon presentation
and surrender of the Securities at the location to be specified in the notice
of termination.
If so specified in the related prospectus supplement, a Series of
Securities may be subject to optional early termination through the repurchase
of the Assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. In the event that any
such party has caused the related Trust Fund (or any segregated pool of assets
therein) to be treated as a REMIC, any such purchase will be affected only
pursuant to either (a) a "clean up call" as defined in Treasury Regulations
Section 1.860G-2(j) or (b) a "qualified liquidation" as defined in Code Section
860F(a)(4)(A). Any qualified liquidation will effect early retirement of the
Securities of that Series, but the right to purchase may be exercised only
after the aggregate principal balance of the Assets for such Series at the time
of purchase is less than a specified percentage, not exceeding 10%, of the
aggregate principal balance as of the Cut-off Date for the Series, or after the
date set forth in the applicable prospectus supplement. If so provided in the
related prospectus supplement, upon the reduction of the Security Balance of a
specified Class or Classes of Securities by a specified percentage, the party
specified therein will solicit bids for the purchase of all assets of the Trust
Fund, or of a sufficient portion of such assets to retire such Class or Classes
or purchase such Class or Classes at a price set forth in the related
prospectus supplement, in each case, under the circumstances and in the manner
set forth therein. Such
52
price will at least equal the outstanding Security Balances and any accrued and
unpaid interest thereon (including any unpaid interest shortfalls for prior
Distribution Dates specified in the applicable prospectus supplement). Any sale
of the Assets of the Trust Fund will be without recourse to the Trust Fund or
the Securityholders. Any such purchase or solicitation of bids may be made only
when the aggregate Security Balance of such Class or Classes declines to a
percentage of the Initial Security Balance of such Securities (not to exceed
10%) specified in the related prospectus supplement. In addition, if so provided
in the related prospectus supplement, certain Classes of Securities may be
purchased or redeemed in the manner set forth therein.
OPTIONAL PURCHASES
Subject to the provisions of the applicable Agreement, the Depositor, the
Servicer or such other party specified in the related prospectus supplement
may, at such party's option, repurchase (i) any Asset which is in default or as
to which default is reasonably foreseeable if, in the Depositor's, the
Servicer's or such other party's judgment, the related default is not likely to
be cured by the borrower or default is not likely to be averted and (ii) any
Asset as to which the origination of such Asset breached a representation or
warranty made with respect of such Mortgage Loan to the Depositor, the Servicer
or such other party at a price equal to the unpaid principal balance thereof
plus accrued interest thereon and under the conditions set forth in the
applicable prospectus supplement.
DEFINITIVE FORM
If so specified in the related prospectus supplement, Securities of a
Series may be issued in fully registered certificated form (such Securities,
"DEFINITIVE SECURITIES"). Distributions of principal of, and interest on,
Definitive Securities will be made directly to holders of Definitive Securities
in accordance with the procedures set forth in the Agreement. The Definitive
Securities of a Series offered hereby and by means of the applicable prospectus
supplement will be transferable and exchangeable at the office or agency
maintained by the Trustee or such other entity for such purpose set forth in
the applicable prospectus supplement. No service charge will be made for any
transfer or exchange of Definitive Securities, but the Trustee or such other
entity may require payment of a sum sufficient to cover any tax or other
governmental charge in connection with such transfer or exchange.
In the event that an election is made to treat the Trust Fund (or one or
more pools of segregated assets therein) as a REMIC, the Residual Securities
thereof will be issued as Definitive Securities. No legal or beneficial
interest in all or a portion of any Residual Security may be transferred
without the receipt by the transferor and the Trustee of an affidavit described
under "-- Taxation of Owners of Residual Securities -- Tax-Related Restrictions
on Transfer of Residual Securities."
BOOK-ENTRY REGISTRATION AND FORM
If so specified in the related prospectus supplement, one or more Classes
of Securities of a Series will be transferable and exchangeable at the office
of the registrar identified in the related prospectus supplement. Unless
otherwise specified in the related prospectus supplement, no service charge
will be made for any such registration or transfer of such Securities, but the
owner may be required to pay a sum sufficient to cover any tax or other
governmental charge.
53
If so specified in the related prospectus supplement, Book-Entry
Securities may be initially represented by one or more Securities registered in
the name of DTC and be available only in the form of book-entries. If specified
in the related prospectus supplement, holders of Securities may hold beneficial
interests in Book-Entry Securities through DTC (in the United States) or
Clearstream or Euroclear (in Europe) directly if they are participants of such
systems, or indirectly through organizations which are participants in such
systems.
Clearstream and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in their respective 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.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream Participants and Euroclear Participants will
occur in accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream or
Euroclear, on the other, will be effected in DTC in accordance with DTC rules on
behalf of the relevant European international clearing system by its Depositary.
However, each such cross-market transaction 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. The relevant European international clearing
system will, if the transaction meets its settlement requirements, deliver
instructions to its Depositary to take action to effect final settlement on its
behalf by delivering or receiving securities through 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 Depositaries.
Because of time-zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a Participant will
be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any
transactions in such securities settled during such processing will be reported
to the Clearstream Participant or Euroclear Participant on such business day.
Cash received in Clearstream or Euroclear as a result of sales of Securities by
or through a Clearstream Participant or a Euroclear Participant to a
Participant will be received with value on the DTC settlement date but will be
available in the relevant Clearstream or Euroclear cash account only as of the
business day following settlement in DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to Section 17A of the Securities Exchange
Act of 1934, as amended ("EXCHANGE ACT"). DTC was created to hold securities
for its participating members ("PARTICIPANTS") and to facilitate the clearance
and settlement of securities transactions between Participants through
electronic book-entries, thereby eliminating the need for physical movement of
securities. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations which may include
54
underwriters, agents or dealers with respect to the Securities of any Class or
Series. Indirect access to the DTC system 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"). The rules applicable to DTC and Participants are on
file with the SEC.
Beneficial owners ("SECURITY OWNERS") that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of, or other interests in, Book-Entry Securities may do so only
through Participants and Indirect Participants. Participants who are Security
Owners of Book-Entry Securities will receive a credit for such Securities on
DTC's records. The ownership interest of such holder will in turn be recorded
on respective records of the Participants and Indirect Participants. Such
holders will not receive written confirmation from DTC of their purchase, but
are expected to receive written confirmations providing details of the
transaction, as well as periodic statements of their holdings, from the
Participant or Indirect Participant through which the Securityholders entered
into the transaction. Unless and until Definitive Securities are issued as
described below, it is anticipated that the only "holder" of Book-Entry
Securities of any Series will be Cede & Co. ("CEDE"), as nominee of DTC.
Security Owners will only permitted to exercise the rights of holders
indirectly through Participants and DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Book-Entry Securities and is
required to receive and transmit distributions of principal of and interest on
the Book-Entry Securities. Participants and Indirect Participants with which
Security Owners have accounts with respect to the Book-Entry Securities
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Securityholders.
DTC has advised the Servicer and the Depositors that, unless and until
Definitive Securities are issued, DTC will take any action permitted to be taken
by a holder only at the direction of one or more Participants to whose DTC
accounts the Securities are credited. DTC has advised the Servicer and the
Depositors that DTC will take such action with respect to any Percentage
Interests of the Book-Entry Securities of a Series only at the direction of and
on behalf of such Participants with respect to such Percentage Interests of the
Book-Entry Securities. DTC may take actions, at the direction of the related
Participants, with respect to some Book-Entry Securities which conflict with
actions taken with respect to other Book-Entry Securities.
Clearstream, Luxembourg was incorporated in 1970 as "Cedel S.A.," a company
with limited liability under Luxembourg law, or 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 Borse 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.
55
Further to the merger, the Board of Directors of New Cedel International
decided to re-name the companies in the group in order to give them a cohesive
brand name. The new brand name that was chosen is "Clearstream." Effective
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 Borse Clearing AG."
Clearstream, Luxembourg holds securities for its customers 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 elminating 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
Euroclear Bank S.A./N.V., as the Operator of the Euroclear System (EOB/EOC) to
facilitate settlement of trades between Clearstream, Luxembourg and EOB/EOC.
The Euroclear System ("EUROCLEAR") was created in 1968 to hold securities
for its participants ("EUROCLEAR PARTICIPANTS") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may be settled in a variety of currencies,
including United States dollars. Euroclear 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 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
56
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
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 the Euroclear System, withdrawals of
securities and cash from the Euroclear System and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System 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 Euroclear Participants, and has no record
of or relationship with persons holding through Euroclear Participants.
Payments and distributions with respect to Book-Entry Securities held
through Clearstream or Euroclear will be credited to the cash accounts of
Clearstream Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by Citibank,
N.A. or JPMorgan Chase Bank, the relevant depositary of Clearstream and
Euroclear (the "DEPOSITARIES" ), respectively. Such payments and distributions
will be subject to tax withholding in accordance with relevant United States
tax laws and regulations. See "Federal Income Tax Consequences". Clearstream or
the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Certificateholder on behalf of a Clearstream
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to its Depositary's ability to effect such actions
on its behalf through DTC.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among 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.
Book-Entry Securities of a Series will be converted to Definitive
Securities and reissued to beneficial owners or their nominees, rather than to
DTC or its nominee, only under the circumstances provided in the related
Pooling and Servicing Agreement, which generally will include, except if
otherwise provided therein, if (i) DTC or the Servicer advises the Trustee in
writing that DTC is no longer willing or able to discharge properly its
responsibilities as nominee and depository with respect to the Book-Entry
Securities of such Series and the Servicer is unable to locate a qualified
successor, (ii) the Servicer, at its sole option, elects to terminate the
book-entry system through DTC or (iii) after the occurrence of a Servicer
Termination Event, a majority of the aggregate Percentage Interest of any Class
of Securities of such Series advises DTC in writing that the continuation of a
book-entry system through DTC (or a successor
57
thereto) to the exclusion of any physical Securities being issued to Security
Owners is no longer in the best interests of Security Owners of such Class of
Securities. Upon issuance of Definitive Securities of a Series to Security
Owners, such Book-Entry Securities will be transferable directly (and not
exclusively on a book-entry basis) and registered holders will deal directly
with the Trustee with respect to transfers, notices and distributions.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC Securities, FASIT Securities, Grantor Trust Securities
Securities representing interests in a Trust Fund, or a portion thereof,
that the Trustee will elect to have treated as REMIC Securities, FASIT
Securities or Grantor Trust Securities will be issued, and the related Trust
Fund will be created, pursuant to a pooling and servicing agreement (a "POOLING
AND SERVICING AGREEMENT") among the Depositor, the Trustee and the sole
Servicer or Master Servicer, as applicable. The Assets of such Trust Fund will
be transferred to the Trust Fund and thereafter serviced in accordance with the
terms of the Pooling and Servicing Agreement. In the event there are multiple
Servicers of the Assets of such Trust Fund, each Servicer will perform its
servicing functions pursuant to a servicing agreement (each, an "UNDERLYING
SERVICING AGREEMENT").
SECURITIES THAT ARE PARTNERSHIP INTERESTS FOR TAX PURPOSES AND NOTES
Partnership Securities that are partnership interests for tax purposes
will be issued, and the related Trust Fund will be created, pursuant to a
Pooling and Servicing Agreement.
A Series of Notes issued by a Trust Fund will be issued pursuant to an
indenture (the "INDENTURE") between the related Trust Fund and the Indenture
Trustee named in the related prospectus supplement. The Trust Fund will be
established pursuant to a trust agreement (each, a "TRUST AGREEMENT") between
the Depositor and an owner trustee specified in the prospectus supplement
relating to such Series of Notes. The Assets securing payment on the Notes will
be serviced in accordance with a servicing agreement (each, a "SERVICING
AGREEMENT") between the related Trust Fund as issuer of the Notes (also referred
to herein as the "Issuer"), the Servicer and the Indenture Trustee. The Pooling
and Servicing Agreements, the Servicing Agreements, the Underlying Servicing
Agreements and the Indenture are referred to each as an "AGREEMENT."
MATERIAL TERMS OF THE POOLING AND SERVICING AGREEMENTS AND UNDERLYING SERVICING
AGREEMENTS
GENERAL
The following summaries describe the material provisions that may appear
in each Pooling and Servicing Agreement and Underlying Servicing Agreement. The
prospectus supplement for a Series of Securities will describe any provision of
the applicable Agreement relating to such Series that materially differs from
the description thereof contained in this prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the applicable Agreement for each
Trust Fund and the
58
description of such provisions in the related prospectus supplement. The
provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust Fund. As
used herein with respect to any Series, the term "SECURITY" refers to all of the
Securities of that Series, whether or not offered hereby and by the related
prospectus supplement, unless the context otherwise requires. A form of a
Pooling and Servicing Agreement has been filed as an exhibit to the Registration
Statement of which this prospectus is a part. The Depositor will provide a copy
of the Pooling and Servicing Agreement (without exhibits) relating to any Series
of Securities without charge upon written request of a Securityholder of such
Series addressed to Wachovia Asset Securitization Issuance, LLC, 8739 Research
Drive, NC0121-Suite D, Charlotte, North Carolina 28288-0121, Attention: Vice
President.
The servicers (the "SERVICERS"), any master servicer (the "MASTER
SERVICER") and the trustee (the "TRUSTEE") or indenture trustee (the "INDENTURE
TRUSTEE"), as applicable, with respect to any Series of Securities will be named
in the related prospectus supplement. In the event there are multiple Servicers
for the Assets in a Trust Fund, a Master Servicer will perform certain
administration, calculation and reporting functions with respect to such Trust
Fund and, if specified in the related prospectus supplement, will supervise the
related Servicers pursuant to a Pooling and Servicing Agreement. With respect to
Series involving a Master Servicer, references in this prospectus to the
Servicer will apply to the Master Servicer where non-servicing obligations are
described. If so specified in the related prospectus supplement, a manager or
administrator may be appointed pursuant to the Pooling and Servicing Agreement
for any Trust Fund to administer such Trust Fund or certain administrative
functions which would otherwise be performed by the Servicer or the Master
Servicer may be performed by the Trustee.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any Series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest to
be received on or with respect to such Assets after the Cut-off Date, other
than principal and interest due on or before the Cut-off Date and other than
any Retained Interest. The Trustee will, concurrently with such assignment,
deliver the Securities to the Depositor in exchange for the Assets and the
other assets comprising the Trust Fund for such Series. Each Asset will be
identified in a schedule appearing as an exhibit to the applicable Agreement.
Such schedule will include detailed information to the extent available and
relevant (i) in respect of each Mortgage Loan included in the related Trust
Fund, including without limitation, the city and state of the related Mortgaged
Property and type of such 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 (ii) in
respect of each Contract included in the related Trust Fund, including without
limitation the outstanding principal amount and the Contract Rate.
With respect to each Mortgage Loan, except as otherwise specified in the
related prospectus supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which will generally include the original
59
Mortgage Note endorsed, without recourse, in blank or to the order of the
Trustee, the original Mortgage (or a certified copy thereof) with evidence of
recording indicated thereon and an assignment of the Mortgage to the Trustee in
recordable form. Notwithstanding the foregoing, a Trust Fund may include
Mortgage Loans where the original Mortgage Note is not delivered to the Trustee
if the Depositor 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 thereof has been lost or destroyed. With respect to such 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
related prospectus supplement will be required to agree to repurchase, or
substitute for, each such Mortgage Loan that is subsequently in default if the
enforcement thereof or of the related Mortgage is materially adversely affected
by the absence of the original Mortgage Note. The applicable Agreement will
generally require the Depositor or another party specified in the related
prospectus supplement to promptly cause each such assignment of Mortgage to be
recorded in the appropriate public office for real property records, unless (i)
with respect to a particular state, the Trustee has received an opinion of
counsel acceptable to it that such recording is not required to make the
assignment effective against the parties to the Mortgage or subsequent
purchasers or encumbrancers of the Mortgaged Property or (ii) recordation in a
state is not required by the Rating Agencies rating the Series in order to
obtain the initial ratings on the Securities described in the related prospectus
supplement.
Notwithstanding the preceding paragraph, with respect to any Mortgage Loan
which has been recorded in the name of Mortgage Electronic Registration
Systems, Inc. ("MERS") or its designee, no mortgage assignment in favor of the
Trustee will be required to be prepared or delivered. Instead, the Master
Servicer and the applicable Servicer will be required to take all actions as
are necessary to cause the applicable Trust Fund to be shown as the owner of
the related Mortgage Loan on the records of MERS for purposes of the system of
recording transfers of beneficial ownership of mortgages maintained by MERS.
The Trustee (or a custodian) will review such Mortgage Loan documents
within a specified period of days after receipt thereof, and the Trustee (or a
custodian) will hold such documents in trust for the benefit of the
Securityholders. If any such document is found to be missing or defective in
any material respect, the Trustee (or such custodian) shall immediately notify
the Servicer and the Depositor, and the Servicer shall immediately notify the
relevant Asset Seller or other entity specified in the related prospectus
supplement. If the Asset Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice, then unless otherwise
specified in the related prospectus supplement, the Asset Seller or other
entity specified in the related prospectus supplement will be obligated, within
a specified number of days of receipt of such notice, to repurchase the related
Mortgage Loan from the Trustee at a price equal to the sum of the unpaid
principal balance thereof, plus unpaid accrued interest at the interest rate
for such Asset from the date as to which interest was last paid to the due date
in the Due Period in which the relevant purchase is to occur, plus certain
servicing expenses that are payable to the Servicer or such other price as
specified in the related prospectus supplement (the "PURCHASE PRICE") or
substitute for such Mortgage Loan. There can be no assurance that an Asset
Seller or other named entity will fulfill this repurchase or substitution
obligation, and neither the Servicer nor the Depositor will be obligated to
repurchase or substitute for such Mortgage Loan if the Asset Seller or other
named entity defaults on its obligation. This repurchase or substitution
obligation constitutes the sole remedy available to the Securityholders
60
or the Trustee for omission of, or a material defect in, a constituent document.
To the extent specified in the related prospectus supplement, in lieu of curing
any omission or defect in the Asset or repurchasing or substituting for such
Asset, the Asset Seller or other named entity may agree to cover any losses
suffered by the Trust Fund as a result of such breach or defect.
Notwithstanding the preceding two paragraphs, the documents with respect
to First Lien Mortgage Loans, Home Equity Loans, Home Improvement Contracts and
Unsecured Home Improvement Loans will be delivered to the Trustee (or a
custodian) only to the extent specified in the related prospectus supplement.
Generally such documents will be retained by the Servicer, which may also be
the Asset Seller. In addition, assignments of the related Mortgages to the
Trustee will be recorded only to the extent specified in the related prospectus
supplement.
With respect to each Contract, the Servicer (which may also be the Asset
Seller) generally will maintain custody of the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. In order to give notice of the
right, title and interest of the Trustee in the Contracts, the Depositor will
cause UCC-1 financing statements to be authorized by the related Asset Seller
identifying the Depositor as secured party and by the Depositor identifying the
Trustee as the secured party and, in each case, identifying all Contracts as
collateral. The Contracts will be stamped or otherwise marked to reflect their
assignment from the Company to the Trust Fund only to the extent specified in
the related prospectus supplement. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Contracts without notice of such assignment, the interest of the Trustee in the
Contracts could be defeated. See "Certain Legal Aspects of the Contracts."
While the Contract documents will not be reviewed by the Trustee or the
Servicer, if the Servicer finds that any such document is missing or defective
in any material respect, the Servicer will be required to immediately notify the
Depositor and the relevant Asset Seller or other entity specified in the related
prospectus supplement. If the Asset Seller or such other entity cannot cure the
omission or defect within a specified number of days after receipt of such
notice, then the Asset Seller or such other entity will be obligated, within a
specified number of days of receipt of such notice, to repurchase the related
Contract from the Trustee at the Purchase Price or substitute for such Contract.
There can be no assurance that an Asset Seller or such other entity will fulfill
this repurchase or substitution obligation, and neither the Servicer nor the
Depositor will be obligated to repurchase or substitute for such Contract if the
Asset Seller or such other entity defaults on its obligation. This repurchase or
substitution obligation constitutes the sole remedy available to the
Securityholders or the Trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the related prospectus
supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller may agree to cover
any losses suffered by the Trust Fund as a result of such breach or defect.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
To the extent provided in the related prospectus supplement the Depositor
will, with respect to each Asset, make or assign certain representations and
warranties, as of a specified date (the person making such representations and
warranties including the Depositor, the "WARRANTING PARTY") covering, by way of
example, the following types of matters:
61
o the accuracy of the information set forth for such Asset on the schedule
of Assets appearing as an exhibit to the applicable 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 thereof or
such other person acceptable to the Depositor and shall be identified in the
related prospectus supplement.
Representations and warranties made in respect of an Asset may have been
made as of a date prior to the applicable Cut-off Date. A substantial period of
time may have elapsed between such date and the date of initial issuance of the
related Series of Securities evidencing an interest in such Asset. In the event
of a breach of any such representation or warranty, the Warranting Party will
be obligated to reimburse the Trust Fund for losses caused by any such breach
or either cure such breach or repurchase or replace the affected Asset as
described below. Since the representations and warranties may not address
events that may occur following the date as of which they were made, the
Warranting Party will have a reimbursement, cure, repurchase or substitution
obligation in connection with a breach of such a representation and warranty
only if the relevant event that causes such breach occurs prior to such date.
Such party would have no such obligations if the relevant event that causes
such breach occurs after such date.
Each Agreement will provide that the Servicer and/or Trustee or such other
entity identified in the related prospectus supplement will be required to
notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of an Asset that materially
and adversely affects the value of such Asset or the interests therein of the
Securityholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which such party was notified of such
breach, then such Warranting Party will be obligated to repurchase such Asset
from the Trustee within a specified period from the date on which the
Warranting Party was notified of such breach, at the Purchase Price therefor.
If so provided in the prospectus supplement for a Series, a Warranting Party,
rather than repurchase an Asset as to which a breach has occurred, will have
the option, within a specified period after initial issuance of such Series of
Securities, to cause the removal of such Asset from the Trust Fund and
substitute in its place one or more other Assets, as applicable, in accordance
with the standards described in the related prospectus supplement. 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
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Securityholders for any losses caused by such 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 Warranting Parties will carry out such obligations
with respect to the Assets.
A Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
applicable Agreement. A breach of any such representation of the Servicer which
materially and adversely affects the interests of the Securityholders and which
continues unremedied for the number of days specified in the applicable
Agreement after the giving of written notice of such breach to the Servicer by
the Trustee or the Depositor, or to the Servicer, the Depositor and the Trustee
by the holders of Securities evidencing not less than 25% of the Voting Rights
or such other percentage specified in the related prospectus supplement, will
constitute an Event of Default under such Agreement. See "-- Events of Default
under the Agreements" and "-- Rights Upon Event of Default under the
Agreements."
COLLECTION ACCOUNT AND RELATED ACCOUNTS
General. The Servicer 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 either (i) an account
or accounts the deposits in which 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 such 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 such 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 (ii) otherwise maintained
with a bank or trust company, and in a manner, satisfactory to the Rating
Agency or Agencies rating any Class of Securities of such Series. The
collateral eligible to secure amounts in the Collection Account is limited to
United States government securities and other investment grade obligations
specified in the applicable Agreement ("PERMITTED INVESTMENTS"). A Collection
Account may be maintained as an interest bearing or a non-interest bearing
account and the funds held therein may be invested pending each succeeding
Distribution Date in certain short-term Permitted Investments. Unless otherwise
specified in the applicable prospectus supplement, any interest or other income
earned on funds in the Collection Account will be paid to the Servicer or its
designee as additional servicing compensation. The Collection Account may be
maintained with an institution that is an affiliate of the Servicer, if
applicable, provided that such institution meets the standards imposed by the
Rating Agency or Agencies. If permitted by the Rating Agency or Agencies, a
Collection Account may contain funds relating to more than one Series of
mortgage pass-through certificates and may contain other funds respecting
payments on mortgage loans belonging to the Servicer or serviced or master
serviced by it on behalf of others.
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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 such
other period provided in the applicable Agreement, the following payments and
collections received, or advances made, by the Servicer or the Trustee or on
its behalf subsequent to the Cut-off Date (other than payments due on or before
the Cut-off Date, and exclusive of any amounts representing a Retained
Interest):
o all payments on account of principal, including principal prepayments, on
the Assets;
o all payments on account of interest on the Assets, including any default
interest collected, in each case net of any portion thereof retained by a
Servicer as its servicing compensation and net of any Retained Interest;
o 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;
o any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related Series of Securities as
described under "Description of Credit Support";
o any advances made as described under "Description of the Securities --
Advances in Respect of Delinquencies";
o any amounts paid under any Cash Flow Agreement, as described under
"Description of the Trust Funds -- Cash Flow Agreements";
o all proceeds of any Asset or, with respect to a Mortgage Loan, property
acquired in respect thereof purchased by the Depositor, any Asset Seller
or any other specified person as described under "-- Assignment of
Assets; Repurchases" and "-- Representations and Warranties;
Repurchases," all proceeds of any defaulted Mortgage Loan purchased as
described under "-- Realization Upon Defaulted Assets," and all proceeds
of any Asset purchased as described under "Description of the Securities
-- Termination";
o any amounts paid by a Servicer to cover certain interest shortfalls
arising out of the prepayment of Assets in the Trust Fund as described
under "Description of the Agreements -- Retained Interest; Servicing
Compensation and Payment of Expenses";
o to the extent that any such item does not constitute additional servicing
compensation to a Servicer, any payments on account of modification or
assumption fees, late payment charges or Prepayment Premiums on the
Assets;
o all payments required to be deposited in the Collection Account with
respect to any deductible clause in any blanket insurance policy
described under "-- Hazard Insurance Policies";
o 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
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o any other amounts required to be deposited in the Collection Account as
provided in the applicable Agreement and described in the related
prospectus supplement.
Withdrawals. A Servicer or the Trustee may, from time to time, make
withdrawals from the Collection Account for each Trust Fund for any of the
following purposes:
o to make distributions to the Securityholders on each Distribution Date;
o to reimburse a Servicer for unreimbursed amounts advanced as described
under "Description of the Securities -- Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received
which were identified and applied by the Servicer as late collections of
interest (net of related servicing fees and Retained Interest) on and
principal of the particular Assets with respect to which the advances
were made or out of amounts drawn under any form of Credit Support with
respect to such Assets;
o to reimburse a Servicer for unpaid servicing fees earned and certain
unreimbursed servicing expenses incurred with respect to Assets and
properties acquired in respect thereof, such reimbursement to be made out
of amounts that represent Liquidation Proceeds and Insurance Proceeds
collected on the particular Assets and properties, and net income
collected on the particular properties, with respect to which such fees
were earned or such expenses were incurred or out of amounts drawn under
any form of Credit Support with respect to such Assets and properties;
o to reimburse a Servicer for any advances described above and any
servicing expenses described above which, in the Servicer's good faith
judgment, will not be recoverable from the amounts described in such
clauses, such reimbursement to be made from amounts collected on other
Assets or, if and to the extent so provided by the applicable Agreement
and described in the related prospectus supplement, just from that
portion of amounts collected on other Assets that is otherwise
distributable on one or more Classes of Subordinate Securities, if any,
remain outstanding, and otherwise any outstanding Class of Securities, of
the related Series;
o if and to the extent described in the related prospectus supplement, to
pay a Servicer interest accrued on the advances described above and the
servicing expenses described above while such advances and servicing
expenses remain outstanding and unreimbursed;
o to reimburse a Servicer, the Depositor, or any of their respective
directors, officers, employees and agents, as the case may be, for
certain expenses, costs and liabilities incurred thereby, as and to the
extent described under "-- Certain Matters Regarding Servicers, the
Master Servicer and the Depositor";
o if and to the extent described in the related prospectus supplement, to
pay (or to transfer to a separate account for purposes of escrowing for
the payment of) the Trustee's fees;
o to reimburse the Trustee or any of its directors, officers, employees and
agents, as the case may be, for certain expenses, costs and liabilities
incurred thereby, as and to the extent described under "-- Certain
Matters Regarding the Trustee";
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o to pay a Servicer, as additional servicing compensation, interest and
investment income earned in respect of amounts held in the Collection
Account;
o to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Servicer as
recoveries of Retained Interest;
o to pay for costs reasonably incurred in connection with the proper
management and maintenance of any Mortgaged Property acquired for the
benefit of Securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise, such payments to be made out of income received
on such property;
o if one or more elections have been made to treat the Trust Fund or
designated portions thereof as a REMIC or a FASIT, to pay any federal,
state or local taxes imposed on the Trust Fund or its assets or
transactions, as and to the extent described under "Federal Income Tax
Consequences -- REMICs -- Taxes That May Be Imposed on the REMIC Pool" or
in the applicable prospectus supplement, respectively;
o 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 thereof in connection
with the liquidation of such Mortgage Loan or property;
o to pay for the cost of various opinions of counsel obtained pursuant to
the applicable Agreement for the benefit of Securityholders;
o to pay for the costs of recording the applicable Agreement if such
recordation materially and beneficially affects the interests of
Securityholders, provided that such 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 applicable Agreement;
o to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset
after its removal from the Trust Fund whether by reason of purchase or
substitution as contemplated by "--Assignment of Assets; Repurchase" and
"--Representations and Warranties; Repurchases" or otherwise;
o to make any other withdrawals permitted by the applicable Agreement; and
o to clear and terminate the Collection Account at the termination of the
Trust Fund.
Other Collection Accounts. Notwithstanding the foregoing, if so specified
in the related prospectus supplement, the applicable Agreement for any Series of
Securities may provide for the establishment and maintenance of a separate
collection account into which the Servicer will deposit on a daily basis the
amounts described under "-- Deposits" above for one or more Series of
Securities. Any amounts on deposit in any such collection account will be
withdrawn therefrom and deposited into the appropriate Collection Account by a
time specified in the related prospectus supplement. To the extent specified in
the related prospectus supplement, any amounts which could be withdrawn from the
Collection Account as described under "-- Withdrawals" above, may also be
withdrawn from any such collection account. The
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prospectus supplement will set forth any restrictions with respect to any such
collection account, including investment restrictions and any restrictions with
respect to financial institutions with which any such collection account may be
maintained.
Collection and Other Servicing Procedures. The Servicer is required to
make reasonable efforts to collect all scheduled payments under the Assets and
will follow or cause to be followed such collection procedures as it would
follow with respect to assets that are comparable to the Assets and held for
its own account, provided such procedures are consistent with (i) the terms of
the applicable Agreement and any related hazard insurance policy or instrument
of Credit Support, if any, included in the related Trust Fund described herein
or under "Description of Credit Support," (ii) applicable law and (iii) the
general servicing standard specified in the related prospectus supplement or,
if no such standard is so specified, its normal servicing practices (in either
case, the "SERVICING STANDARD"). In connection therewith, the Servicer will be
permitted in its discretion to waive any late payment charge or penalty
interest in respect of a late payment on an Asset.
Each Servicer will also be required to perform other customary functions
of a servicer of comparable assets, including maintaining hazard insurance
policies as described herein and in any related prospectus supplement, and
filing and settling claims thereunder; maintaining, to the extent required by
the applicable Agreement, escrow or impoundment accounts of obligors for
payment of taxes, insurance and other items required to be paid by any obligor
pursuant to the terms of the Assets; processing assumptions or substitutions in
those cases where the Servicer has determined not to enforce any applicable
due-on-sale clause; attempting to cure delinquencies; supervising foreclosures
or repossessions; inspecting and managing Mortgaged Properties or Manufactured
Homes under certain circumstances; and maintaining accounting records relating
to the Assets. The Servicer or such other entity specified in the related
prospectus supplement will be responsible for filing and settling claims in
respect of particular Assets under any applicable instrument of Credit Support.
See "Description of Credit Support."
The Servicer may agree to modify, waive or amend any term of any Asset in
a manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (i) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (ii) in its judgment,
materially impair the security for the Asset or reduce the likelihood of timely
payment of amounts due thereon. 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, unless otherwise provided in the related
prospectus supplement, (i) in its judgment, a material default on the Asset has
occurred or a payment default is reasonably foreseeable and (ii) in its
judgment, such 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. The Servicer is required to notify the Trustee in the
event of any modification, waiver or amendment of any Asset.
In the case of Multifamily Mortgage Loans, a mortgagor's failure to make
required Mortgage Loan payments may mean that operating income is insufficient
to service the Mortgage Loan debt, or may reflect the diversion of that income
from the servicing of the Mortgage Loan debt. In addition, a mortgagor under a
Multifamily Mortgage Loan that is unable to make Mortgage Loan payments may
also be unable to make timely payment of all required taxes and otherwise to
maintain and insure the related Mortgaged Property. In general, the Servicer
will be required
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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 the related Mortgaged Property, initiate corrective
action in cooperation with the mortgagor if cure is likely, inspect the related
Multifamily Property and take such other actions as are consistent with the
applicable Agreement. A significant period of time may elapse before the
Servicer is able to assess the success of any such corrective action or the need
for additional initiatives. The time within which the Servicer can make the
initial determination of appropriate action, evaluate the success of corrective
action, develop additional initiatives, institute foreclosure proceedings and
actually foreclose may vary considerably depending on the particular Multifamily
Mortgage Loan, the Multifamily Property, the mortgagor, the presence of an
acceptable party to assume the Multifamily Mortgage Loan and the laws of the
jurisdiction in which the Multifamily Property is located.
REALIZATION UPON DEFAULTED ASSETS
Generally, the Servicer is required to monitor any Assets which is in
default, initiate corrective action in cooperation with the mortgagor or
obligor if cure is likely, inspect the Asset and take such other actions as are
consistent with the Servicing Standard. A significant period of time may elapse
before the Servicer is able to assess the success of such corrective action or
the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Mortgage Loans or
Contracts may grant to the Servicer and/or the holder or holders of certain
Classes of Securities a right of first refusal to purchase from the Trust Fund
at a predetermined purchase price any such Mortgage Loan or Contract as to
which a specified number of scheduled payments thereunder are delinquent. Any
such right granted to the holder of an Offered Security will be described in
the related prospectus supplement. The related prospectus supplement will also
describe any such right granted to any person if the predetermined purchase
price is less than the Purchase Price described under "--Representations and
Warranties; Repurchases."
If so specified in the related prospectus supplement, the Servicer may
offer to sell any defaulted Mortgage Loan or Contract described in the
preceding paragraph and not otherwise purchased by any person having a right of
first refusal with respect thereto, if and when the Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a
greater recovery on a present value basis than would liquidation through
foreclosure, repossession or similar proceedings. The applicable Agreement will
provide that any such offering be made in a commercially reasonable manner for
a specified period and that the Servicer accept the highest cash bid received
from any person (including itself, an affiliate of the Servicer or any
Securityholder) that constitutes a fair price for such defaulted Mortgage Loan
or Contract. In the absence of any bid determined in accordance with the
applicable Agreement to be fair, the Servicer shall proceed with respect to
such defaulted Mortgage Loan or Contract as described below. Any bid in an
amount at least equal to the Purchase Price described under "-- Representations
and Warranties; Repurchases" will in all cases be deemed fair.
The Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Mortgage Loan by operation of law or otherwise and may at
any time repossess and realize upon any Manufactured Home, if such
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action is consistent with the Servicing Standard and a default on such Mortgage
Loan or Contract has occurred or, in the Servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a Trust Fund as to which
a REMIC election has been made, the Servicer, on behalf of the Trust Fund, will
be required to sell the Mortgaged Property by the close of the third calendar
year after the year of acquisition, unless (i) the Internal Revenue Service
(the "IRS") grants an extension of time to sell such property or (ii) the
Trustee receives an opinion of independent counsel to the effect that the
holding of the property by the Trust Fund subsequent to three years after 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 Securities are outstanding. Subject to the foregoing, the Servicer
will be required to (i) solicit bids for any Mortgaged Property so acquired in
such a manner as will be reasonably likely to realize a fair price for such
property and (ii) accept the first (and, if multiple bids are contemporaneously
received, the highest) cash bid received from any person that constitutes a
fair price. The applicability of these limitations if a FASIT election is made
with respect to all or a part of the Trust Fund will be described in the
applicable prospectus supplement.
The limitations imposed by the applicable Agreement and the REMIC
provisions or the FASIT provisions of the Code (if a REMIC election or a FASIT
election, respectively, has been made with respect to the related Trust Fund)
on the ownership and management of any Mortgaged Property acquired on behalf of
the Trust Fund may result in the recovery of an amount less than the amount
that would otherwise be recovered. See "Certain Legal Aspects of Mortgage Loans
- -- Foreclosure."
If recovery on a defaulted Asset under any related instrument of Credit
Support is not available, the Servicer nevertheless will be obligated to follow
or cause to be followed such normal practices and procedures as it deems
necessary or advisable to realize upon the defaulted Asset. If the proceeds of
any liquidation of the property securing the defaulted Asset are less than the
outstanding principal balance of the defaulted Asset plus interest accrued
thereon at the applicable interest rate, plus the aggregate amount of expenses
incurred by the Servicer in connection with such proceedings and which are
reimbursable under the applicable Agreement, the Trust Fund will realize a loss
in the amount of such difference. The Servicer will be entitled to withdraw or
cause to be withdrawn from the Collection Account out of the Liquidation
Proceeds recovered on any defaulted Asset, prior to the distribution of such
Liquidation Proceeds to Securityholders, amounts representing its normal
servicing compensation on the Security, unreimbursed servicing expenses
incurred with respect to the Asset and any unreimbursed advances of delinquent
payments made with respect to the Asset.
If any property securing a defaulted Asset is damaged, the Servicer is not
required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Asset after reimbursement of the Servicer
for its expenses and (ii) that such expenses will be recoverable by it from
related Insurance Proceeds or Liquidation Proceeds.
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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 obligor under each
instrument of Credit Support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Assets.
If a Servicer or its designee recovers payments under any instrument of
Credit Support with respect to any defaulted Assets, the Servicer will be
entitled to withdraw or cause to be withdrawn from the Collection Account out
of such proceeds, prior to distribution thereof to Securityholders, amounts
representing its normal servicing compensation on such Asset, unreimbursed
servicing expenses incurred with respect to the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset. See "-- Hazard
Insurance Policies" and "Description of Credit Support."
HAZARD INSURANCE POLICIES
Mortgage Loans. Generally, each Agreement for a Trust Fund comprised of
Mortgage Loans will require the Servicer to cause the mortgagor on each
Mortgage Loan to maintain a hazard insurance policy providing for such coverage
as is required under the related Mortgage or, if any Mortgage permits the
holder thereof to dictate to the mortgagor the insurance coverage to be
maintained on the related Mortgaged Property, then such coverage as is
consistent with the Servicing Standard. Such coverage will be in general in an
amount equal to the lesser of the principal balance owing on such Mortgage Loan
(but not less than the amount necessary to avoid the application of any
co-insurance clause contained in the hazard insurance policy) and the amount
necessary to fully compensate for any damage or loss to the improvements on the
Mortgaged Property on a replacement cost basis or such other amount specified
in the related prospectus supplement. The ability of the Servicer to assure
that hazard insurance proceeds are appropriately applied may be dependent upon
its being named as an additional insured under any hazard insurance policy and
under any other insurance policy referred to below, or upon the extent to which
information in this regard is furnished by mortgagors. All amounts collected by
the Servicer under any such policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor in
accordance with the Servicer's normal servicing procedures, subject to the
terms and conditions of the related Mortgage and Mortgage Note) will be
deposited in the Collection Account. The applicable Agreement may provide that
the Servicer may satisfy its obligation to cause each mortgagor to maintain
such a hazard insurance policy by the Servicer's maintaining a blanket policy
insuring against hazard losses on the Mortgage Loans. If such blanket policy
contains a deductible clause, the Servicer will be required to deposit in the
Collection Account all sums that would have been deposited therein but for such
clause.
In general, the standard form 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 thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other
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water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and certain 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 improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, such clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (i) the replacement cost of the improvements less physical
depreciation and (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Each Agreement for a Trust Fund comprised of Mortgage Loans will require
the Servicer to cause the mortgagor on each Mortgage Loan to maintain all such
other insurance coverage with respect to the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the Servicer in maintaining any such insurance policy
will be added to the amount owing under the Mortgage Loan where the terms of
the Mortgage Loan so permit; provided, however, that the addition of such cost
will not be taken into account for purposes of calculating the distribution to
be made to Securityholders. Such costs may be recovered by the Servicer from
the Collection Account, with interest thereon, as provided by the applicable
Agreement.
Under the terms of the Mortgage Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Servicer, on behalf of the
Trustee and Securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
Mortgaged Properties securing the Mortgage Loans. However, the ability of the
Servicer to present or cause to be presented such claims is dependent upon the
extent to which information in this regard is furnished to the Servicer by
mortgagors.
CONTRACTS
Generally, the terms of the applicable Agreement for a Trust Fund comprised
of Contracts will require the Servicer to cause to be maintained with respect to
each Contract one or more hazard insurance policies which provide, at a minimum,
the same coverage as a standard form fire and extended coverage insurance policy
that is customary for manufactured housing, issued by a company authorized to
issue such policies in the state in which the Manufactured Home is located, and
in an amount which is not less than the maximum insurable value of such
Manufactured Home or the principal balance due from the obligor on the related
Contract, whichever is less; provided, however, that the amount of coverage
provided by each such hazard insurance policy shall be sufficient to avoid the
application of any co-insurance clause contained therein. When a Manufactured
Home's location was, at the time of origination of the related Contract, within
a federally designated special flood hazard area, the Servicer shall cause such
flood insurance to be maintained, which coverage shall be at least equal to the
minimum amount
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specified in the preceding sentence or such lesser amount as may be available
under the federal flood insurance program. Each hazard insurance policy caused
to be maintained by the Servicer shall contain a standard loss payee clause in
favor of the Servicer and its successors and assigns. If any obligor is in
default in the payment of premiums on its hazard insurance policy or policies,
the Servicer shall pay such premiums out of its own funds, and may add
separately such premium to the obligor's obligation as provided by the Contract,
but may not add such premium to the remaining principal balance of the Contract.
The Servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained with respect to each Manufactured Home, and shall
maintain, to the extent that the related Contract does not require the obligor
to maintain a hazard insurance policy with respect to the related Manufactured
Home, one or more blanket insurance policies covering losses on the obligor's
interest in the Contracts resulting from the absence or insufficiency of
individual hazard insurance policies. The Servicer shall pay the premium for
such blanket policy on the basis described therein and shall pay any deductible
amount with respect to claims under such policy relating to the Contracts.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Each Agreement will require that the Servicer obtain and maintain in
effect a fidelity bond or similar form of insurance coverage (which may provide
blanket coverage) or any combination thereof insuring against loss occasioned
by fraud, theft or other intentional misconduct of the officers, employees and
agents of the Servicer. The applicable Agreement 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 certain criteria set
forth in such Agreement are met.
DUE-ON-SALE PROVISIONS
The Mortgage Loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
Mortgage Loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The Servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the Servicer will not take any action in relation to
the enforcement of any due-on-sale provision which would adversely affect or
jeopardize coverage under any applicable insurance policy. Any fee collected by
or on behalf of the Servicer for entering into an assumption agreement will be
retained by or on behalf of the Servicer as additional servicing compensation.
See "Certain Legal Aspects of Mortgage Loans -- Due-on-Sale Clauses." The
Contracts may also contain such clauses. The Servicer will generally permit
such transfer so long as the transferee satisfies the Servicer's then
applicable underwriting standards. The purpose of such transfers is often to
avoid a default by the transferring obligor. See "Certain Legal Aspects of the
Contracts -- Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses."
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RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The prospectus supplement for a Series of Securities will specify whether
there will be any Retained Interest in the Assets, and, if so, the initial
owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the applicable
Agreement. A "RETAINED INTEREST" in an Asset represents a specified portion of
the interest payable thereon. The Retained Interest will be deducted from
mortgagor payments as received and will not be part of the related Trust Fund.
The Servicer's primary servicing compensation with respect to a Series of
Securities will come from the periodic payment to it of a portion of the
interest payment on each Asset or such other amount specified in the related
prospectus supplement. Since any Retained Interest and a Servicer's primary
compensation are percentages of the principal balance of each Asset, such
amounts will decrease in accordance with the amortization of the Assets. The
prospectus supplement with respect to a Series of Securities evidencing
interests in a Trust Fund that includes Mortgage Loans or Contracts may provide
that, as additional compensation, the Servicer may retain all or a portion of
assumption fees, modification fees, late payment charges or Prepayment Premiums
collected from mortgagors and any interest or other income which may be earned
on funds held in the Collection Account or any account established by a Servicer
pursuant to the applicable Agreement.
The Servicer may, to the extent provided in the related prospectus
supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and
independent accountants, payment of expenses incurred in connection with
distributions and reports to Securityholders, and payment of any other expenses
described in the related prospectus supplement. Certain other expenses,
including certain expenses relating to defaults and liquidations on the Assets
and, to the extent so provided in the related prospectus supplement, interest
thereon at the rate specified therein may be borne by the Trust Fund.
If and to the extent provided in the related prospectus supplement, the
Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Assets in the related
Trust Fund during such period prior to their respective due dates therein.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets which include Mortgage Loans or
Contracts will provide that on or before a specified date in each year, a firm
of independent public accountants will furnish a statement to the Trustee to
the effect that, on the basis of the examination by such 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 such 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 applicable Agreement) was conducted in compliance with the
terms of such agreements or such 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 such other program, requires it to
report.
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Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Servicer to the effect that the Servicer has fulfilled its
obligations under the applicable Agreement throughout the preceding calendar
year or other specified twelve-month period.
Copies of such annual accountants' statement and such statements of
officers will be obtainable by Securityholders without charge upon written
request to the Servicer or other entity specified in the related prospectus
supplement at the address set forth in the related prospectus supplement.
CERTAIN MATTERS REGARDING SERVICERS, THE MASTER SERVICER AND THE DEPOSITOR
The Servicers and Master Servicer, if any, under each Agreement will be
named in the related prospectus supplement. The entities serving as Servicer or
Master Servicer may be affiliates of the Depositor and may have other normal
business relationships with the Depositor or the Depositor's affiliates.
Reference herein to the Servicer shall be deemed to be to the Master Servicer,
if applicable.
The applicable Agreement will provide that the Servicer may resign from
its obligations and duties thereunder only upon a determination that its duties
under such Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Servicer so causing such a conflict being
of a type and nature carried on by the Servicer at the date of such Agreement.
No such resignation will become effective until the Trustee or a successor
servicer has assumed the Servicer's obligations and duties under the applicable
Agreement.
Each Agreement will further provide that neither any Servicer, 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 applicable Agreement; provided, however,
that neither a Servicer, the Depositor nor any such person will be protected
against any breach of a representation, warranty or covenant made in such
Agreement, or against any liability specifically imposed thereby, or against any
liability which would otherwise be imposed by reason of willful misfeasance, bad
faith or gross negligence in the performance of obligations or duties thereunder
or by reason of reckless disregard of obligations and duties thereunder. Each
Agreement will further provide that 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 applicable Agreement or the Securities; provided,
however, that such indemnification will not extend to any loss, liability or
expense
o specifically imposed by such Agreement or otherwise incidental to the
performance of obligations and duties thereunder, 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 such loss, liability or expense shall be otherwise reimbursable
pursuant to such Agreement);
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o incurred in connection with any breach of a representation, warranty or
covenant made in such Agreement;
o incurred by reason of misfeasance, bad faith or gross negligence in the
performance of obligations or duties thereunder, or by reason of reckless
disregard of such obligations or duties;
o incurred in connection with any violation of any state or federal
securities law; or
o imposed by any taxing authority if such loss, liability or expense is not
specifically reimbursable pursuant to the terms of the applicable
Agreement.
In addition, each Agreement will provide that neither any Servicer nor the
Depositor will be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its respective responsibilities under
the applicable Agreement and which in its opinion may involve it in any expense
or liability. Any such Servicer or the Depositor may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the applicable Agreement and the rights and duties of the
parties thereto and the interests of the Securityholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Securityholders, and
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, will be the successor of the
Servicer or the Depositor, as the case may be, under the applicable Agreement.
SPECIAL SERVICERS
If and to the extent specified in the related prospectus supplement, a
special servicer (a "SPECIAL SERVICER") may be a party to the applicable
Agreement or may be appointed by the Servicer or another specified party to
perform certain specified duties in respect of servicing the related Mortgage
Loans that would otherwise be performed by the Servicer, such as the workout
and/or foreclosure of defaulted Mortgage Loans. The rights and obligations of
any Special Servicer will be specified in the related Agreement The Servicer
will be liable for the performance of a Special Servicer only if, and to the
extent, set forth in such Agreement.
EVENTS OF DEFAULT UNDER THE AGREEMENTS
Events of default under the applicable 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 applicable
Agreement which continues unremedied for 30 days after written notice of
such failure has been given to the Servicer
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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;
o any breach of a representation or warranty made by the Servicer under the
applicable Agreement which materially and adversely affects the interests
of Securityholders and which continues unremedied for 30 days after
written notice of such breach has been given to the Servicer by the
Trustee or the Depositor, or to the Servicer, the Depositor and the
Trustee by the holders of Securities evidencing not less than 25% of the
Voting Rights; and
o certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings and certain actions by or on
behalf of the Servicer indicating its insolvency or inability to pay its
obligations.
Material variations to the foregoing events of default (other than to shorten
cure periods or eliminate notice requirements) will be specified in the related
prospectus supplement. The Trustee will, not later than the later of 60 days or
such other period specified in the related prospectus supplement after the
occurrence of any event which constitutes or, with notice or lapse of time or
both, would constitute an event of default and five days after certain officers
of the Trustee become aware of the occurrence of such an event, transmit by
mail to the Depositor and all Securityholders of the applicable Series notice
of such occurrence, unless such default shall have been cured or waived.
The manner of determining the "Voting Rights" of a Security or Class or
Classes of Securities will be specified in the related prospectus supplement.
RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENTS
So long as an event of default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or such other percentage speci.ed in the related
prospectus supplement) of the Voting Rights, the Trustee shall terminate all of
the rights and obligations of the Servicer under the applicable Agreement and in
and to the Mortgage Loans (other than as a Securityholder or as the owner of any
Retained Interest), whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Servicer under the applicable
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent Assets, or if the related
prospectus supplement so specifies, then the Trustee will not be obligated to
make such advances) and will be entitled to similar compensation arrangements.
In the event that the Trustee is unwilling or unable so to act, it may or, at
the written request of the holders of Securities entitled to at least 51% (or
such other percentage speci.ed in the related prospectus supplement) of the
Voting Rights, it shall appoint, or petition a court of competent jurisdiction
for the appointment of, a loan servicing institution acceptable to the Rating
Agency with a net worth at the time of such appointment of at least $15,000,000
(or such other amount specified in the related prospectus supplement) to act as
successor to the Servicer under the applicable Agreement. Pending such
appointment, the Trustee is obligated to act in such capacity. The Trustee and
any such successor may agree upon the servicing compensation to be paid, which
in no event may be greater than the compensation payable to the Servicer under
the applicable Agreement.
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The holders of Securities representing at least 662.3% (or such other
percentage specified in the related prospectus supplement) of the Voting Rights
allocated to the respective Classes of Securities affected by any event of
default will be entitled to waive such event of default; provided, however, that
an Event of Default involving a failure to distribute a required payment to
Securityholders described in the first bullet point above under "-- EVENTS OF
DEFAULT UNDER THE AGREEMENTS" may be waived only by all of the Securityholders.
Upon any such waiver of an event of default, such event of default shall cease
to exist and shall be deemed to have been remedied for every purpose under the
applicable Agreement.
No Securityholders will have the right under any Agreement to institute any
proceeding with respect thereto unless such holder previously has given to the
Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or such other percentage speci.ed in the related
prospectus supplement) of the Voting Rights have made written request upon the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity, and the Trustee for 60 days
(or such other number of days speci.ed in the related prospectus supplement) has
neglected or refused to institute any such proceeding. The Trustee, however, is
under no obligation to exercise any of the trusts or powers vested in it by any
Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the Securityholders covered by such
Agreement, unless such Securityholders have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
AMENDMENT
Each Agreement may be amended by the parties thereto, without the consent
of any Securityholders covered by the applicable Agreement,
o to cure any ambiguity or mistake,
o to correct, modify or supplement any provision therein which may be
inconsistent with any other provision therein or with the related
prospectus supplement,
o to make any other provisions with respect to matters or questions arising
under the applicable Agreement which are not materially inconsistent with
the provisions thereof, provided that, such amendment pursuant to this
clause will not adversely affect in any material respect the interests of
any Securityholders covered by the applicable Agreement as evidenced
either by an opinion of counsel to such effect or the delivery to the
Trustee of written notification from each Rating Agency that provides, at
the request of the Depositor, a rating for the Offered Securities of the
related Series to the effect that such amendment or supplement will not
cause such Rating Agency to lower or withdraw the then current rating
assigned to such Securities; or
o to comply with any requirements imposed by the Code.
Each Agreement may also be amended by the Depositor, the Servicer, if any, and
the Trustee, with the consent of the Securityholders affected thereby
evidencing not less than 51% (or such other percentage specified in the related
prospectus supplement) of the Voting Rights,
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for any purpose; provided, however, no such amendment may (i) reduce in any
manner the amount of, or delay the timing of, payments received or advanced on
Assets which are required to be distributed on any Security without the consent
of the Securityholder or (ii) reduce the consent percentages described in this
paragraph without the consent of all the Securityholders covered by such
Agreement then outstanding. However, with respect to any Series of Securities as
to which a REMIC election or a FASIT election is to be made, the Trustee will
not consent to any amendment of the applicable Agreement unless it shall first
have received an opinion of counsel to the effect that such amendment will not
result in the imposition of a tax on the related Trust Fund or cause the related
Trust Fund to fail to qualify as a REMIC or a FASIT, as the case may be, at any
time that the related Securities are outstanding.
THE TRUSTEE
The Trustee under each Agreement will be named in the related prospectus
supplement. The commercial bank, national banking association, banking
corporation or trust company serving as Trustee may have a banking relationship
with the Depositor and its affiliates, with any Servicer and its affiliates and
with any Master Servicer and its affiliates. If so specified in the related
prospectus supplement with respect to certain Series of Securities, a
certificate administrator will perform certain duties and functions normally
performed by the Trustee. Any certificate administrator will be a party to the
applicable Agreement and will be named in the applicable prospectus supplement.
Any certificate administrator will have obligations and rights similar to the
Trustee as described in this prospectus. The commercial bank, national banking
association, banking corporation or trust company serving as certificate
administrator 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.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of any Agreement, the Securities or any Asset or related document and is not
accountable for the use or application by or on behalf of any Servicer of any
funds paid to the Master Servicer or its designee in respect of the Securities
or the Assets, or deposited into or withdrawn from the Collection Account or
any other account by or on behalf of the Servicer. If no Event of Default has
occurred and is continuing, the Trustee is required to perform only those
duties specifically required under the applicable Agreement, 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 such
documents and to determine whether they conform to the requirements of the
applicable Agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
The Trustee and any director, officer, employee or agent of the Trustee
shall be 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
o enforcing its rights and remedies and protecting the interests, of the
Securityholders during the continuance of an Event of Default,
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o defending or prosecuting any legal action in respect of the applicable
Agreement or Series of Securities,
o being the mortgagee of record with respect to the Mortgage Loans in a
Trust Fund and the owner of record with respect to any Mortgaged Property
acquired in respect thereof for the benefit of Securityholders, or
o acting or refraining from acting in good faith at the direction of the
holders of the related Series of Securities entitled to not less than 25%
(or such other percentage as is specified in the applicable Agreement
with respect to any particular matter) of the Voting Rights for such
Series.
Any such indemnification of the Trustee discussed above will not extend to any
loss, liability or expense that constitutes a specific liability of the Trustee
pursuant to the applicable 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 thereunder, or
by reason of its reckless disregard of such obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice thereof to the Depositor, the Servicer, if
any, and all Securityholders. Upon receiving such notice of resignation, the
Depositor is required promptly to appoint a successor trustee acceptable to the
Servicer, if any. If no successor trustee shall have been so appointed and have
accepted appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as such
under the applicable Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will adversely
affect the rating on any Class of the Securities, then the Depositor may remove
the Trustee and appoint a successor trustee acceptable to the Master Servicer,
if any. Securityholders of any Series entitled to at least 51% (or such other
percentage specified in the related prospectus supplement) of the Voting Rights
for such 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 shall not become effective until acceptance of appointment by the
successor trustee.
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
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relating to such Series that materially differs from the description thereof
contained in this prospectus. The summaries do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, all of the
provisions of the 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 such Series addressed to Wachovia Asset Securitization
Issuance, LLC, 8739 Research Drive, NC0121-Suite D, Charlotte, North Carolina
28288-0121, Attention: Vice President.
Events of Default
Events of default under the Indenture for each Series of Notes will
generally include:
o a default for five (5) days (or such other number of days specified in
such prospectus supplement) or more in the payment of any principal of or
interest on any Note of such Series;
o there occurs a default in the observance or performance in any material
respect of any covenant or agreement of the Issuer made in the Indenture,
or any representation or warranty of the Issuer made in the Indenture or
in any certificate delivered pursuant to or in connection with the
Indenture proving to have been incorrect in any material respect as of
the time when the same shall have been made that has a material adverse
effect on the noteholders or the issuer of a financial guaranty insurance
policy relating to such Series, and the default shall continue or not be
cured, or the circumstance or condition in respect of which the
representation or warranty was incorrect shall not have been eliminated
or otherwise cured, for a period of 30 days (or such other number of days
specified in such prospectus supplement) after there shall have been
given, by registered or certified mail, to the Issuer by the Indenture
Trustee or to the Issuer and the Indenture Trustee by the holders of at
least 25% of the outstanding Note Balance of the Notes or the issuer of a
financial guaranty insurance policy relating to such Series, a written
notice specifying the default or incorrect representation or warranty and
requiring it to be remedied and stating that the notice is a notice of
default under the Indenture;
o there occurs the filing of a decree or order for relief by a court having
jurisdiction in the premises in respect of the Issuer or any substantial
part of the trust fund in an involuntary case under any applicable
federal or state bankruptcy, insolvency or other similar law now or
hereafter in effect, or appointing a receiver, liquidator, assignee,
servicer, trustee, sequestrator or similar official of the Issuer or for
any substantial part of the trust fund, or ordering the winding-up or
liquidation of the Issuer's affairs, and the decree or order shall remain
unstayed and in effect for a period of 60 consecutive days; or
o there occurs the commencement by the Issuer of a voluntary case under any
applicable federal or state bankruptcy, insolvency or other similar law
now or hereafter in effect, or the consent by the Issuer to the entry of
an order for relief in an involuntary case under any such law, or the
consent by the Issuer to the appointment or taking possession by a
receiver, liquidator, assignee, servicer, trustee, sequestrator or
similar official of the Issuer or for any substantial part of the assets
of the trust fund, or the making by the Issuer of any general assignment
for the benefit of creditors, or the failure by the Issuer
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generally to pay its debts as those debts become due, or the taking of
any action by the Issuer in furtherance of any of the foregoing.
If an event of default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Indenture Trustee or the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such Series may declare the principal amount (or, if the Notes of that
Series are Accrual Securities, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related prospectus
supplement) of all the Notes of such Series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled by
the Securityholders of a majority in aggregate outstanding amount of the Notes
of such Series.
If, following an event of default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such Series
as they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a Series following an event of default, other
than a default in the payment of any principal or interest on any Note of such
Series for thirty (30) days or more, unless (a) the Securityholders of 100% (or
such other percentage specified in the related prospectus supplement) of the
then aggregate outstanding amount of the Notes of such Series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the outstanding
Notes of such Series at the date of such sale or (c) the Indenture Trustee
determines that such collateral would not be sufficient on an ongoing basis to
make all payments on such Notes as such payments would have become due if such
Notes had not been declared due and payable, and the Indenture Trustee obtains
the consent of the Securityholders of 66 2/3% (or such other percentage
specified in the related prospectus supplement) of the then aggregate
outstanding amount of the Notes of such Series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an event of default involving a default for thirty (30) days
(or such other number of days specified in the related prospectus supplement)
or more in the payment of principal of or interest on the Notes of a Series,
the Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any such liquidation for unpaid fees and expenses. As a result,
upon the occurrence of such an event of default, the amount available for
distribution to the Securityholders would be less than would otherwise be the
case. However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Securityholders
after the occurrence of such an event of default.
To the extent provided in the related prospectus supplement, in the event
the principal of the Notes of a Series is declared due and payable, as
described above, the Securityholders of any such Notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is unamortized.
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Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an event of default shall occur and be continuing
with respect to a Series of Notes, the Indenture Trustee shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the Securityholders of such Series, unless such
holders offered to the Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such Series shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Indenture Trustee
or exercising any trust or power conferred on the Indenture Trustee with respect
to the Notes of such Series, and the Securityholders of a majority of the then
aggregate outstanding amount of the Notes of such Series may, in certain cases,
waive any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of the
Indenture that cannot be modified without the waiver or consent of all the
Securityholders of the outstanding Notes of such Series affected thereby.
DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to a Series of Notes (except
with respect to certain continuing rights specified in the Indenture) upon the
delivery to the Indenture Trustee for cancellation of all the Notes of such
Series or, with certain limitations, upon deposit with the Indenture Trustee of
funds sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect
of the Notes of such Series (except for certain obligations relating to
temporary Notes and exchange of Notes, to register the transfer of or exchange
Notes of such Series, to replace stolen, lost or mutilated Notes of such
Series, to maintain paying agencies and to hold monies for payment in trust)
upon the deposit with the Indenture Trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America which
through the payment of interest and principal in respect thereof in accordance
with their terms will provide money in an amount sufficient to pay the
principal of and each installment of interest on the Notes of such Series on
the maturity date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
INDENTURE TRUSTEE'S ANNUAL REPORT
The Indenture Trustee for each Series of Notes will be required to mail
each year to all related Securityholders a brief report relating to its
eligibility and qualification to continue as Indenture Trustee under the
related Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by such Trust to
the applicable Indenture Trustee in its individual capacity, the property and
funds physically held by such Indenture Trustee as such and any action taken by
it that materially affects such Notes and that has not been previously
reported.
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THE INDENTURE TRUSTEE
The Indenture Trustee for a Series of Notes will be specified in the
related prospectus supplement. The Indenture Trustee for any Series may resign
at any time, in which event the Depositor will be obligated to appoint a
successor trustee for such Series. The Depositor may also remove any such
Indenture Trustee if such Indenture Trustee ceases to be eligible to continue
as such under the related Indenture or if such Indenture Trustee becomes
insolvent. In such circumstances the Depositor will be obligated to appoint a
successor trustee for the applicable Series of Notes. Any resignation or
removal of the Indenture Trustee and appointment of a successor trustee for any
Series of Notes does not become effective until acceptance of the appointment
by the successor trustee for such Series.
The bank or trust company serving as Indenture Trustee may have a banking
relationship with the Depositor or any of its affiliates, a Servicer or any of
its affiliates or the Master Servicer or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any Series of Securities, Credit Support may be provided with respect
to one or more Classes thereof or the related Assets. Credit Support may be in
the form of the subordination of one or more Classes of Securities, letters of
credit, insurance policies, guarantees, the establishment of one or more
reserve funds or another method of Credit Support described in the related
prospectus supplement, or any combination of the foregoing. If so provided in
the related prospectus supplement, any form of Credit Support may be structured
so as to be drawn upon by more than one Series to the extent described therein.
The coverage provided by any Credit Support will be described in the
related prospectus supplement. Generally, such coverage will not provide
protection against all risks of loss and will not guarantee repayment of the
entire Security Balance of the Securities and interest thereon. 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 Securities (each, a "COVERED TRUST"), Securityholders evidencing
interests in any of such Covered Trusts will be subject to the risk that such
Credit Support will be exhausted by the claims of other Covered Trusts prior to
such Covered Trust receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more Classes of
Securities of a Series, or the related Assets, the related prospectus
supplement will include a description of:
o the nature and amount of coverage under such Credit Support,
o any conditions to payment thereunder not otherwise described herein,
o the conditions, if any, under which the amount of coverage under such
Credit Support may be reduced and under which such Credit Support may be
terminated or replaced and
o the material provisions relating to such Credit Support.
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Additionally, the related prospectus supplement will set forth certain
information with respect to the obligor under any instrument of Credit Support,
including:
o a brief description of its principal business activities,
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business,
o if applicable, the identity of regulatory agencies that exercise primary
jurisdiction over the conduct of its business and
o its total assets, and its stockholders' or policyholders' surplus, if
applicable, as of the date specified in the prospectus supplement.
See "Risk Factors -- Risks Associated with the Securities -- Credit Enhancement
is Limited in Amount and Coverage."
SUBORDINATE SECURITIES
If so specified in the related prospectus supplement, one or more Classes
of Securities of a Series may be Subordinate Securities. To the extent
specified in the related prospectus supplement, the rights of the holders of
Subordinate Securities to receive distributions of principal and interest from
the Collection Account on any Distribution Date will be subordinated to such
rights of the holders of Senior Securities. If so provided in the related
prospectus supplement, the subordination of a Class may apply only in the event
of (or may be limited to) certain types of losses or shortfalls. The related
prospectus supplement will set forth information concerning the amount of
subordination of a Class or Classes of Subordinate Securities in a Series, the
circumstances in which such 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 Securities of a Series, Credit
Support may be provided by cross-support provisions requiring that
distributions be made on Senior Securities evidencing interests in one group of
Mortgage Loans prior to distributions on Subordinate Securities 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 such provisions.
LIMITED GUARANTEE
If so specified in the related prospectus supplement with respect to a
Series of Securities, credit enhancement may be provided in the form of a
limited guarantee issued by a guarantor named therein.
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FINANCIAL GUARANTY INSURANCE POLICY OR SURETY BOND
If so specified in the related prospectus supplement with respect to a
Series of Securities, credit enhancement may be provided in the form of a
financial guaranty insurance policy or a surety bond issued by an insurer named
therein.
LETTER OF CREDIT
Alternative credit support with respect to a Series of Securities may be
provided by the issuance of a letter of credit by the bank or financial
institution specified in the related prospectus supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of
credit issued with respect to a Series of Securities will be set forth in the
prospectus supplement relating to such Series.
POOL INSURANCE POLICIES
If so specified in the related prospectus supplement relating to a Series
of Securities, 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 related prospectus 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 such
coverage will be set forth in the prospectus supplement.
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related prospectus supplement, a special hazard
insurance policy may also be obtained for the related Trust Fund in the amount
set forth in such prospectus supplement. The special hazard insurance policy
will, subject to the limitations described in the related prospectus
supplement, protect against loss by reason of damage to Mortgaged Properties
caused by certain 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 such coverage will be set
forth in the prospectus supplement.
MORTGAGOR BANKRUPTCY BOND
If so specified in the related prospectus supplement, losses resulting from
a bankruptcy proceeding relating to a mortgagor affecting the Mortgage Loans in
a Trust Fund with respect to a Series of Securities will be covered under a
mortgagor bankruptcy bond, or any other instrument that will not result in a
downgrading of the rating of the Securities of a Series by the Rating Agency or
Rating Agencies that rate such Series. Any mortgagor bankruptcy bond or such
other instrument will provide for coverage in an amount meeting the criteria of
the Rating Agency or Rating Agencies rating the Securities of the related
Series, which amount will be set forth in the related prospectus supplement. The
amount and principal terms of any such coverage will be set forth in the
prospectus supplement.
RESERVE FUNDS
If so provided in the prospectus supplement for a Series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain Classes
thereof will be covered by one
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or more reserve funds in which cash, a letter of credit, Permitted Investments,
a demand note or a combination thereof will be deposited, in the amounts so
specified in such prospectus supplement. The reserve funds for a Series may also
be funded over time by depositing therein a specified amount of the
distributions received on the related Assets as specified in the related
prospectus supplement.
Amounts on deposit in any reserve fund for a Series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related prospectus supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Securities. If so specified in the related
prospectus supplement, reserve funds may be established to provide limited
protection against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required to
be maintained therein may be released from the reserve fund under the
conditions and to the extent specified in the related prospectus supplement and
will not be available for further application to the Securities.
Moneys deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the related prospectus supplement. To
the extent specified in the related prospectus supplement, any reinvestment
income or other gain from such investments will be credited to the related
reserve fund for such Series, and any loss resulting from such investments will
be charged to such reserve fund. However, such income may be payable to any
related Servicer or another service provider as additional compensation. To the
extent specified in the related prospectus supplement, the reserve fund, if
any, for a Series will not be a part of the Trust Fund.
Additional information concerning any reserve fund will be set forth in
the related prospectus supplement, including the initial balance of such
reserve fund, the balance required to be maintained in the reserve fund, the
manner in which such required balance will decrease over time, the manner of
funding such 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 related 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 Securities relative to the amortization
of the related Assets. The accelerated amortization is achieved by the
application of certain excess interest to the payment of principal of one or
more Classes of Securities. This acceleration feature creates, with respect to
the Assets or groups thereof, overcollateralization which results from the
excess of the aggregate principal balance of the related Assets, or a group
thereof, over the principal balance of the related Class or Classes of
Securities. Such 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 certain
provisions specified in the related prospectus supplement, such limited
acceleration feature may cease, unless necessary to maintain the required level
of overcollateralization.
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal aspects of loans secured by single-family or multi-family
residential properties. Because such legal aspects are governed primarily by
applicable state law (which laws may differ substantially), the summaries do
not purport to be complete nor to reflect the laws of any particular state, nor
to encompass the laws of all states in which the security for the Mortgage
Loans is situated. The summaries are qualified in their entirety by reference
to the applicable federal and state laws governing the Mortgage Loans. See
"Description of the Trust Funds -- Assets."
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and
secured by instruments granting a security interest in real property which may
be mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the
instrument in the appropriate public recording office. However, recording does
not generally establish priority over governmental claims for real estate taxes
and assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties -- a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a
deed of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this prospectus, unless the context otherwise requires, "mortgagor" includes
the trustor under a deed of trust and a grantor under a security deed or a deed
to secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by
the related mortgage note. In case the mortgagor under a mortgage is a land
trust, there would be an additional party because legal title to the property
is held by a land trustee under a land trust agreement for the benefit of the
mortgagor. At origination of a mortgage loan involving a land trust, the
mortgagor executes a separate undertaking to make payments on the mortgage
note. The mortgagee's authority under a mortgage, the trustee's authority under
a deed of trust and the grantee's authority under a deed to secure debt are
governed by the express provisions of the mortgage, the law of the state in
which the real property is located, certain federal laws
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(including, without limitation, the Relief Act) and, in some cases, in deed of
trust transactions, the directions of the beneficiary.
The Mortgages that encumber Multifamily Properties may contain an
assignment of rents and leases, pursuant to which the mortgagor assigns to the
lender the mortgagor's right, title and interest as landlord under each lease
and the income derived therefrom, while retaining a revocable license to
collect the rents for so long as there is no default. If the mortgagor
defaults, the license terminates and the lender is entitled to collect the
rents. Local law may require that the lender take possession of the property
and/or obtain a court-appointed receiver before becoming entitled to collect
the rents.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. The Depositor, the Asset Seller or other entity specified
in the related prospectus supplement will make certain representations and
warranties in the applicable Agreement or certain representations and warranties
will be assigned to the Trustee with respect to any Mortgage Loans that are
secured by an interest in a leasehold estate. Such representation and
warranties, if applicable, will be set forth in the prospectus supplement.
COOPERATIVE LOANS
If specified in the prospectus supplement relating to a Series of Offered
Securities, 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 which 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. Such a 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
therein. 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 mortgagor, 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
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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 (i) 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 (ii) 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 such 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.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing such tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying 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
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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 upon the extent
to which state courts are willing, or able pursuant to state statute, to
enforce the contract strictly according to its terms. The terms of Land Sale
Contracts generally provide that upon default by the Contract Borrower, the
borrower loses his or her right to occupy the property, the entire indebtedness
is accelerated, and the buyer's equitable interest in the property is
forfeited. The Contract Lender in such a situation does not have to foreclose
in order to obtain title to the property, although in some cases a quiet title
action is in order if the Contract Borrower has filed the Land Sale Contract in
local land records and an ejectment action may be necessary to recover
possession. In a few states, particularly in cases of Contract Borrower default
during the early years of a Land Sale Contract, the courts will permit
ejectment of the buyer and a forfeiture of his or her interest in the property.
However, most state legislatures have enacted provisions by analogy to mortgage
law protecting borrowers under Land Sale Contracts from the harsh consequences
of forfeiture. Under such statues, a judicial contract may be reinstated upon
full payment of the default amount and the borrower may have a post-foreclosure
statutory redemption right. In other states, courts in equity may permit a
Contract Borrower with significant investment in the property under a Land Sale
Contract for the sale of real estate to share the proceeds of sale of the
property after the indebtedness is repaid or may otherwise refuse to enforce
the forfeiture clause. Nevertheless, generally speaking, the Contract Lender's
procedures for obtaining possession and clear title under a Land Sale Contract
for the sale of real estate in a given state are simpler and less time
consuming and costly than are the procedures for foreclosing and obtaining
clear title to a mortgaged property.
FORECLOSURE
GENERAL
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its
obligations under the note or mortgage, the mortgagee has the right to
institute foreclosure proceedings to sell the mortgaged property at public
auction to satisfy the indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
JUDICIAL FORECLOSURE
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure
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may occasionally result from difficulties in locating defendants. When the
lender's right to foreclose is contested, the legal proceedings can be
time-consuming. Upon successful completion of a judicial foreclosure proceeding,
the court generally issues a judgment of foreclosure and appoints a referee or
other officer to conduct a public sale of the mortgaged property, the proceeds
of which are used to satisfy the judgment. Such sales are made in accordance
with procedures that vary from state to state.
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may
require the lender to undertake affirmative and expensive actions to determine
the cause of the mortgagor's default and the likelihood that the mortgagor will
be able to reinstate the loan. In some cases, courts have substituted their
judgment for the lender's and have required that lenders reinstate loans or
recast payment schedules in order to accommodate mortgagors who are suffering
from a temporary financial disability. In other cases, courts have limited the
right of the lender to foreclose if the default under the mortgage is not
monetary, e.g., the mortgagor failed to maintain the mortgaged property
adequately or the mortgagor executed a junior mortgage on the mortgaged
property. The exercise by the court of its equity powers will depend on the
individual circumstances of each case presented to it. Finally, some courts
have been faced with the issue of whether federal or state constitutional
provisions reflecting due process concerns for adequate notice require that a
mortgagor receive notice in addition to statutorily-prescribed minimum notice.
For the most part, these cases have upheld the reasonableness of the notice
provisions or have found that a public sale under a mortgage providing for a
power of sale does not involve sufficient state action to afford constitutional
protections to the mortgagor.
NON-JUDICIAL FORECLOSURE/POWER OF SALE
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The mortgagor or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears
(without acceleration) plus the expenses
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incurred in enforcing the obligation. In other states, the mortgagor or the
junior lienholder is not provided a period to reinstate the loan, but has only
the right to pay off the entire debt to prevent the foreclosure sale. Generally,
the procedure for public sale, the parties entitled to notice, the method of
giving notice and the applicable time periods are governed by state law and vary
among the states. Foreclosure of a deed to secure debt is also generally
accomplished by a non-judicial sale similar to that required by a deed of trust,
except that the lender or its agent, rather than a trustee, is typically
empowered to perform the sale in accordance with the terms of the deed to secure
debt and applicable law.
PUBLIC SALE
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of such property
at the time of sale, due to, among other things, redemption rights which may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. For these reasons, it is common for the lender to
purchase the mortgaged property for an amount equal to or less than the
underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses which may be recovered by a lender. Thereafter, subject to the
mortgagor's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and
have both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Moreover, a lender commonly incurs substantial legal fees and
court costs in acquiring a mortgaged property through contested foreclosure
and/or bankruptcy proceedings. Generally, state law controls the amount of
foreclosure expenses and costs, including attorneys' fees, that may be
recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, in the event that the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, with respect to
those Mortgage Loans, if any, that are junior mortgage loans, if the lender
purchases the property the lender's title will be subject to all senior
mortgages, prior liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
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RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the mortgage being foreclosed, from
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the
mortgagor, must be exercised prior to foreclosure sale and should be
distinguished from the post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the mortgagor and foreclosed junior lienors are given a statutory period in
which to redeem the property from the foreclosure sale. In some states,
statutory redemption may occur only upon payment of the foreclosure sale price.
In other states, redemption may be authorized if the former mortgagor pays only
a portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The
exercise of a right of redemption would defeat the title of any purchaser from
a foreclosure sale or sale under a deed of trust. Consequently, the practical
effect of the redemption right is to force the lender to maintain the property
and pay the expenses of ownership until the redemption period has expired. In
some states, a post-sale statutory right of redemption may exist following a
judicial foreclosure, but not following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three calendar years
following the year the Trust Fund acquired the property. With respect to a
Series of Securities for which an election is made to qualify the Trust Fund or
a part thereof as a REMIC, the applicable Agreement will permit foreclosed
property to be held for more than such period of time if the IRS grants an
extension of time within which to sell such property or independent counsel
renders an opinion to the effect that holding such property for such additional
period is permissible under the REMIC Provisions. The applicability of these
limitations if a FASIT election is made with respect to all or a part of the
Trust Fund will be described in the applicable prospectus supplement.
COOPERATIVE LOANS
The Cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and by-laws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder.
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Typically, the lender and the Cooperative enter into a recognition agreement
which establishes the rights and obligations of both parties in the event of a
default by the tenant-stockholder under the proprietary lease or occupancy
agreement will usually constitute a default under the security agreement between
the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale
be conducted in a "commercially reasonable" manner. Whether a foreclosure sale
has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in a building so converted.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The
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rights of the Trust Fund as the holder of a junior deed of trust or a junior
mortgage are subordinate in lien and in payment to those of the holder of the
senior mortgage or deed of trust, including the prior rights of the senior
mortgagee or beneficiary to receive and apply hazard insurance and condemnation
proceeds and, upon default of the mortgagor, to cause a foreclosure on the
property. Upon completion of the foreclosure proceedings by the holder of the
senior mortgage or the sale pursuant to the deed of trust, the junior
mortgagee's or junior beneficiary's lien will be extinguished unless the junior
lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "-- Foreclosure" herein.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event
of a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to
perform the obligation itself. Generally, all sums so expended by the mortgagee
or beneficiary become part of the indebtedness secured by the mortgage or deed
of trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the mortgage being foreclosed, from
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the
mortgagor, must be exercised prior to foreclosure sale and should be
distinguished from the post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the mortgagor and foreclosed junior lienors are given a statutory period in
which to redeem the property from the foreclosure sale. In some states,
statutory redemption may occur only upon payment of the foreclosure sale price.
In other states, redemption may be authorized if the former mortgagor pays only
a portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The
exercise of a right of redemption would defeat the title of any purchaser from
a foreclosure sale or sale under a deed of trust. Consequently, the practical
effect of the redemption right is to force the lender to maintain the property
and pay the expenses of ownership until the redemption period has expired. In
some states, a post-sale statutory right of redemption may exist following a
judicial foreclosure, but not following a trustee's sale under a deed of trust.
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ANTI-DEFICIENCY LEGISLATION, THE BANKRUPTCY CODE AND OTHER LIMITATIONS ON
LENDERS
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment would be a
personal judgment against the former borrower equal in most cases to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Other statutes require the
beneficiary or mortgagee to exhaust the security afforded under a deed of trust
or mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. Finally, other statutory
provisions limit any deficiency judgment against the former borrower following
a judicial sale to the excess of the outstanding debt over the fair market
value of the property at the time of the public sale. The purpose of these
statutes is generally to prevent a beneficiary or a mortgagee from obtaining a
large deficiency judgment against the former borrower as a result of low or no
bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the United States Bankruptcy
Code, 11 U.S.C. Sections 101 et seq. (the "BANKRUPTCY CODE"), and state laws
affording relief to debtors may interfere with or affect the ability of a
secured mortgage lender to obtain payment of a mortgage loan, to realize upon
collateral and/or enforce a deficiency judgment. For example, under the
Bankruptcy Code, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and interest or principal payments may not be made during
the course of the bankruptcy case. Foreclosure can occur only if the bankruptcy
court grants relief from the stay and the court is not required to grant such
relief. The delay and the consequences thereof caused by such automatic stay can
be significant. Also, under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a junior lienor (a subordinate lender secured by a
mortgage on the property) may stay a senior lender from taking action to
foreclose.
Under the Bankruptcy Code, the lender's security interest in property may
be reduced to the then-current value of the property as determined by the court
if the value is less than the amount due on the loan, thereby leaving the lender
as a general unsecured creditor for the difference between the value of the
collateral and the outstanding balance of the mortgage loan. A borrower's
unsecured indebtedness will typically be discharged in full upon payment of a
substantially reduced amount. Other modifications to a mortgage loan may include
a reduction in the amount of each scheduled payment, a reduction in the rate of
interest, an alteration of the repayment schedule, an extension of the final
maturity date, and/or a reduction in the outstanding balance of the secured
portion of the loan. In certain circumstances, subject to the court's approval,
a debtor may have the power to grant liens senior to the lien of a mortgage.
A debtor may be allowed to cure a default with respect to a mortgage loan
on such debtor's residence by paying arrearages over a period of time and to
deaccelerate and reinstate the original mortgage loan payment schedule, even
though the lender accelerated the loan and a final judgment of foreclosure had
been entered in state court prior to the filing of the debtor's petition under
the Bankruptcy Code.
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State statutes and general principles of equity may also provide a
mortgagor with means to halt a foreclosure proceeding or sale and to force a
restructuring of a mortgage loan on terms a lender would not otherwise accept.
In a bankruptcy or similar proceeding of a mortgagor, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the mortgagor under the related mortgage loan prior to the
bankruptcy or similar proceeding.
A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. Moreover, the laws of certain states also give priority
to certain tax and mechanics liens over the lien of a mortgage. Under the
Bankruptcy Code, if the court finds that actions of the mortgagee have been
unreasonable and inequitable, the lien of the related mortgage may be
subordinated to the claims of unsecured creditors.
Various proposals to amend the Bankruptcy Code in ways that could
adversely affect the value of the Mortgage Loans in a trust are being
considered by Congress, and more such proposed legislation may be considered in
the future. If enacted into law, such legislation could have an adverse impact
on the rights of mortgagees in bankruptcy cases.
The Bankruptcy Code provides priority to certain tax liens over the lien
of the mortgage. In addition, substantive requirements are imposed upon
mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act, and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail to
comply with the provisions of the applicable laws. In some cases, this
liability may affect assignees of the Mortgage Loans.
ENFORCEABILITY OF CERTAIN PROVISIONS
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan
is prepaid.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial remedies
that may be fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's judgment
and have required lenders to reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from temporary financial disability. In
some cases, courts have limited the right of lenders to foreclose if the default
under the mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second
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mortgage or deed of trust affecting the property. In other cases, some courts
have been faced with the issue of whether federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under the deeds of trust receive notices in addition to the
statutorily-prescribed minimum requirements. For the most part, these cases have
upheld the notice provisions as being reasonable or have found that the sale by
a trustee under a deed of trust or under a mortgage having a power of sale does
not involve sufficient state action to afford constitutional protections to the
borrower.
ENVIRONMENTAL CONSIDERATIONS
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to such a
security interest may be subject to federal, state, and local laws and
regulations relating to environmental protection. Such laws may regulate, among
other things: emissions of air pollutants; discharges of wastewater or storm
water; generation, transport, storage or disposal of hazardous waste or
hazardous substances; operation, closure and removal of underground storage
tanks; removal and disposal of asbestos-containing materials; management of
electrical or other equipment containing polychlorinated biphenyls ("PCBS").
Failure to comply with such laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of certain
states, environmental contamination on a property may give rise to a lien on
the property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on such property are subordinated to such a lien
and, in some states, even prior recorded liens are subordinated to such liens
("SUPERLIENS"). In the latter states, the security interest of the Trustee in a
property that is subject to such Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
certain types of activities that may constitute management of the mortgaged
property may become liable in certain circumstances for the costs of remedial
action ("CLEANUP COSTS") if hazardous wastes or hazardous substances have been
released or disposed of on the property. Such Cleanup Costs may be substantial.
CERCLA imposes strict, as well as joint and several liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to the contamination
on the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may be
held strictly, jointly and severally liable for environmental remediation
and/or damages at those off-site locations. Many states also have laws that are
similar to CERCLA. Liability under CERCLA or under similar state law could
exceed the value of the property itself as well as the aggregate assets of the
property owner.
The law is unclear as to whether and under what precise circumstances
cleanup costs, or the obligation to take remedial actions, could be imposed on
a secured lender such as the Trust Fund. Under the laws of some states and
under CERCLA, a lender may be liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances on a
mortgaged property if such lender or its agents or employees have "participated
in the
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management" of the operations of the borrower, even though the environmental
damage or threat was caused by a prior owner or current owner or operator or
other third party. Excluded from CERCLA's definition of "owner or operator" is a
person "who without participating in the management of . . . [the] facility,
holds indicia of ownership primarily to protect his security interest" (the
"secured-creditor exemption"). This exemption for holders of a security interest
such as a secured lender applies only to the extent that a lender seeks to
protect its security interest in the contaminated facility or property. Thus, if
a lender's activities begin to encroach on the actual management of such
facility or property, the lender faces potential liability as an "owner or
operator" under CERCLA. Similarly, when a lender forecloses and takes title to a
contaminated facility or property, the lender may incur potential CERCLA
liability in various circumstances, including among others, when it holds the
facility or property as an investment (including leasing the facility or
property to a third party), fails to market the property in a timely fashion or
fails to properly address environmental conditions at the property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"), contains
a similar secured-creditor exemption for those lenders who hold a security
interest in a petroleum underground storage tank ("UST") or in real estate
containing a UST, or that acquire title to a petroleum UST or facility or
property on which such a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if such lender or its employees or agents participate in the
management of the UST. In addition, if the lender takes title to or possession
of the UST or the real estate containing the UST, under certain circumstances
the secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly
construed CERCLA's secured-creditor exemption. The court's opinion suggested
that a lender need not have involved itself in the day-to-day operations of the
facility or participated in decisions relating to hazardous waste to be liable
under CERCLA; rather, liability could attach to a lender if its involvement
with the management of the facility were broad enough to support the inference
that the lender had the capacity to influence the borrower's treatment of
hazardous waste. The court added that a lender's capacity to influence such
decisions could be inferred from the extent of its involvement in the
facility's financial management. A subsequent decision by the United States
Court of Appeals for the Ninth Circuit in In re Bergsoe Metal Corp., apparently
disagreeing with, but not expressly contradicting, the Fleet Factors court,
held that a secured lender had no liability absent "some actual management of
the facility" on the part of the lender.
Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts
to provide guidance to lenders on the scope of activities that would trigger
CERCLA and/or RCRA liability. Until recently, these efforts have failed to
provide substantial guidance.
On September 28, 1996, Congress enacted, and on September 30, 1996 the
President signed into law the Asset Conservation Lender Liability and Deposit
Insurance Protection Act of 1996 (the "ASSET CONSERVATION ACT"). The Asset
Conservation Act was intended to clarify the scope of the secured creditor
exemption. This legislation more clearly defines the kinds of activities that
would constitute "participation in management" and that therefore would trigger
liability for secured parties under CERCLA. It also identified certain
activities that ordinarily would not
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trigger liability, provided, however, that such activities did not otherwise
rise to the level of "participation in management." The Asset Conservation Act
specifically reverses the Fleet Factors "capacity to influence" standard. The
Asset Conservation Act also provides additional protection against liability in
the event of foreclosure. It is important to note, however, that the Asset
Conservation Act does not offer complete protection to lenders and that the risk
of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the Trust Fund and occasion a loss to the Trust Fund and to Securityholders in
certain circumstances. The new secured creditor amendments to CERCLA, also,
would not necessarily affect the potential for liability in actions by either a
state or a private party under other federal or state laws which may impose
liability on "owners or operators" but do not incorporate the secured-creditor
exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property prior to the origination of the mortgage loan
or prior to foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
Depositor nor any Servicer makes any representations or warranties or assumes
any liability with respect to: environmental conditions of such Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from such Mortgaged Property; the impact on
Securityholders of any environmental condition or presence of any substance on
or near such Mortgaged Property; or the compliance of any Mortgaged Property
with any environmental laws. In addition, no agent, person or entity otherwise
affiliated with the Depositor is authorized or able to make any such
representation, warranty or assumption of liability relative to any such
Mortgaged Property.
DUE-ON-SALE CLAUSES
Unless the related prospectus supplement indicates otherwise, the Mortgage
Loans will contain due-on-sale clauses. These clauses generally provide that
the lender may accelerate the maturity of the loan if the mortgagor sells,
transfers or conveys the related Mortgaged Property. The enforceability of
due-on-sale clauses has been the subject of legislation or litigation in many
states and, in some cases, the enforceability of these clauses was limited or
denied. However, with respect to certain loans the Garn-St. Germain Depository
Institutions Act of 1982 (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 certain limited exceptions. Due-on-sale clauses
contained in mortgage loans originated by federal savings and loan associations
of federal savings banks are fully enforceable pursuant to regulations of the
United States Federal Home Loan Bank Board, as succeeded by the Office of
Thrift Supervision ("OTS"), which preempt state law restrictions on the
enforcement of such clauses. Similarly, "due-on-sale" clauses in mortgage loans
made by national banks and federal credit unions are now fully enforceable
pursuant to preemptive regulations of the Comptroller of the Currency and the
National Credit Union Administration, respectively.
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The Garn-St. Germain Act also sets forth nine specific instances in which
a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale"
clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment 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 certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of single family loans,
cooperative loans or manufactured housing contracts with respect to prepayments
on loans secured by liens encumbering owner-occupied residential properties.
Since many of the mortgaged properties will be owner-occupied, it is anticipated
that prepayment charges may not be imposed with respect to many of the single
family loans, cooperative loans and manufactured housing contracts. The absence
of such a restraint on prepayment, particularly with respect to fixed rate
single family loans, cooperative loans or manufactured housing contracts having
higher specified interest rates or accrual percentage rates, may increase the
likelihood of refinancing or other early retirement of such loans or contracts.
The Alternative Mortgage Transaction Parity Act of 1982, or the Parity Act,
permits the collection of prepayment charges in connection with some types of
loans subject to the Parity Act, or Parity Act loans, preempting any contrary
state law prohibitions. However, some states may not recognize the preemptive
authority of the Parity Act or have opted out of the Parity Act. Moreover, the
OTS, the agency that administers the application of the Parity Act to some types
of mortgage lenders that are not chartered under federal law, withdrew its
favorable regulations and opinions that previously authorized those lenders,
notwithstanding contrary state law, to charge prepayment charges and late fees
on Parity Act loans in accordance with OTS rules. The withdrawal is effective
with respect to Parity Act loans originated on or after July 1, 2003. The OTS's
action does not affect Parity Act loans originated before July 1, 2003. It is
possible that prepayment charges may not be collected even on loans that provide
for the payment of these charges unless otherwise specified in the accompanying
prospectus supplement.
Legal restrictions, if any, on prepayment of Multifamily Mortgage Loans
will be described in the related prospectus supplement.
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SUBORDINATE FINANCING
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("TITLE V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. The statute authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a law
or constitutional provision that expressly rejects application of the federal
law. In addition, even where Title V is not so rejected, any state is authorized
by the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other charges.
The Depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1,
1980 are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges prior to origination of
such mortgage loans, any such limitation under such state's usury law would not
apply to such mortgage loans.
In any state in which application of Title V has been expressly rejected
or a provision limiting discount points or other charges is adopted, no
mortgage loan originated after the date of such state action will be eligible
for inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be usurious and the mortgagor's counsel
has rendered an opinion that such choice of law provision would be given
effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the mortgagor may cancel the recorded mortgage
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or deed of trust upon paying its debt with lawful interest, and the lender may
foreclose, but only for the debt plus lawful interest. A second group of
statutes is more severe. A violation of this type of usury law results in the
invalidation of the transaction, thereby permitting the mortgagor to cancel the
recorded mortgage or deed of trust without any payment or prohibiting the lender
from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St. Germain Act ("TITLE VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
HOMEOWNERSHIP ACT AND SIMILAR STATE LAWS
Some Mortgage Loans and Contracts may be subject to special rules,
disclosure requirements and other provisions that were added to the federal
Truth-in-Lending Act by the Home Ownership and Equity Protection Act of 1994
(the "Homeownership Act"), if such trust assets were originated on or after
October 1, 1995, are not loans made to finance the purchase of the mortgaged
property and have interest rates or origination costs in excess of certain
prescribed levels (such Mortage Loans or Contracts, "Homeownership Act Loans").
The Homeownership Act requires certain additional disclosures, specified the
timing of those disclosures and limits or prohibits inclusion of certain
provisions in mortgages subject to the Homeownership Act. Purchasers or
assignees of any Homeownership Act Loan, including any Trust Fund, could be
liable under federal law for all claims and subject to all defenses that the
borrower could assert against the originator of the Homeownership Act Loan,
under the federal Truth-in-Lending Act or any other law, unless the purchaser or
assignee did not know and could not with reasonable diligence have determined
that the loan was subject to the provisions of the Homeownerhip Act. Remedies
available to the borrower include monetary penalties, as well as recission
rights if appropriate disclosures were not given as required or if the
particular mortgage includes provisions prohibited by the law. The maximum
damages that may be recovered under these
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provisions from an assignee, including the Trust Fund, is the remaining amount
of indebtedness plus the total amount paid by the borrower in connection with
the mortgage loan.
In addition to the Homeownership Act, a number of legislative proposals
have been introduced at both the federal and state level that are designed to
discourage predatory lending practices. Some states have enacted, and other
states or local governments may enact, laws that impose requirements and
restrictions greater than those in the Homeownership Act. These laws prohibit
inclusion of some provisions in mortgage loans or contracts that have interest
rates or origination costs in excess of prescribed levels, and require that
borrowers be given certain disclosures prior to the consummation of the mortgage
loans. Purchasers or assignees of a mortgage loan or contract, including the
related Trust Fund, could be exposed to all claims and defenses that the
mortgagor could assert against the originator of the mortgage loan or contract
for a violation of state law. Claims and defenses available to the borrower
could include monetary penalties, rescission and defenses to a foreclosure
action or an action to collect.
Lawsuits have been brought in various states making claims against
assignees of Homeownership Act Loans for violations of federal and state law
allegedly committed by the originator. Named defendants in these cases include
numerous participants within the secondary mortgage market, including some
securitization trusts.
HOMEOWNERS PROTECTION ACT OF 1998
The Homeowners Protection Act of 1998 ("HOPA") provides for certain
disclosure and termination requirements for primary mortgage insurance ("PMI").
The termination provisions of HOPA apply only to mortgage loans relating to
single-family primary residences originated on or after July 29, 1999. Such
termination provisions govern when a mortgagor may cancel the requirement to
maintain PMI and when the requirement to maintain PMI is automatically
terminated. In general, voluntary termination is permitted and automatic
termination occurs when the principal balance of the mortgage loan is reduced
to 80% or 78%, respectively, of the original property value. The disclosure
requirements of HOPA vary depending on whether the mortgage loan was originated
before or after July 29, 1999. Such disclosure requirements include
notification of the circumstances whereby a mortgagor may cancel PMI, the date
when PMI automatically terminates and servicer contact information. In
addition, HOPA provides that no later than 30 days after cancellation or
termination of PMI, the servicer shall provide written notification that such
PMI is terminated and no further payments are due or payable. Any servicer,
mortgagee or mortgage insurer that violates provisions of HOPA is subject to
possible liability which includes, but is not limited to, actual damages,
statutory damages and reasonable attorney's fees.
TEXAS HOME EQUITY LOANS
Generally, any "cash-out" refinance or other non-purchase money
transaction (except for rate/term refinance loans and certain other narrow
exceptions) secured by a Texas resident's principal residence is subject to the
provisions set forth in Section 50(a)(6) of Article XVI of the Constitution of
Texas (the "TEXAS HOME EQUITY LAWS"). The Texas Home Equity Laws provide for
certain disclosure requirements, caps on allowable fees, required loan closing
procedures and other restrictions. Failure, inadvertent or otherwise, to comply
with any requirement may render the Mortgage Loan unenforceable and/or the lien
on the Mortgaged Property invalid. Because
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mortgage loans which are subject to the Texas Home Equity Laws can be foreclosed
only pursuant to court order, rather than non-judicial foreclosure as is
available for other types of mortgage loans in Texas, delays and increased
losses may result in connection with foreclosures of such loans. If a court were
to find that any requirement of the Texas Home Equity Laws was not complied
with, the court could refuse to allow foreclosure to proceed, declare the lien
on the Mortgaged Property to be invalid, and/or require the originating lender
or the holder of the note to forfeit some or all principal and interest of the
related Mortgage Loan. Title insurance generally available on such Mortgage
Loans may exclude coverage for some of the risks described in this paragraph.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940 AND SIMILAR LAWS
Generally, 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 such borrower's Mortgage Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such action could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Mortgage Loans in a Trust Fund. Any
shortfall in interest collections resulting from the application of the Relief
Act could result in losses to the holders of the Certificates or Notes of the
related Series. Further, the Relief Act imposes limitations which would impair
the ability of the Servicer to foreclose on an affected Mortgage Loan during the
borrower's period of active duty status. Thus, in the event that such a Mortgage
Loan goes into default, there may be delays and losses occasioned by the
inability to realize upon the Mortgaged Property in a timely fashion. Certain
states have enacted comparable legislation which may interfere with or affect
the ability of the Servicer to timely collect payments of principal and interest
on, or to foreclose on, Mortgage Loans of borrowers in such states who are
active or reserve members of the armed services.
FORFEITURES IN DRUG, RICO AND MONEY LAUNDERING VIOLATIONS
Federal law provides that property purchased or improved with assets
derived from criminal activity or otherwise tainted, or used in the commission
of certain offenses, can be seized and ordered forfeited to the United States
of America. The offenses which can trigger such a seizure and forfeiture
include, among others, violations of the Racketeer Influenced and Corrupt
Organizations Act, the Bank Secrecy Act, the anti-money laundering laws and
regulations, including the USA Patriot Act of 2001 and the regulations issued
thereunder, as well as the narcotic drug laws. In many instances, the United
States may seize the property even before a conviction occurs.
In the event of a forfeiture proceeding, a lender may be able to establish
its interest in the property by proving that (i) its mortgage was executed and
recorded before the commission of the illegal conduct from which the assets
used to purchase or improve the property were derived or before any other crime
upon which the forfeiture is based, or (ii) the lender, at the time of
execution of the mortgage, "did not know or was reasonably without cause to
believe that the property was subject to forfeiture." However, there can be no
assurance that such a defense will be successful.
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CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Contracts. Because such legal aspects
are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Contracts is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
Contracts may be originated.
GENERAL
As a result of the assignment of the Contracts to the Trustee, the Trustee
will succeed collectively to all of the rights (including the right to receive
payment on the Contracts) of the obligee under the Contracts. Each Contract
evidences both (a) the obligation of the obligor to repay the loan evidenced
thereby, and (b) the grant of a security interest in the Manufactured Home to
secure repayment of such loan. Certain aspects of both features of the
Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the UCC in
effect in the states in which the Manufactured Homes initially were registered.
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar
to perfection of a security interest in chattel paper. Under the applicable
Agreement, the Servicer will transfer physical possession of the Contracts to
the Trustee or its custodian or may retain possession of the Contracts as
custodian for the Trustee. In addition, the Servicer will make an appropriate
filing of a UCC-1 financing statement in the appropriate states to give notice
of the Trustee's ownership of the Contracts. The Contracts will be stamped or
marked otherwise to reflect their assignment from the Company to the Trustee
only if provided in the related prospectus supplement. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Contracts without notice of such assignment, the
Trustee's interest in Contracts could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some nontitle states, perfection pursuant
to the provisions of the UCC is required. The Asset Seller may effect such
notation or delivery of the required documents and fees, and obtain possession
of the certificate of title, as appropriate under the laws of the state in which
any manufactured home securing a manufactured housing conditional sales contract
is registered. In the event the Asset Seller fails, due to clerical error, to
effect such notation or delivery, or files the security interest under the wrong
law (for example, under a motor vehicle title statute rather than under the UCC,
in a few states), the Asset Seller may not have a first priority security
interest in the Manufactured Home securing a Contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the
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interests of other parties claiming an interest in the home under applicable
state real estate law. In order to perfect a security interest in a manufactured
home under real estate laws, the holder of the security interest must file
either a "fixture filing" under the provisions of the UCC or a real estate
mortgage under the real estate laws of the state where the home is located.
These filings must be made in the real estate records office of the county where
the home is located. Substantially all of the Contracts contain provisions
prohibiting the borrower from permanently attaching the Manufactured Home to its
site. So long as the borrower does not violate this agreement, a security
interest in the Manufactured Home will be governed by the certificate of title
laws or the UCC, and the notation of the security interest on the certificate of
title or the filing of a UCC financing statement will be effective to maintain
the priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to its site, other parties could
obtain an interest in the Manufactured Home which is prior to the security
interest originally retained by the Asset Seller and transferred to the
Depositor. With respect to a Series of Securities and if so described in the
related prospectus supplement, the Servicer may be required to perfect a
security interest in the Manufactured Home under applicable real estate laws.
The Warranting Party will represent that as of the date of the sale to the
Depositor it has obtained a perfected first priority security interest by proper
notation or delivery of the required documents and fees with respect to
substantially all of the Manufactured Homes securing the Contracts.
The Depositor will cause the security interests in the Manufactured Homes
to be assigned to the Trustee on behalf of the Securityholders. The Depositor
or the Trustee will amend the certificates of title (or file UCC-3 statements)
to identify the Trustee as the new secured party, and will deliver the
certificates of title to the Trustee or note thereon the interest of the
Trustee only if specified in the related prospectus supplement. Accordingly,
the Asset Seller (or other originator of the Contracts) will continue to be
named as the secured party on the certificates of title relating to the
Manufactured Homes. In some states, such assignment is an effective conveyance
of such security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to Servicer's rights as
the secured party. However, in some states, in the absence of an amendment to
the certificate of title (or the filing of a UCC-3 statement), such assignment
of the security interest in the Manufactured Home may not be held effective or
such security interests may not be perfected and in the absence of such
notation or delivery to the Trustee, the assignment of the security interest in
the Manufactured Home may not be effective against creditors of the Asset
Seller (or such other originator of the Contracts) or a trustee in bankruptcy
of the Asset Seller (or such other originator).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Asset
Seller (or other originator of the Contracts) on the certificate of title or
delivery of the required documents and fees will be sufficient to protect the
Securityholders against the rights of subsequent purchasers of a Manufactured
Home or subsequent lenders who take a security interest in the Manufactured
Home. If there are any Manufactured Homes as to which the security interest
assigned to the Trustee is not perfected, such security interest would be
subordinate to, among others, subsequent purchasers for value of Manufactured
Homes and holders of perfected security interests. There also exists a risk in
not identifying the Trustee as the new secured party on the certificate of
title that, through fraud or negligence, the security interest of the Trustee
could be released.
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In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another state
and not re-register the Manufactured Home in such state, and if steps are not
taken to re-perfect the Trustee's security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Servicer must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien, the
Asset Seller (or other originator) would receive notice of surrender if the
security interest in the Manufactured Home is noted on the certificate of
title. Accordingly, the Trustee would have the opportunity to re-perfect its
security interest in the Manufactured Home in the state of relocation. In
states which do not require a certificate of title for registration of a
manufactured home, re-registration could defeat perfection. In the ordinary
course of servicing the manufactured housing contracts, the Servicer takes
steps to effect such re-perfection upon receipt of notice of re-registration or
information from the obligor as to relocation. Similarly, when an obligor under
a manufactured housing contract sells a manufactured home, the Servicer must
surrender possession of the certificate of title or, if it is noted as
lienholder on the certificate of title, will receive notice as a result of its
lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related manufactured housing conditional sales contract
before release of the lien. Under the applicable Agreement, the Servicer is
obligated to take such steps, at the Servicer's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority even over
a perfected security interest. The Warranting Party will represent in the
applicable Agreement that it has no knowledge of any such liens with respect to
any Manufactured Home securing payment on any Contract. However, such liens
could arise at any time during the term of a Contract. No notice will be given
to the Trustee or Securityholders in the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Servicer on behalf of the Trustee, to the extent required by the
applicable Agreement, may take action to enforce the Trustee's security
interest with respect to Contracts in default by repossession and resale of the
Manufactured Homes securing such defaulted Contracts. So long as the
Manufactured Home has not become subject to the real estate law, a creditor can
repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give
the debtor a number of days' notice, which varies from 10 to 30 days depending
on the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale
of a Manufactured Home, the
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Trustee would be entitled to be paid out of the sale proceeds before such
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 such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a
judgment.
Certain other statutory provisions, including 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 AND SIMILAR LAWS
The terms of the Relief Act apply to an obligor on a Contract as described
for a mortgagor on a Mortgage Loan under "Certain Legal Aspects of Mortgage
Loans -- Soldiers' and Sailors' Civil Relief Act of 1940 and Similar Laws."
CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal
Trade Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting
Act, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act
and the Uniform Consumer Credit Code. In the case of some of these laws, the
failure to comply with their provisions may affect the enforceability of the
related Contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF DUE-ON-SALE CLAUSES
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such
sale or transfer that is not consented to. Generally, it is expected that the
Servicer will permit most transfers of Manufactured Homes and not accelerate
the maturity of the related Contracts. In certain cases, the transfer may be
made by a delinquent obligor in order to avoid a repossession proceeding with
respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St. Germain Act preempts,
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subject to certain exceptions and conditions, state laws prohibiting enforcement
of "due-on-sale" clauses applicable to the Manufactured Homes. Consequently, in
some states the Servicer may be prohibited from enforcing a "due-on-sale" clause
in respect of certain Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V provides that, subject to the following conditions, state usury
limitations shall not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of or
foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered by
Title V. The related Asset Seller will represent that all of the Contracts
comply with applicable usury law.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion is based on the advice of Cadwalader, Wickersham
& Taft LLP and Orrick, Herrington & Sutcliffe LLP, as to the anticipated
material federal income tax consequences of the purchase, ownership and
disposition of the Securities offered hereunder. As to any Securities offered
pursuant hereto, Cadwalader, Wickersham & Taft LLP or Orrick, Herrington &
Sutcliffe LLP is of the opinion that the following discussion, as supplemented
by the discussion under the heading "Federal Income Tax Consequences," if any,
in the Prospectus Supplement accompanying this Prospectus with respect to those
Securities, is correct in all material respects as of the date of such
Prospectus Supplement. Except as specifically set forth elsewhere herein, the
opinion set forth in the preceding sentence is the only opinion being rendered
with respect to tax matters affecting the Securities offered hereunder by
Cadwalader, Wickersham & Taft LLP or Orrick, Herrington & Sutcliffe LLP. This
discussion is directed solely to Securityholders that hold the Securities as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "CODE") and does not purport to discuss all federal
income tax consequences that may be applicable to particular categories of
investors, some of which (such as banks, insurance companies and foreign
investors) may be subject to special rules. Further, the authorities on which
this discussion, and the opinion referred to below, are based are subject to
change or differing interpretations, which could apply retroactively. In
addition to the federal income tax consequences described herein, potential
investors should consider the state and local tax consequences, if any, of the
purchase, ownership and disposition of the Securities. See "State and Other Tax
Consequences." Securityholders are advised to consult their own tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the Securities offered hereunder.
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The following discussion addresses securities of four general types:
o securities ("REMIC SECURITIES") representing interests in a Trust Fund,
or a portion thereof, that the Trustee will elect to have treated as a
REMIC under Sections 860A through 860G (the "REMIC PROVISIONS") of the
Code,
o securities ("GRANTOR TRUST SECURITIES") representing interests in a Trust
Fund ("GRANTOR TRUST FUND") as to which no such election will be made,
o securities ("PARTNERSHIP SECURITIES") representing interests in a Trust
Fund ("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 for federal income tax purposes.
The prospectus supplement for each Series of Securities will indicate which of
the foregoing treatments will apply to such Series and, if a REMIC election (or
elections) will be made for the related Trust Fund, will identify all "regular
interests" and "residual interests" in the REMIC. For purposes of this tax
discussion, (i) references to a "Securityholder" or a "holder" are to the
beneficial owner of a Security, (ii) references to "REMIC Pool" are to an
entity or portion thereof as to which a REMIC election will be made and (iii)
unless indicated otherwise in the applicable prospectus supplement, references
to "Mortgage Loans" include Contracts. Except as set forth in the applicable
prospectus supplement, no REMIC election will be made with respect to Unsecured
Home Improvement Loans. The discussion below assumes that no election will be
made to treat the Trust Fund, or any portion thereof, as a FASIT under Sections
860H through 860L of the Code. If a FASIT election is made for a particular
Series, the prospectus supplement for that Series will address the material
federal income tax consequences of such election. Securities issued with
respect to a Series for which a FASIT election has been made are referred to
herein as "FASIT Securities."
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code and
in the Treasury regulations issued thereunder (the "OID REGULATIONS"), and in
part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the "REMIC REGULATIONS"). The OID Regulations do not adequately address certain
issues relevant to, and in some instances provide that they are not applicable
to, securities such as the Securities.
TAXABLE MORTGAGE POOLS
Corporate income tax can be imposed on the net income of certain entities
issuing non-REMIC debt obligations secured by real estate mortgages ("TAXABLE
MORTGAGE POOLS"). Any entity other than a REMIC or a FASIT will be considered a
Taxable Mortgage Pool if:
o substantially all of the assets of the entity consist of debt obligations
and more than 50% of such obligations consist of "real estate mortgages,"
o such entity is the obligor under debt obligations with two or more
maturities, and
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o under the terms of the debt obligations on which the entity is the
obligor, payments on such obligations bear a relationship to payments on
the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
The Depositor generally will structure offerings of non-REMIC Securities to
avoid the application of the Taxable Mortgage Pool rules.
REMICS
CLASSIFICATION OF REMICS
With respect to each Series of REMIC Securities, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the related
Trust Fund (or each applicable portion thereof) will qualify as a REMIC and the
REMIC Securities offered with respect thereto will be considered to evidence
ownership of "regular interests" ("REGULAR SECURITIES") or "residual interests"
("RESIDUAL SECURITIES") in that REMIC within the meaning of the REMIC
Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Securities) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant
to which the de minimis requirement will be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than 1% of the aggregate
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a de
minimis amount of nonqualified assets. A REMIC Pool also must provide
"reasonable arrangements" to prevent its residual interests from being held by
"disqualified organizations" or agents thereof and must furnish applicable tax
information to transferors or agents that violate this requirement. The Pooling
and Servicing Agreement with respect to each Series of REMIC Securities will
contain provisions meeting these requirements. See "-- Taxation of Owners of
Residual Securities -- Tax-Related Restrictions on Transfer of Residual
Securities -- Disqualified Organizations."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
and, generally, certificates of beneficial interest in a grantor trust that
holds mortgage loans and regular interests in another REMIC, such as lower-tier
regular interests in Tiered REMICs. The REMIC Regulations specify that loans
secured by timeshare interests, shares held by a tenant stockholder in a
cooperative housing corporation, and manufactured housing that qualifies as a
"single family residence" under Code section 25(e)(10) can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage, which
is any property that would have been treated as a qualified mortgage if it were
transferred to the REMIC Pool on the Startup Day and that is received either (i)
in exchange for any qualified
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mortgage within a three-month period thereafter or (ii) in exchange for a
"defective obligation" within a two-year period thereafter. A "defective
obligation" includes:
o a mortgage in default or as to which default is reasonably foreseeable,
o a mortgage as to which a customary representation or warranty made at the
time of transfer to the REMIC Pool has been breached,
o a mortgage that was fraudulently procured by the mortgagor, and
o a mortgage that was not in fact principally secured by real property (but
only if such mortgage is disposed of within 90 days of discovery). A
Mortgage Loan that is "defective" as described in this clause that is not
sold or, if within two years of the Startup Day, exchanged, within 90
days of discovery, ceases to be a qualified mortgage after such 90-day
period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC
Pool. A qualified reserve asset is any intangible property held for investment
that is part of any reasonably required reserve maintained by the REMIC Pool to
provide for payments of expenses of the REMIC Pool or amounts due on the
regular or residual interests in the event of defaults (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and certain other contingencies. The
reserve fund will be disqualified if more than 30% of the gross income from the
assets in such fund for the year is derived from the sale or other disposition
of property held for less than three months, unless required to prevent a
default on the regular interests caused by a default on one or more qualified
mortgages. A reserve fund must be reduced "promptly and appropriately" as
payments on the Mortgage Loans are received. Foreclosure property is real
property acquired by the REMIC Pool in connection with the default or imminent
default of a qualified mortgage and generally may not be held beyond the close
of the third calendar year beginning after the taxable year of acquisition
unless an extension is granted by the IRS.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more Classes of regular interests or
(ii) a single class of residual interests on which distributions, if any, are
made pro rata. A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate, or consist of a specified, nonvarying portion of
the interest payments on qualified mortgages. Such a specified portion may
consist of a fixed number of basis points, a fixed percentage of the total
interest, or a qualified variable rate, inverse variable rate or difference
between two fixed or qualified variable rates on some or all of the qualified
mortgages. The specified principal amount of a regular interest that provides
for interest payments consisting of a specified, nonvarying portion of interest
payments on qualified mortgages may be zero. A residual interest is an interest
in a
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REMIC Pool other than a regular interest that is issued on the Startup Day and
that is designated as a residual interest. An interest in a REMIC Pool may be
treated as a regular interest even if payments of principal with respect to such
interest are subordinated to payments on other regular interests or the residual
interest in the REMIC Pool, and are dependent on the absence of defaults or
delinquencies on qualified mortgages or permitted investments, lower than
reasonably expected returns on permitted investments, unanticipated expenses
incurred by the REMIC Pool or prepayment interest shortfalls. Accordingly, the
Regular Securities of a Series will constitute one or more Classes of regular
interests, and the Residual Securities with respect to that Series will
constitute a single Class of residual interests with respect to each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Securities may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief
in the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC Pool
will include provisions designed to maintain the Trust Fund's status as a REMIC
under the REMIC Provisions. It is not anticipated that the status of any Trust
Fund as a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC SECURITIES
In general, the REMIC Securities will be treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code in the same proportion that the assets of
the REMIC Pool underlying such Securities would be so treated. Moreover, if 95%
or more of the assets of the REMIC Pool qualify for either of the foregoing
treatments at all times during a calendar year, the REMIC Securities will
qualify for the corresponding status in their entirety for that calendar year.
If the assets of the REMIC Pool include Buydown Mortgage Loans, it is possible
that the percentage of such assets constituting "loans . . . secured by an
interest in real property which is . . . residential real property" for
purposes of Code Section 7701(a)(19)(C)(v) may be required to be reduced by the
amount of the related funds paid thereon (the "BUYDOWN FUNDS"). Interest
(including original issue discount) on the Regular Securities and income
allocated to the Class of Residual Securities will be interest described in
Section 856(c)(3)(B) of the Code to the extent that such Securities are treated
as "real estate assets" within the meaning of Section 856(c)(4)(A) of the Code.
In addition, the Regular Securities generally will be "qualified mortgages"
within the meaning of Section 860G(a)(3) of the Code if transferred to another
REMIC on its Startup Day in exchange for regular or residual interests therein.
Regular Securities held by a FASIT will qualify for treatment as "permitted
assets" within the meaning of Section 860L(c)(1)(G) of the Code. The
determination as to the percentage of the REMIC Pool's assets that constitute
assets described in the foregoing sections of the Code will be made with
respect to each calendar quarter based on the average adjusted basis of each
category of the assets held by the REMIC Pool during such calendar quarter. The
REMIC will report those determinations to Securityholders in the manner and at
the times required by applicable Treasury regulations.
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The assets of the REMIC Pool will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Securities and
property acquired by foreclosure held pending sale, and may include amounts in
reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. The REMIC
Regulations do provide, however, that payments on Mortgage Loans held pending
distribution are considered part of the Mortgage Loans for purposes of Section
856(c)(4)(A) of the Code. Furthermore, foreclosure property generally will
qualify as "real estate assets" under Section 856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES
For certain Series of REMIC Securities, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("TIERED REMICs") for federal income tax purposes. Upon the issuance of any
such Series of REMIC Securities, Cadwalader, Wickersham & Taft LLP or Orrick,
Herrington & Sutcliffe LLP will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement, the Tiered REMICs will each qualify as a REMIC and the
REMIC Securities issued by the Tiered REMICs will be considered to evidence
ownership of Regular Securities or Residual Securities in the related REMIC
within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Securities is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REGULAR SECURITIES
GENERAL
In general, interest, original issue discount, and market discount on a
Regular Security will be treated as ordinary income to a holder of the Regular
Security (the "REGULAR SECURITYHOLDER"), and principal payments on a Regular
Security will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to
Regular Securities, regardless of the method of accounting otherwise used by
such Regular Securityholder.
ORIGINAL ISSUE DISCOUNT
Accrual Securities will be, and other Classes of Regular Securities may
be, issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or subclass of Regular Securities having original
issue discount generally must include original issue discount in ordinary
income for federal income tax purposes as it accrues, in accordance with a
constant yield method that takes into account the compounding of interest, in
advance of
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the receipt of the cash attributable to such income. The following discussion is
based in part on OID Regulations and in part on the provisions of the 1986 Act.
Regular Securityholders should be aware, however, that the OID Regulations do
not adequately address certain issues relevant to prepayable securities, such as
the Regular Securities. To the extent such issues are not addressed in such
regulations, the Depositor intends to apply the methodology described in the
Conference Committee Report to the 1986 Act. No assurance can be provided that
the IRS will not take a different position as to those matters not currently
addressed by the OID Regulations. Moreover, the OID Regulations include an
anti-abuse rule allowing the IRS to apply or depart from the OID Regulations
where necessary or appropriate to ensure a reasonable tax result in light of the
applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect on
the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors as to the discussion therein and the appropriate
method for reporting interest and original issue discount with respect to the
Regular Securities.
Each Regular Security (except to the extent described below with respect
to a Regular Security on which principal is distributed in a single installment
or by lots of specified principal amounts upon the request of a Securityholder
or by random lot (a "NON-PRO RATA SECURITY")) will be treated as a single
installment obligation for purposes of determining the original issue discount
includable in a Regular Securityholder's income. The total amount of original
issue discount on a Regular Security is the excess of the "stated redemption
price at maturity" of the Regular Security over its "issue price." The issue
price of a Class of Regular Securities offered pursuant to this prospectus
generally is the first price at which a substantial amount of such Class is
sold to the public (excluding bond houses, brokers and underwriters). Although
unclear under the OID Regulations, it is anticipated that the Trustee will
treat the issue price of a Class as to which there is no substantial sale as of
the issue date or that is retained by the Depositor as the fair market value of
the Class as of the issue date. The issue price of a Regular Security also
includes any amount paid by an initial Regular Securityholder for accrued
interest that relates to a period prior to the issue date of the Regular
Security, unless the Regular Securityholder elects on its federal income tax
return to exclude such amount from the issue price and to recover it on the
first Distribution Date. The stated redemption price at maturity of a Regular
Security always includes the original principal amount of the Regular Security,
but generally will not include distributions of interest if such distributions
constitute "qualified stated interest." Under the OID Regulations, qualified
stated interest generally means interest payable at a single fixed rate or a
qualified variable rate (as described below), provided that such interest
payments are unconditionally payable at intervals of one year or less during
the entire term of the Regular Security. Because there is no penalty or default
remedy in the case of nonpayment of interest with respect to a Regular
Security, it is possible that no interest on any Class of Regular Securities
will be treated as qualified stated interest. However, except as provided in
the following three sentences or in the applicable prospectus supplement,
because the underlying Mortgage Loans provide for remedies in the event of
default, it is anticipated that the Trustee will treat interest with respect to
the Regular Securities as qualified stated interest. Distributions of interest
on an Accrual Security, or on other Regular Securities with respect to which
deferred interest will accrue, will not constitute qualified stated interest,
in which case the stated redemption price at maturity of such Regular
Securities includes all distributions of interest as well as principal thereon.
Likewise, it is anticipated that the Trustee will treat an interest-only Class
or a Class on which interest is substantially disproportionate to its principal
amount (a so-
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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 such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Security
multiplied by the weighted average maturity of the Regular Security. For this
purpose, the weighted average maturity of the Regular Security is computed as
the sum of the amounts determined by multiplying the number of full years
(i.e., rounding down partial years) from the issue date until each distribution
in reduction of stated redemption price at maturity is scheduled to be made by
a fraction, the numerator of which is the amount of each distribution included
in the stated redemption price at maturity of the Regular Security and the
denominator of which is the stated redemption price at maturity of the Regular
Security. The Conference Committee Report to the 1986 Act provides that the
schedule of such distributions should be determined in accordance with the
assumed rate of prepayment of the Mortgage Loans (the "PREPAYMENT ASSUMPTION")
and the anticipated reinvestment rate, if any, relating to the Regular
Securities. The Prepayment Assumption with respect to a Series of Regular
Securities will be set forth in the applicable prospectus supplement. Holders
generally must report de minimis original issue discount pro rata as principal
payments are received, and such income will be capital gain if the Regular
Security is held as a capital asset. Under the OID Regulations, however,
Regular Securityholders may elect to accrue all de minimis original issue
discount as well as market discount and market premium, under the constant
yield method. See "-- Election to Treat All Interest Under the Constant Yield
Method."
A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for
each day on which it holds the Regular Security, including the date of purchase
but excluding the date of disposition. The Trustee will treat the monthly
period ending on the day before each Distribution Date as the accrual period.
With respect to each Regular Security, a calculation will be made of the
original issue discount that accrues during each successive full accrual period
(or shorter period from the date of original issue) that ends on the day before
the related Distribution Date on the Regular Security. The Conference Committee
Report to the 1986 Act states that the rate of accrual of original issue
discount is intended to be based on the Prepayment Assumption. The original
issue discount accruing in a full accrual period would be the excess, if any,
of (i) the sum of (a) the present value of all of the remaining distributions
to be made on the Regular Security as of the end of that accrual period, and
(b) the distributions made on the Regular Security during the accrual period
that are included in the Regular Security's stated redemption price at
maturity, over (ii) the adjusted issue price of the Regular Security at the
beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence is calculated based on (i)
the yield to maturity of the Regular Security at the issue date, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, and (iii) the Prepayment Assumption. For these purposes, the
adjusted issue price of a Regular Security at the beginning of any accrual
period equals the issue price of the Regular Security, increased by the
aggregate amount of original issue discount with respect to the Regular
Security that accrued in all prior accrual periods and reduced by the amount of
distributions included in the Regular
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Security's stated redemption price at maturity that were made on the Regular
Security in such prior periods. The original issue discount accruing during any
accrual period (as determined in this paragraph) will then be divided by the
number of days in the period to determine the daily portion of original issue
discount for each day in the period. With respect to an initial accrual period
shorter than a full accrual period, the daily portions of original issue
discount must be determined according to an appropriate allocation under any
reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder
generally will increase to take into account prepayments on the Regular
Securities as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Securities can result in both a change in the priority of principal
payments with respect to certain Classes of Regular Securities and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the Trustee
will determine the yield to maturity of such Security based upon the
anticipated payment characteristics of the Class as a whole under the
Prepayment Assumption. In general, the original issue discount accruing on each
Non-Pro Rata Security in a full accrual period would be its allocable share of
the original issue discount with respect to the entire Class, as determined in
accordance with the preceding paragraph. However, in the case of a distribution
in retirement of the entire unpaid principal balance of any Non-Pro Rata
Security (or portion of such unpaid principal balance), (a) the remaining
unaccrued original issue discount allocable to such Security (or to such
portion) will accrue at the time of such distribution, and (b) the accrual of
original issue discount allocable to each remaining Security of such Class will
be adjusted by reducing the present value of the remaining payments on such
Class and the adjusted issue price of such Class to the extent attributable to
the portion of the unpaid principal balance thereof that was distributed. The
Depositor believes that the foregoing treatment is consistent with the "pro
rata prepayment" rules of the OID Regulations, but with the rate of accrual of
original issue discount determined based on the Prepayment Assumption for the
Class as a whole. Investors are advised to consult their tax advisors as to
this treatment.
ACQUISITION PREMIUM
A purchaser of a Regular Security having original issue discount at a
price greater than its adjusted issue price but less than its stated redemption
price at maturity will be required to include in gross income the daily
portions of the original issue discount on the Regular Security reduced pro
rata by a fraction, the numerator of which is the excess of its purchase price
over such adjusted issue price and the denominator of which is the excess of
the remaining stated redemption price at maturity over the adjusted issue
price. Alternatively, such a subsequent purchaser may elect to treat all such
acquisition premium under the constant yield method, as described below under
the heading "-- Election to Treat All Interest Under the Constant Yield
Method."
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VARIABLE RATE REGULAR SECURITIES
Regular Securities may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate
if, generally, (i) the issue price does not exceed the original principal
balance by more than a specified amount and (ii) the interest compounds or is
payable at least annually at current values of (a) one or more "qualified
floating rates," (b) a single fixed rate and one or more qualified floating
rates, (c) a single "objective rate," or (d) a single fixed rate and a single
objective rate that is a "qualified inverse floating rate." A floating rate is
a qualified floating rate if variations can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds. A multiple of a
qualified floating rate is considered a qualified floating rate only if the
rate is equal to either (a) the product of a qualified floating rate and a
fixed multiple that is greater than 0.65 but not more than 1.35 or (b) the
product of a qualified floating rate and a fixed multiple that is greater that
0.65 but not more than 1.35, increased or decreased by a fixed rate. Such rate
may also be subject to a fixed cap or floor, or a cap or floor that is not
reasonably expected as of the issue date to affect the yield of the instrument
significantly. An objective rate is any rate (other than a qualified floating
rate) that is determined using a single fixed formula and that is based on
objective financial or economic information, provided that such information is
not (i) within the control of the issuer or a related party or (ii) unique to
the circumstances of the issuer or a related party. A qualified inverse
floating rate is a rate equal to a fixed rate minus a qualified floating rate
that inversely reflects contemporaneous variations in the cost of newly
borrowed funds; an inverse floating rate that is not a qualified inverse
floating rate may nevertheless be an objective rate. A Class of Regular
Securities may be issued under this prospectus that does not have a variable
rate under the foregoing rules, for example, a Class that bears different rates
at different times during the period it is outstanding such that it is
considered significantly "front-loaded" or "back-loaded" within the meaning of
the OID Regulations. It is possible that such a Class may be considered to bear
"contingent interest" within the meaning of the OID Regulations. The OID
Regulations, as they relate to the treatment of contingent interest, are by
their terms not applicable to Regular Securities. However, if final regulations
dealing with contingent interest with respect to Regular Securities apply the
same principles as the OID Regulations, such regulations may lead to different
timing of income inclusion that would be the case under the OID Regulations.
Furthermore, application of such principles could lead to the characterization
of gain on the sale of contingent interest Regular Securities as ordinary
income. Investors should consult their tax advisors regarding the appropriate
treatment of any Regular Security that does not pay interest at a fixed rate or
variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Security (i) bearing interest at a
rate that qualifies as a variable rate under the OID Regulations that is tied
to current values of a variable rate (or the highest, lowest or average of two
or more variable rates, including a rate based on the average cost of funds of
one or more financial institutions), or a positive or negative multiple of such
a rate (plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such
a rate that is subject to one or more caps or floors, or (ii) bearing one or
more such variable rates for one or more periods, or one or more fixed rates
for one or more periods, and a different variable rate or fixed rate for other
periods, qualifies as a regular interest in a REMIC. Accordingly, unless
otherwise indicated in the applicable prospectus supplement, it is anticipated
that the Trustee will treat
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Regular Securities that qualify as regular interests under this rule in the same
manner as obligations bearing a variable rate for original issue discount
reporting purposes.
The amount of original issue discount with respect to a Regular Security
bearing a variable rate of interest will accrue in the manner described above
under "Original Issue Discount," with the yield to maturity and future payments
on such Regular Security generally to be determined by assuming that interest
will be payable for the life of the Regular Security based on the initial rate
(or, if different, the value of the applicable variable rate as of the pricing
date) for the relevant Class. Unless required otherwise by applicable final
regulations, it is anticipated that the Trustee will treat such variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium Class, which will be treated as non-qualified
stated interest includable in the stated redemption price at maturity. Ordinary
income reportable for any period will be adjusted based on subsequent changes
in the applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, the Seller intends to treat Regular Securities
bearing an interest rate that is a weighted average of the net interest rates
on Mortgage Loans as having qualified stated interest, except to the extent
that initial "teaser" rates cause sufficiently "back-loaded" interest to create
more than de minimis original issue discount. The yield on such Regular
Securities for purposes of accruing original issue discount will be a
hypothetical fixed rate based on the fixed rates, in the case of fixed-rate
Mortgage Loans, and initial "teaser rates" followed by fully indexed rates, in
the case of adjustable-rate Mortgage Loans. In the case of adjustable-rate
Mortgage Loans, the applicable index used to compute interest on the Mortgage
Loans in effect on the pricing date (or possibly the issue date) will be deemed
to be in effect beginning with the period in which the first weighted average
adjustment date occurring after the issue date occurs. Adjustments will be made
in each accrual period either increasing or decreasing the amount of ordinary
income reportable to reflect the actual Pass-Through Rate on the Regular
Securities.
MARKET DISCOUNT
A subsequent purchaser of a Regular Security also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Security (i) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified stated
interest payments due on a Regular Security, or (ii) in the case of a Regular
Security having original issue discount, is exceeded by the adjusted issue price
of such Regular Security at the time of purchase. Such purchaser generally will
be required to recognize ordinary income to the extent of accrued market
discount on such Regular Security as distributions includable in the stated
redemption price at maturity thereof are received, in an amount not exceeding
any such distribution. Such market discount would accrue in a manner to be
provided in Treasury regulations and should take into account the Prepayment
Assumption. The Conference Committee Report to the 1986 Act provides that until
such regulations are issued, such market discount would accrue either (i) on the
basis of a constant interest rate, or (ii) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for such period plus
the remaining interest as of the end of such period, or in the case of a Regular
Security issued with original issue discount, in the ratio of original issue
discount accrued for the relevant period to the sum of the original issue
discount accrued for such period plus the remaining original issue
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discount as of the end of such period. Such purchaser also generally will be
required to treat a portion of any gain on a sale or exchange of the Regular
Security as ordinary income to the extent of the market discount accrued to the
date of disposition under one of the foregoing methods, less any accrued market
discount previously reported as ordinary income as partial distributions in
reduction of the stated redemption price at maturity were received. Such
purchaser will be required to defer deduction of a portion of the excess of the
interest paid or accrued on indebtedness incurred to purchase or carry a Regular
Security over the interest distributable thereon. The deferred portion of such
interest expense in any taxable year generally will not exceed the accrued
market discount on the Regular Security for such year. Any such deferred
interest expense is, in general, allowed as a deduction not later than the year
in which the related market discount income is recognized or the Regular
Security is disposed of. As an alternative to the inclusion of market discount
in income on the foregoing basis, the Regular Securityholder may elect to
include market discount in income currently as it accrues on all market discount
instruments acquired by such Regular Securityholder in that taxable year or
thereafter, in which case the interest deferral rule will not apply. See "--
Election to Treat All Interest Under the Constant Yield Method" below regarding
an alternative manner in which such election may be deemed to be made. A person
who purchases a Regular Security at a price lower than the remaining amounts
includable in the stated redemption price at maturity of the security, but
higher than its adjusted issue price, does not acquire the Regular Security with
market discount, but will be required to report original issue discount,
appropriately adjusted to reflect the excess of the price paid over the adjusted
issue price.
Market discount with respect to a Regular Security will be considered to
be zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Security (or, in the case of a
Regular Security having original issue discount, the adjusted issue price of
such Regular Security) multiplied by the weighted average maturity of the
Regular Security (determined as described above in the third paragraph under
"-- Original Issue Discount") remaining after the date of purchase. It appears
that de minimis market discount would be reported in a manner similar to de
minimis original issue discount. See "-- Original Issue Discount" above.
Under provisions of the OID Regulations relating to contingent payment
obligations, a secondary purchaser of a Regular Security that has "contingent
interest" at a discount generally would continue to accrue interest and
determine adjustments on the Regular Security based on the original projected
payment schedule devised by the issuer of the Security. The holder of such a
Regular Security would be required, however, to allocate the difference between
the adjusted issue price of the Regular Security and its basis in the Regular
Security as positive adjustments to the accruals or projected payments on the
Regular Security over the remaining term of the Regular Security in a manner
that is reasonable (e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those
rules. Due to the substantial lack of regulatory guidance with respect to the
market discount rules, it is unclear how those rules will affect any secondary
market that develops for a given Class of Regular Securities. Prospective
investors in Regular Securities should consult their own tax advisors regarding
the application of the market discount rules to the Regular Securities.
Investors should also consult Revenue
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Procedure 92-67 concerning the elections to include market discount in income
currently and to accrue market discount on the basis of the constant yield
method.
AMORTIZABLE PREMIUM
A Regular Security purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds such Regular Security as a
"capital asset" within the meaning of Code Section 1221, the Regular
Securityholder may elect under Code Section 171 to amortize such premium under
a constant yield method that reflects compounding based on the interval between
payments on the Regular Security. Such election will apply to all taxable debt
obligations (including REMIC regular interests) acquired by the Regular
Securityholder at a premium held in that taxable year or thereafter, unless
revoked with the permission of the IRS. Final Treasury regulations have been
issued with respect to amortizable bond premiums which do not by their terms
apply to prepayable debt instruments such as the Regular Securities. However,
the Conference Committee Report to the 1986 Act indicates a Congressional
intent that the same rules that apply to the accrual of market discount on
installment obligations will also apply to amortizing bond premium under Code
Section 171 on installment obligations such as the Regular Securities, although
it is unclear whether the alternatives to the constant interest method
described above under "-- Market Discount" are available. Amortizable bond
premium generally will be treated as an offset to interest income on a Regular
Security, rather than as a separate deduction. See "-- Election to Treat All
Interest Under the Constant Yield Method" below regarding an alternative manner
in which the Code Section 171 election may be deemed to be made.
Amortizable premium on a Regular Security that is subject to redemption at
the option of the issuer generally must be amortized as if the optional
redemption price and date were the Security's principal amount and maturity
date if doing so would result in a smaller amount of premium amortization
during the period ending with the optional redemption date. Thus, a holder of a
Regular Security would not be able to amortize any premium on a Regular
Security that is subject to optional redemption at a price equal to or greater
than the Securityholder's acquisition price unless and until the redemption
option expires. A Regular Security subject to redemption at the option of the
issuer described in the preceding sentence will be treated as having matured on
the redemption date for the redemption price and then as having been reissued
on that date for that price. Any premium remaining on the Regular Security at
the time of the deemed reissuance will be amortized on the basis of (i) the
original principal amount and maturity date or (ii) the price and date of any
succeeding optional redemption, under the principles described above.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD METHOD
A holder of a debt instrument such as a Regular Security may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to such an election, (i) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were
issued on the holder's acquisition date in the amount of the holder's adjusted
basis immediately after acquisition. It is unclear whether, for this purpose,
the
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initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make such an election on an instrument by instrument basis or for
a Class or group of debt instruments. However, if the holder makes such an
election with respect to a debt instrument with amortizable bond premium or with
market discount, the holder is deemed to have made elections to amortize bond
premium or to report market discount income currently as it accrues under the
constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the IRS. Investors should consult their own tax advisors regarding
the advisability of making such an election.
TREATMENT OF LOSSES
Regular Securityholders will be required to report income with respect to
Regular Securities on the accrual method of accounting, without giving effect to
delays or reductions in distributions attributable to defaults or delinquencies
on the Mortgage Loans, except to the extent it can be established that such
losses are uncollectable. Accordingly, the holder of a Regular Security,
particularly a 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 uncollectable, the IRS may take the position
that original issue discount must continue to be accrued in spite of its
uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166. Under Code Section 166, it appears that Regular Securityholders that are
corporations or that otherwise hold the Regular Securities in connection with a
trade or business should in general be allowed to deduct as an ordinary loss
such loss with respect to principal sustained during the taxable year on account
of any such Regular Securities becoming wholly or partially worthless, and that,
in general, Regular Securityholders that are not corporations and do not hold
the Regular Securities in connection with a trade or business should be allowed
to deduct as a short-term capital loss any loss sustained during the taxable
year on account of a portion of any such Regular Securities becoming wholly
worthless. Although the matter is not free from doubt, such non-corporate
Regular Securityholders should be allowed a bad debt deduction at such time as
the principal balance of such Regular Securities is reduced to reflect losses
resulting from any liquidated Mortgage Loans. The IRS, however, could take the
position that non-corporate holders will be allowed a bad debt deduction to
reflect such losses only after all the Mortgage Loans remaining in the Trust
Fund have been liquidated or the applicable Class of Regular Securities has been
otherwise retired. The IRS could also assert that losses on the Regular
Securities are deductible based on some other method that may defer such
deductions for all holders, such as reducing future cashflow for purposes of
computing original issue discount. This may have the effect of creating
"negative" original issue discount which would be deductible only against future
positive original issue discount or otherwise upon termination of the Class.
Regular Securityholders are urged to consult their own tax advisors regarding
the appropriate timing, amount and character of any loss sustained with respect
to such Regular Securities. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
non-corporate holders, the IRS may take the
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position that losses attributable to accrued original issue discount may only be
deducted as capital losses in the case of non-corporate holders who do not hold
the Regular Securities in connection with a trade or business. Special loss
rules are applicable to banks and thrift institutions, including rules regarding
reserves for bad debts. Such taxpayers are advised to consult their tax advisors
regarding the treatment of losses on Regular Securities.
SALE OR EXCHANGE OF REGULAR SECURITIES
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular
Security. The adjusted basis of a Regular Security generally will equal the
original cost of the Regular Security to the seller, increased by any original
issue discount or market discount previously included in the seller's gross
income with respect to the Regular Security and reduced by amounts included in
the stated redemption price at maturity of the Regular Security that were
previously received by the seller, by any amortized premium, and by any
recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). Such gain will be
treated as ordinary income (i) if a Regular Security is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount
of interest that would have accrued on the Regular Securityholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any
prior disposition of property that was held as part of such transaction, (ii)
in the case of a non-corporate taxpayer, to the extent such taxpayer has made
an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates, or (iii) to the extent that such
gain does not exceed the excess, if any, of (a) the amount that would have been
includable in the gross income of the holder if its yield on such Regular
Security were 110% of the applicable Federal rate as of the date of purchase,
over (b) the amount of income actually includable in the gross income of such
holder with respect to such Regular Security. In addition, gain or loss
recognized from the sale of a Regular Security by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c). Long-term capital gains of certain noncorporate taxpayers
generally are subject to a lower maximum tax rate than ordinary income or
short-term capital gains of such taxpayers for property held for more than one
year. Currently, the maximum tax rate for corporations is the same with respect
to both ordinary income and capital gains.
Regular Securityholders that recognize a loss on a sale or exchange of a
Regular Security for federal income tax purposes in excess of certain threshold
amounts should consult their tax advisors as to the need to file IRS Form 8886
(disclosing certain potential tax shelters) on their federal income tax returns.
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TAXATION OF OWNERS OF RESIDUAL SECURITIES
TAXATION OF REMIC INCOME
Generally, the "daily portions" of REMIC taxable income or net loss will be
includable as ordinary income or loss in determining the federal taxable income
of holders of Residual Securities ("RESIDUAL HOLDERS"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in such quarter
and by allocating such daily portion among the Residual Holders in proportion to
their respective holdings of Residual Securities in the REMIC Pool on such day.
REMIC taxable income is generally determined in the same manner as the taxable
income of an individual using the accrual method of accounting, except that (i)
the limitations on deductibility of investment interest expense and expenses for
the production of income do not apply, (ii) all bad loans will be deductible as
business bad debts, and (iii) the limitation on the deductibility of interest
and expenses related to tax-exempt income will apply. The REMIC Pool's gross
income includes interest, original issue discount income and market discount
income, if any, on the Mortgage Loans, reduced by amortization of any premium on
the Mortgage Loans, plus income from amortization of issue premium, if any, on
the Regular Securities, plus income on reinvestment of cash flows and reserve
assets, plus any cancellation of indebtedness income upon allocation of realized
losses to the Regular Securities. The REMIC Pool's deductions include interest
and original issue discount expense on the Regular Securities, servicing fees on
the Mortgage Loans, other administrative expenses of the REMIC Pool and realized
losses on the Mortgage Loans. The requirement that Residual Holders report their
pro rata share of taxable income or net loss of the REMIC Pool will continue
until there are no Securities of any Class of the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year
will be affected by, among other factors, the relationship between the timing
of recognition of interest, original issue discount or market discount income
or amortization of premium with respect to the Mortgage Loans, on the one hand,
and the timing of deductions for interest (including original issue discount)
or income from amortization of issue premium on the Regular Securities, on the
other hand. In the event that an interest in the Mortgage Loans is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Loans is
prepaid, the prepayment may be used in whole or in part to make distributions
in reduction of principal on the Regular Securities, and (ii) the discount on
the Mortgage Loans which is includable in income may exceed the deduction
allowed upon such distributions on those Regular Securities on account of any
unaccrued original issue discount relating to those Regular Securities. When
there is more than one Class of Regular Securities that distribute principal
sequentially, this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Securities when
distributions in reduction of principal are being made in respect of earlier
Classes of Regular Securities to the extent that such Classes are not issued
with substantial discount or are issued at a premium. If taxable income
attributable to such a mismatching is realized, in general, losses would be
allowed in later years as distributions on the later maturing Classes of
Regular Securities are made. Taxable income may also be greater in earlier
years than in later years as a result of the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of
such a Series of Regular Securities, may increase over time
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as distributions in reduction of principal are made on the lower yielding
Classes of Regular Securities, whereas, to the extent the REMIC Pool consists of
fixed rate Mortgage Loans, interest income with respect to any given Mortgage
Loan will remain constant over time as a percentage of the outstanding principal
amount of that loan. Consequently, Residual Holders must have sufficient other
sources of cash to pay any federal, state, or local income taxes due as a result
of such mismatching or unrelated deductions against which to offset such income,
subject to the discussion of "excess inclusions" below under "-- Limitations on
Offset or Exemption of REMIC Income." The timing of such mismatching of income
and deductions described in this paragraph, if present with respect to a Series
of Securities, may have a significant adverse effect upon a Residual Holder's
after-tax rate of return.
A portion of the income of a Residual Securityholder may be treated
unfavorably in three contexts:
o it may not be offset by current or net operating loss deductions;
o it will be considered unrelated business taxable income to tax-exempt
entities; and
o it is ineligible for any statutory or treaty reduction in the 30%
withholding tax otherwise available to a foreign Residual Securityholder.
See "--Limitations on Offset or Exemption of REMIC Income" below. In addition,
a Residual Holder's taxable income during certain periods may exceed the income
reflected by such Residual Holders for such periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Securities.
BASIS AND LOSSES
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Holder is limited to the adjusted basis of the Residual
Security as of the close of the quarter (or time of disposition of the Residual
Security if earlier), determined without taking into account the net loss for
the quarter. The initial adjusted basis of a purchaser of a Residual Security
is the amount paid for qsuch Residual Security. Such adjusted basis will be
increased by the amount of taxable income of the REMIC Pool reportable by the
Residual Holder and will be decreased (but not below zero), first, by a cash
distribution from the REMIC Pool and, second, by the amount of loss of the
REMIC Pool reportable by the Residual Holder. Any loss that is disallowed on
account of this limitation may be carried over indefinitely with respect to the
Residual Holder as to whom such loss was disallowed and may be used by such
Residual Holder only to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, the taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Although the law is unclear in certain respects, such recovery of basis
by the REMIC Pool will have the effect of amortization of the issue price of
the Residual Securities over their life. However, in view of the possible
acceleration of the income of Residual Holders described above under "--
Taxation of REMIC Income," the period of time over
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which such issue price is effectively amortized may be longer than the economic
life of the Residual Securities.
A Residual Security may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. Any payments received by a holder of a
REMIC Residual Certificate in connection with the acquisition of such
Certificate will be taken into account in determining the income of such holder
for federal income tax purposes. The timing of such income is uncertain under
current law. The IRS has issued proposed regulations that, if adopted as final
regulations, would require such payment to be included in income over time
according to an amortization schedule that reasonably reflects the costs and
benefits of holding the REMIC Residual Certificate over its expected life. The
proposed regulations also would provide two more specific methods that would be
accepted as meeting the general test set forth above for determining the timing
and amount of income inclusion. One generally follows the method of inclusion
used by the taxpayer for GAAP purposes, but not over a period shorter than the
period over which the REMIC is expected to generate income. The other calls for
ratable inclusion over the remaining anticipated weighted average life of the
REMIC as of the time the REMIC Residual Certificate is transferred to the
taxpayer. Because of the uncertainty concerning the treatment of such payments,
holders of REMIC Residual Certificates should consult their tax advisors
concerning the treatment of such payments for income tax purposes.
Further, to the extent that the initial adjusted basis of a Residual
Holder (other than an original holder) in the Residual Security is greater than
the corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See "-- Treatment of Certain
Items of REMIC Income and Expense -- Market Discount" below regarding the basis
of Mortgage Loans to the REMIC Pool and "-- Sale or Exchange of a Residual
Security" below regarding possible treatment of a loss upon termination of the
REMIC Pool as a capital loss.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
Although it is anticipated that the Trustee will compute REMIC income and
expense in accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The Depositor makes no representation as to the
specific method that will be used for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Securities, and
different methods could result in different timing or reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of premium
will be determined in the same manner as original issue discount income on
Regular Securities as described above under "-- Taxation of Owners of Regular
Securities -- Original Issue Discount" and "-- Variable Rate Regular
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Securities," without regard to the de minimis rule described therein, and "--
Taxation of Owners of Regular Securities -- Amortizable Premium."
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool in such
Mortgage Loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in such Mortgage Loans is generally the fair market value of the Mortgage
Loans immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool. The accrued
portion of such market discount would be recognized currently as an item of
ordinary income in a manner similar to original issue discount. Market discount
income generally should accrue in the manner described above under "-- Taxation
of Owners of Regular Securities -- Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans, based on the aggregate of
the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner analogous
to the discussion above under "-- Taxation of Owners of Regular Securities --
Amortizable Premium," a person that holds a Mortgage Loan as a capital asset
under Code Section 1221 may elect under Code Section 171 to amortize premium on
Mortgage Loans originated after September 27, 1985 under the constant yield
method. Amortizable bond premium will be treated as an offset to interest
income on the Mortgage Loans, rather than as a separate deduction item. Because
substantially all of the mortgagors on the Mortgage Loans are expected to be
individuals, Code Section 171 will not be available for premium on Mortgage
Loans originated on or prior to September 27, 1985. Premium with respect to
such Mortgage Loans may be deductible in accordance with a reasonable method
regularly employed by the holder thereof. The allocation of such premium pro
rata among principal payments should be considered a reasonable method;
however, the IRS may argue that such premium should be allocated in a different
manner, such as allocating such premium entirely to the final payment of
principal.
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME
A portion (or all) of the REMIC taxable income includable in determining
the federal income tax liability of a Residual Holder will be subject to
special treatment. That portion, referred to as the "excess inclusion," is
equal to the excess of REMIC taxable income for the calendar quarter allocable
to a Residual Security over the daily accruals for such quarterly period of (i)
120% of the long-term applicable Federal rate that would have applied to the
Residual Security (if it were a debt instrument) on the Startup Day under Code
Section 1274(d), multiplied by (ii) the adjusted issue price of such Residual
Security at the beginning of such quarterly period. For this purpose, the
adjusted issue price of a Residual Security at the beginning of a quarter is
the issue price of the Residual Security, plus the amount of such daily
accruals of REMIC income described in this paragraph for all prior quarters,
decreased by any distributions made with respect to such Residual Security
prior to the beginning of such quarterly period. Accordingly, the portion of
the REMIC Pool's taxable income that will be treated as excess inclusions will
be a larger portion of such income as the adjusted issue price of the Residual
Securities diminishes.
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The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on such Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of such
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who are
not U.S. Persons (as defined below under "-- Tax-Related Restrictions on
Transfer of Residual Securities -- Foreign Investors"), and the portion thereof
attributable to excess inclusions is not eligible for any reduction in the rate
of withholding tax (by treaty or otherwise). See "-- Taxation of Certain Foreign
Investors -- Residual Securities" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Security, a portion
(allocated under Treasury regulations yet to be issued) of dividends paid by the
real estate investment trust or regulated investment company could not be offset
by net operating losses of its shareholders, would constitute unrelated business
taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons.
There are three rules for determining the effect of excess inclusions on
the alternative minimum taxable income of a Residual Holder. First, alternative
minimum taxable income for a Residual Holder is determined without regard to the
special rule, discussed above, that taxable income cannot be less than excess
inclusions. Second, a Residual Holder's alternative minimum taxable income for a
taxable year cannot be less than the excess inclusions for the year. Third, the
amount of any alternative minimum tax net operating loss deduction must be
computed without regard to any excess inclusions.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL SECURITIES
Disqualified Organizations. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The REMIC Regulations
provide that the anticipated excess inclusions are based on actual prepayment
experience to the date of the transfer and projected payments based on the
Prepayment Assumption. The present value rate equals the applicable Federal
rate under Code Section 1274(d) as of the date of the transfer for a term
ending with the last calendar quarter in which excess inclusions are expected
to accrue. Such rate is applied to the anticipated excess inclusions from the
end of the remaining calendar quarters in which they arise to the date of the
transfer. Such a tax generally would be imposed on the transferor of the
Residual Security, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Security would in no event be liable for such tax with
respect to a transfer if the transferee furnished to the transferor an
affidavit stating that the transferee is not a Disqualified Organization and,
as of the time of the transfer, the transferor does not have actual knowledge
that such affidavit is false. The tax also may be waived by the IRS if the
Disqualified Organization promptly disposes of the
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Residual Security and the transferor pays income tax at the highest corporate
rate on the excess inclusion for the period the Residual Security is actually
held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of (i) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that it is not
a Disqualified Organization or stating such holder's taxpayer identification
number and, during the period such person is the record holder of the Residual
Security, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
If an "electing large partnership" holds a Residual Security, all interests
in the electing large partnership are treated as held by Disqualified
Organizations for purposes of the tax imposed upon a Pass-Through Entity by
section 860E(c) of the Code. An exception to this tax, otherwise available to a
Pass-Through Entity that is furnished certain affidavits by record holders of
interests in the entity and that does not know such affidavits are false, is not
available to an electing large partnership.
For these purposes, (i) "DISQUALIFIED ORGANIZATION" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors
in not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service or persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 531) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, (II) "PASS-THROUGH
ENTITY" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through Entity as a
nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity, and (iii) an "ELECTING LARGE PARTNERSHIP" means any
partnership having more than 100 members during the preceding tax year (other
than certain service partnerships and commodity pools), which elect to apply
simplified reporting provisions under the Code.
The Pooling and Servicing Agreement with respect to a Series will provide
that no legal or beneficial interest in a Residual Security may be transferred
or registered unless (i) the proposed transferee furnished to the transferor
and the Trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual Security
and is not a Disqualified Organization and is not purchasing such Residual
Security on behalf of a Disqualified Organization (i.e., as a broker, nominee
or middleman thereof) and (ii) the transferor provides a statement in writing
to the Trustee that it has no actual knowledge that such affidavit is false.
Moreover, the Pooling and Servicing Agreement will provide that any attempted
or purported transfer in violation of these transfer restrictions will be null
and void
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and will vest no rights in any purported transferee. Each Residual Security with
respect to a Series will bear a legend referring to such restrictions on
transfer, and each Residual Holder will be deemed to have agreed, as a condition
of ownership thereof, to any amendments to the related Pooling and Servicing
Agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the IRS and to the requesting party
within 60 days of the request, and the Depositor or the Trustee may charge a fee
for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person as defined below under "-- Foreign Investors") is
disregarded 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 REMIC (including a residual interest with a positive value at issuance) is a
"noneconomic residual interest" unless at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "--Disqualified Organizations." The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have know
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. Under the REMIC Regulations, as amended on
July 19, 2002, a safe harbor is provided if (i) the transferor conducted, at the
time of the transfer, a reasonable investigation of the financial condition of
the transferee and found that the transferee historically had paid its debts as
they came due and found no significant evidence to indicate that the transferee
would not continue to pay its debts as they come due in the future, (ii) the
transferee represents to the transferor that it understands that, as the holder
of the non-economic residual interest, the transferee may incur liabilities in
excess of any cash flows generated by the interest and that the transferee
intents to pay taxes associated with holding the residual interest as they
become due and (iii) the transferee represents to the transferor that it will
not cause income from the Residual Security to be attributable to a foreign
permanent establishment or fixed base (within the meaning of an applicable
income tax treaty) of the transferee or any other person. The Pooling and
Servicing Agreement with respect to each Series of Certificates will require the
transferee of a Residual Security to certify to the matters in the preceding
sentence as part of the affidavit described above under the heading
"Disqualified Organizations".
In addition to the three conditions set forth above for the transferor or a
noneconomic residual interest to be presumed not to have knowledge that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC, the REMIC Regulations contain a fourth condition
for the transferor to be presumed to lack such knowledge. This fourth condition
requires that one of the two following tests be satisfied: Either
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(a) the present value of the anticipated tax liabilities associated with
holding the noneconomic residual interest not exceed the sum of:
(1) the present value of any consideration given to the transferee to
acquire the interest;
(2) the present value of the expected future distributions on the
interest; and
(3) the present value of the anticipated tax savings associated with
holding the interest as the REMIC generates losses.
For purposes of these computations, the transferee is assumed to pay tax at the
highest corporate rate of tax specified in the Code or, in certain
circumstances, the alternative minimum tax rate. Further, present values
generally are computed using a discount rate equal to the short-term Federal
rate set forth in Section 1247(d) of the Code for the month of the transfer and
the compounding period used by the transferee; or
(b) (1) the transferee must be a domestic "C" corporation (other than a
corporation exempt from taxation or a regulated investment company or real
estate investment trust) that meets certain asset test; (2) the transferee
must agree in writing that any subsequent transfer of the residual interest
would be to an eligible "C" corporation and would meet the requirements for
a safe harbor transfer; and (3) the facts and circumstances known to the
transferor on or before the date of the transfer must not reasonably
indicate that the taxes associated with ownership of the residual interest
will not be paid by the transferee.
Unless otherwise indicated in the applicable Prospectus Supplement, the
Pooling and Servicing Agreement will not require that transfers of the Residual
Securities meet the fourth condition above, and thus meet the safe harbor.
Persons considering the purchase of the Residual Securities should consult their
advisors regarding the advisability of meeting the safe harbor in any transfer
of the Residual Securities.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, (i) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (ii) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and prior to the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The prospectus supplement relating to the 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 such a transfer may be
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made. The term "U.S. PERSON" means a citizens or resident of the United States,
a corporation or partnership (unless, in the case of a partnership, Treasury
regulations are adopted that provide otherwise) created or organized in or under
the laws of the United States, any state thereof or the District of Columbia,
including an entity treated as a corporation or partnership for federal income
tax purposes, an estate that is subject to U.S. federal income tax regardless of
the source of its income, or a trust if a court within the United States is able
to exercise primary supervision over the administration of such trust and one or
more such U.S. Persons have the authority to control all substantial decisions
of such trust (or, to the extent provided in applicable Treasury regulations,
certain trusts in existence on August 20, 1996 which are eligible to elect to be
treated as U.S. Persons).
SALE OR EXCHANGE OF A RESIDUAL SECURITY
Upon the sale or exchange of a Residual Security, the Residual Holder will
recognize gain or loss equal to the excess, if any, of the amount realized over
the adjusted basis (as described above under "-- Taxation of Owners of Residual
Securities -- Basis and Losses") of such Residual Holder in such Residual
Security at the time of the sale or exchange. In addition to reporting the
taxable income of the REMIC Pool, a Residual Holder will have taxable income to
the extent that any cash distribution to it from the REMIC Pool exceeds such
adjusted basis on that Distribution Date. Such income will be treated as gain
from the sale or exchange of the Residual Holder's Residual Security, in which
case, if the Residual Holder has an adjusted basis in its Residual Security
remaining when its interest in the REMIC Pool terminates, and if it holds such
Residual Security as a capital asset under Code Section 1221, then it will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (i) if a Residual Security is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would
have accrued on the Residual Holder's net investment in the conversion
transaction at 120% of the appropriate applicable Federal rate in effect at the
time the taxpayer entered into the transaction minus any amount previously
treated as ordinary income with respect to any prior disposition of property
that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. In addition, gain or loss recognized from the sale of a
Residual Security by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Securities where the seller
of the Residual Security, during the period beginning six months before the
sale or disposition of the Residual Security and ending six months after such
sale or disposition, acquires (or enters into any 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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The Residual Holder that recognizes a loss on a sale or exchange of a
Residual Security for federal income tax purposes in excess of certain threshold
amounts should consult their tax advisors as to the need to file IRS Form 8886
(disclosing certain potential tax shelters) on their federal income tax returns.
MARK TO MARKET REGULATIONS
The IRS has issued final regulations (the "MARK TO MARKET REGULATIONS")
under Code Section 475 relating to the requirement that a securities dealer mark
to market securities held for sale to customers. This mark-to-market requirement
applies to all securities of a dealer, except to the extent that the dealer has
specifically identified a security as held for investment. The Mark to Market
Regulations provide that, for purposes of this mark to market requirement, a
Residual Security is not treated as a security and thus may not be marked to
market.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
PROHIBITED TRANSACTIONS
Income from certain transaction by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includable
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include:
o the disposition of a qualified mortgages other than for (a) substitution
within two years of the Startup Day for a defective (including a
defaulted) obligation (or repurchase in lieu of substitution of a
defective (including a defaulted) obligation at any time) or for any
qualified mortgage within three months of the Startup Day, (b)
foreclosure, default, or imminent default of a qualified mortgage, (c)
bankruptcy or insolvency of the REMIC Pool, or (d) a qualified (complete)
liquidation,
o the receipt of income from assets that are not the type of mortgages or
investments that the REMIC Pool is permitted to hold,
o the receipt of compensation for services, or
o the receipt of gain from disposition of cash flow investments other than
pursuant to a qualified liquidation.
Notwithstanding the first and fourth bullet points 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 Securities is outstanding). The REMIC Regulations indicate
that the modification of a Mortgage Loan generally will not be treated as a
disposition if it is occasioned by a default or reasonably foreseeable default,
an assumption of the Mortgage Loan, the waiver of a due-on-sale or
due-on-encumbrance clause, or the conversion of an interest rate by a mortgagor
pursuant to the terms of a convertible adjustable rate Mortgage Loan.
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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
o during the three months following the Startup Day,
o made to a qualified reserve fund by a Residual Holder,
o in the nature of a guarantee,
o made to facilitate a qualified liquidation or clean-up call, and
o as otherwise permitted in Treasury regulations yet to be issued.
It is not anticipated that there will be any contributions to the REMIC Pool
after the Startup Day.
NET INCOME FROM FORECLOSURE PROPERTY
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period ending with the close of the third calendar
year beginning after the year in which the REMIC Pool acquires such property,
with a possible extension. Net income from foreclosure property generally means
gain from the sale of a foreclosure property that is inventory property and
gross income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust. It is not anticipated
that the REMIC Pool will have any taxable net income from foreclosure property.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular Securities
and Residual Holders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Holder for an entire
taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the IRS of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit in a unified
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administrative proceeding. The Master Servicer will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, with respect to
the REMIC Pool as agent of the Residual Holders holding the largest percentage
interest in the Residual Securities. If the Code or applicable Treasury
regulations do not permit the Master Servicer to act as tax matters person in
its capacity as agent of such Residual Holder, such Residual Holder or such
other person specified pursuant to Treasury regulations will be required to act
as tax matters person. The tax matters person generally has responsibility for
overseeing and providing notice to the other Residual Holders of certain
administrative and judicial proceedings regarding the REMIC Pool's tax affairs,
although other holders of the Residual Securities of the same Series would be
able to participate in such proceedings in appropriate circumstances.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over a statutory threshold amount, or (ii) 80% of
the amount of itemized deductions otherwise allowable for such year. These
limitations will be phased out and eliminated by 2010. In the case of a REMIC
Pool, such deductions may include deductions under Code Section 212 for the
Servicing Fee and all administrative and other expenses relating to the REMIC
Pool, or any similar expenses allocated to the REMIC Pool with respect to a
regular interest it holds in another REMIC. Such investors who hold REMIC
Securities either directly or indirectly through certain pass-through entities
may have their pro rata share of such expenses allocated to them as additional
gross income, but may be subject to such limitation on deductions. In addition,
such expenses are not deductible at all for purposes of computing the
alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Temporary Treasury regulations provide
that the additional gross income and corresponding amount of expenses generally
are to be allocated entirely to the holders of Residual Securities in the case
of a REMIC Pool that would not qualify as a fixed investment trust in the
absence of a REMIC election. With respect to a REMIC Pool that would be
classified as an investment trust in the absence of a REMIC election or that is
substantially similar to an investment trust, any holder of a Regular Security
that is an individual, trust, estate, or pass-through entity also will be
allocated its pro rata share of such expenses and a corresponding amount of
income and will be subject to the limitations or deductions imposed by Code
Sections 67 and 68, as described above. Unless indicated otherwise in the
applicable prospectus supplement, all such expenses will be allocable to the
Residual Securities. In general, such allocable portion will be determined based
on the ratio that a REMIC Securityholder's income, determined on a daily basis,
bears to the income of all holders of Regular Securities and Residual Securities
with respect to a REMIC Pool. As a result, individuals, estates or trusts
holding REMIC Securities (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing temporary Treasury regulations) may have taxable
income in excess of the interest income at the pass-through rate on Regular
Securities that are issued in a single Class or otherwise consistently with
fixed investment trust status or in excess of cash distributions for the related
period on Residual Securities.
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TAXATION OF CERTAIN FOREIGN INVESTORS
REGULAR SECURITIES
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (i) such interest is not effectively connected
with the conduct of a trade or business in the United States of the
Securityholder, (ii) such Non-U.S. Person is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (iii) such Non-U.S.
Person provides the Trustee, or the person who would otherwise be required to
withhold tax from such distributions under Code Section 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on
the Regular Security is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "NON-U.S. PERSON" means any person who is not a U.S. Person.
The IRS has issued final regulations (the "WITHHOLDING REGULATIONS")
which provide alternative methods of satisfying the beneficial ownership
certification requirement described above effective January 1, 2001. The
Withholding Regulations provide for a new series of withholding certificates
that must be used for all payments after December 31, 2000. The Withholding
Regulations require, in the case of Regular Securities held by a foreign
partnership, that (x) the certification described above be provided by the
partners rather than by the foreign partnership and (y) the partnership provide
certain information, including a United States taxpayer identification number in
certain circumstances. A look-through rule applies in the case of tiered
partnerships. Non-U.S. Persons should consult their own tax advisors concerning
the application of the certification requirements in the Withholding
Regulations.
RESIDUAL SECURITIES
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Holders who are Non-U.S. Persons generally should be treated
as interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "-- Regular Securities" above, but only to the extent that (i) the
Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Fund or
segregated pool of assets therein (as to which a separate REMIC election will
be made), to which the Residual Security relates, consists of obligations
issued in "registered form" within the meaning of Code Section 163(f)(1).
Generally, Mortgage Loans will not be, but regular interests in another REMIC
Pool will be, considered obligations issued in registered form. Furthermore,
Residual Holders will not be entitled to any exemption from the 30% withholding
tax (or lower treaty rate) to the extent of that portion of REMIC taxable
income that constitutes an "excess inclusion." See "-- Taxation of
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Owners of Residual Securities -- Limitations on Offset or Exemption of REMIC
Income." If the amounts paid to Residual Holders who are Non-U.S. Persons are
effectively connected with the conduct of a trade or business within the United
States by such Non-U.S. Persons, 30% (or lower treaty rate) withholding will not
apply. Instead, the amounts paid to such Non-U.S. Persons will be subject to
United States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account for
purposes of withholding only when paid or otherwise distributed (or when the
Residual Security is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See "--
Taxation of Owners of Residual Securities -- Tax-Related Restrictions on
Transfer of Residual Securities -- Foreign Investors" above concerning the
disregard of certain transfers having "tax avoidance potential." Investors who
are Non-U.S. Persons should consult their own tax advisors regarding the
specific tax consequences to them of owning Residual Securities.
BACKUP WITHHOLDING
Distributions made on the Regular Securities, and proceeds from the sale
of the Regular Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 28% (increasing to 31% after
2010) on "reportable payments" (including interest distributions, original issue
discount, and, under certain circumstances, principal distributions) unless the
Regular Holder complies with certain reporting and/or certification procedures,
including the provision of its taxpayer identification number to the Trustee,
its agent or the broker who effected the sale of the Regular Security, or such
Holder is otherwise an exempt recipient under applicable provisions of the Code.
Any amounts to be withheld from distribution on the Regular Securities would be
refunded by the IRS or allowed as a credit against the Regular Holder's federal
income tax liability. The Withholding Regulations change certain of the rules
relating to certain presumptions relating to information reporting and backup
withholding. Non-U.S. Persons are urged to contact their own tax advisors
regarding the application to them of backup withholding and information
reporting.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to
the IRS and to individuals, estates, non-exempt and non-charitable trusts, and
partnerships who are either holders of record of Regular Securities or
beneficial owners who own Regular Securities through a broker or middleman as
nominee. All brokers, nominees and all other non-exempt holders of record of
Regular Securities (including corporations, non-calendar year taxpayers,
securities or commodities dealers, real estate investment trusts, investment
companies, common trust funds, thrift institutions and charitable trusts) may
request such information for any calendar quarter by telephone or in writing by
contacting the person designated in Internal Revenue Service Publication 938
with respect to a particular Series of Regular Securities. Holders through
nominees must request such information from the nominee.
The IRS's Form 1066 has an accompanying Schedule Q, Quarterly Notice to
Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool to
each Residual Holder by the end of the month following the close of each
calendar quarter (41 days after the end of a quarter under
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proposed Treasury regulations) in which the REMIC Pool is in existence).
Treasury regulations require that, in addition to the foregoing requirements,
information must be furnished quarterly to Residual Holders, furnished annually,
if applicable, to holders of Regular Securities, and filed annually with the IRS
concerning Code Section 67 expenses (see "-- Taxes That May Be Imposed on the
REMIC Pool -- Limitations on Deduction of Certain Expenses" above) allocable to
such holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Securities, and filed annually with the IRS concerning the percentage of the
REMIC Pool's assets meeting the qualified asset tests described above under
"Characterization of Investments in REMIC Securities."
Residual Holders should be aware that their responsibilities as holders of
the residual interest in a REMIC Pool, including the duty to account for their
shares of the REMIC Pool's income or loss on their returns, continue for the
life of the REMIC Pool, even after the principal and interest on their Residual
Securities have been paid in full.
Treasury regulations provide that a Residual Holder is not required to
treat items on its return consistently with their treatment on the REMIC Pool's
return if the Holder owns 100% of the Residual Securities for the entire
calendar year. Otherwise, each Residual Holder is required to treat items on
its returns consistently with their treatment on the REMIC Pool's return,
unless the Holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC Pool. The IRS may assess a deficiency resulting from a failure
to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC Pool level. A REMIC Pool typically will
not register as a tax shelter pursuant to Code Section 6111 because it
generally will not have a net loss for any of the first five taxable years of
its existence. Any person that holds a Residual Security as a nominee for
another person may be required to furnish the related REMIC Pool, in a manner
to be provided in Treasury regulations, with the name and address of such
person and other specified information.
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
With respect to each Series of Grantor Trust Securities, assuming
compliance with all provisions of the applicable Agreement, the related Grantor
Trust Fund will be classified as a grantor trust under subpart E, part I of
subchapter J of the Code and not as a partnership, an association taxable as a
corporation, or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Accordingly, each holder of a Grantor Trust Security generally will be
treated as the beneficial owner of an undivided interest in the Mortgage Loans
included in the Grantor Trust Fund.
STANDARD SECURITIES
GENERAL
Where there is no Retained Interest or "excess" servicing with respect to
the Mortgage Loans underlying the Securities of a Series, and where such
Securities are not designated as "Stripped Securities," the holder of each such
Security in such Series (referred to herein as "STANDARD
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SECURITIES") will be treated as the owner of a pro rata undivided interest in
the ordinary income and corpus portions of the Grantor Trust Fund represented by
its Standard Security and will be considered the beneficial owner of a pro rata
undivided interest in each of the Mortgage Loans, subject to the discussion
below under "-- Recharacterization of Servicing Fees." Accordingly, the holder
of a Standard Security of a particular Series will be required to report on its
federal income tax return its pro rata share of the entire income from the
Mortgage Loans represented by its Standard Security, including interest at the
coupon rate on such Mortgage Loans, original issue discount (if any), prepayment
fees, assumption fees, and late payment charges received by the Servicer, in
accordance with such Securityholder's method of accounting. A Securityholder
generally will be able to deduct its share of the Servicing Fee and all
administrative and other expenses of the Trust Fund in accordance with its
method of accounting, provided that such amounts are reasonable compensation for
services rendered to that Grantor Trust Fund. However, investors who are
individuals, estates or trusts who own Securities, either directly or indirectly
through certain pass-through entities, will be subject to limitations with
respect to certain itemized deductions described in Code Section 67, including
deductions under Code Section 212 for the Servicing Fee and all such
administrative and other expenses of the Grantor Trust Fund, to the extent that
such deductions, in the aggregate, do not exceed two percent of an investor's
adjusted gross income. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer will
be reduced by the lesser of (i) 3% of the excess, if any, of adjusted gross
income over a statutory threshold amount or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. These limitations will be phased
out and eliminated by 2010. As a result, such investors holding Standard
Securities, directly or indirectly through a pass-through entity, may have
aggregate taxable income in excess of the aggregate amount of cash received on
such Standard Securities with respect to interest at the pass-through rate or as
discount income on such Standard Securities. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Moreover, where there is Retained Interest with respect to the Mortgage Loans
underlying a Series of Securities or where the servicing fees are in excess of
reasonable servicing compensation, the transaction will be subject to the
application of the "stripped bond" and "stripped coupon" rules of the Code, as
described below under "-- Stripped Securities" and "-- Recharacterization of
Servicing Fees," respectively.
Holders of Standard Securities, particularly any Class of a Series which
is a Subordinate Security, may incur losses of interest or principal with
respect to the Mortgage Loans. Such losses would be deductible generally only
as described above under "-- REMICs -- Taxation of Owners of Regular Securities
- -- Treatment of Losses," except that Securityholders on the cash method of
accounting would not be required to report qualified stated interest as income
until actual receipt.
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TAX STATUS
With respect to a Series, Cadwalader, Wickersham & Taft LLP or Orrick,
Herrington & Sutcliffe LLP has advised the Depositor that, except with respect
to a Trust Fund consisting of Unsecured Home Improvement Loans:
o A Standard Security owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) will be considered to
represent "loans . . . secured by an interest in real property which is .
. . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the Mortgage
Loans represented by that Standard Security is of the type described in
such section of the Code.
o A Standard Security owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A) to the extent that the assets of the related Grantor
Trust Fund consist of qualified assets, and interest income on such
assets will be considered "interest on obligations secured by mortgages
on real property" to such extent within the meaning of Code Section
856(c)(3)(B).
o A Standard Security owned by a REMIC will be considered to represent an
"obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Grantor Trust Fund consist of "qualified
mortgages" within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be characterized
in their entirety under the Code provisions cited in the first two bullet
pointed paragraphs above or whether the amount qualifying for such treatment
must be reduced by the amount of the Buydown Funds. There is indirect authority
supporting treatment of an investment in a Buydown Mortgage Loan as entirely
secured by real property if the fair market value of the real property securing
the loan exceeds the principal amount of the loan at the time of issuance or
acquisition, as the case may be. There is no assurance that the treatment
described above is proper. Accordingly, Securityholders are urged to consult
their own tax advisors concerning the effects of such arrangements on the
characterization of such Securityholder's investment for federal income tax
purposes.
PREMIUM AND DISCOUNT
Securityholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon
initial acquisition of Standard Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Security will be determined generally as described above under "-- REMICs --
Taxation of Owners of Residual Securities -- Premium." The rules allowing for
the amortization of premium are available with respect to Mortgage Loans
originated after September 27, 1985.
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Original Issue Discount. The original issue discount rules of Code Section
1271 through 1275 will be applicable to a Securityholder's interest in those
Mortgage Loans as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
generally are applicable to mortgages originated after March 2, 1984. Under the
OID Regulations, original issue discount could arise by the charging of points
by the originator of the mortgages in an amount greater than the statutory de
minimis exception, including a payment of points that is currently deductible
by the borrower under applicable Code provisions or, under certain
circumstances, by the presence of "teaser" rates on the Mortgage Loans. See "--
Stripped Securities" below regarding original issue discount on Stripped
Securities.
Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest, in advance of the cash attributable to such
income. Unless indicated otherwise in the applicable prospectus supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includable in the income of a holder of an obligation that acquires
the obligation after its initial issuance at a price greater than the sum of
the original issue price and the previously accrued original issue discount,
less prior payments of principal. Accordingly, if such Mortgage Loans acquired
by a Securityholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Loans (i.e., points) will be includable by such holder.
Market Discount. Securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "-- REMICs -- Taxation of Owners of Regular Securities -- Market
Discount," except that the ratable accrual methods described therein will not
apply. Rather, the holder will accrue market discount pro rata over the life of
the Mortgage Loans, unless the constant yield method is elected. Unless
indicated otherwise in the applicable prospectus supplement, no prepayment
assumption will be assumed for purposes of such accrual.
RECHARACTERIZATION OF SERVICING FEES
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither income
nor a deduction to Securityholders. In this regard, there are no authoritative
guidelines for federal income tax purposes as to either the maximum amount of
servicing compensation that may be considered reasonable in the context of this
or similar transactions or whether, in the case of Standard Securities, the
reasonableness of servicing compensation should be determined on a weighted
average or loan-by-loan basis. If a loan-by-loan basis is appropriate, the
likelihood that such amount would exceed reasonable servicing compensation as to
some of the Mortgage Loans would be increased. IRS guidance indicates that a
servicing fee in excess of reasonable compensation ("EXCESS SERVICING") will
cause the Mortgage Loans to be treated under the "stripped bond" rules. Such
guidance provides safe harbors for servicing deemed to be
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reasonable and requires taxpayers to demonstrate that the value of servicing
fees in excess of such amounts is not greater than the value of the services
provided.
Accordingly, if the IRS's approach is upheld, a Servicer who receives a
servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Loans.
Under the rules of Code Section 1286, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from the right
to receive some or all of the principal payments on the obligation would result
in treatment of such Mortgage Loans as "stripped coupons" and "stripped bonds."
Subject to the de minimis rule discussed below under "-- Stripped Securities,"
each stripped bond or stripped coupon could be considered for this purpose as a
non-interest bearing obligation issued on the date of issue of the Standard
Securities, and the original issue discount rules of the Code would apply to
the holder thereof. While Securityholders would still be treated as owners of
beneficial interests in a grantor trust for federal income tax purposes, the
corpus of such trust could be viewed as excluding the portion of the Mortgage
Loans the ownership of which is attributed to the Servicer, or as including
such portion as a second Class of equitable interest. Applicable Treasury
regulations treat such an arrangement as a fixed investment trust, since the
multiple Classes of trust interests should be treated as merely facilitating
direct investments in the trust assets and the existence of multiple Classes of
ownership interests is incidental to that purpose. In general, such a
recharacterization should not have any significant effect upon the timing or
amount of income reported by a Securityholder, except that the income reported
by a cash method holder may be slightly accelerated. See "-- Stripped
Securities" below for a further description of the federal income tax treatment
of stripped bonds and stripped coupons.
SALE OR EXCHANGE OF STANDARD SECURITIES
Upon sale or exchange of a Standard Securities, a Securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its aggregate adjusted basis in the Mortgage Loans and other
assets represented by the Security. In general, the aggregate adjusted basis
will equal the Securityholder's cost for the Standard Security, exclusive of
accrued interest, increased by the amount of any income previously reported
with respect to the Standard Security and decreased by the amount of any losses
previously reported with respect to the Standard Security and the amount of any
distributions (other than accrued interest) received thereon. Except as
provided above with respect to market discount on any Mortgage Loans, and
except for certain financial institutions subject to the provisions of Code
Section 582(c), any such gain or loss generally would be capital gain or loss
if the Standard Security was held as a capital asset. However, gain on the sale
of a Standard Security will be treated as ordinary income (i) if a Standard
Security is held as part of a "conversion transaction" as defined in Code
Section 1258(c), up to the amount of interest that would have accrued on the
Securityholder's net investment in the conversion transaction at 120% of the
appropriate applicable Federal rate in effect at the time the taxpayer entered
into the transaction minus any amount previously treated as ordinary income
with respect to any prior disposition of property that was held as part of such
transaction or (ii) in the case of a non-corporate taxpayer, to the extent such
taxpayer has made an election under Code Section 163(d)(4) to have net capital
gains taxed as investment income at ordinary income rates. Long-term capital
gains of certain noncorporate taxpayers generally are subject to a lower
maximum tax rate than ordinary income or short-term capital gains of such
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taxpayers for property held for more than one year. The maximum tax rate for
corporations currently is the same with respect to both ordinary income and
capital gains.
A Securityholder that recognized a loss on a sale or exchange of a
Standard Security for federal income tax purposes in excess of certain threshold
amounts should consult their tax advisors as to the need to file IRS Form 8886
(disclosing certain potential tax shelters) on their federal income tax returns.
STRIPPED SECURITIES
GENERAL
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership
of the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Securities that are subject to those rules will be referred to as "STRIPPED
SECURITIES." The Securities will be subject to those rules if (i) the Depositor
or any of its affiliates retains (for its own account or for purposes of
resale), in the form of Retained Interest or otherwise, an ownership interest
in a portion of the payments on the Mortgage Loans, (ii) the Depositor or any
of its affiliates is treated as having an ownership interest in the Mortgage
Loans to the extent it is paid (or retains) servicing compensation in an amount
greater than reasonable consideration for servicing the Mortgage Loans (see
"-- Standard Securities -- Recharacterization of Servicing Fees" above), and
(iii) a Class of Securities are issued in two or more Classes or subclasses
representing the right to non-pro-rata percentages of the interest and
principal payments on the Mortgage Loans.
In general, a holder of a Stripped Security will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Security's allocable share of the
servicing fees paid to a Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"-- Standard Securities -- Recharacterization of Servicing Fees." Although not
free from doubt, for purposes of reporting to Stripped Securityholders, the
servicing fees will be allocated to the Classes of Stripped Securities in
proportion to the distributions to such Classes for the related period or
periods. The holder of a Stripped Security generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under
"-- Standard Securities -- General," subject to the limitation described
therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped Securities
for federal income tax purposes is not clear in certain respects, particularly
where such Stripped Securities are issued with respect to a Mortgage Pool
containing variable-rate Mortgage Loans, the Depositor has been advised by
counsel that (i) the Grantor Trust Fund will be treated as a grantor trust
under subpart E, part I of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of
Code Section 7701(i), and (ii) each Stripped Security should be treated as a
single
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installment obligation for purposes of calculating original issue discount and
gain or loss on disposition. This treatment is based on the interrelationship of
Code Section 1286, Code Sections 1272 through 1275, and the OID Regulations.
Although it is possible that computations with respect to Stripped Securities
could be made in one of the ways described below under "-- Possible Alternative
Characterizations," the OID Regulations state, in general, that two or more debt
instruments issued by a single issuer to a single investor in a single
transaction should be treated as a single debt instrument. Accordingly, for
original issue discount purposes, all payments on any Stripped Securities should
be aggregated and treated as though they were made on a single debt instrument.
The Pooling and Servicing Agreement will require that the Trustee make and
report all computations described below using this aggregate approach, unless
substantial legal authority requires otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Security as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under such
regulations, a Stripped Security that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount (as described below), at a de minimis original issue
discount, or, presumably, at a premium. This treatment indicates that the
interest component of such a Stripped Security would be treated as qualified
stated interest under the OID Regulations, assuming it is not an interest-only
or super-premium Stripped Security. Further, these regulations provide that the
purchaser of such a Stripped Security will be required to account for any
discount as market discount rather than original issue discount if either (i)
the initial discount with respect to the Stripped Security was treated as zero
under the de minimis rule, or (ii) no more than 100 basis points in excess of
reasonable servicing is stripped off the related Mortgage Loans. Any such market
discount would be reportable as described above under "-- REMICs -- Taxation of
Owners of Regular Securities -- Market Discount," without regard to the de
minimis rule therein, assuming that a prepayment assumption is employed in such
computation.
The holder of a Stripped Security will be treated as owning an interest in
each of the Mortgage Loans held by the Grantor Trust Fund and will recognize an
appropriate share of the income and expenses associated with the Mortgage
Loans. Accordingly, an individual, trust or estate that holds a Stripped
Security directly or through a pass-through entity will be subject to the
limitations on deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Security, particularly any Class of a Series which
is a Subordinate Security, may deduct losses incurred with respect to the
Stripped Security as described above under
"-- Standard Securities -- General."
STATUS OF STRIPPED SECURITIES
No specific legal authority exists as to whether the character of the
Stripped Securities, for federal income tax purposes, will be the same as that
of the Mortgage Loans. Although the issue is not free from doubt, counsel has
advised the Depositor that, except with respect to a Trust Fund consisting of
Unsecured Home Improvement Loans, Stripped Securities owned by applicable
holders should be considered to represent "real estate assets" within the
meaning of Code Section 856(c)(4)(A), "obligation[s] . . . principally secured
by an interest in real property which is . . . residential real estate" within
the meaning of Code Section 860G(a)(3)(A), and "loans . . . secured by an
interest in real property" within the meaning of
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Code Section 7701(a)(19)(C)(v), and interest (including original issue discount)
income attributable to Stripped Securities should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), provided that in each case the Mortgage
Loans and interest on such Mortgage Loans qualify for such treatment. The
application of such Code provisions to Buydown Mortgage Loans is uncertain. See
"-- Standard Securities -- Tax Status" above.
TAXATION OF STRIPPED SECURITIES
Original Issue Discount. Except as described above under "-- General,"
each Stripped Security will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount with
respect to a Stripped Security must be included in ordinary income as it
accrues, in accordance with a constant yield method that takes into account the
compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the issue discount required to be
included in the income of a holder of a Stripped Security (referred to in this
discussion as a "STRIPPED SECURITYHOLDER") in any taxable year likely will be
computed generally as described above under "-- REMICs -- Taxation of Owner of
Regular Securities -- Original Issue Discount" and "-- Variable Rate Regular
Securities." However, with the apparent exception of a Stripped Security
qualifying as a market discount obligation as described above under "--
General," the issue price of a Stripped Security will be the purchase price
paid by each holder thereof, and the stated redemption price at maturity will
include the aggregate amount of the payments, other than qualified stated
interest, to be made on the Stripped Security to such Securityholder,
presumably under the Prepayment Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Securityholder's recognition of original
issue discount will be either accelerated or decelerated and the amount of such
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each Mortgage Loan represented
by such Securityholder's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security should be entitled in the year that it
becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in such Stripped Security to recognize a
loss (which may be a capital loss) equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Securities will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as
the Stripped Securities. However, if final regulations dealing with contingent
interest with respect to the Stripped Securities apply the same principles as
the OID Regulations, such regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on
the sale of contingent interest Stripped Securities as ordinary income.
Investors should consult their tax advisors regarding the appropriate tax
treatment of Stripped Securities.
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Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Securityholder's
adjusted basis in such Stripped Security, as described above under "-- REMICs
- -- Taxation of Owners of Regular Securities -- Sale or Exchange of Regular
Securities." Gain or loss from the sale or exchange of a Stripped Security
generally will be capital gain or loss to the Securityholder if the Stripped
Security is held as a "capital asset" within the meaning of Code section 1221,
and will be long-term or short-term depending on whether the Stripped Security
has been held for the long-term capital gain holding period (currently, more
than one year). To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Securities, such subsequent
purchaser will be required for federal income tax purposes to accrue and report
such excess as if it were original issue discount in the manner described
above. It is not clear for this purpose whether the assumed prepayment rate
that is to be used in the case of a Securityholder other than an original
Securityholder should be the Prepayment Assumption or a new rate based on the
circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Securities. When an investor
purchases more than one Class of Stripped Securities, it is currently unclear
whether for federal income tax purposes such Classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
Possible Alternative Characterization. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations
of the applicable Code provisions. For example, the Securityholder may be
treated as the owner of (i) one installment obligation consisting of such
Stripped Security's pro rata share of the payments attributable to principal on
each Mortgage Loan and a second installment obligation consisting of such
Stripped Security's pro rata share of the payments attributable to interest on
each Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there
are scheduled payments of principal and/or interest on each Mortgage Loan, or
(iii) a separate installment obligation for each Mortgage Loan, representing
the Stripped Security's pro rata share of payments of principal and/or interest
to be made with respect thereto. Alternatively, the holder of one or more
Classes of Stripped Securities may be treated as the owner of a pro rata
fractional undivided interest in each Mortgage Loan to the extent that such
Stripped Security, or Classes of Stripped Securities in the aggregate,
represent the same pro rata portion of principal and interest on each such
Mortgage Loan, and a stripped bond or stripped coupon (as the case may be),
treated as an installment obligation or contingent payment obligation, as to
the remainder. Treasury regulations regarding original issue discount on
stripped obligations make the foregoing interpretations less likely to be
applicable. The preamble to such regulations states that they are premised on
the assumption that an aggregation approach is appropriate for determining
whether original issue discount on a stripped bond or stripped coupon is de
minimis, and solicits comments on appropriate rules for aggregating stripped
bonds and stripped coupons under Code Section 1286.
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Because of these possible varying characterizations of Stripped Securities
and the resultant differing treatment of income recognition, Securityholders
are urged to consult their own tax advisors regarding the proper treatment of
Stripped Securities for federal income tax purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Securityholder at any time during such year, such
information (prepared on the basis described above) as is necessary to enable
such Securityholder to prepare its federal income tax returns. Such information
will include the amount of original issue discount accrued on Securities held
by persons other than Securityholders exempted from the reporting requirements.
However, the amount required to be reported by the Trustee may not be equal to
the proper amount of original issue discount required to be reported as taxable
income by a Securityholder, other than an original Securityholder that
purchased at the issue price. In particular, in the case of Stripped
Securities, unless provided otherwise in the applicable prospectus supplement,
such reporting will be based upon a representative initial offering price of
each Class of Stripped Securities. The Trustee will also file such original
issue discount information with the IRS. If a Securityholder fails to supply an
accurate taxpayer identification number or if the Secretary of the Treasury
determines that a Securityholder has not reported all interest and dividend
income required to be shown on his federal income tax return, backup
withholding may be required in respect of any reportable payments, as described
above under "-- REMICs -- Taxation of Certain Foreign Investors -- Backup
Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Security evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. Persons generally
will be subject to 30% United States withholding tax, or such lower rate as may
be provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Securityholder on the sale or exchange of such a
Security also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements, described above under "--
REMICs -- Taxation of Certain Foreign Investors -- Regular Securities."
PARTNERSHIP TRUST FUNDS
CLASSIFICATION OF PARTNERSHIP TRUST FUNDS
With respect to each Series of Partnership Securities or Debt Securities,
Cadwalader, Wickersham & Taft LLP or Orrick, Herrington & Sutcliffe LLP will
deliver its opinion that the Trust Fund will not be a taxable mortgage pool or
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the applicable Agreement and related documents will be complied
148
with, and on counsel's conclusion that the nature of the income of the Trust
Fund will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations.
Characterization of Investments in Partnership Securities and Debt Securities
For federal income tax purposes, (i) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning of Code
Section 7701(a)(19)(C)(v) and (ii) interest on Debt Securities held by a real
estate investment trust will not be treated as "interest on obligations secured
by mortgages on real property or on interests in real property" within the
meaning of Code Section 856(c)(3)(B), and Debt Securities held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code Section 856(c)(4)(A), but Partnership Securities held by a real estate
investment trust will qualify under those sections based on the real estate
investments trust's proportionate interest in the assets of the Partnership
Trust Fund qualifying for such treatments based on capital accounts.
TAXATION OF DEBT SECURITYHOLDERS
TREATMENT OF THE DEBT SECURITIES AS INDEBTEDNESS
The Depositor will agree, and the Securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
with respect to each Series of Debt Securities, Cadwalader, Wickersham & Taft
LLP or Orrick, Herrington & Sutcliffe LLP will deliver its opinion that the Debt
Securities will be classified as indebtedness for federal income tax purposes.
The discussion below assumes this characterization of the Debt Securities is
correct.
If, contrary to the opinion of counsel, the IRS successfully asserted that
the Debt Securities were not debt for federal income tax purposes, the Debt
Securities might be treated as equity interests in the Partnership Trust, and
the timing and amount of income allocable to holders of such Debt Securities
may be different than as described in the following paragraph.
Debt Securities generally will be subject to the same rules of taxation as
Regular Securities issued by a REMIC, as described above, except that (i)
income reportable on Debt Securities is not required to be reported under the
accrual method unless the holder otherwise uses the accrual method and (ii) the
special rule treating a portion of the gain on sale or exchange of a Regular
Security as ordinary income is inapplicable to Debt Securities. See "-- REMICs
- -- Taxation of Owners of Regular Securities" and "Sale or Exchange of Regular
Securities".
TAXATION OF OWNERS OF PARTNERSHIP SECURITIES
TREATMENT OF THE PARTNERSHIP TRUST FUND AS A PARTNERSHIP
If so specified in the applicable prospectus supplement, the Depositor
will agree, and the Securityholders will agree by their purchase of Securities,
to treat the Partnership Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax
149
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Partnership Trust Fund, the partners of the partnership
being the Securityholders (including the Depositor), and the Debt Securities (if
any) being debt of the partnership. However, the proper characterization of the
arrangement involving the Partnership Trust Fund, the Partnership Securities,
the Debt Securities, and the Depositor is not clear, because there is no
authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because one or more of the Classes of Partnership Securities have certain
features characteristic of debt, the Partnership Securities might be considered
debt of the Depositor or the Partnership Trust Fund. Any such characterization
would not result in materially adverse tax consequences to Securityholders as
compared to the consequences from treatment of the Partnership Securities as
equity in a partnership, described below. The following discussion assumes that
the Partnership Securities represent equity interests in a partnership.
PARTNERSHIP TAXATION
As a partnership, the Partnership Trust Fund will not be subject to federal
income tax. Rather, each Securityholder will be required to separately take into
account such holder's allocated share of income, gains, losses, deductions and
credits of the Partnership Trust Fund. It is anticipated that the Partnership
Trust Fund's income will consist primarily of interest earned on the Mortgage
Loans (including appropriate adjustments for market discount, original issue
discount and bond premium) as described above under "-- Grantor Trust Funds --
Standard Securities -- General" and "-- Premium and Discount") and any gain upon
collection or disposition of Mortgage Loans. The Partnership Trust Fund's
deductions will consist primarily of interest accruing with respect to the Debt
Securities, servicing and other fees, and losses or deductions upon collection
or disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Agreements and related documents). The applicable Agreement will provide, in
general, that the Securityholders will be allocated taxable income of the
Partnership Trust Fund for each Due Period equal to the sum of (i) the interest
that accrues on the Partnership Securities in accordance with their terms for
such Due Period, including interest accruing at the applicable pass-through
rate for such Due Period and interest on amounts previously due on the
Partnership Securities but not yet distributed; (ii) any Partnership Trust Fund
income attributable to discount on the Mortgage Loans that corresponds to any
excess of the principal amount of the Partnership Securities over their initial
issue price; and (iii) any other amounts of income payable to the
Securityholders for such Due Period. Such allocation will be reduced by any
amortization by the Partnership Trust Fund of premium on Mortgage Loans that
corresponds to any excess of the issue price of Partnership Securities over
their principal amount. All remaining taxable income of the Partnership Trust
Fund will be allocated to the Depositor. Based on the economic arrangement of
the parties, this approach for allocating Partnership Trust Fund income should
be permissible under applicable Treasury regulations, although no assurance can
be given that the IRS would not require a greater amount of income to be
allocated to Securityholders. Moreover, even under the foregoing method of
allocation, Securityholders may be allocated income equal to the entire
pass-through rate plus the other items described above even though the Trust
Fund might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders
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will in effect be required to report income from the Partnership Securities on
the accrual basis and Securityholders may become liable for taxes on Partnership
Trust Fund income even if they have not received cash from the Partnership Trust
Fund to pay such taxes.
Part or all of the taxable income allocated to a Securityholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) may constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of the
Master Servicer but not interest expense) allocable to an individual, estate or
trust Securityholder would be miscellaneous itemized deductions subject to the
limitations described above under "Grantor Trust Funds -- Standard Securities
- -- General". Accordingly, such deductions might be disallowed to the individual
in whole or in part and might result in such holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to such holder over
the life of the Partnership Trust Fund.
Discount income or premium amortization with respect to each Mortgage Loan
would be calculated in a manner similar to the description above under "--
Grantor Trust Funds -- Standard Securities -- General" and "-- Premium and
Discount." Notwithstanding such description, it is intended that the Partnership
Trust Fund will make all tax calculations relating to income and allocations to
Securityholders on an aggregate basis with respect to all Mortgage Loans held by
the Partnership Trust Fund rather than on a Mortgage Loan-by-Mortgage Loan
basis. If the IRS were to require that such calculations be made separately for
each Mortgage Loan, the Partnership Trust Fund might be required to incur
additional expense, but it is believed that there would not be a material
adverse effect on Securityholders.
DISCOUNT AND PREMIUM
Unless indicated otherwise in the applicable prospectus supplement, it is
not anticipated that the Mortgage Loans will have been issued with original
issue discount and, therefore, the Partnership Trust Fund should not have
original issue discount income. However, the purchase price paid by the
Partnership Trust Fund for the Mortgage Loans may be greater or less than the
remaining principal balance of the Mortgage Loans at the time of purchase. If
so, the Mortgage Loans will have been acquired at a premium or discount, as the
case may be. See "-- Standard Securities -- Premium and Discount." (As indicated
above, the Partnership Trust Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Mortgage Loan-by-Mortgage Loan
basis).
If the Partnership Trust Fund acquires the Mortgage Loans at a market
discount or premium, the Partnership Trust Fund will elect to include any such
discount in income currently as it accrues over the life of the Mortgage Loans
or to offset any such premium against interest income on the Mortgage Loans. As
indicated above, a portion of such market discount income or premium deduction
may be allocated to Securityholders.
SECTION 708 TERMINATION
Under Section 708 of the Code, the Partnership Trust Fund will be deemed
to terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership
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Trust Fund are sold or exchanged within a 12-month period. If such a termination
occurs, it would cause a deemed contribution of the assets of a Partnership
Trust Fund (the "OLD PARTNERSHIP") to a new Partnership Trust Fund (the "NEW
PARTNERSHIP") in exchange for interests in the new partnership. Such interests
would be deemed distributed to the partners of the old partnership in
liquidation thereof, which would not constitute a sale or exchange. The
Partnership Trust Fund will not comply with certain technical requirements that
might apply when such a constructive termination occurs. As a result, the
Partnership Trust Fund may be subject to certain tax penalties and may incur
additional expenses if it is required to comply with those requirements.
Furthermore, the Partnership Trust Fund might not be able to comply due to lack
of data.
DISPOSITION OF SECURITIES
Generally, capital gain or loss will be recognized on a sale of
Partnership Securities in an amount equal to the difference between the amount
realized and the seller's tax basis in the Partnership Securities sold. A
Securityholder's tax basis in an Partnership Security will generally equal the
holder's cost increased by the holder's share of Partnership Trust Fund income
(includable in income) and decreased by any distributions received with respect
to such Partnership Security. In addition, both the tax basis in the
Partnership Securities and the amount realized on a sale of an Partnership
Security would include the holder's share of the Debt Securities and other
liabilities of the Partnership Trust Fund. A holder acquiring Partnership
Securities at different prices may be required to maintain a single aggregate
adjusted tax basis in such Partnership Securities, and, upon sale or other
disposition of some of the Partnership Securities, allocate a portion of such
aggregate tax basis to the Partnership Securities sold (rather than maintaining
a separate tax basis in each Partnership Security for purposes of computing
gain or loss on a sale of that Partnership Security).
Any gain on the sale of a Partnership Security attributable to the
holder's share of unrecognized accrued market discount on the Mortgage Loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a Securityholder is required to recognize an aggregate amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Partnership Securities that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Partnership Securities.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will be
apportioned among the Securityholders in proportion to the principal amount of
Partnership Securities owned by them as of the close of the last day of such Due
Period. As a result, a holder purchasing Partnership Securities may be allocated
tax items (which will affect its tax liability and tax basis) attributable to
periods before the actual transaction.
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The use of such a Due Period convention may not be permitted by existing
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 Securityholders.
The Depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
SECTION 731 DISTRIBUTIONS
In the case of any distribution to a Securityholder, no gain will be
recognized to that Securityholder as long as the amount of any money
distributed with respect to such Security does not exceed the adjusted basis of
such Securityholder's interest in the Security. To the extent that the amount
of money distributed exceeds such Securityholder's adjusted basis, gain will be
currently recognized. In the case of any distribution to a Securityholder, no
loss will be recognized except upon a distribution in liquidation of a
Securityholder's interest. Any gain or loss recognized by a Securityholder will
be capital gain or loss.
SECTION 754 ELECTION
In the event that a Securityholder sells its Partnership Securities at a
profit (loss), the purchasing Securityholder will have a higher (lower) basis
in the Partnership Securities than the selling Securityholder had. The tax
basis of the Partnership Trust Fund's assets would not be adjusted to reflect
that higher (or lower) basis unless the Partnership Trust Fund were to file an
election under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Partnership
Trust Fund will not make such an election. As a result, a Securityholder might
be allocated a greater or lesser amount of Partnership Trust Fund income than
would be appropriate based on its own purchase price for Partnership
Securities.
ADMINISTRATIVE MATTERS
The Trustee is required to keep or have kept complete and accurate books
of the Partnership Trust Fund. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Partnership Trust Fund and will report each Securityholder's
allocable share of items of Partnership Trust Fund income and expense to
holders and the IRS on Schedule K-1. The Trustee will provide the Schedule K-1
information to nominees that fail to provide the Partnership Trust Fund with
the information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Partnership
Securities. Generally, holders must file tax returns that are consistent with
the information return filed by the Partnership Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership
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Securities so held. Such information includes (i) the name, address and taxpayer
identification number of the nominee and (ii) as to each beneficial owner (x)
the name, address and identification number of such person, (y) whether such
person is a United States person, a tax-exempt entity or a foreign government,
an international organization, or any wholly-owned agency or instrumentality of
either of the foregoing, and (z) certain information on Partnership Securities
that were held, bought or sold on behalf of such person throughout the year. In
addition, brokers and financial institutions that hold Partnership Securities
through a nominee are required to furnish directly to the Trustee information as
to themselves and their ownership of Partnership Securities. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Partnership Trust Fund. The information
referred to above for any calendar year must be furnished to the Partnership
Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Partnership Trust Fund with the
information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the Pooling
and Servicing Agreement and, as such, will be responsible for representing the
Securityholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Securityholders, and, under certain circumstances, a Securityholder may be
precluded from separately litigating a proposed adjustment to the items of the
Partnership Trust Fund. An adjustment could also result in an audit of a
Securityholder's returns and adjustments of items not related to the income and
losses of the Partnership Trust Fund.
TAX CONSEQUENCES TO FOREIGN SECURITYHOLDERS
It is not clear whether the Partnership Trust Fund would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to Non-U.S. Persons, because there is no clear
authority dealing with that issue under facts substantially similar to those
described herein. Although it is not expected that the Partnership Trust Fund
would be engaged in a trade or business in the United States for such purposes,
if so specified in the applicable prospectus supplement, the Partnership Trust
Fund may withhold as if it were so engaged in order to protect the Partnership
Trust Fund from possible adverse consequences of a failure to withhold. The
Partnership Trust Fund may withhold on the portion of its taxable income that
is allocable to Securityholders who are Non-U.S. Persons pursuant to Section
1446 of the Code, as if such income were effectively connected to a U.S. trade
or business, at the maximum tax rate for corporations or individuals, as
applicable. Amounts withheld will be deemed distributed to the Non-U.S. Person
Securityholders. Subsequent adoption of Treasury regulations or the issuance of
other administrative pronouncements may require the Partnership Trust Fund to
change its withholding procedures. In determining a holder's withholding
status, the Partnership Trust Fund may rely on IRS Form W-8BEN, IRS Form W-9 or
the holder's certification of nonforeign status signed under penalties of
perjury.
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To the extent specified in the applicable prospectus supplement,
o each Non-U.S. Person holder might be required to file a U.S. individual
or corporate income tax return (including, in the case of a corporation,
the branch profits tax) on its share of the Partnership Trust Fund's
income;
o each Non-U.S. Person holder must obtain a taxpayer identification number
from the IRS and submit that number to the Partnership Trust Fund on Form
W-8BEN in order to assure appropriate crediting of the taxes withheld;
and
o a Non-U.S. Person holder generally would be entitled to file with the
IRS a claim for refund with respect to taxes withheld by the Partnership
Trust Fund, taking the position that no taxes were due because the
Partnership Trust Fund was not engaged in a U.S. trade or business.
Notwithstanding the foregoing, interest payments made (or accrued) to a
Securityholder who is a Non-U.S. Person may be considered guaranteed payments to
the extent such payments are determined without regard to the income of the
Partnership Trust Fund. If these interest payments are properly characterized as
guaranteed payments, then the interest may not be considered "portfolio
interest." As a result, Securityholders who are Non-U.S. Persons may be subject
to United States federal income tax and withholding tax at a rate of 30 percent,
unless reduced or eliminated pursuant to an applicable treaty. In such case, a
Non-U.S. Person holder would only be entitled to claim a refund for that portion
of the taxes in excess of the taxes that should be withheld with respect to the
guaranteed payments.
BACKUP WITHHOLDING
Distributions made on the Partnership Securities and proceeds from the
sale of the Partnership Securities will be subject to a "backup" withholding tax
of 28% (increasing to 31% after 2010) if, in general, the Securityholder fails
to comply with certain identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A SECURITYHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF REMIC SECURITIES, GRANTOR TRUST SECURITIES,
PARTNERSHIP SECURITIES AND DEBT SECURITIES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER TAX LAWS.
155
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
Securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Securities
offered hereunder.
ERISA CONSIDERATIONS
ERISA and the Code impose certain requirements on employee benefit plans
and on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts in which such plans, accounts or arrangements are
invested, that are subject to Title I of ERISA and Section 4975 of the Code
("PLANS") and on persons who are fiduciaries with respect to such Plans in
connection with the investment of Plan assets. Certain employee benefit plans,
such as governmental plans (as defined in ERISA Section 3(32)), and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Securities without regard
to the ERISA considerations described below, subject to the provisions of other
applicable federal, state and local law. Any such plan which is qualified and
exempt from taxation under Sections 401(a) and 501(a) of the Code, however, is
subject to the prohibited transaction rules set forth in Section 503 of the
Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and
the requirement that a Plan's investments be made in accordance with the
documents governing the Plan. In addition, ERISA and Section 4975 of the Code
prohibit a broad range of transactions involving assets of a Plan and persons
("PARTIES IN INTEREST") who have certain specified relationships to the Plan
unless a statutory or administrative exemption is available. Certain Parties in
Interest that participate in a prohibited transaction may be subject to an
excise tax imposed pursuant to Section 4975 of the Code, unless a statutory or
administrative exemption is available. These prohibited transactions generally
are set forth in Sections 406 and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in Securities may cause the Mortgage Loans, Contracts,
Unsecured Home Improvement Loans and other assets included in a related Trust
Fund to be deemed Plan assets. Section 2510.3-101 of the regulations of the
United States Department of Labor ("DOL") provides that when a Plan acquires an
equity interest in an entity, the Plan's assets include both such equity
interest and an undivided interest in each of the underlying assets of the
entity, unless certain exceptions not applicable here apply, or unless the
equity participation in the entity by "benefit plan investors" (i.e., Plans and
employee benefit plans not subject to ERISA) is not "significant", both as
defined therein. For this purpose, in general, equity participation by benefit
plan investors will be "significant" on any date if 25% or more of the value of
any Class of equity interests in the entity is held by benefit plan investors.
To the extent the Securities are treated as equity interests for purposes of
DOL regulations section 2510.3-101, equity
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participation in a Trust Fund will be significant on any date if immediately
after the most recent acquisition of any Security, 25% or more of any Class of
Securities is held by benefit plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Mortgage Loans, Contracts, Unsecured Home Improvement Loans and
other assets included in a Trust Fund constitute Plan assets, then any party
exercising management or discretionary control regarding those assets, such as
the Servicer or Master Servicer, may be deemed to be a Plan "fiduciary" and thus
subject to the fiduciary responsibility provisions and prohibited transaction
provisions of ERISA and Section 4975 of the Code with respect to the investing
Plan. In addition, if the Mortgage Loans, Contracts, Unsecured Home Improvement
Loans and other assets included in a Trust Fund constitute Plan assets, the
purchase of Securities by a Plan, as well as the operation of the Trust Fund,
may constitute or involve a prohibited transaction under ERISA and the Code.
The DOL has granted to Wachovia Capital Markets (formerly First Union
Securities, Inc.), an individual administrative exemption, Prohibited
Transaction Exemption ("PTE") 96-22, 61 Fed. Reg. 14828 (April 3, 1996), as
most recently amended and restated by PTE 2002-41, 67 Fed. Reg. 54487 (August
22, 2002) (the "EXEMPTION"), which generally exempts from the application of
(i) the prohibited transaction provisions of Sections 406(a) and 407 of ERISA
and (ii) the excise taxes imposed on such prohibited transactions pursuant to
Sections 4975(a) and (b) of the Code, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the purchase,
sale and holding of Securities underwritten by an Underwriter (as defined
below) that (a) represent a beneficial ownership interest in the assets of a
Trust Fund and entitle the holder the pass-through payments of principal,
interest and/or other payments made with respect to the assets of the Trust
Fund or (b) are denominated as a debt instrument and represent an interest in a
REMIC, provided that certain conditions set forth in the Exemption are
satisfied. For purposes of this "ERISA Considerations" Section, the term
"UNDERWRITER" includes (a) Wachovia Corporation, (b) any person directly or
indirectly, through one or more intermediaries, controlling, controlled by or
under common control with Wachovia Corporation, including Wachovia Capital
Markets, LLC, and (c) any member of the underwriting syndicate or selling group
of which a person described in (a) or (b) is a manager or co-manager with
respect to a Class of Securities.
The Exemption sets forth five general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief thereunder.
1. The acquisition of Securities by a Plan must be on terms that are at
least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party.
2. The Securities at the time of acquisition by the Plan must be rated in
one of the four highest generic rating categories by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors
Service, Inc. ("MOODY'S") or Fitch Ratings ("FITCH").
157
3. The Trustee cannot be an affiliate of any member of the "RESTRICTED
GROUP" other than an Underwriter. The Restricted Group consists of the
Underwriters, the Depositor, the Trustee, the Master Servicer, any
Servicer, any insurer and any obligor with respect to Assets constituting
more than 5% of the aggregate unamortized principal balance of the Assets
in the related Trust Fund as of the date of initial issuance of the
Securities.
4. The sum of all payments made to and retained by the Underwriter(s) must
represent not more than reasonable compensation for underwriting the
Securities; the sum of all payments made to and retained by the Depositor
pursuant to the assignment of the Assets to the related Trust Fund must
represent not more than the fair market value of such obligations; and
the sum of all payments made to and retained by the Servicer must
represent not more than reasonable compensation for such person's
services under the applicable Agreement and reimbursement of such
person's reasonable expenses in connection therewith.
5. The investing Plan must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the SEC under the Securities Act of 1933, as
amended (the "SECURITIES ACT").
In addition, the Trust Fund must meet the following requirements:
o the assets of the Trust Fund must consist solely of assets of the type
that have been included in other investment pools;
o securities evidencing interests in such other investment pools must have
been rated in one of the four highest generic rating categories by S&P,
Moody's or Fitch for at least one year prior to the Plan's acquisition of
the securities; and
o securities evidencing interests in such other investment pools must have
been purchased by investors other than Plans for at least one year prior
to any Plan's acquisition of the Securities.
A fiduciary of a Plan contemplating purchasing a Security must make its
own determination that the general conditions set forth above will be satisfied
with respect to such Security. In addition, any Securities representing a
beneficial ownership interest in Unsecured Home Improvement Loans or Revolving
Credit Line Loans will not satisfy the general conditions of the Exemption.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the prohibited transaction provisions of Sections
406(a) and 407 of ERISA and Sections 4975(c)(1)(A) through (D) of the Code) in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of
Securities by Plans. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or
holding of a Security on behalf of an "EXCLUDED PLAN" by any person who has
discretionary authority or renders investment advice with respect to the assets
of such Excluded Plan. For purposes of the Securities, an Excluded Plan is a
Plan sponsored by any member of the Restricted Group.
158
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the prohibited transaction provisions
of Sections 406(b)(1) and (b)(2) of ERISA and Section 4975(c)(1)(E) of the
Code, for transactions in connection with (1) the direct or indirect sale,
exchange or transfer of Securities in the initial issuance of Securities
between the Depositor or an Underwriter and a Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of Plan assets in the Securities is (a) an obligor with respect to
5% or less of the fair market value of the Assets or (b) an affiliate of such a
person, (2) the direct or indirect acquisition or disposition in the secondary
market of Securities by a Plan and (3) the holding of Securities by a Plan.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the prohibited transaction
provisions of Sections 406(a), 406(b) and 407 of ERISA, and Section 4975(c) of
the Code for transactions in connection with the servicing, management and
operation of the Trust Fund. The Depositor expects that the specific conditions
of the Exemption required for this purpose will be satisfied with respect to
the Securities so that the Exemption would provide an exemption from the
restrictions imposed by Sections 406(a) and (b) of ERISA (as well as the excise
taxes imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c) of the Code) for transactions in connection with the servicing,
management and operation of the Assets, provided that the general conditions of
the Exemption are satisfied.
The Exemption also may provide an exemption from the prohibited
transaction provisions of Sections 406(a) and 407(a) of ERISA, and Sections
4975(c)(1)(A) through (D) of the Code, for transactions that would otherwise be
prohibited merely because a person is deemed to be a "Party in Interest" (within
the meaning of Section 3(14) of ERISA) with respect to an investing Plan by
virtue of providing services to the Plan (or by virtue of having certain
specified relationships to such a person) solely as a result of the Plan's
ownership of Securities.
The Exemption also permits the inclusion of a Pre-Funding Account in a
Trust Fund, provided that the following conditions are met:
o the Pre-Funding Account may not exceed 25% of the total amount of
Securities being offered;
o additional obligations purchased generally must meet the same terms and
conditions as those of the original obligations used to create the Trust
Fund;
o the transfer of additional obligations to the Trust Fund during the
Pre-Funding Period must not result in the Securities receiving a lower
rating at the termination of the Pre-Funding Period than the rating that
was obtained at the time of the initial issuance of the Securities;
o the weighted average interest rate for all of the obligations in the
Trust Fund at the end of the Pre-Funding Period must not be more than 100
basis points less than the weighted average interest rate for the
obligations which were transferred to the Trust Fund on the closing date;
159
o the characteristics of the additional obligations must be monitored to
confirm that they are substantially similar to those which were acquired
as of the closing date either by a credit support or insurance provider
independent of the Depositor or by an independent accountant retained by
the Depositor that confirms such conformance in writing;
o the Pre-Funding Period must be described in the prospectus or private
placement memorandum provided to investing Plans; and
o the trustee of the Trust Fund must be a substantial financial
institution or trust company experienced in trust activities and familiar
with its duties, responsibilities and liabilities as a fiduciary under
ERISA.
Further, the Pre-Funding Period must be a period beginning on the closing
date and ending no later than the earliest to occur of (x) the date the amount
on deposit in the Pre-Funding Account is less than the minimum dollar amount
specified in the applicable Agreement; (y) the date on which an event of default
occurs under the applicable Agreement; or (z) the date which is the later of
three months or 90 days after the closing date. It is expected that the
Pre-Funding Account will meet all of these requirements.
To the extent the Securities are not treated as equity interests for
purposes of DOL regulations section 2510.3-101, a Plan's investment in such
Securities ("NON-EQUITY SECURITIES") would not cause the Assets included in a
related Trust Fund to be deemed Plan assets. However, the Depositor, the
Servicer, the Trustee or an Underwriter may be the sponsor of or investment
advisor with respect to one or more Plans. Because such parties may receive
certain benefits in connection with the sale of Non-Equity Securities, the
purchase of Non-Equity Securities using Plan assets over which any such party
has investment authority might be deemed to constitute or result in a violation
of the prohibited transaction rules of ERISA and Section 4975 of the Code for
which no exemption may be available. Accordingly, Non-Equity Securities may not
be purchased using the assets of any Plan if any of the Depositor, the
Servicer, the Trustee or Underwriters has investment authority with respect to
such assets.
In addition, certain affiliates of the Depositor might be considered or
might become Parties in Interest with respect to a Plan. Also, any holder of
Securities, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest (within the meaning of
Section 3(14) of ERISA) with respect to certain Plans, including but not
limited to Plans sponsored by such holder. In either case, the acquisition or
holding of Non-Equity Securities by or on behalf of such a Plan could be
considered to give rise to an indirect prohibited transaction under ERISA and
Section 4975 of the Code, unless it is subject to one or more statutory or
administrative exemptions such as Prohibited Transaction Class Exemption
("PTCE") 84-14, which exempts certain transactions effected on behalf of a Plan
by a "qualified professional asset manager"; PTCE 90-1, which exempts certain
transactions involving insurance company pooled separate accounts; PTCE 91-38,
which exempts certain transactions involving bank collective investment funds;
PTCE 95-60, which exempts certain transactions involving insurance company
general accounts; or PTCE 96-23, which exempts certain transactions effected on
behalf of a Plan by certain "in-house" asset managers. It should be noted,
however, that even if the conditions specified in one or more of these
exemptions are met, the scope of relief provided by these exemptions may not
necessarily cover all acts that might be construed as prohibited transactions.
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Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to such investment, the availability of the exemptive relief
provided in the Exemption and the potential applicability of any other
prohibited transaction exemption in connection therewith. In particular, a Plan
fiduciary which proposes to cause a Plan to purchase Securities representing a
beneficial ownership interest in a pool of single-family residential first
mortgage loans, a Plan fiduciary should consider the applicability of PTCE 83-1,
which provides exemptive relief for certain transactions involving mortgage pool
investment trusts. The prospectus supplement with respect to a Series of
Securities may contain additional information regarding the application of the
Exemption, PTCE 83-1 or any other exemption, with respect to the Securities
offered thereby. In addition, any Plan fiduciary that proposes to cause a Plan
to purchase Strip Securities should consider the federal income tax consequences
of such investment. Fiduciaries of plans not subject to ERISA or Section 4975 of
the Code, such as government plans, should consider the application of any
applicable federal, state or local law materially similar to the provisions of
ERISA or Section 4975 of the Code, as well as the need for and the availability
of exemptive relief under such applicable law.
ANY PLAN FIDUCIARY CONSIDERING WHETHER TO PURCHASE A SECURITY ON BEHALF OF
A PLAN SHOULD CONSULT WITH ITS COUNSEL REGARDING THE APPLICABILITY OF THE
FIDUCIARY RESPONSIBILITY AND PROHIBITED TRANSACTION PROVISIONS OF ERISA AND
SECTION 4975 OF THE CODE TO SUCH INVESTMENT.
THE SALE OF SECURITIES TO A PLAN IS IN NO RESPECT A REPRESENTATION BY THE
DEPOSITOR OR ANY UNDERWRITER THAT THIS INVESTMENT MEETS ALL RELEVANT LEGAL
REQUIREMENTS WITH RESPECT TO INVESTMENTS BY PLANS GENERALLY OR ANY PARTICULAR
PLAN, OR THAT THIS INVESTMENT IS APPROPRIATE FOR PLANS GENERALLY OR ANY
PARTICULAR PLAN.
LEGAL INVESTMENT
As will be specified in the applicable prospectus supplement, certain
Classes of the Securities may constitute "mortgage related securities " for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended
("SMMEA"), so long as (i) they are rated in one of the two highest rating
categories by at least one Rating Agency and (ii) are part of a Series
representing interests in a Trust Fund consisting of Mortgage Loans originated
by certain types of originators specified in SMMEA and secured by first liens
on real estate. As "mortgage related securities," such Classes will constitute
legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including but not limited
to depository institutions, insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation, to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Pursuant to SMMEA, a number of
states enacted legislation, on or before the October 3, 1991 cut-off for such
enactments, limiting to varying extents the ability of certain entities (in
particular, insurance companies) to invest in "mortgage related securities," in
most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Accordingly, the investors affected by such
legislation will be authorized to invest in the Offered Securities only to the
extent provided in such legislation.
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SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in mortgage related
securities without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in such securities, and national banks
may purchase mortgage related securities for their own account without regard to
the limitations generally applicable to investment securities set forth in 12 U.
S. C. Section 24 (Seventh), subject in each case to such regulations as 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 certain general standards in 12 C. F. R. Section 1.5
concerning "safety and soundness" and retention of credit information), certain
"Type IV securities," defined in 12 C. F. R. Section 1.2(m) to include certain
"residential mortgage-related securities." As so defined, "residential
mortgage-related security" means, in relevant part, "mortgage related security"
within the meaning of SMMEA. The National Credit Union Administration ("NCUA")
has adopted rules, codified at 12 C.F.R. Part 703, which permit federal credit
unions to invest in "mortgage related securities" under certain 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. Section
703.140. The OTS has issued Thrift Bulletin 13a (December 1, 1998), "Management
of Interest Rate Risk, Investment Securities, and Derivative Activities," which
thrift institutions subject to the jurisdiction of the OTS should consider
before investing in any of the Offered Securities.
All depository institutions considering an investment in the Offered
Securities should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (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.
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 Class of
the Offered Securities, as certain Classes may be deemed unsuitable
investments, or may otherwise be restricted, under those rules, policies, or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines, or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions
which may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying," and, with regard to any Class of Offered
Securities issued in book-
162
entry form, provisions which may restrict or prohibit investments in securities
which are issued in book-entry form.
Except as to the status of certain Classes of Offered Securities as
"mortgage related securities," no representations are made as to the proper
characterization of the Offered Securities for legal investment purposes,
financial institution regulatory purposes, or other purposes, or as to the
ability of particular investors to purchase any Offered Securities under
applicable legal investment restrictions. The uncertainties described above
(and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the Offered Securities) may
adversely affect the liquidity of the Offered Securities.
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Offered Securities of any Class
constitute legal investments or are subject to investment, capital or other
restrictions and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the applicable prospectus supplement
to this prospectus will be offered in Series. The distribution of the Securities
may be effected from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
to be determined at the time of sale or at the time of commitment therefor. If
so specified in the related prospectus supplement, the Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Wachovia Capital Markets, LLC
("Wachovia Capital Markets") acting as underwriter with other underwriters, if
any, named therein. In such event, the prospectus supplement may also specify
that the underwriters will not be obligated to pay for any Securities agreed to
be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of the Securities, underwriters may
receive compensation from the Depositor or from purchasers of the Securities in
the form of discounts, concessions or commissions. The prospectus supplement
will describe any such compensation paid by the Depositor.
Alternatively, the prospectus supplement may specify that the Securities
will be distributed by Wachovia Capital Markets acting as agent or in some cases
as principal with respect to Securities which it has previously purchased or
agreed to purchase. If Wachovia Capital Markets acts as agent in the sale of
Securities, Wachovia Capital Markets will receive a selling commission with
respect to each Series of Securities, depending on market conditions, expressed
as a percentage of the aggregate principal balance of the related Mortgage Loans
as of the Cut-off Date. The exact percentage for each Series of Securities will
be disclosed in the related prospectus supplement. To the extent that Wachovia
Capital Markets elects to purchase Securities as principal, Wachovia Capital
Markets may realize losses or profits based upon the difference between its
purchase price and the sales price. The prospectus supplement with respect to
any Series offered other than through underwriters will contain information
regarding
163
the nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Securities of such Series.
Wachovia Capital Markets is an affiliate of the Depositor. This prospectus
may be used by Wachovia Capital Markets, to the extent required, in connection
with market making transactions in the Securities. Wachovia Capital Markets may
act as principal or agent in such transactions.
The Depositor will indemnify Wachovia Capital Markets and any underwriters
against certain civil liabilities, including liabilities under the Securities
Act, or will contribute to payments Wachovia Capital Markets and any
underwriters may be required to make in respect thereof.
In the ordinary course of business, Wachovia Capital Markets and the
Depositor may engage in various securities and financing transactions, including
repurchase agreements to provide interim financing of the Depositor's mortgage
loans pending the sale of such mortgage loans or interests therein, including
the Securities.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act in connection with
reoffers and sales by them of Securities. Securityholders should consult with
their legal advisors in this regard prior to any such reoffer or sale.
As to each Series of Securities, only those Classes rated in one of the
four highest rating categories by any Rating Agency will be offered hereby. Any
unrated Class may be initially retained by the Depositor, and may be sold by
the Depositor at any time to one or more institutional investors.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
Securityholders of an investment in the Securities of a Series, will be passed
upon for the Depositor by Cadwalader, Wickersham & Taft LLP, New York, New York
or Orrick, Herrington & Sutcliffe LLP, New York, New York.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this prospectus or in the related prospectus supplement.
RATINGS
It is a condition to the issuance of any Class of Offered Securities that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one nationally recognized
statistical rating organization ("RATING AGENCY").
164
Ratings on mortgage pass-through certificates address the likelihood of
receipt by Securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
certificates and other asset backed securities do not represent any assessment
of the likelihood of principal prepayments by borrowers or of the degree by
which such prepayments might differ from those originally anticipated. As a
result, securityholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest 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.
WHERE YOU CAN FIND MORE INFORMATION
The Depositor filed a registration statement (the "REGISTRATION
STATEMENT") relating to the Securities with the SEC. This prospectus is part of
the Registration Statement, but the Registration Statement includes additional
information.
Copies of the Registration Statement and any other materials filed with the
SEC may be read and copied at the SEC's Public Reference Room at 450 Fifth
Street N.W., Washington, D.C. 20549. Information concerning the operation of the
SEC's Public Reference Room may be obtained by calling the SEC at (800)
SEC-0330. The SEC also maintains a site on the World Wide Web at
"http://www.sec.gov" at which you can view and download copies of reports, proxy
and information statements and other information filed electronically through
the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system. The
Depositor has filed the Registration Statement, including all exhibits, through
the EDGAR system and therefore such materials should be available by logging
onto the SEC's Web site. Copies of any documents incorporated to this prospectus
by reference will be provided at no cost to each person, including any
beneficial owner, to whom a prospectus is delivered upon written or oral request
directed to Wachovia Asset Securitization Issuance, LLC, One Wachovia Center,
301 South College Street, Charlotte, North Carolina 28288, telephone number
(704) 383-4634.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows the Depositor to "incorporate by reference" information it
files with the SEC, which means that the Depositor can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus.
Information that the Depositor files later with the SEC will automatically
update the information in this prospectus. In all cases, you should rely on the
later information rather than on any different information included in this
prospectus or the accompanying prospectus supplement. The Depositor
incorporates by reference any future annual, monthly and special SEC reports
filed by or on behalf of the Trust until the termination of the offering of the
related Series of Securities offered hereby (including market making
transactions by Wachovia Capital Markets, to the extent required, with respect
to such Series of Securities, unless such transactions are exempt from the
registration provisions of the Securities Act).
165
As a recipient of this prospectus, you may request a copy of any document
the Depositor incorporates by reference, except exhibits to the documents
(unless the exhibits are specifically incorporated by reference) at no cost, by
writing or calling the Treasurer at Wachovia Asset Securitization Issuance, LLC,
One Wachovia Center, 301 South College Street, Charlotte, North Carolina 28288,
telephone number (704) 383-4634.
166
INDEX OF SIGNIFICANT DEFINITIONS
TERMS PAGE
- ----- ----
1998 Policy Statement.............................162
Accrual Period.....................................31
Accrual Securities.................................39
Accrued Security Interest..........................42
Additional Collateral Assets.......................22
Adjustable Rate Assets.............................22
Agreement..........................................58
ARM Contracts......................................29
ARM Loans..........................................25
ARM Unsecured Home Improvement Loans...............27
Asset Conservation Act.............................99
Asset Group........................................39
Asset Seller.......................................21
Assets.............................................21
Available Distribution Amount......................40
Balloon Payment Assets.............................22
Bankruptcy Code....................................96
Bi-weekly Assets...................................22
Book-Entry Securities..............................39
Buy Down Assets....................................22
Buydown Funds.....................................114
Buydown Mortgage Loans.............................35
Buydown Period.....................................35
Capitalized Interest Account.......................30
Cash Flow Agreement................................31
Cede...............................................55
CERCLA.............................................98
Certificates.......................................38
Class..............................................38
Cleanup Costs......................................98
Closing Date........................................7
Code..............................................110
Collection Account.................................63
Component..........................................43
Contract Borrower..................................89
Contract Lender....................................89
Contract Rate......................................29
Contracts..........................................21
Convertible Assets.................................22
Cooperative....................................56, 88
Cooperative Loans..................................88
Cooperatives.......................................23
Covered Trust......................................83
CPR................................................34
Credit Support.....................................30
Cut-off Date....................................7, 24
Debt Securities...................................111
Definitive Securities..........................39, 53
Depositor.......................................7, 38
Depositories.......................................57
Determination Date.................................40
Disqualified Organization.........................130
Distribution Date...............................7, 32
DOL...............................................156
Due Period.........................................40
electing large partnership........................130
Euroclear..........................................56
Euroclear Operator.................................56
Euroclear Participants.............................56
Excess Servicing..................................142
Exchange Act.......................................54
Excluded Plan.....................................158
Exemption.........................................157
FASIT Securities..................................111
FDIC...............................................63
FFIEC.............................................162
First Lien Mortgage Loans..........................24
Fitch.............................................157
Garn-St. Germain Act..............................100
GEM Assets.........................................22
GPM Assets.........................................22
Grantor Trust Fund................................111
Grantor Trust Securities..........................111
Home Equity Loans..................................24
Home Improvement Contracts.........................24
HOPA..............................................104
Increasing Payment Asset...........................23
Indenture..........................................58
Indenture Trustee...............................7, 59
Indirect Participants..............................55
Insurance Proceeds.................................40
Interest Reduction Assets..........................22
Interest-Only Assets...............................22
IRS................................................69
Issuer..............................................7
Land Sale Contracts................................24
Legal Investment...................................11
Level Payment Assets...............................22
Liquidation Proceeds...............................40
Loan-to-Value Ratio................................24
Lock-out Date......................................26
Lock-out Period....................................26
Manufactured Home..................................28
Mark to Market Regulations........................134
Master Servicer.................................7, 59
MERS...............................................60
Moody's...........................................157
Mortgage Loans.....................................21
Mortgage Notes.....................................24
Mortgage Rate......................................26
Mortgaged Properties...............................23
Mortgages..........................................24
167
Multifamily Mortgage Loan..........................23
Multifamily Property...............................23
National Housing Act...............................25
NCUA..............................................162
new partnership...................................152
Non-Equity Securities.............................160
Non-Pro Rata Security.............................116
Nonrecoverable Advance.............................50
Non-U.S. Person...................................137
Notes..............................................38
OCC...............................................162
Offered Securities.................................39
OID Regulations...................................111
old partnership...................................152
Originator.........................................24
OTS...............................................100
PAC Certificates...................................44
PAC I..............................................44
PAC II.............................................44
PAC Notes..........................................44
Participants.......................................54
Parties in Interest...............................156
Partnership Securities............................111
Partnership Trust Fund............................111
Pass-Through Entity...............................130
Pass-Through Rate..................................41
PCBs...............................................98
Permitted Investments..............................63
Plans.............................................156
PMI...............................................104
Pooling and Servicing Agreement....................58
Pre-Funded Amount..................................29
Pre-Funding Account................................29
Pre-Funding Period.................................29
Prepayment Assumption.............................117
Prepayment Premium.................................26
PTCE..............................................160
Purchase Price.....................................60
Rating Agency.....................................164
RCRA...............................................99
Record Date........................................40
Refinance Loans....................................24
Registration Statement............................165
Regular Securities................................112
Regular Securityholder............................115
Related Proceeds...................................50
Relief Act........................................105
REMIC Pool........................................111
REMIC Provisions..................................111
REMIC Regulations.................................111
REMIC Securities..................................111
REO Property.......................................51
Residual Holders..................................125
Residual Securities...............................112
Restricted Group..................................158
Retained Interest..................................73
Revolving Credit Line Loans........................26
S&P...............................................157
Scheduled Certificates.............................45
Scheduled Notes....................................45
SEC................................................25
Secured-creditor exemption.........................99
Securities.........................................38
Securities Act....................................158
Security...........................................59
Security Balance...................................33
Security Owners....................................55
Securityholder.....................................31
Senior Certificates................................39
Senior Notes.......................................39
Senior Securities..................................39
Series.............................................38
Servicer............................................7
Servicers..........................................59
Servicing Agreement................................58
Servicing Standard.................................67
Single Family Mortgage Loan........................23
Single Family Property.............................23
SMMEA.............................................161
SPA................................................34
Special Servicer...................................75
Standard Securities...............................140
Startup Day.......................................112
Statistical Calculation Date........................7
Step-up Rate Assets................................22
Strip Securities...................................39
Stripped Securities...............................144
Stripped Securityholder...........................146
Subordinate Certificates...........................39
Subordinate Notes..................................39
Subordinate Securities.............................39
Subsequent Assets..................................29
Superliens.........................................98
Support Certificates...............................43
Support Notes......................................43
TAC Certificates...................................47
TAC Notes..........................................47
Taxable Mortgage Pools............................111
Terms and Conditions...............................57
Texas Home Equity Laws............................104
Tiered REMICs.....................................115
Title V...........................................102
Title VIII........................................103
Trust..............................................38
Trust Agreement....................................58
Trust Fund.........................................38
Trustee............................................59
U.S. Person.......................................133
UCC................................................54
Underlying Servicing Agreement.....................58
Underwriter.......................................157
Unsecured Home Improvement Loans...................21
168
UST................................................99
Value..............................................24
Voting Rights......................................76
Wachovia Capital Markets..........................163
Warranting Party...................................61
Withholding Regulations...........................137
169
$1,000,000,000
WACHOVIA BANK, NATIONAL ASSOCIATION
SELLER AND SERVICER
WACHOVIA ASSET SECURITIZATION ISSUANCE, LLC 2004-HE1 TRUST
ISSUER
WACHOVIA ASSET SECURITIZATION ISSUANCE, LLC
DEPOSITOR
WACHOVIA ASSET SECURITIZATION ISSUANCE, LLC
ASSET-BACKED NOTES, SERIES 2004-HE1
[WACHOVIA LOGO]
----------------
PROSPECTUS SUPPLEMENT
----------------
UNDERWRITERS
WACHOVIA SECURITIES
ABN AMRO CITIGROUP
No person has been authorized to give any information or to make any
representation other than those contained in this prospectus supplement or the
prospectus and, if given or made, such information or representation must not be
relied upon. This prospectus supplement and the prospectus do not constitute an
offer to sell or a solicitation of an offer to buy any securities other than the
notes offered hereby, nor an offer of the notes in any state or jurisdiction in
which, or to any person to whom, such offer would be unlawful. The delivery of
this prospectus supplement or the prospectus at any time does not imply that
information in this prospectus supplement or in the accompanying prospectus is
correct as of any time subsequent to its date; however, if any material change
occurs while this prospectus supplement or the prospectus is required by law to
be delivered, this prospectus supplement or the prospectus will be amended or
supplemented accordingly.
Until 90 days after the date of this prospectus supplement, all dealers selling
the notes, whether or not participating in this distribution, will deliver a
prospectus supplement and the prospectus to which it relates. This delivery
requirement is in addition to the obligation of dealers to deliver a prospectus
supplement and prospectus when acting as underwriter and with respect to their
unsold allotments or subscriptions.